Item 1A, Risk Factors, in this Quarterly Report and our Quarterly Report on Form 10-Q for the period ending June 30, 2021.
The Company continues to review opportunities to improve its capital structure and to enhance shareholder value. As a result, pursuant to a sales agreement with its agents, the Company sold at the market price an aggregate of 1,238,637 shares of its Class A Common Stock in the nine months ended September 30, 2021, for a total of $28.7 million. After expenses and commissions paid to the agents, the Company’s proceeds total $27.6 million. Additionally, the Company recorded direct costs of $0.4 million related to the issuance. The shares of Class A Common Stock were issued pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-239242), which became effective on August 5, 2020, and a prospectus supplement dated December 31, 2020, to the prospectus. At present, the Company has $21.3 million remaining available for sale under the prospectus supplement dated December 31, 2020 and may from time to time sell additional shares through the sales agreement at the then market price. In addition to the availability under the prospectus supplement, the Company has $25 million remaining available under the registration statement.
In addition and in connection with the entry into the amendment (the “Voting Agreement Amendment”) to its existing Voting and Nomination Agreement with Mr. Morris Bawabeh, Kulayba LLC and M&D Bawabeh Foundation, Inc., the Company and Kulayba LLC also entered into an Exchange Agreement, dated February 2, 2021 (the “Exchange Agreement”), pursuant to which Kulayba LLC agreed to exchange (the “Exchange”) 3,873 shares of the Company’s outstanding Series B Senior Preferred Stock, par value $1.00 per share (“Preferred Stock”), representing a $5,000,198 liquidation preference (including accrued and unpaid dividends), for (i) 231,276 shares of the Company’s Class A Common Stock, priced at the closing market price of $21.62 on the date the Exchange Agreement was signed and (ii) a Centrus Energy Corp. Warrant to Purchase Common Stock (the “Warrant”), exercisable for 250,000 shares of Common Stock at an exercise price of $21.62 per share, which was the closing market price on the date the Exchange Agreement was signed, subject to certain customary adjustments pursuant to the terms of the Warrant. The Company retired the 3,873 shares of Preferred Stock received by the Company under the Exchange Agreement.
On October 20, 2021, the Company announced commencement of a tender offer to purchase all of its outstanding Series B Senior Preferred Stock, par value $1.00 per share (the “Series B Preferred Shares”), at a price per Series B Preferred Share (inclusive of any rights to accrued but unpaid dividends) of $1,145.20, less any applicable withholding taxes. The aggregate liquidation preference per Series B Preferred Share (including accrued but unpaid dividends) was $1,347.29 as of September 30, 2021. The tender offer will expire at 5:00 p.m., Eastern Standard Time, on Thursday, November 18, 2021, unless the offer is extended. For additional details, refer to Note 13, Subsequent Event, of the unaudited condensed consolidated financial statements.
The nuclear industry in general, and the nuclear fuel industry in particular, is in a period of significant change, which continues to affect the competitive landscape. In the years following the 2011 Fukushima accident in Japan, the published market prices for uranium enrichment declined more than 75% through mid-2018. While the monthly price indicators have since increased, the uranium enrichment segment of the nuclear fuel market remains oversupplied and faces uncertainty about future demand for nuclear power generation. Changes in the competitive landscape affect pricing trends, change customer spending patterns, and create uncertainty. To address these changes, we have taken steps to adjust our cost structure; we may seek further adjustments to our cost structure and operations and evaluate opportunities to grow our business organically or through acquisitions and other strategic transactions.
We are also actively considering, and expect to consider from time to time in the future, potential strategic transactions, which could involve, without limitation, acquisitions and/or dispositions of businesses or assets, joint ventures or investments in businesses, products or technologies or changes to our capital structure. In connection with any such transaction, we may seek additional debt or equity financing, contribute or dispose of assets, assume additional indebtedness, or partner with other parties to consummate a transaction.
COVID-19 Update
On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. The Company has taken actions to protect its workforce and to maintain critical operations. Travel, operational, and other restrictions imposed by the U.S. and foreign governments may impact our ability to make future sales and may impact the ability of our suppliers, including our suppliers of low enriched uranium, to perform under their contracts. As of the date of this filing, our LEU segment operations have not been materially affected by the COVID-19 pandemic and we are working with our suppliers, fabricators, and customers to monitor the situation closely, including with respect to the impact of emerging variants. However, our technical solutions segment has been impacted by supply chain disruptions and increased costs as a result of the pandemic.
Further, the governments of states and counties in which we operate have from time to time issued orders imposing various restrictions, including prohibiting holding gatherings and closing nonessential businesses. Many of these restrictions remain in place and we continue to monitor and adjust as necessary. On September 9, 2021 President Biden announced that he had signed an Executive Order requiring federal contractors to require vaccination of their workforce. The Company has issued a policy requiring vaccinations subject to medical and religious exemptions as required by law. The Company has also continued other measures to protect its workforce such as expanded telework to protect our workforce, to comply with government orders, and to maintain critical operations. We are working closely with DOE and we are continuing to make progress while implementing measures to protect our workforce. Not all work, however, can be performed remotely. Further, the actions taken by our suppliers and government regulatory agencies to protect their workforces may impact our ability to obtain the necessary supplies and governmental reviews and approvals to timely complete the HALEU project. We are experiencing delays by our suppliers and increased costs from them as a result of the impact of the COVID-19 pandemic on their operations. Refer to the HALEU Contract discussion above in Overview for additional details.
For further discussion, refer to Part I, Item 1A - Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2020, as updated by Part II, Item 1A, Risk Factors, in our Quarterly Report on Form 10-Q for the period ending June 30, 2021.
Operating Results
Our revenues, operating results, and cash flows can fluctuate significantly from quarter to quarter and year to year. Operating results for the three and nine months ended September 30, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.
Our sales order book in the LEU segment consists primarily of long-term, fixed commitment contracts, and we have visibility on a significant portion of our revenue for 2021-2022. In 2020, we benefited from the one-time collection from a customer of $32.4 million in settlement of a supply contract that was subject to the customer’s bankruptcy proceeding. Based on our current order book and under current market conditions, we anticipate fiscal year 2021 and fiscal year 2022 revenues in the LEU segment to be slightly higher than 2020 and gross margins to be similar to 2020, excluding the one-time claim recovery. Please see Forward Looking Statements at the beginning of this Quarterly Report. With respect to our technical solutions segment, work under the HALEU Contract currently remains on schedule but we have been experiencing increased delays from vendors and increased costs due to the continuing COVID pandemic. We are working with DOE to minimize the impacts and to obtain funding for these additional costs. Additional funding commitments from DOE and a contract amendment will be required to complete the project. Refer to Overview above for additional details.
Our order book of sales under contract in the LEU segment extends to 2030. As of September 30, 2021, the order book was approximately $1 billion. The order book represents the estimated aggregate dollar amount of revenue for future SWU and uranium deliveries under contract which includes approximately $320 million of Deferred Revenue and Advances from Customers. We estimate that approximately 2% of our order book is at risk related to customer operations. Due to the nature of the long-term contracts and our order book, we have visibility of a significant portion of our anticipated revenue for 2021 and 2022 in the LEU segment. However, these long-term contracts are subject to significant risks and uncertainties, including potential import laws and restrictions, including under the Russian Suspension Agreement, which limits imports of Russian uranium products into the United States and applies to our sales using material procured under the TENEX Supply Contract. For further discussion of these risks and uncertainties, refer to Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2020.
Our future operating results are subject to a number of uncertainties that could affect results either positively or negatively. Among the factors that could affect our results are the following:
•Additional purchases or sales of SWU and uranium;
•Conditions in the LEU and energy markets, including pricing, demand, operations, government restrictions on imports, exports or investments, and regulations of our business and activities and those of our customers, suppliers, contractors, and subcontractors;
•Timing of customer orders, related deliveries, and purchases of LEU or components;
•Costs, future funding and demand for HALEU;
•Financial market conditions and other factors that may affect pension and benefit liabilities and the value of related assets;
•The outcome of legal proceedings and other contingencies;
•Potential use of cash for strategic or financial initiatives;
•Actions taken by customers, including actions that might affect existing contracts;
•Market, international trade and other conditions impacting Centrus’ customers and the industry; and
•The length and severity of the COVID-19 pandemic and its impact on our operations.
For further discussion of these uncertainties, refer to Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2020, as updated by Part II, Item 1A, Risk Factors, in our Quarterly Reports.
Revenue
We have two reportable segments: the LEU segment and the technical solutions segment.
Revenue from our LEU segment is derived primarily from the following:
•sales of the SWU component of LEU;
•sales of both the SWU and uranium components of LEU; and
•sales of natural uranium.
Our technical solutions segment reflects our technical, manufacturing, engineering, and operations services offered to public and private sector customers, including engineering and testing activities as well as technical and resource support currently being performed by the Company. This includes the HALEU Contract and a variety of other contracts with public and private sector customers.
SWU and Uranium Sales
Revenue from our LEU segment accounted for approximately 77% of our total revenue in 2020. The majority of our customers are domestic and international utilities that operate nuclear power plants, with international sales constituting approximately one-third of revenue from our LEU segment in recent years. Our agreements with electric utilities are primarily medium and long-term fixed-commitment contracts under which our customers are obligated to purchase a specified quantity of the SWU component of LEU from us. Contracts where we sell both the SWU and uranium component of LEU to utilities or where we sell natural uranium to utilities and other nuclear fuel related companies are generally shorter-term, fixed-commitment contracts.
Centrus recognizes revenue at the time LEU or uranium is delivered under the terms of our contracts. The timing of customer deliveries is affected by, among other things, electricity markets, reactor operations, maintenance and refueling outages, and customer inventories. Based on customers’ individual needs, some customers are building inventories and may choose to take deliveries under annual purchase obligations later in the year or in subsequent years. Customer payments for the SWU component of LEU average roughly $5 million to $10 million per order. As a result, a relatively small change in the timing of customer orders for LEU may cause significant variability in our operating results.
Utility customers in general have the option to defer receipt of SWU and uranium products purchased from Centrus beyond the contractual sale period, resulting in the deferral of costs and revenue recognition. Refer to Note 2, Revenue and Contracts with Customers, in the unaudited condensed consolidated financial statements for further details.
Our financial performance over time can be affected significantly by changes in prices for SWU and uranium. Since 2011, market prices for SWU and uranium significantly declined until mid-2018, when they began to trend upward. Since our sales order book includes contracts awarded to us in previous years, the average SWU price billed to customers typically lags behind published price indicators by several years. While newer sales reflect the market prices prevalent in recent years, a few older contracts included in our order book have sales prices that are significantly above current market prices.
The following chart summarizes long-term and spot SWU price indicators, and a spot price indicator for natural uranium hexafluoride (“UF6”), as published by TradeTech, LLC in Nuclear Market Review:
SWU and Uranium Market Price Indicators*
* Source: Nuclear Market Review, a TradeTech publication, www.uranium.info
Our contracts with customers are denominated primarily in U.S. dollars, and although revenue has not been materially affected by changes in the foreign exchange rate of the U.S. dollar, we may have a competitive price advantage or disadvantage obtaining new contracts in a competitive bidding process depending upon the weakness or strength of the U.S. dollar. On occasion, we will accept payment in euros for spot sales that may be subject to short-term exchange rate risk. Costs of our primary competitors are denominated in other currencies. Our contracts with suppliers are primarily denominated in U.S. dollars. We have a SWU supply agreement, nominally commencing in 2023, with prices payable in a combination of U.S. dollars and euros.
On occasion, we will accept payment for SWU in the form of uranium. Revenue from the sale of SWU under such contracts is recognized at the time LEU is delivered and is based on the fair value of the uranium at contract inception, or as the quantity of uranium is finalized, if variable.
Cost of sales for SWU and uranium is based on the amount of SWU and uranium sold and delivered during the period and unit inventory costs. Unit inventory costs are determined using the average cost method. Changes in purchase costs have an effect on inventory costs and cost of sales over current and future periods. Cost of sales includes costs for inventory management at off-site licensed locations. Cost of sales also includes certain legacy costs related to former employees of the Portsmouth GDP and Paducah GDP.
In 2018 through 2020, the Company borrowed SWU inventory valued at $20.7 million from a customer and recorded the SWU and the related liability using the Company’s projected average unit price of SWU purchases under contract to be used for repayment. The cumulative liability to the customer for borrowed inventory was revalued to $25.5 million in the third quarter of 2021, of which $3.0 million is included in Accounts Payable and Accrued Liabilities and $22.5 million is included in Other Long-Term Liabilities. The revaluation reflects an updated projection of the timing and sources of inventory to be used for repayment. Cost of Sales for the three and nine months ended September 30, 2021 includes the related expense of $4.8 million.
Technical Solutions
Our technical solutions segment reflects our technical, manufacturing, engineering, and operations services offered to public and private sector customers, including the American Centrifuge engineering, procurement, construction, manufacturing, and operations services being performed under the HALEU Contract. With our private sector customers, we seek to leverage our domestic enrichment experience, engineering know-how, and precision manufacturing facility to assist customers with a range of engineering, design, and advanced manufacturing projects, including the production of fuel for next-generation nuclear reactors and the development of related facilities.
Government Contracting
On October 31, 2019, we signed the cost-share HALEU Contract with DOE to deploy a cascade of centrifuges to demonstrate production of HALEU for advanced reactors. The three-year program has been under way since May 31, 2019, when the Company and DOE signed an interim HALEU letter agreement that allowed work to begin while the full contract was being finalized. We continue to invest in advanced technology because of the potential for future growth into new areas of business for the Company, while also preserving our unique workforce at our Technology and Manufacturing Center in Oak Ridge, Tennessee, and our production facility in Piketon, Ohio. The Company entered into this cost-share contract with DOE as a critical first step on the road back to the commercial production of enriched uranium, which the Company had terminated in 2013 with the closure of the Paducah GDP. The HALEU Contract, once fully implemented, is expected to result in the Company having demonstrated the capability to enrich uranium to the 20% concentration in the uranium-235 isotope that is required by many of the advanced reactor concepts now under development. Centrus is the only company with an NRC license to enrich HALEU.
In 2019, under the HALEU Contract, DOE agreed to reimburse the Company for 80% of its costs incurred in performing the contract, up to a maximum of $115 million. The Company’s cost share is the corresponding 20% and any costs the Company elects to incur above these amounts. Costs under the HALEU Contract include program costs, including internal labor, third-party services and materials and associated indirect costs that are classified as Cost of Sales, and an allocation of corporate costs supporting the program that are classified as Selling, General and Administrative Expenses. Services to be provided over the three-year contract include constructing and assembling centrifuge machines and related infrastructure in a cascade formation and production of a small quantity of HALEU. When estimates of total costs for such an integrated, construction-type contract exceed estimates of total revenue to be earned, a provision for the remaining loss on the contract is recorded to Cost of Sales in the period the loss is determined. Our corporate costs supporting the program are recognized as expense as incurred over the duration of the contract term. In 2019, the portion of our anticipated cost share under the HALEU Contract representing our share of projected program costs was recognized in Cost of Sales as an accrued loss of $18.3 million. The accrued loss on the contract is being adjusted over the remaining contract term based on actual results, remaining program cost projections and the Company’s anticipated cost-share. Cost of Sales in the nine months ended September 30, 2021 and 2020, benefited by $6.5 million and $8.7 million, respectively, for previously accrued contract losses attributable to work performed in the periods. As of September 30, 2021, a total of $17.1 million of previously accrued contract losses have been realized and the accrued contract loss balance included in Accounts Payable and Accrued Liabilities was $1.2 million. Our HALEU Contract expires June 1, 2022 and although we believe demand for HALEU will emerge over the next several years thereafter, there are no guarantees about whether or when
government or commercial demand for HALEU will materialize, and there are a number of technical, regulatory and economic hurdles that must be overcome for these fuels and reactors to come to the market.
Work under the HALEU Contract has progressed but we have been experiencing increased delays from vendors and increased costs due to the continuing effects of the COVID-19 pandemic. Additionally, COVID-19-related supply chain difficulties have also affected DOE in its supply of equipment that it is required to furnish under the contract. As a result, we currently estimate that costs required to complete the existing HALEU Contract have increased approximately $10 million over the 2019 initial estimate. Further, while we still anticipate completing the cascade in 2022, due to a COVID-related supply chain delay in the DOE-supplied HALEU storage cylinders, production will not begin until mid-2022. The U.S. Government is currently operating on a continuing resolution through December 3, 2021. On October 28, 2021, DOE increased the government’s cost share ceiling to $117.9 million and provided additional incremental funding that we expect will be sufficient to continue work through the middle of November.
While the existing contract ends on June 1, 2022, the Department of Energy’s Fiscal Year 2022 budget request includes $33 million to establish a new HALEU availability program, a portion of which would be used for “continuing to support the 16 machines in Piketon.” The Department has indicated that it is considering changes to the scope of the existing contract including moving the operational portion of the demonstration to a new, competitively-awarded contract, with operations to begin in mid-2022. Centrus believes it is well-positioned to compete for a follow-on contract to operate the machines in Piketon but there is no assurance that DOE will award such a contract to the Company. Congress has not yet adopted a Fiscal Year 2022 appropriations bill for the Department, and there is no assurance that the proposed program, which would go beyond the scope and expiration of our existing contract, will be approved and funded.
Additional COVID-19-related impacts, delays in DOE furnishing equipment, or changes to the existing scope of the HALEU Contract could result in further material increases to our estimate of the costs required to complete the demonstration cascade and produce HALEU, as well as delay completion of the HALEU Contract. The Company does not currently have a contractual obligation to perform work in excess of the funding provided by DOE and, therefore, no additional costs have been accrued as of September 30, 2021. If the Company commits to a plan to complete the demonstration cascade and produce HALEU and DOE does not commit to fully fund the additional costs, we may incur material additional costs or losses in future periods that could have an adverse impact on our financial condition and liquidity.
Commercial Contracting
In March 2018, we entered into an initial services agreement with X-energy to provide technical and resource support for conceptual design of its TRISO fuel manufacturing process. In November 2018, we entered into a second services agreement with X-energy to proceed with preliminary design of the TRISO facility. Under both agreements, which were funded by two separate cooperative agreement awards by DOE, we provide X-energy with non-cash in-kind contributions pursuant to X-energy’s obligations under those agreements. In November 2020, the parties extended the period of performance through August 2021. In August 2021, we entered into a new services agreement with X-energy to provide design services for detailed design of the TRISO fuel manufacturing facility and various support services for establishing their TRISO Research and Development Center. The task orders under the new agreement may include non-cash in-kind contributions at our discretion.
Under the X-energy agreements, Centrus performs services pursuant to separate task orders issued and provide for time-and-materials based pricing. The cumulative task orders issued through October 2020 provided for payments to us of $13.7 million and in-kind contributions provided by us of $7.5 million. Under the agreement, effective November 2020, the cumulative value of the additional task orders issued provides for payments to us of $6.8 million and in-kind contributions to be provided by us of $3.0 million. Under the new agreement effective August 2021, releases to date provide for payments to us of $5.6 million.
Prior Site Services Work
We formerly performed sites services work under contracts with DOE and its contractors at the former Portsmouth GDP. In September 2021, the Company and DOE fully settled the Company’s claims for reimbursements for certain pension and postretirement benefits costs incurred in connection with a past cost-reimbursable contract for work performed at the Portsmouth GDP. Under the terms of the settlement agreement, DOE paid the Company $43.5 million in September 2021, of which $33.8 million was contributed in September 2021 to the pension plan for its subsidiary United States Enrichment Corp. (“Enrichment Corp.”) and $9.7 million was deposited in October 2021 in a trust for payment of postretirement health benefits payable by Enrichment Corp. The payment of $43.5 million is included in revenue of the technical solutions segment for the three and nine months ended September 30, 2021.
Results of Operations
Segment Information
The following tables present elements of the accompanying unaudited condensed consolidated statements of operations that are categorized by segment (dollar amounts in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
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|
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|
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2021
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2020
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$ Change
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% Change
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LEU segment
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|
|
|
|
|
|
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Revenue:
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|
|
|
|
|
|
SWU revenue
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$
|
19.1
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|
|
$
|
0.1
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|
|
$
|
19.0
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|
|
19,000
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%
|
Uranium revenue
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12.9
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|
|
18.6
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|
|
(5.7)
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|
|
(31)
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%
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Total
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32.0
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|
|
18.7
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|
|
13.3
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|
|
71
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%
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Cost of sales
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23.7
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|
|
19.6
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|
|
(4.1)
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|
|
(21)
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%
|
Gross profit (loss)
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$
|
8.3
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|
|
$
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(0.9)
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|
|
$
|
9.2
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|
|
|
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|
Technical solutions segment
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Revenue
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$
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59.3
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|
|
$
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14.9
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|
|
$
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44.4
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|
|
298
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%
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Cost of sales
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18.1
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|
|
14.8
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|
|
(3.3)
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(22)
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%
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Gross profit
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$
|
41.2
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|
|
$
|
0.1
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|
|
$
|
41.1
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|
|
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Total
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Revenue
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$
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91.3
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|
|
$
|
33.6
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|
|
$
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57.7
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|
172
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%
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Cost of sales
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41.8
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|
|
34.4
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|
|
(7.4)
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|
|
(22)
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%
|
Gross profit (loss)
|
$
|
49.5
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|
|
$
|
(0.8)
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|
|
$
|
50.3
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
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|
|
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|
|
2021
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|
2020
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$ Change
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% Change
|
LEU segment
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|
|
|
|
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Revenue:
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|
|
|
|
|
|
SWU revenue
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$
|
102.4
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|
|
$
|
89.4
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|
|
$
|
13.0
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|
|
15
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%
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Uranium revenue
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12.9
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23.4
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|
|
(10.5)
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|
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(45)
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%
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Total
|
115.3
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|
|
112.8
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|
|
2.5
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|
|
2
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%
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Cost of sales
|
76.1
|
|
|
51.8
|
|
|
(24.3)
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|
|
(47)
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%
|
Gross profit
|
$
|
39.2
|
|
|
$
|
61.0
|
|
|
$
|
(21.8)
|
|
|
|
|
|
|
|
|
|
|
|
Technical solutions segment
|
|
|
|
|
|
|
|
Revenue
|
$
|
94.0
|
|
|
$
|
41.5
|
|
|
$
|
52.5
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|
|
127
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%
|
Cost of sales
|
54.9
|
|
|
39.9
|
|
|
(15.0)
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|
|
(38)
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%
|
Gross profit
|
$
|
39.1
|
|
|
$
|
1.6
|
|
|
$
|
37.5
|
|
|
|
|
|
|
|
|
|
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Total
|
|
|
|
|
|
|
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Revenue
|
$
|
209.3
|
|
|
$
|
154.3
|
|
|
$
|
55.0
|
|
|
36
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%
|
Cost of sales
|
131.0
|
|
|
91.7
|
|
|
(39.3)
|
|
|
(43)
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%
|
Gross profit
|
$
|
78.3
|
|
|
$
|
62.6
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|
|
$
|
15.7
|
|
|
|
Revenue
Revenue from the LEU segment increased $13.3 million (or 71%) in the three months and $2.5 million (or 2%) in the nine months ended September 30, 2021, compared to the corresponding periods in 2020. SWU revenue in the second quarter of 2020 included $32.4 million related to a customer’s bankruptcy proceeding. Excluding this settlement, revenue from the sales of SWU increased $45.4 million (or 82%) in the nine months ended September 30, 2021. The volume of SWU sold increased 126% for the nine-month period ended September 30, 2021 and the average SWU price decreased 20%, largely due to the variability in timing of utility customer orders and the particular contracts under which SWU were sold during the periods. There were no SWU deliveries in the three months ended September 30, 2020, with revenue of $0.1 million for ancillary services.
Revenue from uranium sales decreased $5.7 million (or 31%) in the three months and $10.5 million (or 45%) in nine months ended September 30, 2021, compared to the corresponding periods in 2020. For the nine-month period, the volume of uranium sold declined 48% and the average price increased 6%.
Revenue from the technical solutions segment increased $44.4 million (or 298%) in the three months and $52.5 million (or 127%) in the nine months ended September 30, 2021, compared to the corresponding periods in 2020. Revenue in the third quarter of 2021 included $43.5 million related to the settlement of the Company’s claims for reimbursements for certain pension and postretirement benefits costs incurred in connection with a past cost-reimbursable contract performed at the Portsmouth GDP. Excluding this settlement, revenue from the technical solutions segment increased $0.9 million (or 6%) in the three months and $9.0 million (or 22%) in the nine months ended September 30, 2021, due to increased work performed under the HALEU and X-energy contracts.
Cost of Sales
Cost of sales for the LEU segment increased $4.1 million (or 21%) in the three months and $24.3 million (or 47%) in the nine months ended September 30, 2021, compared to the corresponding periods in 2020, largely reflecting increases in SWU sales volume partially offset by decreases in the average SWU unit cost. The volume of SWU sold increased 126% for the nine-month period and the average SWU unit cost decreased 3%.
Cost of sales for the three and nine months ended September 30, 2021 included $4.8 million for the revaluation of an obligation to a customer for inventory the Company borrowed in 2018 through 2020. For more information, refer to SWU and Uranium Sales above. Cost of sales for the nine months ended September 30, 2021 includes $15.9 million of previously deferred costs from Deferred Costs Associated with Deferred Revenue that reflected higher inventory costs from 2017-2018. Cost of sales also includes legacy costs related to former employees of the Portsmouth GDP and Paducah GDP of $1.8 million in the nine months ended September 30, 2021 compared to $2.4 million in the corresponding period in 2020.
Cost of sales for the technical solutions segment increased $3.3 million (or 22%) in the three months and $15.0 million (or 38%) in the nine months ended September 30, 2021, compared to the corresponding periods in 2020, largely reflecting the increase in contract work performed. Cost of sales benefited by $6.5 million in the current nine-month period and $8.7 million in the prior nine-month period for previously accrued contract losses attributable to work performed under the HALEU Contract. For details on HALEU Contract accounting, refer to “Technical Solutions - Government Contracting” above.
Gross Profit
We realized a gross profit of $49.5 million in the three months and $78.3 million in the nine months ended September 30, 2021, compared to a gross loss of $0.8 million and gross profit of $62.6 million in the corresponding periods in 2020. Gross profit in the three and nine months ended September 30, 2021, included $43.5 million of revenue related to the settlement of the Company’s claim for costs incurred in connection with a prior cost-reimbursable contract with DOE. Gross profit in the nine months ended September 30, 2020, included $32.4 million of revenue related to the settlement of a supply contract that was rejected as part of the customer’s bankruptcy proceeding. Excluding these one-time proceeds, gross profit increased $6.8 million in the three-month period and $4.6 million in the nine-month period.
Our LEU segment realized a gross profit of $8.3 million in the three months and $39.2 million in the nine months ended September 30, 2021, compared to a gross loss of $0.9 million and gross profit of $61.0 million in the corresponding periods in 2020. Excluding the revenue related to the bankruptcy court claims of $32.4 million in the prior year, the gross profit for the LEU segment increased $10.6 million in the nine-month period due primarily to increases in SWU sales volume and decreases in the average SWU unit cost, partially offset by decreases in the average SWU sales price.
For the technical solutions segment, we realized a gross profit of $41.2 million in the three months and $39.1 million in the nine months ended September 30, 2021 compared to a gross profit of $0.1 million and $1.6 million for the corresponding periods in 2020. Excluding the settlement with DOE, gross profit from the technical solutions segment decreased $2.0 million in the three months and $5.6 million in the nine months ended September 30, 2021.
Non-Segment Information
The following tables present elements of the accompanying unaudited condensed consolidated statements of operations that are not categorized by segment (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
2021
|
|
2020
|
|
$ Change
|
|
% Change
|
Gross profit (loss)
|
$
|
49.5
|
|
|
(0.8)
|
|
|
$
|
50.3
|
|
|
6,288
|
%
|
Advanced technology costs
|
0.6
|
|
|
0.2
|
|
|
(0.4)
|
|
|
(200)
|
%
|
Selling, general and administrative
|
9.0
|
|
|
6.7
|
|
|
(2.3)
|
|
|
(34)
|
%
|
Amortization of intangible assets
|
1.7
|
|
|
1.2
|
|
|
(0.5)
|
|
|
(42)
|
%
|
Special charges for workforce reductions
|
—
|
|
|
0.6
|
|
|
0.6
|
|
|
100
|
%
|
Operating income (loss)
|
38.2
|
|
|
(9.5)
|
|
|
47.7
|
|
|
502
|
%
|
Nonoperating components of net periodic benefit expense (income)
|
(4.3)
|
|
|
(2.2)
|
|
|
2.1
|
|
|
95
|
%
|
Investment income
|
—
|
|
|
(0.1)
|
|
|
(0.1)
|
|
|
—
|
%
|
Income before income taxes
|
42.5
|
|
|
(7.2)
|
|
|
49.7
|
|
|
690
|
%
|
Income tax expense (benefit)
|
0.4
|
|
|
(0.2)
|
|
|
(0.6)
|
|
|
—
|
%
|
Net income (loss)
|
$
|
42.1
|
|
|
$
|
(7.0)
|
|
|
49.1
|
|
|
701
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
2021
|
|
2020
|
|
$ Change
|
|
% Change
|
Gross profit
|
$
|
78.3
|
|
|
62.6
|
|
|
$
|
15.7
|
|
|
(25)
|
%
|
Advanced technology costs
|
1.3
|
|
|
1.8
|
|
|
0.5
|
|
|
28
|
%
|
Selling, general and administrative
|
25.0
|
|
|
25.6
|
|
|
0.6
|
|
|
2
|
%
|
Amortization of intangible assets
|
5.4
|
|
|
4.3
|
|
|
(1.1)
|
|
|
(26)
|
%
|
Special charges for workforce reductions
|
—
|
|
|
0.5
|
|
|
0.5
|
|
|
100
|
%
|
Operating income
|
46.6
|
|
|
30.4
|
|
|
16.2
|
|
|
(53)
|
%
|
Nonoperating components of net periodic benefit expense (income)
|
(12.9)
|
|
|
(6.6)
|
|
|
6.3
|
|
|
95
|
%
|
Interest expense
|
—
|
|
|
0.1
|
|
|
0.1
|
|
|
100
|
%
|
Investment income
|
—
|
|
|
(0.5)
|
|
|
(0.5)
|
|
|
(100)
|
%
|
Income before income taxes
|
59.5
|
|
|
37.4
|
|
|
22.1
|
|
|
(59)
|
%
|
Income tax expense (benefit)
|
0.7
|
|
|
(0.6)
|
|
|
(1.3)
|
|
|
217
|
%
|
Net income
|
$
|
58.8
|
|
|
$
|
38.0
|
|
|
20.8
|
|
|
(55)
|
%
|
Advanced Technology Costs
Advanced technology costs consist of American Centrifuge expenses that are outside of our customer contracts in the technical solutions segment. Costs increased $0.4 million (or 200%) in the three months and decreased $0.5 million (or 28%) in the nine months ended September 30, 2021, compared to the corresponding periods in 2020.
Selling, General and Administrative
Selling, general and administrative (“SG&A”) expenses increased $2.3 million (or 34%) in the three months ended September 30, 2021, compared to the corresponding period in 2020. Of this amount, $2.2 million reflects a remeasurement of obligations under long-term incentive compensation plans due to recent increases in Centrus’ stock price. Consulting costs increased $0.3 million and other SG&A expenses decreased by a net $0.2 million.
SG&A expenses decreased $0.6 million (or 2%) in the nine months ended September 30, 2021, compared to the corresponding period in 2020. Incentive compensation expense increased $3.6 million reflecting a remeasurement of obligations due to recent increases in Centrus’ stock price. Consulting costs decreased $3.3 million, salaries and benefits decreased $1.0 million, and other SG&A expenses increased by a net $0.1 million.
Amortization of Intangible Assets
Amortization of intangible assets increased $0.5 million (or 42%) in the three months and $1.1 million (or 26%) in the nine months ended September 30, 2021, compared to the corresponding periods in 2020. Amortization expense for the intangible asset related to the September 2014 sales order book is a function of SWU sales volume under that order book, and amortization expense for the intangible asset related to customer relationships is amortized on a straight-line basis.
Nonoperating Components of Net Periodic Benefit Expense (Income)
Nonoperating components of net periodic benefit expense (income) netted to income of $4.3 million and $12.9 million for the three and nine months ended September 30, 2021, compared to income of $2.2 million and $6.6 million in the corresponding periods in 2020. Nonoperating components of net periodic benefit expense (income) consist primarily of the expected return on plan assets, offset by interest cost as the discounted present value of benefit obligations nears payment. Interest cost declined in 2021 as a result of lower market interest rates.
Income Tax Expense (Benefit)
The income tax expense was $0.4 million in the three months ended September 30, 2021, and the income tax benefit was $0.2 million in the three months ended September 30, 2020. The income tax expense was $0.7 million in the nine months ended September 30, 2021, and the income tax benefit was $0.6 million in the nine months ended September 30, 2020.
The 2021 income tax expense resulted from applying the annual effective tax rate to year-to-date income from continuing operations adjusted for discrete items. The income tax expense of $0.7 million in the nine months ended September 30, 2021 included $1.1 million of current income tax expense offset by $0.4 million of income tax benefit from the true-up to the 2020 tax provision. The income tax benefit in the nine months ended September 30, 2020, included an income tax benefit of $0.8 million from the tax valuation allowance release on Centrus’ state deferred income taxes for its LEU segment, an income tax benefit of $0.1 million from the true-up to the 2019 tax provision, and $0.3 million of current income tax expense.
Centrus continues to maintain a valuation allowance against its federal and certain state net deferred tax assets through September 30, 2021. However, we believe it is reasonably possible that sufficient positive evidence may become available to conclude that some or a significant portion of the federal valuation allowance will no longer be needed and may be released within the next 12 months. Although Centrus achieved a three-year cumulative income position during the second quarter of 2021, the Company determined that a valuation allowance is still necessary due to a relatively low level of cumulative pre-tax income during this period and significant net operating loss carryforwards. In addition, the uncertainties described in Centrus’ Annual Report on Form 10-K Part 1, Item 1A – “Risk Factors” for the year ended December 31, 2020 and updated under Part II, Item 1A – “Risk Factors” of our Quarterly Reports on Form 10-Q for the periods ending March 31, 2021 and June 30, 2021 and in the Operating Results section of this document may impact the ability of Centrus to generate future taxable income and, therefore, the ability of Centrus to realize its deferred tax assets, including net operating losses, in the future. Centrus will continue to monitor future financial performance to determine whether such performance is both sustained and significant enough to support a reversal of all or a portion of the valuation allowance. The exact timing and amount of the valuation allowance release are dependent upon the actual level of profitability that is achieved as well as other positive and negative evidence. Additional information about the valuation allowance is provided in Note 14, Income Taxes, of the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Net Income
Net income was $42.1 million in the three months and $58.8 million in the nine months ended September 30, 2021, compared to a net loss of $7.0 million and net income of $38.0 million in the corresponding periods in the prior year. Gross profit in the three and nine months ended September 30, 2021, included $43.5 million of revenue related to the settlement of the Company’s claim for costs incurred in connection with a prior cost-reimbursable contract with DOE. Gross profit in the prior nine-month period included the $32.4 million of revenue related to the settlement of a supply contract that was rejected as part of the customer’s bankruptcy proceedings. The current year periods benefited from increases in nonoperating components of net periodic benefit income.
Net Income per Share
The Company measures Net Income per Share both on a GAAP basis and adjusted to exclude deemed dividends allocable to retired preferred stock shares (“Adjusted Net Income per Share”). We believe Adjusted Net Income per Share, a non-GAAP financial measure, provides investors with additional understanding of the Company’s financial performance and period-to-period comparability.
On February 2, 2021, the Company completed the exchange of 3,873 shares of its outstanding Preferred Stock, for (i) 231,276 shares of its Class A Common Stock, and (ii) the Warrant to purchase 250,000 shares of Class A Common Stock at an exercise price of $21.62 per share, for an aggregate valuation of approximately $7.5 million. (Refer below to Liquidity and Capital Resources for details.) The carrying value on the Balance Sheet was $1.00 per share par value. The aggregate liquidation preference, including accrued but unpaid dividends, was $1,291.04 per share as of December 31, 2020.
The aggregate valuation of approximately $7.5 million, less accrued but unpaid dividends attributable to the acquired and retired Series B preferred shares, is considered for purposes of Net Income per Share to be a deemed dividend to the extent it exceeds the carrying value on the Balance Sheet, or $6.6 million.
Below we present Net Income Per Share and Adjusted Net Income per Share. The non-GAAP financial measure is used in addition to and in conjunction with results presented in accordance with our GAAP results. The non-GAAP financial measure should be viewed in addition to, and not as a substitute for, or superior to, the financial measure calculated in accordance with GAAP. The non-GAAP financial measure used by the Company may be calculated differently from, and therefore may not be comparable to, non-GAAP financial measures used by other companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended
September 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Numerator (in millions):
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
42.1
|
|
|
$
|
(7.0)
|
|
|
$
|
58.8
|
|
|
$
|
38.0
|
|
Less: Preferred stock dividends - undeclared and cumulative
|
0.7
|
|
|
1.9
|
|
|
2.1
|
|
|
5.9
|
|
Less: Distributed earnings allocable to retired preferred shares
|
—
|
|
|
—
|
|
|
6.6
|
|
|
—
|
|
Net income (loss) allocable to common stockholders
|
$
|
41.4
|
|
|
$
|
(8.9)
|
|
|
$
|
50.1
|
|
|
32.1
|
|
|
|
|
|
|
|
|
Adjusted net income (loss), including distributed earnings allocable to retired preferred shares (Non-GAAP)
|
$
|
41.4
|
|
|
$
|
(8.9)
|
|
|
$
|
56.7
|
|
|
$
|
32.1
|
|
|
|
|
|
|
|
|
|
Denominator (in thousands) (a):
|
|
|
|
|
|
|
|
Average common shares outstanding - basic
|
13,741
|
|
|
10,723
|
|
|
13,365
|
|
|
10,008
|
|
Average common shares outstanding - diluted
|
14,056
|
|
|
10,723
|
|
|
13,702
|
|
|
10,282
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (in dollars):
|
|
|
|
|
|
|
|
Basic
|
$
|
3.01
|
|
|
$
|
(0.83)
|
|
|
$
|
3.75
|
|
|
$
|
3.21
|
|
Diluted
|
$
|
2.95
|
|
|
$
|
(0.83)
|
|
|
$
|
3.66
|
|
|
$
|
3.12
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income (Loss) per Share (Non-GAAP) (in dollars):
|
|
|
|
|
|
|
|
Basic
|
$
|
3.01
|
|
|
$
|
(0.83)
|
|
|
$
|
4.24
|
|
|
$
|
3.21
|
|
Diluted
|
$
|
2.95
|
|
|
$
|
(0.83)
|
|
|
$
|
4.14
|
|
|
$
|
3.12
|
|
(a) For details related to average shares outstanding, refer to Note 9, Net Income Per Share of the unaudited condensed consolidated financial statements.
Liquidity and Capital Resources
We ended the third quarter of 2021 with a consolidated cash balance of $171.0 million. We anticipate having adequate liquidity to support our business operations for at least the next 12 months from the date of this Quarterly Report. Our view of liquidity is dependent on, among other things, conditions affecting our operations, including market, international trade restrictions, COVID-19 and other conditions, the level of expenditures and government funding for our services contracts and the timing of customer payments. Liquidity requirements for our existing operations are affected primarily by the timing and amount of customer sales and our inventory purchases.
We believe our sales order book in our LEU segment is a source of stability for our liquidity position. Subject to market conditions, we see the potential for growing uncommitted demand for LEU during the next few years with accelerated open demand in 2025 and beyond.
Cash resources and net sales proceeds from our LEU segment fund technology costs that are outside of our customer contracts in the technical solutions segment and general corporate expenses, including cash interest payments on our debt. We believe our investment in advanced U.S. uranium enrichment technology will position the Company to meet the needs of our customers as they deploy advanced reactors and next generation fuels. We signed the three-year HALEU Contract with DOE in October 2019 to deploy a cascade of centrifuges to demonstrate production of HALEU for advanced reactors. Under the agreement, the Company is contributing a portion of the program costs. The program has been under way since May 31, 2019, when Centrus and DOE signed a preliminary letter agreement that allowed work to begin while the full contract was being finalized.
In 2019, under the HALEU Contract, DOE agreed to reimburse the Company for 80% of its costs incurred in performing the contract, up to a maximum of $115 million. The Company’s cost share is the corresponding 20% and any costs the Company elects to incur above these amounts. The HALEU Contract is incrementally funded and DOE is currently obligated for costs up to the full $115 million. The Company has received aggregate cash payments of $101.9 million through September 30, 2021.
The Company entered into this cost-share contract with DOE as a critical first step on the road back to the commercial production of enriched uranium, which the Company had terminated in 2013 with the closure of the Paducah GDP. HALEU is expected to be required by many of the advanced reactor designs now under development, including nine out of the ten reactor designs that were selected in 2020 for the ARDP. In addition to commercial demand, HALEU may be needed for advanced reactor designs that are now under development for the U.S. Department of Defense. Our HALEU Contract expires in June 2022 and although we believe demand for HALEU will emerge in the mid to late 2020s, there are no guarantees about whether or when government or commercial demand for HALEU will materialize, and there are a number of technical, regulatory and economic hurdles that must be overcome for these fuels and reactors to come to the market. Our goal is to scale up the facility in modular fashion as demand for HALEU grows in the commercial and government sectors, subject to the availability of funding and/or contracts to purchase the output of the plant. At this time, however, there is no assurance that sufficient government or commercial funding or demand for material will be timely secured to permit the continued operation or expansion of the demonstration cascade. If funding or a contract for the output are not secured, we would need to terminate operation of the demonstration cascade or continue to operate the cascade at a loss with an adverse effect on our liquidity. For further discussion, refer to Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2020, as updated in this Quarterly Report and our Quarterly Report on Form 10-Q for the period ended June 30, 2021.
We lease facilities and related personal property in Piketon, Ohio, from DOE. In September 2021, DOE and Centrus extended the lease term through December 31, 2025. Any facilities or equipment constructed or installed under contract with DOE will be owned by DOE, may be returned to DOE in an “as is” condition at the end of the lease term, and DOE would be responsible for its D&D. If we determine the equipment and facilities may benefit Centrus after completion of the HALEU Contract, we may extend the facility lease, subject to mutual agreement regarding D&D and other issues.
In the event that funding by the U.S. government for research, development and demonstration of gas centrifuge technology is reduced or discontinued, such actions may have a material adverse impact on our ability to deploy the American Centrifuge technology and on our liquidity.
Capital expenditures of approximately $1 million are anticipated over the next 12 months.
The change in cash, cash equivalents and restricted cash from our unaudited condensed consolidated statements of cash flows are as follows on a summarized basis (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2021
|
|
2020
|
Cash provided by operating activities
|
$
|
0.8
|
|
|
$
|
5.2
|
|
Cash (used in) investing activities
|
(0.7)
|
|
|
(0.9)
|
|
Cash provided by financing activities
|
18.9
|
|
|
17.8
|
|
Increase in cash, cash equivalents and restricted cash
|
$
|
19.0
|
|
|
$
|
22.1
|
|
Operating Activities
In the nine months ended September 30, 2021, net cash provided by operating activities was $0.8 million. Net income of $58.8 million in the nine-month period, net of non-cash expenses, was a significant source of cash. Income included the $43.5 million recovery of claims for reimbursement for costs related to past contract services performed. The net increase is also the result of the $12.7 million decrease in accounts receivable. The increase in cash is partially offset by a net reduction of $7.8 million in deferred revenue and advances from customers which reflects revenue recognized in the current period related to payments received in advance in a prior period. Uses of cash are also reflected in the decrease in pension and postretirement benefit liabilities of $55.3 million and the decrease in payables under SWU purchase agreements of $19.0 million.
In the nine months ended September 30, 2020, net cash provided by operating activities was $5.2 million. The net income of $38.0 million in the nine-month period, net of non-cash expenses, was a significant source of cash. Income included the $32.4 million recovery of bankruptcy court claims. The net increase is also the result of a decrease in inventories of $17.1 million. These increases were partially offset by a net reduction of $17.5 million in deferred revenue and advances from customers which reflects revenue recognized in the current period related to payments received in advance in a prior period. Uses of cash are also reflected in the decrease in pension and postretirement benefit liabilities of $28.1 million.
Investing Activities
Capital expenditures were $0.7 million and $0.9 million in the nine months ended September 30, 2021, and 2020, respectively.
Financing Activities
In the nine months ended September 30, 2021, net cash provided by financing activities include net proceeds of $27.2 million raised from the issuance of common stock pursuant to a Registration Statement on Form S-3. Refer below to Common Stock Issuance. In both the nine months ended September 30, 2021 and 2020, payments of $6.1 million of interest classified as debt are classified as a financing activity. Refer to Note 6, Debt, of the unaudited condensed consolidated financial statements regarding the accounting for the 8.25% notes (the “8.25% Notes”) maturing in February 2027.
Working Capital
The following table summarizes the Company’s working capital (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2021
|
|
December 31,
2020
|
Cash and cash equivalents
|
$
|
171.0
|
|
|
$
|
152.0
|
|
Accounts receivable
|
16.9
|
|
|
29.6
|
|
Inventories, net
|
73.0
|
|
|
59.9
|
|
Current debt
|
(6.1)
|
|
|
(6.1)
|
|
Deferred revenue and advances from customers, net of deferred costs
|
(138.0)
|
|
|
(131.3)
|
|
Other current assets and liabilities, net
|
(37.8)
|
|
|
(64.1)
|
|
Working capital
|
$
|
79.0
|
|
|
$
|
40.0
|
|
We are managing our working capital to seek to improve the long-term value of our LEU and technical solutions businesses and are planning to continue funding the Company’s qualified pension plans in the ordinary course because we believe that is in the best interest of all stakeholders. We expect that any other uses of working capital will be undertaken in light of these strategic priorities and will be based on the Company’s determination as to the relative strength of its operating performance and prospects, financial position and expected liquidity requirements. In addition, we expect that any such other uses of working capital will be subject to compliance with contractual restrictions to which the Company and its subsidiaries are subject, including the terms and conditions of our debt securities and credit facilities. We continually evaluate alternatives to manage our capital structure, and may opportunistically repurchase, exchange or redeem Company securities from time to time.
Common Stock Issuance
Pursuant to a sales agreement with its agents, the Company sold at the market price an aggregate of 1,238,637 shares of its Class A Common Stock in the nine months ended September 30, 2021, for a total of $28.7 million. After expenses and commissions paid to the agents the Company’s proceeds total $27.6 million. Additionally, the Company recorded direct costs of $0.4 million related to the issuance. The shares of Class A Common Stock were issued pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-239242), which became effective on August 5, 2020, and a prospectus supplement dated December 31, 2020 to the prospectus, dated August 5, 2020. At present, the Company has $21.3 million remaining available for sale under the prospectus supplement dated December 31, 2020 and may from time to time sell additional shares through the sales agreement at the then market price. The Company currently intends to use the net proceeds from this offering for general working capital purposes, to invest in technology development and to repay outstanding debt or retire shares of its Series B Senior Preferred Stock.
As previously disclosed in our Current Report on Form 8-K filed February 5, 2021, on February 2, 2021, the Company entered into an amendment to its existing Voting and Nomination Agreement with Mr. Morris Bawabeh, Kulayba LLC and M&D Bawabeh Foundation, Inc. (collectively, the “MB Group”) and an Exchange Agreement (as described below) whereby the MB Group agreed to support management’s recommendation on certain matters at the Company’s 2021 annual meeting of stockholders (the “Annual Meeting”) and Kulayba LLC agreed to exchange shares of Preferred Stock for shares of Class A Common Stock and a warrant to acquire additional shares of Class A
Common Stock. Pursuant to the First Amendment to the Voting and Nomination Agreement, the MB Group agreed to cause all shares of Class A Common Stock owned of record or beneficially owned by the MB Group at the Annual Meeting to be voted in favor of (i) an amendment to extend the length of the term of the Company’s Section 382 Rights Agreement dated as of April 6, 2016, as amended to date, for two years from June 30, 2021, to June 30, 2023, and (ii) an increase of shares of Class A Common Stock reserved for delivery under the Company’s 2014 Equity Incentive Plan, as amended to date, of an additional 700,000 shares of Class A Common Stock.
In connection with the entry into the Voting Agreement Amendment, the Company and Kulayba LLC also entered into the Exchange Agreement, pursuant to which Kulayba LLC agreed to the Exchange, representing a $5,000,198 liquidation preference (including accrued and unpaid dividends), for (i) 231,276 shares of Class A Common Stock priced at the closing market price of $21.62 on the date the Exchange Agreement was signed and (ii) the Warrant, exercisable for 250,000 shares of Class A Common Stock at an exercise price of $21.62 per share, which was the closing market price on the date the Exchange Agreement was signed, subject to certain customary adjustments pursuant to the terms of the Warrant. The Warrant is exercisable by Kulayba LLC for a period commencing on the closing date of the Exchange and ending, unless sooner terminated as provided in the Warrant, on the first to occur of: (a) the second anniversary of the closing date of the Exchange or (b) the last business day immediately prior to the consummation of a Fundamental Transaction (as defined in the Warrant) which results in the shareholders of the Company immediately prior to such Fundamental Transaction owning less than 50% of the voting equity of the surviving entity immediately after the consummation of the Fundamental Transaction. The Company retired the 3,873 shares of Preferred Stock received by the Company under the Exchange Agreement.
Capital Structure and Financial Resources
Interest on the 8.25% Notes is payable semi-annually in arrears as of February 28 and August 31 based on a 360-day year consisting of twelve 30-day months. The 8.25% Notes are guaranteed on a subordinated and limited basis by, and secured by substantially all assets of, Enrichment Corp. The 8.25% Notes mature on February 28, 2027. Additional terms and conditions of the 8.25% Notes are described in Note 6, Debt, of the unaudited condensed consolidated financial statements and Note 9, Debt, of the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Holders of the Series B Preferred Stock are entitled to cumulative dividends of 7.5% per annum of the liquidation preference at origination of $104.6 million. We are obligated to pay cash dividends on our Series B Preferred Stock to the extent certain criteria are met and dividends are declared by the Board of Directors. We have not met these criteria for the periods from issuance through September 30, 2021, and have not declared, accrued or paid dividends on the Series B Preferred Stock as of September 30, 2021. Additional terms and conditions of the Series B Preferred Stock, including the criteria that must be met for the payment of dividends, are described in Note 16, Stockholders’ Equity, of the consolidated financial statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
On October 20, 2021, the Company announced the commencement of a tender offer to purchase all of its outstanding Series B Senior Preferred Stock, par value $1.00 per share (the “Series B Preferred Shares”), at a price of $1,145.20 per Series B Preferred Share (inclusive of any rights to accrued but unpaid dividends), to the sellers in cash, less any applicable withholding taxes (the “Offer”). The Offer is being made pursuant to the Tender Offer Statement on Schedule TO filed by the Company on October 20, 2021 with the SEC. The aggregate liquidation preference per Series B Preferred Share (including accrued but unpaid dividends) was $1,347.29 as of September 30, 2021. If the maximum number of Series B Preferred Shares is validly tendered and purchased, the aggregate consideration paid will be $43,342,384. Under no circumstances, will the Company pay interest as part of the consideration, including, but not limited to, by reason of any delay in making payment. Concurrently with the Offer, we also are soliciting consents (the “Consent Solicitation”) from holders of the Series B Preferred Shares to amend (the “Series B Preferred Amendment”) the certificate of designation of the Series B Preferred Shares (the “Certificate of Designation”) from and after the effective date of the Series B Preferred Amendment to: (i) cease any obligation to pay dividends on Series B Preferred Shares (other than the payment of accrued dividends in connection with a redemption or distribution of assets upon liquidation, dissolution or winding up), (ii) permit the
Company to redeem Series B Preferred Shares during the 90 days following the date of effectiveness of the Series B Preferred Amendment at a redemption price per share equal to $1,145.20 (plus any additional accrued dividends for the period from and including the date of effectiveness of the Series B Preferred Amendment to the date of redemption), (iii) remove the prohibition on the declaration and payment of dividends on junior stock of the Company, which includes all shares of the Company’s capital stock defined as “Common Stock” in the Company’s Amended and Restated Certificate of Incorporation, or the redemption, purchase or acquisition of such junior stock, and (iv) remove the restriction on redemption, purchase or acquisition of capital stock of the Company ranking on parity with the Series B Preferred Shares. If the Series B Preferred Amendment is approved, we currently intend to redeem all Series B Preferred Shares that remain outstanding following the consummation of the Offer at the reduced redemption price referred to in clause (ii) above. Pursuant to the terms of the Certificate of Designation, the consent of holders of at least 90% of the outstanding Series B Preferred Shares is required to approve the Series B Preferred Amendment. The Offer is currently set to expire on November 18, 2021.
The nuclear industry in general, and the nuclear fuel industry in particular, are in a period of significant change. We are actively considering, and expect to consider from time to time in the future, potential strategic transactions, which at any given time may be in various stages of discussions, diligence or negotiation. If we pursue opportunities that require capital, we believe we would seek to satisfy these needs through a combination of working capital, cash generated from operations or additional debt or equity financing.
Commitments under Long-Term SWU Purchase Agreements
The Company purchases SWU contained in LEU from Russia supplied to us under a long-term agreement, as amended, signed in 2011 with the Russian government owned entity TENEX. Under a 2018 agreement, the Company will purchase SWU contained in LEU from the French government owned company, Orano. Refer to Note 11, Commitments and Contingencies, of the unaudited condensed consolidated financial statements for additional information.
DOE Technology License
We have a non-exclusive license in DOE inventions that pertain to enriching uranium using gas centrifuge technology. The license agreement with DOE provides for annual royalty payments based on a varying percentage (1% up to 2%) of our annual revenues from sales of the SWU component of LEU produced by us using DOE centrifuge technology. There is a minimum annual royalty payment of $100,000 and the maximum cumulative royalty over the life of the license is $100 million. There is currently no commercial enrichment facility producing LEU using DOE centrifuge technology. We are continuing to advance our U.S. centrifuge technology that has evolved from DOE inventions at specialized facilities in Oak Ridge, Tennessee, with a view to deploying a commercial enrichment facility over the long term once market conditions recover.
Off-Balance Sheet Arrangements
Other than outstanding surety bonds, our SWU purchase commitments and the license agreement with DOE relating to the American Centrifuge technology, there were no material off-balance sheet arrangements at September 30, 2021 or December 31, 2020.
New Accounting Standards
Reference is made to New Accounting Standards in Note 1, Basis of Presentation, of the unaudited condensed consolidated financial statements for information on new accounting standards.