Advanced Emissions Solutions, Inc.
(Name of registrant as specified in its charter)
| Delaware | 27-5472457 | |||||||
| (State of incorporation) | (IRS Employer Identification No.) | |||||||
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code): (720)(720) 598-3500
Securities registered under Section 12(b) of the Act:
| Trading Symbol | Name of each exchange on which registered | |||||||||||||
| Common | ADES | NASDAQ Global Market | ||||||||||||
Securities registered under Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. ¨ Yes x No
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. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large"large accelerated filer,” “accelerated filer”" "accelerated filer" and “smaller"smaller reporting company”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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.) ¨☐ Yes x No
The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $114.3$86.1 million based on the last reported bid price of the Common Stock on the NASDAQ Global Market on June 30, 2017.2020. The number of shares outstanding of the registrant’s Common Stock, par value $0.001 per share, as of March 2, 20181, 2021 was 20,752,939.
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Documents Incorporated By Reference
Portions of Part III of this Form 10-K are incorporated by reference from the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission no later than 120 days after the end of the Registrant's fiscal year.
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ADVANCED EMISSIONS SOLUTIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 20172020
TABLE OF CONTENTS
| Page | ||||||||||||||
PART I
Item 1. Business
General
ADA-ES, Inc. (“ADA”("ADA"), a Colorado corporation, was incorporated in 1997. Pursuant to an Agreement and Plan of Merger, ("Reorganization"), effective July 1, 2013, Advanced Emissions Solutions, Inc. (“ADES”("ADES"), a Delaware company incorporated in 2011, replacedsucceeded ADA as the publicly-held corporation and ADA became a wholly-owned subsidiary of ADES. Each outstanding share of ADA’s common stock automatically convertedIn 2018, ADA acquired ADA Carbon Solutions, LLC ("Carbon Solutions"). We acquired Carbon Solutions to enter into one share of common stock of ADESthe broader activated carbon ("AC") market and to expand our product offerings in the shareholders of ADA became stockholders of ADES on a one-for-one basis, holding the same number of shares inmercury control industry and the same ownership percentage of ADES after the reorganization as they held in and of ADA prior to the reorganization. ADES’s common stock became listed on the NASDAQ Capital Market under the symbol, "ADES," ADA’s previous symbol, and ADA’s stock ceased trading on the NASDAQ Capital Market on July 1, 2013. From March 30, 2015 through July 6, 2016, ADES's common stock was traded on the OTC Pink® Marketplace - Limited Information Tier under the trading symbol "ADES." Effective, July 7, 2016 ADES's common stock began trading on the NASDAQ Global Market under the symbol, ADES.other complementary activated carbon markets. This Annual Report on Form 10-K is referred to as the "Form 10-K" or the "Report."
As used in this filing pertains to the year ended December 31, 2017,Report, the terms the "Company," "we," "us" and "our" means ADA and its consolidated subsidiaries for the periods through and including the period ended June 30, 2013 and ADES and its consolidated subsidiaries forsubsidiaries.
We sell consumable products that utilize AC and chemical-based technologies to a broad range of customers, including coal-fired utilities, industrials, water treatment plants, and other diverse markets. Our proprietary technologies and associated product offerings provide purification solutions to enable our customers to reduce certain contaminants and pollutants to meet the dates or periods after July 1, 2013.challenges of existing and potential regulations.
As of December 31, 20172020 and 2016,2019, we held equity interests of 42.50%42.5% and 50.00%50.0% in Tinuum Group, LLC ("Tinuum Group") and Tinuum Services, LLC ("Tinuum Services"), respectively, which are both unconsolidated entities, and each of their operationsboth contribute significantly impactedto our financial position and results of operations for the years ended December 31, 2017, 20162020 and 2015.2019. We account for Tinuum Group and Tinuum Services under the equity method of accounting. As described further below, both Tinuum Group and Tinuum Services expect to significantly wind down their operations by the end of 2021 and we believe our Refined Coal ("RC") business will substantially cease as of December 31, 2021.
On September 30, 2020, we and joint ventures,Cabot Norit Americas, Inc., ("Cabot") entered into a supply agreement (the "Supply Agreement") pursuant to which we are a leader in emissions controlagree to sell and deliver to Cabot, and Cabot agrees to purchase and accept from us, certain lignite-based activated carbon products ("EC"Furnace Products") technologies and associated equipment, chemicals and services. Our proprietary environmental technologies enable our customers to reduce emissions of mercury and other pollutants, maximize utilization levels and improve operating efficiencies to meet the challenges of existing and pending EC regulations.
We continue to believe the MATS regulation as well as certain state regulations createSupply Agreement will provide material incremental volume and capture lower operating cost efficiencies of our manufacturing plant located in Louisiana (the "Red River Plant"). As these incremental volumes come on-line and after our existing inventory balances are sold, we anticipate an increase in gross margins. Further, the Supply Agreement will expand our AC products to additional markets that are outside of coal-fired power generation.
On February 1, 2021, we and a subsidiary of Cabot Corporation ("Cabot Corporation") entered into a 5-year supply agreement ("EMEA Supply Agreement") to supply Cabot Corporation with lignite activated carbon products and other proprietary products used for mercury removal in utility and industrial coal-fired power plants in the EMEA market (as defined below). Cabot Corporation will be the exclusive and sole reseller of these products within Europe, Turkey, the Middle East and Africa ("EMEA"), and we will have a first right to provide the products to Cabot for our RCsale in the EMEA.
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Acquisition of Marshall Mine
Concurrently with the execution of the Supply Agreement, on September 30, 2020, we entered into an agreement to purchase (the "Mine Purchase Agreement") from Cabot 100% of the membership interests in Marshall Mine, LLC (the "Marshall Mine Acquisition") for a nominal cash purchase price. Marshall Mine, LLC owns a lignite mine located outside of Marshall, Texas (the "Marshall Mine"). Immediately after completion of the Mine Purchase Agreement, we independently determined to commence activities to shutter the Marshall Mine, and EC products.we will incur the associated reclamation costs.
In general, coal is a low cost, stable and reliable source of domestic energy that, unlike many other forms of energy, can be easily stored in large quantities. We believe coal is critical to ensuringconjunction with the U.S. has a secure and stable source of energy. With current environmental regulations, we believe it is unlikely that any new coal-fired electric generating units will be financed or constructed, which suggests that the average coal-fired electric generating unit age in 2040 will be 64 years old. However, following the retirement of manyexecution of the less efficient and generally smaller coal-fired electric generating units over the past few years,Supply Agreement and the announcement from the EPAMine Purchase Agreement, on October 10, 2017 of their proposalSeptember 30, 2020, we entered into a reclamation contract (the "Reclamation Contract") with a third party that provides a capped cost, subject to repeal the CPP, we believe thatcertain contingencies, in the amount of electricity generated from coal will remain relatively steadyapproximately $19.7 million plus an obligation to pay certain direct costs of approximately $3.6 million (collectively, the "Reclamation Costs") over the estimated reclamation period of 10 years. Under the terms of the Supply Agreement, Cabot is obligated to reimburse us for $10.2 million of Reclamation Costs (the "Reclamation Reimbursements"), which are payable semi-annually over 13 years and inclusive of interest. As of September 30, 2020, we recorded an asset retirement obligation related to the Reclamation Contract in the near term.amount of $21.3 million and a receivable related to the Reclamation Reimbursements in the amount of $9.7 million.
Markets
AC is uncertain,a specialized sorbent material that is used widely in a host of industrial and consumer applications to remove impurities, contaminants or pollutants from gas, water and other product or waste streams. AC is produced by activating carbonaceous raw materials, including wood, coal, nut shells, resins and petroleum pitch. Properties such as coal assetssurface area, pore volume and particle size can be specifically engineered to selectively target various contaminants to meet end-use application requirements. AC can come in several different forms that are important for the end-use application, including powdered activated carbon ("PAC"), granular activated carbon ("GAC"), pellets, honeycombs, blocks or cloths.
Key markets include removal of heavy metal pollutants from coal-fired electrical generation processes, treatment of drinking and waste waters, industrial acid gas and odor removal, automotive gasoline emission control, soil and ground water remediation, and food and beverage process and product purification.
The AC market has been and is expected to continue to age,be driven by increasing environmental regulations pertaining to water and air purification, especially in the mature and more industrialized areas of the world. Additionally, we expect a continued purchasing trend towards variable costbelieve environmental issues will continue to be the predominant force in the AC markets of rapidly developing countries.
We see opportunities to continue to pursue diverse markets for our purification products and integrated solutions with low capital expenditure requirements and away from large capital equipmentoutside of coal-fire power generation, including industrial application, water treatment plants and other fixed cost solutionsend markets.
Segments
Refined Coal
Tinuum Group provides reduction of mercury and nitrogen oxide ("NOX") emissions at select coal-fired power generators through the production and sale of RC that are less likelyqualifies for tax credits ("Section 45 tax credits") under the Internal Revenue Code ("IRC") Section 45 - Production Tax Credit ("IRC Section 45"). We benefit from Tinuum Group's production and sale of RC through our share of earnings from Tinuum Group's sales or leases of RC facilities to have costs recovered.
Products
Our patented M-45TM and placed into serviceM-45-PCTM technologies (collectively, the "M-45 Technology") are proprietary pre-combustion coal treatment technologies used to control emissions from circulating fluidized bed boilers and pulverized coal boilers, respectively.
Our patented CyCleanTM technology, a totalpre-combustion coal treatment process provides electric power generators the ability to enhance combustion and reduce emissions of 28nitrogen oxides ("NOX") and mercury from coals burned in cyclone boilers.
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Our patents related to the RC segment are not expected to have significant commercial application post the expected expiration of the Section 45 tax credit period.
Sales and Customers
Our RC segment derives its revenues from license royalties ("M-45 Royalties") earned under a licensing arrangement (the "M-45 License") with Tinuum Group for their use of our proprietary chemical technologies, M-45TM and M-45-PCTM (the "M-45 Technology") at their RC facilities designed to producetreat coal for the reduction of emissions of both NOX and mercury. For the year ended December 31, 2020, M-45 Royalties comprised 22% of our total consolidated revenues. M-45 Royalties are recognized based upon a percentage of the per-ton, pre-tax margin as defined in the M-45 License. We also derive substantial earnings in the RC for salesegment from our equity method investments in Tinuum Group and Tinuum Services. Both Tinuum Group and Tinuum Services expect to coal-fired electric generating units. significantly wind down their operations by the end of 2021 due to the planned expiration of the Section 45 tax credit period as of December 31, 2021, and the loss of equity earnings and M-45 Royalties will have a material adverse effect on our financial condition and consolidated operating results compared to historical periods beginning in 2022. Additional information related to major customers is disclosed in Note 21 of the Consolidated Financial Statements included in Item 8 of this Report.
Coal-fired electricelectricity generating units use RC as one of a portfolio of tools to help comply with MATSMercury and Air Toxics Standards ("MATS") and other environmental regulations. These RC facilities produce and sell RC that qualifies for Section 45 tax credits, including meeting the "placed in service" requirements (referred to as "placed in service"). The IRS has issued guidance regarding emissions reductions in the production of electricity by coal-fired electric generating units, including measurement and certification criteria necessary to qualify for the Section 45 tax credits. The ability to produce and sell RC which generatesand generate Section 45 tax credits, expires 10 years after each RC facility iswas placed in service, but not later than December 31, 2021. Two of Tinuum Group's RC facilities were placedreached their 10-year life in service in 20092019, and related Section 45 tax credits forearned from these facilities substantially expireexpired in December 2019. As of December 31, 2020, Tinuum Group has built and placed into service a total of 26 RC facilities that produce RC for sale to coal-fired electricity generating units, and which are still eligible to produce RC qualifying for Section 45 tax credits. The ability to generate Section 45 tax credits related to thethose remaining 26 RC facilities expireexpires in 2021.
Once an RC facility is in operation, Tinuum Group may lease or sell it to a tax equity investor, which we refer to as an "invested" RC facility. The tax equity investor subsequently operates the RC facility to produce and sell RC to a utility. It is financially advantageous for Tinuum Group to lease or sell an RC facility, as the tax equity investor assumes the operating expenses for the RC facility and paysremits to Tinuum Group either an up-front paymentpayments to purchase or lease payments to lease the RC facility. We benefit from equity income and cash distributions accruing through our investment infrom Tinuum Group. Tax equity investors may benefit from their investment in RC facilities through the realization of tax assets and credits from the production and sale of RC.
RC facilities that are producing and selling RC and have not been leased or sold, are referred to as "retained" RC facilities, whereby the RC is produced and sold by Tinuum Group and, as an owner in Tinuum Group, we benefit from the related Section 45 tax benefits. As of December 31, 20172020 and 2016, respectively,2019, the Section 45 tax credits were $6.91$7.301 and $6.81$7.173 per ton, respectively, of RC produced and sold to a utility. The value of the Section 45 tax credits is adjusted annually based on inflation adjustment factors published in the Federal Register. As of December 31, 2017,2020, we have received,earned substantial tax credits from certain retained RC facilities through our ownership in Tinuum Group, but have not been able to fully utilize substantial tax credits and benefits from certain retained RC facilities that previously produced and sold RC for the benefit of Tinuum Group.them. See Note 1218 to our Consolidated Financial Statements included in Item 8 - "Financial Statements and Supplementary Data" ("Item 8") of this Report for additional information regarding our net operating losses, tax credits and other deferred tax assets.
As of December 31, 2017,2020, Tinuum Group had 1723 invested RC facilities producing RC at utility sites and no retained RC facilities. The remaining 11 RC facilities, although placed in service, were either installed but not operating, awaiting site selection or in various other stages of contract negotiation or permanent installation.
Section 45 tax credit period, we do not believe that Tinuum will enter into additional contracts for invested facilities during 2021. As of December 31, 2017, our operations consisted of two reportable segments: (1) RC and (2) EC.
Group. A majority of Tinuum Group owns,Group's leases or sells facilities used in the production of RC. The RC facilities are located at coal-fired generation stations owned by regulated utilities, cooperatives, government agencies and wholesale power generators (collectively, "Generators"). The RC produced by the RC facilities is used by the Generators as fuel in the coal-fired boilers to produce electricity. For invested RC facilities, Tinuum Group collects lease income from the lessee if leased, or sales proceeds from the buyer if sold. We benefit from these transactions through our equity method investment in Tinuum Group. RC facilities that are producing RC, but that Tinuum Group has not leased or sold, are referred to as retained RC facilities. Tinuum Group produces and sells RC to Generatorsperiodically renewed and the ownersloss of Tinuum Group, including us, may benefitthese investors or material modification to the extent Section 45 tax creditslease terms of these facilities would have a significant adverse impact on Tinuum Group's financial position, results of operations and other tax benefits are realized from the operationcash flows, which in turn would have material adverse impact on our financial position, results of retained RC facilities.operations and cash flows.
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Tinuum Services operates and maintains RC facilities under operating and maintenance agreements with Tinuum Group and owners or lessees of RC facilities. Tinuum Group or theThe owners or lessees of the RC facilities pay Tinuum Services, subject to certain limitations, the costs of operating and maintaining the RC facilities plus various fees. Tinuum Services also arranges for the purchase and delivery of certain chemical additives under chemical agency agreements whichthat include the chemicals required for our CyCleanTM and M-45 Technologies that are necessary for the production of RC. The term of each chemical agency agreement runs concurrently with the respective RC facility's sale or leaseoperating and maintenance agreement.
The following table provides summary information related to the Company's investment in Tinuum Group and the related RC facilities as of December 31, 20172020 and tons of RC produced and sold for the year ended December 31, 2017:2020:
| Operating | Operating | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| # of RC Facilities | Not Operating | Invested | Retained | # of RC Facilities | Not Operating | Invested | Retained | |||||||||||||||||||||||||||||||||||||||||||||||||
| RC Facilities | 28 | 11 | 17 | (1) | — | RC Facilities | 26 | 3 | 23 | (1) | — | |||||||||||||||||||||||||||||||||||||||||||||
| RC tons produced and sold (000's) | 46,887 | 1,187 | RC tons produced and sold (000's) | 64,982 | 693 | |||||||||||||||||||||||||||||||||||||||||||||||||||
The following tables provide summary information of Tinuum Group's RC facilities as of December 31, 2019 and tons of RC produced and sold for the year ended December 31, 2019:
| Operating | ||||||||||||||||||||||||||||||||||||||||||||
| # of RC Facilities | Not Operating | Invested | Retained | |||||||||||||||||||||||||||||||||||||||||
| Facilities | 26 | 6 | 20 | (1) | — | |||||||||||||||||||||||||||||||||||||||
| RC tons produced and sold (000's) | 66,481 | 1,505 | ||||||||||||||||||||||||||||||||||||||||||
(1) One RC facility iswas approximately 50% invested with an independent third party. TheAs of December 31, 2019, the remaining approximate 50% iswas retained by Tinuum Group, the Company and another member of Tinuum Group. During the year ended December 31, 2020, Tinuum Group sold its interest in this RC facility.
Competition
We believe Chem-Mod, LLC and licensees of Chem-Mod's technology are Tinuum Group's principal competitors. Competition in the RC market is based primarily on price, the number of tons of coal burned at the coal-fired electric generating units where the RC facilities are operating and the Company.tax compliance facts associated with each RC facility.
The principal raw materials used in our RC products are comprised of non-bromine based halogens.
Operations
Tinuum RC facilities is includedare located at coal-fired power plants in Item 7 - "Management’s Discussionthe U.S. As of December 31, 2020, Tinuum Group and Analysis of Financial Condition and Results of Operations" ("Item 7") of this Report.Tinuum Services had operations in 16 states.
Given the sale of ACI and DSI equipment systems, chemical sales, consulting services and other sales related to the reduction of emissionsdownward trends in the coal-fired electricpower generation processmarket, the prices of competing power generation sources as well as our recognition of the unavailability of Section 45 tax credits for RC after 2021, during 2020 we executed on plans to expand our AC products and diversify into new markets. As a result, internal changes, including changes in operating structure and the electric utility industry. Demand for ACImethod in which the Chief Operating Decision Maker ("CODM") allocates resources, resulted in the change in reportable segments.
Products
Our AC and DSI system contracts historically was driven bychemical products are used to purify coal-fired utilities, industrials, water treatment plants, and other markets. For the purification of air and gases, one of the uses of AC is to reduce mercury emissions and other air contaminants, specifically at coal-fired power plant utilities that needed to comply with MATS and Maximum Achievable Control Technology Standards ("MACT"). As the deadline for these standards has passed, and customers have now implemented ACI, DSIgenerators and other largeindustrial companies. Most of the North American coal-fired power generators installed equipment systemsto control air pollutants, such as mercury, prior to or since the inception of the MATS. However, many power generators need consumable products on a componentrecurring basis to chemically and physically capture mercury and other contaminants. AC has widely been adopted as the best available technology to capture mercury due to product efficiency and
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effectiveness and currently accounts for over 50% of their strategies to comply with applicable regulations, the Company does not anticipate entering into future long-term fixed price contracts for ACI or DSI systems. However, we may continue to provide smaller scale equipment products that may be needed by power generation units as part of their ongoing operations.
For the purification of water, AC has been used in the treatment of drinking water, wastewater, contaminated soil and groundwater to increase our market share within the consumables market, both organicallyabsorb compounds causing unpleasant taste and through potential acquisition(s).
the country. We experienced higher demandsee opportunities to continue to pursue diverse markets for our M-ProveTechnologypurification products outside of coal-fired power generation, including industrial applications, water treatment plants and other diverse markets. We expect the Supply Agreement with Cabot, as discussed above, does help expand our AC products into some of those diverse end-markets.
Sales and Customers
Sales of consumables are primarily made by the Company’s employees to a range of customers, including coal-fired utilities, industrial companies, water treatment plants and other customers. Some of our sales of AC are made under annual requirements-based contracts or longer-term agreements. Revenues from our top three customers comprised approximately 28% of our consolidated consumables revenues for the year ended December 31, 2020, and the loss of any of these customers would have a material adverse effect on the APT operating results.
Competition
Our primary competitors for consumable products include Cabot (CBT), Calgon Carbon, a subsidiary of Tokyo Stock Exchange listed Kuraray Co., Ltd., Donau Carbon Company, Midwest Energy Emissions Corp. (MEEC) and Nalco Holding Company, a subsidiary of Ecolab Inc. (ECL).
Raw Materials
The principal raw material we use in 2017the manufacturing of AC is lignite coal, which is, in general, readily available and we believe that related revenues will continue to increase in 2018 as plants gain experience with their mercury control systems and begin to optimize their strategy to reduce operational impacts, especially as they relate to corrosion and wastewater. In October 2012, we were awarded the first in a family of patents designed to protect this technology in the U.S., and are pursuing similar patents in various other countries.
We purchase additives that are included in certain chemical products for resale to our customers through contracts with Tinuum Group, whichsuppliers. The manufacturing of these consumable products is effective for the durationdependent upon certain discrete additives that Section 45 tax credits are available. We believe these licenses will leverage Tinuum Group’s operating expertisesubject to price fluctuations and allow it the ability to provide and use either the CyClean or M-Prove Technologies to produce RC. Later in 2012, we made a technological advancement in the M-Prove Technology, which was incorporated in the M-45 License and allows it to be effective in “pulverized coal” (“PC”) boilers.supply constraints. In addition, the number of suppliers who provide the necessary additives needed to manufacture our products are limited. Supply agreements with these producers are generally renewed on an annual basis.
Operations
We own and operate the Red River plant that is located in Louisiana. We also lease a manufacturing and distribution facility located in Louisiana. Additionally, we have sales, product development and administrative operations located in Colorado.
Research and Development Activities
We have conducted research and development directed towards product development related to the royalty paymentsSupply Agreement and other markets. During the years ended December 31, 2020 and 2019, we receive from Tinuum Group, the useincurred expenses of M-Prove Technology in the production of RC provides valuable operating data$1.0 million and validates the effectiveness of the M-Prove Technology in a range of coal-fired boilers. We expect this information will help in our sales process for the M-Prove Technology. We are in the early stages of selling M-Prove into the EC market and a portion of our current revenues in this offering include application tests of M-Prove at customer sites.
| Years Ended December 31, | ||||||||||||
| (in thousands) | 2017 | 2016 | 2015 | |||||||||
| Revenues: | ||||||||||||
| Equipment sales | $ | 31,401 | $ | 46,949 | $ | 60,099 | ||||||
| Chemicals | 4,246 | 3,025 | 888 | |||||||||
| Consulting services and other | 45 | 648 | 1,752 | |||||||||
| Total revenues | $ | 35,692 | $ | 50,622 | $ | 62,739 | ||||||
Legislation and Environmental Regulations
Our products and services, as well as Tinuum Group’s production and sale of RC, are for the reduction of pollutants and other contaminants. To the extent that legislation and regulation limit the amount of pollutants and other contaminants permitted, the need for our products increases. Below is a summary of the primary legislation and regulation that affects the market for our products.
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U.S. Federal Mercury and Air Toxic Standards (“MATS”("MATS") Affecting Electric Utility Steam Generating Units
In April 2017, a review by the U.S. Court of Appeals for the D.C. Circuit of a 2016 “supplemental finding” associated with the cost benefit analysis of the MATS Rule conducted by the EPA was stayed at the request of the currentTrump Administration. The court case continues to be stayed indefinitely, butindefinitely. In May 2020, the EPA reconsidered and withdrew its 2016 "supplemental finding" associated with the cost benefit analysis of the MATS Rule. In this action, EPA found that it was not “appropriate and necessary” to regulate HAPs emissions from coal- and oil-fired EGUs. However, the EPA expressly stated that the reconsideration neither removed coal- and oil-fired EGUs from the list of sources that must comply with the MATS rule, nor rescinded the MATS Rule, which has remained continuously in effect. ADES joined a number of parties in seeking review of this EPA action before the U.S. Court of Appeals for the D.C. Circuit. President Biden identified EPA’s withdrawal of the supplemental finding as one of the actions to be reviewed for conformity with Biden Administration policy, and in February 2021, the Biden Administration moved that the pending judicial review of the supplemental finding withdrawal be held in abeyance. The Court has granted the administration’s motion, and this appeal also is stillnow in force until the issue is resolved.abeyance. The EPA has not issued any further official proceedings regarding MATS Rule.Rule remains in effect.
State Mercury and Air Toxics Regulations Affecting EGUs
In addition, certain states have their own mercury rules that are similar to or more stringent than the MATS Rule, and coal-fired electricelectricity generating units aroundin the countryU.S are subject to consent decrees that require the control of acid gases and particulate matter, in addition to mercury emissions. Twenty-three states
U.S. Federal Industrial Boiler MACT
In January 2013, the U.S. EPA issued the final set of adjustments to the MACT-based air toxics standards for industrial boilers, including mercury, particulate matter, and acid gas emission limits. Existing boilers typically had until January 31, 2017 to comply with the rule. On December 1, 2014, the EPA announced the reconsideration of the industrial boiler MACT ("IBMACT") and proposed amendments to the version published January 31, 2013, representing technical corrections and clarifications. The proposed amendments do not affect the applicability of the final rule.
The EPA estimated that approximately 600 coal-fired boilers will be affected by IBMACT, in industries such as pulp and paper. Our estimates, based on conversations with plant operators, suggest that most of the affected plants have mercury-specific rules that affect more than 283 generating units and more than 100 GW of generating capacity that were still operating ator will either shut down or switch fuels to natural gas to comply with the end of 2017.regulation.
Effluent Limitation Guidelines
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under several (though not all) of the proposed treatment options that the EPA is considering, selenium in the effluent guidelines, someFGD wastewater would be regulated. Some halogens may impact the effectiveness of biological wastewater treatment systems that are often used for the removal of selenium. We are evaluating whether the potential market opportunity supports our development of new products to help plants comply with these rules, as well as how these rules may affect our current product offerings.
Additional U.S. Legislation and Regulations
In July 2019, the EPA repealed the CPP and replaced it with the Affordable Clean Energy ("ACE") rule, which established guidelines for states to follow in developing plans to reduce GHG emissions from fossil fuel-fired power plants. ACE also requires states to prepare State Plans and prescribes that they must be based on heat rate improvements at affected plants. Numerous states, power companies, and non-governmental organizations challenged the ACE rule in the D.C. Circuit, which vacated the ACE rule on January 19, 2021.
International Regulations
There are various international regulations related to mercury control. In Canada, the Canada-Wide Standard ("CWS") was initially implemented in 2010, with increasingly stringent limits through 2020 and with varying mercury emissions caps for each province. China and Germany both have limits for mercury emissions that are less stringent than U.S. limits whichand are typically met using co-benefits from other installed air pollution control equipment designed to control other pollutants. In May 2017, the EU ratified the Minimata Convention on Mercury, triggering mercury control regulations with implementation starting in 2021. Specific emissions limits are currently being developed guided by the best available technologies reference ("BREF") document for limiting stack emissions and liquid effluents from industrial processes. The BREF conclusions for large coal-fired electricelectricity generating units were adopted by the European Commission in July 2017.
Based upon the existing and potential regulations, we believe the international market for mercury control products may expand in the coming years, and we areyears. We believe the EMEA Supply Agreement will help facilitate positioning our patent portfolio and existing commercial products accordinglyin the EMEA region.
Mining Environmental and Reclamation Matters
Federal, state and local authorities regulate the U.S. coal mining industry with respect to matters such as employee health and safety and the environment, including the protection of air quality, water quality, wetlands, special status species of plants and animals, land uses, cultural and historic properties and other environmental resources identified during the permitting process. Reclamation is required during production and after mining has been completed. Materials used and generated by mining operations must also be preparedmanaged according to applicable regulations and law.
The Surface Mining Control and Reclamation Act of 1977 ("SMCRA"), establishes mining, environmental protection, reclamation and closure standards for all aspects of surface mining. Mining operators must obtain SMCRA permits and permit renewals from the Office of Surface Mining (the "OSM"), or from the applicable state agency if an international market for our products develops.the state agency has obtained regulatory primacy. A state agency may achieve primacy if the state regulatory agency develops a mining regulatory program that is no less stringent than the federal mining regulatory program under SMCRA. The Five Forks Mine operates in Louisiana, which has achieved primacy and issues permits in lieu of the OSM. The Marshall Mine operates in Texas, which has achieved primacy and issues permits in lieu of the OSM.
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Patents
As of December 31, 2017,2020, we held 3871 U.S. patents and three15 international patents that were issued or allowed, 1224 additional U.S. provisional patents or applications that were pending, and ninefive international patent applications that were either pending or filed relating to different aspects of our technology. Our existing patents generally have terms of 20 years from the date of filing, with our next patents expiring beginning in 2021. We consider many of our patents and pending patents to be critical to the ongoing conduct of our business.
Seasonality of Activities
The sale of our chemicalconsumable products and RC facility operation levels depend on the operations of the coal-fired electric generatingpower generation units and industrial facilities to which the applicable chemicalsconsumables are provided and the location of the RC facilities, respectively. Coal-fired electricPower generation is weather dependent, with electricity and steam production varying in response to heating and cooling needs. Additionally, power generating units routinely schedule maintenance outages in the spring and/or fall depending upon the operation of the boilers. During the period in which an outage may occur, which may range from one week to over a month, no chemicalsconsumables are used orand no RC is produced andor sold, and our earnings and Tinuum's revenues canmay be correspondingly reduced. Additionally, power generation is
The sale of our AC products for water purification depends on demand from municipal water treatment facilities where these products are utilized. Depending on weather dependent, with electricityconditions and steam production varying in response to heating and cooling needs.
Safety, Health and Environment
Our operations are subject to numerous federal, state, and local laws, regulations, rules and ordinances relating to safety, health, and environmental matters ("SH&E Regulations"). These SH&E Regulations include requirements to maintain and comply with various environmental permits related to major customers is disclosed in Note 14the operation of many of our facilities, including mine health and safety laws required for continued operation of the Consolidated Financial Statements included in Item 8 of this Report.
| (in thousands) | ||||
| Backlog as of December 31, 2016 | $ | 49,468 | ||
| New contracts | 4,472 | |||
| Change order and claims to existing contracts, net | (76 | ) | ||
| Revenues recognized | (35,616 | ) | ||
| Backlog as of December 31, 2017 | $ | 18,248 | ||
Five Forks Mine.
Employees
As of December 31, 20172020, we employed 29136 personnel, all of which were full-time and part-time personnel; allemployees; 35 employees were employed at our offices in Colorado.Colorado and 101 employees were employed at our facilities in Louisiana.
Available Information
Our periodic and current reports are filed with the SECSecurities and Exchange Commission ("SEC') pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and are available free of charge within 24 hours after they are filed with, or furnished to, the SEC at the Company’s website at www.advancedemissionssolutions.com. The filings are also available through the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or by calling 1-800- SEC-0330.1-800-SEC-0330. Alternatively, these reports can be accessed at the SEC’s website at www.sec.gov. The information contained on our web sitewebsite shall not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended (the "Securities Act") or the Exchange Act.
Copies of Corporate Governance Documents
The following Company corporate governance documents are available free of charge at our website at www.advancedemissionssolutions.com and such information is available in print to any stockholder who requests it by contacting the Secretary of the Company at 640 Plaza Drive,8051 E. Maplewood Ave, Suite 270, Highlands Ranch210, Greenwood Village CO, 80129.80111.
•Certificate of Incorporation
•Bylaws
•Code of Ethics and Business Conduct
•Insider Trading Policy
•Whistleblower Protection Policy
•Board of Directors Responsibilities
•Audit Committee Charter
•Compensation Committee Charter
•Nominating and Governance Committee Charter
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Forward-Looking Statements Found in this Report
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that involve risks and uncertainties. In particular such forward-looking statements are found in this Part I and under the heading in Part II, Item 7 below. Words or phrases such as "anticipates," "believes," "expects," "intends," "plans," "estimates," "predicts," the negative expressions of such words, or similar expressions are used in this Report to identify forward-looking statements, and such forward-looking statements include, but are not limited to, statements or expectations regarding:
(a)the scheduled expiration of the IRC Section 45 tax credit period in 2021 and the resulting wind down of the business of, and loss of revenue from, Tinuum Group and Tinuum Services;
(b)the production and sale of RC by RC facilities through the remainder of 2021 that will qualify for Section 45 tax credits;
(c)expected growth or contraction in and potential size of our target APT markets, including the water purification, food and beverage and pharmaceuticals markets;
(d)expected supply and demand for our APT products and services;
(e)increasing competition in the APT market;
(f)future level of research and development activities;
(g)the effectiveness of our technologies and the benefits they provide;
(h)probability of any loss occurring with respect to certain guarantees made by Tinuum Group ("Party Guarantees");
(i)the timing of awards of, and work and related testing under, our contracts and agreements and their value;
(j)the timing and amounts of or changes in future revenues, royalties earned, backlog, funding for our business and projects, gross margins, expenses, earnings, tax rates, valuation allowance on our deferred tax assets, cash flows, license royalties, working capital, liquidity and other financial and accounting measures;
(k)the outcome of current legal proceedings;
(l)awards of patents designed to protect our proprietary technologies both in the U.S. and other countries;
(m)the adoption and scope of regulations to control certain chemicals in drinking water; and
(n)opportunities to effectively provide solutions to U.S. coal-related businesses to comply with regulations, improve efficiency, lower costs and maintain reliability.
Our expectations are based on certain assumptions, including without limitation, that:
(a)coal will continue to be a significant source of fuel for electrical generation in the U.S.;
(b)the IRS will allow the production and sale of RC to qualify for Section 45 tax credits through December 31, 2021;
(c)we will continue as a key supplier of consumables to the coal-fired power generation industry as it seeks to implement reduction of mercury emissions;
(d)we will be able to obtain adequate capital and personnel resources to meet our operating needs and to fund anticipated growth and our indemnity obligations;
(e)Cabot will continue to purchase Furnace Products from us under the Supply Agreement in the quantities specified;
(f)we will be able to establish and retain key business relationships with current and other companies;
(g)orders we anticipate receiving will be received;
(h)we will be able to formulate new consumables that will be useful to, and accepted by, the APT markets;
(i)we will be able to effectively compete against others;
(j)we will be able to meet any technical requirements of projects we undertake; and
(k)we will be able to utilize the Section 45 tax credits we have earned before they expire.
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The forward-looking statements included in this Report involve risks and uncertainties. Actual events or results could differ materially from those discussed in the forward-looking statements as a result of various factors including, but not limited to, timing of new and pending regulations and any legal challenges to or extensions of compliance dates of them; the U.S. government’s failure to promulgate regulations or appropriate funds that benefit our business; changes in laws and regulations, accounting rules, prices, economic conditions and market demand; impact of competition; availability, cost of and demand for alternative energy sources and other technologies; technical, start up and operational difficulties; failure of the RC facilities to produce RC; termination of or amendments to the contracts for sale or lease of RC facilities; decreases in the production of RC; our inability to commercialize our APT technologies on favorable terms; our inability to ramp up our operations to effectively address recent and expected growth in our APT business; loss of key personnel; potential claims from any terminated employees, customers or vendors; failure to satisfy performance guarantees; availability of materials and equipment for our businesses; intellectual property infringement claims from third parties; pending litigation; identification of additional material weaknesses or significant deficiencies; as well as other factors relating to our business, as described in our filings with the SEC, with particular emphasis on the risk factor disclosures contained in those filings and in Item 1A - "Risk Factors" of this Report. You are cautioned not to place undue reliance on the forward-looking statements made in this Report and to consult filings we have made and will make with the SEC for additional discussion concerning risks and uncertainties that may apply to our business and the ownership of our securities. The forward-looking statements contained in this Report are presented as of the date hereof, and we disclaim any duty to update such statements unless required by law to do so.
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Item 1A. Risk Factors
The following risks relate to our businessus as of the date this Report is filed with the SEC, or any alternative date specified.SEC. This list of risks is not intended to be exhaustive, but reflects what we believe are the material risks inherent in our business and the ownership of our securities as of the specified dates. A statement to the effect that the occurrence of a specified event may have a negative impact on our business, results of operations, profitability, financial condition, or the like, is intended to reflect the fact that such an event, if it occurs, would be likely to have a negative impact on your investment in the Company,ADES, but should not imply the likelihood of the occurrence of such specified event. The order in which the following risk factors are presented is not intended as an indication of the relative seriousness of any given risk.
The ability to generate Section 45 tax credits from existing operating RC facilities ends in 2021, which could eliminate the desire for investors to further lease RC facilities beyond this date, which wouldwill effectively eliminate Tinuum Group’s and Tinuum Services' income and cash flows from operations and significantly impact our financial condition and results of operations beyond 2021.
From an earnings standpoint, our RC segment has been the larger of our two segments, and the APT segment must grow substantially, either organically or acquisitively, in order to replace earnings from Tinuum Group that will substantially end during the 2020 to 2022-time frame.2021. There can be no assurance that we will be able to increase our ECAPT segment earnings during this time frame2021 or beyond to cover our current operating expenses or to provide a return to shareholders that is comparable to the return currently provided by our RC segment. If we are not able to cover operating expenses, we could be forced to raise additional capital, significantly reduce our operating expenses or take other alternative actions.
The recent change in income tax rates may make Section 45 production tax credits less attractive, which in turn could adversely affect our resultsability of operations or financial condition.
Tinuum Group has successfully sold and leased RC facilities to third party investors. The termination or cancellation of existing RC facility leases, or the cessation of the production of refined coal by existing facilities, in the near term, would likely have an adverse effect on our reported or future results of operations or financial condition.
Our RC businesses are joint ventures and managed under operating agreements where we do not have sole control of the decision makingdecision-making process, and we cannot mandate decisions or ensure outcomes.
We oversee our joint ventures under the terms of their respective operating agreements by participating in the following activities: (1) representation on the respective governing boards of directors, (2) regular oversight of financial and operational performance and controls and establishing audit and reporting requirements, (3) hiring of management personnel, (4) technical support of RC facilities, and (5) other regular and routine involvement with our joint venture partners. Notwithstanding this regular participation and oversight, our joint venture partners also participate in the management of these businesses and they may have business or economic interests that divert their attention from the joint venture, or they may prefer to operate the business, make decisions or invest resources in a manner that is contrary to our preferences. Since material business decisions must be made jointly with our joint venture partners, we cannot mandate decisions or ensure outcomes.
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The financial effects of Tinuum Group providing indemnification under performance guarantees of its RC facilities are largely unknown and could adversely affect our financial condition.
Tinuum Group indemnifies certain utilities and lessees of RC facilities for particular risks associated with the operations of those facilities. We have provided limited, joint and several guarantees of Tinuum Group’s obligations under those leases. Any substantial payments made under such guarantees could have a material adverse effect on our financial condition, results of operations and cash flows.
Presently, the GS Affiliates account for a substantial portion of earnings for Tinuum Group and any further lease renegotiation or termination by the GS Affiliates or any failure to continue to produce and sell RC at the GS Affiliates' RC facilities would have a material adverse effect on our business.
As of December 31, 2020, nineof Tinuum Group’s 26 RC facilities are leased to the GS Affiliates. Significant components of our total cash flows come from Tinuum Group's distributions relating to payments received under these leases. These leases may be terminated at the option of the lessee at periodic intervals or upon the occurrence of specified events. In September 2019, Tinuum Group restructured all of the existing leases with the GS Affiliates, which resulted in a decrease in net lease payments for 2020 and 2021. Additional restructurings have occurred on certain GS Affiliate leases in 2020 and 2021, which have also resulted in a decrease in net lease payments for 2020 and 2021. If the GS Affiliates further renegotiate or terminate one or more of their leases, or if the utilities where the RC facilities are installed materially reduce their use of RC, these events would have a material adverse effect on our business, results of operations or financial condition.
Risks relating to our business
The COVID-19 pandemic and ensuing economic downturn has affected, and is expected to continue to affect and pose risks to our business, results of operations, financial condition and cash flows; and other epidemics or outbreaks of infectious diseases may have a similar impact.
In March 2020, the World Health Organization ("WHO") declared the outbreak of COVID-19 a global pandemic, which continues to spread throughout the United States ("U.S.") and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. We have been designated by Cybersecurity and Infrastructure Security Agency ("CISA") of the Department of Homeland Security as a critical infrastructure supplier to the energy sector. This designation provides some latitude in continuing to conduct our business operations compared to companies in other industries and markets. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could continue to disrupt our business and operations, as well as that of our key customers, suppliers and other counterparties, for an indefinite period of time. To support the health and well-being of our employees, customers, partners and communities, a vast majority of our employees not directly involved in operating our plant have been working remotely since March 2020. In addition, many of our customers are working remotely, which may delay the timing of some orders and deliveries. The disruptions to our operations caused by COVID-19 have resulted, and are expected to continue to result in inefficiencies, delays and additional costs in our manufacturing, sales, marketing, and customer service efforts that we cannot fully mitigate through remote or other alternative work arrangements. Although such disruptions did not have a material adverse impact on our financial results for the first quarter of fiscal 2020, we incurred additional operating costs for the second quarter of fiscal year 2020, which included hazard pay, cleaning costs and sequestration costs related to our operating plant personnel. For 2021, we may see reduced demand for our products due to reduced interaction with our customers and our inability to target new customers and markets.
More generally, the pandemic raises the possibility of an extended global economic downturn and has caused volatility in financial markets, which could affect demand for our products and services and impact our results and financial condition even after the pandemic is contained and the shelter-in-place orders are lifted. For example, a decrease in orders in a given period could negatively affect our revenues in future periods, particularly if experienced on a sustained basis. We will continue to evaluate the nature and extent of the impact of COVID-19 to our business.
As previously disclosed, in April 2020, we entered into a loan (the "PPP Loan") in the amount of $3.3 million through a bank under the Paycheck Protection Program sponsored by the U.S. Small Business Administration ("SBA"). We entered into the PPP Loan to provide additional liquidity in light of our COVID-19-related higher employee costs. Proceeds from the PPP Loan were used to cover a portion of our existing payroll and related expenses, including sequestration pay for certain employees, as well as certain other operating costs as permitted under the Paycheck Protection Program. We expect that current cash and cash
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equivalent balances, inclusive of the PPP Loan, and cash flows that are generated from operations will be sufficient to meet our working capital needs and other capital and liquidity requirements for at least the next 12 months. However, if our business is more adversely impacted by COVID-19 than we expect, and our personnel costs remain higher than budgeted, our cash needs could increase.
Demand for our products and services depends significantly on environmental laws and regulations. Uncertainty as to the future of such laws and regulations, as well as changes to such laws and regulations, or granting of extensions of compliance deadlines has had, and will likely continue to have a material effect on our business.
A significant market driver for our existing products and services, and those planned in the future, are present and expected environmental laws and regulations, particularly those addressing the reduction of mercury and other emissions from coal-fired electricity generating units. If such laws and regulations are delayed, or are not enacted or are repealed or amended to be less strict, or include prolonged phase-in periods, or are not enforced, our business would be adversely affected by declining demand for such products and services. For example:
a.The implementation of environmental regulations regarding certain pollution control and permitting requirements has been delayed from time to time due to various lawsuits. The uncertainty created by litigation and reconsiderations of rule-making by the EPA has negatively impacted our business, results of operations and financial condition and will likely continue to do so.
b.To the extent federal, state, and local legislation mandating that electric power generating companies serving a state or region purchase a minimum amount of power from renewable energy sources such as wind, hydroelectric, solar and geothermal, and such amount lessens demand for electricity from coal-fired plants, the demand for our products and services would likely decrease.
Federal, state, and international laws or regulations addressing emissions from coal-fired electricity generating units, climate change or other actions to limit emissions, including public opposition to new coal-fired electricity generating units, has caused and could continue to cause electricity generators to transition from coal to other fuel and power sources, such as natural gas, nuclear, wind, hydroelectric and solar. The potential financial impact on us of future laws or regulations or public pressure will depend upon the degree to which electricity generators diminish their reliance on coal as a fuel source. That, in turn, will depend on a number of factors, including the specific requirements imposed by any such laws or regulations, the periods over which those laws or regulations are or will be phased in, the amount of public opposition, and the state and cost of commercial development of related technologies and processes. In addition, Public Utility Commissions ("PUCs") may not allow utilities to charge consumers for, and pass on the cost of, emissions control technologies without federal or state mandate. We cannot reasonably predict the impact that any such future laws or regulations or public opposition may have on our results of operations, financial condition or cash flows.
Action by the EPA related to MATS that decreases demand for our mercury removal products could have a material adverse effect on our APT segment.
Performance in our APT segment is largely dependent upon demand for mercury removal related product, which is largely impacted by the amount of coal-based power generation used in the U.S. and the continued regulation of utilities under MATS. In May 2020, the EPA reconsidered and withdrew its 2016 "supplemental finding" associated with the cost benefit analysis of the MATS Rule. In this action, the EPA found that it was not “appropriate and necessary” to regulate HAP emissions from coal- and oil-fired EGUs. However, the EPA expressly stated that the reconsideration neither removed coal- and oil-fired EGUs from the list of sources that must comply with the MATS rule, nor rescinded the MATS Rule, which has remained continuously in effect.ADES joined a number of parties in seeking review of this EPA action before the U.S. Court of Appeals for the D.C. Circuit.President Biden identified EPA’s withdrawal of the supplemental finding as one of the actions to be reviewed for conformity with Biden Administration policy, and in February 2021, the Biden Administration moved that the pending judicial review of the withdrawal be held in abeyance.The Court has granted the administration’s motion, and this appeal is also now in abeyance. The MATS Rule remains in effect.Any final action taken by the EPA related to MATS that decreases demand for our products for mercury removal will have a negative effect on the financial results of our PGI segment. The timing and content of the final reconsideration rule are unknown.
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The failure of tariffs placed on U.S. imports of Chinese activated carbon to adequately address the impact of low-priced imports from China could have a material adverse effect on the competitiveness and financial performance of our APT segment.
Our APT segment faces competition in the U.S. from low-priced imports of activated carbon products. If the volumes of these low-priced imports increase, especially if they are sold at less than fair value, our sales of competing products could decline, which could have an adverse effect on the earnings of our APT segment. In addition, sales of these low-priced imports may negatively impact our pricing. To limit these activities, regulators in the U.S. have enacted an anti-dumping duty order on steam activated carbon products from China. In 2018, the order was extended for an additional five years. The amount of anti-dumping duties collected on imports of steam activated carbon from China is reviewed annually by the U.S. Department of Commerce. To the extent the anti-dumping margins do not adequately address the degree to which imports are unfairly traded, the anti-dumping order may be less effective in reducing the volume of these low-priced activated carbon imports in the U.S., which could negatively affect demand and/or pricing for our AC products.
The market for chemicalsconsumables and other products that provide mercury emissionspollutant reduction is highly competitive and some of our competitors are significantly larger and more established than we are, which could adversely impede our growth opportunities and financial results.
We operate in a highly competitive marketplace. Our ability to compete successfully depends in part upon our ability to maintain a production cost advantage, competitive technological capabilities and to continue to identify, develop and commercialize new and innovative products for existing and future customers. We may face increased competition from existing or newly developed products offered by industry competitors or other companies whose products offer a similar functionality as our products and could be substituted for our products, which may negatively affect demand for our products. In addition, market competition could negatively impact our ability to maintain or raise prices or maintain or grow our market position.
We compete against certain significantly larger and/or more established companies in the market for chemicalsconsumables and other products that provide mercury emissions reduction, including Norit America, Inc.,water treatment and air purification.
Reduction of coal consumption by North American electricity power generators could result in less demand for our products and services. If utilities significantly reduce the number of coal-fired electricity generating units or the amount of coal burned, without a division of Cabot Corporation, Calgon Carbon, ADA Carbon Solutions and Nalco.
The amount of coal consumed for North American electricity power generation is affected by, among other things, (1) the location, availability, quality and price of alternative energy sources for power generation, such as natural gas, fuel oil, nuclear, hydroelectric, wind, biomass and solar power; and (2) technological developments, including those related to competing alternative energy sources.
Additionally, long-term changes in environmental regulation that threaten or preclude the use of coal or other fossil fuels as a primary fuel source for electricity production may result in the reduction or closure of a significant number of coal-fired electric generating units, and may adversely affect our business, financial condition and results of operations.
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The loss of, or significant reduction in, purchases by our largest customers could adversely affect our business, financial condition or results of operations.
During the year ended December 31, 2020, we derived approximately 61% of our chemicaltotal consumable revenues from our ten largest customers. Many of these customers purchase our products that we sell to comply with emissions regulations, and if coal-fired generation decreases, it may have a negative impact on the amount of consumable products purchased. If any of our ten largest customers, were to significantly reduce the quantities of consumables they purchase from us, it may cause delaysadversely affect our business, financial condition and results of operations.
Volatility in products delivered to customers, delayed revenues, lossprice and availability of customers and increased costs to us.raw materials can significantly impact our results of operations.
The manufacturing and processing of our chemicalconsumable products is dependent uponrequires significant amounts of raw materials. The price and availability of those raw materials can be impacted by factors beyond our control. Our consumable products, exclusive of lignite coal, use a variety of additives. Significant movements or volatility in the costs of additives could have an adverse effect on our working capital or results of operations. Additionally, we obtain certain discrete chemicals thatraw materials from selected key suppliers. While we have inventory of such raw materials, if any of these suppliers are proneunable to significantmeet their obligations with us on a timely basis or at an acceptable price, fluctuations and supply constraints. Further, there are a limited number of suppliers that provide ingredients neededwe may be forced to manufacture our proprietary M-Prove and RESPond chemicals that are used at a customer's coal-fired electric generating unit. This makes us vulnerableincur higher costs to potentialobtain the necessary raw materials.
We may attempt to offset the increase in raw material costs with price increases fromallowed in our suppliers that could negatively impact our gross margins ifcontractual relationships or through cost reduction efforts. If we are unable to fully offset the increased cost of raw materials through price increases, it could significantly impact our business, financial condition and results of operations.
We face operational risks inherent in mining operations and our mining operations have the potential to cause safety issues, including those that could result in significant personal injury.
We own the Five Forks Mine, a lignite coal mine located in Louisiana, which is operated for us by a third party. Mining operations by their nature involve a high level of uncertainty and are often affected by risks and hazards outside of our control. At the Five Forks Mine, the risks are primarily operational risks associated with the maintenance and operation of the heavy equipment required to dig and haul the lignite and risks relating to lower than expected lignite quality or recovery rates. The failure to adequately manage these risks could result in significant personal injury, loss of life, damage to mineral properties, production facilities or mining equipment, damage to the environment, delays in or reduced production and potential legal liabilities.
We also own the Marshall Mine, a former lignite coal mine located in Texas, which ceased mining operations in the third quarter of 2020 and is currently being reclaimed. Reclamation operations by their nature involve a high level of uncertainty and are often affected by risks and hazards outside of our control. At the Marshall Mine, the current risks are primarily operational risks associated with the maintenance and operation of the heavy equipment. The failure to adequately manage these risks could result in significant personal injury, loss of life, equipment, damage to the environment, delays in reclamation and potential legal liabilities.
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Our operations and products are subject to extensive safety, health and environmental requirements that could increase the selling price to our customers. If suppliers are unable to procure discrete chemicals neededcosts and/or impair our ability to manufacture and sell certain products.
Our ongoing operations are subject to extensive federal, state and local laws, regulations, rules and ordinances relating to safety, health and environmental matters, many of which provide for substantial monetary fines and criminal sanctions for violations. These include requirements to obtain and comply with various environmental-related permits for constructing any new facilities (or modifications to existing facilities) and operating all of our chemical products or elect notexisting facilities. In addition, our Red River Plant may become subject to continue to do business with us,greenhouse gas emission trading requirements under which we may be delayed in fulfilling customer ordersrequired to purchase emission credits if our emission levels exceed our allocations. Greenhouse gas regulatory programs that have been adopted, such as cap-and-trade programs, have not had a significant impact on our business to date. Costs of complying with regulations could increase, as concerns related to greenhouse gases and might not be ableclimate change continue to fill orders at all. Delays in our ability to fulfill customer orders emerge. The enactment of new environmental laws and regulations and/or the lossmore aggressive interpretation of any ofexisting requirements could require us to incur significant costs for compliance or capital improvements or limit our suppliers would have a material adverse effect on our EC business, results ofcurrent or planned operations, and financial condition.
We may not be successful in achieving our growth expectations related to new products in our existing or new markets.
We may not be successful in achieving our growth expectations from developing new products for our existing or new markets. Further, we cannot ensure costs incurred to develop new products will result in an increase in revenues. Additionally, our ability to bring new products to the market will depend on various factors, including, but not limited to, solving potential technical or manufacturing difficulties, competition and market acceptance, which may hinder the timeliness and cost to bring such products to production. These factors or delays could affect our future operating results.
We may make future acquisitions or form partnerships and joint ventures that may involve numerous risks that could impact our financial condition, results of operations and cash flows.
Our strategy may include expanding our scope of products and services organically or through selective acquisitions, investments or creating partnerships and joint ventures. We have acquired, and may selectively acquire, other businesses, product or service lines, assets or technologies that are complementary to our business. We may be unable to find or consummate future acquisitions at acceptable prices and terms, or we may be unable to integrate existing or future acquisitions effectively and efficiently, and may need to divest those acquisitions. We continually evaluate potential acquisition opportunities in the ordinary course of business. Acquisitions involve numerous risks, including among others:
•our evaluation of the synergies and/or long-term benefits of an acquired business;
•integration difficulties, including challenges and costs associated with implementing systems, processes and controls to comply with the requirements of a publicly-traded company;
•diverting management’s attention;
•litigation arising from acquisition activity;
•potential increased debt leverage;
•potential issuance of dilutive equity securities;
•entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;
•unanticipated costs and exposure to undisclosed or unforeseen liabilities or operating challenges;
•potential goodwill or other intangible asset impairments;
•potential loss of key employees and customers of the acquired businesses, product or service lines, assets or technologies;
•our ability to properly establish and maintain effective internal controls over an acquired company; and
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•increasing demands on our operational and IT systems.
The success of acquisitions of businesses, new technologies and products, or arrangements with third parties is not always predictable and we may not be successful in realizing our objectives as anticipated. The Senior Term Loan and our bank line of credit facility contain certain covenants that limit, or that may have the effect of limiting, among other things, the payment of dividends, acquisitions, capital expenditures, the sale of assets and incurring additional indebtedness.
Natural disasters could affect our operations and financial condition.results.
We operate facilities, including the Red River Plant and Five Forks Mine, that are exposed to natural hazards, such as floods, windstorms and hurricanes. Extreme weather events present physical risks that may become more frequent as a result of factors related to climate change. Such events could disrupt our supply of raw materials or otherwise affect production, transportation and delivery of our products or affect demand for our products.
In addition, extreme and unusually cold or hot temperatures throughout the U.S. could result in abnormally high loads on geographic electrical grids that could result in the failure of coal-fired power plants to produce electricity. If these plants were off-line for a significant period of time, the demand for our products could be less, which would impact our operations and financial results.
Information technology vulnerabilities and cyberattacks on our networks could have a material adverse impact on our business.
We rely on information technology ("IT") to manage and conduct business, both internally and externally, with our customers, suppliers and other third parties. Internet transactions involve the transmission and storage of data including, in certain instances, customer and supplier business information. Therefore, maintaining the security of computers and other electronic devices, computer networks and data storage resources is a critical issue for us and our customers and suppliers because security breaches could result in reduced or lost ability to carry on our business and loss of and/or unauthorized access to confidential information.
We have limited personnel and other resources to address information technology reliability and security of our computer networks and to respond to known security incidents to minimize potential adverse impact. Experienced hackers, cybercriminals and perpetrators of threats may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. These perpetrators of cyberattacks also may be able to develop and deploy viruses, worms, malware and other malicious software programs that attack our information and networks or otherwise exploit any security vulnerabilities of our information and networks.
Techniques used to obtain unauthorized access to or sabotage systems change frequently and often are not recognized until long after being launched against a target, and we may be unable to anticipate these techniques or to implement adequate preventative measures. A breach of our IT systems and security measures as a result of third party action, malware, employee error, malfeasance or otherwise could materially adversely impact our business and results of operations and expose us to customer, supplier and other third party liabilities.
Risks related to intellectual property
Failure to protect our intellectual property or infringement of our intellectual property by a third party could have an adverse impact on our financial condition.
We rely on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. Such means of protecting our proprietary rights may not be adequate because they provide only limited protection or such protection may be prohibitively expensive to enforce. We also enter into confidentiality and non-disclosure agreements with our employees, consultants and many of our customers and vendors, and generally control access to and distribution of our proprietary information. Notwithstanding these measures, a third party could copy or otherwise obtain and use our proprietary information without authorization. We cannot provide assurance that the steps we have taken will prevent misappropriation of our technology and intellectual property, which could negatively impact our business and financial condition. In addition, such actions by third parties could divert the attention of our management from the operation of our business.
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We may be subject to intellectual property infringement claims from third parties that are costly to defend and that may limit our ability to use the disputed technologies.
If our technologies are alleged to infringe the intellectual property rights of others, we may be forced to mount a defense to such claims, which may be expensive and time consuming. During the pendency of litigation, we could be prevented from continuing sales ofmarketing and selling existing products or services and from pursuing research, development or commercialization of new or complimentary products or services. Further, we may be required to obtain licenses to third-partythird party intellectual property or be forced to develop or obtain alternative technologies. Our failure to obtain a license to a technology that we may require, or the need to develop or obtain alternative technologies, could significantly and negatively affect our business.
We have agreed to indemnify licensees of our technologies (including Tinuum Group) and purchasers of our products, and we may enter into additional agreements with others under which we agree to indemnify and hold them harmless from losses they may incur as a result of the alleged infringement of third-party rights caused by the use of our technologies and products. Infringement claims, which are expensive and time-consuming to defend, could have a material adverse effect on our business, operating results and financial condition, even if we are successful in defending ourselves (and the indemnified parties) against them.
Our future success depends in part on our ongoing identification and development of intellectual property and our ability to invest in and deploy new products, services and technologies into the marketplace efficiently and cost effectively.
The process of identifying customer needs and developing and enhancing products, services and solutions for our business segments is complex, costly and uncertain. Any failure by us to identify and anticipate changing needs, emerging trends and new regulations could significantly harm our future market share and results of operations. Historically, our approach to technology development, implementation and commercialization of products has focused on quickly taking technology to full-scale testing and enhancing it under actual power plant operating conditions. We continue to review and adjust methods to deploy products, services and technologies to our customers. Our results are subject to risks
Risk related to our investments in new technologies, products and services, but if we are unable to develop and scale up new technologies, products or services to meet the needs of our customers, our business and financial results would be adversely affected.
An “ownership change”"ownership change" could limit our ability to utilize tax loss and credit carryforwards to offset future taxable income.
We have certain general business credit tax credits (“("Tax Attributes”Credits"). As of December 31, 2017,2020, we had $100.4$93.9 million of Tax Attributes,Credits, equaling 88%86% of our total gross deferred tax assets. Our ability to use these Tax AttributesCredits to offset future taxable income may be significantly limited if we experience an “ownership change”"ownership change" as discussed below.
In general, an “ownership change” for tax purposes"ownership change" under Sections 382 and 383 occurs if the percentage of stock owned by an entity’s 5% stockholders (as defined for tax purposes) increases by more than 50 percentage points over a rolling three-year period. An entity that experiences an ownership change generally will be subject to an annual limitation on its pre-ownership change tax loss and credit carryforwards equal to the equity value of the entity immediately before the ownership change, multiplied by the long-term, tax-exempt rate posted monthly by the IRS (subject to certain adjustments). The annual limitation would be increased each year to the extent that there is an unused limitation in a prior year. The limitation on our ability to utilize the Tax AttributesCredits arising from an ownership change under SectionSections 382 and 383 of the IRC would depend on the value of our equity at the time of any ownership change. If we were to experience an “ownership"ownership change,”" it is possible that a significant portion of our tax loss and credit carryforwards could expire before we would be able to use them to offset future taxable income.
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On April 8, 2020, the Board approved the Third Amendment to the TAPP ("Third Amendment") that amended the TAPP, as previously amended by the First and Second Amendments that were approved by the Board on April 6, 2018 and April 5, 2019, respectively. The Third Amendment amended the definition of "Final Expiration Date" under the TAPP to extend the duration of the TAPP and makes associated changes in connection therewith. At our 2020 annual meeting of stockholders, our stockholders approved the Third Amendment, thus the Final Expiration Date will be the close of business on December 31, 2021.
The TAPP, as amended, is intended to act as a deterrent to any person acquiring beneficial ownership of 4.99% or more of our outstanding common stock without the approval of the Board. Stockholders who beneficially owned 4.99% or more of our outstanding common stock upon execution of the Protection Plan will not trigger the Protection Plan so long as they do not acquire beneficial ownership of additional shares of Common Stock.our common stock. The Board may, in its sole discretion, also exempt any person from triggering the Protection Plan.
Risks relating to our common stock
Our stock price is subject to volatility.
The market price of our common stock has experienceexperienced substantial price volatility in the past and may continue to do so. The market price of our common stock may continue to be affected by numerous factors, including:
a.actual or anticipated fluctuations in our operating results and financial condition;
b.changes in laws or regulations and court rulings and trends in our industry;
c.The expiration of the Section 45 Tax credit period and/or Tinuum Group’s ability to lease or sell RC facilities;
d.announcements of sales awards;
e.changes in supply and demand of components and materials;
f.adoption of new tax regulations or accounting standards affecting our industry;
g.changes in financial estimates by securities analysts;
h.perceptions of the value of corporate transactions;
j.whether we are able and elect to pay cash dividendsdividends;
k.the numbercontinuation of repurchasing shares of common stock repurchased under stock repurchase programsprograms; and
l.the degree of trading liquidity in our common stock and general market conditions.
From January 1, 20162019 to December 31, 2017,2020, the closing price of our common stock ranged from $3.27$3.76 to $12.08$14.84 per share. In June 2017, we commenced a quarterly cash dividend program and paid out cash dividends in July, Septembereach succeeding quarter through March 31, 2020. In 2019 and December 2017. In May 2017,2020, we executed a modified Dutch Auction tender offerimplemented stock repurchase programs, and repurchased 1,370,891 sharesa total of our common stock. In December 2017, the Board authorized a stock repurchase program pursuant to which we may repurchase up to $10.0 million of our outstanding common stock from time to time. As of December 31, 2017, we had purchased 342,875553,958 shares of our common stock under this stock repurchase program.for the fiscal years 2019 and 2020 for cash of $6.0 million.
Stock price volatility over a given period may cause the average price at which we repurchase shares of our common stock to exceed the stock’s price at a given point in time. We believe our stock price should reflect expectations of future growth and profitability. Future dividends are subject to declaration by the Board, and under our current stock repurchase program, we are not obligated to acquire any specific number of shares. If we fail to meet expectations related to future growth, profitability, dividends, stock repurchases or other market expectations, our stock price may decline significantly, which could have a material adverse impact on our ability to obtain additional capital, investor confidence and employee retention, and could further reduce the liquidity of our common stock.
There can be no assurance that we will continue to declareresume declaring cash dividends at all or in any particular amounts.
We last paid a cash dividend on March 10, 2020. The Board first approved a $0.25 per share of common stock quarterly dividend in June 2017. During 2017,2019 and 2020, we declared three quarterly dividends in the aggregate amount of $15.8$23.2 million. We intend to continue to pay quarterly dividends subject to capital availability and periodic determinations by our Board that cash dividends are in the best interest of our stockholders and are in compliance with all laws and agreements applicable to the declaration and
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The payment of cashfuture dividends by us. Future dividends maywill be affected by, among other factors: compliance with debt covenants; our views on potential future capital requirements for investments in acquisitions; legal risks; stock repurchase programs; changes in federal and state income tax laws or corporate laws; changes to our business model; and our increased interest and principal payments for 2021 required by our outstanding indebtednessunder the terms of the Senior Term Loan; and any additional indebtedness that we may incur in the future.
Under a covenant provided for the Senior Term Loan that requires a minimum for expected future net cash flows from refined coal business, as of December 31, 2020, we are precluded from paying dividends or repurchasing shares of our common stock until such time that we repay all outstanding principal and accrued interest related to the Senior Term Loan, absent a modification to the Senior Term Loan.
Our dividend payments may change from time to time, and we cannot provide assurance that we will continue to declareresume paying dividends at all or in any particular amounts. A reduction in ourOur election to not resume dividend payments could have a negative effect on our stock price.
Our certificate of incorporation and bylaws contain provisions that may delay or prevent an otherwise beneficial takeover attempt of us.
Certain provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These include provisions that:
a.Limit the business at special meetings to the purpose stated in the notice of the meeting;
b.Authorize the issuance of “blank check”"blank check" preferred stock, which is preferred stock with voting or other rights or preferences that could impede a takeover attempt and that the Board can create and issue without prior stockholder approval;
c.Establish advance notice requirements for submitting nominations for election to the Board and for proposing matters that can be acted upon by stockholders at a meeting; and
d.Require the affirmative vote of the "disinterested" holders of a majority of our common stock to approve certain business combinations involving an "interested stockholder" or its affiliates, unless either minimum price criteria or procedural requirements are met, or the transaction is approved by a majority of our "continuing directors" (known as "fair price provisions").
These provisions, alone or in combination with each other, may discourage transactions involving actual or potential changes of control, including transactions that otherwise could involve payment of a premium over prevailing market prices to holders of our common stock, or could limit the ability of our stockholders to approve transactions that they may deem to be in their best interest.
An increased focus on environmental, social and governance factors by institutional investors may negatively impact our access to capital and the liquidity of our stock price.
Some institutional investors have recently adopted Environmental, Social and Governance ("ESG") investing guidelines that may prevent them from increasing or taking new stakes with companies with exposure to fossil fuels. Additional institutional investors may adopt similar ESG investment guidelines. This could limit the demand for owning our common stock and/or our access to capital. If such capital is desired, we cannot assure you that we will be able to obtain any additional equity or debt financing on terms that are acceptable to us. Given these emerging trends, liquidity in our common stock and our stock price may be negatively impacted.
We may require additional funding for our growth plans, and such funding may require us to issue additional shares of our common stock, resulting in a dilution of your investment.
We estimate our funding requirements in order to implement our growth plans. If the funding requirements required to implement growth plans should exceed these estimates significantly, or if we come across opportunities to grow through expansion plans which cannot be predicted at this time, andor our funds generated from our operations prove insufficient for such purposes, we may need to raise additional funds to meet these funding requirements.
These additional funds may be raised by issuing equity or debt securities or by borrowing from banks or other resources. We cannot assure you that we will be able to obtain any additional financing on terms that are acceptable to us, or at all. If we fail to
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obtain additional financing on terms that are acceptable to us, we willmay not be able to implement such plans fully. Such financing, even if obtained, may be accompanied by conditions that limit our ability to pay dividends or require us to seek lenders’ consent for payment of dividends, or restrict our freedom to operate our business by requiring lender’s consent for certain corporate actions. Further, if we raise additional funds through the issuance of new shares of our common stock, any shareholders who are unable or unwilling to participate in such an additional round of fund raising may suffer dilution of their investment.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease office space in Greenwood Village, Colorado for our corporate headquarters and primary laboratory comprising approximately 21,000 square feet.
We also lease or own manufacturing, storage and distribution facilities in Louisiana. Our manufacturing plant is located on approximately 59 acres and the remaining facilities are comprised of a total of approximately 310,000 square feet.
Mining
As of December 31, 2017,2020, we owned or controlled primarily through long-term leases approximately 4,570 acres of coal land for surface mining. Of those acres, approximately 1,980 acres are located in Natchitoches Parish, Louisiana ("Five Forks"). The majority of the Five Forks land is leased for mineral rights and right-of-use purposes that expire at varying dates over the next 30 years and contain options to renew. The remaining land is owned by us.
Under our current mining plans, substantially all leased reserves will be mined out within the period of existing leases or within the time period of assured lease approximately 9,785 square feetrenewals. Royalties are paid to lessors either as a fixed price per ton or as a percentage of office spacethe gross sales price of the mined coal. The majority of the significant leases are on a percentage royalty basis. In some cases, a payment is required either at the time of execution of the lease or in Highlands Ranch, Colorado,annual installments. In most cases, the prepaid royalty amount is applied to reduce future production royalties.
The remaining 2,590 acres (of 4,570 acres of coal land for surface mining) were acquired on September 30, 2020 and located in Harrison and Panola Counties, Texas. Mining operations on this land ceased in the third quarter of 2020.
In 2018, the SEC issued new rules for disclosures under this Item for mining registrants. These rules amend Item 102 of Regulation S-K under the Securities Act and the Exchange Act and rescind Industry Guide 7 to direct mining registrants, and create a new subpart of Regulation S-K, which serves as our corporate headquarters. This lease wascontains all of the requirements for property disclosures by mining registrants from and after January 1, 2021 (the "Mining Disclosures"). The Mining Disclosures became effective on February 25, 2019 and allow mining registrants a transition period through January 1, 2021 to comply. We elected to adopt the Mining Disclosures effective February 28, 201725, 2019 and expireswere subject to the requirements effective with the filing of our Annual Report on May 31, 2020.
Item 3. Legal Proceedings
From time to time, we are involved in various litigation matters arising in the ordinary course of our business. Information with respect to this item may be found in Note 4 “Commitments14 "Commitments and Contingencies”Contingencies" to the consolidated financial statements included in Item 8 of this Report.
Item 4. Mine Safety Disclosures
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Our Common Stock
As of December 31, 2017,2020, our common stock was quoted on the NASDAQ Global Market under the symbol "ADES." The table below sets forth the price range of our common stock for each quarter of 2017 and 2016, as well as dividends per common share declared in such quarter.
| High | Low | Dividends | ||||||||||
| 2017 | ||||||||||||
| First quarter | $ | 12.08 | $ | 9.19 | $ | — | ||||||
| Second quarter | 9.99 | 8.19 | 0.25 | |||||||||
| Third quarter | 11.21 | 9.02 | 0.25 | |||||||||
| Fourth quarter | 12.01 | 8.02 | 0.25 | |||||||||
| 2016 | ||||||||||||
| First quarter | $ | 8.18 | $ | 3.27 | $ | — | ||||||
| Second quarter | 8.19 | 6.20 | — | |||||||||
| Third quarter | 8.60 | 6.40 | — | |||||||||
| Fourth quarter | 9.89 | 7.53 | — | |||||||||
The trading volume for our common stock is relatively limited. There is no assurance that an active trading market will provide adequate liquidity for our existing stockholders or for persons who may acquire our common stock in the future.
Dividends
In the future, will be dependent upon earnings, financial condition and other factors considered relevant by the Board of Directors ("Board") and will be subject to limitations imposed under Delaware law.
Holders
The number of holders of record of our common stock as of March 2, 20181, 2021 was approximately 900. The approximate number of beneficial stockholders is estimated at 4,372.6,900.
Purchases of Equity Securities by the Company and Affiliated Purchasers
We maintain a program for us to repurchase up to $10.0$20.0 million of shares of our common stock under a stock repurchase program (the "Stock Repurchase Program") through open market transactions at prevailing market prices. ThisThe Board most recently approved an amendment to The Stock Repurchase Program in which it authorized an incremental $7.1 million, resulting in a total of $10.0 million allowable to repurchase. As of December 31, 2020, $7.0 million remained outstanding to repurchase shares of our common stock repurchase programunder the Stock Repurchase Program, which will remain in effect until December 31, 2018 unlessall amounts are utilized or it is otherwise modified by the Board. The following table summarizes the common stock repurchase activity for the three months ended December 31, 2017:
| Period | (a) Total number of shares (or units) purchased | (b) Average price paid per share (or unit) | (c) Total number of shares (or units) purchased as part of publicly announced programs | (d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs (in thousands) | ||||||||||
| October 1 to 31, 2017 | — | $ | — | — | $ | — | ||||||||
| November 1 to 30, 2017 | — | — | — | — | ||||||||||
| December 1 to 31, 2017 | 342,875 | 9.82 | 342,875 | 6,627 | ||||||||||
| Total | 342,875 | $ | 9.82 | 342,875 | $ | 6,627 | ||||||||
Item 6. Selected Financial Data
The following selected financial data are derived from the audited Consolidated Financial Statements for the years ended December 31, 2017, 2016, 2015, 2014 and 2013 and shouldinformation under this Item is not required to be read in conjunction with Item 1A, Item 7 and our Consolidated Financial Statements and the related notes included in Item 8 of this Report.provided by smaller reporting companies.
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| Years Ended December 31, | ||||||||||||||||||||
| (in thousands, except per share amounts) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| Statement of operations data: | ||||||||||||||||||||
| Revenues | $ | 35,692 | $ | 50,622 | $ | 62,739 | $ | 16,923 | $ | 13,286 | ||||||||||
| Earnings from equity method investments | $ | 53,843 | $ | 45,584 | $ | 8,921 | $ | 42,712 | $ | 15,502 | ||||||||||
| Royalties, related party | $ | 9,672 | $ | 6,125 | $ | 10,642 | $ | 6,410 | $ | 2,505 | ||||||||||
Income tax (benefit) expense (1) | $ | 24,152 | $ | (60,938 | ) | $ | 20 | $ | 296 | $ | 463 | |||||||||
Net income (loss) (2) (3) | $ | 27,873 | $ | 97,678 | $ | (30,141 | ) | $ | 1,387 | $ | (15,987 | ) | ||||||||
Net income (loss), per common share, basic (4) | $ | 1.30 | $ | 4.40 | $ | (1.37 | ) | $ | 0.06 | $ | (0.78 | ) | ||||||||
Net income (loss), per common share, diluted (4) (5) | $ | 1.29 | $ | 4.34 | $ | (1.37 | ) | $ | 0.06 | $ | (0.78 | ) | ||||||||
| Dividends declared per common share | $ | 0.75 | $ | — | $ | — | $ | — | $ | — | ||||||||||
| As of December 31, | ||||||||||||||||||||
| (in thousands) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| Balance sheet data: | ||||||||||||||||||||
| Total assets | $ | 82,618 | $ | 107,296 | $ | 60,775 | $ | 93,699 | $ | 73,524 | ||||||||||
| Total debt | $ | — | $ | — | $ | 28,025 | $ | 15,910 | $ | — | ||||||||||
| Stockholders’ equity (deficit) | $ | 73,455 | $ | 76,165 | $ | (24,978 | ) | $ | (697 | ) | $ | (6,167 | ) | |||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Our APT segment is filed by Advanced Emissionsmaterially operated through a wholly-owned subsidiary, Carbon Solutions, Inc. together with its consolidated subsidiaries (collectively, "ADES,"which we acquired on December 7, 2018 (the "Carbon Solutions Acquisition"). We sell consumable products that utilize AC and chemical based technologies to a broad range of customers, including coal-fired utilities, industrials, water treatment plants, and other diverse markets through the "Company," "we," "us," or "our" unless the context indicates otherwise).
See further discussion of our business included in Item 1 -"Business" ("Item 1") of this Report. Discussion regarding segment information is included withinin the discussion of our consolidated results under this Item 7. Additionally, discussion related to our reportable segments is included in Item 1 and Note 1319 of the Consolidated Financial Statements, which are included in Item 8 of this Report.
We believe there are opportunities to continue to pursue diverse markets for our purification products outside of coal-fire power generation, including industrial applications and water. The Supply Agreement with Cabot, as discussed below, will help our expansion of our AC products to those diverse end-markets and drive the Company’s post-Refined Coal future.
Drivers of Demand and Key Factors Affecting Profitability
Drivers of demand and key factors affecting our profitability differ by segment. In the RC segment, demand is driven primarily from investors who purchase or lease RC facilities that qualify under the Section 45 tax credit period, which is expected to expire no later than December 31, 2021. Operating results in RC are affected by: (1) the ability to sell, lease or operate RC facilities; (2) lease renegotiation or termination; and (3) changes in tonnage of RC due to changing coal-fired dispatch and electricity power generation sources. Earnings and distributions from our RC segment will substantially cease as of December 31, 2021 as a result the significant wind down of both Tinuum Group and Tinuum Services due to the expected expiration of the Section 45 tax credit period as of December 31, 2021.
In the APT segment, demand is driven primarily by consumables-based solutions for coal-fired power generation and other industrials, municipal water customers, and since September 30, 2020, demand from Cabot's customers through the Supply Agreement discussed below. Operating results in APT has been influenced by: (1) changes in our sales volumes; (2) changes in price and product mix; and (3) changes in coal-fired dispatch and electricity power generation sources.
Customer Supply Agreement
On September 30, 2020, we and Cabot entered into the Supply Agreement pursuant to which we agree to sell and deliver to Cabot, and Cabot agrees to purchase and accept from us, Furnace Products. The term of the Supply Agreement is for 15 years with 10-year renewal terms that are automatic unless either party provides three years prior notice of intention not to renew before the end of any term.
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In addition to the sale by us and purchase by Cabot of Furnace Products, we and Cabot have agreed to additional terms whereby Cabot will reimburse us for certain capital expenditures incurred by us that are necessary to manufacture the Furnace Products. Reimbursements will be in the form of revenues earned from capital expenditures incurred that will benefit both us and Cabot (referred to as "Shared Capital") and capital expenditures incurred that will benefit Cabot exclusively (referred to as "Specific Capital").
We believe the Supply Agreement will provide material incremental volume and capture lower operating cost efficiencies of our manufacturing plant. As these incremental volumes come on-line and after our existing inventory balances are sold, we anticipate an increase in gross margins. Further, we expect the Supply Agreement will expand our activated carbon products to diverse end markets that are outside of coal-fired power generation.
Acquisition of Marshall Mine
Concurrently with the execution of the Supply Agreement, on September 30, 2020, we entered into the Mine Purchase Agreement from Cabot 100% of the membership interests in Marshall Mine, LLC (the "Marshall Mine Acquisition") for a nominal purchase price. Marshall Mine, LLC owns a lignite mine located outside of Marshall, Texas (the "Marshall Mine"). We independently determined to immediately commence activities to shutter the Marshall Mine and will incur the associated reclamation costs.
In conjunction with the execution of the Supply Agreement and the Mine Purchase Agreement, on September 30, 2020, we entered into the Reclamation Contract with a third party that provides a capped cost, subject to certain contingencies, in the amount of approximately $19.7 million plus an obligation to pay certain direct costs of approximately $3.6 million (collectively, the "Reclamation Costs") over the estimated reclamation period of 10 years. We are accounting for this obligation as an asset retirement obligation under U.S. GAAP. Under the terms of the Supply Agreement, Cabot is obligated to reimburse us for $10.2 million of Reclamation Costs (the "Reclamation Reimbursements"), which are payable semi-annually over 13 years and inclusive of interest.
As the owner of the Marshall Mine, we were required to post a surety bond to ensure performance of our reclamation activities in the amount of $30.0 million under the Surety Agreement. For the obligations due under the Reclamation Contract, we were required to post collateral of $5.0 million dollars as of September 30, 2020 and to post an additional $5.0 million dollars as of March 31, 2021.
Settlement with Former Customer
On December 29, 2020, we and a former customer (the "Parties") reached a settlement (the "Settlement") on various litigation matters (the "Litigation Matters") that resulted in the former customer (the "Former Customer") agreeing to pay to us cash of $2.5 million (the "Settlement Amount"), which was received on January 27, 2021. This payment was in exchange for full dissolution of all claims and counterclaims that the two Parties have asserted or could have asserted against each other in the Litigation Matters, or which have arisen or may arise against each other but are presently unknown, arising out of or related to the Litigation Matters and related to any other of the Parties’ business dealings, conduct and/or transactions through the date of the Settlement, including all claims for damages, fees, costs, sanctions, or any other amounts due or to become due in connection with the foregoing. We applied the Settlement Amount cash proceeds to both an outstanding trade account receivable and note receivable due from the Former Customer and recognized the excess cash received as a gain from the Settlement of $1.1 million, which is included as a reduction of operating expenses for the year ended December 31, 2020, See further discussion under "Results of Operations" under this Item 7.
Impact of COVID-19
In March 2020, the WHO declared COVID-19 a global pandemic. We are designated by CISA of the Department of Homeland Security as a critical infrastructure supplier to the energy sector. Our operations have been deemed essential and, therefore, our facilities remain open and our employees employed. We follow the COVID-19 guidelines from the Centers for Disease Control concerning the health and safety of our personnel, including remote working for those that have the ability to do so, sequestered employees at our plant and other heath safety measures. Additionally, we have taken proactive and precautionary steps to ensure the safety of our employees, customers and suppliers, including frequent cleaning and disinfection of workspaces, property, plant and equipment, instituting social distancing measures and mandating remote working environments, where possible, for all employees. These measures have resulted in an increase in our personnel costs, operational inefficiencies and the incurrence of incremental costs to allow manufacturing operations to continue; while at the same time we have faced a general downturn in our sales and marketing efforts.
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The duration of these measures is unknown, may be extended and additional measures may be imposed. We cannot predict the long-term effects on our business, including our financial position or results of operations, if governmental restrictions or other such directives continue for a prolonged period of time and cause a material negative change in power generation demand, materially disrupt our supply chain, substantially increase our operating costs or limit our ability to serve existing customers and seek new customers.
In response to the COVID-19 outbreak, in March 2020, the federal government passed the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The CARES Act provided, among other things, the deferral of payroll tax payments for all payroll taxes incurred through December 31, 2020 and created the Paycheck Protection Program ("PPP"), which is sponsored and administered by the SBA. "). In June 2020, the Paycheck Protection Program Flexibility Act of 2020 (the "PPPFA") was signed into law and established the payment dates in the event that amounts borrowed under the PPP are not forgiven. See further discussion below of the loan made to us under the PPP under the section "PPP Loan" under this Item.
The Company elected to defer payments of payroll taxes for the periods allowed under the CARES Act and will repay 50% by December 31, 2021 and 50% by December 31, 2022. As of December 31, 2020, total payroll tax payments deferred under the CARES Act were $0.4 million.
For the year ended December 31, 2020, we incurred costs of $0.4 million related to sequestration of certain of our employees at our Red River plant. These costs included hazard pay, lodging and meal expenses for 30 days.
Our customers may also be impacted by COVID-19 pandemic as the utilization of energy has changed. We cannot predict the long-term impact on our customers and the subsequent impact on our business.
Components of Revenue, Expenses and Equity Method Investees
The following briefly describes the components of revenues and expenses as presented in the Consolidated StatementStatements of Operations. Descriptions of the revenue recognition policies are included in Note 1 to the Consolidated Financial Statements included in Item 8 of this Report.
Revenues and costscost of revenue
We sell AC and proprietary chemical blends toblend technologies for purification of air and water contaminants and other industries. Currently, our products mostly serve coal-fired utilities and other industrial boilers that allow the respective utilities to comply with the regulatory air emissions standards.standards as well as water treatment plants to remove contaminants from the water. Additionally, we sell AC to Cabot and its customers through the Supply Agreement. Revenue is generally recorded upon delivery of our product.
License royalties, related party
We recognize license royalties under the chemicals.
receive license royalties after 2021.
Other Operating Expenses
Payroll and benefits
Payroll and benefits costs include personnel related fringe benefits, sales and administrative staff labor costs and stock compensation expenses. Payroll and benefits costs exclude direct labor included in Cost of revenue.
Legal and professional fees
Legal and professional costs include external legal, audit and consulting expenses.
General and administrative
General and administrative costs include director fees and expenses, bad debt expense, research and development expense and other general costs of conducting business.
Research and development costs, net of reimbursements from cost-sharing
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arrangements, are charged to expense in the period incurred and development expense consists of research relating to continued product development for our ongoing businessare reported in the General and various other projects. Historically, we have entered into reimbursement contracts with the Department of Energy ("DOE") related to certain of our research and development contracts. These contracts were best-effort-basis contracts. We have often included and continued to include industry cost-share partners to offset the costs incurred in excess of funded amounts from the DOE or from our own research and development project budgets. We recognize amounts funded by the DOE and industry partners under research-and-development-cost-sharing arrangements as an offset to our aggregate research and development expenses within the Research and development, netadministrative line item in the Consolidated Statements of Operations included in Item 8 of this Report.Operations.
Depreciation, amortization, depletion and amortizationaccretion
Depreciation and amortization expense consists of depreciation expense related to property, plant and equipment and the amortization of long lived intangibles.
long-lived intangible assets. Depletion and accretion expense consists of depletion expense related to the depletion of mine development costs and the accretion of mine reclamation liabilities.
Other Income (Expense), net
Earnings from equity method investments
Earnings from equity method investments relates torepresent our share of earnings (losses) related to our equity method investments.
Other income (expense)
The remaining components of other income (expense) include interest income, interest expense and other miscellaneous items. For 2017, miscellaneous items included various items related to litigation accruals and settlement with a third-party service provider. For 2016, miscellaneous items included an adjustment to a litigation loss accrual and change in estimate related to royalty indemnity expense.
Results of Operations
For comparison purposes, the following tables set forth our results of operations for the years presented in the Consolidated Financial Statements included in Item 8 of this Report. The year-to-year comparison of financial results is not necessarily indicative of financial results that may be achieved in future years.
Year ended December 31, 20172020 Compared to Year ended December 31, 2016
2019
Total Revenue and Cost of Revenue
A summary of the components of revenues and cost of revenue for the years ended December 31, 20172020 and 20162019 is as follows:
| Years Ended December 31, | Change | |||||||||||||||||||||||||
(Amounts in thousands except percentages) | 2020 | 2019 | ($) | (%) | ||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Consumables | $ | 48,122 | $ | 53,187 | $ | (5,065) | (10) | % | ||||||||||||||||||
| License royalties, related party | 13,440 | 16,899 | (3,459) | (20) | % | |||||||||||||||||||||
| Other | 15 | — | 15 | * | ||||||||||||||||||||||
| Total revenues | $ | 61,577 | $ | 70,086 | $ | (8,509) | (12) | % | ||||||||||||||||||
| Consumables cost of revenue, exclusive of depreciation and amortization | $ | 45,176 | $ | 49,443 | $ | (4,267) | (9) | % | ||||||||||||||||||
| Other cost of revenue, exclusive of depreciation and amortization | (563) | — | (563) | * | ||||||||||||||||||||||
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| Years Ended December 31, | Change | ||||||||||||||
(Amounts in thousands except percentages) | 2017 | 2016 | ($) | (%) | |||||||||||
| Revenues: | |||||||||||||||
| Equipment sales | $ | 31,401 | $ | 46,949 | $ | (15,548 | ) | (33 | )% | ||||||
| Chemicals | 4,246 | 3,025 | 1,221 | 40 | % | ||||||||||
| Consulting services and other | 45 | 648 | (603 | ) | (93 | )% | |||||||||
| Total revenues | 35,692 | 50,622 | (14,930 | ) | (29 | )% | |||||||||
| Operating expenses: | |||||||||||||||
| Equipment sales cost of revenue, exclusive of depreciation and amortization | 28,438 | 37,741 | (9,303 | ) | (25 | )% | |||||||||
| Chemicals cost of revenue, exclusive of depreciation and amortization | 3,434 | 1,700 | 1,734 | 102 | % | ||||||||||
| Consulting services and other cost of revenue, exclusive of depreciation and amortization | 13 | 376 | (363 | ) | (97 | )% | |||||||||
Consumables revenue is affected by electricity demand, driven by seasonal weather and related power generation needs, as well as competitor prices related to alternative power generation sources such as natural gas. According to data provided by the EIA, for the year ended December 31, 2017 were lower than 2016 due to price compression in the EC consumables market and increased field testing of our M-ProveTM ("M-Prove") consumable, which results in significantly lower gross margins2020, power generation from coal-fired power dispatch was down approximately 19.0% compared to recurring sales. Futurethe corresponding period revenues are expected to be negatively impacted byin 2019. Additionally, there was a major customer who is not expected to purchase chemicals going forward, as well as the effectsdecrease in total power generation from all sources of continued price compressionapproximately 4.0% in 2020 compared to historical periods. As we continue to expand our customer base and attempt to increase the volume, size and duration of chemical sale arrangements, we are faced with the challenge of a competitive market with a long lead-to-sale cycle. Increasing future sales of chemicals is our primary focus of the EC business at this time.corresponding period in 2019.
For 2021, based on current market demandestimates and the expected benefits from the Supply Agreement, we believe that consumables revenue and volumes will be higher for 2021 compared to 2020. In addition to the Supply Agreement, the most significant drivers related to historical services provided,this expected volume increase are expected higher natural gas prices and the expansion of energy generation sources related to natural gas and renewables. For 2021, we doexpect to incur additional plant costs that were not believe this revenue component will be materialincurred in 2020 for the planned plant turnaround occurring in 2021.
License royalties, related party
License royalties decreased in 2020 compared to 2019 primarily due to a reduction in the near term.royalty rate per ton. This decrease was primarily attributable to higher depreciation recognized of approximately $1.7 million on all royalty bearing RC facilities as a result of a reduction in their estimated useful lives as determined by Tinuum Group in the second half of 2019. Further reducing the rate per ton was a decrease in net lease payments of approximately $1.3 million as a result of Tinuum Group restructuring RC facility contracted leases with its largest customer in the second half of 2019. As a result of higher depreciation and lower lease payments, we expect that the lower royalty rate per ton will continue in 2021.
Offsetting the year over year decrease in license royalties from a decrease in the royalty rate per ton, there was an increase year over year in tons of RC produced from RC produced using the M-45 Technology under the M-45 License, which increased from 47.3 million tons in 2019 to 49.4 million tons in 2020.
Other cost of revenue
For the year ended December 31, 2020, we recognized a credit of $0.6 million to Other cost of revenue for the reversal of an allowance, originally recorded as of December 31, 2016, on a trade account receivable due from the Former Customer. We also provide consulting services related to emissions regulations.recorded the reversal of this reserve based on our quarterly collectability review of financial assets that was performed as of December 31, 2020. See further discussion below of the reversal of an allowance on a note receivable due from the Former Customer in this section under the caption "General and administrative."
Additional information related to revenue concentrations and contributions by class and reportable segment can be found withinis included in the segment discussion below"Business Segments" section of this Item and in Note 1413 and Note 19 to the Consolidated Financial Statements included in Item 8 of this Report.
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Other Operating Expenses
A summary of the components of our operating expenses, exclusive of cost of revenue items (presented above), for the years ended December 31, 20172020 and 20162019 is as follows:
| Years Ended December 31, | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | 2020 | 2019 | ($) | (%) | ||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Payroll and benefits | $ | 10,621 | $ | 10,094 | $ | 527 | 5 | % | ||||||||||||||||||
| Legal and professional fees | 5,585 | 9,948 | (4,363) | (44) | % | |||||||||||||||||||||
| General and administrative | 8,228 | 8,123 | 105 | 1 | % | |||||||||||||||||||||
| Depreciation, amortization, depletion and accretion | 8,537 | 7,371 | 1,166 | 16 | % | |||||||||||||||||||||
| Impairment of long-lived assets | 26,103 | — | 26,103 | * | ||||||||||||||||||||||
| Gain on settlement | (1,129) | — | (1,129) | * | ||||||||||||||||||||||
| $ | 57,945 | $ | 35,536 | $ | 22,409 | 63 | % | |||||||||||||||||||
| Years Ended December 31, | Change | ||||||||||||||
| (in thousands, except percentages) | 2017 | 2016 | ($) | (%) | |||||||||||
| Operating expenses: | |||||||||||||||
| Payroll and benefits | $ | 7,669 | $ | 12,390 | $ | (4,721 | ) | (38 | )% | ||||||
| Rent and occupancy | 795 | 2,168 | (1,373 | ) | (63 | )% | |||||||||
| Legal and professional fees | 4,354 | 8,293 | (3,939 | ) | (47 | )% | |||||||||
| General and administrative | 3,857 | 3,721 | 136 | 4 | % | ||||||||||
| Research and development, net | 157 | (648 | ) | 805 | (124 | )% | |||||||||
| Depreciation and amortization | 789 | 979 | (190 | ) | (19 | )% | |||||||||
| $ | 17,621 | $ | 26,903 | $ | (9,282 | ) | (35 | )% | |||||||
Payroll and benefits
Payroll and benefits expenses decreased in 2017 compared to 2016increased year over year primarily due to severance related costs of $1.4 million incurred in 2020 associated with the resignation of an executive officer, offset by a decrease in averagesalaries related to our current headcount, which remained relatively consistent year over year.
Legal and professional fees
Legal and professional fees decreased year over year primarily due to decreased outsourced shared service costs, which included legal, general consulting and audit and accounting fees of approximately 40% during 2017. Additionally, restructuring$2.8 million, and a reduction in outsourced IT costs specific to the completion of the integration of Carbon Solutions of $1.5 million.
General and administrative
General and administrative expenses decreased duringincreased year over year primarily due to an increase in product development expenses of approximately $0.8 million related to the Supply Agreement, an increase in rent and occupancy of approximately $0.6 million relating to property taxes and office rent, and an increase in costs incurred due to the sequestration of certain of our employees at our Red River plant of approximately $0.4 million.
Offsetting these increases was the reversal of an allowance on a note receivable from the Former Customer (See "Other cost of revenue" discussion of above under this section) of $0.4 million, which we reversed as part of our financial asset collectability review performed as of December 31, 2020. See further discussion below in this section under the caption "Gain on settlement." Further reductions year over year included travel, as a preventative measure related to the COVID-19 pandemic, and recruiting fees.
Depreciation, amortization, depletion and accretion
Depreciation and amortization expense increased year over year primarily due to increased sales volumes in 2020 and lower absorption due to the drawdown of inventory, resulting in an increase of depreciation expense of $1.1 million. Further, the addition of leasehold improvements at our corporate headquarters in 2020 and the addition of accretion expense related to Marshall Mine contributed approximately $0.7 million of depreciation and amortization expense in 2020. Offsetting these increases was a decrease year over year in depreciation and amortization expense of approximately $0.6 million related to impaired property, plant and equipment assets as of June 30, 2020, which resulted in lower net book values of the impaired assets of June 30, 2020 and lower depreciation and amortization recorded in the second half of 2020.
Impairment of long-lived assets
As of June 30, 2020, we recorded an impairment charge of $26.1 million, which is included in the Statement of Operations for the year ended December 31, 2017 compared2020 and was solely attributable to 2016 in connection with the departure of certain executive officers and management's alignmentour APT segment. This impairment charge was necessitated by an analysis of the business with strategic objectives in 2016. During the years ended December 31, 2017 and December 31, 2016, we recorded net restructuring charges of zero and $1.6 million, respectively. In addition, bonuses and stock-based compensation decreased by $1.4 million in 2017 compared to 2016.
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Group"), which are comprised of our former corporate headquarters.manufacturing plant and related assets and our lignite mine assets, to their respective fair values.
Gain on settlement
Former Customer.
Other Income (Expense), net
A summary of the components of our other income (expense), net for the years ended December 31, 20172020 and 20162019 is as follows:
| Years Ended December 31, | Change | Years Ended December 31, | Change | ||||||||||||||||||||||||||||||||||||||
| (Amounts in thousands, except percentages) | 2017 | 2016 | ($) | (%) | (Amounts in thousands, except percentages) | 2020 | 2019 | ($) | (%) | ||||||||||||||||||||||||||||||||
| Other income (expense): | Other income (expense): | ||||||||||||||||||||||||||||||||||||||||
| Earnings from equity method investments | $ | 53,843 | $ | 45,584 | $ | 8,259 | 18 | % | Earnings from equity method investments | $ | 30,978 | $ | 69,176 | $ | (38,198) | (55) | % | ||||||||||||||||||||||||
| Royalties, related party | 9,672 | 6,125 | 3,547 | 58 | % | ||||||||||||||||||||||||||||||||||||
| Interest income | 54 | 268 | (214 | ) | (80 | )% | |||||||||||||||||||||||||||||||||||
| Interest expense | (3,024 | ) | (5,066 | ) | 2,042 | (40 | )% | Interest expense | (3,920) | (7,174) | 3,254 | (45) | % | ||||||||||||||||||||||||||||
| Litigation settlement and royalty indemnity expense, net | 3,269 | 3,464 | (195 | ) | (6 | )% | |||||||||||||||||||||||||||||||||||
| Other | 2,025 | 2,463 | (438 | ) | (18 | )% | Other | 132 | 427 | (295) | (69) | % | |||||||||||||||||||||||||||||
| Total other income | $ | 65,839 | $ | 52,838 | $ | 13,001 | 25 | % | Total other income | $ | 27,190 | $ | 62,429 | $ | (35,239) | (56) | % | ||||||||||||||||||||||||
Earnings infrom equity method investments
The following table presents the equity method earnings by investee for the years ended December 31, 20172020 and 2016:2019:
| Years Ended December 31, | Change | |||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2020 | 2019 | ($) | (%) | ||||||||||||||||||||||||||||||||||||||||
| Earnings from Tinuum Group | $ | 24,396 | $ | 60,286 | $ | (35,890) | (60) | % | ||||||||||||||||||||||||||||||||||||
| Earnings from Tinuum Services | 6,582 | 8,896 | (2,314) | (26) | % | |||||||||||||||||||||||||||||||||||||||
| Earnings (loss) from other | — | (6) | 6 | (100) | % | |||||||||||||||||||||||||||||||||||||||
| Earnings from equity method investments | $ | 30,978 | $ | 69,176 | $ | (38,198) | (55) | % | ||||||||||||||||||||||||||||||||||||
| Years Ended December 31, | Change | ||||||||||||||
| (in thousands) | 2017 | 2016 | ($) | (%) | |||||||||||
| Earnings from Tinuum Group | $ | 48,875 | $ | 41,650 | $ | 7,225 | 17 | % | |||||||
| Earnings from Tinuum Services | 4,963 | 4,491 | 472 | 11 | % | ||||||||||
| Earnings (losses) from other | 5 | (557 | ) | 562 | (101 | )% | |||||||||
| Earnings from equity method investments | $ | 53,843 | $ | 45,584 | $ | 8,259 | 18 | % | |||||||
| Description | Date(s) | Investment balance | ADES equity earnings (loss) | Cash distributions | Memorandum Account: Cash distributions and equity loss in (excess) of investment balance | |||||||||||||
| Total investment balance, equity earnings (loss) and cash distributions | 12/31/2015 | $ | — | $ | — | $ | — | $ | (3,263 | ) | ||||||||
ADES proportionate share of net income from Tinuum Group (1) | 2016 activity | 35,019 | 35,019 | — | — | |||||||||||||
| Recovery of cash distributions in excess of investment balance (prior to cash distributions) | 2016 activity | (3,263 | ) | (3,263 | ) | — | 3,263 | |||||||||||
| Cash distributions from Tinuum Group | 2016 activity | (41,650 | ) | — | 41,650 | — | ||||||||||||
| Adjustment for current year cash distributions in excess of investment balance | 2016 activity | 9,894 | 9,894 | — | (9,894 | ) | ||||||||||||
| Total investment balance, equity earnings (loss) and cash distributions | 12/31/2016 | — | 41,650 | 41,650 | (9,894 | ) | ||||||||||||
ADES proportionate share of net income from Tinuum Group (1) | 2017 activity | 46,551 | 46,551 | — | — | |||||||||||||
| Recovery of cash distributions in excess of investment balance (prior to cash distributions) | 2017 activity | (9,894 | ) | (9,894 | ) | — | 9,894 | |||||||||||
| Cash distributions from Tinuum Group | 2017 activity | (48,875 | ) | — | 48,875 | — | ||||||||||||
| Adjustment for current year cash distributions in excess of investment balance | 2017 activity | 12,218 | 12,218 | — | (12,218 | ) | ||||||||||||
| Total investment balance, equity earnings and cash distributions | 12/31/2017 | $ | — | $ | 48,875 | $ | 48,875 | $ | (12,218 | ) | ||||||||
"Business Segments" under this Item. Additional information related to equity method investments can be foundis included in Note 27 to the Consolidated Financial Statements included in Item 8 of this Report.
Tinuum Group's audited consolidated financial statements as of December 31, 2020 and 2019 and for the years then ended are included in Item 15 - "Exhibits and Financial Statement Schedules" ("Item 15") of this Report.
Tax Credits and Obligations
| Years Ended December 31, | ||||||||
| (in thousands) | 2017 | 2016 | ||||||
| Section 45 tax credits earned | $ | 3,496 | $ | 2,956 | ||||
In the hypothetical event of an ownership change, as defined by IRC Section 382, utilization of the GBC'sgeneral business credits ("GBC's") generated prior to the change would be subject to an annual limitation imposed by IRC Section 383 for GBC's. The results of a recent analysis indicated that we had not experienced an ownership change as of December 31, 2017,2020, as defined by IRC Section 382. Such analysis for the period from January 1, 20182021 through the date of this Report has not been completed.
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Therefore, it is possible that we experienced an ownership change between January 1, 20182021 and the date of this filing, thus subjecting our GBC
carryforwards to limitation. Should
Interest expense
Interest expense decreased year over year by $3.3 million primarily due to a limitation exist, however, we would likely bereduction in a position to substantially increase the limitation amount by virtuecoupon interest of our approximately $202$2.4 million deferred installment sale gain at Tinuum Group.
purposes.
The following table shows the balance of the tax liability that has been deferred and the applicable interest rate used to calculate 453A interest:
| As of December 31, | ||||||||||||||||||||
| (in thousands) | 2020 | 2019 | ||||||||||||||||||
Tax liability deferred on installment sales (1) | $ | 10,653 | $ | 20,783 | ||||||||||||||||
| Interest rate | 3.00 | % | 5.00 | % | ||||||||||||||||
| As of December 31, | ||||||||
| (in thousands) | 2017 | 2016 | ||||||
Tax liability deferred on installment sales (1) | $ | 70,739 | $ | 71,559 | ||||
| Interest rate | 4.00 | % | 4.00 | % | ||||
(1) Represents the approximate tax effected liability utilizing the federal tax rate in effect for the applicable years ended related to the deferred gain on installment sales (approximately $202$59.8 million as of December 31, 2017)2020).
Income tax expense (benefit)
For the year ended December 31, 2017, we recorded2020, our reported income tax expense of $24.2$6.5 million compared to andiffered from federal income tax benefit of $60.9$2.9 million, for 2016. Thecomputed by applying the U.S. statutory federal income tax expense forrate (the "Federal Rate") and state income tax benefit of $0.4 million, primarily due to the increase in the valuation allowance on our deferred income tax assets of $9.1 million.
For the year ended December 31, 2017 includes $5.8 million associated with the reduction of2019, our net deferred tax asset as of the Enactment Date of the Tax Act. Excluding the impact of the Tax Act,
Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against their deferred tax asset based on an assessment of the amount of the deferred tax asset that is “more likely than not” to be realized. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized.
We assess the valuation allowance recorded against deferred tax assets at each reporting date. The determination of whether a valuation allowance for deferred tax assets is appropriate requires the evaluation of positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available to realize the deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating taxes, we assess the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial, and regulatory guidance.
As of December 31, 2017,2020, we concluded it is more likely than not we will generate sufficient taxable income within the applicable NOLnet operating loss and tax credit carry-forwardcarryforward periods to realize $38.7$10.6 million of our net deferred tax assets, and therefore, reversed $0.5 million of the valuation allowance.assets. In reaching this conclusion, we most significantlyprimarily considered: (1) forecaststhe future reversal of continued future taxable income,existing temporary differences; and (2) changes to the current deferred tax asset ("DTA") balances related to the effects of the Tax Act, (3) changes to forecasts of future utilizationtaxable income. As of DTA's related to the effects of the Tax Act,December 31, 2020 and (4) impacts of additional RC invested facilities during 2017.
The ability to recognize the remaining deferred tax assets that continue to be subject to a valuation allowance is evaluated on a quarterly basis to determine if there are any significant events that would affect the ability to utilize those deferred tax assets.
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Our estimate of future taxable income is based on internal projections whichthat consider historical performance, multiple internal scenariosassumptions on future performance and assumptions, as well as external data that we believe is reasonable.data. If events are identified that affect our ability to utilize our deferred tax assets, or if additional deferred tax assets are generated, thewe update our analysis will be updated to determine if any adjustmentsan increase to the valuation allowance areis required. If actual results differ negatively from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the remaining valuation allowance may need to be increased. Such an increase could have a material adverse effect on our financial condition and results of operations. Conversely, better than expected results and continued positive results and trends could result in further releasesan decrease to the deferred tax valuation allowance, and any such decreases could have a material positive effect on our financial condition and results of operations.
See additional discussion in Note 1218 of the Consolidated Financial Statements included in Item 8 of this Report.
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