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 "forwardlooking 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 forwardlooking 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 ForwardLooking Statements" included elsewhere in this Quarterly Report. Except as otherwise required by applicable law, we assume no obligation to update any of these forwardlooking statements.Charah Solutions, Inc. Charah Solutions, Inc. (together with its subsidiaries, "Charah Solutions ," the "Company," "we," "us" or "our") was formed as aDelaware corporation inJanuary 2018 and did not conduct any material business operations prior to a reorganization and certain activities related to the initial public offering (the "IPO"), which was completed onJune 18, 2018 .Charah Solutions, Inc. is a holding company, the sole material assets of which consist of membership interests inCharah Management LLC , aDelaware limited liability company ("Charah Management"), andAllied Power Holdings, LLC , aDelaware limited liability company ("Allied Power Holdings "). Through the Company's ownership ofCharah Management andAllied Power Holdings , the Company owns the outstanding equity interests inCharah, LLC , aKentucky limited liability company ("Charah"), andAllied Power Management, LLC , aDelaware limited liability company ("Allied"), the subsidiaries through whichCharah Solutions operates its businesses. Recent Developments 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 for our products and services. We, along with our utility partners, have implemented the precautionary health and safety measures recommended by theCenters for Disease Control and Prevention (the "CDC") in response to the COVID-19 pandemic, including, but not limited to: an employee health status questionnaire, taking daily temperatures, enhanced sanitation practices and cleaning surfaces throughout each shift, and increasing the number of hand sanitizing stations. We have also increased social distancing measures, such as staggered shift start and stop times and break times with additional break spaces to support social distancing as well as safety meetings being held outside of the site trailer. Furthermore, we have implemented work-from-home measures for the majority of office employees. With the understanding that the COVID-19 challenge is evolving, based on new information and feedback, we continue to monitor the situation and update our proactive measures in coordination with our customers. Multiple nuclear and fossil outages have been completed and several are currently in progress with little to no interruption to date. We continue to work closely with our utility partners and concrete producer customers to meet their needs and are monitoring any potential slowdowns of byproduct sales given decreased demand for construction materials. We have had no significant contracts canceled at this time. However, projections for power generation demand have been lowered and there is the potential for decreased demand for our byproduct sales in the construction market as capital budgets are reduced and construction activity slows. In light of the uncertain and rapidly evolving situation relating to the COVID-19 pandemic, inApril 2020 , we implemented a series of preemptive cost-cutting and cost savings initiatives across the Company including reductions in employee compensation, reductions in cash-based retainers to our Board of Directors, reduced hiring and significantly reducing discretionary spending including travel restrictions. In addition, we are implementing applicable benefits of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). While we anticipate that these measures are temporary, we cannot predict the duration for which these precautionary measures will stay in effect, and we may elect or need to take additional measures as the information available to us continues to develop, including with respect to our employees, relationships with our third-party vendors, and our customers. Subject to our assumptions regarding the duration and severity of the COVID-19 pandemic, our currently anticipated responses thereto and our current projections, we believe our cash on hand and cash generated from operations will be sufficient to cover our working capital requirements and debt obligations for the next 12 months from the issuance of this Quarterly Report. However, the extent to which the COVID-19 pandemic and our precautionary measures in response thereto may impact our business will depend on future developments, which are highly uncertain and cannot be predicted with certainty at this time. The COVID-19 pandemic presents potential new risks to the Company's business. A sustained downturn may result in the carrying value of our long-lived assets exceeding their fair value, which may require us to recognize an impairment to those assets. Furthermore, delays in customer payments for our services may impact the collectability of our trade accounts receivable. Although there have been logistical and other challenges to date, there was no material adverse impact resulting from the COVID-19 pandemic on the Company's results of operations for the three months endedMarch 31, 2020 . Our results for the three months endedMarch 31, 2020 were primarily driven by the timing of our contract awards and the commencement and progress of work awarded under contract. Revenue generated from new awards won prior to 2019, during 2019 and during the three months endedMarch 31, 2020 was not sufficient to offset the impact of projects completed during 2019. However, the significant majority of revenue contributions from these new awards will be recognized in 2020 and beyond. 22
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Overview
We are a leading provider of mission-critical environmental and maintenance services to the power generation industry. We offer a suite of coal ash management and recycling, environmental remediation, and utility plant outage-related maintenance services. We also design and implement solutions for complex environmental projects (such as coal ash pond closures) and facilitate coal ash recycling through byproduct sales and other beneficial use services. We believe we are a partner-of-choice for the power generation industry due to our quality, safety, domain experience, and compliance record, all of which are key criteria for our customers. In 2019, we performed work at more than 50 coal-fired and nuclear power generation sites nationwide. We are an environmental remediation and maintenance company and we conduct our operations through two segments: (i) Environmental Solutions and (ii) Maintenance and Technical Services. Environmental Solutions. Our Environmental Solutions segment includes remediation and compliance services, as well as byproduct sales. Remediation and compliance services are associated with our customers' need for multi-year environmental improvement and sustainability initiatives, whether driven by regulatory requirements, by power generation customers initiatives, by our proactive engagement or by consumer expectations and standards. Byproduct sales support both our power generation customers' desire to recycle their recurring and legacy volumes of coal combustion residuals ("CCRs"), commonly known as coal ash, and our ultimate end customers' need for high-quality, cost-effective raw material substitutes. Maintenance and Technical Services. Our Maintenance and Technical Services segment includes fossil services and, from and afterMay 2017 when Allied was created, nuclear services. Fossil services are the recurring and mission-critical management of coal ash and the routine maintenance, outage services and staffing solutions for coal-fired power generation facilities. Nuclear services, which we market under the Allied Power brand name, include routine maintenance, outage services, facility maintenance, and staffing solutions for nuclear power generation facilities. The Maintenance and Technical Services segment offerings are most closely associated with the ongoing operations of power plants, whether in the form of daily environmental management or required maintenance services (typically during planned outages). 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 less cost of sales and general and administrative expenses, 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. 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 toCharah Solutions, Inc. before loss on extinguishment of debt, interest expense, income taxes, depreciation and amortization, equity-based compensation, non-recurring legal costs and expenses and start-up costs, the Brickhaven contract deemed termination revenue reversal, and transaction-related expenses and other items. Adjusted EBITDA margin represents the ratio of Adjusted EBITDA to total revenue. See "-Non-GAAP Financial Measures" below for more information and a reconciliation of Adjusted EBITDA to net loss attributable toCharah Solutions, Inc. , the most directly comparable financial measure calculated and presented in accordance with GAAP. 23
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Key Factors Affecting Our Business and Financial Statements Ability to Capture New Contracts and Business Opportunities Our ability to grow revenue and earnings is dependent on maintaining and increasing our market share, renewing existing contracts, and obtaining additional contracts from proactive bidding on contracts with new and existing customers. We proactively work with existing customers ahead of contract end dates to attempt to secure contract renewals. We also leverage the embedded long-term nature of our customer relationships to obtain insight into and to capture new business opportunities across our platform. Seasonality of Business Based on historical trends, we expect our operating results to vary seasonally. Nuclear power generators perform turnaround and outages in the off-peak months when demand is lower and generation capacity is less constrained. As a result, our nuclear services offerings may have higher revenue volume in the spring and fall months. Variations in normal weather patterns can also cause changes in the consumption of energy, which may influence the demand and timing of associated services for our fossil services offerings. Inclement weather can impact construction-related activities associated with pond and landfill remediation, which affects the timing of revenue generation for our remediation and compliance services. Our byproduct sales are also seasonally impacted during winter months when the utilization of cement and cement products is generally lower. Project-Based Nature of Environmental Remediation Mandates We believe there is a significant pipeline of coal ash ponds and landfills that will require remediation and/or closure in the future. Due to their scale and complexity, these environmental remediation projects are typically completed over longer periods of time. As a result, our revenue from these projects can fluctuate over time. Some of our revenue from projects is recognized over time using the cost-to-cost input method of accounting for GAAP purposes, based primarily on contract costs incurred to date compared to total estimated contract costs. This method is the most accurate measure of our contract performance because it depicts the company's performance in transferring control of goods or services promised to customers according to a reasonable measure of progress toward complete satisfaction of the performance obligation. The timing of revenue recorded for financial reporting purposes may differ from actual billings to customers, sometimes resulting in costs and billings in excess of actual revenue. Because of the risks in estimating gross profit margins for long-term jobs, actual results may differ from these estimates. Byproduct Recycling Market Dynamics There is a growing demand for recycled coal ash across a variety of applications driven by market forces and governmental regulations creating the need to dispose of coal ash in an environmentally sensitive manner. Pricing of byproduct sales is driven by supply and demand market dynamics as well as the chemical and physical properties of the ash. As demand increases for the end-products that use CCRs' (i.e., concrete for construction and infrastructure projects), the demand for recycled coal ash also typically rises. These fluctuations affect the relative demand for our byproduct sales. In recessionary periods, construction and infrastructure spending and the corresponding need for concrete may decline. However, this unfavorable effect may be partially offset by an increase in the demand for recycled coal ash during recessionary periods given that coal ash is more cost-effective than other alternatives. Power Generation Industry Spend on Environmental Liability Management and Regulatory Requirements The power generation industry has increased annual spending on environmental liability management. We believe this is the result of not only regulatory requirements and consumer pressure, but also the industry's increasing focus on environmental stewardship. Continued increases in spending on environmental liability management by our customers should result in increased demand for services across our platform. Cost Management and Capital Investment Efficiency Our main operating costs consist of labor, material and equipment costs and equipment maintenance. We maintain a focus on cost management and efficiency, including monitoring labor costs, both in terms of wage rates and headcount, along with other costs such as materials and equipment. We believe we maintain a disciplined approach to capital expenditure decisions, which are typically associated with specific contract requirements. Furthermore, we strive to extend the useful life of our equipment through the application of a well-planned routine maintenance program. How We Generate Revenue The Environmental Solutions segment generates revenue through our remediation and compliance services, as well as our byproduct sales. Our remediation and compliance services primarily consist of designing, constructing, managing, remediating and closing ash ponds and landfills on customer-owned sites. Our byproduct sales offerings include the recycling of recurring and contracted volumes of coal-fired power generation waste byproducts, such as bottom ash, fly ash and gypsum byproduct, each of which can be used for various industrial purposes. More than 90% of our services work is structured as time and materials, cost reimbursable or unit price contracts, which significantly reduces the risk of loss on contracts and provides gross margin visibility. Revenue from management contracts is recognized when the ash is hauled to the landfill or the management services are provided. Revenue from the sale of ash is recognized when it is delivered to the customer. Revenue from construction contracts is recognized using the cost-to-cost input method. The Maintenance and Technical Services segment generates revenue through our fossil services and nuclear services offerings. Maintenance and Technical Services segment offerings are most closely associated with the ongoing operations of power plants, whether in the form of daily environmental management or required maintenance services (typically during planned outages). Our fossil services offerings focus on recurring and mission-critical management of coal ash and routine maintenance, outage services and staffing solutions for coal-fired power generation facilities to fulfill the environmental service need of our customers in handling their waste byproducts. Over the last five years, 24
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our renewal rate for fossil services contracts has been approximately 90%. Our nuclear services operations, which we market under the Allied Power brand name, consist of a broad platform of mission-critical professional, technical and craft services spanning the entire asset life cycle of a nuclear power generator. The services are performed on the customer's site and the contract terms typically range from three to five years. Revenue is billed and paid during the periods of time work is being executed. This combination of the maintenance and environmental-related services deepens customer connectivity and drives long-term relationships which we believe are critical for renewing existing contracts, winning incremental business from existing customers at new sites and adding new customers. Results of Operations The table below sets forth our selected operating data for the three months endedMarch 31, 2020 and 2019. Three Months EndedMarch 31, 2020 Compared to Three Months EndedMarch 31, 2019 Three Months Ended March 31, Change 2020 2019 $ % (dollars in thousands) Revenue: Environmental Solutions$ 36,665 $ 58,383 $ (21,718 ) (37.2 )%
Maintenance and Technical Services 127,966 104,875 23,091 22.0 % Total revenue
164,631 163,258 1,373 0.8 % Cost of sales 153,834 147,879 5,955 4.0 % Gross Profit: Environmental Solutions 3,852 8,267 (4,415 ) (53.4 )% Maintenance and Technical Services 6,945 7,112 (167 ) (2.3 )% Total gross profit 10,797 15,379 (4,582 ) (29.8 )%
General and administrative expenses 12,756 13,985 (1,229 ) (8.8 )% Operating (loss) income
(1,959 ) 1,394 (3,353 ) (240.5 )% Interest expense, net (3,630 ) (5,052 ) 1,422 28.1 % Loss on extinguishment of debt (8,603 ) - (8,603 ) 100.0 % Income from equity method investment 296 554 (258 ) (46.6 )% Loss before taxes (13,896 ) (3,104 ) (10,792 ) 347.7 % Income tax benefit - (761 ) 761 (100.0 )% Net loss (13,896 ) (2,343 ) (11,553 ) 493.1 % Less income attributable to non-controlling interest 354 476 (122 ) (25.6 )% Net loss attributable to Charah Solutions, Inc. (14,250 ) (2,819 ) (11,431 ) 405.5 % Accrued Series A Preferred Stock dividends (111 ) - (111 ) (100.0 )% Net loss attributable to common stockholders$ (14,361 ) $ (2,819 ) (11,542 ) 409.4 % Revenue. Revenue increased$1.4 million , or 0.8%, for the three months endedMarch 31, 2020 to$164.6 million as compared to$163.3 million for the three months endedMarch 31, 2019 , driven by an increase in revenue in the Maintenance and Technical Services segment, partially offset by a decrease in revenue in the Environmental Solutions segment. The change in revenue by segment was as follows: Environmental Solutions Revenue. Environmental Solutions segment revenue decreased$21.7 million , or 37.2%, for the three months endedMarch 31, 2020 to$36.7 million as compared to$58.4 million for the three months endedMarch 31, 2019 . The decrease in revenue was primarily driven by project completions in 2019 within our remediation and compliance services component, including the completion of the Brickhaven project resulting from the deemed termination during the second quarter of 2019. Maintenance and Technical Services Revenue. Maintenance and Technical Services segment revenue increased$23.1 million , or 22.0%, for the three months endedMarch 31, 2020 to$128.0 million as compared to$104.9 million for the three months endedMarch 31, 2019 . The increase in revenue was primarily attributable to additional spring nuclear outage work in the three months endedMarch 31, 2020 , and an increase in revenue from our fossil services offerings. Gross Profit. Gross profit decreased$4.6 million , or 29.8%, for the three months endedMarch 31, 2020 to$10.8 million as compared to$15.4 million for the three months endedMarch 31, 2019 , driven primarily by a decrease in revenue in our Environmental Solutions segment. As a percentage of revenue, gross profit was 6.6% and 9.4% for the three months endedMarch 31, 2020 and 2019, respectively. The change in gross profit by segment was as follows: Environmental Solutions Gross Profit. Gross profit for our Environmental Solutions segment decreased$4.4 million , or 53.4%, for the three months endedMarch 31, 2020 to$3.9 million as compared to$8.3 million for the three months endedMarch 31, 2019 . The decrease 25
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in gross profit was primarily driven by project completions in 2019 within our remediation and compliance services component, including the completion of the Brickhaven project resulting from the deemed termination during the second quarter of 2019. Maintenance and Technical Services Gross Profit. Gross profit for our Maintenance and Technical Services segment decreased$0.2 million , or 2.3%, for the three months endedMarch 31, 2020 to$6.9 million as compared to$7.1 million for the three months endedMarch 31, 2019 . The decrease in gross profit was primarily attributable to margin improvements within our nuclear services offerings during the three months endedMarch 31, 2019 that did not reoccur during the three months endedMarch 31, 2020 , partially offset by an increase in gross profit from our fossil services offerings. General and Administrative Expenses. General and administrative expenses decreased$1.2 million , or 8.8%, for the three months endedMarch 31, 2020 to$12.8 million as compared to$14.0 million for the three months endedMarch 31, 2019 . The decrease was primarily attributable to reductions in staff and other cost-savings initiatives implemented by the Company, partially offset by$2.9 million in lower non-cash general and administrative expenses during the three months endedMarch 31, 2019 associated with the amortization of the purchase option liability due to the deemed termination of the Brickhaven contract. Interest Expense, Net. Interest expense, net decreased$1.4 million , or 28.1%, for the three months endedMarch 31, 2020 to$3.6 million as compared to$5.1 million for the three months endedMarch 31, 2019 . The decrease was primarily attributable to lower debt balances during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 and a$1.3 million decrease in the non-cash mark-to-market expense associated with the change in value of our interest rate swap, partially offset by an increase in interest rates related to the amendments to the Credit Facility as discussed below in "-Liquidity and Capital Resources-Our Debt Agreements-Existing Credit Facility." Loss on Extinguishment of Debt. Loss on extinguishment of debt increased$8.6 million for the three months endedMarch 31, 2020 due to the Company's Amendment No. 3 to Credit Agreement (the "Third Amendment") of our existing Credit Facility as discussed below in "-Liquidity and Capital Resources-Our Debt Agreements-Existing Credit Facility." The Company expensed$5.2 million in amendment fees and wrote off$3.4 million in previously capitalized debt issuance costs. Income fromEquity Method Investment . Income from equity method investment decreased$0.3 million , or 46.6%, for the three months endedMarch 31, 2020 to$0.3 million as compared to$0.6 million for the three months endedMarch 31, 2019 . The decrease period-over-period was primarily attributable to a reduction in ash volumes generated by the utility and available for sale by us. Income Tax Benefit. Income tax benefit decreased by$0.8 million as no tax benefit was recorded during the three months endedMarch 31, 2020 as a result of the full valuation allowance recorded by the Company for the year endedDecember 31, 2019 . Net Loss. Net loss increased$11.6 million , or 493.1%, for the three months endedMarch 31, 2020 to$13.9 million as compared to$2.3 million for the three months endedMarch 31, 2019 . The increase was primarily attributable to higher loss on extinguishment of debt as discussed above and lower gross profit, partially offset by lower general and administrative expenses and interest expense, net. Condensed Consolidated Balance Sheets The following table is a summary of our overall financial position:
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