United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-Q
______________________________________
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x☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20202021
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¨☐ | TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-37822
______________________________________
Advanced Emissions Solutions, Inc.
(Exact name of registrant as specified in its charter)
______________________________________ | | | | | | | | |
Delaware | | 27-5472457 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
Delaware | | 27-5472457 |
(State or other jurisdiction of
incorporation or organization)
| | (I.R.S. Employer
Identification No.)
|
|
| | |
8051 E. Maplewood Ave, Suite 210, Greenwood Village, CO | | 80111 |
(Address of principal executive offices) | | (Zip Code) |
(720) 598-3500
(Registrant’s telephone number, including area code)
640 Plaza Drive, Suite 270, Highlands Ranch, CO 80129Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨☐
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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | o☐ | | Accelerated filer | | o☐ |
| | | |
Non-accelerated filer | | x☒ | | Smaller reporting company | | x☒ |
| | | |
| | | | Emerging growth company | | ¨☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨☐ No x☒
Securities registered pursuant to Section 12(b) of the Act:
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| | | | | | | | | | | | | |
Class | | Trading Symbol | | Name of each exchange on which registered |
Common stock, par value $0.001 per share | | ADES | | NASDAQ Global Market |
As of May 1, 2020,5, 2021, there were 18,493,04818,855,607 outstanding shares of Advanced Emissions Solutions, Inc. common stock, par value $0.001 per share.
INDEX
Part I. – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Advanced Emissions Solutions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
| | | | As of | | As of |
(in thousands, except share data) | | March 31, 2020 | | December 31, 2019 | (in thousands, except share data) | | March 31, 2021 | | December 31, 2020 |
ASSETS | | | | | ASSETS | | | | |
Current assets: | | | | | Current assets: | |
Cash and cash equivalents | | $ | 12,188 |
| | $ | 12,080 |
| |
Cash, cash equivalents and restricted cash | | Cash, cash equivalents and restricted cash | | $ | 42,234 | | | $ | 30,932 | |
Receivables, net | | 5,641 |
| | 7,430 |
| Receivables, net | | 10,349 | | | 13,125 | |
Receivables, related parties | | 3,045 |
| | 4,246 |
| Receivables, related parties | | 4,064 | | | 3,453 | |
Inventories, net | | 13,595 |
| | 15,460 |
| Inventories, net | | 8,040 | | | 9,882 | |
Prepaid expenses and other assets | | 7,605 |
| | 7,832 |
| Prepaid expenses and other assets | | 3,420 | | | 4,597 | |
| Total current assets | | 42,074 |
| | 47,048 |
| Total current assets | | 68,107 | | | 61,989 | |
Restricted cash, long-term | | 5,000 |
| | 5,000 |
| Restricted cash, long-term | | 10,000 | | | 5,000 | |
Property, plant and equipment, net of accumulated depreciation of $9,039 and $7,444, respectively | | 45,525 |
| | 44,001 |
| |
Property, plant and equipment, net of accumulated depreciation of $4,172 and $3,340, respectively | | Property, plant and equipment, net of accumulated depreciation of $4,172 and $3,340, respectively | | 29,777 | | | 29,433 | |
Intangible assets, net | | 3,973 |
| | 4,169 |
| Intangible assets, net | | 1,804 | | | 1,964 | |
Equity method investments | | 30,312 |
| | 39,155 |
| Equity method investments | | 2,753 | | | 7,692 | |
Deferred tax assets, net | | 13,307 |
| | 14,095 |
| Deferred tax assets, net | | 7,553 | | | 10,604 | |
Other long-term assets, net | | 19,992 |
| | 20,331 |
| Other long-term assets, net | | 31,576 | | | 29,989 | |
| Total Assets | | $ | 160,183 |
| | $ | 173,799 |
| Total Assets | | $ | 151,570 | | | $ | 146,671 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current liabilities: | | | | | Current liabilities: | |
Accounts payable | | $ | 8,458 |
| | $ | 8,046 |
| Accounts payable | | $ | 7,908 | | | $ | 7,849 | |
Accrued payroll and related liabilities | | 2,051 |
| | 3,024 |
| Accrued payroll and related liabilities | | 2,214 | | | 3,257 | |
Current portion of long-term debt | | 24,192 |
| | 23,932 |
| Current portion of long-term debt | | 9,913 | | | 18,441 | |
Other current liabilities | | 4,275 |
| | 4,311 |
| Other current liabilities | | 14,888 | | | 12,996 | |
| Total current liabilities | | 38,976 |
| | 39,313 |
| Total current liabilities | | 34,923 | | | 42,543 | |
Long-term debt, net of current portion | | 14,189 |
| | 20,434 |
| Long-term debt, net of current portion | | 4,287 | | | 5,445 | |
| Other long-term liabilities | | 5,238 |
| | 5,760 |
| Other long-term liabilities | | 13,208 | | | 13,473 | |
Total Liabilities | | 58,403 |
| | 65,507 |
| Total Liabilities | | 52,418 | | | 61,461 | |
Commitments and contingencies (Note 8) | |
| |
| |
Commitments and contingencies (Note 11) | | Commitments and contingencies (Note 11) | | 0 | | 0 |
Stockholders’ equity: | | | | | Stockholders’ equity: | |
Preferred stock: par value of $.001 per share, 50,000,000 shares authorized, none outstanding | | — |
| | — |
| |
Common stock: par value of $.001 per share, 100,000,000 shares authorized, 23,114,218 and 22,960,157 shares issued, and 18,496,072 and 18,362,624 shares outstanding at March 31, 2020 and December 31, 2019, respectively | | 23 |
| | 23 |
| |
Treasury stock, at cost: 4,618,146 and 4,597,533 shares as of March 31, 2020 and December 31, 2019, respectively | | (47,692 | ) | | (47,533 | ) | |
Preferred stock: par value of $.001 per share, 50,000,000 shares authorized, NaN outstanding | | Preferred stock: par value of $.001 per share, 50,000,000 shares authorized, NaN outstanding | | 0 | | | 0 | |
Common stock: par value of $.001 per share, 100,000,000 shares authorized, 23,481,648 and 23,141,284 shares issued, and 18,863,502 and 18,523,138 shares outstanding at March 31, 2021 and December 31, 2020, respectively | | Common stock: par value of $.001 per share, 100,000,000 shares authorized, 23,481,648 and 23,141,284 shares issued, and 18,863,502 and 18,523,138 shares outstanding at March 31, 2021 and December 31, 2020, respectively | | 23 | | | 23 | |
Treasury stock, at cost: 4,618,146 and 4,618,146 shares as of March 31, 2021 and December 31, 2020, respectively | | Treasury stock, at cost: 4,618,146 and 4,618,146 shares as of March 31, 2021 and December 31, 2020, respectively | | (47,692) | | | (47,692) | |
Additional paid-in capital | | 98,596 |
| | 98,466 |
| Additional paid-in capital | | 100,630 | | | 100,425 | |
Retained earnings | | 50,853 |
| | 57,336 |
| Retained earnings | | 46,191 | | | 32,454 | |
| Total stockholders’ equity | | 101,780 |
| | 108,292 |
| Total stockholders’ equity | | 99,152 | | | 85,210 | |
Total Liabilities and Stockholders’ Equity | | $ | 160,183 |
| | $ | 173,799 |
| Total Liabilities and Stockholders’ Equity | | $ | 151,570 | | | $ | 146,671 | |
See Notes to the Condensed Consolidated Financial Statements.
Advanced Emissions Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
(in thousands, except per share data) | | 2021 | | 2020 | | | | |
Revenues: | | | | | | | | |
Consumables | | $ | 17,031 | | | $ | 9,217 | | | | | |
License royalties, related party | | 4,066 | | | 3,046 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total revenues | | 21,097 | | | 12,263 | | | | | |
Operating expenses: | | | | | | | | |
Consumables cost of revenue, exclusive of depreciation and amortization | | 12,474 | | | 11,491 | | | | | |
| | | | | | | | |
| | | | | | | | |
Payroll and benefits | | 2,469 | | | 2,742 | | | | | |
| | | | | | | | |
Legal and professional fees | | 1,803 | | | 2,043 | | | | | |
General and administrative | | 1,915 | | | 2,331 | | | | | |
Depreciation, amortization, depletion and accretion | | 2,106 | | | 2,297 | | | | | |
| | | | | | | | |
| | | | | | | | |
Total operating expenses | | 20,767 | | | 20,904 | | | | | |
Operating income (loss) | | 330 | | | (8,641) | | | | | |
Other income (expense): | | | | | | | | |
Earnings from equity method investments | | 18,312 | | | 8,273 | | | | | |
| | | | | | | | |
Interest expense | | (837) | | | (1,210) | | | | | |
Other | | 421 | | | 43 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total other income | | 17,896 | | | 7,106 | | | | | |
Income (loss) before income tax expense | | 18,226 | | | (1,535) | | | | | |
Income tax expense | | 4,489 | | | 358 | | | | | |
Net income (loss) | | $ | 13,737 | | | $ | (1,893) | | | | | |
Earnings (loss) per common share (Note 1): | | | | | | | | |
Basic | | $ | 0.76 | | | $ | (0.11) | | | | | |
Diluted | | $ | 0.75 | | | $ | (0.11) | | | | | |
Weighted-average number of common shares outstanding: | | | | | | | | |
Basic | | 18,166 | | | 17,932 | | | | | |
Diluted | | 18,274 | | | 17,932 | | | | | |
|
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands, except per share data) | | 2020 |
| 2019 |
Revenues: | | | | |
Consumables | | $ | 9,217 |
| | $ | 15,109 |
|
License royalties, related party | | 3,046 |
| | 4,220 |
|
Total revenues | | 12,263 |
|
| 19,329 |
|
Operating expenses: | | | | |
Consumables cost of revenue, exclusive of depreciation and amortization | | 11,491 |
| | 14,108 |
|
Payroll and benefits | | 2,742 |
|
| 2,556 |
|
Legal and professional fees | | 2,043 |
|
| 2,204 |
|
General and administrative | | 2,331 |
|
| 1,914 |
|
Depreciation, amortization, depletion and accretion | | 2,297 |
|
| 2,102 |
|
Total operating expenses |
| 20,904 |
|
| 22,884 |
|
Operating loss |
| (8,641 | ) |
| (3,555 | ) |
Other income (expense): |
| | | |
Earnings from equity method investments |
| 8,273 |
|
| 21,690 |
|
Interest expense |
| (1,210 | ) |
| (2,104 | ) |
Other |
| 43 |
|
| 70 |
|
Total other income |
| 7,106 |
|
| 19,656 |
|
(Loss) income before income tax expense |
| (1,535 | ) |
| 16,101 |
|
Income tax expense |
| 358 |
|
| 1,699 |
|
Net (loss) income |
| $ | (1,893 | ) |
| $ | 14,402 |
|
(Loss) earnings per common share (Note 1): |
| | | |
Basic |
| $ | (0.11 | ) |
| $ | 0.79 |
|
Diluted |
| $ | (0.11 | ) |
| $ | 0.78 |
|
Weighted-average number of common shares outstanding: |
| | | |
Basic |
| 17,932 |
|
| 18,268 |
|
Diluted |
| 17,932 |
|
| 18,433 |
|
See Notes to the Condensed Consolidated Financial Statements.
Advanced Emissions Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Treasury Stock | | | | | | | | |
(Amounts in thousands, except share data) | | Shares | | Amount | | Shares | | Amount | | Additional Paid-in Capital | | Retained Earnings | | | | Total Stockholders’ Equity |
January 1, 2021 | | 23,141,284 | | | $ | 23 | | | (4,618,146) | | | $ | (47,692) | | | $ | 100,425 | | | $ | 32,454 | | | | | $ | 85,210 | |
| | | | | | | | | | | | | | | | |
Stock-based compensation | | 381,339 | | | — | | | — | | | — | | | 421 | | | — | | | | | 421 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Repurchase of common shares to satisfy minimum tax withholdings | | (40,975) | | | — | | | — | | | — | | | (216) | | | — | | | | | (216) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net income | | — | | | — | | | — | | | — | | | — | | | 13,737 | | | | | 13,737 | |
Balances, March 31, 2021 | | 23,481,648 | | | $ | 23 | | | (4,618,146) | | | $ | (47,692) | | | $ | 100,630 | | | $ | 46,191 | | | | | $ | 99,152 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | Common Stock | | Treasury Stock | | | | | | | | Common Stock | | Treasury Stock | |
(Amounts in thousands, except share data) | | Shares | | Amount | | Shares | | Amount | | Additional Paid-in Capital | | Retained Earnings | | Total Stockholders’ Equity | (Amounts in thousands, except share data) | | Shares | | Amount | | Shares | | Amount | | Additional Paid-in Capital | | Retained Earnings | | Total Stockholders’ Equity |
Balances, January 1, 2020 | | 22,960,157 |
| | $ | 23 |
| | (4,597,533 | ) | | $ | (47,533 | ) | | $ | 98,466 |
| | $ | 57,336 |
| | $ | 108,292 |
| Balances, January 1, 2020 | | 22,960,157 | | | $ | 23 | | | (4,597,533) | | | $ | (47,533) | | | $ | 98,466 | | | $ | 57,336 | | | $ | 108,292 | |
| Stock-based compensation | | 218,259 |
| | — |
| | — |
| | — |
| | 506 |
| | — |
| | 506 |
| Stock-based compensation | | 218,259 | | | — | | | — | | | — | | | 506 | | | — | | | 506 | |
| Repurchase of common shares to satisfy minimum tax withholdings | | (64,198 | ) | | — |
| | — |
| | — |
| | (376 | ) | | — |
| | (376 | ) | Repurchase of common shares to satisfy minimum tax withholdings | | (64,198) | | | — | | | — | | | — | | | (376) | | | — | | | (376) | |
Cash dividends declared on common stock | | — |
| | — |
| | — |
| | — |
| | — |
| | (4,590 | ) | | (4,590 | ) | Cash dividends declared on common stock | | — | | | — | | | — | | | — | | | — | | | (4,590) | | | (4,590) | |
Repurchase of common shares | | — |
| | — |
| | (20,613 | ) | | (159 | ) | | — |
| | — |
| | (159 | ) | Repurchase of common shares | | — | | | — | | | (20,613) | | | (159) | | | — | | | — | | | (159) | |
Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,893 | ) | | (1,893 | ) | Net loss | | — | | | — | | | — | | | — | | | — | | | (1,893) | | | (1,893) | |
Balances, March 31, 2020 | | 23,114,218 |
| | $ | 23 |
| | (4,618,146 | ) | | $ | (47,692 | ) | | $ | 98,596 |
| | $ | 50,853 |
| | $ | 101,780 |
| Balances, March 31, 2020 | | 23,114,218 | | | $ | 23 | | | (4,618,146) | | | $ | (47,692) | | | $ | 98,596 | | | $ | 50,853 | | | $ | 101,780 | |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Treasury Stock | | | | | | |
(Amounts in thousands, except share data) | | Shares | | Amount | | Shares | | Amount | | Additional Paid-in Capital | | Retained Earnings | | Total Stockholders’ Equity |
Balances, January 1, 2019 | | 22,640,677 |
| | $ | 23 |
| | (4,064,188 | ) | | $ | (41,740 | ) | | $ | 96,750 |
| | $ | 12,914 |
| | $ | 67,947 |
|
Cumulative effect of change in accounting principle (Note 1) | | — |
| | — |
| | — |
| | — |
| | — |
| | 28,817 |
| | 28,817 |
|
Stock-based compensation | | 218,465 |
| | — |
| | — |
| | — |
| | 317 |
| | — |
| | 317 |
|
Repurchase of common shares to satisfy minimum tax withholdings | | (22,707 | ) | | — |
| | — |
| | — |
| | (245 | ) | | — |
| | (245 | ) |
Cash dividends declared on common stock | | — |
| | — |
| | — |
| | — |
| | — |
| | (4,629 | ) | | (4,629 | ) |
Repurchase of common shares | | — |
| | — |
| | (63,876 | ) | | (693 | ) | | — |
| | — |
| | (693 | ) |
Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 14,402 |
| | 14,402 |
|
Balances, March 31, 2019 | | 22,836,435 |
| | $ | 23 |
| | (4,128,064 | ) | | $ | (42,433 | ) | | $ | 96,822 |
| | $ | 51,504 |
| | $ | 105,916 |
|
See Notes to the Condensed Consolidated Financial Statements.
Advanced Emissions Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | Three Months Ended March 31, | | | Three Months Ended March 31, |
(in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 |
Cash flows from operating activities | | | | | Cash flows from operating activities | | | | |
Net (loss) income |
| $ | (1,893 | ) |
| $ | 14,402 |
| |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
| | | | |
Deferred income tax expense (benefit) |
| 788 |
|
| (677 | ) | |
Net income (loss) | | Net income (loss) | | $ | 13,737 | | | $ | (1,893) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
Deferred income tax expense | | Deferred income tax expense | | 3,051 | | | 788 | |
Depreciation, amortization, depletion and accretion |
| 2,297 |
|
| 2,102 |
| Depreciation, amortization, depletion and accretion | | 2,106 | | | 2,297 | |
| Operating lease expense | | 774 |
| | 775 |
| Operating lease expense | | 379 | | | 774 | |
Amortization of debt discount and debt issuance costs |
| 354 |
|
| 381 |
| Amortization of debt discount and debt issuance costs | | 591 | | | 354 | |
| Stock-based compensation expense |
| 506 |
|
| 317 |
| Stock-based compensation expense | | 421 | | | 506 | |
Earnings from equity method investments |
| (8,273 | ) |
| (21,690 | ) | Earnings from equity method investments | | (18,312) | | | (8,273) | |
Other non-cash items, net |
| — |
|
| 75 |
| Other non-cash items, net | | (273) | | | 0 | |
| Changes in operating assets and liabilities: |
| |
|
|
| Changes in operating assets and liabilities: | |
Receivables and related party receivables |
| 2,988 |
|
| 1,845 |
| Receivables and related party receivables | | 2,147 | | | 2,988 | |
| Prepaid expenses and other assets |
| 226 |
|
| 80 |
| Prepaid expenses and other assets | | 1,178 | | | 226 | |
| Inventories, net |
| 1,572 |
|
| 3,262 |
| Inventories, net | | 1,548 | | | 1,572 | |
| Other long-term assets, net |
| (89 | ) |
| (2 | ) | Other long-term assets, net | | (1,817) | | | (89) | |
Accounts payable |
| (1,477 | ) |
| (789 | ) | Accounts payable | | (706) | | | (1,477) | |
Accrued payroll and related liabilities |
| (973 | ) | | (4,500 | ) | Accrued payroll and related liabilities | | (1,043) | | | (973) | |
Other current liabilities |
| (23 | ) |
| 2,154 |
| Other current liabilities | | 1,305 | | | (23) | |
| Operating lease liabilities |
| (634 | ) |
| (804 | ) | Operating lease liabilities | | 2,104 | | | (634) | |
Other long-term liabilities |
| (22 | ) |
| (401 | ) | Other long-term liabilities | | (2,113) | | | (22) | |
Distributions from equity method investees, return on investment |
| 17,116 |
|
| 19,488 |
| Distributions from equity method investees, return on investment | | 17,644 | | | 17,116 | |
| Net cash provided by operating activities |
| 13,237 |
|
| 16,018 |
| Net cash provided by operating activities | | 21,947 | | | 13,237 | |
Cash flows from investing activities |
| | | | Cash flows from investing activities | | | | |
Acquisition of business |
| — |
|
| (661 | ) | |
Distributions from equity method investees in excess of cumulative earnings | | Distributions from equity method investees in excess of cumulative earnings | | 5,607 | | | 0 | |
| Acquisition of property, plant, equipment, and intangible assets, net |
| (1,289 | ) |
| (1,087 | ) | Acquisition of property, plant, equipment, and intangible assets, net | | (1,321) | | | (1,289) | |
Mine development costs |
| (447 | ) |
| (324 | ) | Mine development costs | | (248) | | | (447) | |
Net cash used in investing activities |
| (1,736 | ) |
| (2,072 | ) | |
Proceeds from sale of property and equipment | | Proceeds from sale of property and equipment | | 848 | | | 0 | |
| Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | | 4,886 | | | (1,736) | |
Cash flows from financing activities |
| | | | Cash flows from financing activities | | | | |
Principal payments on term loan | | (6,000 | ) | | (6,000 | ) | Principal payments on term loan | | (10,000) | | | (6,000) | |
Principal payments on finance lease obligations | | (340 | ) | | (344 | ) | Principal payments on finance lease obligations | | (315) | | | (340) | |
Dividends paid | | (4,518 | ) | | (4,571 | ) | Dividends paid | | 0 | | | (4,518) | |
Repurchase of common shares |
| (159 | ) |
| (693 | ) | Repurchase of common shares | | 0 | | | (159) | |
Repurchase of common shares to satisfy tax withholdings |
| (376 | ) |
| (245 | ) | Repurchase of common shares to satisfy tax withholdings | | (216) | | | (376) | |
| Net cash used in financing activities |
| (11,393 | ) |
| (11,853 | ) | Net cash used in financing activities | | (10,531) | | | (11,393) | |
Increase in Cash and Cash Equivalents and Restricted Cash |
| 108 |
|
| 2,093 |
| Increase in Cash and Cash Equivalents and Restricted Cash | | 16,302 | | | 108 | |
Cash and Cash Equivalents and Restricted Cash, beginning of period |
| 17,080 |
|
| 23,772 |
| Cash and Cash Equivalents and Restricted Cash, beginning of period | | 35,932 | | | 17,080 | |
Cash and Cash Equivalents and Restricted Cash, end of period |
| $ | 17,188 |
|
| $ | 25,865 |
| Cash and Cash Equivalents and Restricted Cash, end of period | | $ | 52,234 | | | $ | 17,188 | |
| Supplemental disclosure of non-cash investing and financing activities: |
| | | | Supplemental disclosure of non-cash investing and financing activities: | | | | |
| Acquisition of property, plant and equipment through accounts payable |
| $ | 1,890 |
|
| $ | — |
| Acquisition of property, plant and equipment through accounts payable | | $ | 765 | | | $ | 1,890 | |
| Dividends payable | | $ | 105 |
| | $ | 58 |
| Dividends payable | | $ | 0 | | | $ | 105 | |
See Notes to the Condensed Consolidated Financial Statements.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
Nature of Operations
Advanced Emissions Solutions, Inc. ("ADES" or the "Company") is a Delaware corporation with its principal office located in Greenwood Village, Colorado and operations located in Louisiana. The Company is principally engaged in the sale of consumable mercury controlair and water treatment options including powdered activated carbon ("PAC"AC") and chemical technologies. The Company's proprietary environmental technologies in the power generation and industrialadvanced purification technologies ("PGI"APT") market enable customers to reduce emissions ofair and water contaminants, including mercury and other pollutants, to maximize utilization levels and improve operating efficiencies to meet the challenges of existing and pending emission control regulations. Through its wholly-owned subsidiary, ADA Carbon Solutions, LLC ("Carbon Solutions"), which the Company acquired on December 7, 2018 (the "Acquisition Date"), the Company manufactures and sells activated carbon ("AC")AC used in mercuryto capture and remove contaminants for the coal-fired power plant,plants and industrial and water treatment markets. Carbon Solutions also owns an associated lignite mine that supplies the primary raw material for manufacturing PAC.AC.
Through its equity ownership in Tinuum Group, LLC ("Tinuum Group") and Tinuum Services, LLC ("Tinuum Services"), both of which are unconsolidated entities, the Company generates substantial earnings. Tinuum Group provides reduction of mercury and nitrogen oxide ("NOx") emissions at select coal-fired power generators through the production and sale of refined coal ("RC") that qualifies for tax credits under the Internal Revenue Code ("IRC") Section 45 - Production Tax Credit ("Section 45 tax credits"). The Company also earns royalties for technologies that are licensed to Tinuum Group and used at certain RC facilities to enhance combustion and reduced emissions of NOx and mercury from coal burned to generate electrical power. Tinuum Services operates and maintains the RC facilities under operating and maintenance agreements with Tinuum Group and owners or lessees of the RC facilities. Both Tinuum Group and Tinuum Services expect to significantly wind down their operations by the end of 2021 due to the expected expiration of the Section 45 tax credit period as of December 31, 2021.
The Company’s sales occur principally throughoutin the United States. See Note 1316 for additional information regarding the Company's operating segments.
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements of ADES are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") and with Article 10 of Regulation S-X of the Securities and Exchange Commission. In compliance with those instructions, certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
The unaudited Condensed Consolidated Financial Statements of ADES in this quarterly report ("Quarterly Report") are presented on a consolidated basis and include ADES and its wholly-owned subsidiaries (collectively, the "Company"). Also included within the unaudited Condensed Consolidated Financial Statements are the Company's unconsolidated equity investments: Tinuum Group, Tinuum Services and GWN Manager, LLC ("GWN Manager"), which are accounted for under the equity method of accounting, and Highview Enterprises Limited (the "Highview Investment"), which is accounted for in accordance with U.S. GAAP applicable to equity investments that do not qualify for the equity method of accounting.
Results of operations and cash flows for the interim periods are not necessarily indicative of the results that may be expected for the entire year. All significant intercompany transactions and accounts were eliminated in consolidation for all periods presented in this Quarterly Report.
In the opinion of management, these Condensed Consolidated Financial Statements include all normal and recurring adjustments considered necessary for a fair presentation of the results of operations, financial position, stockholders' equity and cash flows for the interim periods presented. These Condensed Consolidated Financial Statements of ADES should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 20192020 (the "2019"2020 Form 10-K"). Significant accounting policies disclosed therein have not changed, except as described later in Note 1.changed.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed using the two-class method, which is an earnings allocation formula that determines earnings (loss) per share for common stock and any participating securities according to dividend and participating rights in undistributed earnings (losses). The Company's restricted stock awards ("RSA's") granted prior to December 31, 2016 contain non-forfeitable rights to dividends or dividend equivalents and are deemed to be participating securities. RSA's granted subsequent to December 31, 2016 do not contain non-forfeitable rights to dividends and are not deemed to be participating securities.
Under the two-class method, net income for the period is allocated between common stockholders and the holders of the participating securities based on the weighted-average number of common shares outstanding during the period, excluding
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
participating, unvested RSA's ("common shares"), and the weighted-average number of participating, unvested RSA's outstanding during the period, respectively. The allocated, undistributed income for the period is then divided by the weighted-average number of common shares and participating, unvested RSA's outstanding during the period to arrive at basic earnings per common share and participating security for the period, respectively. Pursuant to U.S. GAAP, the Company has elected not to separately present basic or diluted earnings per share attributable to participating securities in the Condensed Consolidated Statements of Operations.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Diluted earnings (loss) per share is computed in a manner consistent with that of basic earnings per share, while considering other potentially dilutive securities. Potentially dilutive securities consist of both unvested, participating and non-participating RSA's,restricted stock awards ("RSA's"), as well as outstanding options to purchase common stock ("Stock Options") and contingent performance stock units ("PSU's") (collectively, "Potential dilutive shares"). The dilutive effect, if any, for non-participating RSA's, Stock Options and PSU's is determined using the greater of dilution as calculated under the treasury stock method or the two-class method. Potential dilutive shares are excluded from diluted earnings per share when their effect is anti-dilutive. When there is a net loss for a period, all Potential dilutive shares are anti-dilutive and are excluded from the calculation of diluted loss per share for that period.
The following table sets forth the calculations of basic and diluted earnings (loss) per share: | | | | Three Months Ended March 31, | | | Three Months Ended March 31, | |
(in thousands, except per share amounts) | | 2020 | | 2019 | (in thousands, except per share amounts) | | 2021 | | 2020 | |
Net (loss) income | | $ | (1,893 | ) | | $ | 14,402 |
| |
Net income (loss) | | Net income (loss) | | $ | 13,737 | | | $ | (1,893) | | |
Less: Dividends and undistributed income (loss) allocated to participating securities | | (2 | ) | | 20 |
| Less: Dividends and undistributed income (loss) allocated to participating securities | | 0 | | | (2) | | |
(Loss) income attributable to common stockholders | | $ | (1,891 | ) | | $ | 14,382 |
| |
Income (loss) attributable to common stockholders | | Income (loss) attributable to common stockholders | | $ | 13,737 | | | $ | (1,891) | | |
| | | | | | | | | |
Basic weighted-average common shares outstanding | | 17,932 |
| | 18,268 |
| Basic weighted-average common shares outstanding | | 18,166 | | | 17,932 | | |
Add: dilutive effect of equity instruments | | — |
| | 165 |
| Add: dilutive effect of equity instruments | | 108 | | | 0 | | |
| Diluted weighted-average shares outstanding | | 17,932 |
| | 18,433 |
| Diluted weighted-average shares outstanding | | 18,274 | | | 17,932 | | |
(Loss) earnings per share - basic | | $ | (0.11 | ) | | $ | 0.79 |
| |
(Loss) earnings per share - diluted | | $ | (0.11 | ) | | $ | 0.78 |
| |
Earnings (loss) per share - basic | | Earnings (loss) per share - basic | | $ | 0.76 | | | $ | (0.11) | | |
Earnings (loss) per share - diluted | | Earnings (loss) per share - diluted | | $ | 0.75 | | | $ | (0.11) | | |
For the three months ended March 31, 2021 and 2020, and 2019, RSA's, PSU's and Stock Options convertible to 0.70.1 million and 0.30.7 million shares of common stock, respectively, were outstanding but were not included in the computation of diluted net income (loss) per share because the effect would have been anti-dilutive.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. There have been no changes in the Company’s critical accounting estimates from those that were disclosed in the 20192020 Form 10-K. Actual results could differ from these estimates.
Due to the coronavirus (COVID-19)("COVID-19") pandemic, there has been uncertainty and disruption in the global economy and financial markets. Additionally, due to COVID-19, overall power generation and coal-fired power demand may change, which could also have a material adverse effect on the Company. The Company is not aware of any specific event or circumstance due to COVID-19 that would require an update to its estimateestimates or judgments or a revision of the carrying values of its assets or liabilities through the date of this Quarterly Report. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.
Risks and Uncertainties
The Company’s earnings are significantly affected by equity earnings it receives from Tinuum Group. As of March 31, 2020,2021, Tinuum Group has 2023 invested RC facilities of which 89 are leased to a single customer. A majorityBoth Tinuum Group and Tinuum Services expect to significantly wind down their operations by the end of these leases are periodically renewed. Further,2021 due to the ability to generateexpected expiration of the Section 45 tax credits related to Tinuum's RC facilities expires incredit period as of December 31, 2021. The loss of the single customer by Tinuum Group orGroup's customers, reduction in revenue streams as a result of lease renewals and the expiration of Section 45 tax credits wouldwill have a significant adverse impact on Tinuum Group's financial position, results of operations and cash flows, which in turn wouldwill have a material adverse impact on the Company’s financial position, results of operations and cash flows.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company's revenues, sales volumes, earnings and cash flows are significantly affected by prices of competing power generation sources such as natural gas and renewable energy. Low natural gas prices make it a competitive alternative to coal-fired power generation and therefore, coal consumption may be reduced, which reduces the demand for our products. In addition, coal consumption and demand for our products is also affected by the demand for electricity, which is higher in the warmer and colder months of the year. Abnormal temperatures during the summer and winter months may significantly reduce coal consumption and thus the demand for the Company's products.
Reclassifications
Certain balances have been reclassified from the prior year to conform to the current year presentation. Such reclassifications had no effect on the Company’s results of operations or financial position in any of the periods presented.
New Accounting Standards
Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes ("ASU 2019-12"). The amendments in ASU 2019-12 simplify various aspects related to accounting for income taxes by removing certain exceptions contained in Topic 740 and also clarify and amends existing guidance in Topic 740 to improve consistent application. ASU 2019-12 is effective for public business entities beginning after December 15, 2020, including interim periods within those years, and early adoption is permitted. The Company adopted ASU 2019-12 effective January 1, 2021 and it did not have a material impact on the Company's financial statements and disclosures.
Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in ASU 2016-13 replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for "smaller reporting companies" (as defined by the Securities and Exchange Commission) for fiscal years beginning after December 15, 2022, including interim periods within those years, and must be adopted under a modified retrospective method approach. Entities may adopt ASU 2016-13 earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those years. The Company is currently evaluating the provisions of this guidance and assessing itsthe impact on the Company'sits financial statements and disclosures and does not believe this standard will have a material impact on the Company'sits financial statements and disclosures.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes ("ASU 2019-12"). The amendments in ASU 2019-12 simplify various aspects related to accounting for income taxes by removing certain exceptions contained in Topic 740 and also clarifies and amends existing guidance in Topic 740 to improve consistent application. ASU 2019-12 is effective for public business entities beginning after December 15, 2020, including interim periods within those years, and early adoption is permitted. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures and does not believe this standard will have a material impact on the Company's financial statements and disclosures.
Note 2 - AcquisitionCustomer Supply Agreement
As described in Note 1, on the Acquisition Date,On September 30, 2020, the Company completedand Cabot Norit Americas, Inc., ("Cabot") entered into a supply agreement (the "Supply Agreement") pursuant to which the acquisition of Carbon Solutions (the "Carbon Solutions Acquisition") for a totalCompany agreed to sell and deliver to Cabot, and Cabot agreed to purchase price of $75.0 million (the "Purchase Price"and accept from the Company certain lignite-based AC products ("Furnace Products"). The fair valueterm of the purchase consideration totaled $66.5 million, less cash acquiredSupply Agreement is for 15 years with 10-year renewal terms that are automatic unless either party provides three years prior notice of $3.3 million,intention not to renew before the end of any term.
As part of the Supply Agreement, the Company and Cabot agreed to additional terms whereby Cabot reimburses the assumptionCompany for certain capital expenditures incurred by the Company that are necessary to manufacture the Furnace Products, and both the Company and Cabot must mutually agree on these capital expenditures in advance of debtprocurement and contractual commitments of $11.8 million. Thecommissioning. Capital expenditures incurred that benefit both the Company also paid $4.5 million in acquisition-related costs (or transaction costs). The Company funded the cash consideration from cashand Cabot ("Shared Capital") are partially reimbursable by Cabot and recognized as revenues based on hand and the proceeds from the Term Loan and Security Agreement (the "Senior Term Loan")a formula contained in the principal amountSupply Agreement. Revenues from, and reimbursements of, $70.0 million,Shared Capital are recognized and billable, respectively, beginning on the first day of a half year (January 1 and July 1 of a calendar year) following the placed in service date of a Shared Capital asset(s).
Capital expenditures incurred that benefit Cabot exclusively ("Specific Capital") are fully reimbursable by Cabot and recognized as more fully describedrevenues based on a formula contained in Note 5.the Supply Agreement. Revenues earned from Specific Capital are recognized beginning on the first day of a half year following the placed in service date of a Specific Capital asset(s). Reimbursements of Specific Capital are billable in quarterly installments beginning on the first day of a half year following the placed in service date of a Specific Capital asset(s). In the event that Cabot ceases to make purchases under the Supply Agreement, Cabot is obligated to pay the balance of any outstanding payments for Specific Capital.
Revenues earned from both Shared Capital and Specific Capital are reported in the Consumables revenue line item in the Statements of Operations.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 3 - Acquisition of Marshall Mine
Concurrently with the execution of the Supply Agreement, on September 30, 2020, the Company 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"). The Company 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, the Company entered into a reclamation contract (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 (the "Reclamation Period"). Under the terms of the Supply Agreement, Cabot is obligated to reimburse the Company for $10.2 million of Reclamation Costs (the "Reclamation Reimbursements"), which are payable semi-annually over 13 years and inclusive of interest. In the event that Cabot has a change in control as described in the Supply Agreement, all outstanding balances of the Reclamation Reimbursements shall be due and payable in full. See further discussion of the Reclamation Costs and Reclamation Reimbursements in Note 4.
The followingMarshall Mine Acquisition included the acquisition of certain assets that will be consumed and the assumption of certain liabilities that will be paid in reclamation of the Marshall Mine in addition to the incurrence of an obligation for the Reclamation Costs. The Company accounted for the Marshall Mine Acquisition as an asset acquisition as it did not meet the definition of a business. That is, the Company concluded that the Marshall Mine does not have any economic reserves, as the Company had commenced full reclamation as of September 30, 2020, and therefore lacked inputs.
As the Marshall Mine Acquisition represents a transaction with a customer of net assets acquired and liabilities assumed from Cabot, the Company accounted for the excess of the fair value of liabilities assumed over assets acquired as upfront consideration transferred to a customer, Cabot (the "Upfront Customer Consideration"). The amount of the Upfront Customer Consideration was also recognized net of an additional asset recognized in the Marshall Mine Acquisition, which was comprised of a receivable from Cabot (the "Cabot Receivable") for the Reclamation Reimbursements. The Cabot Receivable is further discussed in Note 4.
The total Upfront Customer Consideration is being amortized on a straight-line basis over the expected 15-year contractual period of the Supply Agreement as a reduction to revenues.
As part of the Marshall Mine Acquisition, the Company assumed liabilities, whose fair value exceeded the fair value of assets acquired. A summary of the net assets acquired and liabilities assumed and the additional assets recorded in the Marshall Mine Acquisition as of September 30, 2020 are shown in the table summarizes the final purchase price allocation.below. Subsequent to the Acquisition Date,this date, the Company completed additional analysis of the assets acquired and liabilities assumed and recorded adjustments were made to the preliminary purchase price allocations as notedof December 31, 2020 as shown in the table below:below.
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | As Originally Reported | | Adjustments | | As Adjusted |
Assets acquired: | | | | | | |
Receivables | | $ | 0 | | | $ | 513 | | | $ | 513 | |
Property, plant and equipment | | 3,863 | | | 0 | | | 3,863 | |
Spare parts | | 100 | | | 0 | | | 100 | |
| | | | | | |
Liabilities assumed: | | | | | | |
Accounts payable and accrued expenses | | (673) | | | 160 | | | (513) | |
Asset retirement obligation | | (21,328) | | | 0 | | | (21,328) | |
Net assets acquired and liabilities assumed from Marshall Mine acquisition | | (18,038) | | | 673 | | | (17,365) | |
Cabot receivable | | 9,749 | | | 0 | | | 9,749 | |
Upfront Customer Consideration | | $ | 8,289 | | | $ | (673) | | | $ | 7,616 | |
|
| | | | | | | | | | | | |
Fair value of assets acquired: | | As Originally Reported | | Adjustments | | As Adjusted |
Cash | | $ | 3,284 |
| | $ | — |
| | $ | 3,284 |
|
Receivables | | 6,409 |
| | — |
| | 6,409 |
|
Inventories | | 22,100 |
| | (356 | ) | | 21,744 |
|
Prepaid expenses and other current assets | | 2,992 |
| | 61 |
| | 3,053 |
|
Spare parts | | 3,359 |
| | — |
| | 3,359 |
|
Property, plant and equipment | | 43,033 |
| | (377 | ) | | 42,656 |
|
Mine leases and development | | 2,500 |
| | 200 |
| | 2,700 |
|
Mine reclamation asset | | — |
| | 2,402 |
| | 2,402 |
|
Intangible assets | | 4,000 |
| | 100 |
| | 4,100 |
|
Other assets | | 168 |
| | — |
| | 168 |
|
Amount attributable to assets acquired | | 87,845 |
| | 2,030 |
| | 89,875 |
|
| | | | | | |
Fair value of liabilities assumed: | | | | | | |
Accounts payable | | 4,771 |
| | — |
| | 4,771 |
|
Accrued liabilities | | 7,354 |
| | 254 |
| | 7,608 |
|
Equipment lease liabilities | | 8,211 |
| | — |
| | 8,211 |
|
Mine reclamation liability | | 626 |
| | 1,776 |
| | 2,402 |
|
Other liabilities | | 437 |
| | — |
| | 437 |
|
Amount attributable to liabilities assumed | | 21,399 |
| | 2,030 |
| | 23,429 |
|
| | | | | | |
Net assets acquired | | $ | 66,446 |
| | $ | — |
| | $ | 66,446 |
|
Adjustments toThe Company also evaluated the preliminary purchase price allocation primarily related to changes in fair values assigned to property, plant and equipment, intangible assets, mine reclamation liability and the related mine reclamation assetMarshall Mine entity as a resultpotential variable interest entity ("VIE"), and determined that because of the final valuation report from the Company's third-party valuation firm issued in May 2019. During the three months ended June 30, 2019 based on new informationits structure and closing-stage status, it did not have sufficient equity at-risk and would not likely be able to obtain additional subordinated financial support to complete its closing stage obligations. The Company purchased all of facts and circumstances that existed as of the Acquisition Date, the Company revised its estimates used as of the Acquisition Date related to the net realizable value of certain finished goods inventory items as well as values assigned to certain prepaid and accrued expense items.
The following table represents the intangible assets, as adjusted for purchase price adjustments noted above, identified as part of the Carbon Solutions Acquisition: |
| | | | | | |
(in thousands) | | Amount | | Weighted Average Useful Life (years) |
Customer relationships | | $ | 2,200 |
| | 5 |
Developed technology | | 1,600 |
| | 5 |
Trade name | | 300 |
| | 2 |
Total intangibles acquired | | $ | 4,100 |
| | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
membership interests in Marshall Mine, LLC and determined that the Company was the primary beneficiary. Therefore, Marshall Mine, LLC was determined to be a VIE and Marshall Mine, LLC’s assets and liabilities were consolidated.
Note 34 - Inventories, netMarshall Mine Asset Retirement Obligation and Cabot Receivable
Asset Retirement Obligation
In connection with the Supply Agreement, Purchase Agreement and the Reclamation Contract, the Company assumed the obligation to reclaim and restore the land associated with the Marshall Mine. The Company determined that the Marshall Mine did not have any remaining economic reserves. As of September 30, 2020, the Company recorded an asset retirement obligation (the "Marshall Mine ARO") for the total Reclamation Costs of $21.3 million as measured at the expected future cash flows of $23.7 million, inclusive of contingency costs, discounted to their present value using a discount rate based on a credit-adjusted, risk-free rate of 7.0%. As of March 31, 2021 and December 31, 2020, the carrying value of the Marshall Mine ARO was $16.1 million and $21.3 million, respectively.
Cabot Receivable
As of September 30, 2020, the Company recorded the Cabot Receivable at its estimated fair value of $9.7 million, reflecting a discount rate of approximately 1.5% or $0.5 million. There were no significant related fees or costs associated with the Cabot Receivable.
The Cabot Receivable requires Cabot to pay the Reclamation Reimbursements to the Company in the amount of $10.2 million inclusive of interest over its term. Interest is accreted on the Cabot Receivable and recognized as interest income. An Allowance for the Cabot Receivable asset is assessed periodically, and 0 allowance was deemed necessary as of March 31, 2021 and December 31, 2020.
Surety Bond
As the owner of the Marshall Mine, the Company is required to post a surety bond to ensure performance of its reclamation activities. On September 30, 2020, the Company and a third party entered into a surety bond indemnification agreement (the "Surety Agreement") pursuant to which the Company secured and posted a $30.0 million surety bond (the "Bond") with the local regulatory agency. The Bond will remain in place until the Marshall Mine is fully reclaimed, and it may be reduced in amount from time to time as the Company progresses with its reclamation activities. As of March 31, 2021, for the obligations due under the Reclamation Contract, the Company was required to post collateral of $10.0 million, which is recorded as long-term restricted cash on the Condensed Consolidated Balance Sheet.
Note 5 - COVID-19
In March 2020, the federal government passed the Coronavirus Aid, Relief, and Security Act (the "CARES Act"), which provided among other things the creation of the Paycheck Protection Plan ("PPP"), which is sponsored and administered by the U.S. Small Business Administration ("SBA"). On April 20, 2020, the Company executed a loan agreement (the "PPP Loan") under the PPP, evidenced by a promissory note, with BOK, NA dba Bank of Oklahoma ("BOK") providing for $3.3 million in proceeds, which was funded to the Company on April 21, 2020. 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. The PPP Loan matures April 21, 2022 but may be forgiven subject to the terms of the PPP and approval by the SBA. The Company recorded the PPP Loan as a debt obligation and is accruing interest over the term of the PPP Loan. There is no assurance that the PPP Loan will be forgiven.
The interest rate on the PPP Loan is 1.00%. The PPP Loan is unsecured and contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or BOK, or breaching the terms of the PPP Loan. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, or filing suit and obtaining judgment against the Company.
Under the PPPFA, monthly payments of principal and interest commence on the later of 10 months following the "covered period" (as defined in the PPPFA) or the date that BOK notifies the Company that the SBA has notified BOK that all or a portion of the PPP Loan has not been forgiven. In January 2021, the Company submitted its application to the SBA for forgiveness of the PPP Loan, and the Company is awaiting the SBA's response on its application for forgiveness. Accordingly, for any amounts not forgiven, the Company has determined that the PPP Loan principal and interest payments would commence in August 2021 and, as of March 31, 2021 and December 31, 2020, has classified a portion of the PPP Loan principal and accrued interest as current in the Condensed Consolidated Balance Sheets.
The CARES Act also provided for the deferral of payroll tax payments for all payroll taxes incurred through December 31, 2020. The Company elected to defer payments of payroll taxes for the periods allowed under the CARES Act and will repay
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
50% by December 31, 2021 and 50% by December 31, 2022. As of March 31, 2021, the Company has deferred $0.4 million of payroll tax payments under the CARES Act.
Note 6 - Equity Method Investments
Tinuum Group, LLC
As of March 31, 2021 and December 31, 2020, the Company's ownership interest in Tinuum Group was 42.5%. Tinuum Group supplies technology equipment and technical services at select coal-fired generators, but its primary purpose is to put into operation facilities that produce and sell RC that lower emissions and also qualify for Section 45 tax credits. The Company has determined that Tinuum Group is a VIE; however, the Company does not have the power to direct the activities that most significantly impact Tinuum Group's economic performance and has therefore accounted for the investment under the equity method of accounting. The Company determined that the voting partners of Tinuum Group have identical voting rights, equity control interests and board control interests, and therefore, concluded that the power to direct the activities that most significantly impact Tinuum Group's economic performance was shared.
The following table summarizes the results of operations of Tinuum Group:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
(in thousands) | | 2021 | | 2020 | | | | |
Gross profit | | $ | 2,675 | | | $ | 5,010 | | | | | |
Operating, selling, general and administrative expenses | | 13,802 | | | 12,776 | | | | | |
Loss from operations | | (11,127) | | | (7,766) | | | | | |
Other income (expenses), net | | 853 | | | 3,643 | | | | | |
| | | | | | | | |
Loss attributable to noncontrolling interest | | 35,578 | | | 19,271 | | | | | |
Net income available to members | | $ | 25,304 | | | $ | 15,148 | | | | | |
ADES equity earnings from Tinuum Group | | $ | 16,362 | | | $ | 6,438 | | | | | |
For the three months ended March 31, 2021, the Company recognized earnings from Tinuum Group's net income available to members that were different from its pro-rata share of Tinuum Group's net income available to members, as cash distributions for the three months ended March 31, 2021 exceeded the carrying value of the Tinuum Group equity investment. For 2021, the Company expects to recognize such excess contributions as equity method earnings in the period the distributions occur, limited to the carrying value of the Tinuum Group equity investment. For the three months ended March 31, 2020, the Company recognized its pro-rata share of Tinuum Group's net income available to its members for the respective period.
For the three months ended March 31, 2021 and March 31, 2020, the Company recognized equity earnings from Tinuum Group of $16.4 million and $6.4 million, respectively.
The following tables present the Company's inventories recorded atinvestment balance, equity earnings and cash distributions in excess of the lowerinvestment balance, if any, for the three months ended March 31, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Description | | Date(s) | | Investment balance | | ADES equity earnings | | Cash distributions | | Memorandum Account: Cash distributions and equity earnings in (excess) of investment balance |
Beginning balance | | 12/31/2020 | | $ | 3,387 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | |
ADES proportionate share of income from Tinuum Group | | First Quarter | | 10,755 | | | 10,755 | | | 0 | | | 0 | |
| | | | | | | | | | |
Cash distributions from Tinuum Group | | First Quarter | | (19,749) | | | 0 | | 19,749 | | | 0 | |
Adjustment for current year cash distributions in excess of investment balance | | First Quarter | | 5,607 | | | 5,607 | | | 0 | | | (5,607) | |
Total investment balance, equity earnings and cash distributions | | 3/31/2021 | | $ | 0 | | | $ | 16,362 | | | $ | 19,749 | | | $ | (5,607) | |
| | | | | | | | | | |
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| | | | | | | | | | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Description | | Date(s) | | Investment balance | | ADES equity earnings | | Cash distributions | | |
Beginning balance | | 12/31/2019 | | $ | 32,280 | | | $ | 0 | | | $ | 0 | | | |
| | | | | | | | | | |
ADES proportionate share of income from Tinuum Group | | First Quarter | | 6,438 | | | 6,438 | | | 0 | | | |
| | | | | | | | | | |
Cash distributions from Tinuum Group | | First Quarter | | (13,764) | | | 0 | | | 13,764 | | | |
| | | | | | | | | | |
Total investment balance, equity earnings and cash distributions | | 3/31/2020 | | $ | 24,954 | | | $ | 6,438 | | | $ | 13,764 | | | |
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Tinuum Services, LLC
The Company has a 50% voting and economic interest in Tinuum Services. The Company has determined that Tinuum Services is not a VIE and has further evaluated it for consolidation under the voting interest model. Because the Company does not own greater than 50% of average costthe outstanding voting shares, either directly or net realizable value asindirectly, it has accounted for its investment in Tinuum Services under the equity method of accounting. As of March 31, 20202021 and December 31, 2019:2020, the Company’s investment in Tinuum Services was $2.7 million and $4.2 million, respectively.
The following table summarizes the results of operations of Tinuum Services:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
(in thousands) | | 2021 | | 2020 | | | | |
Gross loss | | $ | (18,522) | | | $ | (22,259) | | | | | |
Operating, selling, general and administrative expenses | | 54,366 | | | 45,753 | | | | | |
Loss from operations | | (72,888) | | | (68,012) | | | | | |
Other income (expenses), net | | (427) | | | (285) | | | | | |
Loss attributable to noncontrolling interest | | 77,215 | | | 71,972 | | | | | |
Net income | | $ | 3,900 | | | $ | 3,675 | | | | | |
ADES equity earnings from Tinuum Services | | $ | 1,950 | | | $ | 1,838 | | | | | |
Included in the Consolidated Statements of Operations of Tinuum Services for the three months ended March 31, 2021 and 2020, respectively, were losses related to VIE entities that consolidated in Tinuum Services of $77.2 million and $72.0 million, respectively. These losses do not impact the Company's equity earnings from Tinuum Services as 100% of those losses are attributable to a noncontrolling interest and eliminated in the calculations of Tinuum Services' net income attributable to the Company's interest.
The following table details the carrying value of the Company's respective equity method investments included in the Equity method investments line item on the Condensed Consolidated Balance Sheets and indicates the Company's maximum exposure to loss:
| | | | | | | | | | | | | | |
| | As of |
(in thousands) | | March 31, 2021 | | December 31, 2020 |
Equity method investment in Tinuum Group | | $ | 0 | | | $ | 3,387 | |
Equity method investment in Tinuum Services | | 2,690 | | | 4,242 | |
Equity method investment in other | | 63 | | | 63 | |
| | | | |
| | | | |
Total equity method investments | | $ | 2,753 | | | $ | 7,692 | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
| | | | | | | | |
| | As of |
(in thousands) | | March 31, 2020 | | December 31, 2019 |
Product inventory | | $ | 11,492 |
| | $ | 13,515 |
|
Raw material inventory | | 2,103 |
| | 1,945 |
|
| | $ | 13,595 |
| | $ | 15,460 |
|
The following table details the components of the Company's respective equity method investments included in the Earnings from equity method investments line item on the Condensed Consolidated Statements of Operations: | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
(in thousands) | | 2021 | | 2020 | | | | |
Earnings from Tinuum Group | | $ | 16,362 | | | $ | 6,438 | | | | | |
Earnings from Tinuum Services | | 1,950 | | | 1,838 | | | | | |
Earnings (loss) from other | | 0 | | | (3) | | | | | |
| | | | | | | | |
| | | | | | | | |
Earnings from equity method investments | | $ | 18,312 | | | $ | 8,273 | | | | | |
The following table details the components of the cash distributions from the Company's respective equity method investments included as a component of cash flows from operating activities and investing activities in the Condensed Consolidated Statements of Cash Flows. Distributions from equity method investees are reported in the Condensed Consolidated Statements of Cash Flows as "Distributions from equity method investees, return on investment" within Operating cash flows until such time as the carrying value in an equity method investee company is reduced to zero. Thereafter, such distributions are reported as "distributions in excess of cumulative earnings" as a component of cash flows from investing activities.
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2021 | | 2020 |
Distributions from equity method investees, return on investment | | | | |
Tinuum Group | | $ | 14,142 | | | $ | 13,764 | |
Tinuum Services | | 3,502 | | | 3,352 | |
| | | | |
| | | | |
| | | | |
| | $ | 17,644 | | | $ | 17,116 | |
Distributions from equity method investees in excess of investment basis | | | | |
Tinuum Group | | $ | 5,607 | | | $ | 0 | |
| | | | |
| | | | |
| | | | |
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| | $ | 5,607 | | | $ | 0 | |
Note 47 - Equity Method InvestmentsInventories, net
Tinuum Group, LLC
The Company's ownership interest in Tinuum Group was 42.5% as of March 31, 2020 and December 31, 2019. Tinuum Group supplies technology equipment and technical services at select coal-fired generators, but its primary purpose is to put into operation facilities that produce and sell RC that lower emissions and also qualify for Section 45 tax credits. Tinuum Group has been determined to be a variable interest entity ("VIE"); however, the Company does not have the power to direct the activities that most significantly impact Tinuum Group's economic performance and has therefore accounted for the investment under the equity method of accounting. The Company determined that the voting partners of Tinuum Group have identical voting rights, equity control interests and board control interests, and therefore, concluded that the power to direct the activities that most significantly impact Tinuum Group's economic performance was shared.
The following table summarizes the resultsCompany's inventories recorded at the lower of operationsaverage cost or net realizable value as of Tinuum Group: |
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2020 | | 2019 |
Gross profit | | $ | 5,010 |
| | $ | 41,200 |
|
Operating, selling, general and administrative expenses | | 12,776 |
| | 6,582 |
|
Loss (income) from operations | | (7,766 | ) | | 34,618 |
|
Other income | | 3,643 |
| | 51 |
|
Loss attributable to noncontrolling interest | | 19,271 |
| | 15,776 |
|
Net income available to members | | $ | 15,148 |
| | $ | 50,445 |
|
ADES equity earnings from Tinuum Group | | $ | 6,438 |
| | $ | 19,767 |
|
For the three months ended March 31, 2020, the Company recognized its pro-rata share of Tinuum Group's net income available to its members for the respective period. For the three months ended March 31, 2019, the Company recognized its pro-rata share of Tinuum Group's net income available to its members for the period, less the amount necessary to recover the cumulative earnings short-fall balance as of the end of the immediately preceding period, which was2021 and December 31, 2018. For the three months ended March 31, 2019, the difference between the Company's proportionate share of Tinuum Group's net income available to members (at its equity interest of 42.5%) and the Company's earnings from its Tinuum Group equity method investment as reported in the Condensed Consolidated Statements of Operations relates to the Company receiving distributions in excess of the carrying value of the equity investment, and therefore recognizing such excess distributions as equity method earnings in the period the distributions occur.2020:
For the three months ended March 31, 2020, the Company recognized equity earnings from Tinuum Group of $6.4 million. For the three months ended March 31, 2019, the Company recognized equity earnings from Tinuum Group of $19.8 million. | | | | | | | | | | | | | | |
| | As of |
(in thousands) | | March 31, 2021 | | December 31, 2020 |
Product inventory, net | | $ | 7,185 | | | $ | 8,361 | |
Raw material inventory | | 855 | | | 1,521 | |
| | | | |
| | $ | 8,040 | | | $ | 9,882 | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following tables present the Company's investment balance, equity earnings and cash distributions in excess of the investment balance, if any, for the three months ended March 31, 2020 and 2019 (in thousands): |
| | | | | | | | | | | | | | | | | | |
Description | | Date(s) | | Investment balance | | ADES equity earnings (loss) | | Cash distributions | | Memorandum Account: Cash distributions and equity earnings in (excess) of investment balance |
Beginning balance | | 12/31/2019 | | $ | 32,280 |
| | $ | — |
| | $ | — |
| | $ | — |
|
ADES proportionate share of income from Tinuum Group | | First Quarter | | 6,438 |
| | 6,438 |
| | — |
| | — |
|
Cash distributions from Tinuum Group | | First Quarter | | (13,764 | ) | | — |
| | 13,764 |
| | — |
|
Total investment balance, equity earnings (loss) and cash distributions | | 3/31/2020 | | $ | 24,954 |
| | $ | 6,438 |
| | $ | 13,764 |
| | $ | — |
|
|
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Description | | Date(s) | | Investment balance | | ADES equity earnings (loss) | | Cash distributions | | Memorandum Account: Cash distributions and equity earnings in (excess) of investment balance |
Beginning balance | | 12/31/2018 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1,672 | ) |
Impact of adoption of accounting standards (1) | | First Quarter | | 37,232 |
| | — |
| | — |
| | — |
|
ADES proportionate share of income from Tinuum Group | | First Quarter | | 21,439 |
| | 21,439 |
| | — |
| | — |
|
Recovery of prior cash distributions in excess of investment balance (prior to cash distributions) | | First Quarter | | (1,672 | ) | | (1,672 | ) | | — |
| | 1,672 |
|
Cash distributions from Tinuum Group | | First Quarter | | (16,788 | ) | | — |
| | 16,788 |
| | — |
|
Total investment balance, equity earnings (loss) and cash distributions | | 3/31/2019 | | $ | 40,211 |
| | $ | 19,767 |
| | $ | 16,788 |
| | $ | — |
|
(1) Tinuum Group adopted Accounting Standards Codification Topic ("ASC") 606 - Revenue from Contracts with Customers and ASC 842 - Leases as of January 1, 2019. As a result of Tinuum Group’s adoption of these standards, the Company recorded a cumulative adjustment of $27.4 million, net of the impact of income taxes, related to the Company's percentage of Tinuum Group's cumulative effect adjustment that increased the Company's Retained earnings as of January 1, 2019.
Tinuum Services, LLC
The Company has a 50% voting and economic interest in Tinuum Services. The Company has determined that Tinuum Services is not a VIE and has evaluated its consolidation analysis under the voting interest model. Because the Company does not own greater than 50% of the outstanding voting shares, either directly or indirectly, it has accounted for its investment in Tinuum Services under the equity method of accounting. The Company’s investment in Tinuum Services as of March 31, 2020 and December 31, 2019 was $5.3 million and $6.8 million, respectively.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes the results of operations of Tinuum Services: |
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2020 | | 2019 |
Gross loss | | $ | (22,259 | ) | | $ | (24,735 | ) |
Operating, selling, general and administrative expenses | | 45,753 |
| | 49,450 |
|
Loss from operations | | (68,012 | ) | | (74,185 | ) |
Other expenses | | (285 | ) | | (242 | ) |
Loss attributable to noncontrolling interest | | 71,972 |
| | 78,270 |
|
Net income | | $ | 3,675 |
| | $ | 3,843 |
|
ADES equity earnings from Tinuum Services | | $ | 1,838 |
| | $ | 1,922 |
|
Included within the Consolidated Statements of Operations of Tinuum Services for the three months ended March 31, 2020 and 2019, respectively, were losses related to VIE's of Tinuum Services. These losses do not impact the Company's equity earnings from Tinuum Services as 100% of those losses are attributable to a noncontrolling interest and eliminated in the calculations of Tinuum Services' net income attributable to the Company's interest.
The following table details the components of the Company's respective equity method investments included within the Earnings from equity method investments line item on the Condensed Consolidated Statements of Operations: |
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2020 | | 2019 |
Earnings from Tinuum Group | | $ | 6,438 |
|
| $ | 19,767 |
|
Earnings from Tinuum Services | | 1,838 |
|
| 1,922 |
|
(Loss) earnings from other | | (3 | ) |
| 1 |
|
Earnings from equity method investments | | $ | 8,273 |
| | $ | 21,690 |
|
The following table details the components of the cash distributions from the Company's respective equity method investments included in the Condensed Consolidated Statements of Cash Flows. Distributions from equity method investees are reported in the Condensed Consolidated Statements of Cash Flows as "Distributions from equity method investees, return on investment" within Operating cash flows. |
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2020 | | 2019 |
Distributions from equity method investees, return on investment | | | | |
Tinuum Group | | $ | 13,764 |
| | $ | 16,788 |
|
Tinuum Services | | 3,352 |
| | 2,700 |
|
| | $ | 17,116 |
| | $ | 19,488 |
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 58 - Debt Obligations
| | | | As of | | As of |
(in thousands) | | March 31, 2020 | | December 31, 2019 | (in thousands) | | March 31, 2021 | | December 31, 2020 |
Senior Term Loan due December 2021, related party | | $ | 34,000 |
| | $ | 40,000 |
| Senior Term Loan due December 2021, related party | | $ | 6,000 | | | $ | 16,000 | |
Less: net unamortized debt issuance costs | | (989 | ) | | (1,163 | ) | Less: net unamortized debt issuance costs | | (175) | | | (465) | |
Less: net unamortized debt discount | | (1,020 | ) | | (1,200 | ) | Less: net unamortized debt discount | | (180) | | | (480) | |
Senior Term Loan due December 2021, net | | 31,991 |
| | 37,637 |
| Senior Term Loan due December 2021, net | | 5,645 | | | 15,055 | |
Finance lease obligations | | 6,390 |
| | 6,729 |
| Finance lease obligations | | 5,250 | | | 5,526 | |
PPP Loan | | PPP Loan | | 3,305 | | | 3,305 | |
| | 38,381 |
| | 44,366 |
| | 14,200 | | | 23,886 | |
Less: Current maturities | | (24,192 | ) | | (23,932 | ) | Less: Current maturities | | (9,913) | | | (18,441) | |
Total long-term debt | | $ | 14,189 |
| | $ | 20,434 |
| Total long-term debt | | $ | 4,287 | | | $ | 5,445 | |
Senior Term Loan
On December 7, 2018, the Company, and ADA-ES, Inc. ("ADA"), a wholly-owned subsidiary, and certain other subsidiaries of the Company as guarantors, The Bank of New York Mellon as administrative agent, and Apollo Credit Strategies Master Fund Ltd and Apollo A-N Credit Fund (Delaware) L.P. (collectively "Apollo"), affiliates of a beneficial owner of greater than five5 percent of the Company's common stock and a related party, entered into the Senior Term Loan and Security Agreement (the "Senior Term Loan") in the amount of $70.0 million less original issue discount of $2.1 million. Proceeds from the Senior Term Loan were used to fund the acquisition of Carbon Solutions Acquisition as disclosed in Note 2.Solutions. The Company also paid debt issuance costs of $2.0 million related to the Senior Term Loan. The Senior Term Loan has a term of 36 monthsmatures on December 7, 2021 and bears interest at a rate equal to 3-month LIBOR (subject to a 1.5% floor) + 4.75% per annum, which is adjusted quarterly to the current 3-month LIBOR rate, and interest is payable quarterly in arrears. Quarterly principal payments of $6.0 million were required beginning in March 2019, and the Company may prepay the Senior Term Loan at any time without penalty. The Senior Term Loan is secured by substantially all of the assets of the Company, including the cash flows from Tinuum Group and Tinuum Services (collectively, the "Tinuum Entities"), but excluding the Company's equity interests in the Tinuum entities.
The Senior Term Loan includes, among others, the following covenants: (1) Beginning December 31, 2018 and asAs of the end of each fiscal quarter, thereafter, the Company must maintain a minimum cash balance of $5.0 million and shall not permit "expected future net cash flows from the refined coal business" (as defined in the Senior Term Loan) to be less than 1.75 times the outstanding principal amount of the Senior Term Loan; (2) Beginning in January 2019, annualAnnual collective dividends and buybacks of the Company shares of common stock in an aggregate amount, not to exceed $30.0 million, isare permitted so long as (a) no default or event of default exists under the Senior Term Loan and (b) expected future net cash flows from the refined coal business as of the end of the most recent fiscal quarter exceed $100.0 million.
Waiver and Limited Consent on Senior Term Loan
Pursuant to entering into the PPP Loan, on April 20, 2020, the Company and Apollo executed the First Amendment to the Senior Term Loan, which permitted the Company to enter into the PPP Loan.
On September 30, 2020, the Company and Apollo entered into a limited consent, which permitted the Company to (i) enter into the Surety Agreement, open the collateral bank accounts and post collateral required under the Surety Agreement, and (ii) acquire the membership interests in Marshall Mine, LLC., as described in Note 3.
Line of Credit
On December 7, 2018,In September 2013, ADA-ES, Inc. ("ADA"), a wholly-owned subsidiary of the Company, as borrower, and the Company, as guarantor, andentered into a line credit (the "Line of Credit") with a bank (the "Lender") for an aggregate borrowing amount of $10.0 million, which was secured by certain amounts due to the Company from certain Tinuum Group RC leases. The Line of Credit has been amended 15 times from the period from December 2, 2013 through March 31, 2021 and included a reduction in the borrowing amount to $5.0 million in September 2018.
On March 23, 2021, ADA, the Company and the Lender entered into an amendment to the 2013 Loan and Security AgreementLine of Credit (the "Line"Fifteenth Amendment"), which extended the maturity date of Credit"). This amendment provided, among other things, for ADA to be able to enter into the Senior Term Loan as a guarantor so long as the principal amount of the Senior Term Loan did not exceed $70.0 million. Additionally, the financial covenants in the Line of Credit were amendedto December 31, 2021 and restated to be consistent withincreased the Senior Term Loan covenants, including maintaining a minimum cash balance ofrequirement from $5.0 million to $6.0 million.
As of March 31, 2021 and December 31, 2020, there were no0 outstanding borrowings under the Line of Credit.
Note 6 - Leases
As of March 31, 2020, the Company has obligations under finance and operating leases in the amounts of $6.4 million and $4.6 million, respectively. As of March 31, 2020, the Company has right of use ("ROU") assets, net of accumulated amortization, under finance leases and operating leases of $5.4 million and $4.4 million, respectively.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 9 - Leases
As of March 31, 2021 and December 31, 2020, the Company had obligations under finance leases of $5.3 million and $5.5 million, respectively, and obligations under operating leases of $5.1 million and $3.0 million, respectively. As of March 31, 2021 and December 31, 2020, the Company had right of use ("ROU") assets, net of accumulated amortization, under finance leases of $2.2 million and $2.4 million, respectively, and ROU assets, net of accumulated amortization, under operating leases of $4.2 million and $1.9 million, respectively.
Finance leases
ROU assets under finance leases and finance lease liabilities are included in Property, plant and equipment and Current portion and Long-term portion of borrowings, respectively, in the Condensed Consolidated Balance SheetSheets as of March 31, 2021 and December 31, 2020. Interest expense related to finance lease liabilities and amortization of ROU assets under finance leases are included in Interest expense and Depreciation, amortization, depletion and accretion, respectively, in the Condensed Consolidated StatementStatements of Operations for the three months ended March 31, 2021 and March 31, 2020.
Operating leases
ROU assets under operating leases and operating lease liabilities are included in Other long-term assets and Other liabilities and Other long-term liabilities, respectively, in the Condensed Consolidated Balance SheetSheets as of March 31, 2021 and December 31, 2020.
Lease expense for operating leases for the three months ended March 31, 20202021 was $1.0 million, of which $0.9 million is included in Consumables - cost of revenue, exclusive of depreciation and 2019amortization, and $0.1 million is included in General and administrative in the Condensed Consolidated Statement of Operations. Lease expense for operating leases for the three months ended March 31, 2020 was $1.2 million, and $1.2 million, respectively, of which $1.0 million and $1.1 million, respectively, is included in Consumables - cost of revenue, exclusive of depreciation and amortization, and $0.2 million and $0.1 million, respectively, is included in General and administrative in the Condensed Consolidated Statement of Operations.
Lease financial information as of and for the three months ended March 31, 20202021 and 20192020 is provided in the following table:
| | | | Three Months Ended March 31, | | Three Months Ended March 31, | |
(in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 | |
Finance lease cost: | | | | | Finance lease cost: | | | | | |
Amortization of right-of-use assets | | $ | 514 |
| | $ | 536 |
| Amortization of right-of-use assets | | $ | 174 | | | $ | 514 | | |
Interest on lease liabilities | | 94 |
| | 131 |
| Interest on lease liabilities | | 79 | | | 94 | | |
Operating lease cost | | 853 |
| | 929 |
| Operating lease cost | | 459 | | | 853 | | |
Short-term lease cost | | 282 |
| | 171 |
| Short-term lease cost | | 567 | | | 282 | | |
Variable lease cost (1) | | 93 |
| | 82 |
| Variable lease cost (1) | | 9 | | | 93 | | |
| Total lease cost | | $ | 1,836 |
| | $ | 1,849 |
| Total lease cost | | $ | 1,288 | | | $ | 1,836 | | |
| | | | | | | | | |
Other Information: | | | | | Other Information: | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows from finance leases | | $ | 94 |
| | $ | 131 |
| Operating cash flows from finance leases | | $ | 79 | | | $ | 94 | | |
Operating cash flows from operating leases | | $ | 634 |
| | $ | 949 |
| Operating cash flows from operating leases | | $ | 575 | | | $ | 634 | | |
Financing cash flows from finance leases | | $ | 340 |
| | $ | 344 |
| Financing cash flows from finance leases | | $ | 315 | | | $ | 340 | | |
Right-of-use assets obtained in exchange for new finance lease liabilities | | Right-of-use assets obtained in exchange for new finance lease liabilities | | $ | 0 | | | $ | 0 | | |
Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 60 |
| | $ | 49 |
| Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 2,679 | | | $ | 60 | | |
Weighted-average remaining lease term - finance leases | | 4.1 years |
| | 4.9 years |
| Weighted-average remaining lease term - finance leases | | 3.3 years | | 4.1 years | |
Weighted-average remaining lease term - operating leases | | 2.3 years |
| | 2.5 years |
| Weighted-average remaining lease term - operating leases | | 1.6 years | | 2.3 years | |
Weighted-average discount rate - finance leases | | 6.1 | % | | 6.1 | % | Weighted-average discount rate - finance leases | | 6.18 | % | | 6.08 | % | |
Weighted-average discount rate - operating leases | | 8.5 | % | | 8.6 | % | Weighted-average discount rate - operating leases | | 8.46 | % | | 8.54 | % | |
(1) Primarily includes common area maintenance, property taxes and insurance payable to lessors.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 710 - Revenues
Trade receivables represent an unconditional right to consideration in exchange for goods or services transferred to a customer. The Company invoices its customers in accordance with the terms of the contract. Credit terms are generally net 30 from the date of invoice. The timing between the satisfaction of performance obligations and when payment is due from the customer is generally not significant. The Company records allowances for doubtful trade receivables when it is probable that the balances will not be collected.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Trade receivables, net
The following table shows the components of the Company's Trade receivables, net: | | | | As of | | As of |
(in thousands) | | March 31, 2020 | | December 31, 2019 | (in thousands) | | March 31, 2021 | | December 31, 2020 |
Trade receivables | | $ | 6,265 |
| | $ | 8,057 |
| Trade receivables | | $ | 9,481 | | | $ | 12,241 | |
Less: Allowance for doubtful accounts | | (624 | ) | | (627 | ) | Less: Allowance for doubtful accounts | | (53) | | | (37) | |
Trade receivables, net | | $ | 5,641 |
| | $ | 7,430 |
| Trade receivables, net | | $ | 9,428 | | | $ | 12,204 | |
|
For the three months ended March 31, 20202021 and 2019,2020, the Company recognized zero0 and zero of0 bad debt expense, respectively.
Cabot Receivable
The following table shows the components of the Cabot Receivable:
| | | | | | | | | | | | | | |
| | As of |
(in thousands) | | March 31, 2021 | | December 31, 2020 |
Receivables, net | | $ | 921 | | | $ | 921 | |
Other long-term assets, net | | 7,914 | | | 8,852 | |
Total Cabot Receivable | | $ | 8,835 | | | $ | 9,773 | |
Disaggregation of Revenue and Earnings from Equity Method Investments
DuringFor the three months ended March 31, 20202021 and 2019,2020, all performance obligations related to revenues recognized were satisfied at a point in time. The Company disaggregates its revenues by major components as well as between its two2 reportable segments, which are further discussed in Note 1316 to the Condensed Consolidated Financial Statements. The following tables disaggregate revenues by major component for the three months ended March 31, 20202021 and 20192020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2021 | | |
| | Segment | | | | | | | | | | |
| | APT | | RC | | | | Total | | | | | | | | |
Revenue component | | | | | | | | | | | | | | | | |
Consumables | | $ | 17,031 | | | $ | 0 | | | | | $ | 17,031 | | | | | | | | | |
License royalties, related party | | 0 | | | 4,066 | | | | | 4,066 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Revenues from customers | | 17,031 | | | 4,066 | | | | | 21,097 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Earnings from equity method investments | | 0 | | | 18,312 | | | | | 18,312 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total revenues from customers and earnings from equity method investments | | $ | 17,031 | | | $ | 22,378 | | | | | $ | 39,409 | | | | | | | | | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2020 | |
| | Segment | | | | | | Segment | | | | |
| | PGI | | RC | | Other | | Total | | APT | | RC | | | Total | |
Revenue component | | | | | | | | | Revenue component | | | | | | | | |
Consumables | | $ | 8,475 |
| | $ | — |
| | $ | 742 |
| | $ | 9,217 |
| Consumables | | $ | 9,217 | | | $ | 0 | | | | $ | 9,217 | | |
License royalties, related party | | — |
| | 3,046 |
| | — |
| | 3,046 |
| License royalties, related party | | 0 | | | 3,046 | | | | 3,046 | | |
| Revenues from customers | | 8,475 |
| | 3,046 |
| | 742 |
| | 12,263 |
| Revenues from customers | | 9,217 | | | 3,046 | | | | 12,263 | | |
| | | | | | | | | | | | |
Earnings from equity method investments | | — |
| | 8,273 |
| | — |
| | 8,273 |
| Earnings from equity method investments | | 0 | | | 8,273 | | | | 8,273 | | |
| | | | | | | | | | | | |
Total revenues from customers and earnings from equity method investments | | $ | 8,475 |
| | $ | 11,319 |
| | $ | 742 |
| | $ | 20,536 |
| Total revenues from customers and earnings from equity method investments | | $ | 9,217 | | | $ | 11,319 | | | | $ | 20,536 | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 |
| | Segment | | | | |
| | PGI | | RC | | Other | | Total |
Revenue component | | | | | | | | |
Consumables | | $ | 14,553 |
| | $ | — |
| | $ | 556 |
| | $ | 15,109 |
|
License royalties, related party | | — |
| | 4,220 |
| | — |
| | 4,220 |
|
Revenues from customers | | 14,553 |
| | 4,220 |
| | 556 |
| | 19,329 |
|
| | | | | | | | |
Earnings from equity method investments | | — |
| | 21,690 |
| | — |
| | 21,690 |
|
| | | | | | | | |
Total revenues from customers and earnings from equity method investments | | $ | 14,553 |
| | $ | 25,910 |
| | $ | 556 |
| | $ | 41,019 |
|
Note 811 - Commitments and Contingencies
Legal Proceedings
The Company is from time to time subject to, and is presently involved in, various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of its business. Such matters are subject to many uncertainties and to outcomes, the financial impacts of which are not predictable with assurance and that may not be known for extended periods of time. The Company records a liability in its consolidated financial statements for costs related to claims, settlements, and judgments where management has assessed that a loss is probable and an amount can be reasonably estimated. There were no significant legal proceedings as of March 31, 2020.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2021.
Restricted Cash
As of March 31, 20202021 and December 31, 2019,2020, the Company had long-termshort-term restricted cash of $5.0$6.0 million and $5.0 million, respectively, which primarily consisted ofas required under a minimum cash balance requirementsrequirement of a Line of Credit covenant, and long-term restricted cash of $10.0 million and $5.0 million, respectively, as required under the Senior Term Loan.Surety Agreement.
Other Commitments and Contingencies
The Company has certain limited obligations contingent upon future events in connection with the activities of Tinuum Group. The Company, NexGen Refined Coal, LLC ("NexGen") and two2 entities affiliated with NexGen have provided an affiliate of the Goldman Sachs Group, Inc. with limited guaranties (the "Tinuum Group Party Guaranties") related to certain losses it may suffer as a result of inaccuracies or breach of representations and covenants. The Company also is a party to a contribution agreement with NexGen under which any party called upon to pay on a Tinuum Group Party Guaranty is entitled to receive contributions from the other party equal to 50% of the amount paid. The Company has not0t recorded a liability or expense provision related to this contingent obligation as it believes that it is not probable that a loss will occur with respect to the Tinuum Group Party Guaranties.
Note 912 - Stockholders' Equity
Stock Repurchase Programs
In November 2018, the Company's Board of Directors (the "Board") authorized the Company to purchase up to $20.0 million of its outstanding common stock under a stock repurchase program (the "Stock Repurchase Program"), which was to remain in effect until December 31, 2019 unless otherwise modified by the Board. As of November 2019, $2.9 million remained outstanding related to the Stock Repurchase Program. In November 2019, the Board authorized an incremental $7.1 million to the Stock Repurchase Program and provided that it will remain in effect until all amounts are utilized or it is otherwise modified by the Board.
ForUnder the Stock Repurchase Program, for the three months ended March 31, 2021 and March 31, 2020, under the Stock Repurchase Program, the Company purchased 0 and 20,613 shares, respectively, of its common stock for cash of 0 and $0.2 million, inclusive of commissions and fees. For the three months ended March 31, 2019, under the Stock Repurchase Program, the Company purchased 63,876 shares of its common stock for cash of $0.7 million,respectively, inclusive of commissions and fees. As of March 31, 2020,2021, the Company had $7.0 million remaining under the Stock Repurchase Program.
Quarterly Cash Dividend
Dividends declared and paid quarterly on all outstanding shares of common stock during the three months ended March 31, 20202021 and 20192020 were as follows:
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | | 2020 | | 2019 | | 2021 | | 2020 |
| | Per share | | Date paid | | Per share | | Date paid | | Per share | | Date paid | | Per share | | Date paid |
Dividends declared during quarter ended: | | | | | | Dividends declared during quarter ended: | | | | | | | | |
March 31 | | $ | 0.25 |
| | March 10, 2020 | | $ | 0.25 |
| | March 7, 2019 | March 31 | | $ | 0 | | | N/A | | $ | 0.25 | | | March 10, 2020 |
| | $ | 0.25 |
| | $ | 0.25 |
| | |
| | | | $ | 0 | | | $ | 0.25 | | |
A portion of the dividends declared remains accrued subsequent to the payment dates and represents dividends accumulated on nonvested shares of common stock held by employees and directors of the Company that contain forfeitable dividend rights that are not payable until the underlying shares of common stock vest. These amounts are included in both Other current liabilities and Other long-term liabilities on the Condensed Consolidated Balance SheetSheets as of March 31, 2021 and December 31, 2020.
Tax Asset Protection Plan
U.S. federal income tax rules, and Section 382 of the Internal Revenue Code in particular, could substantially limit the use of net operating losses and other tax assets if the Company experiences an "ownership change" (as defined in the Internal Revenue Code). In general, an ownership change occurs if there is a cumulative change in the ownership of the Company by "5 percent stockholders" that exceeds 50 percentage points over a rolling three-year period.
On May 5, 2017, the Board approved the declaration of a dividend of rights to purchase Series B Junior Participating Preferred Stock for each outstanding share of common stock as part of a tax asset protection plan (the "TAPP") designed to protect the Company’s ability to utilize its net operating losses and tax credits. The TAPP is intended to act as a deterrent to any person acquiring beneficial ownership of 4.99% or more of the Company’s outstanding common stock.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On April 9, 2020,2021, the Board approved the ThirdFourth Amendment to the TAPP ("ThirdFourth Amendment") that amends the TAPP, as previously amended by the First, Second and SecondThird Amendments that were approved the Board on April 6, 2018, and April 5, 2019 and April 9, 2020, respectively. The ThirdFourth Amendment amends the definition of "Final Expiration Date" under the TAPP to extend the duration of the TAPP and makes associated changes in connection therewith. Pursuant to the ThirdFourth Amendment, the Final Expiration Date shall be the close of business on the earlier of (i) December 31, 20212022 or (ii) December 31, 20202021 if stockholder approval of the ThirdFourth Amendment has not been obtained prior to such date.
Note 1013 - Stock-Based Compensation
The Company grants equity-based awards to employees, non-employee directors, and consultants that may include, but are not limited to, RSA's, restricted stock units ("RSU's"), performance stock units ("PSU's") and stock options. Stock-based compensation expense related to manufacturing employees and administrative employees is included within the Cost of goods soldrevenue and Payroll and benefits line items, respectively, in the Condensed Consolidated Statements of Operations. Stock-based compensation expense related to non-employee directors and consultants is included within the General and administrative line item in the Condensed Consolidated Statements of Operations.
Total stock-based compensation expense for the three months ended March 31, 20202021 and 20192020 was as follows: | | | | Three Months Ended March 31, | | | Three Months Ended March 31, | |
(in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 | |
RSA expense | | $ | 506 |
| | $ | 317 |
| RSA expense | | $ | 407 | | | $ | 506 | | |
| PSU expense | | PSU expense | | 14 | | | 0 | | |
| Total stock-based compensation expense | | $ | 506 |
| | $ | 317 |
| Total stock-based compensation expense | | $ | 421 | | | $ | 506 | | |
The amount of unrecognized compensation cost as of March 31, 2020,2021, and the expected weighted-average period over which the cost will be recognized is as follows:
| | | | | | | | | | | | | | |
| | As of March 31, 2021 |
(in thousands) | | Unrecognized Compensation Cost | | Expected Weighted- Average Period of Recognition (in years) |
RSA expense | | $ | 3,383 | | | 2.46 |
| | | | |
PSU expense | | 545 | | | 2.49 |
| | | | |
Total unrecognized stock-based compensation expense | | $ | 3,928 | | | 2.46 |
|
| | | | | | |
| | As of March 31, 2020 |
(in thousands) | | Unrecognized Compensation Cost | | Expected Weighted- Average Period of Recognition (in years) |
RSA expense | | $ | 3,178 |
| | 2.23 |
PSU expense | | 309 |
| | 2.94 |
Total unrecognized stock-based compensation expense | | $ | 3,487 |
| | 2.29 |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Restricted Stock
Restricted stock is typically granted with vesting terms of three years. The fair value of RSA's and RSU's is determined based on the closing price of the Company’s common stock on the authorization date of the grant multiplied by the number of shares subject to the stock award. Compensation expense for RSA's is generally recognized on a straight-line basis over the entire vesting period. Compensation expense for RSU's is generally recognized on a straight-line basis over the service period of the award.
A summary of RSA activity under the Company's various stock compensation plans for the three months ended March 31, 2020 is presented below: |
| | | | | | | |
| | Restricted Stock | | Weighted-Average Grant Date Fair Value |
Non-vested at January 1, 2020 | | 451,344 |
| | $ | 10.65 |
|
Granted | | 218,524 |
| | $ | 5.34 |
|
Vested | | (184,023 | ) | | $ | 10.39 |
|
Forfeited | | (265 | ) | | $ | 10.84 |
|
Non-vested at March 31, 2020 | | 485,580 |
| | $ | 8.36 |
|
Stock Options
Stock options generally vest over three years or upon satisfaction of performance-based conditions and have a contractual limit of five years from the date of grant to exercise. The fair value of stock options granted is determined on the date of grant using
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
the Black-Scholes option pricing model and the related expense is recognized on a straight-line basis over the entire vesting period.
A summary of stock option activity for the three months ended March 31, 20202021 is presented below:
|
| | | | | | | | | | | | | |
| | Number of Options Outstanding and Exercisable | | Weighted-Average Exercise Price | | Aggregate Intrinsic Value (in thousands) | | Weighted-Average Remaining Contractual Term (in years) |
Options outstanding, January 1, 2020 | | 300,000 |
| | $ | 13.87 |
| | | |
|
Options granted | | — |
| | — |
| | | | |
Options exercised | | — |
| | — |
| | | | |
Options expired / forfeited | | — |
| | — |
| | | | |
Options outstanding, March 31, 2020 | | 300,000 |
| | $ | 13.87 |
| | $ | — |
| | 0.18 |
Options vested and exercisable, March 31, 2020 | | 300,000 |
| | $ | 13.87 |
| | $ | — |
| | 0.18 |
| | | | | | | | | | | | | | | | | | |
| | Restricted Stock | | | | Weighted-Average Grant Date Fair Value | | |
| | | | | | | | |
Non-vested at January 1, 2021 | | 373,860 | | | | | $ | 7.25 | | | |
Granted | | 385,631 | | | | | $ | 5.27 | | | |
Vested | | (152,021) | | | | | $ | 7.81 | | | |
Forfeited | | (4,292) | | | | | $ | 7.00 | | | |
Non-vested at March 31, 2021 | | 603,178 | | | | | $ | 5.85 | | | |
Performance Share Units
Compensation expense is recognized for PSU awards on a straight-line basis over the applicable service period, which is generally three years, based on the estimated fair value at the date of grant using a Monte Carlo simulation model. A summary of PSU activity for the three months ended March 31, 20202021 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Units | | Weighted-Average Grant Date Fair Value | | Aggregate Intrinsic Value (in thousands) | | Weighted-Average Remaining Contractual Term (in years) |
PSU's outstanding, January 1, 2021 | | 50,127 | | | $ | 6.17 | | | | | |
Granted | | 62,448 | | | 7.09 | | | | | |
Vested / Settled | | 0 | | | 0 | | | | | |
Forfeited / Canceled | | 0 | | | 0 | | | | | |
PSU's outstanding, March 31, 2021 | | 112,575 | | | $ | 6.68 | | | $ | 619 | | | 2.49 |
|
| | | | | | | | | | | | | |
| | Units | | Weighted-Average Grant Date Fair Value | | Aggregate Intrinsic Value (in thousands) | | Weighted-Average Remaining Contractual Term (in years) |
PSU's outstanding, January 1, 2020 | | — |
| | $ | — |
| | | | |
Granted | | 50,127 |
| | 6.17 |
| | | | |
Vested / Settled | | — |
| | — |
| | | | |
Forfeited / Canceled | | — |
| | — |
| | | | |
PSU's outstanding, March 31, 2020 | | 50,127 |
| | $ | 6.17 |
| | $ | 329 |
| | 2.94 |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1114 - Supplemental Financial Information
Supplemental Balance Sheet Information
The following table summarizes the components of Prepaid expenses and other assets and Other long-term assets, net as presented in the Condensed Consolidated Balance Sheets:
| | | | | | | | | | | | | | |
| | As of |
(in thousands) | March 31, 2021 | | December 31, 2020 |
Prepaid expenses and other assets: | | | | |
| | | | |
Prepaid income taxes and income tax refunds | | $ | 263 | | | $ | 1,605 | |
Prepaid expenses | | 1,794 | | | 1,690 | |
Other | | 1,363 | | | 1,302 | |
| | | | |
| | | | |
| | $ | 3,420 | | | $ | 4,597 | |
Other long-term assets, net: | | | | |
Upfront customer consideration (1) | | $ | 7,363 | | | $ | 7,490 | |
Cabot receivable (1) | | 7,914 | | | 8,852 | |
Right of use assets, operating leases, net | | 4,230 | | | 1,930 | |
Spare parts, net | | 3,883 | | | 3,727 | |
Mine development costs, net | | 4,511 | | | 4,338 | |
Mine reclamation asset, net | | 1,689 | | | 1,712 | |
Highview Investment | | 552 | | | 552 | |
Other long-term assets | | 1,434 | | | 1,388 | |
| | $ | 31,576 | | | $ | 29,989 | |
|
| | | | | | | | |
| | As of |
(in thousands) | March 31, 2020 | | December 31, 2019 |
Prepaid expenses and other assets: | | | | |
Prepaid expenses | | $ | 1,592 |
| | $ | 1,708 |
|
Prepaid income taxes | | 4,772 |
| | 4,228 |
|
Other | | 1,241 |
| | 1,896 |
|
| | $ | 7,605 |
| | $ | 7,832 |
|
Other long-term assets, net: | | | | |
Right of use assets, operating leases, net | | $ | 4,358 |
| | $ | 5,073 |
|
Spare parts, net | | 3,360 |
| | 3,453 |
|
Mine development costs, net | | 7,457 |
| | 7,084 |
|
Mine reclamation asset, net | | 2,423 |
| | 2,451 |
|
Highview Investment | | 552 |
| | 552 |
|
Other long-term assets | | 1,842 |
| | 1,718 |
|
| | $ | 19,992 |
| | $ | 20,331 |
|
(1) See further discussion of Upfront customer consideration in Note 3 and Cabot receivable in Note 4 and Note 10.Spare parts include critical spares required to support plant operations. Parts and supply costs are determined using the lower of cost or estimated replacement cost. Parts are recorded as maintenance expenses in the period in which they are consumed.
Mine development costs include acquisition costs, the cost of other development work and mitigation costs related to the Company's mining operationsFive Forks Mine and are depleted over the estimated life of the related mine reserves, which is 21 years.reserves. The Company performs an evaluation of the recoverability of the carrying value of mine development costs to determine if facts and circumstances indicate that their carrying value may be impaired and if any adjustment is warranted. There were no indicators of impairment as of March 31, 2020.2021. Mine reclamation asset, net represents an asset retirement obligation ("ARO") asset related to the Five Forks Mine and is depreciated over the estimated life of the mine.
The Company holds a long-term investment (the "Highview Investment") in Highview Enterprises Limited ("Highview"), a London, England basedUK-based developmental stage company specializing in power storage. In November 2014, the Company acquired an 8% ownership interest in the common stock of Highview for $2.8 million in cash. The Company accounts for the Highview Investment as an investment recorded at cost, less impairment, plus or minus observable changes in price for identical or similar investments of the same issuer.
The Highview Investment is evaluated for indicators of impairment such as an event or change in circumstances that may have a significant adverse effect on the fair value of the investment. There were no changes to the carrying value of the Highview Investment for the three months ended March 31, 20202021 as there were no indicators of impairment or observable price changes for identical or similar investments.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table details the components of Other current liabilities and Other long-term liabilities as presented in the Condensed Consolidated Balance Sheets:
| | | | | | | | | | | | | | |
| | As of |
(in thousands) | | March 31, 2021 | | December 31, 2020 |
Other current liabilities: | | | | |
Current portion of operating lease obligations | | $ | 2,434 | | | $ | 1,883 | |
| | | | |
Income and other taxes payable | | 2,810 | | | 1,305 | |
Current portion of mine reclamation liability | | 9,169 | | | 9,370 | |
| | | | |
| | | | |
| | | | |
| | | | |
Other current liabilities | | 475 | | | 438 | |
| | | | |
| | $ | 14,888 | | | $ | 12,996 | |
Other long-term liabilities: | | | | |
| | | | |
Operating lease obligations, long-term | | $ | 2,661 | | | $ | 1,109 | |
| | | | |
Mine reclamation liabilities | | 10,330 | | | 12,077 | |
Other long-term liabilities | | 217 | | | 287 | |
| | | | |
| | $ | 13,208 | | | $ | 13,473 | |
|
| | | | | | | | |
| | As of |
(in thousands) | | March 31, 2020 | | December 31, 2019 |
Other current liabilities: | | | | |
Current portion of operating lease obligations | | $ | 2,142 |
| | $ | 2,382 |
|
Accrued interest | | 298 |
| | 213 |
|
Income and other taxes payable | | 805 |
| | 678 |
|
Other | | 1,030 |
| | 1,038 |
|
| | $ | 4,275 |
| | $ | 4,311 |
|
Other long-term liabilities: | | | | |
Operating lease obligations, long-term | | $ | 2,415 |
| | $ | 2,810 |
|
Mine reclamation liability | | 2,752 |
| | 2,721 |
|
Other | | 71 |
| | 229 |
|
| | $ | 5,238 |
| | $ | 5,760 |
|
The Mine reclamation liability related to the Five Forks Mine is included in Other long-term liabilities. The Mine reclamation liability related to Marshall Mine, which was assumed in the Marshall Mine Acquisition, is included in Other current liabilities and Other long-term liabilities. The Mine reclamation liabilities represent AROs. Changes in the AROs were as follows: | | | | | | | | | | | | | | |
| | As of |
(in thousands) | | March 31, 2021 | | December 31, 2020 |
Asset retirement obligation, beginning of period | | $ | 21,447 | | | $ | 2,721 | |
Asset retirement obligation assumed | | 0 | | | 21,328 | |
Accretion | | 351 | | | 543 | |
Liabilities settled | | (2,315) | | | (3,565) | |
Changes due to scope and timing of reclamation | | 16 | | | 420 | |
| | | | |
Asset retirement obligations, end of period | | 19,499 | | | 21,447 | |
Less current portion | | 9,169 | | | 9,370 | |
Asset retirement obligation, long-term | | $ | 10,330 | | | $ | 12,077 | |
Supplemental Condensed Consolidated Statements of Operations Information
The following table details the components of Interest expense in the Condensed Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
(in thousands) | | 2021 | | 2020 | | | | |
Interest on Senior Term Loan | | $ | 155 | | | $ | 630 | | | | | |
Debt discount and debt issuance costs | | 591 | | | 354 | | | | | |
453A interest | | 0 | | | 132 | | | | | |
Other | | 91 | | | 94 | | | | | |
| | | | | | | | |
| | $ | 837 | | | $ | 1,210 | | | | | |
|
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2020 | | 2019 |
Interest on Senior Term Loan | | $ | 630 |
| | $ | 1,270 |
|
Debt discount and debt issuance costs | | 354 |
| | 381 |
|
453A interest | | 132 |
| | 322 |
|
Other | | 94 |
| | 131 |
|
| | $ | 1,210 |
| | $ | 2,104 |
|
Note 1215 - Income Taxes
For the three months ended March 31, 20202021 and 2019,2020, the Company's income tax expense and effective tax rates based on forecasted pretax income were:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
(in thousands, except for rate) | | 2021 | | 2020 | | | | |
Income tax expense | | $ | 4,489 | | | $ | 358 | | | | | |
Effective tax rate | | 25 | % | | (23) | % | | | | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands, except for rate) | | 2020 | | 2019 |
Income tax expense | | $ | 358 |
| | $ | 1,699 |
|
Effective tax rate | | (23 | )% | | 11 | % |
The effective rate for the three months ended March 31, 2021 was higher from the federal statutory rate primarily from the impact of estimated state income taxes. For the three months ended March 31, 2020,2021, the Company reported a loss before incomerecorded tax credits earned of $1.5 million and income tax expense of $0.4$0.1 million, which resulted in a negative effective tax rate for the quarter. Income tax expense for three months ended March 31, 2020 was due to federal and state income tax expense of $0.4 million, primarily from an increasewere fully reserved in the valuation allowance on deferred tax assets of $0.9 million. The increase in the valuation allowance was a result of a reduction in forecasts as of March 31, 2020 of current and future years' taxable income.2021.
The Company assesses 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,assets, 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 income taxes, the Company assesses the relative merits and risks of the appropriate income tax treatment of transactions taking into account statutory, judicial, and regulatory guidance.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1316 - Business Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by a company's chief operating decision maker ("CODM"), or a decision-making group, in deciding how to allocate resources and in assessingassess financial performance. As of March 31, 2020,2021, the Company's CODM was the Company's CEO. The Company's operating and reportable segments are identified by products and services provided.
As of March 31, 2020,2021, the Company has two2 reportable segments: (1) Refined Coal ("RC"); and (2) Power GenerationAdvanced Purification Technologies ("APT"). Effective December 31, 2020, and Industrials ("PGI").as reported in the 2020 Form 10-K, the Company revised its segments to RC and APT and amounts for the three months ended March 31, 2020 have been recast to conform with the current year presentation.
The business segment measurements provided to and evaluated by the CODM are computed in accordance with the principles listed below:
•The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the 20192020 Form 10-K.
•Segment revenues include equity method earnings and losses from the Company's equity method investments.
•Segment operating income (loss) includes segment revenues and allocation of certain "Corporate general and administrative expenses," which include Payroll and benefits, Legal and professional fees and General and administrative.administrative and Depreciation, amortization, depletion and accretion.
•RC segment operating income includes interest expense directly attributable to the RC segment.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of March 31, 20202021 and December 31, 2019,2020, substantially all of the Company's material assets are located in the U.S. and substantially all of significant customers are U.S. companies. The following table presents the Company's operating segment results for the three months ended March 31, 20202021 and 2019:2020:
| | | | Three Months Ended March 31, | | | Three Months Ended March 31, | |
(in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 | |
Revenues: | | | | | Revenues: | | | | | |
Refined Coal: | | | | | Refined Coal: | | |
Earnings in equity method investments | | $ | 8,273 |
| | $ | 21,690 |
| Earnings in equity method investments | | $ | 18,312 | | | $ | 8,273 | | |
License royalties, related party | | 3,046 |
| | 4,220 |
| License royalties, related party | | 4,066 | | | 3,046 | | |
| | 11,319 |
| | 25,910 |
| |
Power Generation and Industrials: | | | | | |
| | | | 22,378 | | | 11,319 | | |
Advanced Purification Technologies: | | Advanced Purification Technologies: | | | | | |
Consumables | | 8,475 |
|
| 14,553 |
| Consumables | | 17,031 | | | 9,217 | | |
| | | | 17,031 | | | 9,217 | | |
| | | 8,475 |
| | 14,553 |
| |
Total segment reporting revenues | | 19,794 |
| | 40,463 |
| Total segment reporting revenues | | 39,409 | | | 20,536 | | |
| | | | | | | | | |
Adjustments to reconcile to reported revenues: | | | | | Adjustments to reconcile to reported revenues: | | |
| Earnings in equity method investments | | (8,273 | ) | | (21,690 | ) | Earnings in equity method investments | | (18,312) | | | (8,273) | | |
Corporate and other | | 742 |
| | 556 |
| |
| Total reported revenues | | $ | 12,263 |
| | $ | 19,329 |
| Total reported revenues | | $ | 21,097 | | | $ | 12,263 | | |
| | | | | | | | | |
Segment operating income (loss): | | | | | Segment operating income (loss): | | |
Refined Coal (1) | | $ | 10,860 |
| | $ | 25,233 |
| |
Power Generation and Industrials (2) | | (6,577 | ) | | (3,462 | ) | |
| Refined Coal | | Refined Coal | | $ | 22,271 | | | $ | 10,860 | | |
Advanced Purification Technologies (1) | | Advanced Purification Technologies (1) | | 15 | | | (7,370) | | |
| Total segment operating income | | $ | 4,283 |
| | $ | 21,771 |
| Total segment operating income | | $ | 22,286 | | | $ | 3,490 | | |
(1) Included in RCAPT segment operating income (loss) for the three months ended March 31, 2021 and 2020 and 2019 is 453A interest expense of $0.1$1.9 million and $0.3 million, respectively.
(2) Included in PGI segment operating loss for the three months ended March 31, 2020 and 2019 was $2.0 million and $2.0$2.2 million, respectively, of depreciation, amortization, depletion and depletionaccretion expense on mine and plant long-lived assets. Included in PGI segment operating loss for the three months ended March 31, 2019 was $3.4assets and liabilities and $0.1 million and 0, respectively, of costs recognized as a resultamortization of the step-up in inventory fair value recorded from the Carbon Solutions Acquisition.Upfront Customer Consideration.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A reconciliation of reportable segment operating income to the Company's consolidated income (loss) before income tax expense is as follows: | | | | Three Months Ended March 31, | | | Three Months Ended March 31, | |
(in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 | |
Total reported segment operating income | | $ | 4,283 |
| | $ | 21,771 |
| Total reported segment operating income | | $ | 22,286 | | | $ | 3,490 | | |
Other operating loss | | (793 | ) | | (398 | ) | |
| | 3,490 |
| | 21,373 |
| |
Adjustments to reconcile to (loss) income before income tax expense attributable to the Company: | | | | | |
| Adjustments to reconcile to income (loss) before income tax expense attributable to the Company: | | Adjustments to reconcile to income (loss) before income tax expense attributable to the Company: | | |
Corporate payroll and benefits | | (709 | ) | | (432 | ) | Corporate payroll and benefits | | (639) | | | (709) | | |
| Corporate legal and professional fees | | (1,749 | ) | | (1,811 | ) | Corporate legal and professional fees | | (1,754) | | | (1,749) | | |
Corporate general and administrative | | (1,599 | ) | | (1,434 | ) | Corporate general and administrative | | (1,176) | | | (1,599) | | |
Corporate depreciation and amortization | | (26 | ) | | (13 | ) | Corporate depreciation and amortization | | (154) | | | (26) | | |
Corporate interest (expense) income, net | | (942 | ) | | (1,582 | ) | |
(Loss) income before income tax expense | | $ | (1,535 | ) | | $ | 16,101 |
| |
| Corporate interest expense, net | | Corporate interest expense, net | | (650) | | | (942) | | |
| Other income (expense), net | | Other income (expense), net | | 313 | | | 0 | | |
| Income (loss) before income tax expense | | Income (loss) before income tax expense | | $ | 18,226 | | | $ | (1,535) | | |
Corporate general and administrative expenses include certain costs that benefit the business as a whole but are not directly related to one of the Company's segments. Such costs include, but are not limited to, accounting and human resources staff, information systems costs, legal fees, facility costs, audit fees and corporate governance expenses.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A reconciliation of reportable segment assets to
the Company's consolidated assets is as follows:
| | | | As of | | As of |
(in thousands) | | March 31, 2020 | | December 31, 2019 | (in thousands) | | March 31, 2021 | | December 31, 2020 |
Assets: | | | | | Assets: | | | | |
Refined Coal (1) | | $ | 33,940 |
| | $ | 43,953 |
| Refined Coal (1) | | $ | 7,117 | | | $ | 11,516 | |
Power Generation and Industrials | | 78,539 |
| | 80,912 |
| |
Advanced Purification Technologies (2) | | Advanced Purification Technologies (2) | | 78,373 | | | 80,877 | |
Total segment assets | | 112,479 |
| | 124,865 |
| Total segment assets | | 85,490 | | | 92,393 | |
| All Other and Corporate (2)(3) | | 47,704 |
| | 48,934 |
| | 66,080 | | | 54,278 | |
Consolidated | | $ | 160,183 |
| | $ | 173,799 |
| Consolidated | | $ | 151,570 | | | $ | 146,671 | |
(1) Includes $30.3$2.8 million and $39.2$7.7 million of investments in equity method investees as of March 31, 2021 and December 31, 2020,respectively.
(2) Includes $35.1 million and $34.6 million of long-lived assets, net. Expenditures for additions to long-lived assets were $1.3 million and $0.7 million, respectively for the three months ended March 31, 2021 and 2020.
(3) Includes the Company's deferred tax assets.assets of $7.6 million and $10.6 million as of March 31, 2021 and December 31, 2020,respectively.
Note 1417 - Fair Value Measurements
Fair value of financial instruments
The carrying amounts of financial instruments, including cash, cash equivalents and restricted cash, accounts receivable, accounts payable and accrued expenses, approximate fair value due to the short maturity of these instruments. The carrying amounts of the Senior Term Loan and other obligations, including finance leases, approximate fair value based on credit terms and market interest rates currently available for similar instruments. Accordingly, these instruments are not presented in the table below. The following table provides the estimated fair values of the remaining financial instruments:
| | | | As of March 31, 2020 | | As of December 31, 2019 | | As of March 31, 2021 | | As of December 31, 2020 |
(in thousands) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | (in thousands) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Financial Instruments: | | | | | | | | | Financial Instruments: | | | | | | | | |
| Highview Investment | | $ | 552 |
| | $ | 552 |
| | $ | 552 |
| | $ | 552 |
| Highview Investment | | $ | 552 | | | $ | 552 | | | $ | 552 | | | $ | 552 | |
| Highview Obligation | | $ | 208 |
| | $ | 208 |
| | $ | 220 |
| | $ | 220 |
| Highview Obligation | | $ | 231 | | | $ | 231 | | | $ | 228 | | | $ | 228 | |
|
Concentration of credit risk
The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents. The Company holds cash and cash equivalents at threefour financial institutions as of March 31, 2020.2021. If an institution was unable to perform its obligations, the Company would be at risk regarding the amount of cash and investments in excess of the Federal Deposit Insurance Corporation limits (currently $250 thousand) that would be returned to the Company.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of March 31, 20202021 and December 31, 2019,2020, the Company had no0 financial instruments carried and measured at fair value on a recurring basis.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
As disclosed in Note 2,3, the Company completed the Carbon Solutions Acquisition for purchase considerationasset acquisition of $66.5 million.Marshall Mine, LLC. The estimated fair values of the assets acquired and liabilities assumed were determined based on Level 3 inputs.
TheAs disclosed in Note 14, the Company has applied the measurement alternative for investments without readily determinable fair values under ASC Topic 321 - Investments in Equity Securities ("ASC 321")accounts for the Highview Investment.Investment as an investment recorded at cost, less impairment, plus or minus observable changes in price for identical or similar investments of the same issuer. Fair value measurements, if any, resulting from the Company's application of the guidance in ASC 321 represent either Level 2 or Level 3 measurements. There were no changes to the carrying value of the Highview Investment for the three months ended March 31, 2020 and 2019 as there were no indicators of impairment or observable price changes for identical or similar investments.
Note 15 - Restructuring
In December 2018, the Company recorded restructuring charges in connection with the departures of certain executives of Carbon Solutions in conjunction with the Carbon Solutions Acquisition. As part of the Carbon Solutions Acquisition, the Company also assumed a salary severance liability for an additional executive of Carbon Solutions in the amount of $0.6 million. There were no material restructuring activities during the three months ended March 31, 2020.
The following table summarizes the Company's change in restructuring accruals for the three months ended March 31, 2020:
|
| | | | |
(in thousands) | | Employee Severance |
Remaining accrual as of December 31, 2019 | | $ | 254 |
|
Expense provision | | — |
|
Cash payments and other | | (122 | ) |
Change in estimates | | (7 | ) |
Remaining accrual as of March 31, 2020 | | $ | 125 |
|
Restructuring accruals are included within the Accrued payroll and related liabilities line item in the Condensed Consolidated Balance Sheets. Restructuring expenses are included within the Payroll and benefits line item in the Condensed Consolidated Statements of Operations.
Note 1618 - Subsequent Events
Unless disclosed elsewhere within the notes to the Condensed Consolidated Financial Statements, the following are the significant matters that occurred subsequent to March 31, 2020.
Paycheck Protection Program Loan2021.
On April 20, 2020,22, 2021, there was an incident at the Company entered into a loan (the "PPP Loan") evidenced by a promissory note (the "Promissory Note"), under the Paycheck Protection Program sponsored by the U.S. Small Business Administration ("SBA") through BOK, NA dba Bank of Oklahoma ("BOK") providing for $3.3 millionCompany's Red River Plant in proceeds,Louisiana, which amount was funded to the Company on April 21, 2020. The PPP Loan was made pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and is administered by the SBA.
The Promissory Note matures April 21, 2022 and provides for 18 monthly payments of principal and interest commencing on November 21, 2020. The interest rate on the PPP Loan is 1.00%. The Promissory Note is unsecured and contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or BOK, or breaching the termsinvolved an isolated fire in one of the PPP Loan.plant's coal handling systems. As a result, the Red River Plant was shut down for approximately one week for repair. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, or filing suit and obtaining judgment against the Company. The Promissory Note principal may be forgiven subject to the terms of the Paycheck Protection Program.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
cash flow impact associated with the incident, including maintenance and repairs, capital expenditures, inventory replacement due to lost production and other items, is not expected to exceed $3.0 million.
WaiverThe Company entered into agreements ("Retention Agreements") with all of its executive officers and certain other key employees to retain those officers and employees in order to maintain the Company’s current business operations while it pursues and executes on Senior Term Loan
Pursuant to entering into the PPP Loan, on April 20, 2020, the Company and Apollo Credit Strategies Master Fund Ltd and Apollo A-N Credit Fund (Delaware) L.P. (collectively, "Apollo"), affiliates of a beneficial owner of greater than five percent of the Company's common stock, executed the First Amendment (the "First Amendment")its strategic initiatives. The total amount payable pursuant to the Senior Term Loan, which permitted the Company to enter into the PPP Loan.
Retention Agreements is $2.4 million.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of our operations should be read together with the unaudited Condensed Consolidated Financial Statements and notes of Advanced Emissions Solutions, Inc. ("ADES" or the "Company") included elsewhere in Item 1 of Part I of this Quarterly Report and with the audited consolidated financial statements and the related notes of ADES included in the 20192020 Form 10-K.
Overview
We are a leader in emissions reductions technologies through consumables that utilize powdered activated carbon (“PAC”) and chemical based technologies, primarily serving the coal-fired power generation and industrial boiler industries. Our proprietary environmental technologies and specialty chemicals 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 potential emissions control regulations. Our products are also used for the purification of water.
Through our wholly-owned subsidiary, ADA Carbon Solutions, LLC ("Carbon Solutions"), which we acquired on December 7, 2018 (the "Acquisition Date"), we manufacture and sell activated carbon ("AC") used in mercury capture for the coal-fired power plant, industrial and water treatment markets. Carbon Solutions also owns an associated lignite mine that supplies the primary raw material for manufacturing our products.
We operate two segments: Refined Coal ("RC")RC and Power Generation and Industrials ("PGI").APT. Our RC segment is comprised of our equity ownership in Tinuum Group LLC ("Tinuum Group") and Tinuum Services, LLC ("Tinuum Services"), both of which are unconsolidated entities in which we generate substantial earnings. Tinuum Group provides reduction of mercury and nitrogen oxide ("NOX")NOx emissions at select coal-fired power generators through the production and sale of RC that qualifies for tax credits ("Section 45 tax credits")credits under the Internal Revenue Code Section 45 - Production Tax Credit ("IRC Section 45").45. We benefit from Tinuum Group's production and sale of RC, which generates tax credits, as well as its revenue from selling or leasing RC facilities to tax equity investors. We also earn royalties for technologies that are licensedwe license to Tinuum Group and are used at certain RC facilities to enhance combustion and reduced emissions of NOx and mercury from coal burned to generate electrical power. Tinuum Services operates and maintains the RC facilities under operating and maintenance agreements with Tinuum Group and owners or lessees of the RC facilities. Both Tinuum Group and Tinuum Services expect to significantly wind down their operations by the end of 2021 due to the expected expiration of the Section 45 tax credit period as of December 31, 2021. As such, our earnings and distributions from our RC segment will substantially cease as of December 31, 2021.
Our PGIAPT segment includes the sale ofis primarily operated through a wholly-owned subsidiary, Carbon Solutions. We sell consumable products that provide mercury controlutilize AC and chemical based technologies to a broad range of customers, including coal-fired utilities, industrials, water treatment plants, and other air and water contaminants control to coal-fired power generators and other industrial companies.diverse markets through the customer supply agreement defined below. Our primary products are comprised of AC, which is produced from lignite coal, which creates AC. Fromcoal. Our AC we manufacture various forms of AC thatproducts include PACboth powdered activated carbon ("PAC") and granular activated carbon ("GAC"). There are threeOur proprietary technologies and associated product offerings provide purification solutions to enable our customers to reduce certain contaminants and pollutants to meet the challenges of existing and potential regulations. Additionally, we own an associated lignite mine that supplies the primary consumable products that work in conjunction with the installed equipment at coal-fired utilities to control mercury: PAC, coal additives and scrubber additives. In many cases these three consumable products can be used together or in many circumstances substitutedraw material for each other. However, AC is typically the most efficient and effective way to capture mercury and currently accounts for over 50% of the mercury control consumables North American market.manufacturing our products.
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 by IRCfrom 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 have been influencedare 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 of 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 PGIAPT segment, demand is driven primarily by consumables-based solutions for coal-fired power generation and other industrials.industrials, municipal water customers, and since September 30, 2020, demand from Cabot's customers through the Supply Agreement discussed below. Operating results in PGI havethe APT segment 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.
On April 22, 2021, there was an incident at our Red River Plant in Louisiana ("Plant Incident"), which involved an isolated fire in one of the plant's coal handling systems. As a result, the Red River Plant was shut down for approximately one week for repair. The cash flow impact associated with the incident, including maintenance and repairs, capital expenditures, inventory replacement due to lost production and other items, is not expected to exceed $3.0 million.
Customer Supply Agreement
On September 30, 2020, we and Cabot entered into the Supply Agreement pursuant to which we agreed to sell and deliver to Cabot, and Cabot agreed 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.
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, the Supply Agreement will expand our AC 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 with Cabot to purchase 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"). 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. For the three months ended March 31, 2021, we settled $2.3 million in of Reclamation Costs.
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. As of March 31, 2021, for the obligations due under the Reclamation Contract, we were required to post collateral of $10.0 million in the form of restricted cash.
Impact of COVID-19
In March 2020, the World Health Organization ("WHO")WHO declared the novel strain of coronavirus ("COVID-19")COVID-19 a global pandemic. We are designated by the Cybersecurity and Infrastructure Security Agency ("CISA")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. 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 timeAdditionally, we have faced a general downturn in our sales and marketing efforts. The duration of these measures is unknown, may be extended and additional measures may be imposed.
Both of our business segments have continued to operate during the pandemic, and we have taken certain 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 certainall 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.
The duration of these measures is unknown, may be extended and additional measures may be imposed. We cannot however, predict the long-term effects on our business, including our financial position or results of operations, if governmental restrictions such as "stay-at-home orders" 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 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 March 31, 2021, total payroll tax payments deferred under the CARES Act were $0.4 million.
Our customers may also be impacted by COVID-19 pandemic as the utilization of energy has declined during “stay-at-home” orders.changed. We cannot predict the long-term impact on our customers and the subsequent impact on our business.
Results of Operations
For the three months ended March 31, 2020,2021, we recognized net lossincome of $1.9$13.7 million compared to net incomeloss of $14.4$1.9 million for the three months ended March 31, 2019.
The operating results for the three months ended March 31, 2020 are primarily attributable to a combination of factors, including:
Continued performance in our RC business segment, principally related to equity earnings and license royalties;
Performance in our PGI business segment, principally related to Carbon Solutions;
Impacts related to changes in income tax expense.2020.
The following sections provide additional information regarding these comparative periods. For comparability purposes, the following tables set forth our results of operations for the periods presented in the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report. The period-to-period comparison of financial results may not be indicative of financial results to be achieved in future periods.
Comparison of the Three Months Ended March 31, 20202021 and 20192020
Total Revenue and Cost of Revenue
A summary of the components of our revenues and cost of revenue for the three months ended March 31, 20202021 and 20192020 is as follows: | | | | Three Months Ended March 31, | | Change | | Three Months Ended March 31, | | Change |
(in thousands, except percentages) | | 2020 | | 2019 | | ($) | | (%) | (in thousands, except percentages) | | 2021 | | 2020 | | ($) | | (%) |
Revenues: | | | | | | | | | Revenues: | | | | | | | | |
Consumables | | $ | 9,217 |
| | $ | 15,109 |
| | $ | (5,892 | ) | | (39 | )% | Consumables | | $ | 17,031 | | | $ | 9,217 | | | $ | 7,814 | | | 85 | % |
License royalties, related party | | 3,046 |
| | 4,220 |
| | (1,174 | ) | | (28 | )% | License royalties, related party | | 4,066 | | | 3,046 | | | 1,020 | | | 33 | % |
| Total revenues | | $ | 12,263 |
| | $ | 19,329 |
| | $ | (7,066 | ) | | (37 | )% | Total revenues | | $ | 21,097 | | | $ | 12,263 | | | $ | 8,834 | | | 72 | % |
Operating expenses: | | | | | | | | | Operating expenses: | | | | | | | |
Consumables cost of revenue, exclusive of depreciation and amortization | | $ | 11,491 |
| | $ | 14,108 |
| | $ | (2,617 | ) | | (19 | )% | Consumables cost of revenue, exclusive of depreciation and amortization | | $ | 12,474 | | | $ | 11,491 | | | $ | 983 | | | 9 | % |
|
Consumables and consumables cost of revenue
For the three months ended March 31, 2020,2021, consumables revenues decreasedincreased from the comparable periodquarter in 20192020 primarily due to lower volumes, which were negatively impacted by low coal-fired power dispatch driven by power generationhigher product volumes, most significantly from sources other than coal.product sold under the Supply Agreement, which impacted revenue by $7.1 million, and favorable pricing mix of $2.1 million. Negatively impacting revenue quarter over quarter was less favorable product mix of approximately $1.3 million. Our gross margin, exclusive of depreciation and amortization, was negativeincreased for the three months ended March 31, 2020 as2021 compared to the corresponding quarter in 20192020 primarily due to the impact ofhigher volumes, which resulted in lower sales volumes and the high fixed cost operating structure. per pound compared to the prior year.
We expect Consumables cost of revenue and gross margin to be negatively impacted due to routine scheduled maintenance outages planned for the second quarter of 2021. Further, as a result of the Plant Incident, the Red River Plant was shut down for approximately one week for repair, which will increase our Consumables cost of revenue and negatively impact gross margin in future quarters of 2021.
Consumables revenue iscontinues to be 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 U.S. Energy Information Administration ("EIA"), for the three months ended March 31, 2020,2021, power generation from coal-fired power dispatch was downincreased approximately 33%37% compared to the corresponding quarter in 2019. Due to safety actions taken by the Company to provide for continued operation of our manufacturing facilities, we expect that cost of revenue will increase as a result of COVID-19 during the three months ended June 30, 2020.
License royalties, related party
For the three months ended March 31, 20202021 and 2019,2020, there were 11.914.7 million tons and 10.911.9 million tons, respectively, of RC produced using M-45TM and M-45-PCTM technologies ("M-45 Technology"), which Tinuum Group licenses from us ("M-45 License"). M-45 License royalties increased for the three months ended March 31, 2021 primarily from higher tonnage compared to the three months ended March 31, 2020. This decrease combined withwas primarily a lower royalty rate per ton resulted in a decrease in license royaltiesresult of an increase quarter over quarter.quarter in RC facilities that use the M-45 Technology. The reductionincrease in tonnage as well as the additional RC facilities attributed to the royalty rate per ton was primarily attributable to higher depreciation recognized of approximately $0.8 million on all royalty bearing RC facilities as a result of a reduction in their estimated useful lives as determined by Tinuum Group. Further reducing the rate per ton was a decrease in net lease payments of approximately $0.4 million as a result ofincreasing period over period. As both Tinuum Group restructuring RC facility contracted leases with its largest customer. As a resultand Tinuum Services expect to significantly wind down their operations by the end of higher depreciation and lower lease payments,2021 due to the expected expiration of the Section 45 tax credit period as of December 31, 2021, we do not expect that the lower royalty rate per ton willto continue in 2020 andearning M-45 License royalties after December 31, 2021.
Additional information related to revenue concentrations and contributions by class and reportable segment can be found within the Business Segments discussion and in Note 1316 to the Condensed Consolidated Financial Statements.
Other Operating Expenses
A summary of the components of our operating expenses, exclusive of cost of revenue items (presented above), for the three months ended March 31, 20202021 and 20192020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change |
(in thousands, except percentages) | | 2021 | | 2020 | | ($) | | (%) |
Operating expenses: | | | | | | | | |
Payroll and benefits | | $ | 2,469 | | | $ | 2,742 | | | $ | (273) | | | (10) | % |
| | | | | | | | |
Legal and professional fees | | 1,803 | | | 2,043 | | | (240) | | | (12) | % |
General and administrative | | 1,915 | | | 2,331 | | | (416) | | | (18) | % |
Depreciation, amortization, depletion and accretion | | 2,106 | | | 2,297 | | | (191) | | | (8) | % |
| | | | | | | | |
| | | | | | | | |
| | $ | 8,293 | | | $ | 9,413 | | | $ | (1,120) | | | (12) | % |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Change |
(in thousands, except percentages) | | 2020 | | 2019 | | ($) | | (%) |
Operating expenses: | | | | | | | | |
Payroll and benefits | | $ | 2,742 |
| | $ | 2,556 |
| | $ | 186 |
| | 7 | % |
Legal and professional fees | | 2,043 |
| | 2,204 |
| | (161 | ) | | (7 | )% |
General and administrative | | 2,331 |
| | 1,914 |
| | 417 |
| | 22 | % |
Depreciation, amortization, depletion and accretion | | 2,297 |
| | 2,102 |
| | 195 |
| | 9 | % |
| | $ | 9,413 |
| | $ | 8,776 |
| | $ | 637 |
| | 7 | % |
Payroll and benefits
Payroll and benefits expenses, which represent costs related to selling, general and administrative personnel, increased duringdecreased for the three months ended March 31, 20202021 compared to the corresponding quarter in 20192020 primarily due to an increasea decrease in payroll-related expenses of executive and personnel mix. Our headcount of personnel and payroll-related expenses.remained relatively constant quarter over quarter.
Legal and professional fees
Legal and professional fees decreased duringfor the three months ended March 31, 20202021 compared to the corresponding quarter in 20192020 as a result of costs associated with the integration of the Carbon Solutions that were incurred during the three months ended March 31, 2019 of $0.4 million. These costs were partially offset by costs incurredcost reductions related to professional fees;fees of $0.5 million, primarily in consulting and outsourced IT costcosts specific to the completion of the integration of Carbon SolutionsSolutions. Offsetting this decrease was an increase in outsourced shared service costs, including legal fees, of $0.3 million.
General and administrative
General and administrative expenses increaseddecreased for the three months ended March 31, 2021 compared to the corresponding quarter in 2020 primarily due to a reduction of general and administrative expenses included a reduction in product development of $0.4 million that occurred during the three months ended March 31, 2020 compared to the corresponding quarter in 2019 most significantly due to2020. Further reduction of general and administrative expenses included a reduction of travel of $0.1 million. Offsetting these decreases was an increase in product developmentrent and occupancy expenses of approximately $0.4 million.$0.1 million related to property taxes.
Depreciation, amortization, depletion and accretion
Depreciation and amortization expense increased duringdecreased for the three months ended March 31, 20202021 compared to the corresponding quarter in 20192020 due to an impairment charge taken in the second quarter of 2020 that reduced the value of our fixed assets and intangibles and thus, reduced the corresponding depreciation and amortization expense by approximately $0.6 million. Offsetting this decrease was an increase in accretion expense of $0.3 million related to the ARO liability of Marshall Mine for the three months ended March 31, 2021. Further, the addition of long-lived assetsleasehold improvements at our manufacturing plantcorporate headquarters in Louisiana, which2020 contributed to approximately $0.3$0.2 million of depreciationamortization expense for the three months ended March 31, 2020.
2021.
Other Income (Expense), net
A summary of the components of other income (expense), net for the three months ended March 31, 20202021 and 20192020 is as follows: | | | | Three Months Ended March 31, | | Change | | Three Months Ended March 31, | | Change |
(in thousands, except percentages) | | 2020 | | 2019 | | ($) | | (%) | (in thousands, except percentages) | | 2021 | | 2020 | | ($) | | (%) |
Other income (expense): | | | | | | | | | Other income (expense): | | | | | | | | |
Earnings from equity method investments | | $ | 8,273 |
| | $ | 21,690 |
| | $ | (13,417 | ) | | (62 | )% | Earnings from equity method investments | | $ | 18,312 | | | $ | 8,273 | | | $ | 10,039 | | | 121 | % |
| Interest expense | | (1,210 | ) | | (2,104 | ) | | 894 |
| | (42 | )% | Interest expense | | (837) | | | (1,210) | | | 373 | | | (31) | % |
Other | | 43 |
| | 70 |
| | (27 | ) | | (39 | )% | Other | | 421 | | | 43 | | | 378 | | | 879 | % |
| Total other income | | $ | 7,106 |
| | $ | 19,656 |
| | $ | (12,550 | ) | | (64 | )% | Total other income | | $ | 17,896 | | | $ | 7,106 | | | $ | 10,790 | | | 152 | % |
Earnings from equity method investments
The following table details the components of our respective equity method investments included within the Earnings from equity method investments line item in the Condensed Consolidated Statements of Operations:
| | | | Three Months Ended March 31, | | Three Months Ended March 31, | |
(in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 | |
Earnings from Tinuum Group | | $ | 6,438 |
| | $ | 19,767 |
| Earnings from Tinuum Group | | $ | 16,362 | | | $ | 6,438 | | |
Earnings from Tinuum Services | | 1,838 |
| | 1,922 |
| Earnings from Tinuum Services | | 1,950 | | | 1,838 | | |
(Loss) earnings from other | | (3 | ) | | 1 |
| |
Earnings (loss) from other | | Earnings (loss) from other | | — | | | (3) | | |
| Earnings from equity method investments | | $ | 8,273 |
| | $ | 21,690 |
| Earnings from equity method investments | | $ | 18,312 | | | $ | 8,273 | | |
Earnings from equity method investments, and changes related thereto, are impacted by our significant equity method investees: Tinuum Group and Tinuum Services.
For the three months ended March 31, 2021, we recognized $16.4 million in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of $10.8 million for the quarter. The difference between our pro-rata share of Tinuum Group's net income and our earnings from Tinuum Group equity method investment as reported on the Condensed Consolidated Statements of Operations is the result of cumulative distributions received from Tinuum Group being in excess of the carrying value of the investment, and therefore we recognize such excess distributions as equity method earnings in the period the distributions occur.
For the three months ended March 31, 2020, we recognized $6.4 million in equity earnings from Tinuum Group, which was equal to our proportionate share of Tinuum Group's net income for the respective quarter. For the three months ended March 31, 2019, we recognized $19.8 million
See further discussion of quarter over quarter changes in equity earningsEarnings from Tinuum Group, which was equalEquity Investments in "Business Segments" under this Item. Additional information related to our proportionate share of Tinuum Group's net income of $21.4 million for the quarter less the recovery of the cash distributions in excess of cumulative earnings as of December 31, 2018. The difference between our pro-rata share of Tinuum Group's net income and our earnings from our Tinuum Group equity method investment as reported oninvestments is included in Note 6 to the Condensed Consolidated Financial Statements included in Part I - Item 1 of Operations for the three months ended March 31, 2019 was the result of cumulative distributions received from Tinuum Group being in excess of the carrying value of the investment, and thereforethis Report.
For 2021, we recognizedexpect to recognize such excess distributionscontributions as equity method earnings in the period the distributions occurred.occur, limited to the carrying value of the Tinuum Group equity investment.
Interest expense
For the three months ended March 31, 2020, equity earnings from our interest in Tinuum Group were positively impacted by the addition of two new RC facilities during the second half of 2019. However, equity earnings from Tinuum Group for the three months ended March 31, 2020 decreased from the comparable quarter in 2019 primarily from a new RC facility in the first quarter of 2019 that was recognized as a point-in-time sale and higher depreciation recognized of approximately $2.4 million for the three months ended March 31, 2020 on all Tinuum Group RC facilities as a result of a reduction in RC facilities estimated useful lives as determined by Tinuum Group during the second half of 2019. Further contributing to the decrease in equity earnings quarter over quarter was the restructuring of RC facility leases with Tinuum Group's largest customer, which decreased lease payments and equity earnings beginning in the three months ended September 30, 2019. We believe the increase in depreciation and decrease in lease payments will negatively impact equity earnings for the remainder of 2020 as well as 2021.
Further, two coal-fired utilities in which Tinuum Group has invested RC facilities announced expected closures in the fourth quarter of 2019 and the associated leases of those facilities terminated during this period. As a result of higher depreciation, reduced lease payments and closures of two utilities, we expect our pro-rata share of Tinuum Group’s earnings and distributions to be lower in future periods.
Equity earnings from our interest in Tinuum Services decreased by $0.1 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019, and for those quarters, Tinuum Services provided operating and maintenance services to 19 operating RC facilities. Tinuum Services derives earnings under fixed-fee arrangements as well as fee arrangements that are based on actual RC production, depending upon the specific RC facility operating and maintenance agreement.
Tax Credits and Obligations
Historically, we have earned Section 45 tax credits related to the production of RC, most significantly due to our direct and indirect ownership, through Tinuum Group, in the GWN REF RC facility ("GWN REF"). However, based on an agreement effective January 1, 2019 with Tinuum Group's largest customer, which also has an ownership interest in Tinuum Group, substantially all of the tax credits earned from GWN REF were allocated to this customer. As a result, our earned Section 45 tax credits for three months ended March 31, 2020 and 2019 were minimal and will likely to continue to be for the remainder of 2020 and 2021.
Interest expense
For the three months ended March 31, 2020,2021, interest expense decreased $0.9$0.4 million compared to the three months ended March 31, 20192020 primarily due to a reduction in interest expense related to a senior term loan (the "Seniorthe Senior Term Loan")Loan, as the principal balance was reduced from payments of $30.0$28.0 million quarter over quarter. Thismade during the period from March 31, 2020 to March 31, 2021. The remaining decrease in interest expense related to a reduction in the deferred balance during the period from March 31, 2020 to March 31, 2021 related to Internal Revenue Code section 453A ("453A"), which requires taxpayers to pay an interest charge ("453A interest") on the portion of the tax liability that is deferred under the installment method for tax purposes.
Income tax expense
For the three months ended March 31, 2020,2021, we recorded income tax expense of $0.4$4.5 million compared to income tax expense of $1.7$0.4 million for the three months ended March 31, 2019.2020. The income tax expense recorded for the three months ended March 31, 2021 was comprised of estimated federal income tax expense of $4.1 million and estimated state income tax expense of $0.4 million. The income tax expense recorded for the three months ended March 31, 2020 was comprised of estimated federal income tax expense of $0.3 million and estimated state income tax expense of $0.1 million. The income tax expense recorded for the three months ended March 31, 2019 was comprised of estimated federal income tax expense of $0.8 million and estimated state income tax expense of $0.9 million.
The decreaseincrease in income tax expense quarter over quarter was primarily due to pretax income for the three months ended March 31, 2021 of $18.2 million compared to a pretax loss for the three months ended March 31, 2020 of $1.5 million compared to pretax income of $16.1 millionmillion. In addition, for the three months ended March 31, 2019 as well as2020, we recorded tax expense of $0.9 million related to an increase in the valuation allowance on deferred tax assets as of $0.9 million for the three months ended March 31, 2020 compared to a decrease in the valuation allowance on deferred tax assets of $4.0 million for the three months ended March 31, 2019. For both quarters, the adjustments to the valuation allowance were2020. This increase was based on changes in forecasts as of March 31, 2020 and March 31, 2019, respectively, of future years' taxable income. In addition, income tax expense quarter over quarter was lower from a decrease in state income tax expense of $0.8 million primarily due to lower forecasted pretax income for 2020 compared to 2019.and 2021.
Non-GAAP Financial Measures
To supplement our financial information presented in accordance with accounting principles generally accepted in the U.S. ("GAAP"GAAP (or "GAAP"), we are providing non-GAAP measures of certain financial performance. These non-GAAP measures include Consolidated EBITDA, Consolidated Adjusted EBITDA, RC Segment EBITDA, RC Segment Adjusted EBITDA, APT Segment EBITDA and RCAPT Segment Adjusted EBITDA. We have included these non-GAAP measures because management believes that they help to facilitate comparisonperiod to period comparisons of our operating results between periods.results. We believe the non-GAAP measures provide useful information to both management and users of the financial statements by excluding certain expenses, and gains and losses that may not be indicative of core operating results and business outlook. Management uses these non-GAAP measures in evaluating the performance of our business.
These non-GAAP measures are not in accordance with, or an alternative to, measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. These measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures.
We define Consolidated Adjusted EBITDA as net income adjusted for the impact of the following items that are either non-cash or that we do not consider representative of our ongoing operating performance: depreciation, amortization, depletion, and accretion, amortization of upfront customer consideration that was recorded as a component of the Marshall Mine Acquisition ("Upfront Customer Consideration"), interest expense, net and income tax expense, thenexpense. We define Consolidated Adjusted EBITDA as Consolidated EBITDA reduced by the non-cash impact of equity earnings from equity method investments and increased by cash distributions from equity method investments. Because Consolidated Adjusted EBITDA omits certain non-cash items, we believe that the measure is less susceptible to variances that affect our operating performance.
We define APT Segment EBITDA (Loss) as APT Segment operating income (loss)Operating Income (Loss) adjusted for the impact of the following items that are either non-cash or that we do not consider representative of itsour ongoing operating performance: depreciation, amortization, depletion, and accretion and interest expense, net. When used in conjunction with GAAP financial measures,net and amortization of Upfront Customer Consideration. There were no additional adjustments made to APT Segment Adjusted EBITDA (Loss) for the three months ended March 31, 2021 and 2020.
We define RC Segment EBITDA is a supplemental measureas RC Segment operating income adjusted for the impact of operating performancethe following items that management believes is a useful measure for eachare either non-cash or that we do not consider representative of our PGIongoing operating performance: depreciation, amortization, depletion, accretion and RC segment's performance relative to the performance of competitors as well as performance period over period. Additionally, we believe the measure is less susceptible to variances that affect its operating performance results.
interest expense. We define RC Segment Adjusted EBITDA as RC Segment EBITDA reduced by the non-cash impact of equity earnings from equity method investments and increased by cash distributions from equity method investments.
We presentWhen used in conjunction with GAAP financial measures, we believe these non-GAAP measures because we believe they are useful as supplemental measures in evaluating theof operating performance ofthat explain our operating performance for our period to period comparisons and provide greater transparency into the results of operations. Management usesagainst our competitors' performance. Generally, we believe these non-GAAP measures in evaluatingare less susceptible to variances that affect our operating performance results.
We expect the performance of our business.
The adjustments to Consolidated Adjusted EBITDA Segment EBITDA and RCAPT Segment Adjusted EBITDA in future periods arewill be generally expected to be similar. These non-GAAP measures have limitations as analytical tools, and should not be considered in isolation or as a substitute for analyzing our results as reported under GAAP.
Consolidated EBITDA and Adjusted EBITDA
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
(in thousands) | | 2021 | | 2020 | | | | |
Net income (loss) | | $ | 13,737 | | | $ | (1,893) | | | | | |
Depreciation, amortization, depletion and accretion | | 2,106 | | | 2,297 | | | | | |
Amortization of Upfront Customer Consideration | | 127 | | | — | | | | | |
Interest expense, net | | 729 | | | 1,167 | | | | | |
Income tax expense | | 4,489 | | | 358 | | | | | |
Consolidated EBITDA | | 21,188 | | | 1,929 | | | | | |
Cash distributions from equity method investees | | 23,251 | | | 17,116 | | | | | |
Equity earnings | | (18,312) | | | (8,273) | | | | | |
| | | | | | | | |
Consolidated Adjusted EBITDA | | $ | 26,127 | | | $ | 10,772 | | | | | |
|
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2020 | | 2019 |
Net (loss) income (1) | | $ | (1,893 | ) | | $ | 14,402 |
|
Depreciation, amortization, depletion and accretion | | 2,297 |
| | 2,102 |
|
Interest expense, net | | 1,167 |
| | 2,034 |
|
Income tax expense | | 358 |
| | 1,699 |
|
Consolidated EBITDA | | 1,929 |
| | 20,237 |
|
Equity earnings | | (8,273 | ) | | (21,690 | ) |
Cash distributions from equity method investees | | 17,116 |
| | 19,488 |
|
Consolidated Adjusted EBITDA | | $ | 10,772 |
| | $ | 18,035 |
|
(1) Net income for the three months ended March 31, 2019 included a $3.6 million adjustment, which increased cost of revenue due to a step-up in basis of inventory acquired related to the Carbon Solutions Acquisition.
Business Segments
As of March 31, 2020,2021, we have two reportable segments: (1) RC and (2) PGI.APT. The business segment measurements provided to and evaluated by our chief operating decision maker are computed in accordance with the principles listed below:
•The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the 20192020 Form 10-K.
•Segment revenues include equity method earnings and losses from our equity method investments.
•Segment operating income (loss) includes segment revenues and allocation of certain "Corporate general and administrative expenses," which include Payroll and benefits, Rent and occupancy, Legal and professional fees, and General and administrative.
•RC segment operating income includes interest expense directly attributable to the RC segment.
The principal products and services of our segments are:
| |
1. | RC - Our RC segment derives its earnings from equity method investments as well as royalty payment streams and other revenues related to enhanced combustion of and reduced emissions of both NOX and mercury from the burning of coal. Our equity method investments related to the RC segment include Tinuum Group, Tinuum Services and other immaterial equity method investments. Segment revenues include our equity method earnings (losses) from our equity method investments and royalty earnings from Tinuum Group. These earnings are included within the Earnings from equity method investments and License royalties, related party line items in the Condensed Consolidated Statements of Operations. Key drivers to the RC segment performance are the produced and sold RC from both operating and retained RC facilities, royalty-bearing tonnage and the number of operating (leased or sold) and retained RC facilities. These key drivers impact our earnings and cash distributions from equity method investments.
|
| |
2. | PGI - Our PGI segment includes revenues and related expenses from the sale of consumable products that utilize PAC and chemical technologies. These options provide coal-powered utilities and industrial boilers with mercury control solutions working in conjunction with pollution control equipment systems, generally without the requirement for significant ongoing capital outlays. These amounts are included within the respective revenues and cost of revenue line items in the Condensed Consolidated Statements of Operations. |
1.RC - Our RC segment derives its earnings from equity method investments as well as royalty payment streams and other revenues related to enhanced combustion of and reduced emissions of both NOX and mercury from the burning of coal. Our equity method investments related to the RC segment include Tinuum Group, Tinuum Services and other immaterial equity method investments. Segment revenues include our equity method earnings (losses) from our equity method investments and M-45 License royalties earned from Tinuum Group. These earnings are included within the Earnings from equity method investments and License royalties, related party line items in the Condensed Consolidated Statements of Operations. Key drivers to the RC segment performance are the produced and sold RC from both operating and retained RC facilities, royalty-bearing tonnage and the number of operating (leased or sold) and retained RC facilities. These key drivers impact our earnings and cash distributions from equity method investments. Both Tinuum Group and Tinuum Services expect to significantly wind down their operations by the end of 2021 due to the expected expiration of the Section 45 tax credit period as of December 31, 2021. As such, our earnings and distributions from our RC segment will substantially cease as of December 31, 2021.
2.APT - Our APT segment includes revenues and related expenses from the sale of our AC and chemical products, which 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 generators and other industrial companies. These amounts are included within the Consumables and respective cost of revenue line items in the Condensed Consolidated Statements of Operations.
Management uses segment operating income (loss) to measure profitability and performance at the segment level. Management believes segment operating income (loss) provides investors with a useful measure of our operating performance and underlying trends of the businesses. Segment operating income (loss) may not be indicative of our overall consolidated performance and therefore, should be read in conjunction with our Condensed Consolidated Statements of Operations.
The following table presents our operating segment results for the three months ended March 31, 20202021 and 2019:2020:
|
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2020 | | 2019 |
Revenues: | | | | |
Refined Coal: | | | | |
Earnings in equity method investments | | $ | 8,273 |
| | $ | 21,690 |
|
License royalties, related party | | 3,046 |
| | 4,220 |
|
| | 11,319 |
| | 25,910 |
|
Power Generation and Industrials: | | | | |
Consumables | | 8,475 |
| | 14,553 |
|
| | 8,475 |
| | 14,553 |
|
Total segment reporting revenues | | 19,794 |
| | 40,463 |
|
| | | | |
Adjustments to reconcile to reported revenues: | | | | |
Earnings in equity method investments | | (8,273 | ) | | (21,690 | ) |
Corporate and other | | 742 |
| | 556 |
|
Total reported revenues | | $ | 12,263 |
| | $ | 19,329 |
|
| | | | |
Segment operating income (loss): | | | | |
Refined Coal (1) | | $ | 10,860 |
| | $ | 25,233 |
|
Power Generation and Industrials (2) | | (6,577 | ) | | (3,462 | ) |
Total segment operating income | | $ | 4,283 |
| | $ | 21,771 |
|
(1) Included in RC segment operating income for the three months ended March 31, 2020 and 2019 is 453A interest expense of $0.1 million and $0.3 million, respectively.
(2) Included in PGI segment operating loss for the three months ended March 31, 2020 and 2019 is $2.0 million and $2.0 million, respectively, of depreciation, amortization, and depletion expense on mine- and plant-related long-lived assets. Included in PGI segment operating loss for the three months ended March 31, 2019 was approximately $3.4 million of costs recognized as a result of the step-up in inventory fair value recorded from the acquisition of Carbon Solutions.
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
(in thousands) | | 2021 | | 2020 | | | | |
Revenues: | | | | | | | | |
Refined Coal: | | | | | | | | |
Earnings in equity method investments | | $ | 18,312 | | | $ | 8,273 | | | | | |
| | | | | | | | |
License royalties, related party | | 4,066 | | | 3,046 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | 22,378 | | | 11,319 | | | | | |
Advanced Purification Technologies: | | | | | | | | |
Consumables | | 17,031 | | | 9,217 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | 17,031 | | | 9,217 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total segment reporting revenues | | 39,409 | | | 20,536 | | | | | |
| | | | | | | | |
Adjustments to reconcile to reported revenues: | | | | | | | | |
| | | | | | | | |
Earnings in equity method investments | | (18,312) | | | (8,273) | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
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| | | | | | | | |
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| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total reported revenues | | $ | 21,097 | | | $ | 12,263 | | | | | |
| | | | | | | | |
Segment operating income (loss): | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Refined Coal | | $ | 22,271 | | | $ | 10,860 | | | | | |
Advanced Purification Technologies | | 15 | | | (7,370) | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total segment operating income | | $ | 22,286 | | | $ | 3,490 | | | | | |
RC
The following table details the segment revenues of our respective equity method investments:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
(in thousands) | | 2021 | | 2020 | | | | |
Earnings from Tinuum Group | | $ | 16,362 | | | $ | 6,438 | | | | | |
Earnings from Tinuum Services | | 1,950 | | | 1,838 | | | | | |
Earnings (loss) from other | | — | | | (3) | | | | | |
| | | | | | | | |
| | | | | | | | |
Earnings from equity method investments | | $ | 18,312 | | | $ | 8,273 | | | | | |
|
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2020 | | 2019 |
Earnings from Tinuum Group | | $ | 6,438 |
| | $ | 19,767 |
|
Earnings from Tinuum Services | | 1,838 |
| | 1,922 |
|
(Loss) earnings from other | | (3 | ) | | 1 |
|
Earnings from equity method investments | | $ | 8,273 |
| | $ | 21,690 |
|
For the three months ended March 31, 20202021 and March 31, 20192020
RC earnings decreasedincreased primarily due to a decreasean increase in equity earnings in Tinuum Group duringfor the three months ended March 31, 20202021 compared to the corresponding quarter in 2019, as presented above.2020 primarily from the addition of three new RC facilities in 2020.
For the three months ended March 31, 2020, equity earnings from our interest in Tinuum Group were positively impacted by the addition of two new RC facilities during the second half of 2019. However, equity earnings from Tinuum Group for the
three months ended March 31, 2020 decreased from the comparable quarter in 2019 primarily from a new RC facility in the first quarter of 2019 that was recognized as a point-in-time sale and higher depreciation recognized of approximately $2.4 million for the three months ended March 31, 2020 on all Tinuum Group RC facilities as described above. Further contributing to the decrease in equity earnings quarter over quarter was the restructuring of RC facility leases with Tinuum Group's largest customer, which decreased lease payments and equity earnings beginning in the three months ended September 30, 2019. We believe the increase in depreciation and decrease in lease payments will negatively impact equity earnings for the remainder of 2020 as well as 2021.
For the three months ended March 31, 2020, we recognized $6.4 million in equity earnings from Tinuum Group, which was equal to our proportionate share of Tinuum Group's net income for the quarter. For the three months ended March 31, 2019, we recognized $19.8 million in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of $21.4 million for the quarter less the recovery of the cash distributions in excess of cumulative earnings as of December 31, 2018. The difference between our pro-rata share of Tinuum Group's net income and our earnings from our Tinuum Group equity method investment as reported on the Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 was the result of cumulative distributions received from Tinuum Group being in excess of the carrying value of the investment, and therefore we recognized such excess distributions as equity method earnings in the period the distributions occurred.
For the three months ended March 31, 2020,2021, earnings from Tinuum Services remained relatively flatincreased compared to the samecorresponding quarter in 20192020 primarily due to no changean increase in tonnage quarter over quarter and an increase in the number of operating RC facilities in which Tinuum Services provides operating and maintenance services.services from 19 to 22.
As noted above,RC earnings related to M-45 License royalties increased for the three months ended March 31, 2021 compared to the corresponding quarter in 2020 due to higher tonnage quarter over quarter, which was primarily a result of an increase in RC earnings were impacted by a decrease in license royalties earned from Tinuum Group'sfacilities that use of our M-45 License. For the three months ended March 31, 2020 and 2019, there were 11.9 million tons and 10.9 million tons, respectively, of RC produced using the M-45 Technology. This decrease combined with a lower royalty rate per ton resultedThe increase in a decrease in license royalties quarter over quarter. The reduction intonnage as well as the additional RC facilities attributed to the royalty rate per ton was primarily attributable to higher depreciation recognized on all royalty bearing RC facilities as a result of a reduction in their estimated useful lives as determined by Tinuum Group. Further reducing the rate per ton was a decrease in net lease payments as a result ofincrease period over period.
Outlook
Both Tinuum Group restructuring RC facility contracted leases with its largest customer.
Futureand Tinuum Services expect to 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, distributions and growthM-45 License royalties beginning in 2022, will have a material adverse effect on our financial condition and consolidated operating results compared to historical periods. Earnings in the RC segment for 2021 will continue to be impacted by coal-fired electricity generation dispatch and invested facilities with leases subject to periodic renewals being terminated, repriced, or otherwise subject to renegotiated terms.
Additional discussion of our equity method investments is included above within our consolidated results and in Note 4 As a result of the Condensed Consolidated Financial Statements.wind-down in both Tinuum Group's and Tinuum Services' operations occurring throughout 2021, we expect our earnings in both entities to decrease in 2021 compared to 2020. However, in 2021, cash distributions should substantially exceed earnings.
RC Segment EBITDA and Adjusted EBITDA
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
(in thousands) | | 2021 | | 2020 | | | | |
RC Segment operating income | | $ | 22,271 | | | $ | 10,860 | | | | | |
Depreciation, amortization, depletion and accretion | | 20 | | | 27 | | | | | |
Interest expense | | — | | | 132 | | | | | |
RC Segment EBITDA | | 22,291 | | | 11,019 | | | | | |
Cash distributions from equity method investees | | 23,251 | | | 17,116 | | | | | |
Equity earnings | | (18,312) | | | (8,273) | | | | | |
RC Segment Adjusted EBITDA | | $ | 27,230 | | | $ | 19,862 | | | | | |
|
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2020 | | 2019 |
RC Segment operating income | | $ | 10,860 |
| | $ | 25,233 |
|
Depreciation, amortization, depletion and accretion | | 27 |
| | 21 |
|
Interest expense | | 132 |
| | 322 |
|
RC Segment EBITDA | | 11,019 |
| | 25,576 |
|
Equity earnings | | (8,273 | ) | | (21,690 | ) |
Cash distributions from equity method investees | | 17,116 |
| | 19,488 |
|
RC Segment Adjusted EBITDA | | $ | 19,862 |
| | $ | 23,374 |
|
PGIAPT
Discussion of revenues derived from our PGIAPT segment and costs related thereto are included above within our consolidated results.
For the three months ended March 31, 20202021 and March 31, 20192020
PGIAPT segment operating lossincome increased for the three months ended March 31, 20202021 compared to the three months ended March 31, 20192020 primarily due to a reductionan increase in consumable revenuerevenues and associated margins. For the three months ended March 31, 2020, consumablesThe increase in our consumable revenue and margins also continued to be negatively impacted by low coal-fired power dispatchwas driven by power generation from sources other than coal. Accordingan increase in volume quarter over quarter, specifically product sold under the Supply Agreement. Our gross margin, exclusive of depreciation and amortization, increased primarily due to data provided by the U.S. Energy Information Administration
("EIA"), for the three months ended March 31, 2020, power generation from coal-fired power dispatch was down approximately 33%higher volumes causing lower fixed cost per pound compared to the comparable quarter in 2019.prior year.
PGIAPT Segment EBITDA (Loss)
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
(in thousands) | | 2021 | | 2020 | | | | |
APT Segment operating income (loss) | | $ | 15 | | | $ | (7,370) | | | | | |
Depreciation, amortization, depletion and accretion | | 1,932 | | | 2,244 | | | | | |
Amortization of Upfront Customer Consideration | | 127 | | | — | | | | | |
Interest expense, net | | 79 | | | 94 | | | | | |
APT Segment EBITDA (loss) | | $ | 2,153 | | | $ | (5,032) | | | | | |
| | | | | | | | |
| | | | | | | | |
|
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2020 | | 2019 |
Segment operating loss | | $ | (6,577 | ) | | $ | (3,462 | ) |
Depreciation, amortization, depletion and accretion | | 2,035 |
| | 1,960 |
|
Interest expense, net | | 94 |
| | 131 |
|
PGI Segment EBITDA loss | | $ | (4,448 | ) | | $ | (1,371 | ) |
(1) Included in segment operating loss for the three months ended March 31, 2019 was approximately $3.4 million of costs recognized as a result of the step-up in inventory fair value recorded from the acquisition of Carbon Solutions.
Liquidity and Capital Resources
Overview of Factors Affecting Our Liquidity
During the three months ended March 31, 2020,2021, our liquidity position was positively affected primarily due tofrom distributions from Tinuum Group and Tinuum Services, M-45 License royalty payments from Tinuum Group and borrowing availability under our bank ("Lender") line of credit ("Line of Credit").
OurAs of March 31, 2021, our principal sources of cashliquidity include:
•cash on hand;
•distributions from Tinuum Group and Tinuum Services; and
•M-45 License royalty payments from Tinuum Group.Group;
Our•operations of the APT segment; and
•the Line of Credit.
As of March 31, 2021, our principal uses of cash during the three months ended March 31, 2020 included:liquidity include:
repurchases of shares of common stock;
payment of dividends;
payment of debt principal and interest; and
•our business operating expenses, including federal and state tax payments and cash severance payments.severance;
Our ability to continue to generate sufficient cash flow required to meet ongoing operational needs•payments of principal and obligations, capital expenditures, future potential dividend payments and potential future share repurchases depends on several factors, including executinginterest on our contractsdebt and initiatives, receiving license royalty lease obligations;
•payments from Tinuum Groupof ARO liabilities; and distributions from Tinuum Group
•restricted cash of $16.0 million under the Line of Credit and Tinuum Services, and increasing our share of the market for PGI consumables, including expanding our overall PAC business into additional adjacent markets. Increased distributions from Tinuum Group will likely be dependent upon both preserving existing contractual relationships and securing additional tax equity investors for those Tinuum Group facilities that are currently not operating.
We incur significant recurring capital expenditures for our AC manufacturing facility and for mine development at our lignite mine. For 2020, we anticipate that our capital expenditures will be lower than 2019 as we do not anticipate having significant planned maintenance as we incurred in 2019.
We expect our liquidity will be impacted from COVID-19 due to anticipated increased operating losses in our PGI segment from anticipated higher operating costs as a result of measures taken to support our ability to deliver as a critical infrastructure business, primarily from sequestration efforts and "hazard pay," which is a premium on wages, for a substantial number of our employees, and overall plant operating inefficiencies. In addition, we also anticipate that Tinuum Group's ability to sell or lease additional RC facilities will be delayed as a result of the economic slowdown associated with the COVID-19 pandemic.
In April 2020, we took steps to enhance our short-term liquidity through the Paycheck Protection Program as discussed below.
Surety Agreement requirements.
Tinuum Group and Tinuum Services Distributions
The following table summarizes the cash distributions from our equity method investments that most significantly affected
our consolidated cash flow results for the three months ended March 31, 20202021 and 2019:2020:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2021 | | 2020 |
Tinuum Group | | $ | 19,749 | | | $ | 13,764 | |
Tinuum Services | | 3,502 | | | 3,352 | |
Distributions from equity method investees | | $ | 23,251 | | | $ | 17,116 | |
|
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2020 |
| 2019 |
Tinuum Group | | $ | 13,764 |
| | $ | 16,788 |
|
Tinuum Services | | 3,352 |
| | 2,700 |
|
Distributions from equity method investees | | $ | 17,116 |
| | $ | 19,488 |
|
Cash distributions from Tinuum Group for the three months ended March 31, 2020 decreased2021 increased by $3.0$6.0 million compared to the three months ended March 31, 20192020 primarily due to reductions in lease payments received by Tinuum Group from its largest customer as a result of renegotiations of certain leases, which occurred in 2019 between Tinuum Group and this customer, and the shuttering of two coal-fired utilities in the fourth quarter of 2019 where two investedthree RC facilities were operating.added in 2020.
Future cash flows from Tinuum through 2021 are expected to range from $125$50 million to $150 million, a decrease from the previously reported range of $150 to $175$60 million. The key drivers in achieving these future cash flows are based on the following:
20•23 invested facilities as of March 31, 20202021 and inclusive of all net Tinuum cash flows (distributions and license
royalties), offset by estimated federal and state income tax payments and 453A interest payments.
Expected future cash flows from Tinuum Group are based on the following key assumptions:
•Tinuum Group continues to not operate retained facilities;
•Tinuum Group does not have material unexpected capital expenditures or unusual operating expenses;
•Tax equity lease renewals on invested facilities are not terminated or repriced; and
•Coal-fired power generation remains consistent with contractual expectations.
Paycheck Protection ProgramBoth Tinuum Group and Tinuum Services expect to significantly wind down their operations by the end of 2021 due to the expected expiration of the Section 45 tax credit period as of December 31, 2021. As such, our distributions from our RC segment will substantially cease as of December 31, 2021.
PPP Loan
On April 21,20, 2020, we entered into a loan (the "PPP Loan")the PPP Loan under the PPP, evidenced by a promissory note (the "Promissory Note"), under the Paycheck Protection Program sponsored by the U.S. Small Business Administration ("SBA") throughwith BOK, NA dba Bank of Oklahoma (the "Lender") providing for $3.3 million in proceeds, which amount was funded on April 21, 2020. The PPP Loan was made pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and is administered by the SBA.
The Promissory Note matures April 21, 20222022. The PPP Loan principal may be forgiven subject to the terms of the PPP and provides for 18 monthly payments of principal and interest commencing on November 21, 2020.approval by the SBA. The interest rate on the PPP Loan is 1.00%. The Promissory NotePPP Loan is unsecured and contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or the Lender,BOK, or breaching the terms of the PPP Loan. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from us, or filing suit and obtaining judgment against us. The Promissory Note
Under the PPPFA, monthly payments of principal may be forgiven subjectand interest commence on the later of 10 months following the "covered period" (as defined in the PPPFA) or the date that BOK notifies us that the SBA has notified BOK that all or a portion of the
PPP Loan has not been forgiven. In January 2021, we submitted an application to the termsSBA for forgiveness of the Paycheck Protection Program.PPP Loan and we are awaiting the SBA's response on our application for forgiveness. Accordingly, for any amounts not forgiven, we have determined that PPP Loan principal and interest payments would commence in August 2021.
Our business has been classified as an essential business, and therefore we continue to operate on a modified basis to comply with governmental restrictions and public health authority guidelines. In April 2020, we sequestered approximately 60 employees to continue to run our manufacturing plant and build-up inventory in order to supply our customers. This resulted in additional costs as the sequestered employees received "hazardhazard pay." We used proceeds from the PPP Loan to fund these additional employment expenses.our payroll costs.
Senior Term Loan
On December 7, 2018, we and ADA-ES, Inc. ("ADA"), a wholly-owned subsidiary, and certain other subsidiaries of the Company as guarantors, The Bank of New York Mellon as administrative agent, and Apollo Credit Strategies Master Fund Ltd and Apollo A-N Credit Fund (Delaware) L.P. (collectively "Apollo”), affiliates of a beneficial owner of greater than five percent of our common stock and a related party, entered into the "SeniorSenior Term Loan"Loan in the amount of $70.0 million, less original issue discount of $2.1 million. Proceeds from the Senior Term Loan were used to fund the acquisition of Carbon Solutions as disclosed in Note 2.Solutions. We also paid debt issuance costs of $2.0 million related to the Senior Term Loan. The Senior Term Loan has a term of 36 monthsmatures on December 7, 2021 and bears interest at a rate equal to 3-month LIBOR (subject to a 1.5% floor) + 4.75% per annum, which is adjusted quarterly to the current 3-month LIBOR rate, and interest is payable quarterly in arrears. Quarterly principal payments of $6.0 million arewere required and commencedbeginning in March 2019, and we may prepay the Senior Term Loan at any time without penalty. The Senior Term Loan is secured by substantially all the assets of our assets,the Company, including the cash flows from Tinuum
Group andthe Tinuum Services (collectively, the "Tinuum Entities"),Entities, but excluding ourthe Company's equity interests in thosethe Tinuum entities. DuringFor the three months ended March 31, 2020,2021, we made principal payments of $6.0$10.0 million.
The Senior Term Loan includes, among others, the following covenants: (1) Beginning December 31, 2018 and asAs of the end of each fiscal quarter, thereafter, we must maintain a minimum cash balance of $5.0 million and shall not permit "expected future net cash flows from the refined coal business" (as defined in the Senior Term Loan) to be less than 1.75 times the outstanding principal amount of the Senior Term Loan; (2) Beginning in January 2019, annualAnnual collective dividends and buybacks of shares of our common stock in an aggregate amount, not to exceed $30.0 million, isare permitted so long as (a) no default or event of default exists under the Senior Term Loan and (b) expected future net cash flows from the refined coal business as of the end of the most recent fiscal quarter exceed $100.0 million.
Waiver and Limited Consent on Senior Term Loan
Pursuant to entering into the PPP Loan, on April 20, 2020, we and Apollo executed the First Amendment (the "First Amendment") to the Senior Term Loan, which permitted us to enter into the PPP Loan.
On September 30, 2020, we and Apollo entered into a limited consent, which permitted the Company to (i) enter into the Surety Agreement, open the collateral bank accounts and post collateral required under the Surety Agreement, and (ii) acquire the membership interests in Marshall Mine, LLC.
Line of Credit
In September 2013, ADA, as borrower, and us, as guarantor, entered into the Line of Credit with the Lender for an aggregate borrowing amount of $10.0 million, which was secured by certain amounts due to us from certain Tinuum Group RC leases. The Line of Credit has been amended 15 times from the period from December 2, 2013 through March 31, 2021 and included a reduction in the borrowing amount to $5.0 million in September 2018.
On March 23, 2021, ADA), the Company and the Lender entered into an amendment to the Line of Credit (the "Fifteenth Amendment"), which extended the maturity date of the Line of Credit to December 31, 2021 and increased the minimum cash requirement from $5.0 million to $6.0 million.
As of March 31, 2021, we have $4.7 million of borrowing availability and no outstanding borrowings under the Line of Credit.
Stock Repurchases and Dividends
In November 2018, ourthe Board of Directors (the "Board") authorized us to purchase up to $20.0 million of our outstanding common stock under a stock repurchase program (the "Stock Repurchase Program"), which was to remain in effect until December 31, 2019 unless otherwise modified by the Board. As of November 2019, $2.9 million remained outstanding related to the Stock Repurchase Program. In November 2019, the Board authorized an incremental $7.1 million to the Stock Repurchase Program and provided that it will remain in effect until all amounts are utilized or it is otherwise modified by the Board.
Under the Stock Repurchase Program, for the three months ended March 31, 2021 and March 31, 2020, under the Stock Repurchase Program, we purchased zero and 20,613 shares, respectively, of our common stock for cash of zero and $0.2 million, inclusive of commissions and fees. For the three months ended March 31, 2019, under the Stock Repurchase Program, we purchased 63,876 shares of our common stock for cash of $0.7 million,respectively, inclusive of commissions and fees. As of March 31, 2020,2021, we had $7.0 million remaining under the Stock Repurchase Program.
For the three months ended March 31, 20202021 and 2019,2020, we declared and paid quarterly cash dividends to stockholders of $4.5 millionzero and $4.6$4.5 million, respectively.
LineLiquidity Outlook
Our ability to continue to generate sufficient cash flow required to meet ongoing operational needs and obligations, and make potential future dividend payments and share repurchases depends upon several factors, including executing on our contracts and initiatives, receiving M-45 License royalty payments from Tinuum Group and distributions from Tinuum Group and Tinuum Services, increasing our share of Creditthe market for APT consumables, including expanding our overall AC business into additional adjacent markets and improving our customer and product mix.
OnIn 2021, our primary source of liquidity is expected to be distributions from Tinuum Group and Tinuum Services. These distributions in 2021 will provide sufficient cash on hand to fund operations in 2021 and 2022. For 2021, we expect to spend $9.5 million in capital expenditures compared to $7.1 million incurred in 2020. This increase is primarily the result of product specific capital related to the Supply Agreement and routine scheduled maintenance outages planned for the second quarter of 2021. As a result of the Plant Incident, the Red River Plant was shut down for approximately one week for repair. The cash flow impact associated with the incident, including maintenance and repairs, capital expenditures, inventory replacement due to lost production and other items, is not expected to exceed $3.0 million.
Due to the expiration of the Section 45 tax period as of December 7, 2018, ADA-ES, Inc. ("ADA"), a wholly-owned subsidiary, as borrower, we, as guarantor,31, 2021 and the Lender entered into an amendmentresultant wind down of Tinuum Group's and Tinuum Services' operations by the end of 2021, distributions from Tinuum Group will no longer be a source of liquidity after 2021.
As we look to the Line2022 and beyond, our primary source of Credit. This amendment provided, among other things, for ADAliquidity is expected to be ablethrough our ongoing operations from our APT segment. We believe the Supply Agreement will provide material incremental volume and capture lower operating cost efficiencies of our Red River plant, providing additional sources of operating cash flows in the future. Full and partial reimbursements on capital expenditures from Cabot will help limit our uses of investing cash flows. Further, we intend to enter intofund the Senior Term Loan as a guarantor so long as the principal amountremaining portion of the Senior Term Loan did not exceed $70.0 million. Additionally,Reclamation Costs from cash on hand as well as cash generated from the financial covenants in the Line of Credit were amendedSupply Agreement. In 2022 and restatedbeyond, our annual capital expenditures are expected to be consistent with the Senior Term Loan covenants, including maintaining a minimum cash balance ofaverage approximately $5.0 million.
As of March 31, 2020, we have $5.0 million of borrowing availability and there were no outstanding borrowings under the Line of Credit.
Sources and Uses of Cash
Three Months Ended March 31, 20202021 vs. Three Months Ended March 31, 20192020
Cash, cash equivalents and restricted cash increased from $17.1$35.9 million as of December 31, 20192020 to $17.2$52.2 million as of March 31, 2020.2021. The following table summarizes our cash flows for the three months ended March 31, 20202021 and 2019,2020, respectively:
| | | | Three Months Ended March 31, | | | | | Three Months Ended March 31, | |
(in thousands) | | 2020 | | 2019 | | Change | (in thousands) | | 2021 | | 2020 | | Change |
Cash and cash equivalents and restricted cash provided by (used in): | | | | | | | Cash and cash equivalents and restricted cash provided by (used in): | | | | | | |
| Operating activities | | $ | 13,237 |
| | $ | 16,018 |
| | $ | (2,781 | ) | Operating activities | | $ | 21,947 | | | $ | 13,237 | | | $ | 8,710 | |
| Investing activities | | (1,736 | ) | | (2,072 | ) | | 336 |
| Investing activities | | 4,886 | | | (1,736) | | | 6,622 | |
| Financing activities | | (11,393 | ) | | (11,853 | ) | | 460 |
| Financing activities | | (10,531) | | | (11,393) | | | 862 | |
Net change in cash and cash equivalents and restricted cash | | $ | 108 |
| | $ | 2,093 |
| | $ | (1,985 | ) | Net change in cash and cash equivalents and restricted cash | | $ | 16,302 | | | $ | 108 | | | $ | 16,194 | |
|
Cash flow from operating activities
Cash flows provided by operating activities for the three months ended March 31, 2020 decreased2021 increased by $2.8$8.7 million compared to the three months ended March 31, 2019.2020. The net decreaseincrease was primarily attributable to an increase in net income for the three months ended March 31, 2021 compared to net loss for the three months ended March 31, 2020 of $1.9 million compared to net income for the three months ended March 31, 2019 of $14.4$15.6 million and a
decrease quarteran increase period over quarterperiod in distributions from equity method investments, return on investmentthe net increase in operating lease liabilities of $2.4$2.7 million. Offsetting this net decreaseincrease in cash flows provided by operating activities was a decrease quarteran increase period over quarterperiod in earnings from equity method investees of $13.4$10.0 million and a decrease of $3.5 million in the net change in accrued payroll and related liabilities for the three months ended March 31, 20202021 compared to the three months ended March 31, 2019.2020.
Cash flow from investing activities
Cash flows usedprovided in investing activities for the three months ended March 31, 2020 decreased2021 increased by $0.3$6.6 million compared to the three months ended March 31, 20192020 primarily from a decreasedistributions from equity earnings in cash consideration paid for the three months ended March 31, 2019excess of $0.7 million related to the acquisition of Carbon Solutions. Offsetting this decrease in cash flows used in investing activities was an increase quarter over quarter in capital expenditures related to property, plant equipment and intangibles of $0.2 million.cumulative earnings.
Cash flow from financing activities
Cash flows used in financing activities for the three months ended March 31, 20202021 decreased by $0.5$0.9 million compared to the three months ended March 31, 20192020 primarily from a decrease quarterdecreases period over quarterperiod in dividends paid of $4.5 million and repurchases of common shares.shares of $0.2 million. Offsetting these decrease was an increase in principal loan repayments on the Senior Term Loan of $4.0 million.
Contractual Obligations
During the three months ended March 31, 2020,2021, there were no material changes to our contractual obligations outside of the ordinary course of business from those reported as of December 31, 2019.2020.
Off-Balance Sheet Arrangements
During the three months endedAs of March 31, 2020,2021, we did not engage in any off-balance sheet arrangements except those discussed in Item 7 - "Management's Discussionhad outstanding surety bonds of $36.7 million related to performance requirements under reclamation contracts associated with both the Five Forks Mine and Analysisthe Marshall Mine. As of Financial Condition and ResultsMarch 31, 2021, we had restricted cash of Operations"$10.0 million securing the Surety Agreement. We expect that the obligations secured by these surety bonds will be performed in the 2019 10-K.ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related surety bonds should be released, and we should not have any continuing obligations. However, in the event any surety bond is called, our indemnity obligations could require us to reimburse the issuer of the surety bond.
Critical Accounting Policies and Estimates
Our significant accounting policies and estimates have not changed from those reported in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 20192020 10-K.
Recently Issued Accounting Standards
Refer to Note 1 of the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report for newinformation regarding recently issued accounting standards applicable to us that were issued during the three months ended March 31, 2020 and subsequent thereto through the date of this Quarterly Report.us.
Forward-Looking Statements Found in this Report
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that involve risks and uncertainties. In particular, such forward-looking statements are found in this Part I, Item 2 above. 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 Quarterly Report to identify forward-looking statements, and such forward-looking statements include, but are not limited to, statements or expectations regarding:
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(a) | the scope and impact of mercury and other regulations or pollution control requirements, including the impact of the final MATS; |
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(b) | the production and sale of RC by RC facilities that will qualify for Section 45 tax credits; |
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(c) | expected growth or contraction in and potential size of our target markets; |
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(d) | expected supply and demand for our products and services; |
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(e) | increasing competition in the PGI market; |
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(f) | future level of research and development activities; |
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(g) | the effectiveness of our technologies and the benefits they provide; |
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(h) | Tinuum Group’s ability to profitably sell and/or lease additional RC facilities and/or RC facilities that may be returned to Tinuum Group, or to recognize the tax benefits from production and sale of RC on retained RC facilities and the effect of these factors on Tinuum Group's future earnings and distributions; |
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(i) | probability of any loss occurring with respect to certain guarantees made by Tinuum Group ("Party Guarantees"); |
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(j) | the timing of awards of, and work and related testing under, our contracts and agreements and their value; |
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(k) | the timing and amounts of or changes in future revenues, royalties earned, backlog, funding for our business and projects, margins, expenses, earnings, tax rates, cash flows, royalty payment obligations, working capital, liquidity and other financial and accounting measures; |
(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 and associated cash flows from Tinuum expected through 2021;
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(l) | the outcome of current legal proceedings; |
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(m) | awards of patents designed to protect our proprietary technologies both in the U.S. and other countries; |
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(n) | whether any legal challenges or EPA actions will have a material impact on the implementation of the MATS or other regulations and on our ongoing business; |
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(o) | the evolving impact and duration of the COVID-19 pandemic to our business; |
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(p) | whether any amounts under the PPP loan will be forgiven; and |
| |
(q) | the tax impact of the use of or forgiveness of funds received or forgiven under the PPP loan. |
(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;
(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, margins, expenses, earnings, tax rates, cash flows, royalty payment obligations, working capital, liquidity and other financial and accounting measures;
(k)the amount of future capital expenditures needed for our business, including, those associated with the Plant Incident;
(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.
The forward-looking statements included in this Quarterly 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; availability, cost of and demand for alternative energy sources and other technologies; 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 or such facilities to qualify for Section 45 tax credits; 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; our ability to mitigate or manage disruptions posed by COVID-19; the impact of COVID-19 and changes in U.S. economic conditions that materially impact the demand for our products and services, loss of key personnel; potential claims from any terminated employees, customers or vendors; availability of materials and equipment for our businesses; intellectual property infringement claims from third parties; pending litigation; 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. You are cautioned not to place undue reliance on the forward-looking statements made in this Quarterly 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 Quarterly Report are presented as of the date hereof, and we disclaim any duty to update such statements unless required by law to do so.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information under this Item is not required to be provided by smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a‑15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), we have evaluated, under the supervision of and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2020.2021.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act) during the fiscal quarter ended March 31, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in litigation, claims and other proceedings related to the conduct of our business. Information with respect to this item may be found in Note 811 "Commitments and Contingencies" to the consolidated financial statements included in Item 1 of Part I of this Quarterly Report.
Item 1A. Risk Factors
There are no material updates to our risk factors as disclosed in the 2019 Form 10-K except as set forth below. This risk factor should be read together with the risk factors in the 20192020 Form 10-K.
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 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 CISA 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 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 expected in the second quarter of 2020 and beyond. The disruptions to our operations caused by COVID-19 may 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 currently expect that our operating costs of revenue for the second quarter of fiscal 2020 will be higher than initially anticipated at the beginning of 2020 as a result of reduced plant capacity due to fewer employees physically working at our plant, increased costs associated with those employees continuing to physically work at our plant and disruptions in our supply chain. In addition, for the balance of 2020, we may see reduced demand for our products due to reduced interaction with our customers and our inability to target new customers and markets. Similarly, we anticipate that Tinuum Group's ability to sell or lease additional RC facilities will be delayed due to the economic shutdown.
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, we may be unable to collect receivables from those customers significantly impacted by COVID-19. Also, 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"). The PPP loan became available to us pursuant to the Coronavirus Aid, Relief, and Economic Security Act and is administered by the 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 will be 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 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 expected, and our personnel costs remain higher than budgeted, our cash needs could increase.
Further, we have assessed the impact on our existing internal control over financial reporting as of March 31, 2020 and going forward under the current state of COVID-19. We performed procedures to ensure that existing internal control over financial reporting was operating effectively as March 31, 2020 and will continue to operate effectively for the foreseeable future. Such
procedures included, but were not limited to, developing a COVID- 19 risk assessment identifying the risks of fraud, changes required in our internal control framework as well as other business information technology and cybersecurity risks. We are implementing necessary remediation plans, including backup planning, documentation and training initiatives.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
|
| | | | | | | | | | | | | | |
Period | | (a) Total number of shares purchased | | (b) Average price paid per share | | (c) Total number of shares purchased as part of publicly announced programs | | (d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs (in thousands) |
January 1 to January 31, 2020 | | 1,170 |
| | $ | 10.51 |
| | 1,170 |
| | $ | — |
|
February 1 to February 29, 2020 | | 1,930 |
| | 9.43 |
| | 1,930 |
| | — |
|
March 1 to March 31, 2020 | | 17,513 |
| | 7.37 |
| | 17,513 |
| | 6,974 |
|
Total | | 20,613 |
| | $ | — |
| | 20,613 |
| | $ | 6,974 |
|
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
The statement concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this Quarterly Report.
Item 5. Other Information
None.
The Company entered into agreements ("Retention Agreements") with all of its executive officers and certain other key employees of the organization for the benefit of retaining those officers and key employees in order to maintain the Company’s current business operations while it pursues and executes on its strategic initiatives. The Retention Agreements with the executive officers were approved by the Compensation Committee of the Board of Directors and the Board of Directors on May 5, 2021.
The total amount payable pursuant to the Retention Agreements is $2.4 million. Under the Retention Agreements, the following executive officers will be paid the following amounts if they satisfy the conditions for payment: Greg Marken, Interim Chief Executive Officer, $460,000; Morgan Fields, Vice President of Accounting, $129,000; and Joe Wong, Chief Technology Officer, $153,001. The other key employees would be paid an aggregate amount of $1.6 million.
In order to receive the Retention Agreement payments, the employees must remain employed at the Company through the earliest of the following: (1) the date the employee’s employment is terminated without Cause or for Good Reason (as those terms are defined in the Retention Agreement or the employee’s employment agreement, as applicable), (2) 90 days after a Transaction Date or a Change in Control (as those terms are defined in the Retention Agreement or the employee’s employment agreement, as applicable), or (3) 15 days following the date the Company’s Form 10-Q for the quarter ended June 30, 2022 is filed with the SEC.
The foregoing description of the Retention Agreements is qualified in its entirety by reference to the forms of Retention Agreement, copies of which are filed as Exhibits 10.4 and 10.5 to this Quarterly Report on Form 10-Q and incorporated herein by reference.
Item 6. Exhibits
| | Exhibit No. | | Description | | Form | | File No. | | Incorporated by Reference Exhibit | | Filing Date | Exhibit No. | | Description | | Form | | File No. | | Incorporated by Reference Exhibit | | Filing Date |
4.1 | | | | 8-K | | 001-37822 | | 4.3 | | April 9, 2020 | |
| 10.1 | | | | 8-K | | 001-37822 | | 10.1 | | April 22, 2020 | 10.1 | | | | 8-K | | 001-37822 | | 10.1 | | March 29, 2021 |
10.2 | | | | 8-K | | 001-37822 | | 10.2 | | April 22, 2020 | 10.2 | | | | 8-K | | 001-37822 | | 4.5 | | April 13, 2021 |
10.3 | | 10.3 | | | | 8-K | | 001-37822 | | 10.1 | | March 3, 2021 |
10.4 | | 10.4 | | | |
10.5 | | 10.5 | | | |
| 31.1 | | | | 31.1 | | | |
31.2 | | | | 31.2 | | | |
32.1 | | | | 32.1 | | | |
95.1 | | | | 95.1 | | | |
101. INS | | XBRL Instance Document | | 101. INS | | XBRL Instance Document | |
101.SCH | | XBRL Schema Document | | 101.SCH | | XBRL Schema Document | |
101.CAL | | XBRL Calculation Linkbase Document | | 101.CAL | | XBRL Calculation Linkbase Document | |
101.LAB | | XBRL Label Linkbase Document | | 101.LAB | | XBRL Label Linkbase Document | |
101.PRE | | XBRL Presentation Linkbase Document | | 101.PRE | | XBRL Presentation Linkbase Document | |
101.DEF | | Taxonomy Extension Definition Linkbase Document | | 101.DEF | | Taxonomy Extension Definition Linkbase Document | |
|
Notes:
* – Filed herewith.
** – Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| Advanced Emissions Solutions, Inc. |
| (Registrant) |
| | |
| | |
May 10, 2021 | Advanced Emissions Solutions, Inc.By: | /s/ Greg Marken |
| (Registrant) | Greg Marken |
| | |
| | |
May 11, 2020 | By: | /s/ L. Heath Sampson |
| | L. Heath Sampson |
| | Interim Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
| | |
May 11, 202010, 2021 | By: | /s/ Greg P. MarkenMorgan Fields |
| | Greg P. MarkenMorgan Fields |
| | Chief Financial OfficerVice President of Accounting |
| | (Principal Financial and Accounting Officer) |