UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q

____________________________

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30, 2022~~March 31, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number: 001-38523

____________________________

CHARAH SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

____________________________


Delaware			82-4228671
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

12601 Plantside Drive Louisville, Kentucky			40299
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code: (502) 245-1353

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.01 per share

CHRA

~~New York Stock Exchange~~OTC Markets*

8.50% Senior Notes due 2026

CHRB

~~New York Stock Exchange~~OTC Markets*

*On April 3, 2023, Charah Solutions, Inc. common stock and 8.50% Senior Notes due 2026 were suspended from trading on the New York Stock Exchange. On April 4, 2023, Charah Solutions, Inc. common stock and 8.50% Senior Notes due 2026 began trading on the OTC Markets operated by the OTC Markets Group, Inc., under the trading symbols CHRA and CHRB, respectively.

____________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller

reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer x

Smaller reporting company ☒

Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No x

As of ~~August 1, 2022,~~June 15, 2023, the registrant had ~~33,721,705~~3,402,624 shares of common stock outstanding.

CHARAH SOLUTIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE ~~AND SIX~~ MONTHS ENDED ~~JUNE 30, 2022~~MARCH 31, 2023

TABLE OF CONTENTS


			Page
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS			ii

PART I - FINANCIAL INFORMATION			1
Item 1. Financial Statements (Unaudited)			1
Condensed Consolidated Balance Sheets as of JuMarch 31, 2023 ~~ne 30, 2022~~ and December 31, ~~2021~~202 2			1
Condensed Consolidated Statements of Operations for the Three ~~and Six~~Months Ended ~~June~~ 3 0March 31 , ~~2022~~2023 and ~~2021~~2022			2
Condensed Consolidated Statements of Stockholders’ Equity for the Three ~~and Six~~ Months Ended ~~June~~March 3 031 , ~~2022~~2023 and ~~2021~~2022			3
Condensed Consolidated Statements of Cash Flows for the S ixThree Months Ended ~~June~~March 3 031 , ~~2022~~2023 and ~~2021~~2022			54
Notes to Condensed Consolidated Financial Statements			76
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			2324
Item 4. Controls and Procedures			34

PART II - OTHER INFORMATION			3537
Item 1. Legal Proceedings			3537
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			3537
Item 6. Exhibits			3537

SIGNATURES			3739

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The information in this Quarterly Report on Form 10‑Q (this “Quarterly Report”) includes “forward‑looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenue and losses, projected costs, prospects, plans and objectives of management are forward‑looking statements. When used in this Quarterly Report, the words “may,” “will,” “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward‑looking statements. However, not all forward‑looking statements contain such identifying words. These forward‑looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events. When considering forward‑looking statements, you should keep in mind the risk factors and other cautionary statements included in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022, and elsewhere herein.

On April 16, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Acquisition Parent 0423 Inc., a Delaware corporation (the “Parent”), and Acquisition Sub April 2023, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Parent (“Acquisition Sub”), pursuant to which, and subject to the terms and conditions therein, Acquisition Sub will be merged with and into the Company, with the Company continuing as the surviving corporation in ~~Part II, “Item 1A. Risk Factors” of~~the merger (the “Merger”). See Note 18, Subsequent Events, to the accompanying unaudited condensed consolidated financial statements. Various forward-looking statements in this Quarterly Report ~~and elsewhere herein. These forward‑looking statements are based on management’s current belief, based on currently available information, as~~relate to the ~~outcome~~acquisition by Parent of the Company. Important transaction-related and other risk factors that could cause actual results and events to differ materially from those expressed or implied in the forward-looking statements include: (i) the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement; (ii) the completion of the transaction on unanticipated terms and timing, including delays in obtaining required stockholder and regulatory approvals, and in satisfying the other conditions to the completion of ~~future events.~~the transaction; (iii) significant transaction costs associated with the transaction; (iv) potential litigation relating to the transaction, including the effects of any outcomes related thereto; (v) the risk that disruptions from the transaction will harm the Company’s business, including current plans and operations; (vi) the ability of the Company to retain and hire key personnel; and (vii) potential adverse reactions or changes to business relationships resulting from the announcement or completion of the transaction.

Forward‑looking statements may include statements about:

•the impacts of the COVID-19 pandemic on the Company's business;

•our business strategy;

•our operating cash flows, the availability of capital and our liquidity;

•our future revenue, income, operating performance and backlog;

•our ability to sustain and improve our utilization, revenue and margins;

•our ability to maintain acceptable pricing for our services;

•our future capital expenditures;

•our ability to finance equipment, working capital and capital expenditures;

•competition and government regulations;

•our ability to obtain permits and governmental approvals;

•pending legal or environmental matters or liabilities;

•environmental hazards;

•industrial accidents;

•business or asset acquisitions;

•general economic conditions;

•credit markets;

•our ability to successfully develop our research and technology capabilities and to implement technological developments and enhancements;

•uncertainty regarding our future operating results;

•our ability to obtain additional financing on favorable terms, if required, to fund the operations and growth of our business;

•timely review and approval of permits, permit renewals, extensions and amendments by regulatory authorities;

•our ability to comply with our debt ~~covenants;~~covenantsand the covenants contained in the Merger Agreement;

•our expectations relating to dividend payments and our ability to make such payments, if any; and

•plans, objectives, expectations and intentions, as well as any other statement contained in this Quarterly Report that are not

statements of historical fact.

We caution you that these forward‑looking statements are subject to a number of risks, uncertainties and assumptions, which are difficult to predict and many of which are beyond our control. These risks include, but are not limited to, the risks described under Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, ~~2021 and under Part II, “Item 1A. Risk Factors” of this Quarterly Report~~2022, and elsewhere herein. Should one or more of the risks or uncertainties described occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward‑looking statements.

All forward‑looking statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary note. This cautionary note should also be considered in connection with any subsequent written or oral forward‑looking statements that we or persons acting on our behalf may issue. Except as otherwise required by applicable law, we disclaim any duty to update any forward‑looking statements, all of which are expressly qualified by the statements in this cautionary note, to reflect events or circumstances after the date of this Quarterly Report.

iiiii

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CHARAH SOLUTIONS, INC.

Condensed Consolidated Balance Sheets

(in thousands, except par value and share amounts)

(Unaudited)


		June 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash	Cash	$	7,071	$	24,266	Cash	$	11,876	$	21,559
Restricted cash	Restricted cash	50,576		34,908		Restricted cash	36,536		40,100
Trade accounts receivable, net	Trade accounts receivable, net	43,951		49,303		Trade accounts receivable, net	46,930		45,696

Contract assets	Contract assets	34,000		26,844		Contract assets	23,390		20,981
Inventory	Inventory	5,168		6,289		Inventory	4,986		5,204

Prepaid expenses and other current assets	Prepaid expenses and other current assets	9,514		6,113		Prepaid expenses and other current assets	5,716		4,709
Total current assets	Total current assets	150,280		147,723		Total current assets	129,434		138,249
Real estate, property and equipment, net	Real estate, property and equipment, net	106,197		70,473		Real estate, property and equipment, net	89,601		93,940
Operating right-of-use assets						Operating right-of-use assets	29,797		32,748
Goodwill	Goodwill	62,193		62,193		Goodwill	62,193		62,193
Intangible assets, net		49,584		53,531
Equity method investments		7		7
Other assets	Other assets	10,373		10,180		Other assets	9,744		11,413

Total assets	Total assets	$	378,634	$	344,107	Total assets	$	320,769	$	338,543

Liabilities, mezzanine equity and stockholders’ equity	Liabilities, mezzanine equity and stockholders’ equity					Liabilities, mezzanine equity and stockholders’ equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	40,951		30,641		Accounts payable	32,625		36,475

Contract liabilities	Contract liabilities	5,702		6,199		Contract liabilities	8,991		8,418
Capital lease obligations, current portion		9,737		6,979
Finance lease obligations, current portion						Finance lease obligations, current portion	10,156		10,592
Operating lease obligations, current portion						Operating lease obligations, current portion	11,425		12,483
Notes payable, current maturities	Notes payable, current maturities	8,010		7,567		Notes payable, current maturities	8,131		9,649
Asset-based lending credit agreement						Asset-based lending credit agreement	8,500		—
Asset retirement obligations, current portion	Asset retirement obligations, current portion	47,542		27,534		Asset retirement obligations, current portion	30,301		37,982
Accrued liabilities	Accrued liabilities	28,220		36,874		Accrued liabilities	26,621		26,296
Other current liabilities	Other current liabilities	460		460		Other current liabilities	1,027		1,027
Total current liabilities	Total current liabilities	140,622		116,254		Total current liabilities	137,777		142,922
Deferred tax liabilities	Deferred tax liabilities	1,309		949		Deferred tax liabilities	894		819
Contingent payments for acquisitions	Contingent payments for acquisitions	1,950		1,950		Contingent payments for acquisitions	1,950		1,950
Asset retirement obligations	Asset retirement obligations	36,187		14,879		Asset retirement obligations	28,338		30,579

Capital lease obligations, less current portion		26,563		19,444
Finance lease obligations, less current portion						Finance lease obligations, less current portion	22,472		24,585
Operating lease obligations, less current portion						Operating lease obligations, less current portion	21,208		23,621
Notes payable, less current maturities	Notes payable, less current maturities	130,942		133,661		Notes payable, less current maturities	149,246		149,584
Deferred gain and other liabilities	Deferred gain and other liabilities	5,118		641		Deferred gain and other liabilities	3,915		4,192
Total liabilities	Total liabilities	342,691		287,778		Total liabilities	365,800		378,252

Commitments and contingencies (see Note 14)		0		0
Commitments and contingencies (see Note 15)						Commitments and contingencies (see Note 15)

Mezzanine equity	Mezzanine equity					Mezzanine equity
Series A Preferred Stock — $0.01 par value; 50,000 shares authorized, 26 shares issued and outstanding as of June 30, 2022 and December 31, 2021; aggregate liquidation preference of $34,873 and $32,712 as of June 30, 2022 and December 31, 2021, respectively		39,915		35,532
Series A Preferred Stock — $0.01 par value; 26,000 shares authorized, issued and outstanding as of March 31, 2023 and December 31, 2022; aggregate liquidation preference of $38,385 and $37,176 as of March 31, 2023 and December 31, 2022, respectively						Series A Preferred Stock — $0.01 par value; 26,000 shares authorized, issued and outstanding as of March 31, 2023 and December 31, 2022; aggregate liquidation preference of $38,385 and $37,176 as of March 31, 2023 and December 31, 2022, respectively	43,558		42,743
Series B Preferred Stock — $0.01 par value; 30,000 shares authorized, issued and outstanding as of March 31, 2023 and December 31, 2022; aggregate liquidation preference of $30,000 as of March 31, 2023 and December 31, 2022						Series B Preferred Stock — $0.01 par value; 30,000 shares authorized, issued and outstanding as of March 31, 2023 and December 31, 2022; aggregate liquidation preference of $30,000 as of March 31, 2023 and December 31, 2022	28,800		28,800

Stockholders’ equity	Stockholders’ equity					Stockholders’ equity
Retained losses	Retained losses	(116,322)		(94,679)		Retained losses	(228,608)		(222,522)
Common Stock — $0.01 par value; 200,000 shares authorized 33,722 and 33,408 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		337		334
Common Stock — $0.01 par value; 200,000,000 shares authorized, 3,379,605 shares issued and outstanding as of March 31, 2023 and December 31, 2022						Common Stock — $0.01 par value; 200,000,000 shares authorized, 3,379,605 shares issued and outstanding as of March 31, 2023 and December 31, 2022	339		339
Additional paid-in capital	Additional paid-in capital	111,754		114,880		Additional paid-in capital	110,880		110,931
Total stockholders’ equity	Total stockholders’ equity	(4,231)		20,535		Total stockholders’ equity	(117,389)		(111,252)
Non-controlling interest		259		262
Total equity		(3,972)		20,797
Total liabilities, mezzanine equity and stockholders’ equity	Total liabilities, mezzanine equity and stockholders’ equity	$	378,634	$	344,107	Total liabilities, mezzanine equity and stockholders’ equity	$	320,769	$	338,543

See accompanying notes to condensed consolidated financial statements

CHARAH SOLUTIONS, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)


		Three Months Ended				Six Months Ended					Three Months Ended
		June 30,				June 30,					March 31,
		2022		2021		2022		2021				2023		2022
Revenue		$	77,110	$	63,518	$	143,161	$	115,625
Cost of sales		(74,436)		(56,598)		(144,254)		(103,120)
Gross profit		2,674		6,920		(1,093)		12,505
Construction and service revenue										Construction and service revenue		$	61,846	$	54,858
Raw material sales										Raw material sales		9,067		11,193
Total revenues										Total revenues		70,913		66,051
Construction and service cost of sales										Construction and service cost of sales		(57,109)		(59,242)
Raw material cost of sales										Raw material cost of sales		(7,772)		(10,576)
Total cost of sales										Total cost of sales		(64,881)		(69,818)
Gross profit (loss)										Gross profit (loss)		6,032		(3,767)
General and administrative expenses	General and administrative expenses	(9,238)		(9,379)		(18,190)		(18,811)		General and administrative expenses		(6,234)		(8,952)
Gain on sales-type lease		—		—		—		5,568
Gains on sales of real estate, property and equipment, net	Gains on sales of real estate, property and equipment, net	2,798		2,696		6,341		3,243		Gains on sales of real estate, property and equipment, net		2,975		3,543
Gain on ARO settlement		1,557		—		4,008		—
(Loss) gain on ARO settlement										(Loss) gain on ARO settlement		(41)		2,451
Other operating expenses from ERT services	Other operating expenses from ERT services	(2,586)		(1,007)		(3,253)		(1,297)		Other operating expenses from ERT services		(3,813)		(667)

Operating (loss) income		(4,795)		(770)		(12,187)		1,208
Operating loss										Operating loss		(1,081)		(7,392)
Interest expense, net	Interest expense, net	(4,467)		(3,314)		(9,040)		(6,549)		Interest expense, net		(4,890)		(4,573)

Income (loss) from equity method investment		—		(11)		—		191
Loss before income taxes	Loss before income taxes	(9,262)		(4,095)		(21,227)		(5,150)		Loss before income taxes		(5,971)		(11,965)
Income tax expense	Income tax expense	341		72		419		229		Income tax expense		(115)		(78)
Net loss	Net loss	(9,603)		(4,167)		(21,646)		(5,379)		Net loss		(6,086)		(12,043)
Less (loss) income attributable to non-controlling interest		—		(1)		(3)		74
Less (loss) attributable to non-controlling interest										Less (loss) attributable to non-controlling interest		—		(3)
Net loss attributable to Charah Solutions, Inc.	Net loss attributable to Charah Solutions, Inc.	(9,603)		(4,166)		(21,643)		(5,453)		Net loss attributable to Charah Solutions, Inc.		(6,086)		(12,040)
Deemed and imputed dividends on Series A Preferred Stock	Deemed and imputed dividends on Series A Preferred Stock	(150)		(148)		(299)		(295)		Deemed and imputed dividends on Series A Preferred Stock		(126)		(149)
Series A Preferred Stock dividends	Series A Preferred Stock dividends	(1,571)		(2,148)		(3,661)		(4,215)		Series A Preferred Stock dividends		(677)		(2,090)
Net loss attributable to common stockholders	Net loss attributable to common stockholders	$	(11,324)	$	(6,462)	$	(25,603)	$	(9,963)	Net loss attributable to common stockholders		$	(6,889)	$	(14,279)

Net loss attributable to common stockholders per common share:	Net loss attributable to common stockholders per common share:									Net loss attributable to common stockholders per common share:
Basic	Basic	$	(0.34)	$	(0.21)	$	(0.76)	$	(0.33)	Basic		$	(2.04)	$	(4.27)
Diluted	Diluted	$	(0.34)	$	(0.21)	$	(0.76)	$	(0.33)	Diluted		$	(2.04)	$	(4.27)

Weighted-average shares outstanding used in loss per common share:	Weighted-average shares outstanding used in loss per common share:									Weighted-average shares outstanding used in loss per common share:
Basic	Basic	33,642		30,450		33,526		30,282		Basic		3,380		3,341
Diluted	Diluted	33,642		30,450		33,526		30,282		Diluted		3,380		3,341

See accompanying notes to condensed consolidated financial statements.

CHARAH SOLUTIONS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)

(Unaudited)

For the Six Months Ended June 30, 2022
Mezzanine Equity Permanent Equity
Preferred Stock (Shares) Preferred Stock (Amount) Common Stock (Shares) Common Stock (Amount) Additional Paid-In Capital Retained
Losses Total Non-Controlling
Interest Total
Balance, December 31, 2021 26,000 $ 35,532 33,407,806 $ 334 $ 114,880 $ (94,679) $ 20,535 $ 262 $ 20,797
Net loss — — — — — (21,643) (21,643) (3) (21,646)
Shares issued under share-based compensation plans — — 480,453 5 (5) — — — —
Taxes paid related to the net settlement of shares — — (166,554) (2) (698) — (700) — (700)
Share-based compensation expense — — — — 1,537 — 1,537 — 1,537
Deemed and imputed dividends on Series A Preferred Stock — 4,383 — — (299) — (299) — (299)
Series A Preferred Stock dividends — — — — (3,661) — (3,661) — (3,661)
Balance, June 30, 2022 26,000 $ 39,915 33,721,705 $ 337 $ 111,754 $ (116,322) $ (4,231) $ 259 $ (3,972)


	For the Three Months Ended March 31, 2023
	Mezzanine Equity						Permanent Equity
	Series A Preferred Stock (Shares)	Series A Preferred Stock (Amount)		Series B Preferred Stock (Shares)	Series B Preferred Stock (Amount)		Common Stock (Shares)	Common Stock (Amount)		Additional Paid-In Capital		Retained Losses		Total
Balance, December 31, 2022	26,000	$	42,743	30,000	$	28,800	3,379,605	$	339	$	110,931	$	(222,522)	$	(111,252)
Net (loss) income	—	—		—	—		—	—		—		(6,086)		(6,086)
Share based compensation expense	—	—		—	—		—	—		752		—		752
Deemed and imputed dividends on Series A Preferred Stock	—	815		—	—		—	—		(126)		—		(126)
Series A Preferred Stock Dividends	—	—		—	—		—	—		(677)		—		(677)
Balance, March 31, 2023	26,000	$	43,558	30,000	$	28,800	3,379,605	$	339	$	110,880	$	(228,608)	$	(117,389)

For the Six Months Ended June 30, 2021
Mezzanine Equity Permanent Equity
Preferred Stock (Shares) Preferred Stock (Amount) Common Stock (Shares) Common Stock (Amount) Additional Paid-In Capital Retained
Losses Total Non-Controlling
Interest Total
Balance, December 31, 2020 26,000 $ 27,423 30,077,018 $ 300 $ 108,471 $ (88,865) $ 19,906 $ 410 $ 20,316
Net (loss) income — — — — — (5,453) (5,453) 74 (5,379)
Distributions — — — — — — — (165) (165)
Share-based compensation expense — — — — 998 — 998 — 998
Shares issued under share-based compensation plans — — 535,417 6 (6) — — — —
Taxes paid related to the net settlement of shares — — (93,518) (1) (511) — (512) — (512)
Deemed and imputed dividends on Series A Preferred Stock — 295 — — (295) — (295) — (295)
Series A Preferred Stock dividends — 3,423 — — (4,215) — (4,215) — (4,215)
Balance, June 30, 2021 26,000 $ 31,141 30,518,917 $ 305 $ 104,442 $ (94,318) $ 10,429 $ 319 $ 10,748


	For the Three Months Ended March 31, 2022
	Mezzanine Equity			Permanent Equity
	Series A Preferred Stock (Shares)	Series A Preferred Stock (Amount)		Common Stock (Shares)	Common Stock (Amount)		Additional Paid-In Capital		Retained Losses		Total		Non-Controlling Interest		Total
Balance, December 31, 2021	26,000	$	35,532	3,340,780	$	334	$	114,880	$	(94,679)	$	20,535	$	262	$	20,797
Net (loss) income	—	—		—	—		—		(12,040)		(12,040)		(3)		(12,043)
Share-based compensation expense	—	—		—	—		791		—		791		—		791
Shares issued under share-based compensation plans	—	—		75	—		—		—		—		—		—
Taxes paid related to the net settlement of shares	—	—		(26)	—		—		—		—				—
Deemed and imputed dividends on Series A Preferred Stock	—	2,144		—	—		(149)		—		(149)		—		(149)
Series A Preferred Stock dividends	—	—		—	—		(2,090)		—		(2,090)		—		(2,090)
Balance, March 31, 2022	26,000	$	37,676	3,340,829	$	334	$	113,432	$	(106,719)	$	7,047	$	259	$	7,306

See accompanying notes to condensed consolidated financial statements.

~~CHARAH SOLUTIONS, INC.~~

~~Condensed Consolidated Statements of Stockholders’ Equity~~

~~(in thousands, except share amounts)~~

~~(Unaudited)~~

For the Three Months Ended June 30, 2022
Mezzanine Equity Permanent Equity
Preferred Stock (Shares) Preferred Stock (Amount) Common Stock (Shares) Common Stock (Amount) Additional Paid-In Capital Retained
Losses Total Non-Controlling
Interest Total
Balance, March 31, 2022 26,000 $ 37,676 33,408,296 $ 334 $ 113,432 $ (106,719) $ 7,047 $ 259 $ 7,306
Net loss — — — — — (9,603) (9,603) — (9,603)
Share-based compensation expense — — — — 746 — 746 — 746
Shares issued under share-based compensation plans — — 479,703 5 (5) — — — —
Taxes paid related to the net settlement of shares — — (166,294) (2) (698) — (700) — (700)
Deemed and imputed dividends on Series A Preferred Stock — 2,239 — — (150) — (150) — (150)
Series A Preferred Stock dividends — — — — (1,571) — (1,571) — (1,571)
Balance, June 30, 2022 26,000 $ 39,915 33,721,705 $ 337 $ 111,754 $ (116,322) $ (4,231) $ 259 $ (3,972)

For the Three Months Ended June 30, 2021
Mezzanine Equity Permanent Equity
Preferred Stock (Shares) Preferred Stock (Amount) Common Stock (Shares) Common Stock (Amount) Additional Paid-In Capital Retained
Losses Total Non-Controlling
Interest Total
Balance, March 31, 2021 26,000 $ 28,926 30,228,385 $ 302 $ 106,552 $ (90,152) $ 16,702 $ 485 $ 17,187
Net loss — — — — — (4,166) (4,166) (1) (4,167)
Distributions — — — — — — — (165) 0
Share-based compensation expense — — — — 699 — 699 — 699
Shares issued under share-based compensation plans — — 383,080 4 (4) — — — —
Taxes paid related to the net settlement of shares — — (92,548) (1) (509) — (510) — (510)
Deemed and imputed dividends on Series A Preferred Stock — 2,215 — — (148) — (148) — (148)
Series A Preferred Stock dividends — — — — (2,148) — (2,148) — (2,148)
Balance, June 30, 2021 26,000 $ 31,141 30,518,917 $ 305 $ 104,442 $ (94,318) $ 10,429 $ 319 $ 10,748

~~See accompanying notes to condensed consolidated financial statements.~~

CHARAH SOLUTIONS, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)


		Six Months Ended					Three Months Ended
		June 30,					March 31,
		2022		2021			2023		2022
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net loss	Net loss	$	(21,646)	$	(5,379)	Net loss	$	(6,086)	$	(12,043)
Adjustments to reconcile net loss to net cash and restricted cash (used in) provided by operating activities:	Adjustments to reconcile net loss to net cash and restricted cash (used in) provided by operating activities:					Adjustments to reconcile net loss to net cash and restricted cash (used in) provided by operating activities:
Depreciation and amortization	Depreciation and amortization	13,390		12,315		Depreciation and amortization	3,836		6,571
Paid-in-kind interest on long-term debt		—		2,448
Impairment expense		—		127
Non-cash lease expense						Non-cash lease expense	2,951		—
Amortization of debt issuance costs	Amortization of debt issuance costs	1,141		331		Amortization of debt issuance costs	686		561
Deferred income taxes	Deferred income taxes	361		229		Deferred income taxes	75		36
Gain on sales-type lease		—		(5,568)
Gains on sales of real estate, property and equipment	Gains on sales of real estate, property and equipment	(5,982)		(4,140)		Gains on sales of real estate, property and equipment	(2,696)		(3,543)
Income from equity method investment		—		(191)
Non-cash share-based compensation	Non-cash share-based compensation	1,537		998		Non-cash share-based compensation	752		791
Gain on interest rate swap		—		(201)
Gain on ARO settlements		(4,008)		—
Loss (gain) on ARO settlements						Loss (gain) on ARO settlements	41		(2,451)
Realization of deferred gain on ERT project performance						Realization of deferred gain on ERT project performance	(278)		—
Increase (decrease) in cash and restricted cash due to changes in:	Increase (decrease) in cash and restricted cash due to changes in:					Increase (decrease) in cash and restricted cash due to changes in:
Trade accounts receivable	Trade accounts receivable	5,640		4,695		Trade accounts receivable	(1,234)		279
Contract assets and liabilities	Contract assets and liabilities	(8,931)		20,479		Contract assets and liabilities	(1,837)		2,326
Inventory	Inventory	1,121		(607)		Inventory	218		1,497
Accounts payable	Accounts payable	11,327		1,986		Accounts payable	(3,694)		1,652
Lease liabilities						Lease liabilities	(3,471)		—
Asset retirement obligation	Asset retirement obligation	(19,156)		(3,387)		Asset retirement obligation	(9,963)		(5,992)
Other assets and liabilities	Other assets and liabilities	(11,675)		(13,893)		Other assets and liabilities	906		(13,596)
Net cash and restricted cash (used in) provided by operating activities		(36,881)		10,242
Net cash and restricted cash used in operating activities						Net cash and restricted cash used in operating activities	(19,794)		(23,912)

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Net proceeds from the sales of real estate, property and equipment	Net proceeds from the sales of real estate, property and equipment	8,394		4,232		Net proceeds from the sales of real estate, property and equipment	3,237		3,095
Purchases of property and equipment	Purchases of property and equipment	(3,148)		(2,829)		Purchases of property and equipment	(63)		(2,126)
Cash and restricted cash received from ERT transactions		38,239		34,900
Payments of working capital adjustment and other items for the sale of subsidiary		—		(7,367)
Distribution received from equity method investment		—		1,015
Net cash and restricted cash provided by investing activities	Net cash and restricted cash provided by investing activities	43,485		29,951		Net cash and restricted cash provided by investing activities	3,174		969

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Net proceeds on the line of credit		—		778
Proceeds on asset-based lending credit agreement	Proceeds on asset-based lending credit agreement	2,000		—		Proceeds on asset-based lending credit agreement	8,500		—
Payments on asset-based lending credit agreement		(2,000)		—
Proceeds from long-term debt	Proceeds from long-term debt	1,824		1,009		Proceeds from long-term debt	—		1,402
Principal payments on long-term debt	Principal payments on long-term debt	(5,059)		(11,631)		Principal payments on long-term debt	(2,447)		(2,367)
Payments of debt issuance costs	Payments of debt issuance costs	(178)		—		Payments of debt issuance costs	—		(144)
Principal payments on capital lease obligations		(4,018)		(1,224)
Taxes paid related to net settlement of shares		(700)		(512)
Distributions to non-controlling interest		—		(165)
Net cash and restricted cash used in financing activities		(8,131)		(11,745)
Net (decrease) increase in cash and restricted cash		(1,527)		28,448
Principal payments on finance lease obligations						Principal payments on finance lease obligations	(2,680)		(1,884)
Net cash and restricted cash provided by (used in) financing activities						Net cash and restricted cash provided by (used in) financing activities	3,373		(2,993)
Net decrease in cash and restricted cash						Net decrease in cash and restricted cash	(13,247)		(25,936)
Cash and restricted cash, beginning of period	Cash and restricted cash, beginning of period	59,174		29,211		Cash and restricted cash, beginning of period	61,659		59,174
Cash and restricted cash, end of period	Cash and restricted cash, end of period	$	57,647	$	57,659	Cash and restricted cash, end of period	$	48,412	$	33,238

See accompanying notes to condensed consolidated financial statements.

Supplemental Disclosures and Non-cash investing and financing transactions

The following table summarizes additional supplemental disclosures and non-cash investing and financing transactions:

Six Months Ended
June 30,
2022 2021
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 7,779 4,049
Cash paid during the period for taxes 98 534
Supplemental disclosures and non-cash investing and financing transactions:
Gross proceeds from lines of credit $ — $ 60,590
Gross payments on lines of credit — (59,812)
Sale of structural fill asset through a sales-type lease — 6,000
Proceeds from the sale of equipment in accounts receivable, net 288 1,109
Series A Preferred Stock dividends payable included in accrued expenses 1,571 2,148
Deemed and imputed dividends on Series A Preferred Stock 4,383 295
Equipment acquired through capital leases 13,895 7,137
Property and equipment included in accounts payable and accrued expenses 376 205
As reported within the unaudited condensed consolidated balance sheet:
Cash $ 7,071 $ 18,081
Restricted cash 50,576 39,578
Total cash and restricted cash as presented in the balance sheet $ 57,647 $ 57,659


	Three Months Ended
	March 31,
	2023		2022
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	3,745	3,865
Cash refunds during the period for taxes	69		—

Supplemental disclosures and non-cash investing and financing transactions:
Proceeds from the sale of equipment in accounts receivable, net	$	—	$	1,652
Series A Preferred Stock dividends payable included in accrued expenses	677		2,090
Deemed and imputed dividends on Series A Preferred Stock	815		2,144
Equipment acquired through finance leases	132		10,043
Property and equipment included in accounts payable and accrued expenses	—		496

As reported within the unaudited condensed consolidated balance sheet:
Cash	$	11,876	$	11,184
Restricted cash	36,536		22,054
Total cash and restricted cash as presented in the balance sheet	$	48,412	$	33,238

See accompanying notes to condensed consolidated financial statements.

CHARAH SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands, except per share data)

(Unaudited)

1. Nature of Business and Basis of Presentation

Organization

Charah Solutions, Inc. (together with its wholly-owned subsidiaries, “Charah Solutions,” the “Company,” “we,” “us, or “our”) is a holding company formed in Delaware in January 2018. The Company's majority shareholder is Bernhard Capital Partners Management, LP and its affiliates (collectively, “BCP”). BCP owns ~~approximately 59%~~73% of the total voting power of our outstanding shares of common stock and all of the outstanding Series A and Series B Preferred Stock ~~(“Preferred~~(collectively, the “Preferred Stock”) ~~on an as-converted basis. BCP owns all of the outstanding shares of Preferred Stock, and it~~, which is convertible at BCP's option ~~at any time~~ into shares of common stock.

Description of Business Operations

The Company is a leading national service provider of mission-critical environmental services and byproduct recycling to the power generation industry, enabling our customers to address challenges related to the remediation of coal ash ponds and landfills at open and closed power plant sites while continuously operating and providing necessary electric power to communities nationwide. Services offered include a suite of remediation and compliance services, byproduct services, raw material sales and Environmental Risk Transfer (“ERT”) services. The Company has corporate offices in Kentucky and North Carolina and principally operates in the eastern and mid-central United States.

Under the Jumpstart Our Business Startups Act (the “JOBS Act”), the Company meets the definition of an “emerging growth company,” which allows the Company to have an extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. The Company intends to take advantage of the reduced reporting requirements and exemptions, including the longer phase-in periods for adopting new or revised financial accounting standards under Section 107 of the JOBS Act until the Company is no longer an emerging growth company. Among other things, we are not required to provide an auditor attestation report on the assessment of the internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002 and our disclosure obligations regarding executive compensation may be reduced. We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the IPO, or December 31, 2023. However, if certain events occur before the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenue exceeds $1.07 billion, or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company before the end of such five-year period.

Basis for Presentation

The Company’s fiscal year ends December 31. The accompanying unaudited condensed consolidated financial statements include the assets, liabilities, stockholders’ equity and results of operations of the Company and its consolidated subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with rules and regulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included, which consist of normal recurring adjustments. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

Going Concern

The accompanying unaudited condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

As discussed in Note 9, Long-term Debt, the Company entered into an amendment to its Credit Agreement (as defined elsewhere herein) to change the maturity date from November 9, 2025 to January 31, 2024, amongst other changes. The Company does not have sufficient cash on hand or available liquidity to repay the maturing credit agreement debt, including the outstanding letters of credit, as it becomes due within one year after the date that these unaudited condensed consolidated financial statements are issued. Combined with the Company’s recurring losses, recurring and continuing negative operating cash flows, and lack of available liquidity or cash on hand to sustain operations, these conditions raise substantial doubt about the Company’s ability to continue as a going concern.

In response, the Company has entered into a definitive agreement to be acquired by SER Capital Partners, which management anticipates will bring necessary funding to support the ongoing operations of the Company, and has implemented certain cost saving strategies to preserve liquidity. Additionally, the Company is currently pursuing a plan to refinance its Credit Agreement before the maturity date and other strategies to secure additional liquidity. However, these factors are subject to external conditions that are not within the Company’s control, and therefore, implementation of management’s plans cannot be deemed probable. As a result, management has concluded these plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.

The accompanying unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

CHARAH SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

(in thousands, except per share data)

(Unaudited)

Segment Information

The Company operates as 1one reportable segment, reflecting the suite of end-to-end services we offer our utility partners and how our Chief Operating Decision Maker (“CODM”) reviews consolidated financial information to evaluate results of operations, assess performance and allocate resources. Due to the nature of the Company’s business, the Company's Chief Executive Officer, who is also the CODM, evaluates the performance of the Company and allocates resources of the Company based on consolidated gross profit, general and administrative expenses, balance sheet, liquidity, capital spending, safety statistics and business development reports for the Company as a whole. Since the Company has a single operating segment, all required financial segment information can be found in the unaudited condensed consolidated financial statements.

We provide the following services through our 1one segment: remediation and compliance services, byproduct services, raw material sales and ERT services. Remediation and compliance services are associated with our customers’ need for multi-year environmental improvement and sustainability initiatives, whether driven by regulatory requirements, power generation customer initiatives or consumer expectations and standards. Byproduct services consist of recurring and mission-critical coal ash management and operations for coal-fired power generation facilities while also supporting both our power generation customers’ desire to recycle their recurring and legacy volumes of coal combustion residuals (“CCRs”), commonly known as coal ash, and our ultimate end customers’ need for high-quality, cost-effective supplemental cementitious materials (“SCMs”) that provide a sustainable, environmentally-friendly substitute for Portland cement in concrete. Our raw material sales provide customers with the raw materials essential to their business while also providing the sourcing, logistics, and management needed to facilitate these raw material transactions around the globe. ERT services represent an innovative solution designed to meet our ~~coal fired~~coal-fired plant energy providers’ evolving and increasingly complex plant closure and environmental remediation needs. These customers need to retire and decommission older or underutilized assets while maximizing the ~~assets~~assets’ value and improving the

~~CHARAH SOLUTIONS, INC.~~

~~Notes to Condensed Consolidated Financial Statements, continued~~

~~(in thousands, except per share data)~~

~~(Unaudited)~~

environment. Our ERT services manage the ~~sites'~~sites’ environmental remediation requirements, benefiting the communities and lowering the ~~coal fired~~coal-fired plant energy providers’ costs.

~~Impact of the COVID-19 Pandemic~~

In March 2020, the World Health Organization categorized the disease caused by a novel coronavirus (“COVID-19”) to be a pandemic. Management continues to evaluate the impact of the COVID-19 pandemic and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position and results of its operations, the specific impact is not readily determinable as of the date of these financial statements. The financial statement does not include any adjustments that might result from the outcome of this uncertainty.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which includes modifications to the limitation on business interest expense and net operating loss carryforward provisions and provided a payment delay of certain employer payroll taxes during 2020. The Company deferred $1,637 of employer payroll taxes otherwise due in 2020, with 50% paid in the year ended December 31, 2021 and the remaining 50% due by December 31, 2022.

2. Recent Accounting Pronouncements

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASC 842”), requiring all leases to be recognized on the balance sheet as a right-of-use asset and a lease liability unless the lease is a short-term lease (generally a lease with a term of 12 months or less). At the commencement date of the lease, the Company will recognize: (i) a lease liability for the Company’s obligation to make payments under the lease agreement, measured on a discounted basis; and (ii) a right-of-use asset that represents the Company’s right to use, or control the use of, the specified asset for the lease term. This ASU originally required recognition and measurement of leases at the beginning of the earliest period presentedWe adopted ASC 842 using a modified retrospective ~~transition method.~~approach, which required recognition under the new standard, ASC 842, to be applied as of the date of adoption with all prior periods being presented under Leases (Topic 840) (“ASC 840”). In ~~July 2018, the FASB issued ASU No. 2018-11, which provided an additional (and optional) transition method that permits the application of this ASU at the adoption date~~accordance with ~~recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In June 2020, the FASB issued~~ ASU No. 2020-05, ~~and delayed the~~ASC 842 was effective ~~date of this ASU, extending the effective date~~ for non-public business entities ~~and making the ASU effective for the Company~~ for the fiscal year ending December 31, 2022 and interim periods within the fiscal year ending December 31, ~~2023, with early adoption permitted. The Company has not yet selected a transition method and, while we are still in the process of assessing the impact of this new standard on our consolidated~~2023. Therefore, financial position, results of operations and cash flows, we expect the adoption of this standard will have a material impact on our consolidated financial position due to the recognition of the right-of-use asset and lease liability related to operating leases. We had operating leases with remaining rental payments of approximately $24,077information as of ~~June 30, 2022. The discounted minimum remaining rental payments will be~~and for the ~~starting point~~period ended March 31, 2022 herein is presented under ASC 840, and financial information as of and for ~~determining~~ the ~~right-of-use asset~~periods ended December 31, 2022 and ~~lease liability.~~March 31, 2023 herein is presented under ASC 842.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments, which introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new model will apply to: (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost, (2) loan commitments and certain other off-balance sheet credit exposures, (3) debt securities and other financial assets measured at fair value through other comprehensive income, and (4) beneficial interests in securitized financial assets. The amendments contained in this ASU will be applied through a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. In November 2018, the FASB issued ASU No. 2018-19, which amended the effective date of ASU No. 2016-13 and clarified that receivables arising from operating leases are not within the scope of Subtopic 326-20. In October 2019, the FASB delayed the effective date of this ASU, extending the effective date for non-public business entities and making the ASU effective for the Company for the fiscal year ending December 31, 2023, and interim periods ~~therein, with early adoption permitted.~~therein. The ~~Company is currently evaluating the effect that the~~ adoption of this ASU ~~will have~~has not had a material impact on ~~its~~the Company's consolidated financial ~~statements.~~statements and is not expected to have a material impact on the Company's consolidated financial statements on a go-forward basis.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-bank Offered Rate (“LIBOR”) or another rate that is expected to be discontinued. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). This ASU provides supplemental guidance and clarification to ASU No. 2020-04, and these updates must be adopted concurrently, cumulatively referred to as “Topic 848.” The amendments in Topic 848 are currently effective for all entities, and upon adoption, may be applied prospectively to contract modifications made on or before December 31, 2022. The ~~Company is still assessing~~adoption of this ASU has not had a material impact on the ~~impact of Topic 848 on its~~Company's consolidated financial ~~statements.~~statements and is not expected to have a material impact on the Company's consolidated financial statements on a go-forward basis.

In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This ASU simplifies the guidance on accounting for convertible debt instruments by removing the separation models for convertible debt with a cash conversion feature and convertible debt with a beneficial conversion feature. As a result, after adopting the ASU’s guidance, entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a

CHARAH SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

(in thousands, except per share data)

(Unaudited)

convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock unless certain other conditions are met. Also, the ASU requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock

~~CHARAH SOLUTIONS, INC.~~

~~Notes to Condensed Consolidated Financial Statements, continued~~

~~(in thousands, except per share data)~~

~~(Unaudited)~~

method will no longer be available. This ASU will be effective for the Company for the fiscal year ending December 31, 2024, and interim periods therein, with early adoption permitted. The Company is currently evaluating the effect that the adoption of this ASU will have on its consolidated financial statements.

3. ~~Asset Acquisitions~~Revenue

We disaggregate our revenue from customers by customer arrangement as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. See details in the table below.


	Three Months Ended
	March 31,
	2023		2022
Construction contracts	$	33,276	$	30,840
Byproduct services	28,570		24,018
Raw material sales	9,067		11,193
Total revenue	$	70,913	$	66,051

As of March 31, 2023, the Company had remaining performance obligations with an aggregate transaction price of $498,504 on construction contracts for which we recognize revenue over time. We expect to recognize approximately 15% of our remaining performance obligations as revenue during the remainder of 2023, 14% in 2024, 12% in 2025, and 59% thereafter. Revenue associated with our remaining performance obligations includes performance obligations related to our construction contracts. The balance of remaining performance obligations does not include variable consideration that was determined to be constrained as of March 31, 2023. As of March 31, 2023, there were $2,113 of unapproved change orders associated with project scope changes included in determining the profit or loss on certain construction contracts, of which $1,014 were approved subsequent to quarter-end.

The Company ~~closed on 2 acquisitions during~~did not have any foreign revenue for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 and ~~one acquisition during the six months ended June 30, 2021 as~~2022.

4. Asset Acquisitions

As part of its ERT service ~~offerings.~~offerings, the Company closed on two acquisitions during the year ended December 31, 2022: the Avon Lake Asset Acquisition and the Cheswick Generation Station Asset Acquisition.

As each asset group lacked the necessary elements of a business, these transactions were accounted for as asset acquisitions in accordance with ASC 805, Business Combinations, with the assumed liabilities, plus expenses and cash paid by or owed to the seller, comprising the purchase price. Since the fair value of the net assets acquired was different than the purchase price of the assets, the Company allocated the difference pro rata on the basis of relative fair values to reduce the basis of land, land improvements and structural fill sites, property and equipment and other assets acquired. For ~~one acquisition,~~the Cheswick Generating Station Asset Acquisition, the Company recognized a deferred gain representing the difference between the fair value of the assets acquired and the consideration given (including transaction costs incurred).

The Company has identified asset retirement obligations within the assumed liabilities to be initially measured and valued in accordance with ASC 410, Asset Retirement and Environmental Obligations. We developed our estimates of these obligations using input from our operations personnel. Our estimates are based on our interpretation of current requirements and proposed regulatory changes and are intended to approximate fair value. Absent quoted market prices, the estimate of fair value is based on the best available information, including the results of present value techniques. We use professional engineering judgment and estimated prices based on ~~quotes~~quoted rates from third parties and amounts paid for similar work to determine the fair value of these obligations. We are required to recognize these obligations at market prices whether we plan to contract with third parties or perform the work ourselves.

Once we determined the estimated closure and post-closure costs for each asset retirement obligation, we inflation-adjusted those costs to the expected time of payment using an estimated inflation rate and discounted those expected future costs back to present value using the credit-adjusted, risk-free rate effective at the time the obligation was incurred, consistent with the expected cash flow approach. Any changes in expectations that result in an upward revision to the estimated cash flows are treated as a new liability and discounted at the current rate, while downward revisions are discounted at the historical weighted average rate of the recorded obligation. The credit-adjusted, risk-free discount rate used to calculate the present value of an obligation is specific to each specific asset retirement obligation. Gains on ARO settlements result from the requirement to record costs plus an estimate of third-party profit in determining the ARO. When we perform the work using internal resources and reduce the ARO for work performed, we recognize a gain if actual costs are less than the estimated costs plus the third-party profit.

Because these obligations are measured at estimated fair value using present value techniques, changes in the estimated cost or timing of future closure, demolition, and post-closure activities could result in a material change in these liabilities, related assets, and results of operations. We assess the appropriateness of the estimates used to develop our recorded balances annually or more often if conditions warrant. Changes in timing or extent of future final closure and post-closure activities typically result in a current adjustment to the recorded liability and land, land improvements and structural fill sites asset.

CHARAH SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

(in thousands, except per share data)

(Unaudited)

Avon Lake Asset Acquisition

On April 4, 2022, the Company, through its wholly-owned special purpose vehicle subsidiary Avon Lake Environmental Redevelopment Group, LLC (“ALERG”), completed the full acquisition of the Avon Lake Generating Station and adjacent property (the "Avon Lake Property") from GenOn Power Midwest, LP, (“GenOn”) and has begun environmental remediation and sustainable redevelopment of the property.

As part of this agreement, the Company acquired the Avon Lake Property, which is a 40-acre area located on Lake Erie that consists of multiple parcels of land adjacent to the retired generating plant, including the generating station, which ceased electric generation in March 2022, submerged lands lease in Lake Erie, substation/switch gear and transformers, administrative offices and structures, coal rail and storage yard parcels. ALERG assumed all liabilities related to the Avon Lake Property and will be responsible for the shutdown and decommissioning of the coal power plant and performing all environmental remediation and redevelopment work at the site. The decommissioning of the coal power plant and redevelopment of the property are expected to be completed within 36 months from the date of acquisition.

~~CHARAH SOLUTIONS, INC.~~

~~Notes to Condensed Consolidated Financial Statements, continued~~

~~(in thousands, except per share data)~~

~~(Unaudited)~~

The assets acquired and liabilities assumed as recognized within the Company's condensed consolidated balance sheet upon closing on the APA consisted of the following:


Consideration and direct transaction costs:
Asset retirement obligations	$	(34,300)
Direct transaction costs	(1,345)
Total consideration and transaction costs incurred	$	(35,645)

Assets Acquired:
Restricted Cash	$	2,900
Land, land improvements and structural fill sites	32,109
Plant, machinery and equipment	623
Vehicles	13
Total allocated value of assets acquired	$	35,645

A summary of the other assumptions included in the fair value measurement of the asset retirement obligations to be recognized upon closing of the APA consisted of the following:


Other Assumptions:
Inflation rate	2.50	%
Weighted average rate applicable to our long-term asset retirement obligations	7.35	%

As part of the acquisition, the Company acquired certain plant, machinery and equipment and vehicles for which management committed to a plan to sell. Property and equipment of ~~$415~~$505 that was initially classified as held for sale ~~were~~was subsequently sold to third parties ~~as of June 30,~~in 2022. The Company received proceeds of $844 and recorded a gain of $429 within gains on sales of real estate, property and equipment, net, in the Company's condensed consolidated statements of operations. The proceeds were recorded in cash flows from investing activities in the Company's condensed consolidated statements of cash flows. The amount of land, land improvements and structural fill sites acquired includes fair value estimates for real estate and scrap to be sold from the demolition of the coal power plant.

Restricted cash is exclusively used to fund initial costs related to the acquisition and the remaining balance will be used to fund a portion of the asset retirement obligations. Restricted cash is held and will be disbursed by an escrow agent. Funds will be released to the Company as asset retirement obligation costs are incurred and performance of remediation activities are certified by an authorized representative of GenOn.

Cheswick Generating Station Asset Acquisition

On April 6, 2022, the Company, through its wholly-owned special purpose vehicle subsidiaries, Cheswick Plant Environmental Redevelopment Group, LLC, Cheswick Lefever, LLC and Harwick Operating Company, LLC (collectively, “CPERG”), completed the full acquisition of the Cheswick Generating Station, the Lefever Ash Landfill and the Monarch Wastewater Treatment Facility (the "Cheswick Property") from GenOn and ~~will begin~~began environmental remediation and sustainable redevelopment of the Pennsylvania properties immediately. The Cheswick Generating Station ceased electrical generation operations on March 31, 2022.

As part of this agreement, the Company, through CPERG, has acquired properties consisting of:

▪The retired Cheswick Generating Station, a 565 MW coal-fired plant previously operated by GenOn, located in Springdale, PA. The 56-acre primary generating station site, along with an adjacent 27-acre parcel, consists of an operating rail line, a coal yard, bottom ash emergency and recycle ponds, waste ponds and a coal pile runoff pond, coal delivery equipment, and an ash handling parcel. CPERG ~~will be~~is responsible for the shutdown and decommissioning of the coal power plant, the remediation of the 2two ash ponds and performing all environmental remediation and redevelopment work at the site.

▪The Lefever Ash Landfill in Cheswick, PA. The 182-acre site, including the 50-acre landfill facility, provided disposal of coal combustion residuals (CCR) and residual waste from the Cheswick Generating Station. CPERG ~~will be~~is responsible for the closure design, remediation closure work and post-closure monitoring of the landfill.

CHARAH SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

(in thousands, except per share data)

(Unaudited)

▪The Monarch Wastewater Treatment Facility in Allegheny County, PA. CPERG ~~will be~~is responsible for management and compliance with all applicable environmental regulations.

In the process of accounting for this transaction, the basis of the land, property and equipment acquired was reduced to zero, resulting in an excess of financial assets over and above the purchase price. The Company ~~recognized~~recorded a deferred gain of $4,476, representing the difference between the fair value of the assets acquired and the consideration given (including transaction costs incurred). This deferred gain will be recognized ratably over the entire project as remediation costs are incurred in proportion to total estimated remediation costs. During the three months ended March 31, 2023, the Company recognized $278 of the deferred gain within gains on sales of real estate, property and equipment, net, in the Company's condensed consolidated statements of operations. The decommissioning of the coal power plant and redevelopment of these properties are expected to be completed within 42 months from the date

~~CHARAH SOLUTIONS, INC.~~

~~Notes to Condensed Consolidated Financial Statements, continued~~

~~(in thousands, except per share data)~~

~~(Unaudited)~~

of acquisition, and the post-closure monitoring associated with the Lefever Ash Landfill and Monarch Wastewater Treatment Facility will occur for 30 years after the closure of the sites.

The assets acquired and liabilities assumed as recognized within the Company's condensed consolidated balance sheet upon closing on the APA consisted of the following:


Consideration and direct transaction costs:
Asset retirement obligations	$	(30,179)
Direct transaction costs and accrued expenses	(684)
Total consideration and transaction costs incurred	$	(30,863)

Assets Acquired:
Cash	$	5,577
Restricted cash	29,762
Total allocated value of assets acquired	$	35,339

Excess of fair value of assets acquired over total consideration – deferred gain	$	(4,476)

A summary of the other assumptions included in the fair value measurement of the asset retirement obligations to be recognized upon closing of the APA consisted of the following:


Other Assumptions:
Inflation rate	2.50	%
Weighted average rate applicable to our long-term asset retirement obligations	7.45	%

As part of the acquisition, the Company acquired certain plant, machinery and equipment and vehicles for which management committed to a plan to sell. Property and equipment that was initially classified as held for sale was subsequently sold to third parties in 2022.

Restricted cash is exclusively used to fund initial costs related to the acquisition and the remaining balance will be used to fund a portion of the asset retirement obligations. Restricted cash is held and will be disbursed by an escrow agent. Funds will be released to the Company as certain project milestones are met and performance of remediation activities are certified by an authorized representative of GenOn.

~~Gibbons Creek Asset Acquisition~~

In February 2021, the Company, through its wholly-owned special purpose vehicle subsidiary Gibbons Creek Environmental Redevelopment Group (“GCERG”), closed on an Asset Purchase Agreement (the “APA” or the “Agreement”) with Texas Municipal Power Agency to acquire, remediate and redevelop the Gibbons Creek Steam Electric Station and Reservoir (the “Gibbons Creek Transaction”). As part of this Agreement, GCERG took ownership of the 6,166 acre area (collectively, the “Purchased Assets”), which includes the closed power station and adjacent property, the 3,500 acre reservoir, dam and floodway. GCERG assumed all environmental responsibilities and became responsible for decommissioning the coal power plant and performing all environmental remediation work for the site landfills and ash ponds. At closing of the APA, GCERG became liable for and expressly fully assumed any and all environmental liabilities and environmental compliance, as well as, without limitation, any remediation, investigation, management, mitigation, closure, maintenance, reporting, removal, disposal of and any other actions with respect to any hazardous substances at, on, in, under, or emanating from the Purchased Assets.

GCERG, at its discretion, is redeveloping the property in an environmentally conscious manner which the Company expects to expand economic activity and benefit the surrounding communities as well as restore the property to a state that will enable it to be put to its best potential use. The existing power plant has been demolished, and GCERG is working with the Texas Commission on Environmental Quality to complete all environmental remediation required for the property and then plans to redevelop the remediated property within all zoning restrictions. The redevelopment of the property is expected to be completed within 34 months from the date of acquisition.

~~CHARAH SOLUTIONS, INC.~~

~~Notes to Condensed Consolidated Financial Statements, continued~~

~~(in thousands, except per share data)~~

~~(Unaudited)~~

~~The assets acquired and liabilities assumed as recognized within the Company's condensed consolidated balance sheet upon closing on the APA consisted of the following:~~


~~Consideration and direct transaction costs:~~
~~Asset retirement obligations~~	$	~~(50,590)~~
~~Bond and insurance accrued expenses, net~~	~~(2,229)~~
~~Direct transaction costs~~	~~(2,336)~~
~~Total consideration and transaction costs incurred~~	$	~~(55,155)~~

~~Assets Acquired:~~
~~Cash~~	$	~~6,354~~
~~Restricted cash~~	~~28,546~~
~~Water rights~~	~~5,196~~
~~Land, land improvements and structural fill sites~~	~~14,385~~
~~Plant, machinery and equipment~~	~~610~~
~~Vehicles~~	64
~~Total allocated value of assets acquired~~	$	~~55,155~~

~~A summary of the other assumptions included in the fair value measurement of the asset retirement obligations to be recognized upon closing of the APA consisted of the following:~~


~~Other Assumptions:~~
~~Inflation rate~~	~~3.00~~	%
~~Weighted average rate applicable to our long-term asset retirement obligations~~	~~4.50~~	%

Demolition costs will be capitalized as part of land, land improvements and structural fill sites as incurred as part of preparing the site for sale since, at the acquisition date, (i) we planned to demolish the existing structure as part of the redevelopment plan for the acquired property, (ii) demolition is expected to occur within a reasonable period of time after acquisition, and (iii) such expected costs will be incurred to make the land saleable to a third party.

As part of the acquisition, the Company acquired certain plant, machinery and equipment and vehicles for which management committed to a plan to sell. Property and equipment of $193 that was initially classified as held for sale was subsequently sold to third parties.

To date, the Company has completed the sale of nearly 80% of the real property acreage acquired through the Gibbons Creek Transaction. The sale of property included 4,860 acres of the 6,166-acre area, the 3,500-acre reservoir, dam and spillway. There were no sales of real property acreage for the three and six months ended June 30, 2022 and 2021, respectively.

~~4. Revenue~~

Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Construction contracts $ 36,096 $ 31,713 $ 66,936 $ 51,652
Byproduct services 27,405 23,392 51,423 49,865
Raw material sales 13,609 8,413 24,802 14,108
Total revenue $ 77,110 $ 63,518 $ 143,161 $ 115,625

As of June 30, 2022, the Company had remaining performance obligations with an aggregate transaction price of $432,332 on construction contracts for which we recognize revenue over time. We expect to recognize approximately 18% of our remaining performance obligations as revenue during the remainder of 2022, 11% in 2023, 8% in 2024, and 62% thereafter. Revenue associated with our remaining performance obligations includes performance obligations related to our construction contracts. The balance of remaining performance obligations does not include variable consideration that was determined to be constrained as of June 30, 2022. As of June 30, 2022, there were $1,579 of unapproved change orders associated with project scope changes included in determining the profit or loss on certain construction contracts, of which $0 were approved subsequent to quarter-end.

~~The Company did not have any foreign revenue for the three and six months ended June 30, 2022 and 2021.~~

~~CHARAH SOLUTIONS, INC.~~

~~Notes to Condensed Consolidated Financial Statements, continued~~

~~(in thousands, except per share data)~~

~~(Unaudited)~~

5. Balance Sheet Items

Real estate, property and equipment, net

The following table shows the components of real estate, property and equipment, net:


		June 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Plant, machinery and equipment	Plant, machinery and equipment	$	61,963	$	63,937	Plant, machinery and equipment	$	58,215	$	60,377
Structural fill site improvements	Structural fill site improvements	55,760		55,760		Structural fill site improvements	55,760		55,760
Vehicles	Vehicles	12,028		11,718		Vehicles	11,603		11,619
Office equipment	Office equipment	600		600		Office equipment	600		600
Buildings and leasehold improvements	Buildings and leasehold improvements	267		267		Buildings and leasehold improvements	267		267
Land, land improvements and structural fill sites	Land, land improvements and structural fill sites	43,994		12,231		Land, land improvements and structural fill sites	44,614		44,790
Capital lease assets		45,068		31,172
Construction in progress		616		1,522
Finance lease assets						Finance lease assets	49,437		49,306
Total real estate, property and equipment	Total real estate, property and equipment	$	220,296	$	177,207	Total real estate, property and equipment	$	220,496	$	222,719
Less: accumulated depreciation		(114,099)		(106,734)
Less: accumulated depreciation and impairment						Less: accumulated depreciation and impairment	(130,895)		(128,779)
Real estate, property and equipment, net	Real estate, property and equipment, net	$	106,197	$	70,473	Real estate, property and equipment, net	$	89,601	$	93,940

CHARAH SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

(in thousands, except per share data)

(Unaudited)

Land, land improvements and structural fill sites include ~~$5,677~~$18,870 of real property acquired in the ~~Gibbons Creek Transaction~~ asset acquisitions discussed in Note 4that the Company is actively demolishing and for which depreciation expense is not being recorded. During the three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022, the Company capitalized ~~$768~~$64 and ~~$1,610,~~$842, respectively, of demolition costs and sold scrap with a cost basis of ~~$966~~$237 and ~~$1,956,~~$990, respectively. ~~During the three and six months ended June 30, 2021, the Company capitalized $882 and $1,030, respectively, of demolition costs and sold scrap with a cost basis of $339.~~

Depreciation expense was ~~$4,846~~$3,836 and ~~$4,195~~$4,597 for the three months ended ~~June 30,~~March 31, 2023 and 2022, respectively.

Impairment of Long-Lived Assets Other than Goodwill and ~~2021, respectively,~~Intangible Assets

Long-lived assets other than goodwill and ~~$9,443~~indefinite-lived intangible assets, held and ~~$8,368~~used by the Company, including inventory and property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the ~~six months~~carrying amount of the assets may not be recoverable. The Company evaluates the recoverability of assets to be held and used by comparing the carrying amount of an asset to the future net undiscounted cash flows expected to be generated by the asset to determine if the carrying value is not recoverable. If the carrying value is not recoverable, the Company fair values the asset and compares that fair value to the carrying value. If the asset is considered to be impaired, the impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value.

During the year ended ~~June 30,~~December 31, 2022, the Company determined that a triggering event occurred that indicated that the carrying value of certain long-lived assets may not be recoverable. The Company determined that the discounted future cash flows were less that the carrying value of the asset group, indicating impairment. The fair value of the assets was determined through a market approach using the net realizable value of the assets, which indicated that certain assets were impaired that resulted in an impairment charge of $10,484 recognized on October 1, 2022.

~~Capital leases~~

The ~~following table shows the components~~long-lived assets impaired had a remaining fair value of ~~capital lease assets, net:~~

June 30, 2022 December 31, 2021
Capital lease assets $ 45,068 $ 31,172
Less: accumulated depreciation (7,800) (3,606)
Capital lease assets, net $ 37,268 $ 27,566

~~The Company's depreciation~~$20,003 as of ~~capital lease assets is included within depreciation expense as disclosed above.~~December 31, 2022.

Sales-type lease

In March 2021, the Company amended an existing ground lease with a third party concerning one of the Company's structural fill assets with a 30-year term expiring on December 31, 2050. The lease includes multiple options that may be exercised at any time during the lease term for the lessee to purchase all or a portion of the premises as well as a put option (the “Put Option”) that provides the Company the option to require the lessee to purchase all of the premises at the end of the lease term.

In accordance with ASC 840 and ASC 842, Leases, the Company considered whether this lease, as amended, met any of the following four criteria as part of classifying the lease at the amendment date: (a) the lease transfers ownership of the property to the lessee by the end of the lease term; (b) the lease contains a bargain purchase option; (c) the lease term is equal to 75 percent or more of the estimated economic life of the lease property; and (d) the present value of the minimum lease payments, excluding executory costs, equals or exceeds 90 percent of the excess of the fair value of the lease property to the lessor at lease inception. This lease was recorded as a sales-type ~~capital~~finance lease due to the Put Option provision contained within the lease agreement that represents a transfer of ownership of the property by the end of the lease term. Additionally, the Company determined that collectability of the lease payments was reasonably assured and that there were not any significant uncertainties related to costs that it has yet to incur with respect to the lease.

At the amendment date of the lease, a discount rate of 3.9% implicit in the sales-type lease was used to calculate the present value of the minimum lease payments, which the Company recorded as a lease receivable. ~~The Company recognized a gain of $5,568 within operating income in the accompanying unaudited condensed consolidated statements of operations for the six months ended June 30, 2021.~~

~~CHARAH SOLUTIONS, INC.~~

~~Notes to Condensed Consolidated Financial Statements, continued~~

~~(in thousands, except per share data)~~

~~(Unaudited)~~

The following table reflects the classification of the lease receivable within our accompanying unaudited condensed consolidated balance sheet:


		June 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Lease receivable	Lease receivable	$	5,905	$	5,937	Lease receivable	$	5,856	$	5,872
Less: current portion in prepaid expenses and other current assets	Less: current portion in prepaid expenses and other current assets	(66)		(65)		Less: current portion in prepaid expenses and other current assets	(68)		(68)
Non-current portion in other assets	Non-current portion in other assets	$	5,839	$	5,872	Non-current portion in other assets	$	5,788	$	5,804

Asset Sale Agreement

In June 2021, the Company consummated an asset sale with an unrelated third party in which the Company assigned a lease agreement to the purchaser and sold certain grinding-related inventory and fixed assets for an aggregate sale price of $2,852. The Company received $1,250 in cash at closing, with the remaining portion to be paid over time on specified dates, with the final payment to be received 36 months from the closing date.

The Company determined that the note receivable included a significant financing component. As a result, the sale price and gain on sale were determined on a discounted cash flow basis.

The following table reflects the classification of the note receivable within our unaudited condensed consolidated balance sheet:


		June 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Note receivable	Note receivable	$	1,102	$	1,352	Note receivable	$	852	$	852
Less: current portion in prepaid expenses and other current assets	Less: current portion in prepaid expenses and other current assets	(500)		(500)		Less: current portion in prepaid expenses and other current assets	(500)		(500)
Non-current portion in other assets	Non-current portion in other assets	$	602	$	852	Non-current portion in other assets	$	352	$	352

CHARAH SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

(in thousands, except per share data)

(Unaudited)

Accrued liabilities

The following table shows the components of accrued liabilities:


		June 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Accrued expenses	Accrued expenses	$	21,418	$	25,074	Accrued expenses	$	18,553	$	17,022
Accrued payroll and bonuses						Accrued payroll and bonuses	3,971		5,732
Accrued interest	Accrued interest	2,250		2,008		Accrued interest	3,420		2,853
Accrued preferred stock dividends	Accrued preferred stock dividends	1,571		1,994		Accrued preferred stock dividends	677		689
Accrued payroll and bonuses		2,981		7,798
Accrued liabilities	Accrued liabilities	$	28,220	$	36,874	Accrued liabilities	$	26,621	$	26,296

6. Asset Retirement Obligations

As of ~~June 30, 2022,~~March 31, 2023, the Company owns 2two structural fill sites with continuing maintenance and monitoring requirements after their closure, one wastewater treatment facility with continuing maintenance and monitoring requirements, and 8eight tracts of real property with decommissioning, remediation and monitoring requirements. As of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company has accrued ~~$83,729~~$58,639 and ~~$42,413,~~$68,561, respectively, for the asset retirement obligations (“ARO”).

The following table reflects the activity for our asset retirement obligations:


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Balance, beginning of period	Balance, beginning of period	$	33,969	$	54,112	$	42,413	$	5,159	Balance, beginning of period	$	68,561	$	42,413
Liabilities incurred		64,479		—		64,479		50,590
Liabilities settled	Liabilities settled	(13,489)		(2,305)		(19,883)		(4,175)		Liabilities settled	(11,010)		(6,394)
Accretion	Accretion	327		554		728		787		Accretion	1,047		401
Gain on ARO settlement		(1,557)		—		(4,008)		—
Loss (gain) on ARO settlement										Loss (gain) on ARO settlement	41		(2,451)
Balance, end of period	Balance, end of period	83,729		52,361		83,729		52,361		Balance, end of period	58,639		33,969
Less: current portion	Less: current portion	(47,542)		(21,395)		(47,542)		(21,395)		Less: current portion	(30,301)		(24,776)
Non-current portion	Non-current portion	$	36,187	$	30,966	$	36,187	$	30,966	Non-current portion	$	28,338	$	9,193

~~CHARAH SOLUTIONS, INC.~~

~~Notes to Condensed Consolidated Financial Statements, continued~~

~~(in thousands, except per share data)~~

~~(Unaudited)~~

7. Related Party Transactions

ATC Group Services LLC (“ATC”), an entity owned by BCP, our majority stockholder, provided environmental consulting and engineering services at certain service sites. Expenses to ATC were $7$10 and ~~$25~~$18 for the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $25 and $79 for the six months ended June 30, 2022 and 2021.~~respectively. The Company had no receivables outstanding from ATC at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. The Company had payables and accrued expenses, net of credit memos, due to ATC of $4$5 and $4$14 at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

As further discussed in Note 9, Long-term Debt, in August 2021, the Company completed an offering of $135,000, in the aggregate, of the Company’s 8.50% Senior Notes due 2026 (the “Notes”), which amount included the exercise by the underwriters of their option to purchase an additional $5,000 aggregate principal amount of Notes. B. Riley Securities, Inc. (“B. Riley”), a shareholder of the Company with board representation, served as the lead book-running manager and underwriter for this offering, purchasing a principal amount of $80,325 of the Notes. Fees paid to B. Riley related to this offering were $7,914. These fees were capitalized as debt issuance costs within notes payable, less current maturities in the accompanying unaudited condensed consolidated balance sheets and will be amortized prospectively through interest expense, net in the accompanying unaudited condensed consolidated statements of operations using the effective interest method through the maturity date of the Notes.

As further discussed in Note ~~11,~~9, Long-term Debt, on August 15, 2022, the Company, through its GCERG subsidiary, entered into the Term Loan Agreement with BCP that provides for a delayed-draw term loan in an aggregate principal amount of $20,000.

As further discussed in Note 12, Mezzanine Equity, in March 2020, the Company entered into an agreement with an investment fund affiliated with BCP to sell ~~26,000~~26 (twenty-six thousand) shares of Series A Preferred ~~Stock.~~

~~As further discussed~~Stock and, in ~~Note 9, Long-term Debt, on August 15,~~November 2022, the Company ~~through its GCERG subsidiary,~~ entered into ~~a term loan~~an investment agreement ~~(the “Term Loan Agreement”)~~ with BCP ~~that provides for a delayed-draw term loan in an aggregate principal amount~~to sell 30 (thirty thousand) shares of ~~$20.0 million.~~Series B Preferred Stock.

8. Goodwill ~~and Intangible Assets~~

Goodwill ~~and indefinite-lived intangible assets are~~is not amortized but instead ~~are~~is tested for impairment annually or more often if events or changes in circumstances indicate that the fair value of the asset may have decreased below its carrying value. We perform our impairment test effective October 1st of each year and evaluate for impairment indicators between annual impairment tests, of which there were none. There was no goodwill activity during the ~~six months ended June 30, 2022.~~

~~Indefinite-Lived and Definite-Lived Intangible Assets~~

Our intangible assets, net include a trade name that is considered to have an indefinite life and customer relationships that are considered to have a definite life. Our customer relationships are amortized on a straight-line basis over their estimated useful lives of 10 years. The amortization expense of our definite-lived intangible assets was $1,973 for the three months ended ~~June 30, 2022 and 2021 and $3,947 for the six months ended June 30, 2022 and 2021.~~

~~The Company’s intangible assets consist of the following:~~

June 30, 2022 December 31, 2021
Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount
Definite-lived intangibles
Customer relationships $ 78,942 $ (42,674) $ 36,268 $ 78,942 $ (38,727) $ 40,215
Indefinite-lived intangibles
Charah trade name 13,316 13,316
0 0
Total $ 49,584 $ 53,531
March 31, 2023.

9. Long-term Debt

Senior Notes

On August 25, 2021, the Company completed a public offering of $135,000, in the aggregate, of the Company’s Notes, which

CHARAH SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

(in thousands, except per share data)

(Unaudited)

amount includes the exercise by the underwriters of their option to purchase an additional $5,000 aggregate principal amount of Notes.

The Notes were issued pursuant to the First Supplemental Indenture (the “First Supplemental Indenture”), dated as of August 25, 2021, between the Company and Wilmington Savings Fund Society, FSB, as trustee (the “Trustee”). The First Supplemental Indenture supplements the Indenture entered into by and between the Company and the Trustee, dated as of August 25, 2021 (the “Base Indenture” and, together with the First Supplemental Indenture, the “Indenture”).

The public offering price of the Notes was 100.0% of the principal amount. The Company received proceeds before payment of expenses and other fees of $135,000. The Company used the proceeds, along with cash from the sale of equity to B. Riley, to fully repay and

~~CHARAH SOLUTIONS, INC.~~

~~Notes to Condensed Consolidated Financial Statements, continued~~

~~(in thousands, except per share data)~~

~~(Unaudited)~~

terminate the Company’s Credit Facility, as defined below, with any remaining proceeds ~~to be~~being used for general corporate purposes, including funding future acquisitions and investments, repaying indebtedness, making capital expenditures and funding working capital.

The Notes bear interest at the rate of 8.50% per annum. Interest on the Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing October 31, 2021. The Notes will mature on August 31, 2026.

The Company may redeem the Notes for cash in whole or in part at any time (i) on or after August 31, 2023 and prior to August 31, 2024, at a price equal to 103% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption, (ii) on or after August 31, 2024 and prior to August 31, 2025, at a price equal to 102% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption, and (iii) on or after August 31, 2025 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Notes. If the Company is redeeming less than all of the Notes, the Trustee will select the Notes to be redeemed by such method as the Trustee deems fair and appropriate in accordance with methods generally used at the time of selection by fiduciaries in similar circumstances.

The Indenture also contains customary event of default and cure provisions. If an uncured default occurs and is continuing, the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes may declare the Notes to be immediately due and payable.

The Notes are senior unsecured obligations of the Company and rank equal in right of payment with the Company’s existing and future senior unsecured indebtedness.

As a result of the issuance of the Notes, $12,116 of third-party fees were capitalized as debt issuance costs that will be amortized through interest expense, net in the accompanying unaudited condensed consolidated statements of operations using the effective interest method through the maturity date of the Notes.

Asset-Based Lending Credit Agreement

On November 9, 2021, the Company entered into a new Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, the lenders party thereto and certain subsidiary guarantors named therein. The Credit Agreement provides for a four-year senior secured revolving credit facility with initial aggregate commitments from the lenders of $30,000, which includes $5,000 available for swingline loans, plus an additional $5,000 of capacity available for the issuance of letters of credit if supported by cash collateral provided by the Company (with a right to increase such amount by up to an additional $5,000) (“Aggregate Revolving Commitments”). Availability under the Credit Agreement is subject to a borrowing base calculated based on the value of certain eligible accounts receivable, inventory, and equipment of the Company and subject to redeterminations made in good faith and in the exercise of permitted discretion of JPMorgan. Proceeds of the Credit Agreements may be used for working capital and general corporate purposes.

The Credit Agreement provides for borrowings of either base rate loans or Eurodollar loans. Principal amounts borrowed are payable on the maturity date with such borrowings bearing interest that is payable (i) with respect to base rate loans, monthly and (ii) with respect to Eurodollar loans, the last day of each Interest Period (as defined below); provided that if any Interest Period for a Eurodollar loan exceeds three months, interest will be payable on the respective dates that fall every three months after the beginning of such Interest Period. Eurodollar Loans bear interest at a rate per annum equal to the Adjusted LIBOR for one, three or six months (the “Interest Period”), plus an applicable margin of 2.25%. Base rate loans bear interest at a rate per annum equal to the greatest of (i) the agent bank’s reference rate, (ii) the federal funds effective rate plus 50 basis points and (iii) the rate for one month Adjusted LIBOR loans plus 100 basis points, plus an applicable rate of 125 basis points. The Credit Agreement contains a provision for sustainability adjustments annually that will impact the applicable margin by between positive 0.05% and negative 0.05% based on the achievement, or lack thereof, of certain metrics agreed upon between JPMorgan and the Company and publicly reported through the Company’s annual non-financial sustainability report.

The Credit Agreement is guaranteed by certain of the Company’s subsidiaries and is secured by substantially all of the Company’s and such subsidiaries’ assets. The Credit Agreement contains customary restrictive covenants for asset-based loans that may limit the Company’s ability to, among other things: incur additional indebtedness, sell assets, make loans to others, make investments, enter into mergers, make certain restricted payments, incur liens, and engage in certain other transactions without the prior consent of the lenders.

A covenant testing period (“Covenant Testing Period”) is a period in which excess availability (which is defined in the Credit Agreement as the sum of availability and an amount up to $1,000) is less than the greater of (a) 12.5% of the lesser of the aggregate revolving commitments and the borrowing base, (b) the lesser of $7,500 and the PP&E Component as defined in the Credit Agreement, and (c) $3,500, for 3three consecutive business days. During a Covenant Testing Period, the Credit Agreement requires the Company to maintain a fixed charge coverage ratio as defined in the Credit Agreement, determined for any period of twelve (12) consecutive months ending on the last day

CHARAH SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

(in thousands, except per share data)

(Unaudited)

of each fiscal quarter, of at least 1.00 to 1.00.

As of ~~June 30,~~March 31, 2023 and December 31, 2022, the Company ~~has no outstanding draw~~had $8,500 and $0, respectively, drawn on the Credit Agreement. Outstanding letters of credit were $12,487 and ~~$19,027~~$10,687 as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021. As of June 30,~~ 2022, ~~all outstanding letters of credit were issued with JPMorgan.~~respectively.

~~CHARAH SOLUTIONS, INC.~~

~~Notes to Condensed Consolidated Financial Statements, continued~~

~~(in thousands, except per share data)~~

~~(Unaudited)~~

Agreement Amendment permits the Company to include certain gains on ARO settlements and cash received for deferred gains from ERT projects in the calculation of the Company’s fixed charge coverage ratio under the Credit Agreement's financial covenant. As

On November 14, 2022, the Company entered into Amendment No. 2 to the Credit Agreement (the “Second Credit Agreement Amendment”) with JPMorgan Chase Bank, N.A., as administrative agent, the lenders party thereto and certain subsidiary guarantors named therein. The Second Credit Agreement Amendment, among other things, changed the benchmark rate floor on such loans from the LIBO Rate to the Adjusted Term SOFR Rate, increased the revolver Term Benchmark spread from 2.25% to 2.75%, and modified the test for the Covenant Testing Period such that any excess borrowing base over the revolving commitment amount could reduce the threshold that triggers the covenant test up to $2,000. Additionally, the Second Credit Agreement Amendment permits the Company to include $15,000 of ~~June 30, 2022, after taking~~equity contributions in "EBITDA", as defined in the Second Credit Agreement Amendment, for the fourth quarter of 2022.

Asand related documents, and no event of ~~August 19, 2022, based on the undrawn letters of credit utilization of $10,687, borrowings of $9,500 under~~default, as defined within the Credit Agreement, has occurred or will result from the acquisition; (ii) amends the definition of Progress Billings Cap Amount to be used in certain borrowing base certificates; (iii) amends the definition of the Applicable Rate; (iv) changes the maturity date from November 9, 2025 to January 31, 2024; and ~~applicable~~(v) consents to an extension of the deadline for certain financial ~~covenant requirements, springing covenants would become applicable if~~deliverables for the ~~Company were to borrow additional amounts in excess of approximately $1,834 under the Credit Agreement.~~fiscal year ended December 31, 2022.

As a result of entering into the Credit Agreement, ~~$1,443~~$1,366 of third-party fees were capitalized as debt issuance costs that will be amortized through interest expense, net in the unaudited condensed consolidated Statements of Operations using the ~~effective interest~~straight-line method through the maturity date of the Credit Agreement. Unamortized debt issuance costs as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 were ~~$1,232~~$1,018 and ~~$1,338, respectively.~~$1,114, respectively, and classified in other assets in the accompanying unaudited condensed consolidated balance sheets.

Term Loan Agreement

On August 15, 2022, the Company, through its GCERG subsidiary (the “Term Loan Borrower”), entered into a term loan agreement (the “Term Loan Agreement”) with Charah Preferred Stock Aggregator, LP, an affiliate of Bernhard Capital Partners Management, LP (“BCP”). As a result of unexpected operating losses, an increase in contract assets and accelerated cash outflows for remediation activities on an ERT project that led to a decrease in cash during the six months ended June 30, 2022, the Company sought additional financing options to fund ongoing operations and project level investment. The Term Loan Agreement was executed to provide additional liquidity for the Company and accelerate the timing of the Company's cash flows for anticipated sales of the GCERG real estate parcels. The Term Loan Agreement provides for a delayed-draw term loan in an aggregate principal amount of $20,000. ~~Borrowings can be requested at any date before October 24, 2022.~~ The Term Loan Agreement is scheduled to mature on the earlier of the sale of the remaining GCERG real estate parcels or April 15, 2024. The Company elected to draw down the full borrowing capacity available under the Term Loan Agreement by November 8, 2022 through separate funding requests in order to fund operating activities. Borrowings under the Term Loan Agreement accrue interest at a percentage per annum equal to 12.0%, with interest payments due on the first business day of each calendar quarter following the effective date of the Term Loan Agreement and on the maturity date. The Term Loan Borrower agreed to pay a commitment fee equal to $1,000 that is payable on the earliest of (i) April 15, 2024, (ii) the date on which the loans are redeemed in full and all commitments are terminated and (iii) the date on which all commitments are terminated in full. The Term Loan Agreement is secured by a lien on, and security interest in, substantially all of the Term Loan Borrower’s assets, including real property, and is guaranteed on an unsecured basis by the Company and Charah, LLC. Voluntary prepayments are permitted at any time, without premium or penalty.

The Term Loan Agreement contains certain customary representations and warranties and affirmative and negative covenants. The negative covenants include, subject to customary exceptions, limitations on indebtedness, investments and acquisitions, mergers and consolidations, restricted payments, transactions with affiliates, liens and dispositions. The Term Loan Agreement allows the Term Loan Borrower to make distributions to its equity holders with the proceeds of the loans made thereunder. The Term Loan Agreement contains customary events of default. If an event of default occurs and is continuing, the lenders may declare all loans to be immediately due and payable.

~~Previous Credit Facility~~

~~On September 21, 2018, we~~Amendment, ALERG, Cheswick Lefever LLC and Cheswick Plant Environmental Redevelopment Group LLC (collectively, the “Grantors”) entered into a ~~credit~~security agreement, dated as of April 16, 2023, with Charah Preferred Stock Aggregator, LP, an affiliate of BCP, as the secured party (the ~~“Credit Facility”~~“Secured Party”) ~~by and among us,~~, pursuant to which the ~~lenders party thereto from time to time and Bank of America, N.A., as administrative agent (the “Administrative Agent”). The Credit Facility included:~~

•~~A revolving loan not to exceed $50,000 (the “Revolving Loan”);~~

•~~A term loan of $205,000 (the “Closing Date Term Loan”); and~~

•A commitment to loan up to a further $25,000 in term loans, which expired in March 2020 (the “Delayed Draw Commitment” and the term loans funded under such Delayed Draw Commitment, the “Delayed Draw Term Loan,” together with the Closing Date Term Loan, the “Term Loan”).

Pursuant to the terms of the Credit Facility and its related amendments, all amounts associated with the Revolving Loan and the Term Loan under the Credit Facility were set to mature in July 2022. The interest rates per annum applicable to the loans under the Credit Facility were based on a fluctuating rate of interest measured by reference to, at our election, either (i) the Eurodollar rate, currently LIBOR, or (ii) an alternative base rate. Various margins were added to the interest rate based upon our consolidated net leverage ratio (as defined in the Credit Facility). Customary fees were payable regarding the Credit Facility and included (i) commitment fees for the unused portions of the Credit Facility and (ii) fees on outstanding letters of credit. Amounts borrowed under the Credit Facility were secured by substantially all of the assets of the Company.

~~The Credit Facility contained various customary representations, warranties, restrictive covenants, certain affirmative covenants, including reporting requirements, and customary events of default.~~

Grantors granted liens over

1714

CHARAH SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

(in thousands, except per share data)

(Unaudited)

substantially all of their assets in favor of the Secured Party.

As a result of entering into the Term Loan Agreement, $598 of third-party fees were capitalized as debt issuance costs that will be amortized through interest expense, net in the unaudited condensed consolidated statements of operations using the effective interest method through the maturity date of the Term Loan Agreement.

10. Notes Payable

The following table summarizes the major components of debt at each balance sheet date and provides maturities and interest rate ranges for each major category as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:

June 30, 2022 December 31, 2021
Various equipment notes entered into in November 2017, payable in monthly installments ranging from $6 to $24, including interest at 5.2%, maturing in December 2022 through December 2023. The notes are secured by equipment with a net book value of $385 as of June 30, 2022. $ 1,126 $ 1,748
Various equipment notes entered into in 2018, payable in monthly installments ranging from $1 to $39, including interest ranging from 5.6% to 6.8%, maturing in March 2023 through May 2025. The notes are secured by equipment with a net book value of $4,427 as of June 30, 2022. 4,901 5,952
Various equipment notes entered into in 2019, payable in monthly installments ranging from $2 to $23, including interest ranging from 3.9% to 6.4%, maturing in April 2024 through December 2024. The notes are secured by equipment with a net book value of $1,813 as of June 30, 2022. 2,196 2,633
Various equipment notes entered into in 2020, payable in monthly installments ranging from $9 to $10, including interest of 5.4%, maturing in August 2025. The notes are secured by equipment with a net book value of $1,528 as of June 30, 2022. 1,423 1,624
Various equipment notes entered into in 2021, payable in monthly installments ranging from $3 to $9, including interest ranging from 4.0% to 6.5%, maturing in February 2026 through August 2026. The notes are secured by equipment with a net book value of $1,867 as of June 30, 2022. 1,675 1,861
Various commercial insurance premium financing agreements entered into in 2021, payable in monthly installments ranging from $24 to $117, including interest ranging from 3.0% to 3.9%, maturing in October 2021 through April 2022. — 467
A commercial insurance premium financing agreement entered into in 2022, payable in monthly installments of $143, including interest of 4.2%, maturing in November 2022. 1,045 —
A $10,000 equipment line with a bank, entered into in December 2017, secured by all equipment purchased with the proceeds of the loan. Interest is calculated on any outstanding amounts using a fixed rate of 4.5%. The equipment line converted to a term loan in September 2018 with a maturity date of June 22, 2023. The term loan is secured by equipment with a net book value of $1,486 as of June 30, 2022. 2,071 3,387
Senior Unsecured Notes, issued August 2021 (see Note 9). The Notes are senior unsecured obligations of the Company, bearing stated interest at 8.5%, and rank equal in right of payment with the Company’s existing and future senior unsecured indebtedness. 135,000 135,000
Total 149,437 152,672
Less debt issuance costs, net (10,485) (11,444)
138,952 141,228
Less current maturities (8,010) (7,567)
Notes payable due after one year $ 130,942 $ 133,661


	March 31, 2023		December 31, 2022
Various equipment notes entered into in November 2017, payable in monthly installments ranging from $6 to $24, including interest at 5.2%, maturing in December 2022 through December 2023. The notes are secured by equipment with a net book value of $0 as of March 31, 2023.	$	501	$	565
Various equipment notes entered into in 2018, payable in monthly installments ranging from $1 to $39, including interest ranging from 5.6% to 6.8%, maturing in March 2023 through May 2025. The notes are secured by equipment with a net book value of $3,021 as of March 31, 2023.	3,264		3,818
Various equipment notes entered into in 2019, payable in monthly installments ranging from $2 to $23, including interest ranging from 3.9% to 6.4%, maturing in April 2024 through December 2024. The notes are secured by equipment with a net book value of $1,146 as of March 31, 2023.	1,520		1,748
Various equipment notes entered into in 2020, payable in monthly installments ranging from $9 to $10, including interest of 5.4%, maturing in August 2025. The notes are secured by equipment with a net book value of $1,034 as of March 31, 2023.	1,110		1,215
Various equipment notes entered into in 2021, payable in monthly installments ranging from $3 to $9, including interest ranging from 4.0% to 6.5%, maturing in February 2026 through August 2026. The notes are secured by equipment with a net book value of $1,297 as of March 31, 2023.	1,385		1,484
An equipment note entered into in 2022 with a customer, payable in monthly installments of $68 with no interest component, maturing with a balloon payment of the remaining outstanding balance in April 2023. The note is secured by equipment with a net book value of $3,578 as of March 31, 2023.	3,578		3,784
Various commercial insurance premium financing agreements entered into in 2022, payable in monthly installments ranging from $19 to $143, including interest ranging from 4.2% to 5.3%, maturing in November 2022 through June 2023.	203		592
A $10,000 equipment line with a bank, entered into in December 2017, secured by all equipment purchased with the proceeds of the loan. Interest is calculated on any outstanding amounts using a fixed rate of 4.5%. The equipment line converted to a term loan in September 2018 with a maturity date of June 22, 2023. The term loan is secured by equipment with a net book value of $351 as of March 31, 2023.	201		1,003
Term Loan Agreement, issued August 2022, and related amendments (see Note 9). After consideration of the amendments, the Term Loan Agreement bears interest at 12.0%, matures in April 2024 and is secured by land and land improvements with a book value of $25,744.	20,000		20,000
Senior Unsecured Notes, issued August 2021 (see Note 9). The Notes are senior unsecured obligations of the Company, bearing stated interest at 8.5%, and rank equal in right of payment with the Company’s existing and future senior unsecured indebtedness.	135,000		135,000
Total	166,762		169,209
Less debt issuance costs, net	(9,385)		(9,976)
	157,377		159,233
Less current maturities	(8,131)		(9,649)
Notes payable due after one year	$	149,246	$	149,584

11. Leases

The Company leases equipment, vehicles, and real estate under various arrangements which are classified as either operating or finance leases. A lease exists when a contract or part of a contract conveys the right to control the use of an identified asset for a period of

CHARAH SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

(in thousands, except per share data)

(Unaudited)

time in exchange for consideration. In determining whether a lease exists, we consider whether a contract provides us with both: (a) the right to obtain substantially all of the economic benefits from the use of the identified asset and (b) the right to direct the use of the identified asset.

Our leases typically include a combination of fixed and variable payments. Fixed payments are generally included when measuring the right-of-use asset and lease liability. Variable payments, which primarily represent payments based on usage of the underlying asset, are generally excluded from such measurement and expensed as incurred. In addition, certain of our lease arrangements may contain a lease coupled with an arrangement to provide other services, such as maintenance, or may require us to make other payments on behalf of the lessor related to the leased asset, such as payments for taxes or insurance. We elected the practical expedient to not separate lease and non-lease components for all leases entered into after the date of adoption.

The Company has elected the short-term lease exemption for all underlying asset classes. Accordingly, leases with an initial term of 12 months or less which are not expected to be renewed beyond one year, are not recorded on the balance sheet and are recognized as a lease expense on a straight-line basis over the lease term.

The measurement of right-of-use assets and lease liabilities requires us to estimate appropriate discount rates. To the extent the rate implicit in the lease is readily determinable, such rate is utilized. However, based on information available at lease commencement for our leases, the rate implicit in the lease is not known. As such, we utilize an incremental borrowing rate, which represents the rate of interest that we would pay to borrow on a collateralized basis, over a similar term, an amount equal to the lease payments.

Lease position as of March 31, 2023 and December 31, 2022

The following table presents the lease-related assets and liabilities reported in the Consolidated Balance Sheet as of March 31, 2023 and December 31, 2022:


	Classification on the Consolidated Balance Sheet	March 31, 2023		December 31, 2022
Assets
Operating lease assets	Operating lease right-of-use assets	$	29,797	$	32,748
Finance lease assets	Real estate, property and equipment, net	29,308		31,587
Total lease assets		$	59,105	$	64,335

Liabilities
Current
Operating	Operating lease liabilities, current	$	11,425	$	12,483
Finance	Finance lease obligations, current	10,156		10,592
Non-current
Operating	Operating lease liabilities, long-term	21,208		23,621
Finance	Finance lease obligations, less current portion	22,472		24,585
Total lease liabilities		$	65,261	$	71,281

As of March 31, 2023, the Company had gross finance lease assets of $49,437 offset by accumulated amortization and impairment of $20,129. As of December 31, 2022, the Company had gross finance lease assets of $49,306 offset by accumulated amortization and impairment of $17,719.

Lease costs

The following table presents information related to our lease expense for the three months ended March 31, 2023:


	March 31, 2023
Finance lease costs:
Amortization expense	$	2,410
Interest expense	635
Operating lease costs	3,561
Short-term lease expense	111
Total lease expense	$	6,717

CHARAH SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

(in thousands, except per share data)

(Unaudited)

Lease term and Discount rate

The following table presents certain information related to the lease terms and discount rates for our leases as of March 31, 2023:


	March 31, 2023
Weighted-average remaining term in years
Finance leases	3.64
Operating leases	4.39
Weighted-average discount rate
Finance leases	7.35	%
Operating leases	7.15	%

Other Information

The following table presents supplemental cash flow information related to our leases for the three months ended March 31, 2023:


	March 31, 2023
Cash paid amounts included in the measurement of lease liabilities:
Operating cash flows used for operating leases	$	4,080
Operating cash flows used for finance leases	634
Financing cash flows used for finance leases	2,680
Total	$	7,394

Right-of-use assets obtained in exchange for:
New finance lease liabilities	$	132
New operating lease liabilities	—
Total	$	132

12. Mezzanine Equity

Series A Preferred Stock

In March 2020, the Company entered into an agreement with an investment fund affiliated with BCP to sell 26 (twenty-six thousand) shares of Series A Preferred Stock, par value $0.01 per share (the ~~“Preferred~~“Series A Preferred Stock”), with an initial aggregate liquidation preference of $26,000, net of a 3% Original Issue Discount (“OID”) of $780 for net proceeds of $25,220 in a private placement (the ~~“Preferred~~“Series A Preferred Stock Offering”). Proceeds from the Series A Preferred Stock Offering were used for liquidity and general corporate purposes. In connection with the issuance of the Series A Preferred Stock, the Company incurred direct expenses of $966, including financial advisory fees, closing costs, legal expenses and other offering-related expenses. The Series A Preferred Stock was initially recorded net of OID and direct expenses, which will be accreted through paid-in-capital as a deemed dividend from the date of issuance through the first possible known redemption date, March 16, 2023. As of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company had accrued dividends of ~~$1,098~~$1,208 and ~~$1,030,~~$1,170, respectively, associated with the Series A Preferred Stock, which was recorded at a fair value of ~~$1,571~~$677 and ~~$1,994,~~$689, respectively, using observable information for similar items and is classified as a level 2 fair value measurement.

~~CHARAH SOLUTIONS, INC.~~

~~Notes to Condensed Consolidated Financial Statements, continued~~

~~(in thousands, except per share data)~~

~~(Unaudited)~~

Dividend Rights The Series A Preferred Stock ranks senior to the Company’s common stock with respect to dividend rights and rights on the distribution of assets in any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Series A Preferred Stock had an initial liquidation preference of $1 (one thousand dollars) per share.

The holders of the Series A Preferred Stock are entitled to a cumulative dividend paid in cash at the rate of 10.0% per annum on the liquidation preference, payable on a quarterly basis. If we do not declare and pay a cash dividend to the holders of the Series A Preferred Stock, the dividend rate will increase to 13.0% per annum, and the dividends ~~are~~will be paid-in-kind by adding such amount to the liquidation preference. The Company’s intention is to declare and pay in-kind dividends ~~in-kind~~ for the foreseeable future. The dividend rate will increase to 16.0% per annum upon the occurrence and during the continuance of an event of default. As of ~~June 30, 2022,~~March 31, 2023, the liquidation preference of the Series A Preferred Stock was ~~$34,873.~~$38,385.

Conversion Features The Series A Preferred Stock is convertible at the option of the holders at any time into shares of common stock atby dividing the liquidation preference by a conversion price of $2.77 per share (the “Conversion Price”), which represents a 30% premium to the 20-day volume-weighted average price ended March 4, 2020. As of ~~June 30, 2022,~~March 31, 2023, the maximum number of common shares that could be required to be issued if converted is ~~12,589 (NaN)~~13,857 (thirteen million eight hundred fifty-seven thousand). The conversion rate is subject to the following customary anti-dilution and other adjustments:

•the issuance of common stock as a dividend or the subdivision, combination, or reclassification of common stock into a greater or lesser number of shares of common stock;

CHARAH SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

(in thousands, except per share data)

(Unaudited)

•the dividend, distribution or other issuance of rights, options or warrants to holders of common stock entitling them to subscribe for or purchase shares of common stock at a price per share that is less than the market value for such issuance;

•the issuance of a dividend or similar distribution in-kind, which can include shares of any class of capital stock, evidences of the Company’s indebtedness, assets or other property or securities, to holders of common stock;

•a transaction in which a subsidiary of the Company ceases to be a subsidiary of the Company as a result of the distribution of the equity interests of the subsidiary to the holders of the Company’s common stock; and

•the payment of a cash dividend to the holders of common stock.

On or after the three-year anniversary of the date of issuance, if the holders have not elected to convert all their shares of Series A Preferred Stock, the Company may give 30 days’ notice to the holders giving the holders the option to choose, in their sole discretion, to have all outstanding shares of Series A Preferred Stock converted into shares of common stock or redeemed in cash at the then applicable Redemption Price (as defined below). The Company may not issue this conversion notice unless (i) the average volume-weighted average price per share of the Company’s common stock during each of the 20 consecutive trading days before the conversion is greater than 120% of the conversion price; (ii) the Company’s common stock is listed on a national securities exchange; (iii) a registration statement for the re-sale of the common stock is then effective; and (iv) the Company is not then in possession of material non-public information as determined by Regulation FD promulgated under the Exchange Act.

The Series A Preferred Stock and the associated dividend payable on March 31, 2020, did not generate a beneficial conversion feature (“BCF”) upon issuance as the fair value of the Company’s common stock was less than the conversion price. If a BCF is recognized, a reduction to paid-in capital and the Series A Preferred Stock will be recorded and subsequently accreted through the first redemption date.

Additionally, the Company determined that the nature of the Series A Preferred Stock was more akin to an equity instrument and that the economic characteristics and risks of the embedded conversion options were clearly and closely related to the Series A Preferred Stock. As such, the conversion options were not required to be bifurcated from the host under ASC 815, Derivatives and Hedging.

Redemption Rights If the Company undergoes certain change of control transactions, the Company will be required to immediately make an offer to repurchase all of the then-outstanding shares of Series A Preferred Stock for cash consideration per share equal to the greater of (i) 100% of the ~~Liquidation Preference, plus~~liquidation preference, including accrued and unpaid dividends, if any, plus, if applicable for a transaction occurring before the third anniversary of the closing, a make-whole premium determined pursuant to a calculation of the present value of the dividends that would have accrued through such anniversary, discounted at a rate equal to the applicable treasury rate plus 0.50% (the “Make-Whole Premium”); provided that if the transaction occurs before the first anniversary of the closing, the Make-Whole Premium shall be no greater than $4,000 and (ii) the closing sale price of the common stock on the date of such redemption multiplied by the number of shares of common stock issuable upon conversion of the outstanding Series A Preferred Stock.

On or after the three-year anniversary of the issuance of the Series A Preferred Stock, the Company may redeem the Series A Preferred Stock, in whole or in part, for an amount in cash equal to the greater of (i) the closing sale price of the common stock on the date the Company delivers such notice multiplied by the number of shares of common stock issuable upon conversion of the outstanding Series A Preferred Stock and (ii) (x) if the redemption occurs before the fourth anniversary of the date of the closing, 103% of the ~~Liquidation Preference, plus~~liquidation preference, including accrued and unpaid dividends, or (y) if the redemption occurs on or after the fourth anniversary of the date of the closing, the ~~Liquidation Preference~~liquidation preference plus accrued and unpaid dividends (the foregoing clauses (i) or (ii), as applicable, the “Redemption Price”).

On or after the seven-year anniversary of the date of issuance, the holders have the right, subject to applicable law, to require the Company to redeem the Series A Preferred Stock, in whole or in part, into cash consideration equal to the liquidation preference, ~~plus~~including all accrued and unpaid dividends, from any source of funds legally available for such purpose.

~~CHARAH SOLUTIONS, INC.~~

~~Notes to Condensed Consolidated Financial Statements, continued~~

~~(in thousands, except per share data)~~

~~(Unaudited)~~

Since the redemption of the Series A Preferred Stock is contingently or optionally redeemable and therefore not certain to occur, the Preferred Stock is not required to be classified as a liability under ASC 480, Distinguishing Liabilities from Equity. As the Series A Preferred Stock is redeemable in certain circumstances at the option of the holder and is redeemable in certain circumstances upon the occurrence of an event that is not solely within our control, we have classified the Series A Preferred Stock in mezzanine equity in the accompanying unaudited condensed consolidated balance sheets.

Liquidation Rights In the event of any liquidation, winding-up or dissolution of the Company, whether voluntary or involuntary, the holders of the Series A Preferred Stock would receive an amount in cash equal to the greater of (i) 100% of the liquidation preference plus a Make-Whole Premium and (ii) the amount such holders would be entitled to receive at such time if the Series A Preferred Stock were converted into Company common stock immediately before the liquidation event. The Make-Whole Premium is removed from the calculation for a liquidation event occurring after the third anniversary of the issuance date.

Voting Rights The holders of the Series A Preferred Stock are entitled to vote with the holders of the common stock on an as-converted basis in addition to voting as a separate class as provided by applicable Delaware law and the Company’s organizational documents. The holders, acting exclusively and as a separate class, shall have the right to appoint either a non-voting observer to the Company’s Board of Directors or one director to the Company’s Board of Directors.

Registration Rights The holders of the Series A Preferred Stock have certain customary registration rights with respect to the shares of common stock into which the Series A Preferred Stock is converted, pursuant to the terms of a registration rights agreement.

CHARAH SOLUTIONS, INC.

~~12.~~Notes to Condensed Consolidated Financial Statements, continued

(in thousands, except per share data)

(Unaudited)

Series B Preferred Stock

On November 14, 2022, the Company and an investment fund affiliated with BCP entered into (i) an agreement to sell 30 (thirty thousand) shares of Series B Preferred Stock, par value $0.01 per share (the “Series B Preferred Stock”), with an initial aggregate liquidation preference of $30,000, net of a 4% Original Issue Discount (“OID”) of $1,200 for net proceeds of $28,800 in a private placement (the “Series B Preferred Stock Investment”).

The Series B Preferred Stock ranks senior to all classes or series of equity securities of the Company with respect to dividend rights and rights on liquidation. In the event of any liquidation or winding up of the Company, the holder of each share of the Series B Preferred Stock will receive in preference to the holders of the Company common stock a per share amount equal to the greater of (i) the stated value of the Series B Preferred Stock and (ii) the amount such holders would be entitled to receive at such time if the Series B Preferred Stock were converted into Company common stock. Proceeds from the Series B Preferred Stock Investment were used for liquidity and general corporate purposes.

Conversion Features The holder of the Series B Preferred Stock may at any time following the 3-month anniversary of issuance convert all or a portion of the Series B Preferred Stock into common stock of the Company. Each share of Series B Preferred Stock will be convertible into a number of shares of common stock of the Company equal to the purchase price of such share divided by the conversion price, which will be set at an amount representing the volume-weighted average closing price of the Company common stock for the 20-trading days immediately preceding the public announcement of this transaction.

At any time after the three-year anniversary of the date of issuance, if the holders have not elected to convert all their shares of Series B Preferred Stock, the Company will have the option to convert all of the then-outstanding shares of Series B Preferred Stock; provided that (i) the closing price of the Company’s common stock exceeds 120% of the conversion price for each of the 20 consecutive trading days prior to the date of conversion, (ii) the Company’s common stock is then listed on a national securities exchange, (iii) a registration statement for re-sale of the Company’s common stock is then effective and (iv) the Company is not then in possession of material non-public information. The Company will provide the holders with 30 days’ notice of its intention to convert the Series B Preferred Stock and the holders will then have the option, in their sole discretion, to have their Series B Preferred Stock converted at the then-applicable Conversion Price or redeemed in cash at the Company’s redemption price as defined in the agreement. In the event the holders elect to have the Series B Preferred Stock redeemed in cash and the Company is unable to redeem the Series B Preferred Stock in cash, then the holders shall not be required to participate in any conversion and shall retain their then-outstanding Series B Preferred Stock in all respects.

Redemption Rights If a change of control of the Company occurs, subject to the payment in full of all obligations under the Credit Agreement, the Company will be required to immediately make an offer to repurchase all of the then-outstanding shares of Series B Preferred Stock for cash consideration per share equal to the Company’s redemption price as defined in the agreement. Unless the holders buy all or substantially all of the Company’s assets in a transaction or a series of related transactions approved by the Company’s board of directors, no acquisition or disposition of securities by the holders shall constitute a change of control hereunder.

At any time after the 30-month anniversary of the date of closing, the holders will have the option to require the Company to redeem any or all of the then outstanding shares of Series B Preferred Stock for cash consideration equal to the stated value provided that the Company has the financial means and subject to the approval of the Company's lender if required under a customary credit facility.

At any time after the 30-month anniversary of the date of closing, and upon not less than 30 days prior written notice, if the holders have not elected to convert or redeem all their shares of Series B Preferred Stock, the Company may elect to redeem all shares of Series B Preferred Stock for an amount equal to the greater of (i) the closing sale price of the Common Stock on the date the Company delivers such notice multiplied by the number of shares of Common Stock issuable upon conversion of the outstanding Series B Preferred Stock and (ii) the stated value.

Voting Rights The holders of the Series B Preferred Stock are entitled to vote with the holders of the common stock on an as-converted basis and not as a separate class. The voting power of the Series B Preferred Stock will be limited to 5.0% of the outstanding common stock of the Company.

Registration Rights The holders of the Series B Preferred Stock will receive (i) customary transferable shelf registration rights pertaining to the Series B Preferred Stock and any shares of Company common stock issued upon the conversion thereof and (ii) customary piggyback and demand rights in respect of any Company common stock issued upon the conversion of any preferred stock, in each case, by amendment to the Company’s current registration rights agreement or otherwise and on terms consistent therewith.

13. Contract Assets and Liabilities

The timing of revenue recognition, billings and cash collections results in accounts receivable, contract assets, and contract liabilities on the accompanying unaudited condensed consolidated balance sheets.

~~Our contract assets are as follows:~~

June 30, 2022 December 31, 2021
Costs and estimated earnings in excess of billings $ 23,984 $ 17,163
Retainage 10,016 9,681
Total contract assets $ 34,000 $ 26,844

~~Our contract liabilities are as follows:~~

June 30, 2022 December 31, 2021
Billings in excess of costs and estimated earnings $ 3,941 $ 5,716
Deferred revenue 1,761 483
Total contract liabilities $ 5,702 $ 6,199

~~We recognized revenue of $57 and $5,829 for the three and six months ended June 30, 2022 that was previously included in contract liabilities at December 31, 2021.~~

~~The Company's net position on uncompleted contracts is as follows:~~

June 30, 2022 December 31, 2021
Costs incurred on uncompleted contracts $ 269,613 $ 227,195
Estimated earnings 19,518 22,331
Total costs and estimated earnings 289,131 249,526
Less billings to date (269,088) (238,079)
Net balance in process $ 20,043 $ 11,447

~~The net balance in process classified on the accompanying unaudited condensed consolidated balance sheets is as follows:~~

June 30, 2022 December 31, 2021
Costs and estimated earnings in excess of billings $ 23,984 $ 17,163
Billings in excess of costs and estimated earnings (3,941) (5,716)
Net balance in process $ 20,043 $ 11,447

Anticipated losses on long-term contracts are recognized when such losses become evident. As of June 30, 2022 and December 31, 2021, accruals for anticipated losses on long-term contracts were $7 and $159, respectively.

2019

CHARAH SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

(in thousands, except per share data)

(Unaudited)

~~13.~~Our contract assets are as follows:


	March 31, 2023		December 31, 2022
Costs and estimated earnings in excess of billings	$	12,135	$	11,700
Retainage	11,255		9,281
Total contract assets	$	23,390	$	20,981

Our contract liabilities are as follows:


	March 31, 2023		December 31, 2022
Billings in excess of costs and estimated earnings	$	8,505	$	8,160
Deferred revenue	486		258
Total contract liabilities	$	8,991	$	8,418

We recognized revenue of $8,198 for the three months ended March 31, 2023 that was previously included in contract liabilities at December 31, 2022. We recognized revenue of $5,772 for the three months ended March 31, 2022, which was previously included in the contract liability balance at December 31, 2021.

The Company's net position on uncompleted contracts is as follows:


	March 31, 2023		December 31, 2022
Costs incurred on uncompleted contracts	$	304,007	$	344,692
Estimated earnings	10,640		20,267
Total costs and estimated earnings	314,647		364,959
Less billings to date	(311,017)		(361,419)
Net balance in process	$	3,630	$	3,540

The net balance in process classified on the accompanying unaudited condensed consolidated balance sheets is as follows:


	March 31, 2023		December 31, 2022
Costs and estimated earnings in excess of billings	$	12,135	$	11,700
Billings in excess of costs and estimated earnings	(8,505)		(8,160)
Net balance in process	$	3,630	$	3,540

Anticipated losses on long-term contracts are recognized when such losses become evident. As of March 31, 2023 and December 31, 2022, accruals for anticipated losses on long-term contracts were $8 and $120, respectively.

14. Stock-Based Compensation

The Company adopted the Charah Solutions, Inc. 2018 Omnibus Incentive Plan (the “2018 Plan”), pursuant to which employees, consultants, and directors of the Company and its affiliates, including named executive officers, are eligible to receive awards. The 2018 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, bonus stock, dividend equivalents, other stock-based awards, substitute awards, annual incentive awards, and performance awards intended to align the interests of participants with those of Company's stockholders. The Company has reserved 5,007 shares of common stock for issuance under the 2018 Plan.

A summary of the Company’s non-vested share activity for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 is as follows:


		Restricted Stock			Performance Stock			Total				Restricted Stock			Performance Stock			Total
		Shares	Weighted-Average Grant Date Fair Value		Shares	Weighted-Average Grant Date Fair Value		Shares	Weighted-Average Grant Date Fair Value			Shares	Weighted-Average Grant Date Fair Value		Shares	Weighted-Average Grant Date Fair Value		Shares	Weighted-Average Grant Date Fair Value
Balance as of December 31, 2021		885	$	4.62	648	$	4.24	1,533	$	4.46
Balance as of December 31, 2022											Balance as of December 31, 2022	88	$	36.90	63	$	30.21	151	$	34.08
Granted	Granted	729	4.10		313	2.97		1,042	3.76		Granted	—	—		—	—		—	—
Forfeited	Forfeited	(7)	3.21		(231)	6.14		(238)	6.05		Forfeited	—	—		—	—		—	—
Vested	Vested	(480)	4.73		—	—		(480)	4.73		Vested	—	—		—	—		—	—
Balance as of June 30, 2022		1,127	$	4.24	730	$	3.11	1,857	$	3.79
Balance as of March 31, 2023											Balance as of March 31, 2023	88	$	36.90	63	$	30.21	151	$	34.08

Restricted Stock Performance Stock Total
Weighted Average Remaining Contractual Terms (Years) Aggregate Intrinsic Value Weighted Average Remaining Contractual Terms (Years) Aggregate Intrinsic Value Weighted Average Remaining Contractual Terms (Years) Aggregate Intrinsic Value
Balance as of December 31, 2021 0.88 $ 4,072 1.26 $ 2,979 1.04 $ 7,051
Balance as of June 30, 2022 1.40 $ 4,215 1.93 $ 2,730 1.61 $ 6,945

CHARAH SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

(in thousands, except per share data)

(Unaudited)


	Restricted Stock			Performance Stock			Total
	Weighted Average Remaining Contractual Terms (Years)	Aggregate Intrinsic Value		Weighted Average Remaining Contractual Terms (Years)	Aggregate Intrinsic Value		Weighted Average Remaining Contractual Terms (Years)	Aggregate Intrinsic Value
Balance as of December 31, 2022	1.08	$	476	1.33	$	346	1.18	$	822

Balance as of March 31, 2023	0.83	$	184	1.13	$	134	0.95	$	318

Stock-based compensation expense related to the restricted stock issued was ~~$577~~$453 and ~~$501~~$571 during the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021, respectively and $1,148 and $758 for the six months ended June 30, 2022 and 2021,~~ respectively. As of ~~June 30, 2022,~~March 31, 2023, total unrecognized stock-based compensation expense related to non-vested awards of restricted stock, net of estimated forfeitures, was ~~$3,496,~~$1,115, and is expected to be recognized over a weighted-average period of ~~1.54~~1.33 years. ~~The total fair value of awards vested for the three and six months ended June 30, 2022 was $2,015 and $2,018, respectively.~~

Stock-based compensation expense related to the performance stock issued was ~~$169~~$299 and ~~$198~~$220 during the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021, respectively and $389 and $240 for the six months ended June 30, 2022 and 2021,~~ respectively. As of ~~June 30, 2022,~~March 31, 2023, total unrecognized stock-based compensation expense related to non-vested awards of performance stock, net of estimated forfeitures, was ~~$1,369,~~$722, and is expected to be recognized over a weighted-average period of ~~2.24~~1.61 years.

~~14.~~15. Commitments and Contingencies

In December 2022, the Company was notified by a whistleblower that certain employees had engaged in improper spending activities at one of our project sites. In response, the Company conducted an internal investigation that substantiated the whistleblower's allegations. The Company engaged external legal counsel and a forensic accounting investigation team to thoroughly assess the extent of the fraudulent activities. Based on specific assumptions and limitations, we determined a range of $1,140 to $2,670 of possible loss related to potentially fraudulent transactions believed to have been billed to the customer from 2018 through 2022. The investigation will continue to proceed through the legal process, which includes examining the extent of involvement of the customer, its representatives or any third parties in contributory responsibility, evaluating the extent of insurance coverage available for reimbursement of the Company's losses, and collaborating with external law enforcement agencies to ascertain the full scope and magnitude of the overall fraudulent scheme. The Company has reversed revenue of $2,476 for these fraudulent activities during the year ended December 31, 2022, representing management's best estimate of the probable loss, irrespective of potential recoveries from third parties or insurance policies.

In September 2022, TMPA served GCERG in the District Court of Travis County, Texas with a lawsuit alleging improper calculation of costs attributed to the remediation of the Site F Landfill on our Gibbons Creek project. In our APA with TMPA, GCERG agreed that if aggregate costs actually incurred to remediate the Site F Landfill did not exceed $13,600, then the cash and restricted cash received would be reduced on a dollar-for-dollar basis. In May 2023, the two parties held an unsuccessful mediation. This lawsuit is in the discovery phase and the Company intends to continue to defend the case vigorously.

On June 15, 2023, a purported Company stockholder filed an action against the Company and its Board of Directors (the “Board”) captioned Wilson v. Charah Solutions, Inc., et al., No. 23-cv-00656, in the United States District Court for the District of Delaware (the “Wilson Action”). The plaintiff in the Wilson Action alleges that the Company and its Board violated federal securities laws, including Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated under the Exchange Act, by issuing a materially incomplete and misleading definitive proxy statement in connection with the Merger (as defined elsewhere herein). On June 16, 2023, another purported Company stockholder filed an action against the Company and its Board captioned Wilhelm v. Charah Solutions, Inc., et al., No. 23-cv-00661, in the United States District Court for the District of Delaware (the “Wilhelm Action”) and together with the Wilson Action, the “Actions”). The plaintiffs in the Wilhelm Action also allege that the Company and its Board violated federal securities laws, including Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated under the Exchange Act, by issuing a materially incomplete and misleading definitive proxy statement in connection with the Merger. The plaintiffs in each of the Actions seek, among other things, to enjoin the transactions contemplated by the Merger Agreement (as defined elsewhere herein) and an award of attorneys’ and expert fees and expenses. The Company believes that the allegations in the Actions are without merit. The Company has received demand letters containing similar allegations from other purported stockholders and additional lawsuits arising out of the Merger may also be filed in the future.

From time to time ~~we are~~the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. For all such lawsuits, claims and proceedings, we record reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. Although it is difficult to predict the ultimate outcome of these lawsuits, claims and proceedings, we do not believe that the ultimate disposition of any of these matters, individually or in the aggregate, would have a material adverse effect on our results of operations, financial position or cash flows. We maintain liability insurance for certain risks that is subject to certain self-insurance limits.

We believe amounts previously recorded are sufficient to cover any liabilities arising from the proceedings with all outstanding legal claims. Except as reflected in such accruals, we are currently unable to estimate a range of reasonably possible loss or a range of reasonably possible loss in excess of the amount accrued for outstanding legal matters.

~~15.~~

CHARAH SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

(in thousands, except per share data)

(Unaudited)

16. Income Taxes

The Company ~~had~~and income tax expense of ~~$341~~$115 and ~~$72~~$78 for the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $419 and $229 for the six months ended June 30, 2022 and 2021,~~ respectively, due to current state income tax expense and adjustments to the valuation allowance on deferred tax assets.

The effective income tax rate for the three months ended ~~June 30, 2022~~March 31, 2023 was ~~23.0% without regard to the impact of the valuation allowance~~negative 3.9% and includes the effect of the valuation allowance, state income taxes and nondeductible items. The effective income tax rate for the three months ended March 31, 2023 was less than the federal and state statutory rates primarily due to changes in the valuation allowance, which had an impact of 28.1%. The Company’s income is subject to a federal statutory rate of 21.0% and an estimated state statutory rate of ~~4.2%~~4.1% before considering the valuation allowance.

The Company evaluates its effective income tax rate at each interim period and adjusts it accordingly as facts and circumstances warrant. The determination of the annual estimated effective income tax rate at each interim period requires certain estimates and judgments

~~CHARAH SOLUTIONS, INC.~~

~~Notes to Condensed Consolidated Financial Statements, continued~~

~~(in thousands, except per share data)~~

~~(Unaudited)~~

including, but not limited to, the expected operating income for the year, estimated permanent differences between book and tax amounts, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur and additional information is obtained.

At ~~June 30, 2022,~~March 31, 2023, deferred tax liabilities, net of deferred tax assets, was ~~$1,309.~~$894. A valuation allowance has been recorded for the deferred tax assets as the Company has determined that it is not more likely than not that the tax benefits related to all the deferred tax assets will be realized. The Company will continue to evaluate both the positive and negative evidence in determining the need for a valuation allowance on its deferred tax assets.

~~16.~~17. Loss Per Share

Basic loss per share is computed by dividing net loss attributable to the Company’s stockholders by the weighted-average number of shares outstanding during the period. Diluted loss per share reflects all potentially dilutive ordinary shares outstanding during the period and is computed by dividing net loss attributable to the Company’s stockholders by the weighted-average number of shares outstanding during the period increased by the number of additional shares that would have been outstanding as dilutive securities.

Basic and diluted loss per share is determined using the following information:


		Three months ended				Six Months Ended					Three Months Ended
		June 30,				June 30,					March 31,
		2022		2021		2022		2021			2023		2022
Numerator:	Numerator:									Numerator:
Net loss attributable to Charah Solutions, Inc.	Net loss attributable to Charah Solutions, Inc.	$	(9,603)	$	(4,166)	$	(21,643)	$	(5,453)	Net loss attributable to Charah Solutions, Inc.	$	(6,086)	$	(12,040)
Deemed and imputed dividends on Series A Preferred Stock	Deemed and imputed dividends on Series A Preferred Stock	(150)		(148)		(299)		(295)		Deemed and imputed dividends on Series A Preferred Stock	(126)		(149)
Series A Preferred Stock dividends	Series A Preferred Stock dividends	(1,571)		(2,148)		(3,661)		(4,215)		Series A Preferred Stock dividends	(677)		(2,090)
Net loss attributable to common stockholders	Net loss attributable to common stockholders	$	(11,324)	$	(6,462)	$	(25,603)	$	(9,963)	Net loss attributable to common stockholders	$	(6,889)	$	(14,279)

Denominator:	Denominator:									Denominator:
Weighted average shares outstanding	Weighted average shares outstanding	33,642		30,450		33,526		30,282		Weighted average shares outstanding	3,380		3,341
Dilutive share-based awards	Dilutive share-based awards	—		—		—		—		Dilutive share-based awards	—		—
Total weighted average shares outstanding, including dilutive shares	Total weighted average shares outstanding, including dilutive shares	33,642		30,450		33,526		30,282		Total weighted average shares outstanding, including dilutive shares	3,380		3,341

Net loss attributable to common stockholders per common share	Net loss attributable to common stockholders per common share									Net loss attributable to common stockholders per common share
Basic	Basic	$	(0.34)	$	(0.21)	$	(0.76)	$	(0.33)	Basic	$	(2.04)	$	(4.27)
Diluted	Diluted	$	(0.34)	$	(0.21)	$	(0.76)	$	(0.33)	Diluted	$	(2.04)	$	(4.27)

The holders of the Preferred Stock have non-forfeitable rights to common stock dividends or common stock dividend equivalents. Accordingly, the Preferred Stock qualifies as participating securities.

As a result of the net loss per share for the three ~~and six~~ months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ the inclusion of all potentially dilutive shares would be anti-dilutive. Therefore, dilutive shares of ~~14,159~~3,221 and ~~12,018~~1,311 were excluded from the computation of the weighted-average shares for diluted net loss per share for the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021, respectively and dilutive shares of 13,640 and 11,903 were excluded from the computation of the weighted-average shares for diluted net loss~~respectively.

CHARAH SOLUTIONS, INC.

Notes to Condensed Consolidated Financial Statements, continued

(in thousands, except per share ~~for the six months ended June 30, 2022 and 2021, respectively.~~data)

(Unaudited)

A summary of securities excluded from the computation of diluted earnings per share is presented below:


		Three Months Ended		Six Months Ended			Three Months Ended
		June 30,		June 30,			March 31,
		2022	2021	2022	2021			2023	2022
Diluted earnings per share:	Diluted earnings per share:					Diluted earnings per share:
Anti-dilutive restricted and performance stock units	Anti-dilutive restricted and performance stock units	1,962	1,285	1,633	1,338	Anti-dilutive restricted and performance stock units		154	130
Anti-dilutive Series A Preferred Stock convertible into common stock	Anti-dilutive Series A Preferred Stock convertible into common stock	12,197	10,733	12,007	10,565	Anti-dilutive Series A Preferred Stock convertible into common stock		3,067	1,181
Potentially dilutive securities, excluded as anti-dilutive	Potentially dilutive securities, excluded as anti-dilutive	14,159	12,018	13,640	11,903	Potentially dilutive securities, excluded as anti-dilutive		3,221	1,311

Reverse Stock Split

On December 29, 2022, the Company effected a one-for-ten (1:10) reverse stock split of its common stock, par value $0.01 per share. The reverse stock split, which was authorized by its Board of Directors, was approved by Charah Solutions’ stockholders on November 23, 2022. The reverse stock split reduced the number of outstanding shares of the Company's common stock from 33,889 shares as of December 29, 2022, to 3,389 shares outstanding post-split. The primary purpose of the reverse stock split was to increase the per share market price of the Company’s common stock in an effort to maintain compliance with applicable NYSE continued listing standards with respect to the closing price of our common stock.

18. Subsequent Events

Agreement and Plan of Merger

Pursuant to the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of common stock, par value $0.01 per share, of the Company issued and outstanding immediately prior to the Effective Time will be cancelled and each share will be converted into the right to receive $6.00 per share in cash, without interest (the “Common Per Share Merger Consideration”). In addition, at the Effective Time, each share of Series A Preferred Stock of the Company and Series B Preferred Stock of the Company that is issued and outstanding immediately prior to the Effective Time shall be purchased and redeemed by Parent pursuant to Section 8 of the Certificate of Designations of Series A Preferred Stock and Section 7 of the Certificate of Designations of Series B Preferred Stock in exchange for the Series A Redemption Price of $40,061 (as such term is defined in the Merger Agreement) or the Series B Redemption Price of $30,000 (as such term is defined in the Merger Agreement), respectively (the “Redemption”).

The parties to the Merger Agreement have made certain customary representations and warranties and have agreed to certain covenants. The Merger Agreement between Parent and the Company may be terminated by mutual consent of both parties or under certain conditions as detailed within the Merger Agreement.

The closing of the transactions contemplated by the Merger Agreement is subject to (i) receipt of the Requisite Stockholder Approval, (ii) consent from the FCC under section 310 of the Communications Act of 1934, and (iii) consent from JPMorgan Chase Bank, N.A. to the Merger and the Redemption, to the extent the Existing Debt Agreement (as such term is defined in the Merger Agreement) remains outstanding.

The Parent has obtained certain equity financing commitments pursuant to an equity commitment letter (the “Equity Commitment Letter”) for the purpose of financing the transactions contemplated by the Merger Agreement and paying related fees and expenses. Certain affiliates of SER Capital Partners (collectively, “Guarantors”) committed to contribute to Parent an equity contribution equal to $88,054 prior to or at the closing, on the terms and subject to the conditions set forth under those certain commitments.

On April 16, 2023, the Guarantors and the Company executed a guarantee (the “Guarantee”) in favor of the Company in which the Guarantors have guaranteed the due and punctual payment of any and all payment obligations of Parent and Acquisition Sub, including Parent’s and/or Acquisition Sub’s obligations to pay actual damages incurred as a result of any knowing or intentional breach of the Merger Agreement prior to the valid termination of the Merger Agreement.

In connection with the execution of the Merger Agreement, BCP, the Parent and the Company entered into a voting and support agreement (the “Letter Agreement”). Subject to the terms and conditions set forth in the Letter Agreement, BCP agreed, among other things, to vote their shares in favor of the adoption of the Merger Agreement, the Merger and the other transactions contemplated thereby, and against any agreement, transaction or proposal that relates to a competing proposal. The Letter Agreement also includes restrictions on the transfer of the Holder's shares and a waiver of appraisal rights. The Letter Agreement will terminate under certain circumstances as defined in the Letter Agreement.

2223

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the historical financial statements and related notes included in Part I, “Item 1. Financial Statements” of this Quarterly Report. This discussion contains “forward‑looking statements” reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward‑looking statements due to a number of factors. Factors that could cause or contribute to such differences include, but are not limited to, public health threats or outbreaks of communicable diseases, such as the ongoing novel coronavirus “COVID-19” pandemic and its impact on our business, customers, employees or customers' facilities, capital expenditures, economic and competitive conditions, and regulatory changes and other uncertainties, as well as those factors discussed below and elsewhere in this Quarterly Report. Please read “Cautionary Note Regarding Forward‑Looking Statements” included elsewhere in this Quarterly Report. Except as otherwise required by applicable law, we assume no obligation to update any of these forward‑looking statements.

Charah Solutions, Inc.

Charah Solutions, Inc. (together with its subsidiaries, “Charah Solutions,” the “Company,” “we,” “us” or “our”) was incorporated in Delaware in 2018 in connection with our initial public offering in June 2018 and, together with its predecessors, has been in business since 1987. Since our founding, we have continuously worked to anticipate our customers’ evolving environmental needs, increasing the number of services we provide through our embedded presence at their power generation facilities. Our multi-service platform allows customers to gain efficiencies from sourcing multiple required offerings from a single, trusted partner compared to service providers with a more limited scope.

Overview

We are a leading national service provider of mission-critical environmental services and byproduct recycling to the power generation industry. We offer a suite of remediation and compliance services, byproduct services, raw material sales and Environmental Risk Transfer (“ERT”) services. We also design and implement solutions for complex environmental projects (such as coal ash pond closures) and facilitate coal ash recycling through byproduct marketing and other beneficial use services. We believe we are a partner of choice for the power generation industry due to our quality, safety, domain experience, and compliance record, all of which are key criteria for our customers. In ~~2021,~~2022, we performed work at more than 40 coal-fired generation sites nationwide.

We operate as a single operating segment, reflecting the suite of end-to-end services we offer our utility partners and how our chief operating decision maker reviews consolidated financial information to evaluate results of operations, assess performance and allocate resources for these services. We provide the following services through our one segment: remediation and compliance services, byproduct services, raw material sales and ERT services. Remediation and compliance services are associated with our customers’ need for multi-year environmental improvement and sustainability initiatives, whether driven by regulatory requirements, power generation customer initiatives or consumer expectations and standards. Byproduct services consist of recurring and mission-critical coal ash management and operations for coal-fired power generation facilities while also supporting both our power generation customers’ desire to recycle their recurring and legacy volumes of coal combustion residuals (“CCRs”), commonly known as coal ash, and our ultimate end customers’ need for high-quality, cost-effective supplemental cementitious materials (“SCMs”) that provide a sustainable, environmentally-friendly substitute for Portland cement in concrete. Our raw material sales provide customers with the raw materials that are essential to their business while also providing the sourcing, logistics, and management needed to facilitate these raw material transactions around the globe. ERT services represent an innovative solution designed to meet ~~coal fired~~coal-fired plant energy providers’ evolving and increasingly complex plant closure and environmental remediation needs. These customers need to retire and decommission older or underutilized assets while maximizing the assets value and improving the environment. Our ERT services manage the sites' environmental remediation requirements, benefiting the communities and lowering the ~~coal fired~~coal-fired plant energy providers’ costs.

~~COVID-19 Update~~

The pandemic caused by a novel coronavirus (“COVID-19”) has impacted many aspects of our operations, directly and indirectly, including our employees, the services we provide at our customers’ power generation facilities, our suppliers and the overall market. We, along with our utility partners, have implemented the precautionary health and safety measures recommended by the Centers for Disease Control and Prevention (the “CDC”) in response to the COVID-19 pandemic and we follow current CDC guidelines and recommendations. Understanding that the COVID-19 challenge is evolving, we continue to monitor the situation and update our proactive measures in coordination with our customers based on new information and feedback. We continue to work closely with our utility partners and concrete producer customers to meet their needs and monitor any potential slowdowns of byproduct recycling and marketing services if there is decreased demand for construction materials.

The COVID-19 pandemic presents potential new risks to the Company’s business, including logistical, supply chain and other challenges that may continue to affect demand for services, which are driven by construction activity, and the timing of our remediation and compliance services projects, due to delays in new contract awards and increasing costs and declining availability for certain machinery and equipment.

How We Evaluate Our Operations

We use a variety of financial and operational metrics to assess the performance of our operations, including:

•Revenue;

•Gross Profit;

•Operating Income;

•Adjusted EBITDA; and

•Adjusted EBITDA Margin.

Revenue

We analyze our revenue by comparing actual revenue to our internal projections for a given period and to prior periods to assess our performance. We believe that revenue is a meaningful indicator of the demand and pricing for our services.

Gross Profit

We analyze our gross profit, which we define as revenue less cost of sales, to measure our financial performance. We believe that gross profit is a meaningful metric because it provides insight on financial performance of our revenue streams without consideration of company overhead. When analyzing gross profit, we compare actual gross profit to our internal projections for a given period and to prior periods to assess our performance.

Operating Income

We analyze our operating income, which we define as revenue and gains associated with ERT services less cost of sales, ~~and~~other operating expenses from ERT services, general and administrative expenses, and impairment expense, to measure our financial performance. We believe that operating income is a meaningful metric because it provides insight on profitability and true operating performance based on the historical cost basis of our assets. Additionally, due to the nature of the accounting requirements relating to our ERT services, the gains from the sales of fixed assets and the costs associated with ERT fixed asset sales are recorded as a component of operating income. When analyzing operating income, we compare actual operating income to our internal projections for a given period and to prior periods to assess our performance.

Adjusted EBITDA and Adjusted EBITDA Margin

We view Adjusted EBITDA and Adjusted EBITDA margin, which are non-GAAP financial measures, as important indicators of performance because they allow for an effective evaluation of our operating performance when compared to our peers, without regard to our financing methods or capital structure.

We define Adjusted EBITDA as net loss attributable to Charah Solutions, Inc. before ~~income from discontinued operations, net of tax,~~ interest expense, net, loss on extinguishment of debt, income taxes, depreciation and amortization, equity-based compensation, impairment expense (including inventory reserves)~~, gain on change in contingent payment liability~~ and transaction-related expenses and other items. Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to total revenue. See “—Non-GAAP Financial Measures” below for more information and a reconciliation of Adjusted EBITDA to net loss attributable to Charah Solutions, Inc., the most directly comparable financial measure calculated and presented in accordance with GAAP.

Key Factors Affecting Our Business and Financial Statements

Ability to Capture New Contracts and Opportunities

Our ability to grow revenue and earnings is dependent on maintaining and increasing our market share, renewing existing contracts, and obtaining additional contracts from proactive bidding on contracts with new and existing customers. We proactively work with existing customers ahead of contract end dates to attempt to secure contract renewals. We also leverage the embedded long-term nature of our customer relationships to obtain insight and capture new business opportunities across our platform.

Seasonality of Business

Based on historical trends, we expect our operating results to vary seasonally. Variations in normal weather patterns can also cause changes in energy consumption which may influence the demand and timing of associated services for our byproduct services offerings. Our byproduct services and raw material sales are also negatively affected during winter months when the use of cement and cement products is generally lower. Inclement weather can impact construction-related activities associated with pond and landfill remediation, which affects the timing of revenue generation for our remediation and compliance services.

Project-Based Nature of Environmental Remediation Mandates

We believe there is a significant pipeline of coal ash ponds and landfills that will require remediation and/or closure in the future. Due to their scale and complexity, these environmental remediation projects are typically completed over longer periods. As a result, our revenue from these projects can fluctuate over time. Some of our revenue from projects is recognized over time using the cost-to-cost input method of accounting for GAAP purposes, based primarily on contract costs incurred to date compared to total estimated contract costs. This method is the most accurate measure of our contract performance because it depicts the ~~company’s~~Company’s performance in transferring control of goods or services promised to customers according to a reasonable measure of progress toward complete satisfaction of the performance obligation. The timing of revenue recorded for financial reporting purposes may differ from actual billings to customers, sometimes resulting in costs and billings in excess of actual revenue. Because of the risks in estimating gross profit margins for long-term jobs, actual results may differ from these estimates.

Byproduct Recycling Market Dynamics

There is a growing demand for recycled coal ash across various applications driven by market forces and governmental regulations, creating the need to dispose of coal ash in an environmentally sensitive manner. Pricing of byproduct services and raw material sales are

driven by supply and demand market dynamics as well as the chemical and physical properties of the ash. As demand increases for the end-products that use CCRs (i.e., concrete for construction and infrastructure projects), the demand for recycled coal ash also typically rises. These fluctuations affect the relative demand for our raw material sales. In recessionary periods, construction and infrastructure spending and the corresponding need for concrete may decline. However, this unfavorable effect may be partially offset by an increase in the demand for recycled coal ash during recessionary periods, given that coal ash is more cost-effective than other alternatives.

Power Generation Industry Spend on Environmental Liability Management and Regulatory Requirements

The power generation industry has increased annual spending on environmental liability management. We believe this results from regulatory requirements, consumer pressure and the industry’s increasing focus on environmental stewardship. Continued increases in

spending on environmental liability management by our customers should result in increased demand for services across our platform.

Many power generation entities are experiencing an increased need to retire and decommission older or less economically viable generating assets while minimizing costs, maximizing the value of the assets and improving the environment. Our ERT services allow these partners to remove the environmental risk and insurance obligations and place control and oversight with a company specializing in these complex remediation and reclamation projects. We believe our broad set of service capabilities, track record of quality service and safety, exacting environmental standards, and a dependable and experienced labor force is a significant competitive advantage. Our work, mission and culture are directly aligned with meeting environmental, ~~sustainability,~~social, and governance ~~(“ESG”)~~ standards and providing innovative services to solve our ~~coal fired~~coal-fired plant energy providers’ most complex environmental challenges.

Cost Management and Capital Investment Efficiency

Our principal operating costs consist of labor, material and equipment costs and equipment maintenance. We focus on cost management and efficiency, including monitoring labor costs, both in terms of wage rates and headcount, along with other costs such as materials and equipment. We believe we maintain a disciplined approach to capital expenditure decisions, typically associated with specific contract requirements. Furthermore, we strive to extend our equipment's useful life through a well-planned routine maintenance program.

How We Generate Revenue

Our remediation and compliance services primarily consist of designing, constructing, managing, remediating and closing ash ponds and landfills on customer-owned sites.

Our byproduct services include recycling recurring and contracted volumes of coal-fired power generation waste byproducts, such as fly ash, bottom ash, IGCC slag and gypsum byproducts, each of which can be used for various industrial purposes. Byproduct services also include the management of coal ash which is mission-critical to power plants’ daily operations including silo management, on-site ash transportation and capture, and disposal of combustion byproducts from coal-power operations. More than 90% of our services work is time and materials based, cost reimbursable or unit price contracts, which significantly reduces the risk of loss on contracts and provides gross margin visibility. Revenue from management contracts is recognized when the ash is hauled to the landfill or the management services are provided. Revenue from the sale of ash is recognized when it is delivered to the customer. Revenue from construction contracts is recognized using the cost-to-cost input method.

Our raw material sales provide customers with the raw materials essential to their business while also providing the sourcing, logistics, and management needed to facilitate these raw material transactions around the globe.

Revenue from construction contracts is recognized using the cost-to-cost input method. Revenue from management contracts is recognized when the ash is hauled to the landfill or the management services are provided. Revenue from the sale of ash is recognized when it is delivered to the customer. This combination of one-stop related services deepens customer connectivity and drives long-term relationships, which we believe are critical for renewing existing contracts, winning incremental business from existing customers at new sites and adding new customers.

Business Environment

We believe there are long-term growth opportunities within the industry in which we operate, and we continue to have a positive long-term outlook. We believe that with our full suite of service offerings, broad geographic reach, and technical and safety expertise, assuming completion of the Merger, we are well positioned to mitigate the risks and challenges in our industry while continuing to capitalize on opportunities and trends. The following represent the recent risks and challenges experienced by the Company.

Inflationary Market Pressures

We are experiencing the general impact of inflationary market pressures in our supply chain, labor and subcontractor markets. As a result of the tightening of the labor market, we continue to operate with disciplined hiring practices, but we believe our labor costs will remain high given our demand for labor in this environment. Further, we could continue to experience difficulties in securing pricing and the availability of certain equipment, materials and subcontractors.

While opportunities to bid on new projects and work continue to be comparable to prior year levels, we believe inflationary market pressures may impact our ability to secure backlog in the near term. Our customers are focused on cost containment to maintain allowable budgets and we continue to see projects on which we have submitted competitive bids being left unawarded from higher-than-expected cost proposals received.

Additionally, continued inflation may result in tightening of the credit markets, making access to funding, bonding, letters of credit or sureties more challenging, any of which could adversely impact our profitability and cash flow.

Competitive Labor Market.

As our continued success depends on our ability to attract and retain qualified personnel, we continue to compete to identify, hire and retain qualified employees in this labor market. We believe this labor competition trend is likely to continue, possibly to such a degree that demand for labor resources will outpace supply. Furthermore, the nature of our business as well as the markets in which our projects operate could result in shortages of qualified labor in those markets during periods of high demand. Our ability to capitalize on available opportunities is limited by our ability to employ, train and retain the necessary skilled personnel at acceptable labor costs. We continue to monitor our labor markets and do not currently believe the labor market environment will present a material risk to our profitability as we continue to retain and develop our workforce.

2526

Supply Chain Disruption.

We are experiencing supply chain disruptions in our end markets related to the following factors: (i) delays in receiving materials and equipment, and (ii) increased logistics costs resulting from a reduction in available rail cars and truck drivers as well as increases in imported raw materials from tax, tariffs and border controls.

Going Concern

The Company does not have sufficient cash on hand or available liquidity to repay the maturing credit agreement debt, including the outstanding letters of credit, as it becomes due within one year after the date that these unaudited condensed consolidated financial statements are issued. This condition, combined with the Company’s recurring losses, negative operating cash flows, and lack of available liquidity, raises substantial doubt about the Company’s ability to continue as a going concern. In response, the Company has entered into a definitive agreement to be acquired by SER Capital Partners, which management anticipates will bring necessary funding to support the ongoing operations of the Company, and has implemented certain cost saving strategies to preserve liquidity. See “—Liquidity and Capital Resources” below for more information.

These factors differ in their severity and impact to our financial situation, and we continue to monitor these supply chain disruptions, logistical challenges and general market conditions with respect to availability and costs of certain materials and equipment necessary for the performance of our business and the impact to our profitability and cash flow.

Results of Operations

Three Months Ended ~~June 30, 2022~~March 31, 2023 Compared to Three Months Ended ~~June 30, 2021~~March 31, 2022


		Three Months Ended									Three Months Ended
		June 30,				Change					March 31,				Change
		2022		2021		$		%			2023		2022		$		%
		(dollars in thousands)									(dollars in thousands)
Revenue		$	77,110	$	63,518	$	13,592	21.4	%
Cost of sales		(74,436)		(56,598)		(17,838)		31.5	%
Gross profit		2,674		6,920		(4,246)		(61.4)	%
Construction and service revenue										Construction and service revenue	$	61,846	$	54,858	$	6,988	12.7	%
Raw material sales										Raw material sales	9,067		11,193		(2,126)		(19.0)	%
Total revenues										Total revenues	70,913		66,051		4,862		7.4	%
Construction and service cost of sales										Construction and service cost of sales	(57,109)		(59,242)		2,133		(3.6)	%
Raw material cost of sales										Raw material cost of sales	(7,772)		(10,576)		2,804		(26.5)	%
Total cost of sales										Total cost of sales	(64,881)		(69,818)		4,937		(7.1)	%
Gross profit (loss)										Gross profit (loss)	6,032		(3,767)		9,799		260.1	%
General and administrative expenses	General and administrative expenses	(9,238)		(9,379)		141		(1.5)	%	General and administrative expenses	(6,234)		(8,952)		2,718		(30.4)	%

Gains on sales of real estate, property and equipment, net	Gains on sales of real estate, property and equipment, net	2,798		2,696		102		3.8	%	Gains on sales of real estate, property and equipment, net	2,975		3,543		(568)		(16.0)	%
Gain on ARO settlement		1,557		—		1,557		100.0	%
(Loss) gain on ARO settlement										(Loss) gain on ARO settlement	(41)		2,451		(2,492)		(101.7)	%
Other operating expenses from ERT services	Other operating expenses from ERT services	(2,586)		(1,007)		(1,579)		156.8	%	Other operating expenses from ERT services	(3,813)		(667)		(3,146)		471.7	%
Operating income		(4,795)		(770)		(4,025)		(522.7)	%
Operating loss										Operating loss	(1,081)		(7,392)		6,311		85.4	%
Interest expense, net	Interest expense, net	(4,467)		(3,314)		(1,153)		(34.8)	%	Interest expense, net	(4,890)		(4,573)		(317)		6.9	%
Loss from equity method investment		—		(11)		11		(100.0)	%
Loss before income taxes	Loss before income taxes	(9,262)		(4,095)		(5,167)		126.2	%	Loss before income taxes	(5,971)		(11,965)		5,994		(50.1)	%
Income tax expense	Income tax expense	341		72		269		373.6	%	Income tax expense	(115)		(78)		(37)		47.4	%
Net loss	Net loss	(9,603)		(4,167)		(5,436)		(130.5)	%	Net loss	(6,086)		(12,043)		5,957		49.5	%
Less loss attributable to non-controlling interest		—		(1)		1		100.0	%
Less (loss) income attributable to non-controlling interest										Less (loss) income attributable to non-controlling interest	—		(3)		3		100.0	%
Net loss attributable to Charah Solutions, Inc.	Net loss attributable to Charah Solutions, Inc.	$	(9,603)	$	(4,166)	(5,437)		(130.5)	%	Net loss attributable to Charah Solutions, Inc.	$	(6,086)	$	(12,040)	5,954		49.5	%

Construction and Service Revenue. Revenue increased ~~$13.6~~$7.0 million, or ~~21.4%~~12.7%, to ~~$77.1~~$61.8 million for the three months ended ~~June 30, 2022~~March 31, 2023 as compared to ~~$63.5~~$54.9 million for the three months ended ~~June 30, 2021,~~March 31, 2022, primarily driven by increases in ~~raw material sales of $5.2 million resulting from an increase in shipments,~~ byproduct services revenue of ~~$4.0~~$4.6 million ~~resulting~~primarily from our two beneficial use projects and construction revenue of $2.4 million primarily from the ~~net commencement~~timing of ~~new~~ project ~~work and increased ash production and remediation and compliance services revenue of $4.4~~progression on certain project work.

Raw Material Sales. Revenue decreased $2.1 million, ~~from the net commencements of new project work and a full quarter impact of certain projects that began during~~or 19.0%, to $9.1 million for the three months ended ~~June 30, 2021.~~March 31, 2023 as compared to $11.2 million for the three months ended March 31, 2022, primarily driven by a decrease in shipments.

Gross Profit. Gross profit ~~decreased $4.2~~increased $9.8 million, or ~~61.4%~~260.1%, to ~~$2.7~~$6.0 million for the three months ended ~~June 30, 2022~~March 31, 2023 as compared to ~~$6.9~~a $3.8 million gross loss for the three months ended ~~June 30, 2021.~~March 31, 2022. As a percentage of revenue, gross profit was ~~3.5%~~9.8% and ~~10.9%~~(6.9)% for the three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. The ~~decrease~~increase in gross profit and gross profit margin was directly affected by ~~several factors, most notably supply chain~~the absence of the certain legacy construction projects and ~~logistics issues, which impacted the expected ramp of two long-term~~an increase in gross profit on our beneficial use projects ~~and increased costs associated with the completion and demobilization of three construction projects~~ during the ~~quarter, resulting in cost overruns. The construction projects~~three months ended March 31, 2023, all of which were ~~originally scheduled for completion in the Fall of 2021. The Company has now demobilized~~performed at ~~the largest of these projects~~a negative margin and ~~expects to complete the remaining two projects during the third quarter. Delays in receiving material and obtaining necessary rail and trucking resources resulted in a delay~~contributed to the start of one large beneficial use project and have pushed the expected ramp of the second. The Company continues to work closely with its customers on contract adjustments and billing milestones to provide recovery of certain costs incurred to date as well as improved contract profitability and cash flow related to the start-up and logistical challenges experienced on our long-term beneficial use projects.gross profit loss in 2022.

General and Administrative ~~Expenses.~~Expenses. General and administrative expenses decreased ~~$0.1~~$2.7 million, or ~~1.5%~~30.4%, for the three months ended March 31, 2023 to ~~$9.2~~$6.2 million as compared to $9.0 million for the three months ended ~~June 30,~~March 31, 2022, ~~as compared to $9.4 million for the three months ended June 30, 2021,~~ primarily attributable to the ~~continued emphasis on corporate~~lower amortization expense ~~management through~~of $2.0 million resulting from the impairment of our trade name and customer relationship intangibles assets and

a reduction-in-force and cost ~~containment across corporate departments~~restructuring efforts that were implemented at the beginning of 2023. These drivers were partially offset by an increase in transaction-related costs and ~~delays in positions being backfilled.~~other items of $0.4 million.

Gains on Sales of Real Estate, Property and Equipment, Net. Gains on sales of real estate, property and equipment, net ~~increased $0.1~~decreased $0.6 million, or ~~3.8%~~16.0%, to ~~$2.8~~$3.0 million for the three months ended ~~June 30, 2022~~March 31, 2023 as compared to ~~$2.7~~$3.5 million for the three months ended ~~June 30, 2021,~~March 31, 2022, primarily due to ~~increased~~the absence of scrap sales from the ~~demolition of the~~ Gibbons Creek ~~power plant.~~ERT project, partially offset by the commencement of scrap sales at the Avon Lake and Cheswick ERT projects.

(Loss) Gain on ARO ~~settlement.~~Settlement. Gain on ~~ARO~~asset retirement obligation (“ARO”) settlement ~~increased $1.6~~decreased $2.5 million, or (101.7)%, to a slight net loss for the three months ended March 31, 2023 as compared to a net gain of $2.5 million for the three months ended ~~June 30,~~March 31, 2022 due to ~~differences between~~ the ~~estimated costs used in~~lack of any gains on ARO settlements compared to the ~~measurement of the fair value of the Company's AROs and the actual costs incurred for specific remediation tasks~~prior gains recognized on ~~a proportionate basis.~~the Gibbons Creek ERT project.

Other Operating Expenses from ERT Services. Other operating expenses from ERT services increased ~~$1.6~~$3.1 million, or ~~156.8%~~471.7%, to ~~$2.6~~$3.8 million for the three months ended ~~June 30, 2022~~March 31, 2023 as compared to ~~$1.0~~$0.7 million for the three months ended ~~June 30, 2021,~~March 31, 2022, primarily driven by ~~increased~~an increase in operating expenses resulting from the acquisition of the Avon Lake and Cheswick ERT projects, including the related accretion expense on the acquired AROs, and an increase in project management-related expenses ~~recognized~~ for the achievement of certain projects-related milestones and profitability levels on the Gibbons Creek ERT ~~project in 2022.~~project.

Interest Expense, Net. Interest expense, net increased ~~$1.2~~$0.3 million, or ~~34.8%~~6.9%, to ~~$4.5~~$4.9 million for the three months ended ~~June 30, 2022~~March 31, 2023 as compared to ~~$3.3~~$4.6 million for the three months ended ~~June 30, 2021,~~March 31, 2022 primarily ~~due~~attributable to a higher ~~weighted-average cost of capital associated with equipment financing and an increase in amortization of~~ debt ~~issuance costs.~~balances.

Income Tax Expense. Income tax expense ~~increased $0.3 million, or 373.6%, for the three months ended June 30, 2022 to $0.3 million as compared to~~remained at $0.1 million for the three months ended ~~June 30, 2021,~~March 31, 2023 as compared to the three months ended March 31, 2022, with a slight increase primarily due to limitations of the utilization of deferred tax assets against the reversal of deferred tax liabilities.

Net Loss. Net loss ~~increased $5.4~~decreased $6.0 million, or ~~130.5%~~49.5%, to ~~$9.6~~$6.1 million for the three months ended ~~June 30, 2022~~March 31, 2023 as compared to ~~$4.2~~$12.0 million for the three months ended ~~June 30, 2021.~~

~~Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021~~

Six Months Ended
June 30, Change
2022 2021 $ %
(dollars in thousands)
Revenue $ 143,161 $ 115,625 $ 27,536 23.8 %
Cost of sales (144,254) (103,120) (41,134) 39.9 %
Gross profit (1,093) 12,505 (13,598) (108.7) %
General and administrative expenses (18,190) (18,811) 621 (3.3) %
Gain on sales-type lease — 5,568 (5,568) (100.0) %
Gains on sales of real estate, property and equipment, net 6,341 3,243 3,098 95.5 %
Gain on ARO settlement 4,008 — 4,008 100.0 %
Other operating expenses from ERT services (3,253) (1,297) (1,956) 150.8 %
Operating (loss) income (12,187) 1,208 (13,395) 1,108.9 %
Interest expense, net (9,040) (6,549) (2,491) (38.0) %
Income from equity method investment — 191 (191) (100.0) %
Loss before income taxes (21,227) (5,150) (16,077) 312.2 %
Income tax expense 419 229 190 83.0 %
Net loss (21,646) (5,379) (16,267) (302.4) %
Less (loss) income attributable to non-controlling interest (3) 74 (77) 104.1 %
Net loss attributable to Charah Solutions, Inc. $ (21,643) $ (5,453) (16,190) (296.9) %

~~Revenue~~. Revenue increased $27.5 million, or 23.8%, to $143.2 million for the six months ended June 30, 2022 as compared to $115.6 million for the six months ended June 30, 2021, primarily driven by increases in remediation and compliance services revenue of $15.3 million from the net commencements of new project work, in raw material sales of $10.7 million from an increase in shipments and byproduct services revenue of $1.6 million from an increase in production.

~~Gross Profit~~. Gross profit decreased $13.6 million, or 108.7%, to a loss of $1.1 million for the six months ended June 30, 2022 as compared to a profit of $12.5 million for the six months ended June 30, 2021. As a percentage of revenue, gross profit was (0.8)% and 10.8% for the six months ended June 30, 2022 and 2021, respectively. The decrease in gross profit and gross profit margin was directly affected by several factors, most notably supply chain and logistics issues, which impacted the expected ramp of two long-term beneficial use projects, and significant weather challenges, which delayed the completion of three projects during the quarter, resulting in cost overruns. Additionally, significant rain events at three construction projects extended the final completion dates for those projects and resulted in cost overruns. These projects were originally scheduled for completion in the Fall of 2021. The Company has now demobilized at the largest of these projects and expects to complete the remaining two projects during the third quarter. Delays in receiving material and obtaining necessary rail and trucking resources resulted in a delay to the start of one large beneficial use project and have pushed the expected ramp of the second. The Company is taking steps to address these issues, and it is not expected that the long-term profitability of the projects will be materially impacted.

~~General and Administrative Expenses.~~General and administrative expenses decreased $0.6 million, or 3.3%, for the six months ended June 30, 2022 to $18.2 million as compared to $18.8 million for the six months ended June 30, 2021, primarily attributable to improved expense management.

~~Gain on sales-type lease.~~ Gain on sales-type lease decreased $5.6 million for the six months ended June 30, 2022 due to the absence of the recognition of a parcel transferred under a sales-type lease at an ERT project as discussed in Note 5, Balance Sheet Items, to the accompanying unaudited condensed consolidated financial statements.

~~Gains on Sales of Real Estate, Property and Equipment, Net.~~ Gains on sales of real estate, property and equipment, net increased $3.1 million, or 95.5%, to $6.3 million for the six months ended June 30, 2022 as compared to $3.2 million for the six months ended June 30, 2021, primarily due to increased scrap sales from the demolition of the Gibbons Creek power plant.

~~Gain on ARO settlement.~~ Gain on ARO settlement increased $4.0 million for the six months ended June 30, 2022 due to differences between the estimated costs used in the measurement of the fair value of the Company's AROs and the actual costs incurred for specific remediation tasks recognized on a proportionate basis.

~~Other Operating Expenses from ERT Services~~. Other operating expenses from ERT services increased $2.0 million, or 150.8%, to $3.3 million for the six months ended June 30, 2022 as compared to $1.3 million for the six months ended June 30, 2021, primarily driven by

increased project management-related expenses recognized for achievement of certain projects-related milestones and profitability levels on the Gibbons Creek ERT project and a full six months of expenses associated with operations on the Gibbons Creek ERT project inMarch 31, 2022.

~~Interest Expense, Net~~.Interest expense, net increased $2.5 million, or 38.0%, to $9.0 million for the six months ended June 30, 2022 as compared to $6.5 million for the six months ended June 30, 2021, primarily due to a higher weighted-average cost of capital associated with equipment financing and an increase in amortization of debt issuance costs.

~~Income from Equity Method Investment.~~ ~~Income from equity method investment decreased $0.2 million for the six months ended June 30, 2022 due to the dissolution of our joint venture in CV Ash in the first quarter of 2021.~~

~~Income Tax Expense.~~ Income tax expense increased $0.2 million, or 83.0%, for the six months ended June 30, 2022 to $0.4 million as compared to $0.2 million for the six months ended June 30, 2021, primarily due to limitations of the utilization of deferred tax assets against the reversal of deferred tax liabilities.

~~Net Loss~~.~~Net loss increased $16.3 million, or (302.4)%, to $21.6 million for the six months ended June 30, 2022 as compared to $5.4 million for the six months ended June 30, 2021.~~

Condensed Consolidated Balance Sheets

The following table is a summary of our overall financial position:


		June 30, 2022		December 31, 2021		Change			March 31, 2023		December 31, 2022		Change
		(in thousands)							(in thousands)
Total assets	Total assets	$	378,634	$	344,107	$	34,527	Total assets	$	320,769	$	338,543	$	(17,774)
Total liabilities	Total liabilities	342,691		287,778		54,913		Total liabilities	365,800		378,252		(12,452)
Mezzanine equity	Mezzanine equity	39,915		35,532		4,383		Mezzanine equity	72,358		71,543		815
Total equity	Total equity	(3,972)		20,797		(24,769)		Total equity	(117,389)		(111,252)		(6,137)

Assets

Total assets ~~increased $34.5~~decreased $17.8 million, primarily driven ~~primarily~~ by:

▪$~~32.7~~13.2 million in ~~real estate, property~~decreases of cash and ~~equipment additions, net acquired~~restricted cash due to $19.8 million of cash and restricted cash used in ~~the Avon Lake~~operating activities, $3.2 million of cash and ~~Cheswick asset purchase agreements during the six months ended June 30, 2022;~~restricted cash provided by investing activities and $3.4 million of cash and restricted cash provided by financing activities;

▪$~~12.4~~3.8 million in ~~real estate,~~ property and equipment ~~additions, net of disposals, primarily driven by new capital leases of yellow-iron equipment entered into~~depreciation expense during the ~~six~~three months ended ~~June 30, 2022;~~March 31, 2023; and

▪$~~6.8~~3.0 million in ~~increases~~non-cash lease expense during the three months ended March 31, 2023.

Liabilities

Total liabilities decreased $12.5 million, primarily driven by:

▪$9.9 million in ~~costs~~decreases in ~~excess of billings~~AROs primarily resulting from ARO settlements during the three months ended March 31, 2023, partially offset by interest accretion on AROs;

▪$5.1 million in principal payments on total long-term financing and finance lease obligations;

▪$3.9 million in decreases in accounts payable during the three months ended March 31, 2023 primarily driven by ~~a build-up~~the timing of ~~costs on certain construction projects until project billing milestones are achieved.~~cost of sales activities and vendor payments; and

▪$3.5 million in decreases of operating lease liabilities.

These decreases were partially offset by:

▪~~$1.5~~ $8.5 million in decreases of cash and restricted cash due to $36.9 million of cash used in operating activities, $43.5 million of cash provided by investing activities and $8.1 million of cash used in financing activities;

▪~~$9.4 million in property and equipment depreciation expense during the six months ended June 30, 2022; and~~

▪~~$3.9 million in intangible asset amortization expense during the six months ended June 30, 2022.~~

~~Liabilities~~

~~Total liabilities increased $54.9 million, primarily driven by:~~

▪~~$41.3 million in increases of current and non-current asset retirement obligations (“AROs”) resulting~~proceeds from the ~~AROs acquired of $64.5 million~~Credit Agreement as ~~part of the Avon Lake and Cheswick Transactions~~ discussed in Note ~~3, Asset Acquisitions, partially offset by settlements of AROs of $19.9 million and gains on AROs settlements of $4.0 million recognized during the six months ended June 30, 2022;~~

▪9~~$13.9 million in new capital lease obligations entered into during the six months ended June 30, 2022.~~

~~These increases were partially offset by:~~

▪. ~~$4.0 million in principal payments on capital lease obligations.~~Long-term Debt.

Mezzanine Equity

Total mezzanine equity increased ~~$4.4~~$0.8 million related to the paid in-kind dividends and accretion associated with the Series A Preferred Stock.

Equity

Total equity decreased ~~$24.8~~$6.1 million, primarily driven by the ~~$21.6~~$6.1 million net loss and ~~$4.0~~$0.8 million in paid in-kind and deemed dividends associated with our Preferred Stock, partially offset by ~~$1.5~~$0.8 million of share-based compensation.

Liquidity and Capital Resources

Our primary ongoing sources of liquidity and capital resources are cash on the balance sheet, cash flows generated by operating activities, borrowings under the Notes, proceeds from the issuance of ~~common stock~~debt and equity to an affiliate of the Company and availability under our asset-based lending credit agreement. Due to longer sales cycles, driven by the increase in the size, scope and complexity of remediation and compliance projects that we are bidding on, we have experienced contract initiation delays and project completion delays that have adversely affected our revenue, profitability and overall liquidity. Our ~~lengthy~~long and complex projects require us to expend large sums of working capital, and delays in payment receipts, project commencement or project completion can adversely affect our financial position and the cash flows that typically fund our expenditures.

Several factors impacted the Company's financial results and cash flows during the three and six months ended June 30, 2022, which included (i) increased costs associated with the completion and demobilization of three legacy projects (two of these projects have now been completed and the third is substantially complete), (ii) supply chain and logistics issues, which impacted the expected ramp of two long-term beneficial use projects, and (iii) an increaseAs discussed in contract assets, primarily due to an increase in net costs and estimated earnings in excess of billings, resulting from the status of achievement of certain contract billing milestones. To mitigate the issues related to the large beneficial use projects and the increase in contract assets, the Company continues to work closely with customersNote 9, Long-Term Debt, on contract adjustments and billing milestones that we expect will provide recovery of certain costs incurred to-date and improve contractual profitability and cash flow during the second half of the year and throughout the remaining contract period.

As of June 30, 2022, we had $7.1 million of cash on hand and borrowing capacity under our Credit Agreement (as defined elsewhere herein) of $17.0 million, for total liquidity of $24.1 million. Charah Solutions had no borrowings outstanding under the Credit Agreement as of June 30, 2022, and the springing financial covenant was not in effect.

~~On August 15, 2022,~~April 28, 2023, the Company entered into Consent and Amendment No. 13 to ~~the~~ Credit ~~Agreement (the “Credit Agreement Amendment”~~Amendment ("Amendment No. 3") ~~with JPMorgan Chase Bank, N.A., as administrative agent, the lenders party thereto and certain subsidiary guarantors named therein. The Credit Agreement Amendment,~~that, among other things, ~~permitted~~(i) provides consent to the ~~Company (and~~Merger Agreement, subject to certain ~~of its subsidiaries) to execute~~conditions, provided that the Term Loan Agreement and guarantee the Term Loan Agreement borrower’s obligations under the Term Loan Agreement (as defined elsewhere herein). Additionally, the Credit Agreement Amendment permits the Company to include certain gains on ARO settlements and cash received for deferred gains from ERT projects in the calculation of the Company’s fixed charge coverage ratio under the Credit Agreement's financial covenant. As of June 30, 2022, after taking into accountMerger occurs before October 16, 2023, is materially consistent with the terms of the Merger Agreement and related documents, and no event of default, as defined within the Credit Agreement, ~~Amendment,~~has occurred or will result from the acquisition; (ii) amends the definition of Progress Billings Cap Amount to be used in certain borrowing base certificates; (iii) amends the definition of the Applicable Rate; (iv) changes the maturity date from November 9, 2025 to January 31, 2024; and (v) consents to an extension of the deadline for certain financial deliverables for the fiscal year ended December 31, 2022. The Company ~~would~~does not have ~~met~~sufficient cash on hand or available liquidity to repay the ~~financial covenant had it been in effect.~~

~~As of August 19, 2022, based on~~maturing credit agreement debt, including the ~~undrawn~~outstanding letters of credit, ~~utilization~~as it becomes due within one year after the date that these unaudited condensed consolidated financial statements are issued. This condition, combined with the Company’s recurring losses, negative operating cash flows, and lack of ~~$10.7 million, borrowings of $9.5 million under~~available liquidity, raises substantial doubt about the ~~Credit Agreement and applicable financial covenant requirements, springing covenants would become applicable if~~Company’s ability to continue as a going concern. In response, the Company ~~were to borrow additional amounts in excess of approximately $1.8 million under the Credit Agreement.~~

~~On August 15, 2022, the Company, through its GCERG subsidiary (the “Term Loan Borrower”),~~has entered into a ~~term loan~~definitive agreement ~~(the “Term Loan Agreement”) with Charah Preferred Stock Aggregator, LP, an affiliate of Bernhard~~to be acquired by SER Capital Partners, ~~Management, LP (“BCP”).~~which management anticipates will bring necessary funding to support the ongoing operations of the Company, and has implemented certain cost saving strategies to preserve liquidity. Additionally, the Company is currently pursuing a plan to refinance its Credit Agreement before the maturity date and other strategies to secure additional liquidity. However, these factors are subject to external conditions that are not within the Company’s control, and therefore, implementation of management’s plans cannot be deemed probable. As a result, ~~of unexpected operating losses, an increase in contract assets and accelerated cash outflows for remediation activities on an ERT project that led~~management has concluded these plans do not alleviate substantial doubt about the Company’s ability to continue as a ~~decrease in cash during the six months ended June 30, 2022, the Company sought additional financing options to fund ongoing operations and project level investment.~~going concern. The Term Loan Agreement was executed to provide additional liquidity for the Company and accelerate the timing of the Company's cash flows for anticipated sales of the GCERG real estate parcels. The Term Loan Agreement provides for a delayed-draw term loan in an aggregate principal amount of $20.0 million. Borrowings can be requested ataccompanying unaudited condensed consolidated financial statements do not include any date before October 24, 2022. The Term Loan Agreement is scheduled to mature on the earlier of the sale of the remaining GCERG real estate parcels or April 15, 2024. Borrowings under the Term Loan Agreement accrue interest at a percentage per annum equal to 12.0%, with interest payments due on the first business day of each calendar quarter following the effective date of the Term Loan Agreement and on the maturity date. The Term Loan Borrower agreed to pay a commitment fee equal to $1.0 million that is payable on the earliest of (i) April 15, 2024, (ii) the date on which the loans are redeemed in full and all commitments are terminated and (iii) the date on which all commitments are terminated in full. The Term Loan Agreement is secured by a lien on, and security interest in, substantially all of the Term Loan Borrower’s assets, including real property, and is guaranteed on an unsecured basis by the Company and Charah, LLC. Voluntary prepayments are permitted at any time, without premium or penalty. As of August 19, 2022, the Term Loan Borrower had made no borrowings under the Term Loan Agreement.

~~After giving consideration~~adjustments relating to the ~~Credit Agreement Amendment~~recoverability and classification of recorded asset amounts or the ~~Term Loan Agreement, as~~amounts and classification of August 19, 2022, the Company has liquidity of approximately $24.7 million before incurring testing of the springing covenant under the Credit Agreement and approximately $32.8 million assuming full current availability of the Credit Agreement.

We believe our cash on hand, availability under the Credit and Term Loan Agreements and cash generated from operations will be sufficient to cover our working capital requirements and debt obligations for the next 12 monthsliabilities that might result from the ~~issuance~~outcome of this ~~Quarterly Report.~~

uncertainty.

Cash Flows

The following table sets forth our cash flow data:


		Six Months Ended							Three Months Ended
		June 30,				Change			March 31,				Change
		2022		2021		$			2023		2022		$
		(dollars in thousands)							(dollars in thousands)
Net cash and restricted cash (used in) provided by operating activities		(36,881)		10,242		$	(47,123)
Net cash and restricted cash used in operating activities								Net cash and restricted cash used in operating activities	$	(19,794)	$	(23,912)	$	4,118
Net cash and restricted cash provided by investing activities	Net cash and restricted cash provided by investing activities	43,485		29,951		13,534		Net cash and restricted cash provided by investing activities	3,174		969		2,205
Net cash and restricted cash used in financing activities		(8,131)		(11,745)		3,614
Net cash and restricted cash provided by (used in) financing activities								Net cash and restricted cash provided by (used in) financing activities	3,373		(2,993)		6,366
Net change in cash and restricted cash	Net change in cash and restricted cash	$	(1,527)	$	28,448	$	(29,975)	Net change in cash and restricted cash	$	(13,247)	$	(25,936)	$	12,689

Operating Activities

Net cash and restricted cash used in operating activities ~~increased $47.1~~decreased $4.1 million to ~~$36.9~~$19.8 million for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 as compared to ~~net cash provided by operating activities of $10.2~~$23.9 million for the ~~six~~three months ended ~~June 30, 2021.~~March 31, 2022. The change in cash flows from operating activities was primarily attributable to:

•~~an increase~~a decrease in net loss of ~~$16.3~~$6.0 million.

•~~a decrease~~an increase in non-working capital adjustments to net loss of ~~$0.1~~$3.4 million, primarily due to ~~increases in ARO settlements and~~decreases on the gains on sales of real estate, property and equipment ~~of $4.0 million~~ and ~~$1.8 million, respectively, during~~ARO settlements from the ~~six months ended June 30, 2022 as well as the absence of paid-in-kind interest on long-term debt of $2.4 million during the six months ended June 30, 2022. These changes were~~Gibbons Creek ERT project, partially offset by a decrease in amortization expense resulting from the ~~absence~~impairment of ~~the gain on sales-type lease of $5.6 million~~our trade name and ~~increases of depreciation and amortization and amortization of debt issuance costs of $1.1 million and $0.8 million, respectively, during the six months ended June 30, 2022.~~customer relationship intangible assets.

•a decrease in working capital adjustments of $5.2 million, primarily attributable to an increase in ~~cash used~~ARO spending from ~~all other operating activities~~the commencement of ~~$30.9 million, which was primarily driven by~~operations on the ~~increases in net~~Avon Lake and Cheswick ERT projects. contract assets ~~resulting from~~and liabilities due to the timing of ~~billings for construction projects~~activities, milestone payments and ~~in AROs resulting from~~ cash ~~settlements~~activities, and accounts payable due to the timing of ~~the existing liabilities.~~cost of sales activities and vendor payments.

Investing Activities

Net cash and restricted cash provided by investing activities increased ~~$13.5~~$2.2 million to ~~$43.5~~$3.2 million for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 as compared to ~~$30.0~~$1.0 million for the ~~six~~three months ended ~~June 30, 2021.~~March 31, 2022. The changes in cash flows from investing activities ~~was~~were primarily driven by a decrease in demolition costs on the ~~absence of payments of $7.4 million of the working capital adjustment and other items resulting from the sale of the Allied subsidiary, increases of $4.2 million in net proceeds from the sales of~~Gibbons Creek that were capitalized into real estate, property and equipment, ~~from increased scrap sales from the demolition of the Gibbons Creek power plant and increases of $3.3 million in~~

net.

Financing Activities

Net cash and restricted cash ~~received from ERT transactions resulting from the Avon Lake and Cheswick Transactions.~~

~~Financing Activities~~

~~Net cash used in~~provided by (used in) financing activities ~~decreased $3.6~~increased $6.4 million to ~~$8.1~~net cash and restricted cash provided by financing activities of $3.4 million for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 as compared to net cash and restricted cash used in financing activities of ~~$11.7~~$3.0 million for the ~~six~~three months ended ~~June 30, 2021.~~March 31, 2022. The change in cash flows from financing activities was primarily driven by ~~decreases~~$8.5 million in proceeds from the Credit Agreement as discussed in Note 9,Long-term Debt, partially offset by an increase of ~~$3.8~~$0.9 million in principal payments on long-term debt and ~~capital~~financing lease obligations.

Working Capital

Our working capital deficit, which we define as total current assets less total current liabilities, totaled ~~$9.7~~$8.3 million at ~~June 30, 2022~~March 31, 2023 as compared to ~~$31.5~~$4.7 million at December 31, ~~2021.~~2022. This ~~decrease~~increase in the net working capital deficit for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 was primarily due to:

•decreases in cash and cash equivalents from net cash used in operating ~~and financing~~ activities, partially offset by cash provided by investing and financing activities; and

•~~increases~~an increase in the outstanding balances on the asset-based lending credit agreement.

These drivers were partially offset by:

•decreases in AROs primarily driven by settlements on AROs at the ~~AROs acquired in the~~Gibbons Creek, Avon Lake and Cheswick ~~Transactions, partially offset~~ERT projects;

•decreases in accounts payable primarily driven by ~~settlements~~the timing of cost of sales activities and ~~gains on settlement of the Gibbons Creek AROs during the six months ended June 30, 2022;~~vendor payments; and

•~~increases~~decreases in ~~capital~~finance lease obligations and notes payables due to ~~new~~principal payments on long-term debt financing and ~~capital leases entered into~~finance during the ~~six~~three months ended ~~June 30, 2022.~~March 31, 2023.

~~These changes were partially offset by:~~

•~~increases in net contract assets primarily driven by the timing of billings for construction projects during the six months ended June 30, 2022.~~

Our Debt Agreements

Senior Notes

On August 25, 2021, the Company completed a public offering of $135.0 million, in the aggregate, of the Company’s Notes, which amount includes the exercise by the underwriters of their option to purchase an additional $5.0 million aggregate principal amount of Notes.

The public offering price of the Notes was 100.0% of the principal amount. The Company received ~~net~~ proceeds before payment of expenses and other fees of $135.0 million. The Company used the proceeds, along with cash from the sale of equity to B. Riley, to fully repay and terminate the Company’s Credit Facility, as defined below, with any remaining proceeds ~~to be~~being used for general corporate purposes, including funding future acquisitions and investments, repaying indebtedness, making capital expenditures and funding working capital.

The Notes are senior unsecured obligations of the Company and rank equal in right of payment with the Company’s existing and future senior unsecured indebtedness.

As a result of the issuance of the Notes, $12.1 million of third-party fees were capitalized as debt issuance costs that will be amortized through interest expense, net in the accompanying unaudited condensed consolidated statements of operations using the effective interest method through the maturity date of the Notes.

Asset-Based Lending Credit Agreement

provides for a four-year senior secured revolving credit facility with initial aggregate commitments from the lenders of $30.0 million, which includes $5.0 million available for swingline loans, plus an additional $5.0 million of capacity available for the issuance of letters of credit if supported by cash collateral provided by the Company (with a right to increase such amount by up to an additional $5.0 million) (“Aggregate Revolving Commitments”). Availability under the Credit Agreement is subject to a borrowing base calculated based on the value of certain eligible accounts receivable, inventory, and equipment of the Company and subject to redeterminations made in good faith and in the exercise of permitted discretion of JPMorgan. Proceeds of the Credit Agreements may be used for working capital and general corporate purposes.

and (c) $3.5 million, for three consecutive business days. During a Covenant Testing Period, the Credit Agreement requires the Company to maintain a fixed charge coverage ratio as defined in the Credit Agreement, determined for any period of twelve (12) consecutive months ending on the last day of each fiscal quarter, of at least 1.00 to 1.00.

As of ~~June 30,~~March 31, 2023 and December 31, 2022, the Company ~~has not~~had $8.5 million and $0, respectively, drawn on the Credit Agreement. Outstanding letters of credit were $12.5 million and ~~$19.0~~$10.7 million as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021. As of June 30,~~ 2022, ~~all outstanding letters of credit were issued with JPMorgan.~~respectively.

On August 15, 2022, the Company entered into Amendment No. 1 to the Credit Agreement (the “Credit Agreement Amendment”) with JPMorgan Chase Bank, N.A., as administrative agent, the lenders party thereto and certain subsidiary guarantors named therein. The Credit Agreement Amendment, among other things, permitted the Company (and certain of its subsidiaries) to execute the Term Loan Agreement and guarantee the Term Loan Agreement borrower’s obligations under the Term Loan Agreement. Additionally, the Credit Agreement Amendment permits the Company to include certain gains on ARO settlements and cash received for deferred gains from ERT projects in the calculation of the Company’s fixed charge coverage ratio under the Credit Agreement's financial covenant. As

On November 14, 2022, the Company entered into Amendment No. 2 to the Credit Agreement (the “Second Credit Agreement Amendment”) with JPMorgan Chase Bank, N.A., as administrative agent, the lenders party thereto and certain subsidiary guarantors named therein. The Second Credit Agreement Amendment, among other things, changed the benchmark rate floor on such loans from the LIBO Rate to the Adjusted Term SOFR Rate, increased the revolver Term Benchmark spread from 2.25% to 2.75%, and modified the test for the Covenant Testing Period such that any excess borrowing base over the revolving commitment amount could reduce the threshold that triggers the covenant test up to $2.0 million. Additionally, the Second Credit Agreement Amendment permits the Company to include $15,000 of ~~June 30, 2022, after taking~~equity contributions in "EBITDA", as defined in the Second Credit Agreement Amendment, for the fourth quarter of 2022.

On April 28, 2023, the Company entered into ~~account~~Consent and Amendment No. 3 to Credit Amendment ("Amendment No. 3") that, among other things, (i) provides consent to the Merger Agreement, subject to certain conditions, provided that it occurs before October 16, 2023, is materially consistent with the terms of the Merger Agreement and related documents, and no event of default, as defined within the Credit Agreement, ~~Amendment,~~has occurred or will result from the ~~Company would have met~~acquisition; (ii) amends the definition of Progress Billings Cap Amount to be used in certain borrowing base certificates; (iii) amends the definition of the Applicable Rate; (iv) changes the maturity date from November 9, 2025 to January 31, 2024; and (v) consents to an extension of the deadline for certain financial ~~covenant had it been in effect.~~deliverables for the fiscal year ended December 31, 2022.

As a result of entering into the Credit Agreement, $1.4 million of third-party fees were capitalized as debt issuance costs that will be amortized through interest expense, net in the unaudited condensed consolidated ~~statements~~Statements of ~~operations~~Operations using the ~~effective interest~~straight-line method through the maturity date of the Credit Agreement. Unamortized debt issuance costs as of March 31, 2023 and December 31, 2022 were $1.0 million and $1.1 million, respectively, and classified in other assets in the accompanying unaudited condensed consolidated balance sheets.

Term Loan Agreement

fund ongoing operations and project level investment. The Term Loan Agreement was executed to provide additional liquidity for the Company and accelerate the timing of the Company's cash flows for anticipated sales of the GCERG real estate parcels. The Term Loan Agreement provides for a delayed-draw term loan in an aggregate principal amount of $20.0 million. ~~Borrowings can be requested at any date before October 24, 2022.~~ The Term Loan Agreement is scheduled to mature on the earlier of the sale of the remaining GCERG real estate parcels or April 15, 2024. The Company elected to draw down the full borrowing capacity available under the Term Loan Agreement by November 8, 2022 through separate funding requests in order to fund operating activities. Borrowings under the Term Loan Agreement accrue interest at a percentage per annum equal to 12.0%, with interest payments due on the first business day of each calendar quarter following the effective date of the Term Loan Agreement and on the maturity date. The Term Loan Borrower agreed to pay a commitment fee equal to $1.0 million that is payable on the earliest of (i) April 15, 2024, (ii) the date on which the loans are redeemed in full and all commitments are terminated and (iii) the date on which all commitments are terminated in full. The Term Loan Agreement is secured by a lien on, and security interest in, substantially all of the Term Loan Borrower’s assets, including real property, and is guaranteed on an unsecured basis by the Company and Charah, LLC. Voluntary prepayments are permitted at any time, without premium or penalty. ~~As of August 19, 2022, the Term Loan Borrower had made no borrowings under the Term Loan Agreement.~~

~~As of August 19, 2022,~~On April 16, 2023, the Company entered into Amendment No. 2 to the Term Loan ~~Borrower had made no borrowings~~Amendment that, among other things, (i) waives the mandatory prepayment provisions with respect to certain asset sale proceeds, (ii) joins certain subsidiaries of the Company as guarantors under Term Loan Agreement, and (iii) consents to an extension of the deadline for certain financial deliverables for the fiscal year ended December 31, 2022. In connection with the Term Loan Amendment, ALERG, Cheswick Lefever LLC and Cheswick Plant Environmental Redevelopment Group LLC (collectively, the “Grantors”) entered into a security agreement, dated as of April 16, 2023, with Charah Preferred Stock Aggregator, LP, an affiliate of BCP, as the secured party (the “Secured Party”), pursuant to which the Grantors granted liens over substantially all of their assets in favor of the Secured Party.

As a result of entering into the Term Loan Agreement, $0.6 million of third-party fees were capitalized as debt issuance costs that will be amortized through interest expense, net in the unaudited condensed consolidated statements of operations using the effective interest method through the maturity date of the Term Loan Agreement.

Equipment Financing Facilities

We have entered into various equipment financing arrangements to finance the acquisition of certain equipment (the “Equipment Financing Facilities”). As of ~~June 30, 2022,~~March 31, 2023, we had ~~$13.4~~$11.6 million of equipment notes outstanding. Each of the Equipment Financing Facilities includes non-financial covenants, and, as of ~~June 30, 2022,~~March 31, 2023, we were in compliance with these covenants.

Series A Preferred Stock

In March 2020, the Company entered into an agreement with an investment fund affiliated with BCP to sell ~~26,000~~twenty-six thousand shares of Series A Preferred Stock, par value $0.01 per share (the ~~“Preferred~~“Series A Preferred Stock”), for net proceeds of ~~approximately~~ $25.2 million in a private placement (the ~~“Preferred~~“Series A Preferred Stock Offering”). The Series A Preferred Stock had an initial liquidation preference of $1,000 per share and pays a dividend at the rate of 10% per annum in cash, or 13% if the Company elects to pay dividends in-kind by adding such amount to the liquidation preference. The Company intends to pay dividends-in-kind for the foreseeable future. Proceeds from the Series A Preferred Stock Offering were used for liquidity and general corporate purposes.

For more information related to the Series A Preferred Stock, see Note ~~11,~~12, Mezzanine Equity, to the accompanying unaudited condensed consolidated financial statements.

Series B Preferred Stock

On November 14, 2022, the Company entered into an agreement with an investment fund affiliated with BCP to sell thirty thousand shares of Series B Preferred Stock, par value $0.01 per share (the “Series B Preferred Stock”), with an initial aggregate liquidation preference of $30.0 million, net of a 4% OID of $1.2 million for net proceeds of $28.8 million in a private placement (the “Series B Preferred Stock Investment”). Proceeds from the Series B Preferred Stock Investment will be used for liquidity and general corporate purposes.

For more information related to the Series B Preferred Stock, see Note 12, Mezzanine Equity, to the accompanying unaudited condensed consolidated financial statements.

Reverse Stock Split

The Company effected a one-for-ten reverse stock split of its common stock on December 29, 2022.

Non-GAAP Financial Measures

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA and Adjusted EBITDA margin are not financial measures determined in accordance with GAAP.

We believe Adjusted EBITDA and Adjusted EBITDA margin are useful performance measures because they allow for an effective evaluation of our operating performance compared to our peers, without regard to our financing methods or capital structure. We exclude the items listed above from net loss attributable to Charah Solutions, Inc. in arriving at Adjusted EBITDA because these amounts are either non-recurring or can vary substantially within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net loss attributable to Charah Solutions, Inc. determined in accordance with GAAP. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historic costs of depreciable assets, none of which are reflected in Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an indication that our results will be unaffected by the items excluded from Adjusted EBITDA. Our computations of Adjusted EBITDA may not be identical to other similarly titled measures of other companies. We use Adjusted EBITDA margin to measure the success of our business in managing our cost base and improving profitability. The following table presents a reconciliation of Adjusted EBITDA to net loss attributable to Charah Solutions, Inc., our most directly comparable financial measure calculated and presented in accordance with GAAP, along with our Adjusted EBITDA margin.


		Three Months Ended						Six Months Ended							Three Months Ended
		June 30,						June 30,							March 31,
		2022			2021			2022			2021				2023			2022
		(in thousands)
Net loss attributable to Charah Solutions, Inc.	Net loss attributable to Charah Solutions, Inc.	$	(9,603)		$	(4,166)		$	(21,643)		$	(5,453)		Net loss attributable to Charah Solutions, Inc.	$	(6,086)		$	(12,040)
Interest expense, net	Interest expense, net	4,467			3,314			9,040			6,549			Interest expense, net	4,890			4,573
Income tax expense	Income tax expense	341			72			419			229			Income tax expense	115			78
Depreciation and amortization	Depreciation and amortization	6,819			6,169			13,390			12,315			Depreciation and amortization	3,836			6,571
Equity-based compensation	Equity-based compensation	746			699			1,537			998			Equity-based compensation	752			791
Impairment expense	Impairment expense	—			127			380			127			Impairment expense	—			380
Transaction-related expenses and other items(1)	Transaction-related expenses and other items(1)	—			277			7			1,247			Transaction-related expenses and other items(1)	433			7
Adjusted EBITDA	Adjusted EBITDA	$	2,770		$	6,492		$	3,130		$	16,012		Adjusted EBITDA	$	3,940		$	360
Adjusted EBITDA margin(2)	Adjusted EBITDA margin(2)	3.6		%	10.2		%	2.2		%	13.8		%	Adjusted EBITDA margin(2)	5.6		%	0.5		%

(1)Represents expenses associated with the Amendment to the Credit Facility, non-recurring legal costs and expenses and other miscellaneous items.

(2)Adjusted EBITDA margin is a non-GAAP financial measure that represents the ratio of Adjusted EBITDA to total revenue. We use Adjusted EBITDA margin to measure the success of our businesses in managing our cost base and improving profitability.

Off-Balance Sheet Arrangements

We currently have no material off-balance sheet arrangements except for operating leases as referenced within Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2021.arrangements.

Contractual Obligations

As of ~~June 30, 2022,~~March 31, 2023, there have been no material changes in our outstanding contractual obligations from those disclosed within Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022 except as disclosed in the Liquidity and Capital Resources section of this Quarterly Report.

Critical Accounting Policies and Estimates

There were no changes to our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

Recent Accounting Pronouncements

Please see Note 2, Recent Accounting Pronouncements, to the accompanying unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report and Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 for a discussion of recent accounting pronouncements.

Under the Jumpstart Our Business Startups Act (the “JOBS Act”), we meet the definition of an “emerging growth company,” which allows us to have an extended transition period for complying with new or revised financial accounting standards pursuant to Section 107(b)

of the JOBS Act. We intend to take advantage of all of the reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under Section 107 of the JOBS Act until we are no longer an emerging growth company.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

~~Our management, with the participation of our principal executive officer and our principal financial officer, has evaluated the effectiveness of our~~The Company maintains disclosure controls and procedures (as defined in ~~Rules~~Rule 13a-15(e) ~~and 15d‑15(e) of~~or Rule 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is processed, recorded, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer and Treasurer (Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosure.

As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer and Treasurer, of the effectiveness of the design and operation of the disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer and Treasurer concluded, as of March 31, 2023, the end of the period covered by this Quarterly Report. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Based on such evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective ~~as of June 30, 2022 because of~~due to the material ~~weakness~~weaknesses in ~~our~~ internal control over financial reporting ~~both~~described below.

Notwithstanding the identified material weaknesses disclosed below, management, including our Chief Executive Officer and Chief Financial Officer and Treasurer, believes the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly represent, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented in accordance with U.S. GAAP.

Background

In December 2022, the Company was notified by a whistleblower that certain employees had engaged in improper spending activities at one of our project sites. In response, the Company conducted an internal investigation that substantiated the whistleblower's allegations. The Company engaged external legal counsel and a forensic accounting investigation team to thoroughly assess the extent of the fraudulent activities. Based on specific assumptions and limitations, we determined a range of probable, or potentially fraudulent, transactions believed to have been billed to a customer from 2018 through 2022. The investigation will continue to proceed through the legal process, which includes examining the extent of involvement of the customer or any third parties in contributory responsibility, evaluating the extent of insurance coverage available for reimbursement of the Company's losses, and collaborating with external law enforcement agencies to ascertain the full scope and magnitude of the overall fraudulent scheme. Management concluded that our system of internal control over financial reporting did not timely identify the fraudulent activities as part of the evaluation of the effectiveness of the internal controls. See Note 15, Commitments and Contingencies, for further discussion.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). The Company’s internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer and Chief Financial Officer and Treasurer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of its financial statements for external reporting purposes in accordance with GAAP.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The Company’s internal control over financial reporting is based upon the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO framework”). Our internal control over financial reporting system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, management evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 based on the criteria established in the COSO Framework. Based on this evaluation, management, with the participation of the Chief Executive Officer and Chief Financial Officer and Treasurer, concluded that, as of December 31, 2022, the Company’s internal control over financial reporting was not effective due to the material weaknesses described ~~below and as~~below.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.

As previously ~~identified~~disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~

~~As previously disclosed on our Annual Report on Form 10-K,~~2021, we identified the following control deficiencies which ~~aggregate~~aggregated to a material ~~weakness:~~weakness in control design: (i) lack of a sufficient number of trained resources with assigned responsibilities and accountability for the design and operation of internal controls over financial reporting; (ii) lack of formal and effective controls over certain financial statement account balances; (iii) lack of user profiles to ensure adequate restriction of users to perform only transactions that are consistent with their function; and (iv) lack of appropriate segregation of duties within the accounting and finance functions, including order to cash, process to pay and payroll business processes.

~~Management's Remediation Plan~~

~~We have~~Due to the lack of remediation of the previously disclosed material weakness, in combination with additional deficiencies identified ~~and implemented, and continue to implement, certain remediation efforts to improve~~by management in connection with preparation of the ~~effectiveness of~~Annual Report on Form 10-K for the year ended December 31, 2022, management determined that, in the aggregate, there were additional material weaknesses in our internal control over financial reporting and disclosure controls and procedures. These remediation efforts are ongoing. As previously disclosed in our Annual Report on Form 10-K, the following remedial actions have been identified and initiated:

▪~~We have hired an external consultant to assist us in an evaluation~~as of ~~design and implementation of certain internal controls to address the identified deficiencies.~~December 31, 2022, as follows:

▪Control Environment – We failed to remediate the previously disclosed deficiency related to a lack of sufficient number of trained resources with assigned responsibility and accountability for the design and operation of internal controls and reporting. Lack of trained resources contributed to a lack of control awareness and adequate diligence and expertise required to review accounting transactions. This material weakness increased the likelihood of a material misstatement occurring in the Company’s interim and annual financial statements not being prevented or detected.

▪Risk Assessment – We did not have an effective risk assessment process that defined clear financial reporting objectives, that identified and evaluated risks of misstatement due to errors over certain financial reporting processes, or that developed internal controls to mitigate those risks. The lack of an effective risk assessment process contributed to the Company not identifying the previously disclosed fraudulent activities in a timely manner.

▪Control Activities – Given the absence of proper segregation of duties within the accounting and finance functions including order to cash, process to pay, payroll business processes and information and communication, we failed to design control activities that address relevant risks as well as implement and perform effective controls at the level of precision required to identify all potential material errors. The material weaknesses of improper control design around accounting and financial reporting and failure of control operation of adequately designed controls, increased the likelihood of a material misstatement occurring in the Company’s interim and annual financial statements and not being prevented or detected.

▪Information and Communication – We failed to design and implement certain information and communication activities related to obtaining or generating and using relevant quality information to support the functioning of internal control. Specifically, within information technology controls (“GITCs”), there is a lack of segregation of duties controls within the information technology systems utilized by the Company in its financial reporting. The lack of segregation of duties within information technology systems increased the likelihood of a material misstatement occurring in the Company’s interim and annual financial statements and not being prevented or detected.

▪Monitoring – As a result of the material weaknesses described above, we failed to obtain the required resources, implement the required procedures and effectively monitor the internal control environment and allow the Company to respond timely.

Management's Remediation Plan

We are continuing to evaluate the material weaknesses discussed above and are in the process of executing the plans to remediate these material weaknesses. We expect our remediation plan to include, among other things:

▪Control Environment – (i) Investing in training and hiring ~~additional accounting resources~~personnel with appropriate expertise across the accounting and financial reporting function, (ii) continue communicating and emphasizing the importance of internal control across the Company, and (iii) continue involving and reporting regularly to the Company’s Audit Committee.

▪Risk Assessment – (i) Performing a rigorous scoping and risk assessment process to identify and analyze risk across the various levels of ~~experience~~the Company; and ~~reallocating responsibilities across~~(ii) identifying and analyzing risks.

▪Control Activities – (i) Enhancing the ~~finance organization. This measure will provide~~design of control activities to operate at a level of precision to identify all potential material errors; (ii) training control owners to improve the required retention of documentation evidencing their operation; (iii) implementing revised policies and procedures for ~~appropriate~~corporate expenditures, including spending with corporate credit cards, and the associated approval of those expenditures, and (iv) designing and implementing policies and procedures to address segregation of duties and ~~ensure that the appropriate level of knowledge and experience will be applied based on~~ the risk ~~and complexity~~ of ~~transactions and tasks under review.~~fraud.

▪~~We are revising~~Information and Communication – (i) Designing and implementing controls that review, approve, and periodically re-evaluate the user ~~profiles within our accounting systems~~access privileges for all system users and the business purpose for allowing access for each authorized user to ~~ensure appropriate~~address segregation of duties in information technology systems; and (ii) developing and implementing mitigating control procedures to address areas where limitations exist within GITCs or fraud is ~~in place.~~more likely to occur.

~~In designing~~▪Monitoring – (i) Developing a remediation plan with measurable action items and ~~evaluating~~continuous assessment of progression until completion; and (ii) developing sustainable and measurable procedures to assess the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

~~Because of its inherent limitations,~~ internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. environment on an ongoing basis.

As we continue to evaluate and take actions to improve our internal control over financial reporting, we will further refine our remediation plan and take additional actions to address control deficiencies or modify certain of the remediation measures described above.

~~While progress has been made to enhance our internal control over financial reporting, we~~We are still in the process of designing, implementing, documenting, and testing the effectiveness of these processes, procedures and controls. Additional time is required to complete the implementation and to assess and ensure the sustainability of these procedures. We will continue to devote time and attention to these remedial efforts. However, the material ~~weakness~~weaknesses cannot be considered remediated until the applicable remedial controls are fully implemented, have operated for a sufficient period of time and management has concluded that these controls are operating effectively through testing.

Changes in Internal Control Over Financial Reporting

Aside from the identification of the material weaknesses described above and the actions taken as described in ~~Management's~~Management’s Remediation Plan above to improve the Company’s internal control over financial reporting, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended ~~June 30, 2022~~March 31, 2023 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

3436

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. With respect to all such lawsuits, claims and proceedings, we record reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. Although it is difficult to predict the ultimate outcome of these lawsuits, claims and proceedings, we do not believe that the ultimate disposition of any of these matters, individually or in the aggregate, would have a material adverse effect on our results of operations, financial position or cash flows. We maintain liability insurance for certain risks that is subject to certain self-insurance limits.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities

During the three months ended ~~June 30, 2022, 166,294 shares of common stock were withheld for income tax purposes connected with the vesting of restricted stock units. During the three months ended June 30, 2022,~~March 31, 2023, there were no repurchases of our common stock.

3537

Item 6. Exhibits


Exhibit Number						Description
2.1††						Agreement and Plan of Merger, dated as of April 16, 2023, by and among Acquisition Parent 0423 Inc., Acquisition Sub April 2023 Inc. and Charah Solutions, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed April 21, 2023).
3.1						Amended and Restated Certificate of Incorporation of Charah Solutions, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed June 22, ~~2018~~)2018).
3.2						Amendment to the Amended and Restated Certificate of Incorporation of Charah Solutions, Inc. dated December 28, 2022 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed December 30, 2022).
3.3						Certificate of Designations of Series A Preferred Stock, dated March 16, 2020 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed March 18, ~~2020~~)2020).
~~3.3~~3.4						Certificate of Designations of Series B Preferred Stock, dated November 14, 2022 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8‑K filed on November 16, 2022).
3.5						Amended and Restated Bylaws of Charah Solutions, Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed June 22, ~~2018~~)2018).
~~10.1~~10.1†						~~Form~~Employment Agreement between Charah, LLC, Charah Solutions, Inc. and Joe Skidmore, effective as of ~~2022 Performance Share Unit Grant Notice and Agreement (form for grantee with employment agreement)~~March 16, 2023 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed ~~June 29, 2022)~~on March 22, 2023).
~~10.2~~10.2††						Voting and Support Agreement, dated as of April 16, 2023, by and among Charah Holdings LP, BCP Energy Services Fund-A, LP, BCP Energy Services Fund, LP, Charah Preferred Stock Aggregator, LP, Acquisition Parent 0423 Inc. and Charah Solutions, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed April 21, 2023).
10.3						Amendment No. 2, dated as of ~~2022 Restricted~~April 16, 2023, to the Term Loan Agreement by and among Gibbons Creek Environmental Redevelopment Group, LLC, as borrower, the Charah Solutions, Inc., Charah, LLC, and Charah Preferred Stock ~~Unit Grant Notice and Agreement (form for grantee with employment agreement)~~Aggregator, LP, as lender (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed ~~June 29, 2022)~~April 21, 2023).
~~10.3~~10.4						~~Amended~~Security Agreement, dated as of April 16, 2023, by and ~~Restated Employment Agreement between~~among Avon Lake Environmental Redevelopment Group, LLC, Cheswick Lefever LLC and Cheswick Plant Environmental Redevelopment Group LLC and Charah ~~LLC, Charah Solutions, Inc. and Scott Sewell effective June 27, 2022~~Preferred Stock Aggregator, LP. (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed ~~June 29, 2022).~~
~~10.4~~						Amended and Restated Employment Agreement between Charah, LLC, Charah Solutions, Inc. and Roger Shannon, effective July 22, 2022 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed July 27, 2022)April 21, 2023).
31.1*						Certification of Principal Executive Officer pursuant to Rule 13a‑14(a)/15d‑14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*						Certification of Principal Financial Officer pursuant to Rule 13a‑14(a)/15d‑14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**						Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**						Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.SCH*						Inline XBRL Taxonomy Extension Schema Document.
101.CAL*						Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*						Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*						Inline XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE*						Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104*						Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

___________


*						Filed herewith.
**						Furnished herewith.
†						Indicates a management contract or compensatory plan or arrangement.
††						Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the Securities and Exchange Commission on request.

3638

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	CHARAH SOLUTIONS, INC.


~~August 19, 2022~~June 30, 2023	By:	/s/ ~~Scott A. Sewell~~Jonathan T. Batarseh
	Name:	~~Scott A. Sewell~~Jonathan T. Batarseh
	Title:	President and Chief Executive Officer
		(Principal Executive Officer)


~~August 19, 2022~~June 30, 2023	By:	/s/ ~~Roger D. Shannon~~Joseph P. Skidmore
	Name:	~~Roger D. Shannon~~Joseph P. Skidmore
	Title:	Chief Financial Officer and Treasurer
		(Principal Financial Officer and Principal Accounting Officer)

3739


	For the Six Months Ended June 30, 2022
	Mezzanine Equity			Permanent Equity
	Preferred Stock (Shares)	Preferred Stock (Amount)		Common Stock (Shares)	Common Stock (Amount)		Additional Paid-In Capital		Retained Losses		Total		Non-Controlling Interest		Total
Balance, December 31, 2021	26,000	$	35,532	33,407,806	$	334	$	114,880	$	(94,679)	$	20,535	$	262	$	20,797
Net loss	—	—		—	—		—		(21,643)		(21,643)		(3)		(21,646)
Shares issued under share-based compensation plans	—	—		480,453	5		(5)		—		—		—		—
Taxes paid related to the net settlement of shares	—	—		(166,554)	(2)		(698)		—		(700)		—		(700)
Share-based compensation expense	—	—		—	—		1,537		—		1,537		—		1,537
Deemed and imputed dividends on Series A Preferred Stock	—	4,383		—	—		(299)		—		(299)		—		(299)
Series A Preferred Stock dividends	—	—		—	—		(3,661)		—		(3,661)		—		(3,661)
Balance, June 30, 2022	26,000	$	39,915	33,721,705	$	337	$	111,754	$	(116,322)	$	(4,231)	$	259	$	(3,972)


	For the Six Months Ended June 30, 2021
	Mezzanine Equity			Permanent Equity
	Preferred Stock (Shares)	Preferred Stock (Amount)		Common Stock (Shares)	Common Stock (Amount)		Additional Paid-In Capital		Retained Losses		Total		Non-Controlling Interest		Total
Balance, December 31, 2020	26,000	$	27,423	30,077,018	$	300	$	108,471	$	(88,865)	$	19,906	$	410	$	20,316
Net (loss) income	—	—		—	—		—		(5,453)		(5,453)		74		(5,379)
Distributions	—	—		—	—		—		—		—		(165)		(165)
Share-based compensation expense	—	—		—	—		998		—		998		—		998
Shares issued under share-based compensation plans	—	—		535,417	6		(6)		—		—		—		—
Taxes paid related to the net settlement of shares	—	—		(93,518)	(1)		(511)		—		(512)		—		(512)
Deemed and imputed dividends on Series A Preferred Stock	—	295		—	—		(295)		—		(295)		—		(295)
Series A Preferred Stock dividends	—	3,423		—	—		(4,215)		—		(4,215)		—		(4,215)
Balance, June 30, 2021	26,000	$	31,141	30,518,917	$	305	$	104,442	$	(94,318)	$	10,429	$	319	$	10,748


	June 30, 2022						December 31, 2021
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Definite-lived intangibles
Customer relationships	$	78,942	$	(42,674)	$	36,268	$	78,942	$	(38,727)	$	40,215

Indefinite-lived intangibles
Charah trade name					13,316						13,316
					0						0
Total					$	49,584					$	53,531