| Prospectus Supplement No. 1 | Filed pursuant to Rule 424(b)(3) | ||||||||||||||||
| (To Prospectus dated November 8, 2022) | Registration Statement No. 333-266757 | ||||||||||||||||
OPAL FUELS INC.
This prospectus supplement updates, amends and supplements the prospectus dated November 8, 2022 (the “Prospectus”), which forms a part of our Registration Statement on Form S-1 (Registration No. 333-266757). Capitalized terms used in this prospectus supplement and not otherwise defined herein have the meanings specified in the Prospectus.
This prospectus supplement is being filed to update, amend, and supplement the information included in the Prospectus with the information contained in our Quarterly Report on Form 10-Q filed with the SEC on November 14, 2022, which is set forth below.
This prospectus supplement is not complete without the Prospectus. This prospectus supplement should be read in conjunction with the Prospectus, which is to be delivered with this prospectus supplement, and is qualified by reference thereto, except to the extent that the information in this prospectus supplement updates or supersedes the information contained in the Prospectus. Please keep this prospectus supplement with your Prospectus for future reference.
Our shares of Class A common stock are listed on the Nasdaq Capital Market (the “Nasdaq”) under the symbol “OPAL.” On November 14, 2022 the closing sale price of our Class A common stock was $8.50 per share. Our public warrants are listed on the Nasdaq under the symbol “OPALW.” On November 14, 2022, the closing sale price of our public warrants was $1.31 per warrant.
Investing in shares of our Class A common stock or warrants involves risks that are described in the “Risk Factors” section beginning on page 12 of the Prospectus.
Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued under the Prospectus or determined if the Prospectus or this prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus supplement is November 15, 2022
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2022
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from _______________ to ____________
Commission File Number 001-40272
OPAL FUELS INC.
(Exact name of registrant as specified in its charter)
Delaware | 98-1578357 | |||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
One North Lexington Avenue, Suite 1450 | ||||||||
White Plains, New York | 10601 | |||||||
(Address of principal executive offices) | (Zip Code) | |||||||
(914) 705-4000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Class A Common Stock, par value $0.0001 per share | OPAL | The Nasdaq Stock Market LLC | ||||||
Redeemable Warrants, each whole warrant exercisable for one share of Class A Common Stock at an exercise price of $11.50 per share | OPALW | The Nasdaq Stock Market LLC | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ||||||||
Non-accelerated filer | ☒ | Smaller reporting company | ☒ | ||||||||
Emerging growth company | ☒ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 11, 2022, a total of 25,671,390 shares of Class A common stock, par value $0.0001 per share, and 144,399,037 shares of Class D common stock, par value $0.0001 per share were issued and outstanding.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. Words such as “estimates,” “projected,” “expects,” “estimated,” “anticipates,” “forecasts,” “plans,” “intends,” “believes,” “seeks,” “may,” “will,” “would,” “future,” “propose,” “target,” “goal,” “objective,” “outlook” and variations of these words or similar expressions (or the negative versions of such words or expressions) are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance, conditions or results, and involve a number of known and unknown risks, uncertainties, assumptions and other important factors, many of which are outside our control, that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements. Important factors, among others, that may affect actual results or outcomes include:
● the failure to realize the benefits of the Business Combination (as defined herein), which may be affected by, among other things, competition, our ability to grow and manage growth profitably, maintain relationships with customers and suppliers and retain key employees;
● our success in retaining or recruiting, our principal officers, key employees or directors;
● intense competition and competitive pressures from other companies in the industry in which we operate;
● increased costs of, or delays in obtaining, key components or labor for the construction and completion of LFG and livestock waste projects that generate electricity and renewable natural gas (“RNG”) and compressed natural gas (“CNG”) and hydrogen dispensing stations;
● factors relating to our business, operations and financial performance, including market conditions and global and economic factors beyond our control;
● macroeconomic conditions related to the global COVID-19 pandemic;
● the reduction or elimination of government economic incentives to the renewable energy market;
● factors associated with companies, such as us, that are engaged in the production and integration of RNG, including (i) anticipated trends, growth rates and challenges in those businesses and in the markets in which they operate (ii) contractual arrangements with, and the cooperation of, landfill and livestock biogas conversion project site owners and operators and operators, on which we operate our LFG and livestock waste projects that generate electricity and (iii) RNG prices for Environmental Attributes, LCFS credits and other incentives;
● the ability to identify, acquire, develop and operate renewable projects and fueling stations ("Fueling Stations");
● our ability to issue equity or equity-linked securities or obtain debt financing;
● the demand for renewable energy not being sustained;
● impacts of climate change, changing weather patterns and conditions and natural disasters;
● the effect of legal, tax and regulatory changes; and
● other factors detailed under the section entitled “Risk Factors.”
The forward-looking statements contained in this Form 10-Q are based on current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described under the heading “Risk Factors” in this Form 10-Q. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements
OPAL FUELS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except per share data)
| September 30, 2022 | December 31, 2021 | ||||||||||
| (Unaudited) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
Cash and cash equivalents (includes $10,045 and $1,991 at September 30, 2022 and December 31, 2021, respectively, related to consolidated VIEs) | $ | 25,286 | $ | 39,314 | |||||||
Accounts receivable, net (includes $1,129 and $40 at September 30, 2022 and December 31, 2021, respectively, related to consolidated VIEs) | 36,660 | 25,391 | |||||||||
Restricted cash - current (includes $7,623 and $— at September 30, 2022 and December 31, 2021, respectively, related to consolidated VIEs) | 41,419 | — | |||||||||
Short term investments ( includes $15,411 and $— at September 30, 2022 and December 31, 2021, respectively, related to consolidated VIEs) | 146,936 | — | |||||||||
| Fuel tax credits receivable | 3,442 | 2,393 | |||||||||
| Contract assets | 14,676 | 8,484 | |||||||||
| Parts inventory | 6,570 | 5,143 | |||||||||
| Environmental credits held for sale | 1,224 | 386 | |||||||||
| RNG inventory | 2,094 | — | |||||||||
Prepaid expense and other current assets (includes $268 and $113 at September 30, 2022 and December 31, 2021, respectively, related to consolidated VIEs) | 6,513 | 5,482 | |||||||||
| Derivative financial assets, current portion | 1,435 | 382 | |||||||||
| Total current assets | 286,255 | 86,975 | |||||||||
| Capital spares | 3,333 | 3,025 | |||||||||
Property, plant, and equipment, net (includes $50,099 and $27,794 at September 30, 2022 and December 31, 2021, respectively, related to consolidated VIEs) | 250,355 | 169,770 | |||||||||
| Investment in other entities | 48,708 | 47,150 | |||||||||
| Note receivable | — | 9,200 | |||||||||
| Note receivable - variable fee component | 1,865 | 1,656 | |||||||||
| Deferred financing costs | 3,522 | 2,370 | |||||||||
| Other long-term assets | 489 | 489 | |||||||||
| Intangible assets, net | 2,266 | 2,861 | |||||||||
Restricted cash - non-current (includes $2,867 and $1,163 at September 30, 2022 and December 31, 2021, respectively, related to consolidated VIEs) | 4,655 | 2,740 | |||||||||
| Goodwill | 54,608 | 54,608 | |||||||||
| Total assets | $ | 656,056 | $ | 380,844 | |||||||
| Liabilities and Equity | |||||||||||
| Current liabilities: | |||||||||||
Accounts payable (includes $2,783 and $544 at September 30, 2022 and December 31, 2021, respectively, related to consolidated VIEs) | 5,798 | 12,581 | |||||||||
| Accounts payable, related party | 489 | 166 | |||||||||
| Fuel tax credits payable | 2,668 | 1,978 | |||||||||
| Accrued payroll | 5,266 | 7,652 | |||||||||
Accrued capital expenses (includes $1,493 and $1,722 at September 30, 2022 and December 31, 2021, respectively, related to consolidated VIEs) | 9,284 | 5,517 | |||||||||
| Accrued expenses and other current liabilities | 16,063 | 7,220 | |||||||||
| Contract liabilities | 6,750 | 9,785 | |||||||||
| Senior Secured Credit Facility - term loan, current portion, net of debt issuance costs | 70,179 | 73,145 | |||||||||
F-1
| Senior Secured Credit Facility - working capital facility, current portion | 7,500 | 7,500 | |||||||||
| OPAL Term Loan, current portion | 28,432 | 13,425 | |||||||||
Sunoma loan, current portion (includes $— and $756 at September 30, 2022 and December 31, 2021, respectively, related to consolidated VIEs) | — | 756 | |||||||||
| Convertible Note Payable | 27,964 | — | |||||||||
| Municipality loan | 121 | 194 | |||||||||
| Derivative financial liability, current portion | 4,648 | 992 | |||||||||
| Other current liabilities | 832 | 374 | |||||||||
| Asset retirement obligation, current portion | 1,586 | 831 | |||||||||
| Total current liabilities | 187,580 | 142,116 | |||||||||
| Asset retirement obligation, non-current portion | 4,382 | 4,907 | |||||||||
| OPAL Term Loan | 60,816 | 59,090 | |||||||||
| Convertible Note Payable | — | 58,710 | |||||||||
Sunoma loan, net of debt issuance costs (includes $22,080 and $16,199 at September 30, 2022 and December 31, 2021, respectively, related to consolidated VIEs) | 22,080 | 16,199 | |||||||||
| Municipality loan | — | 84 | |||||||||
| Derivative warrant liabilities | 22,410 | — | |||||||||
| Earn out liabilities | 39,500 | — | |||||||||
| Other long-term liabilities | 597 | 4,781 | |||||||||
| Total liabilities | 337,365 | 285,887 | |||||||||
| Commitments and contingencies | |||||||||||
| Redeemable preferred non-controlling interests | 135,303 | 30,210 | |||||||||
| Redeemable non-controlling interests | 1,222,657 | 63,545 | |||||||||
| Stockholders' (deficit) equity | |||||||||||
Class A common stock, $0.0001 par value, 337,852,251 shares authorized as of September 30, 2022; 25,671,390 and 0 shares, issued and outstanding at September 30, 2022 and December 31, 2021, respectively | 2 | — | |||||||||
Class B common stock, $0.0001 par value, 157,498,947 shares authorized as of September 30, 2022; None issued and outstanding as of September 30, 2022 and December 31, 2021 | — | — | |||||||||
Class C common stock, $0.0001 par value, 154,309,729 shares authorized as of September 30, 2022; None issued and outstanding as of September 30, 2022 and December 31, 2021 | — | — | |||||||||
Class D common stock, $0.0001 par value, 154,309,729 shares authorized as of September 30, 2022; 144,399,037 issued and outstanding at September 30, 2022 and December 31, 2021 | 14 | 14 | |||||||||
| Additional paid-in capital | — | — | |||||||||
| Accumulated deficit | (1,066,137) | — | |||||||||
| Accumulated other comprehensive income | 178 | — | |||||||||
| Total Stockholders' (deficit) equity attributable to the Company | (1,065,943) | 14 | |||||||||
| Non-redeemable non-controlling interests | 26,674 | 1,188 | |||||||||
| Total Stockholders' (deficit) equity | (1,039,269) | 1,202 | |||||||||
| Total liabilities, Redeemable preferred, Redeemable non-controlling interests and Stockholders' (deficit) equity | $ | 656,056 | $ | 380,844 | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-2
OPAL FUELS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except per unit data)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (Restated) | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| RNG fuel | $ | 32,381 | $ | 17,892 | $ | 83,196 | $ | 37,066 | |||||||||||||||
| Fuel station services | 23,227 | 18,387 | 55,524 | 35,560 | |||||||||||||||||||
| Renewable Power | 10,942 | 10,905 | 30,094 | 32,342 | |||||||||||||||||||
| Total revenues | 66,550 | 47,184 | 168,814 | 104,968 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Cost of sales - RNG fuel | 20,959 | 11,973 | 51,843 | 23,053 | |||||||||||||||||||
| Cost of sales - Fuel station services | 20,886 | 15,458 | 49,643 | 29,775 | |||||||||||||||||||
| Cost of sales - Renewable Power | 7,645 | 6,064 | 23,593 | 23,952 | |||||||||||||||||||
| Selling, general, and administrative | 15,751 | 7,922 | 34,561 | 19,107 | |||||||||||||||||||
| Depreciation, amortization, and accretion | 3,258 | 2,613 | 9,816 | 6,672 | |||||||||||||||||||
| Total expenses | 68,499 | 44,030 | 169,456 | 102,559 | |||||||||||||||||||
| Operating (loss) income | (1,949) | 3,154 | (642) | 2,409 | |||||||||||||||||||
| Other (expense) income: | |||||||||||||||||||||||
| Interest and financing expense, net | (776) | (2,354) | (7,184) | (5,659) | |||||||||||||||||||
| Change in fair value of derivative instruments, net | (1,908) | (27) | (1,580) | (10) | |||||||||||||||||||
| Other income | 6,308 | — | 6,308 | — | |||||||||||||||||||
| Gain on acquisition of equity method investment | — | — | — | 19,818 | |||||||||||||||||||
| Income from equity method investments | 3,694 | — | 3,658 | 2,392 | |||||||||||||||||||
| Income before provision for income taxes | 5,369 | 773 | 560 | 18,950 | |||||||||||||||||||
| Provision for income taxes | — | — | — | — | |||||||||||||||||||
| Net income | 5,369 | 773 | 560 | 18,950 | |||||||||||||||||||
| Net income (loss) attributable to redeemable non-controlling interests | 4,161 | — | (2,584) | — | |||||||||||||||||||
| Net loss attributable to non-redeemable non-controlling interests | (325) | (216) | (824) | (414) | |||||||||||||||||||
Paid-in-kind preferred dividends (1) | 2,658 | — | 5,093 | — | |||||||||||||||||||
| Net income attributable to OPAL Fuels | — | 989 | — | $ | 19,364 | ||||||||||||||||||
| Net loss attributable to Class A common stockholders | $ | (1,125) | $ | — | $ | (1,125) | $ | — | |||||||||||||||
| Weighted average shares outstanding of Class A common stock : | |||||||||||||||||||||||
| Basic | 25,671,390 | — | 25,671,390 | — | |||||||||||||||||||
| Diluted | 25,823,772 | — | 25,823,772 | — | |||||||||||||||||||
| Per share amounts: | |||||||||||||||||||||||
Basic (2) | $ | (0.04) | $ | — | $ | (0.04) | $ | — | |||||||||||||||
Diluted (2) | $ | (0.06) | $ | — | $ | (0.06) | $ | — | |||||||||||||||
(1) Paid-in-kind preferred dividend is allocated between redeemable non-controlling interests and Class A common stockholders basis their weighted average percentage of ownership. Please see Note.14 Redeemable non-controlling interests, redeemable preferred non-controlling interests and stockholders' equity for additional information.
F-3
(2) Loss per share information has not been presented for the periods prior to the Business Combination (as defined in Note 3, Business Combination), as it would not be meaningful to the users of these unaudited condensed consolidated financial statements, Refer to Note 3, Business Combination.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
OPAL FUELS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of U.S. dollars)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| (Restated) | ||||||||||||||||||||||||||
| Net income | $ | 5,369 | $ | 773 | $ | 560 | $ | 18,950 | ||||||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||||||||
| Net unrealized gain on cash flow hedges | 1,189 | — | 1,189 | — | ||||||||||||||||||||||
| Total comprehensive income | 6,558 | 773 | 1,749 | 18,950 | ||||||||||||||||||||||
| Net income attributable to Redeemable non-controlling interests | 6,509 | — | 2,199 | — | ||||||||||||||||||||||
| Other comprehensive income attributable to Redeemable non-controlling interests | 1,011 | — | 1,011 | — | ||||||||||||||||||||||
| Comprehensive loss attributable to non-redeemable non-controlling interests | (325) | (216) | (824) | (414) | ||||||||||||||||||||||
| Paid-in-kind preferred dividends | 310 | — | 310 | — | ||||||||||||||||||||||
| Comprehensive income attributable to OPAL Fuels | — | 989 | — | 19,364 | ||||||||||||||||||||||
| Comprehensive loss attributable to Class A common stockholders | $ | (947) | $ | — | $ | (947) | $ | — | ||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-4
OPAL FUELS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE NON-CONTROLLING INTEREST, REDEEMABLE PREFERRED NON-CONTROLLING INTEREST AND STOCKHOLDERS' (DEFICIT) EQUITY
(In thousands of U.S. dollars, except per unit data)
(Unaudited)
| Legacy Series A-1 Preferred Units | Legacy Common Units | Class A common stock | Class D common stock | Mezzanine Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Units | Amount | Units | Amount | Shares | Amount | Shares | Amount | Additional paid-in capital | Accumulated deficit | Other comprehensive income | Non-redeemable non-controlling interests | Total Stockholders' Equity | Redeemable Preferred non-controlling interests | Redeemable non-controlling interests | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2021, as previously reported | 300,000 | $ | 30,210 | 1,000 | $ | 47,592 | — | $ | — | — | $ | — | $ | — | $ | 15,967 | $ | — | $ | 1,188 | $ | 64,747 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retroactive application of recapitalization | (300,000) | (30,210) | (1,000) | (47,592) | — | — | 144,399,037 | 14 | — | (15,967) | — | — | (63,545) | 30,210 | 63,545 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2021, as adjusted | — | — | — | — | — | — | 144,399,037 | 14 | — | — | — | 1,188 | 1,202 | 30,210 | 63,545 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | — | — | — | — | (242) | (242) | — | (4,225) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from non-redeemable non-controlling interest | — | — | — | — | — | — | — | — | — | — | — | 5,738 | 5,738 | — | (95) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization on payment to acquire non-redeemable non-controlling interest | — | — | — | — | — | — | — | — | — | — | — | — | — | — | (91) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Redeemable preferred non-controlling interest, net of issuance costs | — | — | — | — | — | — | — | — | — | — | — | — | — | 25,000 | (267) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | — | — | — | — | — | — | 160 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Paid-in-kind preferred dividend | — | — | — | — | — | — | — | — | — | — | — | — | — | 717 | (717) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2022 | — | — | — | — | — | — | 144,399,037 | 14 | — | — | — | 6,684 | 6,698 | 55,927 | 58,310 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | — | — | — | — | (257) | (257) | — | (85) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from non-redeemable non-controlling interest | — | — | — | — | — | — | — | — | — | — | — | 11,211 | 11,211 | — | 47 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization on payment to acquire non-redeemable non-controlling interest | — | — | — | — | — | — | — | — | — | — | — | — | — | — | (92) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable preferred non-controlling interest issuance, net of issuance costs | — | — | — | — | — | — | — | — | — | — | — | — | — | 75,000 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | — | — | — | — | — | — | 160 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Paid-in-kind preferred dividend | — | — | — | — | — | — | — | — | — | — | — | — | — | 1,718 | (1,718) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2022 | — | — | — | — | — | — | 144,399,037 | 14 | — | — | — | 17,638 | 17,652 | 132,645 | 56,622 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | — | — | (815) | — | (325) | (1,140) | — | 6,509 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gain on cash flow hedges | — | — | — | — | — | — | — | — | — | — | 178 | — | 178 | 1,011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock from the reverse recapitalization and PIPE Investments, net of warrant liability, put option and earnout liability | — | — | — | — | 22,611,857 | 2 | — | — | 68,255 | — | — | — | 68,257 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Convertible Note Payable to common shares | — | — | — | — | 3,059,533 | — | — | — | 30,595 | — | — | — | 30,595 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in redemption value of Redeemable non-controlling interests | — | — | — | — | — | — | — | — | (95,711) | (1,065,012) | — | — | (1,160,723) | — | 1,160,723 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from non-redeemable non-controlling interest | — | — | — | — | — | — | — | — | (3,158) | — | — | 9,361 | 6,203 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | 19 | — | — | — | 19 | — | 140 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Paid-in-kind preferred dividend | — | — | — | — | — | — | — | — | — | (310) | — | — | (310) | 2,658 | (2,348) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2022 | — | $ | — | — | $ | — | 25,671,390 | $ | 2 | 144,399,037 | $ | 14 | $ | — | $ | (1,066,137) | $ | 178 | $ | 26,674 | $ | (1,039,269) | $ | 135,303 | $ | 1,222,657 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
F-5
| Legacy Common Units | Class D common stock | |||||||||||||||||||||||||||||||||||||||||||||||||
| Units | Amount | Shares | Amount | Retained earnings | Non-redeemable non-controlling interests | Total Stockholders' Equity | Redeemable non-controlling interests | |||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020, as previously reported | 986 | $ | 49,170 | — | $ | — | $ | (25,396) | $ | 6,685 | $ | 30,459 | $ | — | ||||||||||||||||||||||||||||||||||||
| Retroactive application of recapitalization | (986) | (49,170) | 142,377,450 | 14 | 25,396 | — | (23,760) | 23,760 | ||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020, as adjusted | — | — | 142,377,450 | 14 | — | 6,685 | 6,699 | 23,760 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (88) | (88) | (427) | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of non-redeemable non-controlling interest | — | — | — | — | — | 6,223 | 6,223 | 3,808 | ||||||||||||||||||||||||||||||||||||||||||
| Contributions from redeemable non-controlling interests | — | — | — | — | — | — | — | 1,766 | ||||||||||||||||||||||||||||||||||||||||||
| Distributions to redeemable non-controlling interests | — | — | — | — | — | — | — | (2,103) | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | 160 | ||||||||||||||||||||||||||||||||||||||||||
| March 31, 2021 | — | — | 142,377,450 | 14 | — | 12,820 | 12,834 | 26,964 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (110) | (110) | 18,802 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of non-redeemable non-controlling interest | — | — | — | — | — | 5,171 | 5,171 | — | ||||||||||||||||||||||||||||||||||||||||||
| Contributions from redeemable non-controlling interests | — | — | — | — | — | — | — | 5,756 | ||||||||||||||||||||||||||||||||||||||||||
| Distributions to redeemable non-controlling interests | (1,592) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | 160 | ||||||||||||||||||||||||||||||||||||||||||
| June 30, 2021 | — | — | 142,377,450 | 14 | — | 17,881 | 17,895 | 50,090 | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (216) | (216) | 989 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of non-redeemable non-controlling interest | — | — | — | — | — | 27,545 | 27,545 | (4,523) | ||||||||||||||||||||||||||||||||||||||||||
| Contributions from redeemable non-controlling interests | — | — | — | — | — | — | — | 397 | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | 159 | ||||||||||||||||||||||||||||||||||||||||||
| September 30, 2021 | — | $ | — | 142,377,450 | $ | 14 | $ | — | $ | 45,210 | $ | 45,224 | $ | 47,112 | ||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-6
OPAL FUELS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
(Unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Restated) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 560 | $ | 18,950 | |||||||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | |||||||||||
| Income from equity method investments | (3,658) | (2,392) | |||||||||
| Depreciation and amortization | 9,581 | 6,510 | |||||||||
| Amortization of deferred financing costs | 1,514 | 678 | |||||||||
| Amortization of PPA liability | — | (194) | |||||||||
| Accretion expense related to asset retirement obligation | 235 | 162 | |||||||||
| Stock-based compensation | 479 | 479 | |||||||||
| Paid-in-kind interest income | (209) | (101) | |||||||||
| Change in fair value of Convertible Note Payable | (151) | 2,250 | |||||||||
| Unrealized loss on derivative financial instruments | 1,677 | 1,553 | |||||||||
| Gain on extinguishment of contingent liability | (4,362) | — | |||||||||
| Gain on repayment of Note receivable | (1,943) | — | |||||||||
| Gain on acquisition of equity method investment | — | (19,818) | |||||||||
| Changes in operating assets and liabilities, net of effects of businesses acquired: | |||||||||||
| Accounts receivable | (11,269) | (237) | |||||||||
| Proceeds received on previously recorded paid-in-kind interest income | 288 | — | |||||||||
| Fuel tax credits receivable | (1,049) | (42) | |||||||||
| Capital spares | (308) | 1,608 | |||||||||
| Brown gas and parts inventory | (3,520) | (804) | |||||||||
| Environmental credits held for sale | (838) | (1,086) | |||||||||
| Prepaid expense and other current assets | (996) | 1,348 | |||||||||
| Contract assets | (6,192) | (1,725) | |||||||||
| Accounts payable | (6,734) | 6,970 | |||||||||
| Accounts payable, related party | 323 | 1,268 | |||||||||
| Fuel tax credits payable | 690 | 1,545 | |||||||||
| Accrued payroll | (2,386) | (549) | |||||||||
| Accrued expenses | 8,561 | 3,672 | |||||||||
| Other current and non-current liabilities | 453 | 8,794 | |||||||||
| Contract liabilities | (3,035) | 58 | |||||||||
| Net cash (used in) provided by operating activities | (22,289) | 28,897 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of property, plant, and equipment | (84,949) | (63,393) | |||||||||
| Cash acquired on acquisition of equity method investment | — | 1,955 | |||||||||
| Cash paid for short term investments | (146,936) | — | |||||||||
| Cash paid for investment in other entity | — | (1,570) | |||||||||
| Purchase of Note receivable | — | (10,450) | |||||||||
| Proceeds received from repayment of Note receivable | 10,855 | — | |||||||||
| Distributions received from equity method investment | 2,100 | 3,695 | |||||||||
| Net cash used in investing activities | (218,930) | (69,763) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from Sunoma loan | 4,593 | 14,191 | |||||||||
| Proceeds from OPAL Term Loan | 27,500 | — | |||||||||
| Proceeds received from Business Combination | 138,850 | — | |||||||||
| Financing costs paid to other third parties | (8,462) | (75) | |||||||||
| Repayment of Senior Secured Credit Facility | (3,674) | (3,835) | |||||||||
F-7
| Repayment of OPAL Term Loan | (11,277) | — | |||||||||
| Repayment of Municipality loan | (157) | — | |||||||||
| Proceeds from sale of non-redeemable non-controlling interest | 23,152 | 21,579 | |||||||||
| Proceeds from sale of non-controlling interest, related party | — | 16,645 | |||||||||
| Proceeds from issuance of redeemable preferred units | 100,000 | — | |||||||||
| Contributions from members | — | 7,919 | |||||||||
| Distributions to members | — | (3,695) | |||||||||
| Net cash provided by financing activities | 270,525 | 52,729 | |||||||||
| Net increase in cash, restricted cash, and cash equivalents | 29,306 | 11,863 | |||||||||
| Cash, restricted cash, and cash equivalents, beginning of period | 42,054 | 15,388 | |||||||||
| Cash, restricted cash, and cash equivalents, end of period | $ | 71,360 | $ | 27,251 | |||||||
| Supplemental disclosure of cash flow information | |||||||||||
Interest paid, net of $— and $531 capitalized, respectively | $ | 7,013 | $ | 2,405 | |||||||
| Noncash investing and financing activities: | |||||||||||
| Issuance of Convertible Note Payable related to business acquisition, excluding paid-in-kind interest | $ | — | $ | 55,410 | |||||||
| Fair value of Class A common stock issued for redemption of Convertible Note Payable | $ | 30,595 | $ | — | |||||||
| Fair value of Derivative warrant liabilities assumed related to Business Combination | $ | 13,524 | $ | — | |||||||
| Fair value of Earnout liabilities related to Business Combination | $ | 45,900 | $ | — | |||||||
| Fair value of put option on a forward purchase agreement related to Business Combination | $ | 4,600 | $ | — | |||||||
Fair value of contingent consideration to redeem the non-controlling interest included in other long-term liabilities | $ | 183 | $ | — | |||||||
| Paid-in-kind dividend on redeemable preferred non-controlling interests | $ | 5,093 | $ | — | |||||||
| Accrual for purchase of Property, plant and equipment included in Accounts payable and Accrued capital expenses | $ | 9,284 | $ | 789 | |||||||
| Accrual for deferred financing costs included in Accrued expenses and other current liabilities | $ | 282 | $ | — | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-8
1. Organization and Description of Business
OPAL Fuels Inc. (including its subsidiaries, the "Company", “OPAL,” “we,” “us” or “our”) is a renewable energy company specializing in the capture and conversion of biogas for the (i) production of RNG for use as a vehicle fuel for heavy and medium-duty trucking fleets, (ii) generation of Renewable Power for sale to utilities, (iii) generation and sale of Environmental Attributes associated with RNG and Renewable Power, and (iv) sales of RNG as pipeline quality natural gas. OPAL also designs, develops, constructs, operates and services Fueling Stations for trucking fleets across the country that use natural gas to displace diesel as their transportation fuel. The biogas conversion projects ("Biogas Conversion Projects") currently use landfill gas and dairy manure as the source of the biogas. In addition, we have recently begun implementing design, development, and construction services for hydrogen Fueling Stations, and we are pursuing opportunities to diversify our sources of biogas to other waste streams.
The Company (formerly known as ArcLight Clean Transition Corp. II) was incorporated as a Cayman Islands exempted company on January 13, 2021. The Company was incorporated for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses.
On December 2, 2021, the Company, OPAL HoldCo LLC ("OPAL Holdco") and OPAL Fuels LLC, a Delaware limited liability company ("OPAL Fuels"), entered into a business combination agreement (as it may be amended, supplemented or otherwise modified from time to time, the “Business Combination Agreement”). On July 21, 2022, we closed the Business Combination Agreement and consummated the transactions contemplated thereby (the “Business Combination”). The Business Combination Agreement and the Business Combination were unanimously approved by the boards of directors of the Company and OPAL Fuels, and also approved by OPAL Holdco, the sole member of OPAL Fuels.
Pursuant to the Business Combination Agreement, on July 21, 2022, (the "Closing Date"), Arclight changed its jurisdiction of incorporation by deregistering as a Cayman Islands exempted company and continuing and domesticating as a corporation incorporated under the laws of the State of Delaware (the "Domestication"). Following the Domestication, on July 21, 2022, Arclight changed its name to "OPAL Fuels Inc." and each outstanding ArcLight Class B ordinary share converted into one ArcLight Class A ordinary share, each outstanding ArcLight Class A ordinary share became one share of Class A common stock of the Company, par value $0.0001 per share (the “Class A common stock”), and each outstanding warrant to purchase one ArcLight Class A ordinary share became a warrant to purchase one share of the Company's Class A common stock at an exercise price of $11.50 per share. Following the consummation of the Business Combination on July 21, 2022, the Company was organized in an “Up-C” structure. The Company is the managing member of OPAL Fuels. OPAL Fuels directly or indirectly holds substantially all of the consolidated assets and business of the Company. Please see Note 3 Business Combination for additional information.
All amounts in these footnotes are presented in thousands of dollars except per share data.
COVID-19 Impact
In March 2020, the World Health Organization categorized the coronavirus disease 2019 ("COVID-19") as a pandemic and the President of the United States declared the COVID-19 outbreak as a national emergency. Management considered the impact of COVID-19 on the assumptions and estimates used and determined that, because the Company was deemed to be an essential business by the U.S. government and incurred neither layoffs of personnel nor a decline in its customer base or business operations. There was no material adverse impact on the Company's statement of position and result of operations as of, and for the three and nine months ended September 30, 2022.
The future impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and its impact on our customers, all of which are uncertain and cannot be predicted.
Liquidity and Capital Resources
F-9
As of September 30, 2022, our liquidity consisted of cash and cash equivalents including restricted cash of $71,360 and short term investments of $146,936.
As of September 30, 2022, we had total indebtedness excluding the deferred financing costs of $219,987 which primarily consisted of $77,679 under the Senior Secured Credit Facility, $27,964 under the Convertible Note Payable, $91,223 under the OPAL Term Loan, $121 under the Municipality loan, and $23,000 under the Sunoma Loan. The amount outstanding under the Senior Secured Credit Facility is due to be repaid in December 2022 and therefore has been classified as a current liability.
In August 2022, we entered into a delayed draw term loan facility for $105,000 to fund the construction of new RNG facilities which is available for us to drawdown upon achievement of certain milestones. In July 2022, we received a redemption notice from Biotown Bio Gas LLC ("Biotown") for the Note receivable and the Company subsequently received $11,555 consisting of the principal balance $10,915, prepayment penalty of $546 and accrued interest of $94. Additionally, we have drawn $12,500 in September 2022 and $12,500 in October 2022 under the OPAL Term Loan following the commencement of operations of two additional RNG facilities. We entered into an amendment to the OPAL Term Loan to extend the commitment date to March 2023 for the remaining $10,000.
We expect that our available cash, together with our other assets, expected cash flows from operations, available lines of credit under various debt facilities and access to expected sources of capital will be sufficient to meet our existing commitments for a period of at least twelve months following the date of this report.
To fuel future growth, we anticipate seeking additional capital through equity offerings or debt financings. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our project development efforts. We may be unable to obtain any such additional financing on acceptable terms or at all. Our ability to access capital when needed is not assured and, if capital is not available when, and in the amounts, needed, we could be required to delay, scale back, or abandon some or all of our development programs and other operations, which could materially harm our business, prospects, financial condition, and operating results.
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
Restatement of Financial Statements
Our condensed consolidated statements of operations for the nine months ended September 30, 2021 and condensed consolidated statements of changes in Redeemable non-controlling interest, Redeemable preferred non-controlling interests and stockholders' equity as of September 30, 2021 have been restated for certain errors made with regard to accounting for certain commodity swap agreements which the Company entered into in December 2018 and November 2019, recording of certain invoices related to construction in progress in the wrong period and for the gross up of revenue for certain federal and state taxes collected by the Company on behalf of the customer, which the Company subsequently remitted to the government.
Restatement relating to commodity swap contracts
In December 2018, the Company signed an amendment to an existing power purchase agreement (“PPA”) which converted the PPA into a swap structure whereby the Company was able to sell the capacity separately and schedule the sale of electricity independent of the PPA. Post the amendment and conversion to a swap, the counterparty agreed to pay the Company the difference between the market price collected from the sale of the electricity and the contract price in the PPA. The contract was expected to be net settled in cash on a monthly basis. Please see Note 10 Derivative Financial Instruments for additional information.
In November 2019, the Company entered into an International Swaps and Derivatives Association(“ISDA”) agreement pursuant to which, the Company entered into a commodity swap contract for a notional quantity of 87,720 MWh at 5MWh per hour for a period of two years — 2020 and 2021 at a fixed contract price of $35.75 per MWh. The swap was expected to be net settled in cash on a monthly basis. Additionally, the Company entered into another commodity swap contract for a notional quantity of 26,280 MWh at 3 MWh per hour for one year - 2022. Please see Note 10 Derivative Financial Instruments for additional information.
F-10
The Company recorded $169 of realized gain on the above swap arrangements as part of Revenues in its consolidated statements of operations for the nine months ended September 30, 2021. The Company previously reported this gain as part of Revenues in the condensed consolidated statement of operations but the gain was not properly disclosed in the notes to the financial statements.
The Company concluded that these two contracts were economic hedges against market price volatility and are considered as derivatives under ASC 815 Derivatives and Hedging, which required the Company to record mark to market unrealized gain (loss) in its condensed consolidated statements of operations.
The Company did not record an unrealized loss of $2,824 for the nine months ended September 30, 2021. Therefore, the Company restated its Revenues - RNG Fuel by $2,824 for the nine months ended September 30, 2021.
Restatement relating to taxes collected on behalf of customers
The Company collects federal and state taxes on its revenues generated from customers in our RNG Fuel segment and remits the same to the government subsequently. The Company concluded that these taxes should be presented on a net basis in Revenues-RNG fuel in its condensed consolidated statements of operations. Therefore, the Company restated its revenues and cost of sales by $1,140 for the nine months ended September 30, 2021. This adjustment did not have any impact on net income reported for the nine months ended September 30, 2021.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
These unaudited condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") for interim financial information and includes the accounts of the Company and all other entities in which the Company has a controlling financial interest: Fortistar Methane 3 LLC (“FM3”), Fortistar Methane 4 LLC, Beacon RNG LLC (“Beacon”) Sunoma Holdings, LLC (“Sunoma”), Emerald RNG LLC (“Emerald”), Sapphire RNG LLC (“Sapphire”), New River LLC (“New River”), Reynolds NRG LLC (“Reynolds”), Beacon RNG LLC (“Beacon”), Central Valley LLC (“Central Valley”), Fortistar Contracting LLC, Fortistar RNG LLC, and OPAL Fuel station services LLC (“Fuel station services”). The Company’s condensed consolidated financial statements include the assets and liabilities of these subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The non-controlling interest attributable to the Company's variable interest entities ("VIE") are presented as a separate component from the Stockholders' equity in the condensed consolidated balance sheets and as a non-redeemable non-controlling interests in the condensed consolidated statements of changes in redeemable non-controlling interests, redeemable preferred non-controlling interests and Stockholders' equity.
The accompanying condensed consolidated financial statements reflect the activities of the Company, its subsidiaries, and its equity method investments for the nine months ended September 30, 2022 and 2021. Investments in unconsolidated entities in which the Company can influence the operating or financial decisions are accounted for under the equity method. As of September 30, 2022 and December 31, 2021, the Company accounted for its ownership interests in Pine Bend RNG LLC ("Pine Bend"), Noble Road RNG LLC ("Noble Road") and GREP BTB Holdings LLC ("GREP") under the equity method. The Company's interests in Beacon for the period between January 1, 2021 and April 30, 2021 were accounted for under the equity method. Beacon was consolidated after acquisition of remaining ownership interests increasing the ownership interest from 44.3% to 100% on May 1, 2021. Please see Note 4. Investment in other entities, for additional information.
The accompanying unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission ("SEC"). Certain information or footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, it does not include all the information and footnotes necessary for a complete presentation of financial position, results of operations, or cash flows. The information herein should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Current Report on Form 8K, which was filed with SEC on July 27, 2022. In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments,
F-11
consisting of a normal recurring nature, which are necessary for a fair statement of the financial position, operating results, and cash flows for the periods presented.
Business Combination
The Business Combination was accounted for as a reverse recapitalization as OPAL Fuels was determined to be the accounting acquirer under Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") Topic 805, Business Combinations. OPAL HoldCo held a controlling financial interest in OPAL Fuels prior to the closing date. At transaction close, OPAL HoldCo obtained a controlling financial interest in the Company and indirectly retained control over OPAL Fuels through the Company. OPAL HoldCo did not relinquish control over OPAL Fuels during the transaction, instead it affected a transfer of a controlled subsidiary (i.e., OPAL Fuels) to a newly-controlled subsidiary (i.e., OPAL Fuels Inc) and in exchange for issuing Class A common units of OPAL Fuels for the net assets of the Company. As there was no change in control, OPAL Fuels has been determined to be the accounting acquirer. Under this method of accounting, ArcLight is treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the transaction is treated as the equivalent of OPAL Fuels issuing stock for the net assets of ArcLight, accompanied by a recapitalization. The net assets of ArcLight are stated at historical cost, with no goodwill or other intangible assets recorded. Results of operations prior to Business Combination are presented as belonging to OPAL Fuels in future reports of the combined entity. The recapitalization had no effect on reported net loss and comprehensive income, cash flows, total assets or members' equity as previously reported. See Note 3. Business Combination, for additional information.
The Business Combination resulted in an umbrella partnership corporation (“Up-C”) structure, which is often used by partnerships and limited liability companies (operating as partnerships) undertaking an initial public offering. The Up-C structure allowed OPAL Fuels equity holders to retain their equity ownership in OPAL Fuels, an entity that is classified as a partnership for U.S. federal income tax purposes, and provides potential future tax benefits for the Company when the OPAL Fuels equity holders ultimately redeem their pass-through interests for shares of Class A common stock in OPAL Fuels Inc.
Use of estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates and assumptions of the Company include the residual value of the useful lives of our property, plant and equipment, the fair value of stock-based compensation, asset retirement obligations, the estimated losses on our trade receivables, the fair value of the Convertible Note Payable (as defined below), the impairment assessment of goodwill, and the fair value of derivative instruments. Actual results could differ from those estimates.
The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the entire year.
Accounting Pronouncements
In June 2022, the FASB issued Accounting Standards Update ("ASU") 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions which states that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and therefore, is not considered in measuring fair value. The ASU clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The ASU requires an entity to disclose (i) the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet (ii) the nature and remaining duration of the restriction and (iii) the circumstances that could cause a lapse in the restriction. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years for public entities and fiscal year beginning December 15, 2024 for all other entities. The Company is currently evaluating the impact on its financial statements of adopting this standard.
In February 2016, the FASB issued Leases (Topic 842) requiring lessees to record the assets and liabilities for operating leases on the balance sheet. This standard is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. In April 2020, the FASB voted to defer the effective date for Leases for private companies and
F-12
certain not-for-profit entities for one year. For companies filing under emerging growth company status and private not-for-profits, the leasing standard will be effective for fiscal years beginning after December 15, 2021. The Company is currently evaluating all of its contracts and expects to record right-of-use assets and corresponding liabilities on its consolidated balance sheet as of December 31, 2022 for its vehicle leases and office lease.
Emerging Growth Company Status
We are an emerging growth company as defined in the JOBS Act. The JOBS Act provides emerging growth companies with certain exemptions from public company reporting requirements for up to five fiscal years while a company remains an emerging growth company. As part of these exemptions, we need only provide two fiscal years of audited financial statements instead of three, we have reduced disclosure obligations such as for executive compensation, and we are not required to comply with auditor attestation requirements from Section 404(b) of the Sarbanes-Oxley Act regarding our internal control over financial reporting. Additionally, the JOBS Act has allowed us the option to delay adoption of new or revised financial accounting standards until private companies are required to comply with new or revised financial accounting standards.
Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash consisted of the following as of September 30, 2022 and December 31, 2021
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | 25,286 | $ | 39,314 | ||||||||||
Restricted cash - current (1) | 41,419 | — | ||||||||||||
| Long-term assets: | ||||||||||||||
Restricted cash held as collateral (2) | 4,655 | 2,740 | ||||||||||||
| Total cash, cash equivalents, and restricted cash | $ | 71,360 | $ | 42,054 | ||||||||||
(1) Restricted cash - current primarily consists of (i) $20,100 held in escrow to secure the Company's purchase obligations under the forward purchase agreement with Meteora (See Note.3 Business Combination for additional information). (ii) $5,800 equity contribution to a joint venture in connection with the closing of OPAL Term Loan II (iii) $1,778 relates to interest reserve on Sunoma Loan and (iv) $13,700 held in a restricted account for funding one of our RNG projects.
(2) Restricted cash held as collateral represents the collateral requirements on our debt facilities.
Short term investments
The Company considers highly liquid investments such as time deposits and certificates of deposit with an original maturity greater than three months at the time of purchase to be short term investments. The Short term investments of $146,936 consists of cash received upon closing of the Business Combination invested in money market accounts with maturities ranging between 1 and 12 months as of September 30, 2022. The amounts in these money market accounts are liquid and available for general use.
Transaction costs
Transaction costs consists of direct legal, consulting, audit and other fees related to the consummation of the Business Combination. These costs were initially capitalized as incurred and recorded as Deferred financing costs in the condensed consolidated balance sheet. Upon the completion of the Business Combination, transaction costs directly related to the issuance of shares were recognized as an offset to additional paid-in capital within the condensed consolidated statements of changes in redeemable non-controlling interest, redeemable preferred non-controlling interest and stockholders' equity. The Company incurred $8,299 in transaction costs consisting of legal and professional fees, which were recorded as an offset to additional paid-in capital.
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Derivative warrant liabilities
The Company assumed publicly-traded warrants (the "Public Warrants") and private warrants (the "Private Warrants") upon the completion of the Business Combination. The Company accounts for warrants for shares of the Company's stock that are not indexed to its own stock as liabilities at fair value on the condensed consolidated balance sheet. The warrants are remeasured at each balance sheet date and any change in fair value is recognized in the Company's condensed consolidated statement of operations as part of change in fair value of derivative instruments, net.
Earnout Awards
In connection with the Business Combination and pursuant to a sponsor letter agreement, the Sponsor agreed to subject 10% of its Class A common stock (received as a result of the conversion of its ArcLight Class B ordinary shares immediately prior to the closing) to vesting and forfeiture conditions relating to VWAP targets for the Company's Class A common stock sustained over a period of 60 months following the closing. OPAL Fuels equity holders are eligible to receive an aggregate of 10,000,000 shares of Class B and Class D common stock upon the Company achieving each earn-out event during the earn-out period. The Earnout Awards were recognized at fair value on the Closing Date and classified as a liability which is remeasured at each balance sheet date and any change in fair value is recognized in the Company's condensed consolidated statement of operations as part of change in fair value of derivative instruments, net.
Put option on forward purchase agreement
Prior to the closing of Business Combination, the Company entered into a forward purchase agreement with Meteora Capital Partners ("Meteora") pursuant to which Meteora agreed to purchase 2,000,000 shares of Class A common stock from shareholders who had previously tendered such shares for redemption but agreed to reverse their redemption and sell such shares to Meteora at the redemption price. The Company placed $20,040 in escrow at the closing of the Business Combination to secure its purchase obligation to repurchase these 2,000,000 shares at Meteora’s option for a price of $10.02 per share on the date that is six months after closing of the Business Combination. The cash plus earned interest is recorded as Restricted cash - current in the Company's condensed consolidated balance sheet as of September 30, 2022. The put option written to Meteora on 2,000,000 shares of Class A common stock is recorded as a liability under Topic 480 Distinguishing Liabilities from Equity with the change in the fair market value recognized in the statement of operations as part of change in fair value of derivative instruments, net. See Note.3 Business Combination for additional information.
Redeemable non-controlling interests
Redeemable non-controlling interests represent the portion of OPAL Fuels that the Company controls and consolidates but does not own. The Redeemable non-controlling interest was created as a result of the Business Combination and represents 144,399,037 Class B Units issued by OPAL Fuels to the prior investors. The Company allocates net income or loss attributable to Redeemable non-controlling interest based on weighted average ownership interest during the period. The net income or loss attributable to Redeemable non-controlling interests is reflected in the condensed consolidated statement of operations.
At each balance sheet date, the mezzanine equity classified Redeemable non-controlling interests is adjusted up to their maximum redemption value if necessary, with an offset in Stockholders' equity. As of September 30, 2022, the Company recorded an adjustment of $1,160,723.
Net income (loss) per share
The Business Combination was accounted for as a reverse recapitalization as OPAL Fuels was determined to be the accounting acquirer under FASB ASC Topic 805, Business Combinations. Accordingly, for accounting purposes, the transaction is treated as the equivalent of OPAL Fuels issuing stock for the net assets of ArcLight, accompanied by a recapitalization.
The Company's basic earnings per share of Class A common stock is computed based on the average number of outstanding shares of Class A common stock for the period.
The Company's diluted earnings per share includes effects of the Company's outstanding Redeemable non-controlling interests (OPAL Fuels Class B units), the put option a forward purchase agreement, redeemable preferred non-controlling interests, Sponsor Earnout Awards, OPAL Earnout Awards, Private Warrants and Public Warrants.
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Accounts Receivable, Net
The Company's allowance for doubtful accounts was $100 and $— at September 30, 2022 and December 31, 2021.
Asset Retirement Obligation
The Company accounts for asset retirement obligations in accordance with FASB ASC 410, Asset Retirement and Environmental Obligations, which requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and when a reasonable estimate of fair value can be made. The fair value of the estimated asset retirement obligations is recorded as a long-term liability, with a corresponding increase in the carrying amount of the related asset. The discounted asset retirement costs capitalized amount are accreted over the life of the sublease or site lease agreement. Asset retirement obligations are deemed Level 3 fair value measurements as the inputs used to measure the fair value are unobservable. The Company estimates the fair value of asset retirement obligations by calculating the estimated present value of the cost to retire the asset. This estimate requires assumptions and judgments regarding the existence of liabilities, the amount and timing of cash outflows required to settle the liability, inflation factors, credit adjusted discount rates, and consideration of changes in legal, regulatory, environmental, and political environments. In addition, the Company determines the Level 3 fair value measurements based on historical information and current market conditions.
As of September 30, 2022 and December 31, 2021, the Company estimated the value of its total asset retirement obligations to be $5,968 and $5,738, respectively.
The changes in the asset retirement obligations were as follows as of September 30, 2022:
| September 30, 2022 | |||||
| Balance, December 31, 2021 | $ | 5,738 | |||
| Addition | (5) | ||||
| Accretion expense | 235 | ||||
| Total asset retirement obligation | 5,968 | ||||
| Less: current portion | (1,586) | ||||
| Total asset retirement obligation, net of current portion | $ | 4,382 | |||
Revenue Recognition
The Company’s revenue arrangements generally consist of a single performance obligation to transfer goods or services. Revenue from the sale of RNG, CNG and, electricity is recognized by applying the “right to invoice” practical expedient within the accounting guidance for Revenue from Contracts with Customers that allows for the recognition of revenue from performance obligations in the amount of consideration to which there is a right to invoice the customer and when the amount for which there is a right to invoice corresponds directly to the value transferred to the customer. For some public CNG Fueling Stations where there is no contract with the customer, the Company recognizes revenue at the point in time that the customer takes control of the fuel.
The Company also performs maintenance services throughout the country. Maintenance consists of monitoring equipment and replacing parts as necessary to ensure optimum performance. Revenue from service agreements is recognized over time as services are provided. Capacity payments fluctuate based on peak times of the year and revenues from capacity payments are recognized monthly as earned.
The Company has agreements with two natural gas producers ("Producers") to transport Producers' natural gas using the Company's RNG gathering system. The performance obligation is the delivery of Producers' natural gas to an agreed delivery point on an interstate gas pipeline. The quantity of natural gas transported for the Producers is measured at a certain specified meter. The price is fixed at contracted rates and the Producers pay approximately 30 days after month-end. As such, transportation sales are recognized over time, using the output method to measure progress.
The Company provides credit monetization services to customers that own renewable gas generation facilities. The Company recognizes revenue from these services as the credits are minted on behalf of the customer. The Company receives non-cash consideration in the form of RINs or LCFSs for providing these services and recognizes the RINs or
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LCFSs received as a current asset based on their estimated fair value at contract inception. When the Company receives RINs or LCFSs as payment for providing credit monetization services, it records the non-cash consideration in inventory based on the fair value of RINs or LCFSs at contract commencement.
On November 29, 2021, the Company entered into a purchase and sale agreement with NextEra for the environmental attributes generated by the RNG Fuels business. Under this agreement, the Company plans to sell a minimum of 90% of the environmental attributes generated and will receive net proceeds based on the agreed upon price less a specified discount. A specified volume of environmental attributes sold per quarter will incur a fee per environmental attribute in addition to the specified discount. The agreement was effective beginning January 1, 2022. For the three and nine months ended September 30, 2022, the Company earned net revenues after discount and fees of $19,335 and $49,023, respectively under this contract which was recorded as part of Revenues - RNG fuel.
Sales of environmental attributes such as RINs, RECs, and LCFS are generally recorded as revenue when the certificates related to them are delivered to a buyer. However, the Company may recognize revenue from the sale of such environmental attributes at the time of the related RNG or renewable power sales when the contract provides that title to the environmental attributes transfers at the time of production, the Company's price to the buyer is fixed, and collection of the sales proceeds occurs within 60 days after generation of the renewable power.
Management operating fees are earned for the operation, maintenance, and repair of the gas collection system of a landfill site. Revenue is calculated on the volume of per million British thermal units of LFG collected and the megawatt hours ("MWhs") produced at that site. This revenue is recognized when LFG is collected and renewable power is delivered.
The Company has various fixed price contracts for the construction of Fueling Stations for customers. Revenues from these contracts, including change orders, are recognized over time, with progress measured by the percentage of costs incurred to date compared to estimated total costs for each contract. This method is used as management considers costs incurred to be the best available measure of progress on these contracts. Costs capitalized to fulfill certain contracts were not material in any of the periods presented.
The Company owns Fueling Stations for use by customers under fuel sale agreements. The Company bills these customers at an agreed upon price for each gallon sold and recognizes revenue based on the amounts invoiced in accordance with the "right to invoice" practical expedient. For some public stations where there is no contract with the customer, the Company recognizes revenue at the point-in-time that the customer takes control of the fuel.
The Company from time-to-time enters into fuel purchase agreements with customers whereby the Company is contracted to design and build a Fueling Station on the customer's property in exchange for the Company providing CNG/RNG to the customer for a determined number of years. In accordance with the standards of ASC 840, Leases, the Company has concluded these agreements meet the criteria for a lease and are classified as operating leases. Typically, these agreements do not require any minimum consumption amounts and, therefore, no minimum payments. Included in "RNG fuel" revenues are $856 and $1,906 related to the lease portion of these agreements for the three and nine months ended September 30, 2022. The lease revenues included in Revenues - RNG fuel for the three and nine months ended September 30, 2021 were $694 and $1,644, respectively. In addition, the Company has assessed all power purchase agreements ("PPAs") and concluded that certain PPAs contain a lease element requiring lease accounting. Included in "Renewable power" revenues are $384 and $1,014 related to the lease element of these PPAs for the three and nine months ended September 30, 2022. For the three and nine months ended September 30, 2021, the lease revenues from the PPAs included in "Renewable power" revenues were $765 and $1,642, respectively.
Disaggregation of Revenue
The following table shows the disaggregation of revenue according to product line:
F-16
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Renewable power sales | $ | 9,666 | $ | 9,551 | $ | 27,205 | $ | 28,162 | |||||||||||||||
| Third party construction | 18,660 | 14,078 | 41,476 | 23,348 | |||||||||||||||||||
| Service | 3,480 | 3,670 | 11,910 | 11,674 | |||||||||||||||||||
| Brown gas sales | 12,430 | 1,611 | 23,398 | 7,836 | |||||||||||||||||||
| Environmental credits | 19,649 | 13,202 | 58,444 | 25,198 | |||||||||||||||||||
| Parts sales | 1,355 | 633 | 2,332 | 532 | |||||||||||||||||||
| Operating agreements | — | 707 | 893 | 2,433 | |||||||||||||||||||
| Other | 70 | 2,273 | 236 | 2,499 | |||||||||||||||||||
| Total revenue from contracts with customers | 65,310 | 45,725 | 165,894 | 101,682 | |||||||||||||||||||
| Lease revenue | 1,240 | 1,459 | 2,920 | 3,286 | |||||||||||||||||||
| Total revenue | $ | 66,550 | $ | 47,184 | $ | 168,814 | $ | 104,968 | |||||||||||||||
For the three and nine months ended September 30, 2022, 28% and 24.6%, respectively of revenue was recognized over time, and the remainder was for products and services transferred at a point in time. For the three and nine months ended September 30, 2021, approximately 29.8% and 22.2%, respectively, of revenue was recognized over time, and the remainder was for products and services transferred at a point in time.
Other income
The following table shows the items consisting of items recorded as Other income:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Reversal of contingent consideration on acquisition of non-controlling interest | $ | 4,365 | $ | — | $ | 4,365 | $ | — | |||||||||||||||
| Gain on redemption of Note receivable | 1,943 | — | 1,943 | — | |||||||||||||||||||
| Other income | $ | 6,308 | $ | — | $ | 6,308 | $ | — | |||||||||||||||
Contract Balances
The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers:
| September 30, 2022 | December 31, 2021 | ||||||||||
| Accounts receivable, net | $ | 36,660 | $ | 25,391 | |||||||
| Contract assets: | |||||||||||
| Cost and estimated earnings in excess of billings | $ | 12,514 | $ | 5,989 | |||||||
| Accounts receivable retainage, net | 2,162 | 2,495 | |||||||||
| Contract assets total | $ | 14,676 | $ | 8,484 | |||||||
| Contract liabilities: | |||||||||||
| Billings in excess of costs and estimated earnings | $ | 6,750 | $ | 9,785 | |||||||
| Contract liabilities total | $ | 6,750 | $ | 9,785 | |||||||
F-17
During the nine months ended September 30, 2022, the Company recognized revenue of $9,785 that was included in "Contract liabilities" at December 31, 2021. During the nine months ended September 30, 2021, the Company recognized revenue of $4,678 that was included in "Contract liabilities" at December 31, 2020.
RNG inventory
RNG inventory relates to storage of an equivalent amount of RNG production from our new RNG facilities during their RIN and LCFS certification period. It is sold to various customers at market prices upon obtaining RIN or LCFS certification. It is recorded at cost and adjusted to its net realizable value at each balance sheet date.
Backlog
The Company's remaining performance obligations ("backlog") represent the unrecognized revenue value of its contract commitments. The Company's backlog may significantly vary each reporting period based on the timing of major new contract commitments. At September 30, 2022, the Company had a backlog of $36,311 which is anticipated to be recognized as revenue in the next 12 months.
Income Taxes
As a result of the Business Combination, the Company is the sole managing member of OPAL Fuels. OPAL Fuels is a limited liability company that is treated as a partnership for U.S. federal income tax purposes and for most applicable state and local income taxes. Any taxable income or loss generated by OPAL Fuels is passed through to and included in the taxable income or loss of its members, including the Company, on a pro-rata basis, subject to applicable tax regulations.
The Company accounts for income taxes in accordance with ASC Topic 740, Accounting for Income Taxes (“ASC Topic 740”), which requires the recognition of tax benefits or expenses on temporary differences between the financial reporting and tax bases of its assets and liabilities by applying the enacted tax rates in effect for the year in which the differences are expected to reverse. Such net tax effects on temporary differences are reflected on the Company’s condensed consolidated balance sheets as deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when the Company believes that it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The Company calculates the interim tax provision in accordance with the provisions of ASC Subtopic 740-270, Income Taxes; Interim Reporting. For interim periods, the Company estimates the annual effective income tax rate and applies the estimated rate to the year-to-date income or loss before income taxes.
Significant Customers, Vendors and Concentration of Credit Risk
For the three and nine months ended September 30, 2022, two customers accounted for 49% and 45% of revenue, respectively. For the three and nine months ended 2021, two customers accounted for 18% and 30% of revenue, respectively. At September 30, 2022, two customers accounted for 38% of accounts receivable. At December 31, 2021, one customer accounted for 11%, of accounts receivable.
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, and trade receivables. The Company places its cash with high credit quality financial institutions located in the United States of America. The Company performs ongoing credit evaluations of its customers.
As of September 30, 2022 one vendor, respectively accounted for 22% of the accounts payable. As of December 31, 2021, no vendors accounted for greater than 10% of the accounts payable.
3.Business Combination
On July 21, 2022, ArcLight filed a notice of deregistration with the Cayman Islands Registrar of Companies, together with the necessary accompanying documents, and filed a certificate of incorporation and a certificate of corporate domestication with the Secretary of State of the State of Delaware, under which ArcLight was domesticated and continued as a Delaware corporation (the “Domestication”). Pursuant to the Domestication, (i) each outstanding Class B ordinary share, par value $0.0001 per share of ArcLight was automatically converted, on a one-for-one basis, into a Class A ordinary share, par value $0.0001 per share (the “Class A ordinary shares”), of ArcLight; (ii) each issued and outstanding Class A ordinary share (including Class A ordinary shares resulting from the conversion of Class B ordinary shares into
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Class A ordinary shares) was automatically converted, on a one-for-one basis, into a share of the Company's Class A common stock, par value $0.0001 per share; (iii) each issued and outstanding whole warrant to purchase Class A ordinary shares of ArcLight automatically converted into a warrant to acquire one share of the Company's Class A common stock at an exercise price of $11.50 per share ("OPAL Warrant"); and (iv) each issued and outstanding unit of ArcLight that had not been previously separated into the underlying Class A ordinary shares of ArcLight and the underlying warrants of ArcLight upon the request of the holder thereof prior to the Domestication was cancelled and entitled the holder thereof to one share of the Company's Class A common stock and one-half of one OPAL Warrant.
In connection with consummation of the Business Combination, the events summarized below, among others, occurred:
•OPAL Fuels and its existing members caused OPAL Fuels’ existing limited liability company agreement to be amended and restated and in connection therewith, all of the common units of OPAL Fuels issued and outstanding immediately prior to the closing were re-classified into 144,399,037 Class B common units ( "Class B Units") of OPAL Fuels. The Company accounts for these Class B units as Redeemable non-controlling interests in its condensed consolidated financial statements. Each Class B unit is paired with 1 non-economic share of Class D common stock issued by the Company.
• ArcLight (i) contributed to OPAL Fuels $138,850 in cash net of transaction expenses of $9.7 million, representing the sum of cash in the trust account after giving effect to the exercise of redemption rights by any Arclight shareholders plus the aggregate proceeds of the PIPE investment received and (ii) issued to OPAL Fuels 144,399,037 shares of Class D common stock of the Company, par value $0.0001 per share; (ii) issued 11,080,600 shares of the Company's Class A common stock to the PIPE investors at $10.0 per share, par value $0.0001 per share and (iii) issued 3,059,533 shares of the Company's Class A common stock to ARCC Beacon LLC ("Ares");
• OPAL Fuels issued 25,671,390 Class A Units of OPAL Fuels to the Company; and
• The Company contributed to OPAL Fuels, and OPAL Fuels in turn distributed to pre-closing members of OPAL Fuels, 144,399,037 shares of Class D common stock, par value $0.0001 per share (such shares of Class D common stock do not have any economic value but entitle the holder thereof to five votes per share).
Pursuant to a forward share purchase agreement (the “Forward Purchase Agreement”) entered into between ArcLight and Meteora and its affiliates (collectively, “Meteora”), prior to the closing of the Business Combination Meteora purchased 2,000,000 Class A common stock of ArcLight from shareholders who had previously tendered such shares for redemption but agreed to reverse their redemption and sell such shares to Meteora at the redemption price, resulting in Meteora holding a total of 2,000,000 Class A common stock, which Meteora agreed not to redeem in connection with the Business Combination. Additionally, ArcLight placed $20,040 in escrow at the closing of the Business Combination to secure its purchase obligation to repurchase these 2,000,000 shares at Meteora’s option for a price of $10.02 per share on the date that is six months after closing of the Business Combination. The cash plus earned interest is recorded as Restricted cash - current in the Company's condensed consolidated balance sheet as of September 30, 2022. The put option written to Meteora on 2,000,000 shares of Class A common stock is recorded as a liability under Topic 480 Distinguishing Liabilities from Equity with the change in the fair market value recognized in the statement of operations. As of September 30, 2022, Meteora sold 340,000 shares. The fair value of the put option for the remaining 1,700,000 as of September 30, 2022 was estimated at $4,200. For the three and nine months ended September 30, 2022, the Company recorded a gain of $384 as change in fair value of derivative instruments,net in its Condensed Consolidated Statement of Operations.
Pursuant to the terms of the Sponsor Letter Agreement entered into on December 2, 2021 among ArcLight, ArcLight CTC Holdings II, L.P. (“Sponsor”), OPAL Fuels and certain other persons concurrently with the execution of the Business Combination Agreement (the “Sponsor Letter Agreement”), the Sponsor agreed to subject 10% of its Class A common stock (received as a result of the conversion of its ArcLight Class B ordinary shares immediately prior to the closing) to vesting and forfeiture conditions relating to VWAP targets for the Company's Class A common stock sustained over a period of 60 months following the closing (“Sponsor Earnout Awards”). The Company accounted for the potential earnout shares as a liability at fair value with the change in the fair market value recognized in the statement of operations. The Sponsor Earnout Awards were classified as liability as their settlement terms contained certain variables that precluded them from being considered index to the Company's common stock under the "fixed-for-fixed" requirement per ASC 815 Derivatives and Hedging. The fair value of Sponsor Earnout Awards as of September 30, 2022 was estimated at $4,600.
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For the three and nine months ended September 30, 2022, the Company recorded a gain of $1,100 as change in fair value of derivative instruments,net in its condensed consolidated statement of operations.
Effective immediately after the closing, and upon the date on which the Company's annual adjusted EBITDA for the calendar year 2023 exceeds $238,000, (i) the Company will issue to OPAL Fuels equity holders (the “Earnout Participants”) an aggregate of 5,000,000 shares of the Company's Class B common stock and Class D common stock and corresponding OPAL Fuels Common Units in accordance with the allocations set forth in the Business Combination Agreement. Additionally, upon the date on which the Company's annual adjusted EBITDA for the calendar year 2024 exceeds $446,000, (i) the Company will issue to the Earnout Participants an aggregate of 5,000,000 additional shares of the Company's Class B common stock and Class D common stock and corresponding OPAL Fuels Common Units in accordance with the allocations set forth in the Business Combination Agreement (“OPAL Earnout Awards”). OPAL Earnout Awards were classified as a liability under Topic 480 Distinguishing Liabilities from Equity because they are considered indexed to an obligation to repurchase shares by delivering cash or other assets as a result of certain settlement provisions. The fair value of OPAL Earnout Awards as of September 30, 2022 was estimated at $34,900. For the three and nine months ended September 30, 2022, the Company recorded a gain of $5,300 as change in fair value of derivative instruments,net in its condensed consolidated statements of operations.
Upon the completion of the business combination, the Company assumed the Public Warrants and Private Warrants. As of September 30, 2022, the Company had 6,223,261 and 9,223,261 Public Warrants and Private Warrants outstanding, respectively.
The Public Warrants will become exercisable 30 days after the completion of a Business Combination; provided that the Company has an effective registration statement under the Securities Act covering the Class A ordinary shares issuable upon exercise of the Public Warrants and a current prospectus relating to them is available and such shares are registered, qualified or exempt from registration under the securities, or blue sky, laws of the state of residence of the holder (or the Company permit holders to exercise their warrants on a cashless basis under certain circumstances). The warrants have an exercise price of $11.50 per share, subject to adjustments, and will expire five years after the completion of a Business Combination or earlier upon redemption or liquidation. The fair value of the Public Warrants as of September 30, 2022 was estimated at $9,024. For the three and nine months ended September 30, 2022, the Company recorded an expense of $3,578 as change in fair value of derivative instruments, net in its condensed consolidated statements of operations.
The Private Warrants are identical to the Public Warrants underlying the units sold in the Initial Public Offering, except that the Private Warrants and the Class A common stock issuable upon exercise of the Private Placement Warrants will not be transferable, assignable or salable until 30 days after the completion of a Business Combination, subject to certain limited exceptions. Additionally, the Private Warrants will be non-redeemable so long as they are held by the initial purchasers or such purchasers’ permitted transferees. If the Private Warrants are held by someone other than the Initial Shareholders or their permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants. The fair value of the Private Warrants as of September 30, 2022 was estimated at $13,388. For the three and nine months ended September 30, 2022, the Company recorded an expense of $5,309 as change in fair value of derivative instruments, net in its condensed consolidated statements of operations.
Redemption of warrants for cash when the price per Class A common stock price equals or exceeds $18.00:
Once the warrants become exercisable, the Company may redeem the outstanding warrants (except as described herein with respect to the Private Warrants):
•in whole and not in part;
•at a price of $0.01 per warrant;
•upon a minimum of 30 days’ prior written notice of redemption to each warrant holder; and
•if, and only if, the last reported sale price (the “closing price”) of Class A common stock equals or exceeds $18.00 per share (as adjusted) for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders.
Redemption of warrants for Class A common stock when the price per share of Class A common stock equals or exceeds $10.00:
Once the warrants become exercisable, the Company may redeem the outstanding warrants:
F-20
•in whole and not in part;
•at $0.10 per warrant upon a minimum of 30 days’ prior written notice of redemption provided that holders will be able to exercise their warrants on a cashless basis prior to redemption and receive that number of shares determined by reference to an agreed table based on the redemption date and the “fair market value” of Class A common stock;
•if, and only if, the closing price of Class A common stock equals or exceeds $10.00 per share (as adjusted) for any 20 trading days within the 30 trading day period ending three trading days before the Company sends the notice of redemption to the warrant holders; and
• if the closing price of the Class A common stock for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which the Company sends the notice of redemption to the warrant holders is less than $18.00 per share (as adjusted), the Private Warrants must also be concurrently called for redemption on the same terms as the outstanding Public Warrants, as described above.
The “fair market value” of Class A common stock for the above purpose shall mean the volume weighted average price of our Class A common stock during the ten trading days immediately following the date on which the notice of redemption is sent to the holders of warrants. In no event will the warrants be exercisable in connection with this redemption feature for more than 0.361 Class A common stock per warrant (subject to adjustment).
The following table reconciles the elements of the Business Combination to the condensed consolidated statements of cash flows and the condensed consolidated statements of stockholders' equity for the nine months ended September 30, 2022:
| Cash proceeds from Arclight, net of redemptions | $ | 17,775 | ||||||
| Cash proceeds from PIPE investors | 110,806 | |||||||
| Cash in escrow account for the Forward Purchase Agreement | 20,040 | |||||||
Less: transaction costs and under writing fees paid (1) | (9,771) | |||||||
| Cash acquired from Business Combination | 138,850 | |||||||
| Less: warrant liabilities | (13,524) | |||||||
| Less: earnout liabilities | (45,900) | |||||||
| Less: put option with Meteora | (4,600) | |||||||
Less: Deferred financing costs recorded in additional paid-in-capital (2) | (6,569) | |||||||
| Net cash from Business Combination recorded in Stockholders' equity | $ | 68,257 | ||||||
(1) Includes $8,041 of Sponsor specific transaction costs paid at closing.
(2) Excludes $1,730 of transaction costs paid at closing and recorded on OPAL Fuels' condensed consolidated balance sheet prior to closing.
The total number of shares of the Company's Class A common stock outstanding immediately following the closing of the Business Combination was 25,671,390, consisting of the following:
F-21
| Shares | ||||||||
| Class A - Public stockholders | 1,752,181 | |||||||
Class A - Sponsor shares (1) | 7,779,076 | |||||||
| Class A - PIPE investors | 11,080,600 | |||||||
| Class A - Forward Purchase Agreement | 2,000,000 | |||||||
| Class A - Ares | 3,059,533 | |||||||
| 25,671,390 | ||||||||
| Class D - Opal Fuels equity holders | 144,399,037 | |||||||
| Total shares issued upon closing of Business Combination | 170,070,427 | |||||||
(1) Includes 763,908 Sponsor Earnout Awards subject to vesting and forfeiture conditions.
The Company incurred $8,299 in transaction costs relating to the Business Combination which were recorded as an offset to additional paid-in capital in the condensed consolidated Statements of Changes in Redeemable preferred units and Stockholders' equity.
4. Investment in Other Entities
The Company uses the equity method to account for investments in affiliates that it does not control, but in which it has the ability to exercise significant influence over operating and financial policies. The Company's investments in these nonconsolidated affiliates are reflected in the Company's condensed consolidated balance sheets under the equity method, and the Company's proportionate net (loss) income, if any, is included in the Company's condensed consolidated statements of operations as (loss) income from equity method investments.
Our equity method investments were as follows as of September 30, 2022 and December 31, 2021:
| Percentage of ownership | Carrying Value | ||||||||||||||||
| September 30, 2022 | December 31, 2021 | ||||||||||||||||
| Pine Bend | 50.0 | % | $ | 20,730 | $ | 21,188 | |||||||||||
| Noble Road | 50.0 | % | 24,053 | 24,516 | |||||||||||||
| GREP | 20.0 | % | 3,925 | 1,446 | |||||||||||||
| Total investment in other entities | $ | 48,708 | $ | 47,150 | |||||||||||||
Note receivable
In August 2021, the Company acquired 100% ownership interest in Reynolds which held a note receivable of $10,450 to Biotown. The Note receivable had a maturity date of July 15, 2027 and carried an interest rate of 12.5% of which 8% is payable in cash on a quarterly basis from the inception of the loan and 4.5% payment-in-kind interest adding to the outstanding debt balance until the facility becomes operational.
On July 15, 2022, Biotown repaid the total amount outstanding under the Note receivable including paid-in-kind interest and prepayment penalty. The total proceeds received were $11,555 which included $701 paid-in-kind interest accrued from August 2021 to July 15, 2022 and $545 of prepayment penalty. The paid-in-kind interest income accrued during the year ended December 31, 2021 of $288 is shown as cash flow from operations. The Company recorded a gain on repayment of $1,943 as part of Other income in the condensed consolidated statement of operations for the three and nine months ended September 30, 2022.
The Company recorded $95 and $841 as a reduction to interest and financing expense, net in its condensed consolidated statement of operations for the three and nine months ended September 30, 2022, respectively.
F-22
The Note receivable also entitles Reynolds to receive 4.25% of any revenue-based distributions made up to a maximum of $4,500 over the term of the debt. The Company recorded the fair value of the Note receivable — variable fee component of $1,538 as an allocation of the initial investment balance of $10,450 and recorded payment-in-kind interest income of $73 and $136 as a reduction to interest and financing expense, net in the condensed consolidated statement of operations for the three and nine months ended September 30, 2022, respectively.
The Note receivable - variable fee component of $1,865 and $1,656 is recorded as a long-term asset on its condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively.
The following table summarizes the net income from equity method investments:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||||||||||||
Revenue (1) | $ | 42,158 | $ | — | $ | 47,247 | $ | 14,181 | ||||||||||||||||||
| Gross profit | 33,053 | — | 34,665 | 6,459 | ||||||||||||||||||||||
| Net income | 31,356 | — | 29,615 | 5,400 | ||||||||||||||||||||||
| — | ||||||||||||||||||||||||||
Net income from equity method investments (2) | $ | 3,694 | $ | — | $ | 3,658 | $ | 2,392 | ||||||||||||||||||
(1) Revenues include a realized gain of $32,796 from commodity swap contracts on our equity method investment, GREP for the three and nine months ended September 30, 2022.
(2) Net income from equity method investments represents our portion of the net income from equity method investments in Pine Bend, Noble Road and GREP for the three and nine months ended September 30, 2022 and Beacon for the three and nine months ended September 30, 2021.
5. Property, Plant, and Equipment, Net
Property, plant, and equipment, net, consisted of the following as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | ||||||||||
| Plant and equipment | $ | 203,382 | $ | 161,387 | |||||||
| CNG/RNG fueling stations | 34,494 | 27,892 | |||||||||
| Construction in progress | 102,205 | 62,616 | |||||||||
| Buildings | 2,585 | 2,544 | |||||||||
| Land | 1,303 | 1,303 | |||||||||
| Service equipment | 1,692 | 1,521 | |||||||||
| Leasehold improvements | 815 | 815 | |||||||||
| Vehicles | 313 | 407 | |||||||||
| Office furniture and equipment | 307 | 302 | |||||||||
| Computer software | 277 | 277 | |||||||||
| Other | 458 | 416 | |||||||||
| 347,831 | 259,480 | ||||||||||
| Less: accumulated depreciation | (97,476) | (89,710) | |||||||||
| Property, plant, and equipment, net | $ | 250,355 | $ | 169,770 | |||||||
As of September 30, 2022, there has been an increase in property, plant and equipment as a result of an increase in the construction of RNG generation facilities including, but not limited to Emerald, Sapphire, and Central Valley RNG dispensing facilities. The majority of these facilities, for which costs are in construction in progress as of September 30, 2022, are expected to be operational during the fourth quarter of 2023 and early 2024.
Depreciation expense on property, plant, and equipment for the nine months ended September 30, 2022 and September 30, 2021 was $8,986 and $6,163, respectively.
F-23
6. Intangible Assets, Net
Intangible assets, net, consisted of the following at September 30, 2022 and December 31, 2021:
| September 30, 2022 | ||||||||||||||||||||||||||
| Cost | Accumulated Amortization | Intangible Assets, Net | Weighted Average Amortization Period (Years) | |||||||||||||||||||||||
| Power purchase agreements | $ | 8,999 | $ | (7,436) | $ | 1,563 | 18.1 | |||||||||||||||||||
| Transmission/distribution interconnection | 1,600 | (945) | 655 | 15.1 | ||||||||||||||||||||||
| CNG sales contract | 807 | (779) | 28 | 10.0 | ||||||||||||||||||||||
| Intellectual property | 43 | (23) | 20 | 5.0 | ||||||||||||||||||||||
| Total intangible assets | $ | 11,449 | $ | (9,183) | $ | 2,266 | ||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| Cost | Accumulated Amortization | Intangible Assets, Net | Weighted Average Amortization Period (years) | |||||||||||||||||||||||
| Power purchase agreements | $ | 8,999 | $ | (6,986) | $ | 2,013 | 18.1 | |||||||||||||||||||
| Transmission/distribution interconnection | 1,600 | (865) | 735 | 15.1 | ||||||||||||||||||||||
| CNG sales contract | 807 | (719) | 88 | 10.0 | ||||||||||||||||||||||
| Intellectual property | 43 | (18) | 25 | 5.0 | ||||||||||||||||||||||
| Total intangible assets | $ | 11,449 | $ | (8,588) | $ | 2,861 | ||||||||||||||||||||
The transmission/distribution interconnection represents an interconnector for one of the Company's LFG recovery facilities. The interconnection construction was initially funded by a municipality. The Company is scheduled to repay the costs of this construction through April 1, 2023. The remaining liability of $121 under the Municipality loan is shown as part of current liabilities on its condensed consolidated balance sheet as of September 30, 2022. Please see Note 8. Borrowings, for additional information.
Amortization expense for the nine months ended September 30, 2022 and 2021 was $595 and $346, respectively. At September 30, 2022, estimated future amortization expense for intangible assets is as follows:
| Three months ended December 31, 2022 | $ | 198 | |||
| Fiscal year: | |||||
| 2023 | 465 | ||||
| 2024 | 275 | ||||
| 2025 | 266 | ||||
| 2026 | 238 | ||||
| Thereafter | 824 | ||||
| $ | 2,266 | ||||
7. Goodwill
The following table summarizes the changes in goodwill, if any, by reporting segment from the beginning of the period to the end of the period:
F-24
| RNG Fuel | Fuel Station Services | Total | |||||||||||||||
| Balance at December 31, 2021 | $ | 51,155 | $ | 3,453 | $ | 54,608 | |||||||||||
| Balance at September 30, 2022 | $ | 51,155 | $ | 3,453 | $ | 54,608 | |||||||||||
8. Borrowings
The following table summarizes the borrowings under the various debt facilities as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | |||||||||||||
| Senior Secured Credit Facility, term loan | $ | 70,179 | $ | 73,869 | ||||||||||
| Less: unamortized debt issuance costs | — | (724) | ||||||||||||
| Less: current portion | (70,179) | (73,145) | ||||||||||||
| Senior Secured Credit Facility, term loan, net of debt issuance costs | — | — | ||||||||||||
| Senior Secured Credit Facility, working capital facility | 7,500 | 7,500 | ||||||||||||
| Less: current portion | (7,500) | (7,500) | ||||||||||||
| Senior Secured Credit Facility, working capital facility | — | — | ||||||||||||
| OPAL Term Loan | 91,223 | 75,000 | ||||||||||||
| Less: unamortized debt issuance costs | (1,975) | (2,485) | ||||||||||||
| Less: current portion | (28,432) | (13,425) | ||||||||||||
| OPAL Term Loan, net of debt issuance costs | 60,816 | 59,090 | ||||||||||||
| Sunoma Loan | 23,000 | 17,524 | ||||||||||||
| Less: unamortized debt issuance costs | (920) | (569) | ||||||||||||
| Less: current portion | — | (756) | ||||||||||||
| Sunoma Loan, net of debt issuance costs | 22,080 | 16,199 | ||||||||||||
| Convertible Note Payable | 27,964 | 58,710 | ||||||||||||
| Less: current portion | (27,964) | — | ||||||||||||
| Convertible Note Payable | — | 58,710 | ||||||||||||
| Municipality Loan | 121 | 278 | ||||||||||||
| Less: current portion | (121) | (194) | ||||||||||||
| Municipality Loan | — | 84 | ||||||||||||
| Non-current borrowings total | $ | 82,896 | $ | 134,083 | ||||||||||
As of September 30, 2022, principal maturities of debt are expected as follows, excluding any subsequent refinancing transactions and any undrawn debt facilities as of the date of the condensed consolidated balance sheets:
| Senior Secured Credit Facility | OPAL Term Loan | Sunoma Loan | Convertible Note Payable (1) | Municipality Loan | Total | ||||||||||||||||||||||||||||||
| Three months ending December 31, 2022 | $ | 77,679 | $ | 7,633 | $ | 27,964 | $ | 55 | $ | 113,331 | |||||||||||||||||||||||||
| Fiscal year: | |||||||||||||||||||||||||||||||||||
| 2023 | — | 27,732 | 953 | — | 66 | 28,751 | |||||||||||||||||||||||||||||
| 2024 | — | 27,732 | 3,812 | — | — | 31,544 | |||||||||||||||||||||||||||||
| 2025 | — | 28,126 | 3,812 | — | — | 31,938 | |||||||||||||||||||||||||||||
| 2026 | — | — | 3,801 | — | 3,801 | ||||||||||||||||||||||||||||||
| 2027 | — | — | 10,622 | — | — | 10,622 | |||||||||||||||||||||||||||||
| $ | 77,679 | $ | 91,223 | $ | 23,000 | $ | 27,964 | $ | 121 | $ | 219,987 | ||||||||||||||||||||||||
(1) The Convertible Note Payable is redeemable on demand at the option of the Company or the lender.
F-25
Senior Secured Credit Facility
On September 21, 2015, FM3, an indirect wholly-owned subsidiary of the Company, entered into a senior secured credit facility (the "Senior Secured Credit Facility") as a borrower and a syndicate of lenders, which provides for an aggregate principal amount of $150,000, consisting of (i) a term loan of $125,000 ( "Term Loan Facility") and a (ii) working capital letter of credit facility (the "Working Capital Facility") of up to $19,000 and a (iii) debt service reserve and liquidity facility of up to $6,000. The Company paid $14,300 to the lenders in connection with the transaction. As of September 30, 2022 and December 31, 2021, $70,179 and $73,869, respectively, was outstanding under the Senior Secured Credit Facility- term loan.
The borrowings under the Senior Secured Credit Facility bear an interest rate of a fixed margin plus LIBOR for the relevant interest period. The fixed margin is 2.75% for the first four years, then 3.0% until October 8, 2021, and 3.25% thereafter. Pursuant to the terms of the facility, FM3 is required to repay 1.0% of the outstanding debt under the Term Loan Facility amounting to $125,000 on a quarterly basis which is then adjusted based on available cash and a target debt balance that declines each quarter. The Working Capital Facility contains a provision whereby the Company is obligated to reduce the amount borrowed to $7,500 or less for a period of ten days consecutive business days annually. As of both September 30, 2022 and December 31, 2021, the total amount outstanding under the Working Capital Facility was $7,500. Additionally, the Company pays commitment fee of 0.75% on the unused portion of the facility.
On October 8, 2021, the Company entered into the Amendment to Second Amended and Restated Credit Agreement (the “Amendment”) which extended the maturity date of the credit facility that supports the Renewable Power business to December 20, 2022. In addition, the minimum required debt service coverage ratio was reduced from 1.1 to 1.0 and the calculation of the Cash Flows Available for Debt Service was amended to exclude the proceeds of working capital loans deposited into the operating account going forward. Additionally, the Company is not allowed to make any distributions or restricted payments. In exchange for these accommodations, the Company agreed to repay $5,182 as a permanent reduction of the Working Capital Facility and to increase the interest rate on the credit facility by 25 basis points.
At September 30, 2022 and December 31, 2021, FM3 had outstanding letters of credit that support obligations of the Company and its subsidiaries of $7,971 and $7,823, respectively. The Senior Secured Credit Facility is collateralized by substantially all the assets of FM3 and assignment of FM3's rights, title, and interests in purchase and sale agreements and LFG rights agreements.
The Senior Secured Credit Facility contains certain warranties and financial covenants including but not limited to debt service coverage ratio to not be less than 1.0 and restrictions on distributions and additional indebtedness. The lenders only have recourse to the assets of FM3. For the nine months ended September 30, 2022, FM3 was in compliance with all debt covenants.
Patronage dividends
The Company is eligible to receive annual patronage dividends from one of its lenders, Cobank ACB under a profit sharing program made available to the borrowers. For the nine months ended September 30, 2022 and 2021, the Company received cash dividends of $126 and $139, respectively, which were recorded as credits to interest expense in its condensed consolidated statements of operations. Additionally, the Company recorded $489 as a long-term asset on its condensed consolidated balance sheets at September 30, 2022 and December 31, 2021, which represents the Company's equity interest in Cobank SCB which will be redeemed for cash beginning in 2024.
OPAL Term Loan
On October 22, 2021, OPAL Fuels Intermediate Holding Company LLC (“OPAL Intermediate Holdco”), an indirect wholly-owned subsidiary of the Company, entered into a $125,000 term loan agreement (the "OPAL Term Loan") with a syndicate of lenders. Of the $125,000, the Company had $90,000 available for borrowing upon closing and the remaining $35,000 to be made available as three more RNG facilities become operational. The OPAL Term Loan is secured by a pledge in the equity interest of Beacon Holdco LLC, OPAL Environmental Credit Marketing LLC, OPAL Fuel Station Services LLC (f/k/a Trustar Energy LLC), and OPAL Fuels Services LLC along with cash bank accounts and a security interest in the Company’s environmental credits. A portion of the proceeds of the OPAL Term Loan were used to pay off the outstanding balance under the TruStar revolver credit facility in October 2021 and the remainder will be used for general corporate purposes, including investments in RNG projects being developed by the Company.
F-26
Pursuant to the OPAL Term Loan, the Company borrowed $75,000 in October 2021 and an another $15,000 in February 2022 pursuant to an amendment allowing the Company to drawdown later than the original commitment date.
On September 29, 2022, OPAL Intermediate Holdco entered into Amendment No. 3 to the OPAL Term Loan (“Amendment No. 3”) that (a) extended the availability period from (i) September 30, 2022 to October 31, 2022 for the borrowing under the Term A-2 Commitments of up to an aggregate of $25 million in Term A-2 Loans, and (ii) March 31, 2023 for the borrowing under the Term A-2 Commitments of a single final borrowing of Term A-2 Loans not to exceed $10 million and (b) amended the principal repayment amortization schedule.
During the third quarter of 2022, one of the RNG projects went operational and the Company borrowed $12,500 under the OPAL Term Loan. In October 2022, the Company borrowed an additional $12,500 with an additional commitment of $10,000 remaining under this debt facility.
The OPAL Term Loan matures April 22, 2025 and bears interest at 3.0% plus SOFR. In accordance to the terms of the facility, OPAL Intermediate Holdco is required to repay 1.79% or $1,611 per month beginning March 2022 and an additional $700 per month beginning September 2022.
The OPAL Term Loan contains customary warranties and representations and certain financial covenants which require OPAL Intermediate Holdco to maintain (i) minimum liquidity of $15,000 until March 31, 2022 and $10,000 thereafter and (ii) a leverage ratio not to exceed 4:1. As of September 30, 2022, the Company is in compliance with the financial covenants under the OPAL Term Loan. Additionally, the OPAL Term Loan contains restrictions on distributions and additional indebtedness.
Sunoma Loan
On August 27, 2020, Sunoma, an indirect wholly-owned subsidiary of the Company entered into a debt agreement (the "Sunoma Loan Agreement") with Live Oak Banking Company for an aggregate principal amount of $20,000. Sunoma paid $635 as financing fees. The loan bears interest at the greater of prime rate plus 3.50%, or 7.75%. The amounts outstanding under the Sunoma Loan are secured by the assets of Sunoma.
The Sunoma Loan Agreement contains certain financial covenants which require Sunoma to maintain (i) maximum debt to net worth ratio not to exceed 5:1 (ii) a minimum current ratio not be less than 1.0 and (iii) minimum debt service coverage ratio of trailing four quarters not be less than 1.25. On July 19, 2022, Sunoma completed the conversion of the construction loan into a permanent loan and increased the commitment from $20,000 to $23,000.
The borrowings under the Sunoma Loan Agreement bear interest at a rate of 7.68% and have a maturity date of July 19, 2033. The Company is required to pay a quarterly amortization of principal of $954 beginning in October 2023. The Company paid $3,482 into interest and debt reserve accounts. This cash is recorded as Restricted cash under long term assets in the Condensed Consolidated Balance Sheet as of September 30, 2022.
The significant assets of Sunoma are parenthesized in the condensed consolidated balance sheets as September 30, 2022 and December 31, 2021. See Note 13. Variable Interest Entities for additional information.
Convertible Note Payable
On May 1, 2021, the Company acquired the remaining ownership interests in Beacon and signed an unsecured, contingently convertible note (the "Convertible Note") with Ares for a total aggregate amount for $50,000 at an interest rate of 8.00% per annum. The Company has the option to pay interest on the Convertible Note in cash on a quarterly basis or payment-in-kind. The Company chose the option of payment-in-kind interest.
The Convertible Note Payable matures earlier of December 31, 2026 or the date on which a change in control occurs as defined in the terms of the Convertible Note. Upon the consummation of the Business Combination, Ares was permitted to choose to convert the total amount outstanding under the Convertible Note to shares of Class A common stock based on a pre-determined conversion formula. Upon completion of the Business Combination in July 2022, Ares elected to convert 50% of the outstanding amount under the Convertible Note to shares of Class A common stock. Therefore the Company issued 3,059,533 shares of Class A common stock and redeemed outstanding debt of $30,595.
F-27
The Company elected to account for the Convertible Note using the fair value option in accordance with ASC 820, Fair Value Measurement, on May 1, 2021, which was determined to be $55,410. The fair value was subsequently remeasured on each reporting date and the change in fair value recorded as interest expense in the condensed consolidated statement of operations for each reporting period. At September 30, 2022, the Convertible Note was classified as a current liability in the condensed consolidated balance sheet at a fair value of 27,964 as it is redeemable on demand by the Company or Ares. At December 31,2021, the Convertible Note was classified as a non-current liability in the condensed consolidated balance sheet at a fair value of $58,710.
The Company recorded $(2,261) and $(151) as change in fair value of Convertible Note for the three and nine months ended September 30, 2022, respectively as interest and financing expense, net. Upon completion of the Business Combination, the Convertible Note no longer provided for the 10% prepayment penalty. Therefore, the change in fair value for the three months ended September 30, 2022 was ($2,906). The Company recorded $1,362 and $2,250 as payment-in-kind interest expense in the condensed consolidated statement of operations for the three and nine months ended September 30, 2021, respectively.
Municipality loan
FM3, an indirect wholly-owned subsidiary of the Company, entered into a loan agreement for the construction of an interconnection that was initially funded by the municipality. The Company is scheduled to make payments to a municipality in the amount of $1,600 plus interest at a fixed annual rate of 3.00% through April 1, 2023. At September 30, 2022 and December 31, 2021, $121 and $278, respectively, were outstanding on the loan.
OPAL Term Loan II
On August 4, 2022, OPAL Fuels Intermediate Holdco 2 LLC ("OPAL Intermediate Holdco 2"), an indirect wholly-owned subsidiary the Company, entered into a new Senior Secured Credit Facility (the "OPAL Term Loan II") with a syndicate of lenders. The indebtedness is guaranteed by certain of the direct and indirect subsidiaries of OPAL Intermediate Holdco 2. The OPAL Term Loan II provides for an approximately two year delayed term loan facility (the "DDTL Facility") of up to a maximum aggregate principal amount of $100,000 and debt service reserve facility (the "DSR Facility") of up to a maximum aggregate principal amount of $5,000. The proceeds of the DDTL Facility are to be used to fund a portion of the construction of the RNG projects owned, either in full or through a joint venture with a third party, by the subsidiary guarantors and the proceeds of the DSR Facility are to be used solely to satisfy the balance to be maintained in the debt service reserve account. In connection with the transaction, the Company paid $2,200 as financing fees to the lenders and incurred $1,322 as third party fees. The transaction costs have been recorded as Deferred financing costs on the condensed consolidated balance sheet as of September 30, 2022.
The borrowings under the OPAL Term Loan II will bear interest at the benchmark rate of adjusted Term SOFR plus (i) for the period from closing to the earlier of the date of conversion of the construction loan to a term loan (the "Conversion Date") or September 30, 2024, a spread of 3.5%, and (ii) thereafter a spread of 3.75%. Accrued interest on amounts outstanding under the DDTL Facility must be paid on the last day of each applicable interest period. The outstanding principal amount of the DDTL Facility is subject to quarterly amortization payments commencing September 30, 2024 equal to 2.5% of the aggregate principal amount of the outstanding term loan balance as of the Conversion Date, subject to adjustment based on certain mandatory prepayments, with the balance due at maturity. The DSR Facility is due at maturity. The OPAL Term Loan II matures on August 4, 2027.
At September 30, 2022, there was no principal amount outstanding under the OPAL Term Loan II.
TruStar revolver credit facility
On September 27, 2021, TruStar, an indirect wholly-owned subsidiary of the Company, renewed its existing revolving credit arrangement (the "TruStar revolver credit facility") with JP Morgan Chase Bank, N.A., for an aggregate amount of $10,000. The amounts outstanding under this credit facility had an interest rate of 1.00% plus one month LIBOR. In the fourth quarter of 2021, the outstanding balance under this credit facility was fully repaid and the revolving credit facility was cancelled.
Interest rates
F-28
2022
For the three and nine months ended September 30, 2022, the weighted average effective interest rate including amortization of debt issuance costs on Senior Secured Credit Facility was 6.8% and 5.40% including a margin plus LIBOR.
For the three and nine months ended September 30, 2022, the weighted average effective interest rate including amortization of debt issuance costs on OPAL Term Loan was 6.4% and 5.20%.
For the three and nine months ended September 30, 2022, the interest rate on Sunoma Loan was 7.81% and 9.00%.
For the three and nine months ended September 30, 2022, the payment-in-kind interest rate on Convertible Note Payable was 8.00%.
For the three and nine months ended September 30, 2022, the weighted average interest rate on Municipality loan was 3.00%.
2021
For the three and nine months ended September 30, 2021, the interest rate on Senior Secured Credit Facility ranged between 3.14% and 3.26% including a margin plus LIBOR and commitment fees of 0.75% on unused portion of the Working capital facility.
For the nine months ended September 30, 2021, the interest rate on TruStar revolver credit facility was 1.52%.
For the three and nine months ended September 30, 2021, the payment-in-kind interest rate on Convertible Note Payable was 8.0%. The change in fair value of the Note recorded as interest expense between May 1, 2021 and September 30, 2021 was $2,250.
For the three and nine months ended September 30, 2021, the weighted average interest rate on Municipality loan was 3.0%.
The following table summarizes the Company's total interest expense for the three and nine months ended September 30, 2022 and 2021:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Senior Secured Credit Facility | $ | 1,100 | $ | 716 | $ | 2,540 | $ | 2,050 | ||||||||||||||||||
| Municipality loan | 1 | 2 | 3 | 7 | ||||||||||||||||||||||
| TruStar revolver credit facility | — | 168 | — | 502 | ||||||||||||||||||||||
Convertible Note Payable mark-to-market (1) | (2,261) | 1,362 | (151) | 2,250 | ||||||||||||||||||||||
Sunoma Loan(2) | 424 | — | 1,335 | — | ||||||||||||||||||||||
| OPAL Term Loan | 1,107 | — | 2,850 | — | ||||||||||||||||||||||
| Commitment fees and other finance fees | 401 | 99 | 605 | 378 | ||||||||||||||||||||||
| Amortization of deferred financing cost | 616 | 201 | 1,514 | 678 | ||||||||||||||||||||||
| Interest income on loan receivable | (612) | (194) | (1,512) | (206) | ||||||||||||||||||||||
| Total interest expense | $ | 776 | $ | 2,354 | $ | 7,184 | $ | 5,659 | ||||||||||||||||||
(1) The mark-to-market on the Convertible Note Payable is negative for the three and nine months ended September 30, 2022 as the prepayment penalty is no longer applicable upon completion of the Business Combination. The change in fair value of the Convertible Note Payable recorded for the three months ended September 30, 2022 was $2,906.
(2) The interest on Sunoma Loan was capitalized during the construction phase of the RNG facility. Sunoma became operational in December 2021. Therefore, the interest for the three and nine months ended September 30, 2022 has been expensed.
F-29
9. Leases
During 2018, the Company renewed a lease for office and warehouse space that became effective upon the termination of the original lease term on January 31, 2018. The term of the lease renewal was 36 months and contained an option to renew for an additional 24 months. In September 2020, the Company exercised this option. In March, 2022, the Company entered into an amendment to the lease which extended the lease term till January 2026. In addition, the Company maintains a fleet of vehicles under lease with terms ranging from 48 to 60 months and with lease expiration dates ranging from April 2021 to June 2026.
Future minimum lease payments are as follows:
| Three months ending December 31, 2022 | $ | 228 | |||
| Fiscal year: | |||||
| 2023 | 987 | ||||
| 2024 | 937 | ||||
| 2025 | 852 | ||||
| 2026 | 183 | ||||
| $ | 3,187 | ||||
The Company incurred rent expense of $359 and $1,050 for the three and nine months ended September 30, 2022, respectively. The Company incurred rent expense of $201 and $604 for the three and nine months ended September 30, 2021,respectively.
10. Derivative Financial Instruments and Fair Value Measurements
Interest rate swaps
In connection with our entry into the Senior Secured Credit Facility, the Company entered into certain interest rate swap agreements. These transactions involved the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. The average annual fixed rate ranged from 2.38% in 2020 to 2.50% in 2022. The Company has accounted for these instruments as economic hedges and has included changes in their fair market value in the condensed consolidated statements of operations. The swaps expired in September 2022 as the facility is scheduled to be repaid in December 2022.
During August 2022, the Company entered into two interest rate swaps for the notional amount of $61,926 of OPAL Term Loan II at a fixed interest rate of 2.47% to hedge the SOFR-based floating interest rate. On August 16, 2022, the Company entered into a swaption for a notional amount of $13,074 with fixed rate of 2.32% with a maturity date of December 30, 2022. The Company accounted for the swaption as an economic hedge and included the change in the fair market value in the condensed consolidated statement of operations.
The two interest rate swaps were designated and qualified as cash flow hedges. The Company uses interest rate swaps for the management of interest rate risk exposure, as an interest rate swap effectively converts a portion of the Company’s debt from a floating to a fixed rate. The interest rate swap is an agreement between the Company and counterparties to pay, in the future, a fixed-rate payment in exchange for the counterparties paying the Company a variable payment. The amount of the net payment obligation is based on the notional amount of the interest rate swap and the prevailing market interest rates. The Company may terminate the interest rate swaps prior to their expiration dates, at which point a realized gain or loss may be recognized, or may be amortized over the original life of the interest rate swap if the hedged debt remains outstanding. The value of the Company’s commitment would increase or decrease based primarily on the extent to which interest rates move against the rate fixed for each swap.
The Company records the fair value of the interest rate swap as an asset or liability on its balance sheet. The effective portion of the swap is recorded in Accumulated other comprehensive income. No portion of the cash flow hedges were ineffective during the three and nine months ended September 30, 2022.
The following table summarizes the interest rate swaps in place as of September 30, 2022 and December 31, 2021:
F-30
| Interest rate swap detail | Notional Amount | ||||||||||||||||||||||
| Trade date | Fixed rate | Start date | End date | September 30, 2022 | December 31, 2021 | ||||||||||||||||||
| August 15, 2022 | 2.47 | % | June 28, 2024 | August 4, 2027 | $ | 41,284 | — | ||||||||||||||||
| August 15, 2022 | 2.47 | % | June 28, 2024 | August 4, 2027 | 20,642 | — | |||||||||||||||||
| $ | 61,926 | $ | — | ||||||||||||||||||||
The location and amounts of derivatives fair values in the condensed consolidated balance sheets are:
| September 30, 2022 | December 31, 2021 | Location of Fair Value Recognized in Balance Sheet | |||||||||||||||
| Derivatives designated as economic hedges: | |||||||||||||||||
| Current portion of swaption | $ | 246 | $ | — | Derivative financial assets, current portion | ||||||||||||
| Current portion of interest swaps | (38) | (992) | Derivative financial liability, current portion | ||||||||||||||
| Derivatives designated as cash flow hedges: | |||||||||||||||||
| Current portion of the interest rate swaps | 1,189 | — | Derivative financial assets, current portion | ||||||||||||||
| $ | 1,397 | $ | |||||||||||||||