United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-Q
______________________________________
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020March 31, 2021
or
| | | | | |
☐ | 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.) |
| | |
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)
Not 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 ☒ 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 ☒ 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.
| | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | | ☐ | | Accelerated filer | | ☐ |
| | | |
Non-accelerated filer | | ☒ | | Smaller reporting company | | ☒ |
| | | |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Class | | Trading Symbol | | Name of each exchange on which registered |
Common stock, par value $0.001 per share | | ADES | | NASDAQ Global Market |
As of October 30, 2020,May 5, 2021, there were 18,547,88718,855,607 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
(Unaudited)
| | | As of | | As of |
(in thousands, except share data) | (in thousands, except share data) | | September 30, 2020 | | December 31, 2019 | (in thousands, except share data) | | March 31, 2021 | | December 31, 2020 |
ASSETS | ASSETS | | | | | ASSETS | | | | |
Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents | | $ | 15,029 | | | $ | 12,080 | | |
Cash, cash equivalents and restricted cash | | Cash, cash equivalents and restricted cash | | $ | 42,234 | | | $ | 30,932 | |
Receivables, net | Receivables, net | | 10,273 | | | 7,430 | | Receivables, net | | 10,349 | | | 13,125 | |
Receivables, related parties | Receivables, related parties | | 3,626 | | | 4,246 | | Receivables, related parties | | 4,064 | | | 3,453 | |
Inventories, net | Inventories, net | | 10,419 | | | 15,460 | | Inventories, net | | 8,040 | | | 9,882 | |
Prepaid expenses and other assets | Prepaid expenses and other assets | | 16,888 | | | 7,832 | | Prepaid expenses and other assets | | 3,420 | | | 4,597 | |
| Total current assets | Total current assets | | 56,235 | | | 47,048 | | Total current assets | | 68,107 | | | 61,989 | |
Restricted cash, long-term | Restricted cash, long-term | | 10,000 | | | 5,000 | | Restricted cash, long-term | | 10,000 | | | 5,000 | |
Property, plant and equipment, net of accumulated depreciation of $2,322 and $7,444, respectively | | 29,823 | | | 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 | Intangible assets, net | | 2,134 | | | 4,169 | | Intangible assets, net | | 1,804 | | | 1,964 | |
Equity method investments | Equity method investments | | 22,885 | | | 39,155 | | Equity method investments | | 2,753 | | | 7,692 | |
Deferred tax assets, net | Deferred tax assets, net | | 3,371 | | | 14,095 | | Deferred tax assets, net | | 7,553 | | | 10,604 | |
Other long-term assets, net | Other long-term assets, net | | 31,206 | | | 20,331 | | Other long-term assets, net | | 31,576 | | | 29,989 | |
| Total Assets | Total Assets | | $ | 155,654 | | | $ | 173,799 | | Total Assets | | $ | 151,570 | | | $ | 146,671 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | | $ | 7,530 | | | $ | 8,046 | | Accounts payable | | $ | 7,908 | | | $ | 7,849 | |
Accrued payroll and related liabilities | Accrued payroll and related liabilities | | 4,114 | | | 3,024 | | Accrued payroll and related liabilities | | 2,214 | | | 3,257 | |
Current portion of long-term debt | Current portion of long-term debt | | 24,360 | | | 23,932 | | Current portion of long-term debt | | 9,913 | | | 18,441 | |
Other current liabilities | Other current liabilities | | 4,102 | | | 4,311 | | Other current liabilities | | 14,888 | | | 12,996 | |
| Total current liabilities | Total current liabilities | | 40,106 | | | 39,313 | | Total current liabilities | | 34,923 | | | 42,543 | |
Long-term debt, net of current portion | Long-term debt, net of current portion | | 5,486 | | | 20,434 | | Long-term debt, net of current portion | | 4,287 | | | 5,445 | |
| Other long-term liabilities | Other long-term liabilities | | 25,712 | | | 5,760 | | Other long-term liabilities | | 13,208 | | | 13,473 | |
Total Liabilities | Total Liabilities | | 71,304 | | | 65,507 | | Total Liabilities | | 52,418 | | | 61,461 | |
Commitments and contingencies (Note 13) | | | | | |
Commitments and contingencies (Note 11) | | Commitments and contingencies (Note 11) | | 0 | | 0 |
Stockholders’ equity: | Stockholders’ equity: | | Stockholders’ equity: | |
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 | | 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, 23,166,033 and 22,960,157 shares issued, and 18,547,887 and 18,362,624 shares outstanding at September 30, 2020 and December 31, 2019, respectively | | 23 | | | 23 | | |
Treasury stock, at cost: 4,618,146 and 4,597,533 shares as of September 30, 2020 and December 31, 2019, respectively | | (47,692) | | | (47,533) | | |
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 | Additional paid-in capital | | 100,005 | | | 98,466 | | Additional paid-in capital | | 100,630 | | | 100,425 | |
Retained earnings | Retained earnings | | 32,014 | | | 57,336 | | Retained earnings | | 46,191 | | | 32,454 | |
| Total stockholders’ equity | Total stockholders’ equity | | 84,350 | | | 108,292 | | Total stockholders’ equity | | 99,152 | | | 85,210 | |
Total Liabilities and Stockholders’ Equity | Total Liabilities and Stockholders’ Equity | | $ | 155,654 | | | $ | 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 September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
(in thousands, except per share data) | (in thousands, except per share data) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands, except per share data) | | 2021 | | 2020 | |
Revenues: | Revenues: | | | | | | | | | Revenues: | | | | | |
Consumables | Consumables | | $ | 15,844 | | | $ | 14,748 | | | $ | 33,231 | | | $ | 41,243 | | Consumables | | $ | 17,031 | | | $ | 9,217 | | |
License royalties, related party | License royalties, related party | | 3,627 | | | 4,385 | | | 9,986 | | | 12,796 | | License royalties, related party | | 4,066 | | | 3,046 | | |
| Total revenues | Total revenues | | 19,471 | | | 19,133 | | | 43,217 | | | 54,039 | | Total revenues | | 21,097 | | | 12,263 | | |
Operating expenses: | Operating expenses: | | | | | | | | | Operating expenses: | | | | | |
Consumables cost of revenue, exclusive of depreciation and amortization | Consumables cost of revenue, exclusive of depreciation and amortization | | 15,013 | | | 11,939 | | | 33,920 | | | 38,339 | | Consumables cost of revenue, exclusive of depreciation and amortization | | 12,474 | | | 11,491 | | |
| Payroll and benefits | Payroll and benefits | | 2,285 | | | 2,651 | | | 8,839 | | | 8,005 | | Payroll and benefits | | 2,469 | | | 2,742 | | |
| Legal and professional fees | Legal and professional fees | | 1,321 | | | 2,907 | | | 4,386 | | | 7,105 | | Legal and professional fees | | 1,803 | | | 2,043 | | |
General and administrative | General and administrative | | 1,900 | | | 1,984 | | | 6,693 | | | 5,894 | | General and administrative | | 1,915 | | | 2,331 | | |
Depreciation, amortization, depletion and accretion | Depreciation, amortization, depletion and accretion | | 1,777 | | | 2,043 | | | 5,807 | | | 4,902 | | Depreciation, amortization, depletion and accretion | | 2,106 | | | 2,297 | | |
Impairment of long-lived assets | | 0 | | | 0 | | | 26,103 | | | 0 | | |
| | Total operating expenses | Total operating expenses | | 22,296 | | | 21,524 | | | 85,748 | | | 64,245 | | Total operating expenses | | 20,767 | | | 20,904 | | |
Operating loss | | (2,825) | | | (2,391) | | | (42,531) | | | (10,206) | | |
Operating income (loss) | | Operating income (loss) | | 330 | | | (8,641) | | |
Other income (expense): | Other income (expense): | | | | | | | | | Other income (expense): | | | | | |
Earnings from equity method investments | Earnings from equity method investments | | 9,518 | | | 14,426 | | | 25,959 | | | 57,051 | | Earnings from equity method investments | | 18,312 | | | 8,273 | | |
| Interest expense | Interest expense | | (881) | | | (1,729) | | | (3,053) | | | (5,820) | | Interest expense | | (837) | | | (1,210) | | |
Other | Other | | 17 | | | 212 | | | 208 | | | 342 | | Other | | 421 | | | 43 | | |
| Total other income | Total other income | | 8,654 | | | 12,909 | | | 23,114 | | | 51,573 | | Total other income | | 17,896 | | | 7,106 | | |
Income (loss) before income tax expense | Income (loss) before income tax expense | | 5,829 | | | 10,518 | | | (19,417) | | | 41,367 | | Income (loss) before income tax expense | | 18,226 | | | (1,535) | | |
Income tax expense | Income tax expense | | 854 | | | 6,595 | | | 1,315 | | | 14,928 | | Income tax expense | | 4,489 | | | 358 | | |
Net income (loss) | Net income (loss) | | $ | 4,975 | | | $ | 3,923 | | | $ | (20,732) | | | $ | 26,439 | | Net income (loss) | | $ | 13,737 | | | $ | (1,893) | | |
Earnings (loss) per common share (Note 1): | Earnings (loss) per common share (Note 1): | | | | | | | | | Earnings (loss) per common share (Note 1): | | | | | |
Basic | Basic | | $ | 0.27 | | | $ | 0.22 | | | $ | (1.15) | | | $ | 1.45 | | Basic | | $ | 0.76 | | | $ | (0.11) | | |
Diluted | Diluted | | $ | 0.27 | | | $ | 0.21 | | | $ | (1.15) | | | $ | 1.44 | | Diluted | | $ | 0.75 | | | $ | (0.11) | | |
Weighted-average number of common shares outstanding: | Weighted-average number of common shares outstanding: | | Weighted-average number of common shares outstanding: | | |
Basic | Basic | | 18,093 | | | 18,112 | | | 18,014 | | | 18,184 | | Basic | | 18,166 | | | 17,932 | | |
Diluted | Diluted | | 18,103 | | | 18,339 | | | 18,014 | | | 18,394 | | Diluted | | 18,274 | | | 17,932 | | |
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 | | | | | Common Stock | | Treasury Stock | | | |
(Amounts in thousands, except share data) | (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 | | |
January 1, 2021 | | January 1, 2021 | | 23,141,284 | | | $ | 23 | | | (4,618,146) | | | $ | (47,692) | | | $ | 100,425 | | | $ | 32,454 | | | | $ | 85,210 | |
| Stock-based compensation | Stock-based compensation | | 218,259 | | | — | | | — | | | — | | | 506 | | | — | | | | 506 | | Stock-based compensation | | 381,339 | | | — | | | — | | | — | | | 421 | | | — | | | | 421 | |
| Repurchase of common shares to satisfy minimum tax withholdings | Repurchase of common shares to satisfy minimum tax withholdings | | (64,198) | | | — | | | — | | | — | | | (376) | | | — | | | | (376) | | Repurchase of common shares to satisfy minimum tax withholdings | | (40,975) | | | — | | | — | | | — | | | (216) | | | — | | | | (216) | |
| Cash dividends declared on common stock | | — | | | — | | | — | | | — | | | — | | | (4,590) | | | | (4,590) | | |
Repurchase of common shares | | — | | | — | | | (20,613) | | | (159) | | | — | | | — | | | | (159) | | |
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 | | |
Stock-based compensation | | (3,549) | | | — | | | — | | | — | | | 1,138 | | | — | | | | 1,138 | | |
| Repurchase of common shares to satisfy minimum tax withholdings | | (384) | | | — | | | — | | | — | | | (2) | | | — | | | | (2) | | |
| Net loss | | — | | | — | | | — | | | — | | | — | | | (23,814) | | | | (23,814) | | |
Balances, June 30, 2020 | | 23,110,285 | | | $ | 23 | | | (4,618,146) | | | $ | (47,692) | | | $ | 99,732 | | | $ | 27,039 | | | | $ | 79,102 | | |
Stock-based compensation | | 87,701 | | | — | | | — | | | — | | | 426 | | | — | | | | 426 | | |
| Repurchase of common shares to satisfy minimum tax withholdings | | (31,953) | | | — | | | — | | | — | | | (153) | | | — | | | | (153) | | |
| Net income | Net income | | — | | | — | | | — | | | — | | | — | | | 4,975 | | | | 4,975 | | Net income | | — | | | — | | | — | | | — | | | — | | | 13,737 | | | | 13,737 | |
Balances, September 30, 2020 | | 23,166,033 | | | $ | 23 | | | (4,618,146) | | | $ | (47,692) | | | $ | 100,005 | | | $ | 32,014 | | | | $ | 84,350 | | |
Balances, March 31, 2021 | | Balances, March 31, 2021 | | 23,481,648 | | | $ | 23 | | | (4,618,146) | | | $ | (47,692) | | | $ | 100,630 | | | $ | 46,191 | | | | $ | 99,152 | |
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
| | | Common Stock | | Treasury Stock | | | Common Stock | | Treasury Stock | |
(Amounts in thousands, except share data) | (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, 2019 | | 22,640,677 | | | $ | 23 | | | (4,064,188) | | | $ | (41,740) | | | $ | 96,750 | | | $ | 12,914 | | | $ | 67,947 | | |
Cumulative effect of change in accounting principle | | — | | | — | | | — | | | — | | | — | | | 28,817 | | | 28,817 | | |
Balances, January 1, 2020 | | Balances, January 1, 2020 | | 22,960,157 | | | $ | 23 | | | (4,597,533) | | | $ | (47,533) | | | $ | 98,466 | | | $ | 57,336 | | | $ | 108,292 | |
| Stock-based compensation | Stock-based compensation | | 218,465 | | | — | | | — | | | — | | | 317 | | | — | | | 317 | | Stock-based compensation | | 218,259 | | | — | | | — | | | — | | | 506 | | | — | | | 506 | |
| Repurchase of common shares to satisfy minimum tax withholdings | Repurchase of common shares to satisfy minimum tax withholdings | | (22,707) | | | — | | | — | | | — | | | (245) | | | — | | | (245) | | Repurchase of common shares to satisfy minimum tax withholdings | | (64,198) | | | — | | | — | | | — | | | (376) | | | — | | | (376) | |
Cash dividends declared on common stock | Cash dividends declared on common stock | | — | | | — | | | — | | | — | | | — | | | (4,629) | | | (4,629) | | Cash dividends declared on common stock | | — | | | — | | | — | | | — | | | — | | | (4,590) | | | (4,590) | |
Repurchase of common shares | Repurchase of common shares | | — | | | — | | | (63,876) | | | (693) | | | — | | | — | | | (693) | | Repurchase of common shares | | — | | | — | | | (20,613) | | | (159) | | | — | | | — | | | (159) | |
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 | | |
Stock-based compensation | | 31,715 | | | — | | | — | | | — | | | 541 | | | — | | | 541 | | |
| Repurchase of common shares to satisfy minimum tax withholdings | | (745) | | | — | | | — | | | — | | | (9) | | | — | | | (9) | | |
Net loss | | Net loss | | — | | | — | | | — | | | — | | | — | | | (1,893) | | | (1,893) | |
Balances, March 31, 2020 | | Balances, March 31, 2020 | | 23,114,218 | | | $ | 23 | | | (4,618,146) | | | $ | (47,692) | | | $ | 98,596 | | | $ | 50,853 | | | $ | 101,780 | |
| Cash dividends declared on common stock | | — | | | — | | | — | | | — | | | — | | | (4,663) | | | (4,663) | | |
Repurchase of common shares | | — | | | — | | | (184,715) | | | (2,138) | | | — | | | — | | | (2,138) | | |
Net income | | — | | | — | | | — | | | — | | | — | | | 8,114 | | | 8,114 | | |
Balances, June 30, 2019 | | 22,867,405 | | | $ | 23 | | | (4,312,779) | | | $ | (44,571) | | | $ | 97,354 | | | $ | 54,955 | | | $ | 107,761 | | |
Stock-based compensation | | 22,305 | | | — | | | — | | | — | | | 468 | | | — | | | 468 | | |
| Stock issued from exercise of stock options | | 25,820 | | | — | | | — | | | — | | | — | | | — | | | — | | |
Repurchase of common shares to satisfy minimum tax withholdings | | (101) | | | — | | | — | | | — | | | (116) | | | — | | | (116) | | |
| Cash dividends declared on common stock | | — | | | — | | | — | | | — | | | — | | | (4,641) | | | (4,641) | | |
Repurchase of common shares | | — | | | — | | | (8,152) | | | (95) | | | — | | | — | | | (95) | | |
Net income | | — | | | — | | | — | | | — | | | — | | | 3,923 | | | 3,923 | | |
Balances, September 30, 2019 | | 22,915,429 | | | $ | 23 | | | (4,320,931) | | | $ | (44,666) | | | $ | 97,706 | | | $ | 54,237 | | | $ | 107,300 | | |
|
See Notes to the Condensed Consolidated Financial Statements.
Advanced Emissions Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | Nine Months Ended September 30, | | | Three Months Ended March 31, |
(in thousands) | (in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 |
Cash flows from operating activities | Cash flows from operating activities | | | | | Cash flows from operating activities | | | | |
Net (loss) income | | $ | (20,732) | | | $ | 26,439 | | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | |
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 | | 10,724 | | | 10,634 | | Deferred income tax expense | | 3,051 | | | 788 | |
Depreciation, amortization, depletion and accretion | Depreciation, amortization, depletion and accretion | | 5,807 | | | 4,902 | | Depreciation, amortization, depletion and accretion | | 2,106 | | | 2,297 | |
Impairment of long-lived assets | | 26,103 | | | 0 | | |
| Operating lease expense | Operating lease expense | | 3,130 | | | 2,371 | | Operating lease expense | | 379 | | | 774 | |
Amortization of debt discount and debt issuance costs | Amortization of debt discount and debt issuance costs | | 1,064 | | | 1,324 | | Amortization of debt discount and debt issuance costs | | 591 | | | 354 | |
| Stock-based compensation expense | Stock-based compensation expense | | 2,070 | | | 1,326 | | Stock-based compensation expense | | 421 | | | 506 | |
Earnings from equity method investments | Earnings from equity method investments | | (25,959) | | | (57,051) | | Earnings from equity method investments | | (18,312) | | | (8,273) | |
Other non-cash items, net | Other non-cash items, net | | 45 | | | 697 | | Other non-cash items, net | | (273) | | | 0 | |
| Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
Receivables and related party receivables | Receivables and related party receivables | | (1,331) | | | 2,685 | | Receivables and related party receivables | | 2,147 | | | 2,988 | |
| Prepaid expenses and other assets | Prepaid expenses and other assets | | (9,056) | | | (440) | | Prepaid expenses and other assets | | 1,178 | | | 226 | |
| Inventories, net | Inventories, net | | 4,688 | | | 4,566 | | Inventories, net | | 1,548 | | | 1,572 | |
| Other long-term assets, net | Other long-term assets, net | | (1,908) | | | (43) | | Other long-term assets, net | | (1,817) | | | (89) | |
Accounts payable | Accounts payable | | (1,123) | | | 1,010 | | Accounts payable | | (706) | | | (1,477) | |
Accrued payroll and related liabilities | Accrued payroll and related liabilities | | 1,089 | | | (4,386) | | Accrued payroll and related liabilities | | (1,043) | | | (973) | |
Other current liabilities | Other current liabilities | | (220) | | | (278) | | Other current liabilities | | 1,305 | | | (23) | |
| Operating lease liabilities | Operating lease liabilities | | (1,678) | | | (2,435) | | Operating lease liabilities | | 2,104 | | | (634) | |
Other long-term liabilities | Other long-term liabilities | | (23) | | | (529) | | Other long-term liabilities | | (2,113) | | | (22) | |
Distributions from equity method investees, return on investment | Distributions from equity method investees, return on investment | | 42,228 | | | 56,806 | | Distributions from equity method investees, return on investment | | 17,644 | | | 17,116 | |
| Net cash provided by operating activities | Net cash provided by operating activities | | 34,918 | | | 47,598 | | Net cash provided by operating activities | | 21,947 | | | 13,237 | |
Cash flows from investing activities | Cash flows from investing activities | | | | | Cash flows from investing activities | | | | |
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 business | | 0 | | | (661) | | |
Acquisition of property, plant, equipment, and intangible assets, net | Acquisition of property, plant, equipment, and intangible assets, net | | (4,879) | | | (6,430) | | Acquisition of property, plant, equipment, and intangible assets, net | | (1,321) | | | (1,289) | |
Mine development costs | Mine development costs | | (723) | | | (2,083) | | Mine development costs | | (248) | | | (447) | |
Proceeds from sale of property and equipment | | Proceeds from sale of property and equipment | | 848 | | | 0 | |
| Net cash used in investing activities | | (5,602) | | | (9,174) | | |
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 | | | | | Cash flows from financing activities | | | | |
Principal payments on term loan | Principal payments on term loan | | (18,000) | | | (24,000) | | Principal payments on term loan | | (10,000) | | | (6,000) | |
Principal payments on finance lease obligations | Principal payments on finance lease obligations | | (1,026) | | | (1,016) | | Principal payments on finance lease obligations | | (315) | | | (340) | |
Dividends paid | Dividends paid | | (4,956) | | | (13,729) | | Dividends paid | | 0 | | | (4,518) | |
Repurchase of common shares | Repurchase of common shares | | (159) | | | (2,926) | | Repurchase of common shares | | 0 | | | (159) | |
Repurchase of common shares to satisfy tax withholdings | Repurchase of common shares to satisfy tax withholdings | | (531) | | | (370) | | Repurchase of common shares to satisfy tax withholdings | | (216) | | | (376) | |
Borrowings from Paycheck Protection Program Loan | | 3,305 | | | 0 | | |
| | Net cash used in financing activities | Net cash used in financing activities | | (21,367) | | | (42,041) | | Net cash used in financing activities | | (10,531) | | | (11,393) | |
Increase (decrease) in Cash and Cash Equivalents and Restricted Cash | | 7,949 | | | (3,617) | | |
Increase in Cash and Cash Equivalents and Restricted Cash | | Increase in Cash and Cash Equivalents and Restricted Cash | | 16,302 | | | 108 | |
Cash and Cash Equivalents and Restricted Cash, beginning of period | 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 | Cash and Cash Equivalents and Restricted Cash, end of period | | $ | 25,029 | | | $ | 20,155 | | 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: | | | | | Supplemental disclosure of non-cash investing and financing activities: | | | | |
| Acquisition of property, plant and equipment through accounts payable | Acquisition of property, plant and equipment through accounts payable | | $ | 446 | | | $ | 0 | | Acquisition of property, plant and equipment through accounts payable | | $ | 765 | | | $ | 1,890 | |
Acquisition of property, plant and equipment through finance lease | | $ | 158 | | | $ | 0 | | |
| Dividends payable | Dividends payable | | $ | 47 | | | $ | 204 | | 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 air and water treatment options including activated carbon ("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 AC used to capture and remove contaminants for coal-fired power plants and industrial and water treatment markets. Carbon Solutions also owns an associated lignite mine that supplies the primary raw material for manufacturing 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 in the United States. See Note 1816 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 September 30, | | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
(in thousands, except per share amounts) | (in thousands, except per share amounts) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands, except per share amounts) | | 2021 | | 2020 | |
Net income (loss) | Net income (loss) | | $ | 4,975 | | | $ | 3,923 | | | $ | (20,732) | | | $ | 26,439 | | Net income (loss) | | $ | 13,737 | | | $ | (1,893) | | |
Less: Dividends and undistributed income (loss) allocated to participating securities | Less: Dividends and undistributed income (loss) allocated to participating securities | | 0 | | | 5 | | | (10) | | | 37 | | Less: Dividends and undistributed income (loss) allocated to participating securities | | 0 | | | (2) | | |
Income (loss) attributable to common stockholders | Income (loss) attributable to common stockholders | | $ | 4,975 | | | $ | 3,918 | | | $ | (20,722) | | | $ | 26,402 | | Income (loss) attributable to common stockholders | | $ | 13,737 | | | $ | (1,891) | | |
| Basic weighted-average common shares outstanding | Basic weighted-average common shares outstanding | | 18,093 | | | 18,112 | | | 18,014 | | | 18,184 | | Basic weighted-average common shares outstanding | | 18,166 | | | 17,932 | | |
Add: dilutive effect of equity instruments | Add: dilutive effect of equity instruments | | 10 | | | 227 | | | 0 | | | 210 | | Add: dilutive effect of equity instruments | | 108 | | | 0 | | |
| Diluted weighted-average shares outstanding | Diluted weighted-average shares outstanding | | 18,103 | | | 18,339 | | | 18,014 | | | 18,394 | | Diluted weighted-average shares outstanding | | 18,274 | | | 17,932 | | |
Earnings (loss) per share - basic | Earnings (loss) per share - basic | | $ | 0.27 | | | $ | 0.22 | | | $ | (1.15) | | | $ | 1.45 | | Earnings (loss) per share - basic | | $ | 0.76 | | | $ | (0.11) | | |
Earnings (loss) per share - diluted | Earnings (loss) per share - diluted | | $ | 0.27 | | | $ | 0.21 | | | $ | (1.15) | | | $ | 1.44 | | Earnings (loss) per share - diluted | | $ | 0.75 | | | $ | (0.11) | | |
For the three and nine months ended September 30,March 31, 2021 and 2020, and 2019, RSA's, PSU's and Stock Options convertible to 0.50.1 million and 0.9 million, and 0.3 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 except for assumptions regarding impairment of long-lived assets and the valuation of assets acquired and liabilities assumed in an asset acquisition.10-K. Actual results could differ from these estimates.
Due to the coronavirus ("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 estimates 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 September 30, 2020,March 31, 2021, Tinuum Group has 2123 invested RC facilities of which 9 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 Tinuum Group's customers, reduction in revenue streams as a single customer by Tinuum Group orresult 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 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 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 - Customer Supply Agreement
On September 30, 2020, the Company and Cabot Norit Americas, Inc., ("Cabot") entered into a supply agreement (the "Supply Agreement") pursuant to which the Company agreesagreed to sell and deliver to Cabot, and Cabot agreesagreed to purchase and accept from the Company certain lignite-based AC products ("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 toAs part of the sale bySupply Agreement, the Company and purchase by Cabot of Furnace Products, the Company and Cabot have agreed to additional terms whereby Cabot will reimbursereimburses the Company for certain capital expenditures incurred by the Company that are necessary to manufacture the Furnace Products. Reimbursements will be in the form of revenues earned from capital expenditures incurred that will benefitProducts, and both the Company and Cabot (referred to as "Shared Capital") and capital expenditures incurred that will benefit Cabot exclusively (referred to as "Specific Capital"). Both the Company and Cabot must mutually agree with all Shared Capital and Specific Capitalon these capital expenditures that are necessary to support operational needs in advance of procurement and commissioning.
Revenues will be earned on Shared Capital ("Shared Capital revenues") based on the percentage of Furnace Products produced and sold divided by the Company’s total products produced and sold multiplied by a mutually agreed to factor, which is based on the cost of Shared Capital assets placed in service amortized as an annuity over the expected asset life (lives) with interest at a rateexpenditures incurred that was mutually agreed to bybenefit both the Company and Cabot.Cabot ("Shared Capital") are partially reimbursable by Cabot and recognized as revenues based on a formula contained in the Supply Agreement. Revenues from, and reimbursements of, Shared Capital revenues are recognized and billable, respectively, beginning on the first day of a half year (either January(January 1 orand July 1 of a calendar year) following the placed in service date of a Shared Capital asset(s).
Revenues will be earned on Specific Capital expenditures incurred that benefit Cabot exclusively ("Specific Capital revenues"Capital") are fully reimbursable by Cabot and arerecognized as revenues based on a mutually agreed to factor, which is based onformula contained in the cost ofSupply Agreement. Revenues earned from Specific Capital assets placed in service amortized as an annuity over five years with interest at a rate
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
that was mutually agreed to by both the Company and Cabot. Specific Capital revenues are recognized beginning on the first day of a half year (either January 1 or July 1 of a calendar year) following the placed in service date of a Specific Capital asset(s) and. 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 "Purchase"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 Marshall 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 determined thataccounted for the Marshall Mine Acquisition should be treated 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 hashad commenced full reclamation as of September 30, 2020, and therefore lackslacked inputs.
As the Marshall Mine Acquisition represents a transaction with a customer of net assets acquired and liabilities assumed from Cabot, the Company has 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 iswas also recognized net of an additional asset recognized in the Marshall Mine Acquisition, which iswas 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 will beis being amortized on a straight-line basis over the expected 15-year contractual period of the Supply Agreement as a reduction to revenue.revenues.
The Company paid a nominal amount to Cabot in the formAs part of cash for the Marshall Mine; in addition,Mine Acquisition, the Company assumed liabilities, whose fair value exceeded the fair value of assets acquired. TheA summary of the net assets acquired and liabilities assumed followed by the Cabot Receivable, and the excess of fair value of liabilities acquired overadditional assets assumed and recognizedrecorded in the Marshall Mine Acquisition as the Upfront Customer Consideration is as follows (in thousands), as of the transaction date of September 30, 2020:2020 are shown in the table below. Subsequent to this date, the Company completed additional analysis of the assets acquired and liabilities assumed and recorded adjustments as of December 31, 2020 as shown in the table below.
| | | | | | | | |
(in thousands) | | Amount |
Assets acquired: | | |
Property, plant and equipment | | $ | 3,863 | |
Spare parts | | 100 | |
| | |
Liabilities assumed: | | |
Accounts payable and accrued expenses | | (673) | |
Asset retirement obligation | | (21,328) | |
Net assets acquired and liabilities assumed from Marshall Mine acquisition | | (18,038) | |
Cabot receivable | | 9,749 | |
Upfront Customer Consideration | | $ | 8,289 | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | | | | | | | | | | | | | | | | | | |
(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 | |
The Company also evaluated the Marshall Mine entity as a potential variable interest entity ("VIE"), and determined that because of its structure and closing-stage status, it doesdid 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 the
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
membership interests in Marshall Mine, LLC and has determined that the Company iswas the primary beneficiary. Therefore, Marshall Mine, LLC has beenwas determined to be a VIE and Marshall Mine, LLC’s assets and liabilities have been consolidated as of September 30, 2020.were consolidated.
Note 4 - Marshall Mine Asset Retirement Obligation and related 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 doesdid 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 previously disclosed, under the terms of the related Supply Agreement, Cabot is obligated to pay Reclamation Reimbursements to the Company for $10.2 million of the Reclamation Costs, inclusive of interest. As of September 30, 2020, the Company recorded the Cabot Receivable for the Reclamation Reimbursements at its estimated fair value, which is measured using a discounted cash flows valuation model that considers the estimated credit risk associated with the obligor’s (Cabot’s) future performance. Interest will be accreted on a monthly basis and recognized as interest income. There were no significant related fees or costs associated with the 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. AllowancesThere 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 thisthe Cabot Receivable asset areis assessed periodically, and 0 allowance was deemed necessary as of September 30,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. ForAs of March 31, 2021, for the obligations due under the Reclamation Contract, the Company was required to post collateral of $5.0$10.0 million, dollarswhich is recorded as of September 30, 2020 and an additional $5.0 million dollars as of March 31, 2021.long-term restricted cash on the Condensed Consolidated Balance Sheet.
Note 5 - Impairment
As part of its periodic review of the carrying value of long-lived assets, the Company assessed its long-lived assets for potential impairment. In assessing impairment of its PGI segment's and certain other long-lived asset groups, the Company considered factors such as the significant decline in both the PGI segment's trailing twelve months revenues and current and future years’ forecasted revenues. These factors are largely due to the significant drop in coal-fired power dispatch that began in 2019 amid historically low prices of alternative power generation sources such as natural gas leading to an increase in natural gas usage as well as other competing energy sources.
As of June 30, 2020, the Company completed an undiscounted cash flow analysis of its PGI segment's and certain other long-lived assets (the "Asset Group"), which are comprised of its manufacturing plant and related assets and its lignite mine assets, and estimated the undiscounted cash flows from the Asset Group at $54.7 million, which was less than the carrying value of the Asset Group of $58.3 million. Accordingly, the Company completed an assessment of the Asset Group’s fair value and estimated the fair value of the Asset Group at $32.2 million. This resulted in an impairment and write-down of the Asset Group (the "Impairment Charge") of $26.1 million as of June 30, 2020, which is reflected as "Impairment of long-lived assets" in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2020. The Impairment Charge was allocated to the PGI segment and Other in the amounts of $23.2 million and $2.9 million, respectively, for the nine months ended September 30, 2020.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes the allocation to the Asset Group of the Impairment Charge of $26.1 million recorded as of June 30, 2020:
| | | | | | | | |
(in thousands) | | |
Property, plant and equipment, net | | $ | 18,986 | |
Intangible assets, net | | 1,445 | |
Other long-term assets, net | | 5,672 | |
| | |
Total impairment | | $ | 26,103 | |
The Company engaged an independent third party to perform the valuation of the Asset Group in order to determine the estimated fair value of the Asset Group. This valuation was based on the use of several established valuation models including an expected future discounted cash flow model using Level 3 inputs under ASC 820 - Fair Value Measurement. The cash flows are those expected to be generated by market participants discounted at the risk-free rate of interest. Because of the continued future uncertainty surrounding the level of coal-fired dispatch, the impact of historically low natural gas prices and other estimates impacting the expected future cash flow, it is reasonably possible that the expected future cash flows may change in the near term and may result in the Company recording additional impairment of the Asset Group.
As of September 30, 2020, the Company determined that there was 0 additional impairment of the Asset Group.
Note 6 - COVID-19
In response to the COVID-19 outbreak, in March 2020, the federal government passed the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The CARES Act, which provided among other things the creation of the Paycheck Protection ProgramPlan ("PPP"), which is sponsored and administered by the U.S. Small Business Administration ("SBA").
On April 20, 2020, the Company entered intoexecuted 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 provides for 18 monthly paymentsapproval by the SBA. The Company recorded the PPP Loan as a debt obligation and is accruing interest over the term of principal and interest commencing on November 21, 2020. 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. The PPP Loan
Under the PPPFA, monthly payments of principal may be forgiven subject toand interest commence on the termslater of 10 months following the PPP and approval by"covered period" (as defined in the SBA.
ThePPPFA) or the date that BOK notifies the Company recordedthat the PPP Loan asSBA has notified BOK that all or a debt obligation under the guidance of ASC 470 - Debt and will accrue interest over the 18-month termportion of the PPP Loan beginning November 21, 2020.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 September 30, 2020,March 31, 2021, the Company has deferred $0.3$0.4 million of payroll tax payments under the CARES Act.
Note 76 - Equity Method Investments
Tinuum Group, LLC
TheAs of March 31, 2021 and December 31, 2020, the Company's ownership interest in Tinuum Group was 42.5% as of September 30, 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. The Company has determined that Tinuum Group has been determined to beis 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.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes the results of operations of Tinuum Group:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
(in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 | |
Gross profit | Gross profit | | $ | 101 | | | $ | 16,810 | | | $ | 11,979 | | | $ | 96,189 | | Gross profit | | $ | 2,675 | | | $ | 5,010 | | |
Operating, selling, general and administrative expenses | Operating, selling, general and administrative expenses | | 13,781 | | | 11,076 | | | 38,476 | | | 23,421 | | Operating, selling, general and administrative expenses | | 13,802 | | | 12,776 | | |
(Loss) income from operations | | (13,680) | | | 5,734 | | | (26,497) | | | 72,768 | | |
Other income (expenses) | | 5,739 | | | (450) | | | 11,526 | | | (427) | | |
Loss from operations | | Loss from operations | | (11,127) | | | (7,766) | | |
Other income (expenses), net | | Other income (expenses), net | | 853 | | | 3,643 | | |
| Loss attributable to noncontrolling interest | Loss attributable to noncontrolling interest | | 25,023 | | | 22,355 | | | 63,117 | | | 51,022 | | Loss attributable to noncontrolling interest | | 35,578 | | | 19,271 | | |
Net income available to members | Net income available to members | | $ | 17,082 | | | $ | 27,639 | | | $ | 48,146 | | | $ | 123,363 | | Net income available to members | | $ | 25,304 | | | $ | 15,148 | | |
ADES equity earnings from Tinuum Group | ADES equity earnings from Tinuum Group | | $ | 7,260 | | | $ | 11,746 | | | $ | 20,462 | | | $ | 50,757 | | ADES equity earnings from Tinuum Group | | $ | 16,362 | | | $ | 6,438 | | |
For the three and nine months ended September 30, 2020 andMarch 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 September 30, 2019,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 nine months ended September 30, 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 was December 31, 2018. For the nine months ended September 30, 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.
For the three and nine months ended September 30,March 31, 2021 and March 31, 2020, the Company recognized equity earnings from Tinuum Group of $7.3$16.4 million and $20.5 million, respectively. For the three and nine months ended September 30, 2019, the Company recognized equity earnings from Tinuum Group of $11.7 million and $50.8$6.4 million, respectively.
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 and nine months ended September 30,March 31, 2021 and 2020 and 2019 (in thousands):
| Description | Description | | Date(s) | | Investment balance | | ADES equity earnings | | Cash distributions | | Memorandum Account: Cash distributions and equity earnings in (excess) of investment balance | Description | | Date(s) | | Investment balance | | ADES equity earnings | | Cash distributions | | Memorandum Account: Cash distributions and equity earnings in (excess) of investment balance |
Beginning balance | Beginning balance | | 12/31/2019 | | $ | 32,280 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | Beginning balance | | 12/31/2020 | | $ | 3,387 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| ADES proportionate share of income from Tinuum Group | ADES proportionate share of income from Tinuum Group | | First Quarter | | 6,438 | | | 6,438 | | | 0 | | | 0 | | ADES proportionate share of income from Tinuum Group | | First Quarter | | 10,755 | | | 10,755 | | | 0 | | | 0 | |
| Cash distributions from Tinuum Group | Cash distributions from Tinuum Group | | First Quarter | | (13,764) | | | 0 | | | 13,764 | | | 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 | | 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 | | Total investment balance, equity earnings and cash distributions | | 3/31/2021 | | $ | 0 | | | $ | 16,362 | | | $ | 19,749 | | | $ | (5,607) | |
| Total investment balance, equity earnings and cash distributions | | 3/31/2020 | | $ | 24,954 | | | $ | 6,438 | | | $ | 13,764 | | | $ | 0 | | |
ADES proportionate share of income from Tinuum Group | | Second Quarter | | $ | 6,764 | | | $ | 6,764 | | | $ | 0 | | | $ | 0 | | |
| Cash distributions from Tinuum Group | | Second Quarter | | (13,600) | | | 0 | | | 13,600 | | | 0 | | |
| Total investment balance, equity earnings and cash distributions | | 6/30/2020 | | $ | 18,118 | | | $ | 6,764 | | | $ | 13,600 | | | $ | 0 | | |
ADES proportionate share of income from Tinuum Group | | Third Quarter | | $ | 7,260 | | | $ | 7,260 | | | $ | 0 | | | $ | 0 | | |
| Cash distributions from Tinuum Group | | Third Quarter | | (7,862) | | | 0 | | | 7,862 | | | 0 | | |
| Total investment balance, equity earnings and cash distributions | | 9/30/2020 | | $ | 17,516 | | | $ | 7,260 | | | $ | 7,862 | | | $ | 0 | | |
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (1,672) | |
Impact of adoption of accounting standards (1) | | First Quarter | | 37,232 | | | 0 | | | 0 | | | 0 | |
ADES proportionate share of income from Tinuum Group | | First Quarter | | 21,439 | | | 21,439 | | | 0 | | | 0 | |
Recovery of prior cash distributions in excess of investment balance (prior to cash distributions) | | First Quarter | | (1,672) | | | (1,672) | | | 0 | | | 1,672 | |
Cash distributions from Tinuum Group | | First Quarter | | (16,788) | | | 0 | | | 16,788 | | | 0 | |
| | | | | | | | | | |
Total investment balance, equity earnings and cash distributions | | 3/31/2019 | | $ | 40,211 | | | $ | 19,767 | | | $ | 16,788 | | | $ | 0 | |
ADES proportionate share of income from Tinuum Group | | Second Quarter | | $ | 19,244 | | | $ | 19,244 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | |
Cash distributions from Tinuum Group | | Second Quarter | | (17,000) | | | 0 | | | 17,000 | | | 0 | |
| | | | | | | | | | |
Total investment balance, equity earnings and cash distributions | | 6/30/2019 | | $ | 42,455 | | | $ | 19,244 | | | $ | 17,000 | | | $ | 0 | |
ADES proportionate share of income from Tinuum Group | | Third Quarter | | $ | 11,746 | | | $ | 11,746 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | |
Cash distributions from Tinuum Group | | Third Quarter | | (16,468) | | | 0 | | | 16,468 | | | 0 | |
| | | | | | | | | | |
Total investment balance, equity earnings and cash distributions | | 9/30/2019 | | $ | 37,733 | | | $ | 11,746 | | | $ | 16,468 | | | $ | 0 | |
(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, which increased the Company's Retained earnings as of January 1, 2019. | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 the outstanding voting shares, either directly or indirectly, it has accounted for its investment in Tinuum Services under the equity method of accounting. TheAs of March 31, 2021 and December 31, 2020, the Company’s investment in Tinuum Services as of September 30, 2020 and December 31, 2019 was $5.3$2.7 million and $6.8$4.2 million, respectively.
The following table summarizes the results of operations of Tinuum Services:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
(in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 | |
Gross loss | Gross loss | | $ | (22,764) | | | $ | (27,834) | | | $ | (65,441) | | | $ | (77,761) | | Gross loss | | $ | (18,522) | | | $ | (22,259) | | |
Operating, selling, general and administrative expenses | Operating, selling, general and administrative expenses | | 42,435 | | | 51,927 | | | 131,703 | | | 151,789 | | Operating, selling, general and administrative expenses | | 54,366 | | | 45,753 | | |
Loss from operations | Loss from operations | | (65,199) | | | (79,761) | | | (197,144) | | | (229,550) | | Loss from operations | | (72,888) | | | (68,012) | | |
Other income (expenses) | | (363) | | | (460) | | | (978) | | | (1,018) | | |
Other income (expenses), net | | Other income (expenses), net | | (427) | | | (285) | | |
Loss attributable to noncontrolling interest | Loss attributable to noncontrolling interest | | 70,075 | | | 85,586 | | | 209,118 | | | 243,163 | | Loss attributable to noncontrolling interest | | 77,215 | | | 71,972 | | |
Net income | Net income | | $ | 4,513 | | | $ | 5,365 | | | $ | 10,996 | | | $ | 12,595 | | Net income | | $ | 3,900 | | | $ | 3,675 | | |
ADES equity earnings from Tinuum Services | ADES equity earnings from Tinuum Services | | $ | 2,257 | | | $ | 2,682 | | | $ | 5,498 | | | $ | 6,297 | | ADES equity earnings from Tinuum Services | | $ | 1,950 | | | $ | 1,838 | | |
Included in the Consolidated Statements of Operations of Tinuum Services for the three and nine months ended September 30,March 31, 2021 and 2020, and 2019, respectively, were losses related to VIE'sVIE entities that consolidated in Tinuum Services of Tinuum Services.$77.2 million and $72.0 million, respectively. These losses do not impact the Company's equity
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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)
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 September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
(in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 | |
Earnings from Tinuum Group | Earnings from Tinuum Group | | $ | 7,260 | | | $ | 11,746 | | | $ | 20,462 | | | $ | 50,757 | | Earnings from Tinuum Group | | $ | 16,362 | | | $ | 6,438 | | |
Earnings from Tinuum Services | Earnings from Tinuum Services | | 2,257 | | | 2,682 | | | 5,498 | | | 6,297 | | Earnings from Tinuum Services | | 1,950 | | | 1,838 | | |
Earnings (loss) from other | Earnings (loss) from other | | 1 | | | (2) | | | (1) | | | (3) | | Earnings (loss) from other | | 0 | | | (3) | | |
| Earnings from equity method investments | Earnings from equity method investments | | $ | 9,518 | | | $ | 14,426 | | | $ | 25,959 | | | $ | 57,051 | | 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.
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 |
Distributions from equity method investees, return on investment | | | | |
Tinuum Group | | $ | 35,226 | | | $ | 50,256 | |
Tinuum Services | | 7,002 | | | 6,550 | |
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| | $ | 42,228 | | | $ | 56,806 | |
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Note 8 - Acquisition
As describedflows until such time as the carrying value in Note 1, on the Acquisition Date, the Company completed the acquisitionan equity method investee company is reduced to zero. Thereafter, such distributions are reported as "distributions in excess of Carbon Solutions (the "Carbon Solutions Acquisition") for a total purchase price of $75.0 million (the "Purchase Price"). The fair value of the purchase consideration totaled $66.5 million, less cash acquired of $3.3 million, and the assumption of debt and contractual commitments of $11.8 million. The Company also paid $4.5 million in acquisition-related costs (or transaction costs). The Company funded the cash consideration from cash on hand and the proceeds from the Term Loan and Security Agreement (the "Senior Term Loan") in the principal amount of $70.0 million, as more fully described in Note 10.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes the final purchase price allocation. Subsequent to the Acquisition Date, the Company completed additional analysis and adjustments were made to the preliminary purchase price allocations as noted in the table below:
| | | | | | | | | | | | | | | | | | | | |
Fair value of assets acquired: | | As Originally Reported | | Adjustments | | As Adjusted |
Cash | | $ | 3,284 | | | $ | 0 | | | $ | 3,284 | |
Receivables | | 6,409 | | | 0 | | | 6,409 | |
Inventories | | 22,100 | | | (356) | | | 21,744 | |
Prepaid expenses and other current assets | | 2,992 | | | 61 | | | 3,053 | |
Spare parts | | 3,359 | | | 0 | | | 3,359 | |
Property, plant and equipment | | 43,033 | | | (377) | | | 42,656 | |
Mine leases and development | | 2,500 | | | 200 | | | 2,700 | |
Mine reclamation asset | | 0 | | | 2,402 | | | 2,402 | |
Intangible assets | | 4,000 | | | 100 | | | 4,100 | |
Other assets | | 168 | | | 0 | | | 168 | |
Amount attributable to assets acquired | | 87,845 | | | 2,030 | | | 89,875 | |
| | | | | | |
Fair value of liabilities assumed: | | | | | | |
Accounts payable | | 4,771 | | | 0 | | | 4,771 | |
Accrued liabilities | | 7,354 | | | 254 | | | 7,608 | |
Equipment lease liabilities | | 8,211 | | | 0 | | | 8,211 | |
Mine reclamation liability | | 626 | | | 1,776 | | | 2,402 | |
Other liabilities | | 437 | | | 0 | | | 437 | |
Amount attributable to liabilities assumed | | 21,399 | | | 2,030 | | | 23,429 | |
| | | | | | |
Net assets acquired | | $ | 66,446 | | | $ | 0 | | | $ | 66,446 | |
Adjustments to 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 assetcumulative earnings" as a resultcomponent of the final valuation reportcash flows from the Company's third-party valuation firm issued in May 2019. During the three months ended June 30, 2019 based on new information 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.investing activities.
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 | | | |
Refer to Note 5 regarding subsequent impairment taken on the long-lived assets acquired above.
| | | | | | | | | | | | | | |
| | 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 | |
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| | $ | 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 | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 97 - Inventories, net
The following table summarizes the Company's inventories recorded at the lower of average cost or net realizable value as of September 30, 2020March 31, 2021 and December 31, 2019:2020:
| | | As of | | As of |
(in thousands) | (in thousands) | | September 30, 2020 | | December 31, 2019 | (in thousands) | | March 31, 2021 | | December 31, 2020 |
Product inventory | | $ | 9,535 | | | $ | 13,515 | | |
Product inventory, net | | Product inventory, net | | $ | 7,185 | | | $ | 8,361 | |
Raw material inventory | Raw material inventory | | 884 | | | 1,945 | | Raw material inventory | | 855 | | | 1,521 | |
| | | $ | 10,419 | | | $ | 15,460 | | | $ | 8,040 | | | $ | 9,882 | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 108 - Debt Obligations
| | | As of | | As of |
(in thousands) | (in thousands) | | September 30, 2020 | | December 31, 2019 | (in thousands) | | March 31, 2021 | | December 31, 2020 |
Senior Term Loan due December 2021, related party | Senior Term Loan due December 2021, related party | | $ | 22,000 | | | $ | 40,000 | | Senior Term Loan due December 2021, related party | | $ | 6,000 | | | $ | 16,000 | |
Less: net unamortized debt issuance costs | Less: net unamortized debt issuance costs | | (640) | | | (1,163) | | Less: net unamortized debt issuance costs | | (175) | | | (465) | |
Less: net unamortized debt discount | Less: net unamortized debt discount | | (660) | | | (1,200) | | Less: net unamortized debt discount | | (180) | | | (480) | |
Senior Term Loan due December 2021, net | Senior Term Loan due December 2021, net | | 20,700 | | | 37,637 | | Senior Term Loan due December 2021, net | | 5,645 | | | 15,055 | |
Finance lease obligations | Finance lease obligations | | 5,841 | | | 6,729 | | Finance lease obligations | | 5,250 | | | 5,526 | |
PPP Loan | PPP Loan | | 3,305 | | | 0 | | PPP Loan | | 3,305 | | | 3,305 | |
| | 29,846 | | | 44,366 | | | 14,200 | | | 23,886 | |
Less: Current maturities | Less: Current maturities | | (24,360) | | | (23,932) | | Less: Current maturities | | (9,913) | | | (18,441) | |
Total long-term debt | Total long-term debt | | $ | 5,486 | | | $ | 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 5 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 8.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 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
In September 2013, ADA-ES, Inc. ("ADA"), a wholly-owned subsidiary of the Company, as borrower, and the Company, as guarantor, entered 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 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 and December 31, 2020, there were 0 outstanding borrowings under the Line of Credit.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
LineNote 9 - Leases
As of Credit
On September 29, 2020, ADA-ES, Inc. ("ADA"), a wholly-owned subsidiary of the Company, as borrower, the Company, as guarantor, and a bank (the "Lender") entered into an amendment to the 2013 Loan and Security Agreement (the "Line of Credit"). This amendment extended the maturity date of the Line of Credit to March 31, 2021 and retained covenants from the prior amendments to the Line of Credit, which included ADA's ability 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 and the revision of covenants that were consistent with the Senior Term Loan covenants, including maintaining a minimum cash balance of $5.0 million.
As of September 30, 2020, there were 0 outstanding borrowings under the Line of Credit.
Note 11 - Leases
As of September 30,December 31, 2020, the Company hashad obligations under finance leases of $5.3 million and $5.5 million, respectively, and obligations under operating leases in the amounts of $5.8$5.1 million and $3.5$3.0 million, respectively. As of September 30,March 31, 2021 and December 31, 2020, the Company hashad 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 $2.6$4.2 million and $2.3$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 Sheets as of September 30, 2020.March 31, 2021 and December 31, 2019.2020. 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 and nine months ended September 30, 2020March 31, 2021 and September 30, 2019.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 September 30, 2020March 31, 2021 and December 31, 2019.2020.
Lease expense for operating leases for the three and nine months ended September 30, 2020March 31, 2021 was $1.1$1.0 million, and $3.5 million, respectively, of which $1.0$0.9 million and $2.9 million, respectively, is included in Consumables - cost of revenue, exclusive of depreciation and amortization, and $0.1 million and $0.6 million, respectively, is included in General and administrative in the Condensed Consolidated Statement of Operations. Lease expense for operating leases for the three and nine months ended September 30, 2019March 31, 2020 was $1.1$1.2 million, and $3.3 million, respectively, of which $1.0 million and $3.1 million, respectively, is included in Consumables - cost of revenue, exclusive of depreciation and amortization, and $0.1$0.2 million and $0.3 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, 2021 and 2020 is provided in the following table:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
(in thousands) | | 2021 | | 2020 | | | | |
Finance lease cost: | | | | | | | | |
Amortization of right-of-use assets | | $ | 174 | | | $ | 514 | | | | | |
Interest on lease liabilities | | 79 | | | 94 | | | | | |
Operating lease cost | | 459 | | | 853 | | | | | |
Short-term lease cost | | 567 | | | 282 | | | | | |
Variable lease cost (1) | | 9 | | | 93 | | | | | |
| | | | | | | | |
Total lease cost | | $ | 1,288 | | | $ | 1,836 | | | | | |
| | | | | | | | |
Other Information: | | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
Operating cash flows from finance leases | | $ | 79 | | | $ | 94 | | | | | |
Operating cash flows from operating leases | | $ | 575 | | | $ | 634 | | | | | |
Financing cash flows from finance leases | | $ | 315 | | | $ | 340 | | | | | |
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 | | $ | 2,679 | | | $ | 60 | | | | | |
Weighted-average remaining lease term - finance leases | | 3.3 years | | 4.1 years | | | | |
Weighted-average remaining lease term - operating leases | | 1.6 years | | 2.3 years | | | | |
Weighted-average discount rate - finance leases | | 6.18 | % | | 6.08 | % | | | | |
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)
Lease financial information as of and for the three and nine months ended September 30, 2020 and 2019 is provided in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Finance lease cost: | | | | | | | | |
Amortization of right-of-use assets | | $ | 258 | | | $ | 1,277 | | | $ | 1,237 | | | $ | 2,371 | |
Interest on lease liabilities | | 88 | | | 82 | | | 275 | | | 270 | |
Operating lease cost | | 412 | | | 908 | | | 1,941 | | | 2,764 | |
Short-term lease cost | | 671 | | | 198 | | | 1,377 | | | 558 | |
Variable lease cost (1) | | 10 | | | 52 | | | 147 | | | 227 | |
| | | | | | | | |
Total lease cost | | $ | 1,439 | | | $ | 2,517 | | | $ | 4,977 | | | $ | 6,190 | |
| | | | | | | | |
Other Information: | | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
Operating cash flows from finance leases | | | | | | $ | 275 | | | $ | 270 | |
Operating cash flows from operating leases | | | | | | $ | 1,678 | | | $ | 2,435 | |
Financing cash flows from finance leases | | | | | | $ | 1,026 | | | $ | 1,016 | |
Right-of-use assets obtained in exchange for new finance lease liabilities | | | | | | $ | 158 | | | $ | 0 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | | | | | | $ | 59 | | | $ | 1,309 | |
Weighted-average remaining lease term - finance leases | | | | | | 3.7 years | | 4.4 years |
Weighted-average remaining lease term - operating leases | | | | | | 2.0 years | | 2.5 years |
Weighted-average discount rate - finance leases | | | | | | 6.1 | % | | 6.1 | % |
Weighted-average discount rate - operating leases | | | | | | 8.5 | % | | 8.6 | % |
(1) Primarily includes common area maintenance, property taxes and insurance payable to lessors.
Note 1210 - 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.
Trade receivables, net
The following table shows the components of the Company's Trade receivables, net:
| | | As of | | As of |
(in thousands) | (in thousands) | | September 30, 2020 | | December 31, 2019 | (in thousands) | | March 31, 2021 | | December 31, 2020 |
Trade receivables | Trade receivables | | $ | 9,950 | | | $ | 8,057 | | Trade receivables | | $ | 9,481 | | | $ | 12,241 | |
Less: Allowance for doubtful accounts | Less: Allowance for doubtful accounts | | (598) | | | (627) | | Less: Allowance for doubtful accounts | | (53) | | | (37) | |
Trade receivables, net | Trade receivables, net | | $ | 9,352 | | | $ | 7,430 | | Trade receivables, net | | $ | 9,428 | | | $ | 12,204 | |
|
For the three and nine months ended September 30,March 31, 2021 and 2020, and 2019, the Company recognized 0 and 0 bad debt expense, respectively.
Advanced Emissions Solutions, Inc. and SubsidiariesCabot Receivable
Notes to Condensed Consolidated Financial StatementsThe following table shows the components of the Cabot Receivable:
(Unaudited)
| | | | | | | | | | | | | | |
| | 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 | |
Upfront Customer Consideration
As described in Note 3, as of September 30, 2020, the Company recorded an asset of $8.3 million representing upfront consideration transferred to a customer in connection with the Supply Agreement. The amount is included in Other long-term assets, net on the Company's Consolidated Balance Sheet as of September 30, 2020.
Disaggregation of Revenue and Earnings from Equity Method Investments
DuringFor the three and nine months ended September 30,March 31, 2021 and 2020, and 2019, 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 2 reportable segments, which are further discussed in Note 1816 to the Condensed Consolidated Financial Statements. The following tables disaggregate revenues by major component for the three and nine months ended September 30,March 31, 2021 and 2020 and 2019 (in thousands):
| | | Three Months Ended September 30, 2020 | | Nine Months Ended September 30, 2020 | | Three Months Ended March 31, 2021 | |
| | Segment | | | Segment | | | Segment | | | | |
| | PGI | | RC | | Other | | Total | | PGI | | RC | | Other | | Total | | APT | | RC | | | Total | |
Revenue component | Revenue component | | | | | | | | | | | | | | | | | Revenue component | | | | | | | | |
Consumables | Consumables | | $ | 13,442 | | | $ | 0 | | | $ | 2,402 | | | $ | 15,844 | | | $ | 28,987 | | | $ | 0 | | | $ | 4,244 | | | $ | 33,231 | | Consumables | | $ | 17,031 | | | $ | 0 | | | | $ | 17,031 | | |
License royalties, related party | License royalties, related party | | 0 | | | 3,627 | | | 0 | | | 3,627 | | | 0 | | | 9,986 | | | 0 | | | 9,986 | | License royalties, related party | | 0 | | | 4,066 | | | | 4,066 | | |
| Revenues from customers | Revenues from customers | | 13,442 | | | 3,627 | | | 2,402 | | | 19,471 | | | 28,987 | | | 9,986 | | | 4,244 | | | 43,217 | | Revenues from customers | | 17,031 | | | 4,066 | | | | 21,097 | | |
| Earnings from equity method investments | Earnings from equity method investments | | 0 | | | 9,518 | | | 0 | | | 9,518 | | | 0 | | | 25,959 | | | 0 | | | 25,959 | | Earnings from equity method investments | | 0 | | | 18,312 | | | | 18,312 | | |
| Total revenues from customers and earnings from equity method investments | Total revenues from customers and earnings from equity method investments | | $ | 13,442 | | | $ | 13,145 | | | $ | 2,402 | | | $ | 28,989 | | | $ | 28,987 | | | $ | 35,945 | | | $ | 4,244 | | | $ | 69,176 | | Total revenues from customers and earnings from equity method investments | | $ | 17,031 | | | $ | 22,378 | | | | $ | 39,409 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
| | Segment | | | | | | Segment | | | | |
| | PGI | | RC | | Other | | Total | | PGI | | RC | | Other | | Total |
Revenue component | | | | | | | | | | | | | | | | |
Consumables | | $ | 14,010 | | | $ | 0 | | | $ | 738 | | | $ | 14,748 | | | $ | 39,612 | | | $ | 0 | | | $ | 1,631 | | | $ | 41,243 | |
License royalties, related party | | 0 | | | 4,385 | | | 0 | | | 4,385 | | | 0 | | | 12,796 | | | 0 | | | 12,796 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Revenues from customers | | 14,010 | | | 4,385 | | | 738 | | | 19,133 | | | 39,612 | | | 12,796 | | | 1,631 | | | 54,039 | |
| | | | | | | | | | | | | | | | |
Earnings from equity method investments | | 0 | | | 14,426 | | | 0 | | | 14,426 | | | 0 | | | 57,051 | | | 0 | | | 57,051 | |
| | | | | | | | | | | | | | | | |
Total revenues from customers and earnings from equity method investments | | $ | 14,010 | | | $ | 18,811 | | | $ | 738 | | | $ | 33,559 | | | $ | 39,612 | | | $ | 69,847 | | | $ | 1,631 | | | $ | 111,090 | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | | |
| | Segment | | | | | | | | | | |
| | APT | | RC | | | | Total | | | | | | | | |
Revenue component | | | | | | | | | | | | | | | | |
Consumables | | $ | 9,217 | | | $ | 0 | | | | | $ | 9,217 | | | | | | | | | |
License royalties, related party | | 0 | | | 3,046 | | | | | 3,046 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Revenues from customers | | 9,217 | | | 3,046 | | | | | 12,263 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Earnings from equity method investments | | 0 | | | 8,273 | | | | | 8,273 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total revenues from customers and earnings from equity method investments | | $ | 9,217 | | | $ | 11,319 | | | | | $ | 20,536 | | | | | | | | | |
Note 1311 - 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 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 September 30, 2020.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2021.Restricted Cash
As of September 30,March 31, 2021 and December 31, 2020, the Company had short-term restricted cash of $6.0 million and $5.0 million, respectively, as required under a minimum cash balance requirement of a Line of Credit covenant, and long-term restricted cash of $10.0 million which consisted of minimum cash balance requirements of $5.0 million and $5.0 million, respectively, as required under the Senior Term Loan and the Surety Agreement related to the Marshall Mine, respectively. As of December 31, 2019, the Company had long-term restricted cash of $5.0 million related to minimum cash requirements under the Senior Term Loan.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 2 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 0t 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 1412 - 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.
For the three and nine months ended September 30, 2020, underUnder the Stock Repurchase Program, for the three months ended March 31, 2021 and March 31, 2020, the Company purchased 0 and 20,613 shares, respectively, of its common stock for cash of 0 and $0.2 million, respectively, inclusive of commissions and fees. For the three and nine months ended September 30, 2019, under the Stock Repurchase Program, the Company purchased 8,152 and 256,743 shares, respectively, of its common stock for cash of $0.1 million and $2.9 million, respectively, inclusive of commissions and fees. As of September 30, 2020,March 31, 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 and nine months ended September 30,March 31, 2021 and 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| | Per share | | Date paid | | Per share | | Date paid |
Dividends declared during quarter ended: | | | | | | | | |
March 31 | | $ | 0.25 | | | March 10, 2020 | | $ | 0.25 | | | March 7, 2019 |
June 30 | | $ | 0 | | | | | $ | 0.25 | | | June 7, 2019 |
September 30 | | $ | 0 | | | | | $ | 0.25 | | | September 6, 2019 |
| | | | | | | | |
| | $ | 0.25 | | | | | $ | 0.75 | | | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| | Per share | | Date paid | | Per share | | Date paid |
Dividends declared during quarter ended: | | | | | | | | |
March 31 | | $ | 0 | | | N/A | | $ | 0.25 | | | March 10, 2020 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | $ | 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 Sheets as of September 30, 2020March 31, 2021 and December 31, 2019.2020.
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
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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.
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. AtPursuant to the Company's 2020 annual meeting of stockholders, the Company's stockholders approved the SecondFourth Amendment, thus the Final Expiration Date willshall be the close of business on the earlier of (i) December 31, 2021.2022 or (ii) December 31, 2021 if stockholder approval of the Fourth Amendment has not been obtained prior to such date.
Note 1513 - 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 revenue 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 and nine months ended September 30,March 31, 2021 and 2020 and 2019 was as follows:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
(in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 | |
RSA expense | RSA expense | | $ | 411 | | | $ | 468 | | | $ | 1,892 | | | $ | 1,326 | | RSA expense | | $ | 407 | | | $ | 506 | | |
| PSU expense | PSU expense | | 15 | | | 0 | | | 178 | | | 0 | | PSU expense | | 14 | | | 0 | | |
| Total stock-based compensation expense | Total stock-based compensation expense | | $ | 426 | | | $ | 468 | | | $ | 2,070 | | | $ | 1,326 | | Total stock-based compensation expense | | $ | 421 | | | $ | 506 | | |
The amount of unrecognized compensation cost as of September 30, 2020,March 31, 2021, and the expected weighted-average period over which the cost will be recognized is as follows:
| | | As of September 30, 2020 | | As of March 31, 2021 |
(in thousands) | (in thousands) | | Unrecognized Compensation Cost | | Expected Weighted- Average Period of Recognition (in years) | (in thousands) | | Unrecognized Compensation Cost | | Expected Weighted- Average Period of Recognition (in years) |
RSA expense | RSA expense | | $ | 2,181 | | | 1.71 | RSA expense | | $ | 3,383 | | | 2.46 |
| PSU expense | PSU expense | | 131 | | | 2.44 | PSU expense | | 545 | | | 2.49 |
| Total unrecognized stock-based compensation expense | Total unrecognized stock-based compensation expense | | $ | 2,312 | | | 1.75 | Total unrecognized stock-based compensation expense | | $ | 3,928 | | | 2.46 |
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.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A summary of RSA activity under the Company's various stock compensation plans for the ninethree months ended September 30, 2020March 31, 2021 is presented below:
| | | | | | | | | | | | | | | | | | |
| | Restricted Stock | | | | Weighted-Average Grant Date Fair Value | | |
| | | | | | | | |
Non-vested at January 1, 2020 | | 451,344 | | | | | $ | 10.65 | | | |
Granted | | 309,976 | | | | | $ | 5.20 | | | |
Vested | | (306,137) | | | | | $ | 10.08 | | | |
Forfeited | | (7,565) | | | | | $ | 7.87 | | | |
Non-vested at September 30, 2020 | | 447,618 | | | | | $ | 7.31 | | | |
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 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 nine months ended September 30, 2020 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 | | 0 | | | 0 | | | | | |
Options exercised | | 0 | | | 0 | | | | | |
Options expired / forfeited | | (300,000) | | | 13.87 | | | | | |
Options outstanding, September 30, 2020 | | 0 | | | $ | 0 | | | $ | 0 | | | — | |
Options vested and exercisable, September 30, 2020 | | 0 | | | $ | 0 | | | $ | 0 | | | — | |
| | | | | | | | | | | | | | | | | | |
| | 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 ninethree months ended September 30, 2020March 31, 2021 is presented below:
| | | Units | | Weighted-Average Grant Date Fair Value | | Aggregate Intrinsic Value (in thousands) | | Weighted-Average Remaining Contractual Term (in years) | | 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 | | 0 | | | $ | 0 | | | | | | |
PSU's outstanding, January 1, 2021 | | PSU's outstanding, January 1, 2021 | | 50,127 | | | $ | 6.17 | | | | | |
Granted | Granted | | 50,127 | | | 6.17 | | | Granted | | 62,448 | | | 7.09 | | |
Vested / Settled | Vested / Settled | | 0 | | | 0 | | | Vested / Settled | | 0 | | | 0 | | |
Forfeited / Canceled | Forfeited / Canceled | | 0 | | | 0 | | | Forfeited / Canceled | | 0 | | | 0 | | |
PSU's outstanding, September 30, 2020 | | 50,127 | | | $ | 6.17 | | | $ | 204 | | | 2.44 | |
PSU's outstanding, March 31, 2021 | | PSU's outstanding, March 31, 2021 | | 112,575 | | | $ | 6.68 | | | $ | 619 | | | 2.49 |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1614 - 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 | | | As of |
(in thousands) | (in thousands) | September 30, 2020 | | December 31, 2019 | (in thousands) | March 31, 2021 | | December 31, 2020 |
Prepaid expenses and other assets: | Prepaid expenses and other assets: | | | | | Prepaid expenses and other assets: | | | | |
Federal and state income tax benefits | | $ | 9,373 | | | $ | 0 | | |
Prepaid federal and state income taxes | | 4,715 | | | 4,228 | | |
| Prepaid income taxes and income tax refunds | | Prepaid income taxes and income tax refunds | | $ | 263 | | | $ | 1,605 | |
Prepaid expenses | Prepaid expenses | | 1,633 | | | 1,708 | | Prepaid expenses | | 1,794 | | | 1,690 | |
Other | Other | | 1,167 | | | 1,896 | | Other | | 1,363 | | | 1,302 | |
| | | $ | 16,888 | | | $ | 7,832 | | | $ | 3,420 | | | $ | 4,597 | |
Other long-term assets, net: | Other long-term assets, net: | | | | | Other long-term assets, net: | | | | |
Upfront Customer Consideration (1) | | $ | 8,290 | | | $ | 0 | | |
Upfront customer consideration (1) | | Upfront customer consideration (1) | | $ | 7,363 | | | $ | 7,490 | |
Cabot receivable(1) | Cabot receivable(1) | | 8,828 | | | 0 | | Cabot receivable(1) | | 7,914 | | | 8,852 | |
Right of use assets, operating leases, net | Right of use assets, operating leases, net | | 2,256 | | | 5,073 | | Right of use assets, operating leases, net | | 4,230 | | | 1,930 | |
Spare parts, net | Spare parts, net | | 3,846 | | | 3,453 | | Spare parts, net | | 3,883 | | | 3,727 | |
Mine development costs, net | Mine development costs, net | | 4,356 | | | 7,084 | | Mine development costs, net | | 4,511 | | | 4,338 | |
Mine reclamation asset, net | Mine reclamation asset, net | | 1,307 | | | 2,451 | | Mine reclamation asset, net | | 1,689 | | | 1,712 | |
Highview Investment | Highview Investment | | 552 | | | 552 | | Highview Investment | | 552 | | | 552 | |
Other long-term assets | Other long-term assets | | 1,771 | | | 1,718 | | Other long-term assets | | 1,434 | | | 1,388 | |
| | $ | 31,206 | | | $ | 20,331 | | | $ | 31,576 | | | $ | 29,989 | |
(1) See further discussion of Upfront Customer Considerationcustomer consideration in Note 3.3 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. IndicatorsThere were no indicators of impairment were present during the second quarteras of 2020. See Note 5 for further discussion.March 31, 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. 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 and nine months ended September 30, 2020March 31, 2021 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 | | | As of |
(in thousands) | (in thousands) | | September 30, 2020 | | December 31, 2019 | (in thousands) | | March 31, 2021 | | December 31, 2020 |
Other current liabilities: | Other current liabilities: | | | | | Other current liabilities: | | | | |
Current portion of operating lease obligations | Current portion of operating lease obligations | | $ | 2,043 | | | $ | 2,382 | | Current portion of operating lease obligations | | $ | 2,434 | | | $ | 1,883 | |
Accrued interest | | 91 | | | 213 | | |
| Income and other taxes payable | Income and other taxes payable | | 1,603 | | | 678 | | Income and other taxes payable | | 2,810 | | | 1,305 | |
Current portion of mine reclamation liability | | Current portion of mine reclamation liability | | 9,169 | | | 9,370 | |
| Other | | 365 | | | 1,038 | | |
Other current liabilities | | Other current liabilities | | 475 | | | 438 | |
| | | $ | 4,102 | | | $ | 4,311 | | | $ | 14,888 | | | $ | 12,996 | |
Other long-term liabilities: | Other long-term liabilities: | | | | | Other long-term liabilities: | | | | |
| Operating lease obligations, long-term | Operating lease obligations, long-term | | $ | 1,471 | | | $ | 2,810 | | Operating lease obligations, long-term | | $ | 2,661 | | | $ | 1,109 | |
| Mine reclamation liability (1) | | 24,183 | | | 2,721 | | |
Other | | 58 | | | 229 | | |
Mine reclamation liabilities | | Mine reclamation liabilities | | 10,330 | | | 12,077 | |
Other long-term liabilities | | Other long-term liabilities | | 217 | | | 287 | |
| | | $ | 25,712 | | | $ | 5,760 | | | $ | 13,208 | | | $ | 13,473 | |
(1) As discussedThe Mine reclamation liability related to the Five Forks Mine is included in Note 3, $21.3 million relatesOther long-term liabilities. The Mine reclamation liability related to Marshall Mine, ARO.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 September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
(in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 | |
Interest on Senior Term Loan | Interest on Senior Term Loan | | $ | 339 | | | $ | 940 | | | $ | 1,453 | | | $ | 3,344 | | Interest on Senior Term Loan | | $ | 155 | | | $ | 630 | | |
Debt discount and debt issuance costs | Debt discount and debt issuance costs | | 355 | | | 473 | | | 1,064 | | | 1,324 | | Debt discount and debt issuance costs | | 591 | | | 354 | | |
453A interest | 453A interest | | 94 | | | 234 | | | 254 | | | 882 | | 453A interest | | 0 | | | 132 | | |
Other | Other | | 93 | | | 82 | | | 282 | | | 270 | | Other | | 91 | | | 94 | | |
| | | $ | 881 | | | $ | 1,729 | | | $ | 3,053 | | | $ | 5,820 | | | $ | 837 | | | $ | 1,210 | | |
Note 1715 - Income Taxes
For the three and nine months ended September 30,March 31, 2021 and 2020, and 2019, the Company's income tax expense and effective tax rates based on forecasted pretax income were:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
(in thousands, except for rate) | (in thousands, except for rate) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands, except for rate) | | 2021 | | 2020 | |
Income tax expense | Income tax expense | | $ | 854 | | | $ | 6,595 | | | $ | 1,315 | | | $ | 14,928 | | Income tax expense | | $ | 4,489 | | | $ | 358 | | |
Effective tax rate | Effective tax rate | | 15 | % | | 63 | % | | (7) | % | | 36 | % | Effective tax rate | | 25 | % | | (23) | % | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The effective rate for the three and nine months ended September 30, 2020March 31, 2021 was differenthigher from the federal statutory rate primarily from changesthe impact of estimated state income taxes. For the three months ended March 31, 2021, the Company recorded tax credits earned of $0.1 million, which were fully reserved in the valuation allowance on deferred tax assets, most notably an increase of $5.1 million for the nine months ended September 30, 2020. The increase in the valuation allowance was a result of a reduction in forecasts as of September 30, 2020 from forecasts as of DecemberMarch 31, 2019 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 deferred tax 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 1816 - 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 September 30, 2020,March 31, 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 September 30, 2020,March 31, 2021, the Company has 2 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 September 30, 2020March 31, 2021 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 and nine months ended September 30, 2020March 31, 2021 and 2019:2020:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | Three Months Ended March 31, | |
(in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 | |
Revenues: | Revenues: | | | | | | | | | Revenues: | | | | | |
Refined Coal: | Refined Coal: | | Refined Coal: | | |
Earnings in equity method investments | Earnings in equity method investments | | $ | 9,518 | | | $ | 14,426 | | | $ | 25,959 | | | $ | 57,051 | | Earnings in equity method investments | | $ | 18,312 | | | $ | 8,273 | | |
License royalties, related party | License royalties, related party | | 3,627 | | | 4,385 | | | 9,986 | | | 12,796 | | License royalties, related party | | 4,066 | | | 3,046 | | |
| | | 13,145 | | | 18,811 | | | 35,945 | | | 69,847 | | | 22,378 | | | 11,319 | | |
Power Generation and Industrials: | | | | | | | | | |
Advanced Purification Technologies: | | Advanced Purification Technologies: | | | | | |
Consumables | Consumables | | 13,442 | | | 14,010 | | | 28,987 | | | 39,612 | | Consumables | | 17,031 | | | 9,217 | | |
| | | 13,442 | | | 14,010 | | | 28,987 | | | 39,612 | | | 17,031 | | | 9,217 | | |
| Total segment reporting revenues | Total segment reporting revenues | | 26,587 | | | 32,821 | | | 64,932 | | | 109,459 | | Total segment reporting revenues | | 39,409 | | | 20,536 | | |
| Adjustments to reconcile to reported revenues: | Adjustments to reconcile to reported revenues: | | Adjustments to reconcile to reported revenues: | | |
| Earnings in equity method investments | Earnings in equity method investments | | (9,518) | | | (14,426) | | | (25,959) | | | (57,051) | | Earnings in equity method investments | | (18,312) | | | (8,273) | | |
| Corporate and other | | 2,402 | | | 738 | | | 4,244 | | | 1,631 | | |
| Total reported revenues | Total reported revenues | | $ | 19,471 | | | $ | 19,133 | | | $ | 43,217 | | | $ | 54,039 | | Total reported revenues | | $ | 21,097 | | | $ | 12,263 | | |
| Segment operating income (loss): | Segment operating income (loss): | | Segment operating income (loss): | | |
| Refined Coal (1) | Refined Coal (1) | | $ | 12,817 | | | $ | 18,158 | | | $ | 34,454 | | | $ | 68,137 | | Refined Coal (1) | | $ | 22,271 | | | $ | 10,860 | | |
Power Generation and Industrials (2) | | (1,270) | | | (977) | | | (33,584) | | | (8,301) | | |
Advanced Purification Technologies (1) | | Advanced Purification Technologies (1) | | 15 | | | (7,370) | | |
| Total segment operating income | Total segment operating income | | $ | 11,547 | | | $ | 17,181 | | | $ | 870 | | | $ | 59,836 | | Total segment operating income | | $ | 22,286 | | | $ | 3,490 | | |
(1) Included in RCAPT segment operating income (loss) for the three and nine months ended September 30,March 31, 2021 and 2020 is 453A interest expense of $0.1 million and $0.3 million, respectively. Included in RC segment operating income for the three and nine months ended September 30, 2019 is 453A interest expense of $0.2 million and $0.9 million, respectively.
(2) Included in PGI segment operating loss for the three and nine months ended September 30, 2020 is 0 and $23.2 million, respectively, of impairment expense on the Asset Group, and 0 and $0.4 million, respectively, of expenses related to sequestration of certain of our employees at our manufacturing plant in Louisiana. Included in PGI segment operating loss for the three and nine months ended September 30, 2020 and 2019 is $1.4 million and $4.9 million, and $1.9 million and $4.5$2.2 million, respectively, of depreciation, amortization,
Advanced Emissions Solutions, Inc. depletion and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
and depletionaccretion expense on mine and plant long-lived assets. Included in PGI segment operating loss for the nine months ended September 30, 2019 was $4.7assets 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.
A reconciliation of reportable segment operating income to the Company's consolidated income (loss) before income tax expense is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Total reported segment operating income | | $ | 11,547 | | | $ | 17,181 | | | $ | 870 | | | $ | 59,836 | |
Other operating loss (1) | | (2,010) | | | (658) | | | (7,065) | | | (1,409) | |
| | 9,537 | | | 16,523 | | | (6,195) | | | 58,427 | |
| | | | | | | | |
Adjustments to reconcile to income (loss) before income tax expense attributable to the Company: | | | | | | | | |
Corporate payroll and benefits | | (587) | | | (768) | | | (2,444) | | | (2,004) | |
| | | | | | | | |
Corporate legal and professional fees | | (1,176) | | | (1,737) | | | (3,850) | | | (5,254) | |
Corporate general and administrative | | (1,116) | | | (2,278) | | | (4,273) | | | (5,427) | |
Corporate depreciation and amortization | | (148) | | | (21) | | | (337) | | | (41) | |
| | | | | | | | |
Corporate interest expense, net | | (680) | | | (1,413) | | | (2,446) | | | (4,668) | |
| | | | | | | | |
| | | | | | | | |
Other income (expense), net | | (1) | | | 212 | | | 128 | | | 334 | |
| | | | | | | | |
Income (loss) before income tax expense | | $ | 5,829 | | | $ | 10,518 | | | $ | (19,417) | | | $ | 41,367 | |
(1) Included in Other operating loss for the three and nine months ended September 30, 2020 was 0 and $2.9 million, respectively, of impairment expense on the Asset Group. | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
(in thousands) | | 2021 | | 2020 | | | | |
Total reported segment operating income | | $ | 22,286 | | | $ | 3,490 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Adjustments to reconcile to income (loss) before income tax expense attributable to the Company: | | | | | | | | |
Corporate payroll and benefits | | (639) | | | (709) | | | | | |
| | | | | | | | |
Corporate legal and professional fees | | (1,754) | | | (1,749) | | | | | |
Corporate general and administrative | | (1,176) | | | (1,599) | | | | | |
Corporate depreciation and amortization | | (154) | | | (26) | | | | | |
| | | | | | | | |
Corporate interest expense, net | | (650) | | | (942) | | | | | |
| | | | | | | | |
| | | | | | | | |
Other income (expense), net | | 313 | | | 0 | | | | | |
| | | | | | | | |
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) | (in thousands) | | September 30, 2020 | | December 31, 2019 | (in thousands) | | March 31, 2021 | | December 31, 2020 |
Assets: | Assets: | | | | | Assets: | | | | |
Refined Coal (1) | Refined Coal (1) | | $ | 26,985 | | | $ | 43,953 | | Refined Coal (1) | | $ | 7,117 | | | $ | 11,516 | |
Power Generation and Industrials | | 70,772 | | | 80,912 | | |
Advanced Purification Technologies (2) | | Advanced Purification Technologies (2) | | 78,373 | | | 80,877 | |
Total segment assets | Total segment assets | | 97,757 | | | 124,865 | | Total segment assets | | 85,490 | | | 92,393 | |
| All Other and Corporate (2)(3) | All Other and Corporate (2)(3) | | 57,897 | | | 48,934 | | All Other and Corporate (2)(3) | | 66,080 | | | 54,278 | |
Consolidated | Consolidated | | $ | 155,654 | | | $ | 173,799 | | Consolidated | | $ | 151,570 | | | $ | 146,671 | |
(1) Includes $22.9$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 1917 - 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 September 30, 2020 | | As of December 31, 2019 |
(in thousands) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Financial Instruments: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Highview Investment | | $ | 552 | | | $ | 552 | | | $ | 552 | | | $ | 552 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Highview Obligation | | $ | 216 | | | $ | 216 | | | $ | 220 | | | $ | 220 | |
| | | | | | | | |
| | | | | | | | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2021 | | As of December 31, 2020 |
(in thousands) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Financial Instruments: | | | | | | | | |
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Highview Investment | | $ | 552 | | | $ | 552 | | | $ | 552 | | | $ | 552 | |
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Highview Obligation | | $ | 231 | | | $ | 231 | | | $ | 228 | | | $ | 228 | |
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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 four financial institutions as of September 30, 2020.March 31, 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.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of September 30, 2020March 31, 2021 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 3, the Company completed the asset acquisition of Marshall Mine, LLC. The estimated fair values of the assets acquired and liabilities assumed were determined based on Level 3 inputs.
As disclosed in Note 5,14, the Company recorded an impairment charge related to the Asset Group based on a valuation models that included an expected future discounted cash flow model using Level 3 inputs.
As disclosed in Note 8, the Company completed the Carbon Solutions Acquisition for purchase consideration of $66.5 million. The estimated fair values of the assets acquired and liabilities assumed were determined based on Level 3 inputs.
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 September 30, 2020 and 2019 as there were no indicators of impairment or observable price changes for identical or similar investments.
Note 20 - Restructuring and Other Compensation
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 0 material restructuring activities during the three and nine months ended September 30, 2020.
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.
Other Compensation
On March 27, 2020, the Company's CEO resigned from the Company effective June 30, 2020. Pursuant to a settlement agreement executed between the Company and the CEO, the Company was obligated to pay severance compensation to the CEO in the form of salary continuance, cash bonus, contingent upon the Company achieving a performance metric, healthcare benefits, RSAs and PSUs, which in the aggregate was $1.4 million. As of June 30, 2020, the Company recorded a liability for the total severance compensation and corresponding expense under the caption "Payroll and benefits" in the Condensed Consolidated Statements of Operations.
The following table summarizes the Company's change in restructuring and other compensation accruals for the nine months ended September 30, 2020:
| | | | | | | | | | | | | | |
(in thousands) | | Severance | | | | | | |
Remaining accrual as of December 31, 2019 | | $ | 254 | | | | | | | |
Expense provision | | 1,403 | | | | | | | |
Cash payments and other | | (956) | | | | | | | |
Change in estimates | | 0 | | | | | | | |
Remaining accrual as of September 30, 2020 | | $ | 701 | | | | | | | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 2118 - Subsequent Events
Unless disclosed elsewhere within the notes to the Condensed Consolidated Financial Statements, the following are the significant matters that occurred subsequent to September 30, 2020.
Invested RC FacilityMarch 31, 2021.
On October 20, 2020,April 22, 2021, there was an incident at the Company announced that Tinuum Group completedCompany's Red River Plant in Louisiana, which involved an isolated fire in one of the plant's coal handling systems. As a leaseresult, the Red River Plant was shut down for an additional RC facility.approximately one week for repair. The RC facility is located at a coal plant that has historically burned in excess of 4.0 million tons of coal per year. With this addition, Tinuum Group has 22 invested facilities in full-time operation.
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.
The 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 its strategic initiatives. The total amount payable pursuant to the 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 consumable air and water treatment options that utilize activated carbon ("AC") and chemical based technologies. Our proprietary environmental technologies sold in the power generation and industrial ("PGI") market, which includes coal-fired power plants and industrial, and water treatment market, 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.
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 contaminant capture and removal for coal-fired power plants and 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 we 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 remove mercuryutilize 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 from 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. Our AC products include both 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, PAC 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 Norit Americas, Inc., ("Cabot") entered into a supply agreement (the "Supply Agreement")the Supply Agreement pursuant to which we agreeagreed to sell and deliver to Cabot, and Cabot agreesagreed to purchase and accept from us, certain lignite-based activated carbon products ("Furnace Products").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
(referred to as "Shared Capital") and capital expenditures incurred that will benefit Cabot exclusively (referred to as "Specific
Capital"). Both we and Cabot must mutually agree with all Shared Capital and Specific Capital that are necessary to support operational needs in advance of procurement and commissioning.
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 activated carbonAC 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 an agreementthe Mine Purchase Agreement with Cabot to purchase (the "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"). 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 a reclamation contract (the "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. 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 September 30, 2020,the Marshall Mine, we recorded an asset retirement obligation relatedwere required to the Reclamation Contractpost a surety bond to ensure performance of our reclamation activities in the amount of $21.3$30.0 million and a receivable related tounder the Surety Agreement. As of March 31, 2021, for the obligations due under the Reclamation ReimbursementsContract, we were required to post collateral of $10.0 million in the amountform of $9.7 million, net.
Impairment
As part of our periodic review of the carrying value of long-lived assets, we assessed our long-lived assets for potential impairment. In assessing impairment of our PGI segment's and certain other long-lived asset groups, we considered factors such as the significant decline in both the PGI segment's trailing twelve months revenues and current and future years’ forecasted revenues. These factors are largely due to the significant drop in coal-fired power dispatch that began in 2019 amid historically low prices of alternative power generation sources, such as natural gas, leading to an increase in natural gas usage as well as other competing energy sources. Natural gas prices continue to be highly volatile, which may impact our volumes and corresponding revenues that could result in future impairment.
As of September 30, 2020, we concluded that there was no impairment of our long-lived assets. However, as of June 30, 2020, we completed an undiscounted cash flow analysis of our PGI segment's and certain other long-lived asset group (the "Asset Group"), which is comprised of our manufacturing plant and related assets and our lignite mine assets, and estimated the undiscounted cash flows from the Asset Group, which were less than the carrying value of the Asset Group. The decrease in undiscounted cash flows was due to lower volumes impacted by overall lower power generation and an increase in power generation from sources other than coal as a percentage of total generation. Accordingly, we completed an assessment of the Asset Group’s fair value and estimated the fair value of the Asset Group at $32.2 million. This resulted in an impairment and write-down of the Asset Group of $26.1 million as of June 30, 2020, and which is reflected as "Impairment of long-lived assets" in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2020. The total impairment charge was allocated to the PGI segment and Other in the amounts of $23.2 million and $2.9 million, respectively, for the nine months ended September 30, 2020.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 all employees. These measures have resulted in an increase in our personnel costs, operational inefficiencies and the incurrence of incremental costs to allow manufacturing operations to continue.
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 or other such directives continue for a prolonged period of time and cause a material negative change in power generation demand, materially disrupt our supply chain, substantially increase our operating costs or limit our ability to serve existing customers and seek new customers.
In response to the COVID-19 outbreak, in March 2020, the federal government passed the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act").CARES Act. The CARES Act provided, among other things, the deferral of payroll tax payments for all payroll taxes incurred through December 31, 2020. 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 has 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 September 30, 2020,March 31, 2021, total payroll tax payments deferred under the CARES Act were $0.3$0.4 million.
During the nine months ended September 30, 2020, we incurred costs of $0.4 million related to sequestration of certain of our employees at our manufacturing plant in Louisiana. These costs included hazard pay, lodging and meal expenses for 30 days.
Our customers may also be impacted by COVID-19 pandemic as the utilization of energy has changed. We cannot predict the long-term impact on our customers and the subsequent impact on our business.
Results of Operations
For the three and nine months ended September 30, 2020,March 31, 2021, we recognized net income of $5.0$13.7 million andcompared to net loss of $20.7 million, respectively, compared to net income of $3.9 million and $26.4$1.9 million for the three and nine months ended September 30, 2019, respectively.
The operating results for the three and nine months ended September 30, 2020 are primarily attributable to a combination of factors, including:
•Continued performance in our RC business segment, principally related to equity earnings and license royalties;
•Performance in our PGI business segment, principally related to Carbon Solutions;
•Impairment recorded related to our PGI segment's and certain other long-lived asset groups; and
•Impacts related to changes in income tax expense.March 31, 2020.
The following sections provide additional information regarding these comparative periods. For comparability purposes, the following tables set forth our results of operations for the periods presented in the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report. The period-to-period comparison of financial results may not be indicative of financial results to be achieved in future periods.
Comparison of the Three Months Ended September 30,March 31, 2021 and 2020 and 2019
Total Revenue and Cost of Revenue
A summary of the components of our revenues and cost of revenue for the three months ended September 30,March 31, 2021 and 2020 and 2019 is as follows:
| | | Three Months Ended September 30, | | Change | | Three Months Ended March 31, | | Change |
(in thousands, except percentages) | (in thousands, except percentages) | | 2020 | | 2019 | | ($) | | (%) | (in thousands, except percentages) | | 2021 | | 2020 | | ($) | | (%) |
Revenues: | Revenues: | | | | | | | | | Revenues: | | | | | | | | |
Consumables | Consumables | | $ | 15,844 | | | $ | 14,748 | | | $ | 1,096 | | | 7 | % | Consumables | | $ | 17,031 | | | $ | 9,217 | | | $ | 7,814 | | | 85 | % |
License royalties, related party | License royalties, related party | | 3,627 | | | 4,385 | | | (758) | | | (17) | % | License royalties, related party | | 4,066 | | | 3,046 | | | 1,020 | | | 33 | % |
| Total revenues | Total revenues | | $ | 19,471 | | | $ | 19,133 | | | $ | 338 | | | 2 | % | Total revenues | | $ | 21,097 | | | $ | 12,263 | | | $ | 8,834 | | | 72 | % |
Operating expenses: | Operating expenses: | | | | | | | | Operating expenses: | | | | | | | |
Consumables cost of revenue, exclusive of depreciation and amortization | Consumables cost of revenue, exclusive of depreciation and amortization | | $ | 15,013 | | | $ | 11,939 | | | $ | 3,074 | | | 26 | % | 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 September 30, 2020,March 31, 2021, consumables revenues increased from the comparable quarter in 20192020 primarily driven by higher product volumes, impactingmost significantly from 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 price and product mix of approximately $1.0 million combined.$1.3 million. Our gross margin, exclusive of depreciation and amortization, decreasedincreased for the three months ended September 30, 2020March 31, 2021 compared to the corresponding quarter in 20192020 primarily due to the lowerhigher volumes, during the first half of the current year causing higherwhich resulted in lower fixed cost 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 continues 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 September 30, 2020,March 31, 2021, power generation from coal-fired power dispatch was downincreased approximately 10%37% compared to the corresponding quarter in 2019.2020.
License royalties, related party
For the three months ended September 30,March 31, 2021 and 2020, and 2019, there were 14.614.7 million tons and 14.511.9 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"). WhileM-45 License royalties increased for the three months ended March 31, 2021 primarily from higher tonnage increased slightly periodcompared to the three months ended March 31, 2020. This was primarily a result of an increase quarter over period, there was a reductionquarter in RC facilities that use the M-45 Technology. The increase in tonnage as well as the additional RC facilities attributed to the royalty rate per ton primarily attributable to higher depreciation recognized of approximately $0.2 million on all royalty bearing RC facilities as a result of a reduction in their estimated useful lives as determined byincreasing period over period. As both Tinuum Group duringand Tinuum Services expect to significantly wind down their operations by the three months ended September 30, 2019. Further reducingend of 2021 due to the rate per ton was a decrease in net lease paymentsexpected expiration of approximately $0.4 millionthe Section 45 tax credit period as a result of Tinuum Group restructuring RC facility contracted leases with its largest customer in the second half of 2019. As a result of higher depreciation and lower lease payments,December 31, 2021, we do not expect that the lower royalty rate per ton willto continue for the remainder of 2020 and inearning M-45 License royalties after December 31, 2021.
Additional information related to revenue concentrations and contributions by class and reportable segment can be found within the Business Segments discussion and in Note 1816 to the Condensed Consolidated Financial Statements.
Other Operating Expenses
A summary of the components of our operating expenses, exclusive of cost of revenue items (presented above), for the three months ended September 30,March 31, 2021 and 2020 and 2019 is as follows:
| | | Three Months Ended September 30, | | Change | | Three Months Ended March 31, | | Change |
(in thousands, except percentages) | (in thousands, except percentages) | | 2020 | | 2019 | | ($) | | (%) | (in thousands, except percentages) | | 2021 | | 2020 | | ($) | | (%) |
Operating expenses: | Operating expenses: | | | | | | | | | Operating expenses: | | | | | | | | |
Payroll and benefits | Payroll and benefits | | $ | 2,285 | | | $ | 2,651 | | | $ | (366) | | | (14) | % | Payroll and benefits | | $ | 2,469 | | | $ | 2,742 | | | $ | (273) | | | (10) | % |
| Legal and professional fees | Legal and professional fees | | 1,321 | | | 2,907 | | | (1,586) | | | (55) | % | Legal and professional fees | | 1,803 | | | 2,043 | | | (240) | | | (12) | % |
General and administrative | General and administrative | | 1,900 | | | 1,984 | | | (84) | | | (4) | % | General and administrative | | 1,915 | | | 2,331 | | | (416) | | | (18) | % |
Depreciation, amortization, depletion and accretion | Depreciation, amortization, depletion and accretion | | 1,777 | | | 2,043 | | | (266) | | | (13) | % | Depreciation, amortization, depletion and accretion | | 2,106 | | | 2,297 | | | (191) | | | (8) | % |
| | | $ | 7,283 | | | $ | 9,585 | | | $ | (2,302) | | | (24) | % | | $ | 8,293 | | | $ | 9,413 | | | $ | (1,120) | | | (12) | % |
Payroll and benefits
Payroll and benefits expenses, which represent costs related to selling, general and administrative personnel, decreased for the three months ended September 30, 2020March 31, 2021 compared to the corresponding quarter in 20192020 primarily due to a decrease in payroll-related expenses of executive and personnel mix. Our headcount and payroll-related expenses.remained relatively constant quarter over quarter.
Legal and professional fees
Legal and professional fees decreased for the three months ended September 30, 2020March 31, 2021 compared to the corresponding quarter in 20192020 as a result of cost reductions related to professional fees of $0.5 million, primarily in consulting and outsourced IT costcosts specific to the completion of the integration of Carbon Solutions of $1.5 million. The remainingSolutions. Offsetting this decrease was a result of decreasedan increase in outsourced shared service costs, including legal fees.fees, of $0.3 million.
General and administrative
General and administrative expenses decreased for the three months ended September 30, 2020March 31, 2021 compared to the corresponding quarter in 20192020 primarily due to a reduction inof general and administrative expenses includingincluded a reduction in product development of $0.4 million that occurred during the three months ended March 31, 2020. Further reduction of general and administrative expenses included a reduction of travel as a preventative measure related to the COVID-19 pandemic, and recruiting fees.of $0.1 million. Offsetting this decreasethese decreases was an increase in product development expenses of approximately $0.1 million and rent and occupancy expenses of approximately $0.1 million related to property taxes.
Depreciation, amortization, depletion and accretion
Depreciation and amortization expense decreased for the three months ended September 30, 2020March 31, 2021 compared to the corresponding quarter in 20192020 due to thean impairment charge taken in the second quarter of 2020 reducingthat reduced the value of our fixed assets and intangibles and thus, reducingreduced the corresponding depreciation and amortization expense by approximately $0.6 million. Offsetting this decrease was higher production volumes duringan increase in accretion expense of $0.3 million related to the ARO liability of Marshall Mine for the three months ended September 30, 2020, resulting in $0.3 million more absorption of depreciation in inventory.March 31, 2021. Further, the addition of leasehold improvements at our corporate
headquarters in 2020 contributed to approximately $0.1$0.2 million of amortization expense for the three months ended September 30, 2020.March 31, 2021.
Other Income (Expense), net
A summary of the components of other income (expense), net for the three months ended September 30,March 31, 2021 and 2020 and 2019 is as follows:
| | | Three Months Ended September 30, | | Change | | Three Months Ended March 31, | | Change |
(in thousands, except percentages) | (in thousands, except percentages) | | 2020 | | 2019 | | ($) | | (%) | (in thousands, except percentages) | | 2021 | | 2020 | | ($) | | (%) |
Other income (expense): | Other income (expense): | | | | | | | | | Other income (expense): | | | | | | | | |
Earnings from equity method investments | Earnings from equity method investments | | $ | 9,518 | | | $ | 14,426 | | | $ | (4,908) | | | (34) | % | Earnings from equity method investments | | $ | 18,312 | | | $ | 8,273 | | | $ | 10,039 | | | 121 | % |
| Interest expense | Interest expense | | (881) | | | (1,729) | | | 848 | | | (49) | % | Interest expense | | (837) | | | (1,210) | | | 373 | | | (31) | % |
Other | Other | | 17 | | | 212 | | | (195) | | | (92) | % | Other | | 421 | | | 43 | | | 378 | | | 879 | % |
| Total other income | Total other income | | $ | 8,654 | | | $ | 12,909 | | | $ | (4,255) | | | (33) | % | 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 September 30, | | |
(in thousands) | | 2020 | | 2019 | | | | |
Earnings from Tinuum Group | | $ | 7,260 | | | $ | 11,746 | | | | | |
Earnings from Tinuum Services | | 2,257 | | | 2,682 | | | | | |
Earnings (loss) from other | | 1 | | | (2) | | | | | |
| | | | | | | | |
| | | | | | | | |
Earnings from equity method investments | | $ | 9,518 | | | $ | 14,426 | | | | | |
| | | | | | | | | | | | | | | | | | |
| | 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 | | | | | |
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 September 30, 2020 and 2019,March 31, 2021, we recognized $7.3$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 $11.7our 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 respectively, 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 September 30, 2020, equity earnings from our interest in Tinuum Group were positively impacted by the additionSee further discussion of two new RC facilities during the second half of 2019, a new RC facility added during the three months ended September 30, 2020 and the sale by Tinuum Group of its 49.9% remaining interest in an RC facility during thethree months ended September 30, 2020. However, equity earnings from Tinuum Group for the three months ended September 30, 2020 decreased from the comparable quarter in 2019 primarily from higher depreciation recognized of approximately $0.4 million for the three months ended September 30, 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 three months ended September 30, 2019. Further contributing to the decrease in equity earnings quarter over quarter waschanges in Earnings from Equity Investments in "Business Segments" under this Item. Additional information related to equity method investments is included in Note 6 to the restructuringCondensed Consolidated Financial Statements included in Part I - Item 1 of RC facility leases with Tinuum Group's largest customer, which decreased lease payments andthis Report.
For 2021, we expect to recognize such excess contributions as equity method earnings beginning in the second halfperiod the distributions occur, limited to the carrying value of 2019. We believe the increase in depreciation and the 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 that 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 $0.4 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019, and for those quarters, Tinuum Services provided operating and maintenance services to 20 and 22 operating RC facilities, respectively. 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.
Interest expense
For the three months ended September 30, 2020,March 31, 2021, interest expense decreased $0.8$0.4 million compared to the three months ended September 30, 2019March 31, 2020 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 $24.0$28.0 million made during the period from September 30, 2019March 31, 2020 to September 30, 2020.March 31, 2021. The remaining decrease in interest expense related to a reduction in the deferred balance during the period from September 30, 2019March 31, 2020 to September 30, 2020March 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 September 30, 2020,March 31, 2021, we recorded income tax expense of $0.9$4.5 million compared to income tax expense of $6.6$0.4 million for the three months ended September 30, 2019.March 31, 2020. The income tax expense recorded for the three months ended September 30, 2020March 31, 2021 was comprised primarily of estimated federal income tax expense of $0.9$4.1 million and estimated state income tax expense of $0.4 million. The income tax expense recorded for the three months ended September 30, 2019March 31, 2020 was comprised of estimated federal income tax expense of $6.2$0.3 million and estimated state income tax expense of $0.4$0.1 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. In addition, for the three months ended March 31, 2020, we recorded tax expense of $0.9 million related to an increase in the valuation allowance on deferred tax assets for the three months ended September 30, 2019as of $4.8 million.March 31, 2020. This increase was based on changes in forecasts as of September 30, 2019 compared to forecasts as of June 30, 2019 of future years' taxable income. The decrease in income tax expense quarter over quarter was also attributable to a decrease of $4.7 million in pretax income for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.
Comparison of the Nine Months Ended September 30, 2020 and 2019
Total Revenue and Cost of Revenue
A summary of the components of our revenues and cost of revenue for the nine months ended September 30, 2020 and 2019 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Change |
(in thousands, except percentages) | | 2020 | | 2019 | | ($) | | (%) |
Revenues: | | | | | | | | |
Consumables | | $ | 33,231 | | | $ | 41,243 | | | $ | (8,012) | | | (19) | % |
License royalties, related party | | 9,986 | | | 12,796 | | | (2,810) | | | (22) | % |
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Total revenues | | $ | 43,217 | | | $ | 54,039 | | | $ | (10,822) | | | (20) | % |
Operating expenses: | | | | | | | | |
Consumables cost of revenue, exclusive of depreciation and amortization | | $ | 33,920 | | | $ | 38,339 | | | $ | (4,419) | | | (12) | % |
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Consumables and consumables cost of revenue
For the nine months ended September 30, 2020, consumables revenues decreased from the comparable period in 2019 primarily driven by lower volume of approximately $2.7 million and less favorable price and product mix of approximately $5.0 million combined. Volumes were negatively impacted by lower coal-fired power dispatch driven by a decrease of 4.0% in overall power generation as well as an increase in power generation from sources other than coal as a percentage of total power generation.
Consumables revenue is affected by electricity demand driven by seasonal weather and related power generation needs, as well as competitor prices related to alternative power generation sources such as natural gas. According to data provided by the EIA, for the nine months ended September 30, 2020, power generation from coal-fired power dispatch was down approximately 23% compared to the corresponding period in 2019. However, we anticipate improvements related increased volumes and revenue in the last quarter of 2020 compared to the same period in 2019 due to the Supply Agreement.
Consumables costs of revenue was negatively impacted for the nine months ended September 30, 2020 due to safety actions taken by the Company to provide for continued operation of our manufacturing facilities in response to COVID-19.
Consumables cost of revenue was negatively impacted during the nine months ended September 30, 2019 due to $5.0 million of costs recognized as a result of the step-up in inventory fair value recorded from the acquisition of Carbon Solutions. As of June 30, 2019, the step-up in inventory was fully recognized in cost of revenue.
Our gross margin, exclusive of depreciation and amortization, was negative for the nine months ended September 30, 2020 compared to the corresponding period in 2019 primarily due to the impact of lower production and sales volumes resulting in higher fixed cost per pound. We anticipate positive impacts to our gross margin starting in 2021 due to the Supply Agreement.
License royalties, related party
For the nine months ended September 30, 2020 and 2019, there were 35.7 million tons and 35.0 million tons, respectively, of RC produced using the M-45 Technology under the M-45 License. While tonnage increased period over period, there was a reduction in the royalty rate per ton primarily attributable to higher depreciation recognized of approximately $1.8 million on all royalty bearing RC facilities as a result of a reduction in their estimated useful lives as determined by Tinuum Group in the second half of 2019. Further reducing the rate per ton was a decrease in net lease payments of approximately $1.0 million as a result of Tinuum Group restructuring RC facility contracted leases with its largest customer in the second half of 2019. As a result of higher depreciation and lower lease payments, we expect that the lower royalty rate per ton will continue in 2020 and 2021.
Additional information related to revenue concentrations and contributions by class and reportable segment can be found within the segment discussion below and in Note 18 to the Condensed Consolidated Financial Statements.
Other Operating Expenses
A summary of the components of our operating expenses, exclusive of cost of revenue items (presented above), for the nine months ended September 30, 2020 and 2019 is as follows:
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| | Nine Months Ended September 30, | | Change |
(in thousands, except percentages) | | 2020 | | 2019 | | ($) | | (%) |
Operating expenses: | | | | | | | | |
Payroll and benefits | | $ | 8,839 | | | $ | 8,005 | | | $ | 834 | | | 10 | % |
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Legal and professional fees | | 4,386 | | | 7,105 | | | (2,719) | | | (38) | % |
General and administrative | | 6,693 | | | 5,894 | | | 799 | | | 14 | % |
Depreciation, amortization, depletion and accretion | | 5,807 | | | 4,902 | | | 905 | | | 18 | % |
Impairment of long-lived assets | | 26,103 | | | — | | | 26,103 | | | * |
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| | $ | 51,828 | | | $ | 25,906 | | | $ | 25,922 | | | 100 | % |
* Calculation not meaningful
Payroll and benefits
Payroll and benefits expenses increased for the nine months ended September 30, 2020 compared to the same period in 2019 primarily due to severance related costs $1.4 million associated with the resignation of an executive officer, offset by a decrease in headcount.
Legal and professional fees
Legal and professional fees decreased for the nine months ended September 30, 2020 compared to the same period in 2019 primarily due to decreased outsourced shared service costs, including legal, general consulting and audit and accounting fees of approximately $2.0 million, and a reduction in outsourced IT costs specific to the completion of the integration of Carbon Solutions of $0.7 million.
General and administrative
General and administrative expenses increased for the nine months ended September 30, 2020 compared to the same period in 2019 primarily due to an increase in product development expenses of approximately $0.8 million related to the Supply Agreement, an increase in rent and occupancy of approximately $0.5 million relating to property taxes and office rent and an increase in costs incurred due to the sequestration of certain of our employees at our manufacturing plant in Louisiana of approximately $0.4 million. Offsetting these increases were reductions in travel, as a preventative measure related to the COVID-19 pandemic, and recruiting fees.
Depreciation and amortization
Depreciation and amortization expense increased for the nine months ended September 30, 2020 compared to the same period in 2019 due to higher volumes during the nine months ended September 30, 2019 resulting in $0.9 million more absorption of depreciation in inventory. Further, the addition of leasehold improvements at our corporate headquarters in 2020 and the addition of long-lived assets at our manufacturing plant in Louisiana contributed to approximately $0.5 million of depreciation and amortization expense for the nine months ended September 30, 2020. Offsetting these increases was a decrease in depreciation and amortization expense of approximately $0.6 million related to the lower net book values of the related property, plant, equipment and intangible assets as of June 30, 2020 due to the impairment charge recorded as of this date.
Impairment of long-lived assets
As previously discussed, as of June 30, 2020, we recorded an impairment charge of $26.1 million, which is included in the Statement of Operations for the nine months ended September 30, 2020.
Other Income (Expense), net
A summary of the components of our other income (expense), net for the nine months ended September 30, 2020 and 2019 is as follows:
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| | Nine Months Ended September 30, | | Change |
(in thousands, except percentages) | | 2020 | | 2019 | | ($) | | (%) |
Other income (expense): | | | | | | | | |
Earnings from equity method investments | | $ | 25,959 | | | $ | 57,051 | | | $ | (31,092) | | | (54) | % |
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Interest expense | | (3,053) | | | (5,820) | | | 2,767 | | | (48) | % |
Other | | 208 | | | 342 | | | (134) | | | (39) | % |
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Total other income | | $ | 23,114 | | | $ | 51,573 | | | $ | (28,459) | | | (55) | % |
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 on the Condensed Consolidated Statements of Operations:
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| | | | Nine Months Ended September 30, |
(in thousands) | | | | | | 2020 | | 2019 |
Earnings from Tinuum Group | | | | | | $ | 20,462 | | | $ | 50,757 | |
Earnings from Tinuum Services | | | | | | 5,498 | | | 6,297 | |
Loss from other | | | | | | (1) | | | (3) | |
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Earnings from equity method investments | | | | | | $ | 25,959 | | | $ | 57,051 | |
For the nine months ended September 30, 2020, we recognized $20.5 million in equity earnings from Tinuum Group, which was equal to our proportionate share of Tinuum Group's net income for the period. For the nine months ended September 30, 2019, we recognized $50.8 million in equity earnings from Tinuum Group, which was equal to our proportionate share of Tinuum Group's net income of $52.4 million for the period less the recovery of the cash distributions in excess of the 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 nine months ended September 30, 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 nine months ended September 30, 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 a new RC facility added during the three months ended September 30, 2020 and the sale by Tinuum Group of its 49.9% remaining interest in an RC facility during thethree months ended September 30, 2020. However, equity earnings from Tinuum Group for the nine months ended September 30, 2020 decreased from the comparable period in 2019 primarily from two new RC facilities during the nine months ended September 30, 2019 that were recognized as point-in-time sales. Further, the decrease in equity earnings was due to higher depreciation recognized of approximately $5.2 million for the nine months ended September 30, 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 for the nine months ended September 30, 2020 compared to the nine
months ended September 30, 2019 was the restructuring of RC facility leases with Tinuum Group's largest customer, which decreased lease payments and equity earnings beginning in the second half of 2019. Furthermore, 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 that 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 will be lower for the remainder of 2020 as well as 2021.
As of September 30, 2020 and 2019, Tinuum Group had 21 and 23 invested RC facilities, respectively, that were generating revenues.
Equity earnings from our interest in Tinuum Services decreased during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.During the nine months ended September 30, 2020 and 2019, Tinuum Services provided operating and maintenance services to 20 and 22 operating RC facilities, respectively, which was the primary driver in the decrease in equity earnings period over period. 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.
Interest expense
For the nine months ended September 30, 2020, interest expense decreased $2.8 million compared to the nine months ended September 30, 2019 primarily due to interest expense incurred in the nine months ended September 30, 2020 related to the Senior Term Loan, as the principal balance was reduced from payments of $24.0 million made during the period from September 30, 2019 to September 30, 2020. The remaining decrease in interest expense related to lower 453A interest from a reduction in the deferred balance related to 453A during the period from September 30, 2019 to September 30, 2020.
Income tax expense
For the nine months ended September 30, 2020, we recorded income tax expense of $1.3 million compared to income tax expense of $14.9 million for the nine months ended September 30, 2019. The income tax expense recorded for the nine months ended September 30, 2020 was comprised of estimated federal income tax expense of $1.4 million. The income tax expense recorded for the nine months ended September 30, 2019 was comprised of estimated federal income tax expense of $13.2 million and estimated state income tax expense of $1.7 million.
The decrease in income tax expense period over period was primarily due to a pretax loss for the nine months ended September 30, 2020 of $19.4 million compared to pretax income for the nine months ended September 30, 2019 of $41.4 million. Offsetting the decrease in income tax expense period over period was an increase in the valuation allowance on deferred tax assets of $5.1 million for the nine months ended September 30, 2020 compared to an increase in the valuation allowance of $3.8 million for the nine months ended September 30, 2019 based on changes in forecasts of future years' taxable income as of September 30, 2020 and September 30, 2019, respectively.
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, PGIRC 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 (loss), 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 and impairment of long-lived assets.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 PGIAPT Segment Adjusted 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, accretion and accretion, interest expense, net and impairmentamortization of long-lived assets. When used in conjunction with
GAAP financial measures, PGIUpfront Customer Consideration. There were no additional adjustments made to APT Segment Adjusted EBITDA is a supplemental measure(Loss) for the three months ended March 31, 2021 and 2020.
We define RC Segment EBITDA as 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 our 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 evaluating theare less susceptible to variances that affect our operating performance of our business.results.
With the exception of impairment,We expect the adjustments to Consolidated Adjusted EBITDA PGI Segment Adjusted 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 September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
(in thousands) | (in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 | |
Net income (loss) (1) (2) | | $ | 4,975 | | | $ | 3,923 | | | $ | (20,732) | | | $ | 26,439 | | |
Net income (loss) | | Net income (loss) | | $ | 13,737 | | | $ | (1,893) | | |
Depreciation, amortization, depletion and accretion | Depreciation, amortization, depletion and accretion | | 1,777 | | | 2,043 | | | 5,807 | | | 4,902 | | Depreciation, amortization, depletion and accretion | | 2,106 | | | 2,297 | | |
Amortization of Upfront Customer Consideration | | Amortization of Upfront Customer Consideration | | 127 | | | — | | |
Interest expense, net | Interest expense, net | | 862 | | | 1,663 | | | 2,974 | | | 5,619 | | Interest expense, net | | 729 | | | 1,167 | | |
Income tax expense | Income tax expense | | 854 | | | 6,595 | | | 1,315 | | | 14,928 | | Income tax expense | | 4,489 | | | 358 | | |
Consolidated EBITDA (loss) | | 8,468 | | | 14,224 | | | (10,636) | | | 51,888 | | |
Impairment | | — | | | — | | | 26,103 | | | — | | |
Consolidated EBITDA | | Consolidated EBITDA | | 21,188 | | | 1,929 | | |
Cash distributions from equity method investees | | Cash distributions from equity method investees | | 23,251 | | | 17,116 | | |
Equity earnings | | Equity earnings | | (18,312) | | | (8,273) | | |
| Equity earnings | | (9,518) | | | (14,426) | | | (25,959) | | | (57,051) | | |
Cash distributions from equity method investees | | 9,712 | | | 18,718 | | | 42,228 | | | 56,806 | | |
Consolidated Adjusted EBITDA | Consolidated Adjusted EBITDA | | $ | 8,662 | | | $ | 18,516 | | | $ | 31,736 | | | 51,643 | | Consolidated Adjusted EBITDA | | $ | 26,127 | | | $ | 10,772 | | |
(1) Net income (loss) for the three and nine months ended September 30, 2020 included zero and $0.4 million related to sequestration of certain of our employees at our manufacturing plant in Louisiana. These costs included hazardous pay, lodging expense and other related costs for 30 days.
(2) Net income for the nine months ended September 30, 2019 included an adjustment of $5.0 million, which increased cost of revenue due to a step-up in basis of inventory acquired related to the acquisition of Carbon Solutions.
Business Segments
As of September 30, 2020,March 31, 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 earningsM-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.PGIAPT - Our PGIAPT segment includes revenues and related expenses from the sale of consumable products that utilizeour AC and chemical technologies. These options provide coal-poweredproducts, 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 boilers with mercury control solutions working in conjunction with pollution control equipment systems, generally without the requirement for significant ongoing capital outlays.companies. These amounts are included within the Consumables and respective revenues and 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 and nine months ended September 30, 2020March 31, 2021 and 2019:2020:
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Revenues: | | | | | | | | |
Refined Coal: | | | | | | | | |
Earnings in equity method investments | | $ | 9,518 | | | $ | 14,426 | | | $ | 25,959 | | | $ | 57,051 | |
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License royalties, related party | | 3,627 | | | 4,385 | | | 9,986 | | | 12,796 | |
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| | 13,145 | | | 18,811 | | | 35,945 | | | 69,847 | |
Power Generation and Industrials: | | | | | | | | |
Consumables | | 13,442 | | | 14,010 | | | 28,987 | | | 39,612 | |
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| | 13,442 | | | 14,010 | | | 28,987 | | | 39,612 | |
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Total segment reporting revenues | | 26,587 | | | 32,821 | | | 64,932 | | | 109,459 | |
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Adjustments to reconcile to reported revenues: | | | | | | | | |
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Earnings in equity method investments | | (9,518) | | | (14,426) | | | (25,959) | | | (57,051) | |
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Corporate and other | | 2,402 | | | 738 | | | 4,244 | | | 1,631 | |
Total reported revenues | | $ | 19,471 | | | $ | 19,133 | | | $ | 43,217 | | | $ | 54,039 | |
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Segment operating income (loss): | | | | | | | | |
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Refined Coal (1) | | $ | 12,817 | | | $ | 18,158 | | | $ | 34,454 | | | $ | 68,137 | |
Power Generation and Industrials (2) | | (1,270) | | | (977) | | | (33,584) | | | (8,301) | |
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Total segment operating income | | $ | 11,547 | | | $ | 17,181 | | | $ | 870 | | | $ | 59,836 | |
(1) Included in RC segment operating income for the three and nine months ended September 30, 2020 is 453A interest expense of $0.1 million and $0.3 million, respectively. Included in RC segment operating income for the three and nine months ended September 30, 2019 is 453A interest expense of $0.2 million and $0.9 million, respectively.
(2) Included in PGI segment operating loss for the nine months ended September 30, 2020 was $23.2 million of impairment expense on PGI segment and certain other long-lived assets, and $0.4 million of expenses related to sequestration of certain of our employees at our manufacturing plant in Louisiana. Included in PGI segment operating loss for the three and nine months ended September 30, 2020 and 2019 is $1.4 million and $4.9 million, and $1.9 million and $4.5 million, respectively, of depreciation, amortization, and depletion expense on mine and plant long-lived assets. Included in PGI segment operating loss for the nine months ended September 30, 2019 is approximately $4.7 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 | | | | | |
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License royalties, related party | | 4,066 | | | 3,046 | | | | | |
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| | 22,378 | | | 11,319 | | | | | |
Advanced Purification Technologies: | | | | | | | | |
Consumables | | 17,031 | | | 9,217 | | | | | |
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| | 17,031 | | | 9,217 | | | | | |
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Total segment reporting revenues | | 39,409 | | | 20,536 | | | | | |
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Adjustments to reconcile to reported revenues: | | | | | | | | |
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Earnings in equity method investments | | (18,312) | | | (8,273) | | | | | |
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Total reported revenues | | $ | 21,097 | | | $ | 12,263 | | | | | |
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Segment operating income (loss): | | | | | | | | |
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Refined Coal | | $ | 22,271 | | | $ | 10,860 | | | | | |
Advanced Purification Technologies | | 15 | | | (7,370) | | | | | |
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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 September 30, | | | Three Months Ended March 31, | |
(in thousands) | (in thousands) | | 2020 | | 2019 | | (in thousands) | | 2021 | | 2020 | |
Earnings from Tinuum Group | Earnings from Tinuum Group | | $ | 7,260 | | | $ | 11,746 | | | Earnings from Tinuum Group | | $ | 16,362 | | | $ | 6,438 | | |
Earnings from Tinuum Services | Earnings from Tinuum Services | | 2,257 | | | 2,682 | | | Earnings from Tinuum Services | | 1,950 | | | 1,838 | | |
Earnings (loss) from other | Earnings (loss) from other | | 1 | | | (2) | | | Earnings (loss) from other | | — | | | (3) | | |
| Earnings from equity method investments | Earnings from equity method investments | | $ | 9,518 | | | $ | 14,426 | | | Earnings from equity method investments | | $ | 18,312 | | | $ | 8,273 | | |
For the three months ended September 30,March 31, 2021 and March 31, 2020 and September 30, 2019
RC earnings decreasedincreased primarily due to a decreasean increase in equity earnings in Tinuum Group for the three months ended September 30, 2020March 31, 2021 compared to the corresponding quarter in 2019.
For the three months ended September 30, 2020 equity earningsprimarily from our interest in Tinuum Group were positively impacted by the addition of twothree new RC facilities during the second half of 2019, a new RC facility added during the three months ended September 30, 2020 and the sale by Tinuum Group of its 49.9% remaining interest in an RC facility during thethree months ended September 30, 2020. However, equity earnings from Tinuum Group for the three months ended September 30, 2020
decreased from the comparable quarter in 2019 primarily from higher depreciation recognized of approximately $0.4 million for the three months ended September 30, 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 three months ended September 30, 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 second half of 2019. We believe the increase in depreciation and the decrease in lease payments will negatively impact equity earnings for the remainder of 2020 as well as 2021.
For the three months ended September 30, 2020 and 2019, we recognized $7.3 million and $11.7 million, respectively, in equity earnings from Tinuum Group, which was equal to our proportionate share of Tinuum Group's net income for those quarters.
For the three months ended September 30, 2020,March 31, 2021, earnings from Tinuum Services decreasedincreased compared to the corresponding quarter in 20192020 primarily due to a decreasean 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 from 2219 to 20.22.
As noted above, for the three months ended September 30, 2020, RC earnings were impacted by a decrease in licenserelated to M-45 License royalties earned from Tinuum Group under the M-45 License. For the three months ended September 30, 2020 and 2019, there were 14.6 million tons and 14.5 million tons, respectively, of RC produced using the M-45 Technology. While tonnage increased slightly period over period, there was a reduction in the royalty rate per ton primarily attributable to higher depreciation recognized of approximately $0.2 million on all royalty bearing RC facilities as a result of a reduction in their estimated useful lives as determined by Tinuum Group during the three months ended September 30, 2019. Further reducing the rate per ton was a decrease in net lease payments as a result of Tinuum Group restructuring RC facility contracted leases with its largest customer in the second half of 2019.
Future earnings and growth in the RC segment 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 7 of the Condensed Consolidated Financial Statements.
RC Segment Adjusted EBITDA
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| | Three Months Ended September 30, | | |
(in thousands) | | 2020 | | 2019 | | | | |
RC Segment operating income | | $ | 12,817 | | | $ | 18,158 | | | | | |
Depreciation, amortization, depletion and accretion | | 26 | | | 25 | | | | | |
Interest expense | | 94 | | | 234 | | | | | |
RC Segment EBITDA | | 12,937 | | | 18,417 | | | | | |
Equity earnings | | (9,518) | | | (14,426) | | | | | |
Cash distributions from equity method investees | | 9,712 | | | 18,718 | | | | | |
RC Segment Adjusted EBITDA | | $ | 13,131 | | | $ | 22,709 | | | | | |
PGI
Discussion of revenues derived from our PGI segment and costs related thereto are included above within our consolidated results.
For the three months ended September 30, 2020 and September 30, 2019
PGI segment operating loss increased for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to a reduction in consumable revenue and associated margins. According to data provided by the U.S. Energy Information Administration ("EIA"), for the three months ended September 30, 2020, power generation from coal-fired power dispatch was down approximately 10%March 31, 2021 compared to the corresponding quarter in 2019.
2020 due to higher tonnage quarter over quarter, which was primarily a result of an increase in RC facilities that use the M-45 Technology. The increase in tonnage as well as the additional RC facilities attributed to the royalty rate per ton to increase period over period.
PGI Segment Adjusted EBITDAOutlook
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| | Three Months Ended September 30, | | |
(in thousands) | | 2020 | | 2019 | | | | |
Segment operating loss | | $ | (1,270) | | | $ | (977) | | | | | |
Depreciation, amortization, depletion and accretion | | 1,427 | | | 1,853 | | | | | |
Interest expense, net | | 78 | | | 75 | | | | | |
PGI Segment EBITDA | | 235 | | | 951 | | | | | |
Impairment | | — | | | — | | | | | |
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PGI Segment Adjusted EBITDA | | $ | 235 | | | $ | 951 | | | | | |
RC
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| | | | Nine Months Ended September 30, |
(in thousands) | | | | | | 2020 | | 2019 |
Earnings from Tinuum Group | | | | | | $ | 20,462 | | | $ | 50,757 | |
Earnings from Tinuum Services | | | | | | 5,498 | | | 6,297 | |
Loss from other | | | | | | (1) | | | (3) | |
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Earnings from equity method investments | | | | | | $ | 25,959 | | | $ | 57,051 | |
For the nine months ended September 30, 2020 and September 30, 2019
For the nine months ended September 30, 2020, we recognized $20.5 million in equity earnings fromBoth Tinuum Group which was equaland Tinuum Services expect to our proportionate sharesignificantly wind down their operations by the end of Tinuum Group's net income for2021 due to the period. For the nine months ended September 30, 2019, we recognized $50.8 million in equity earnings from Tinuum Group, which was equal to our proportionate share of Tinuum Group's net income of $52.4 million for the period less the recoveryplanned expiration of the cash distributions in excess of the cumulative earningsSection 45 tax credit period as of December 31, 2018. The difference between2021, and the loss of equity earnings, distributions and M-45 License royalties beginning in 2022, will have a material adverse effect on our pro-rata share of Tinuum Group's net incomefinancial condition and our earnings from our Tinuum Group equity method investment as reported on the Condensed Consolidated Statements of Operations for the nine months ended September 30, 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 earningsconsolidated operating results compared to historical periods. Earnings in the period the distributions occurred.
For the nine months ended September 30, 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, a new RC facility added during the three months ended September 30, 2020 and the sale by Tinuum Group of its 49.9% remaining interest in an RC facility during thethree months ended September 30, 2020. However, equity earnings from Tinuum Group for the nine months ended September 30, 2020 decreased from the comparable period in 2019 primarily from two new RC facilities during the nine months ended September 30, 2019 that were recognized as point-in-time sales. Further, the decrease in equity earnings was due to higher depreciation recognized of approximately $5.2 million for the nine months ended September 30, 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 for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was the restructuring of RC facility leases with Tinuum Group's largest customer, which decreased lease payments and equity earnings beginning in the second half of 2019. Furthermore, 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 that 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 will be lower for the remainder of 2020 as well as 2021.
As of September 30, 2020 and 2019, Tinuum Group had 21 and 23 invested RC facilities, respectively, that were generating revenues.
Equity earnings from our interest in Tinuum Services decreased during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.During the nine months ended September 30, 2020 and 2019, Tinuum Services provided operating and maintenance services to 20 and 22 operating RC facilities, respectively, which was the primary driver in the decrease in equity earnings. Tinuum Services derives earnings under fixed-fee arrangements as well as fee arrangements that are based on actual RC production, depending on the specific RC facility operating and maintenance agreement.
RC earnings were negatively impacted during the nine months ended September 30, 2020 by a decrease in royalties earned from Tinuum Group under the M-45 License. During the nine months ended September 30, 2020 and 2019, there were 35.7 million tons and 35.0 million tons, respectively, of RC produced using the M-45 Technology. While tonnage increased period over period, there was a reduction in the royalty rate per ton primarily attributable to higher depreciation recognized of approximately $1.8 million on all royalty bearing RC facilities as a result of a reduction in their estimated useful lives as determined by Tinuum Group in the second half of 2019. Further reducing the rate per ton was a decrease in net lease payments of approximately $1.0 million as a result of Tinuum Group restructuring RC facility contracted leases with its largest customer in the second half of 2019. As a result of higher depreciation and lower lease payments, we expect that the lower royalty rate per ton will continue in 2020 and 2021.
Future earnings and growth within the RC segment for 2021 will continue to be impacted by coal-fired 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 7 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.
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| | | | Nine Months Ended September 30, |
(in thousands) | | | | | | 2020 | | 2019 |
RC Segment operating income | | | | | | $ | 34,454 | | | $ | 68,137 | |
Depreciation, amortization, depletion and accretion | | | | | | 84 | | | 55 | |
Interest expense | | | | | | 254 | | | 882 | |
RC Segment EBITDA | | | | | | 34,792 | | | 69,074 | |
Equity earnings | | | | | | (25,959) | | | (57,051) | |
Cash distributions from equity method investees | | | | | | 42,228 | | | 56,806 | |
RC Segment Adjusted EBITDA | | | | | | $ | 51,061 | | | $ | 68,829 | |
RC Segment EBITDA and Adjusted EBITDAPGI | | | | | | | | | | | | | | | | | | |
| | 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 | | | | | |
APT
Discussion of revenues derived from our PGIAPT segment and costs related thereto are included above within our consolidated results.
For the ninethree months ended September 30,March 31, 2021 and March 31, 2020 and September 30, 2019
PGIAPT segment operating lossincome increased duringfor the ninethree months ended September 30, 2020March 31, 2021 compared to the ninethree months ended September 30, 2019March 31, 2020 primarily due to an increase in consumable revenues and associated margins. The increase in our consumable revenue was driven by an 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 the impairment charge of $23.2 million and a reduction in consumable revenue and associated margins and costs incurred related to COVID-19. For the nine months ended September 30, 2020, consumables revenue and margins also continued to be negatively impacted by low coal-fired power dispatch driven by power generation from sources other than coal.
During the nine months ended September 30, 2020, we incurred costs of $0.4 million related to sequestration of certain of our employees at our manufacturing plant in Louisiana. These costs included hazardous pay, lodging expense and other related costs for 60 days.
PGI Segment Adjusted EBITDA
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| | | | Nine Months Ended September 30, |
(in thousands) | | | | | | 2020 | | 2019 |
PGI Segment operating loss (1) (2) | | | | | | $ | (33,584) | | | $ | (8,301) | |
Depreciation, amortization, depletion and accretion | | | | | | 4,851 | | | 4,498 | |
Interest expense, net | | | | | | 265 | | | 263 | |
PGI Segment EBITDA loss | | | | | | (28,468) | | | (3,540) | |
Impairment | | | | | | 23,232 | | | — | |
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PGI Segment Adjusted EBITDA (loss) | | | | | | $ | (5,236) | | | $ | (3,540) | |
(1) Included in PGI segment operating loss for the nine months ended September 30, 2020 is $0.4 million related to sequestration of certain of our employees at our manufacturing plant in Louisiana.
(2) PGI Segment operating loss for the nine months ended September 30, 2019 is inclusive of a $4.7 million adjustment, which increasedhigher volumes causing lower fixed cost of revenue due to a step-up in basis of inventory acquired relatedper pound compared to the acquisition of Carbon Solutions.prior year.
APT Segment EBITDA (Loss)
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| | 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) | | | | | |
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Liquidity and Capital Resources
Overview of Factors Affecting Our Liquidity
During the ninethree months ended September 30, 2020,March 31, 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 cash included:liquidity include:
•cash on hand;
•distributions from Tinuum Group and Tinuum Services;
•M-45 License royalty payments from Tinuum Group;
•operations of the APT segment; and
•cash proceeds received under the Paycheck Protection Program ("PPP") administered by the U.S. Small Business Administration ("SBA").Line of Credit.
OurAs of March 31, 2021, our principal uses of cash for the nine months ended September 30, 2020 included:
•payment of dividends;
•payment of debt principal and interest;
•repurchases of shares of common stock; andliquidity include:
•our business operating expenses, including federal and state tax payments and cash severance payments and costs associated with COVID-19.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 AC 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 will not have significant planned maintenance expenditures for the balance of 2020 at our lignite mine as we did in 2019. For 2021, we expect to incur capital expenditures above the level of 2020 primarily due to planned maintenance at our lignite mine.
Our liquidity was negatively impacted from COVID-19 due to increased operating losses in our PGI segment from 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. However, in April 2020, we took steps to enhance our short-term liquidity through the PPP 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 ninethree months ended September 30, 2020March 31, 2021 and 2019:2020:
| | | Nine Months Ended September 30, | | Three Months Ended March 31, |
(in thousands) | (in thousands) | | 2020 | | 2019 | (in thousands) | | 2021 | | 2020 |
Tinuum Group | Tinuum Group | | $ | 35,226 | | | $ | 50,256 | | Tinuum Group | | $ | 19,749 | | | $ | 13,764 | |
Tinuum Services | Tinuum Services | | 7,002 | | | 6,550 | | Tinuum Services | | 3,502 | | | 3,352 | |
Distributions from equity method investees | Distributions from equity method investees | | $ | 42,228 | | | $ | 56,806 | | Distributions from equity method investees | | $ | 23,251 | | | $ | 17,116 | |
Cash distributions from Tinuum Group for the ninethree months ended September 30, 2020 decreasedMarch 31, 2021 increased by $15.0$6.0 million compared to the ninethree months ended September 30, 2019March 31, 2020 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 the second half of 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 $90$50 million to $110$60 million. The key drivers in achieving these future cash flows are based on the following:
•2123 invested facilities as of September 30, 2020March 31, 2021 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.
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 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, throughevidenced by a promissory note with 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 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 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 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
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 us that the SBA has notified BOK that all or a portion of the
PPP Loan may be forgiven subjecthas not been forgiven. In January 2021, we submitted an application to the termsSBA for forgiveness of the PPP Loan and approval bywe are awaiting the SBA.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 hazard pay. We used proceeds from the PPP Loan to fund 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 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 as disclosed in Note 8.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 the Tinuum Group and Tinuum Services (collectively, the "Tinuum Entities"),Entities, but excluding ourthe Company's equity interests in thosethe Tinuum entities. DuringFor the ninethree months ended September 30, 2020,March 31, 2021, we made principal payments of $18.0$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 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.
For the nine months ended September 30, 2020, underUnder the Stock Repurchase Program, for the three months ended March 31, 2021 and March 31, 2020, 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 nine months ended September 30, 2019, under the Stock Repurchase Program, we purchased 256,743 shares of our common stock for cash of $2.9 million,respectively, inclusive of commissions and fees. As of September 30, 2020,March 31, 2021, we had $7.0 million remaining under the Stock Repurchase Program.
For the ninethree months ended September 30,March 31, 2021 and 2020, and 2019, we declared and paid quarterly cash dividends to stockholders of $5.0 millionzero and $13.7$4.5 million, respectively.
Line of CreditLiquidity Outlook
On September 29, 2020, ADA-ES, Inc. ("ADA"), a wholly-owned subsidiary of ours, as borrower, we, as guarantor,Our ability to continue to generate sufficient cash flow required to meet ongoing operational needs and a bank (the "Lender") entered into an amendment to the 2013 Loanobligations, and Security Agreement (the "Line of Credit"). This amendment (the "Line of Credit Amendment") extended the maturity datemake 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 the Linemarket for APT consumables, including expanding our overall AC business into additional adjacent markets and improving our customer and product mix.
In 2021, our primary source of Creditliquidity is expected to March 31, 2021. The Linebe 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 Credit Amendment retained covenants contained in prior amendmentsproduct specific capital related to the Line of Credit, which included ADA's ability 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 and the revision of covenants that were consistent with the Senior Term Loan covenants, including maintaining a minimum cash balance of $5.0 million.
As of September 30, 2020, we have $5.0 million of borrowing availability and no outstanding borrowings under the Line of Credit.
Customer Supply Agreement and Acquisitionroutine scheduled maintenance outages planned for the second quarter of Marshall Mine2021. 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 31, 2021 and the resultant 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 2022 and beyond, our primary source of liquidity is expected to be through 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 manufacturingRed 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 fund the remaining portion of the Reclamation Costs from cash on hand as well as cash generated from the Supply Agreement. In 2022 and beyond, our annual capital expenditures are expected to average approximately $5.0 million.
Sources and Uses of Cash
NineThree Months Ended September 30, 2020March 31, 2021 vs. NineThree Months Ended September 30, 2019March 31, 2020
Cash, cash equivalents and restricted cash increased from $17.1$35.9 million as of December 31, 20192020 to $25.0$52.2 million as of September 30, 2020.March 31, 2021. The following table summarizes our cash flows for the ninethree months ended September 30,March 31, 2021 and 2020, and 2019, respectively:
| | | | Nine Months Ended September 30, | | | | Three Months Ended March 31, | |
(in thousands) | (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): | | | | | | | Cash and cash equivalents and restricted cash provided by (used in): | | | | | | |
| Operating activities | Operating activities | | $ | 34,918 | | | $ | 47,598 | | | $ | (12,680) | | Operating activities | | $ | 21,947 | | | $ | 13,237 | | | $ | 8,710 | |
| Investing activities | Investing activities | | (5,602) | | | (9,174) | | | 3,572 | | Investing activities | | 4,886 | | | (1,736) | | | 6,622 | |
| Financing activities | Financing activities | | (21,367) | | | (42,041) | | | 20,674 | | Financing activities | | (10,531) | | | (11,393) | | | 862 | |
Net change in cash and cash equivalents and restricted cash | Net change in cash and cash equivalents and restricted cash | | $ | 7,949 | | | $ | (3,617) | | | $ | 11,566 | | 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 ninethree months ended September 30, 2020 decreasedMarch 31, 2021 increased by $12.7$8.7 million compared to the ninethree months ended September 30, 2019.March 31, 2020. The net decreaseincrease was primarily attributable to a decreasean increase in net income for the ninethree months ended September 30, 2020March 31, 2021 compared to net incomeloss for the ninethree months ended September 30, 2019March 31, 2020 of $47.2 million, a decrease period over period in distributions from equity method investments, return on investment of $14.6$15.6 million and an increase period over period in the net increase in prepaid expenses and other assetsoperating lease liabilities of $8.6 million primarily due to increases in prepaid income taxes and federal and state income tax benefits.$2.7 million. Offsetting this net decreaseincrease in cash flows provided by operating activities was a decreasean increase period over period in earnings from equity method investees of $31.1$10.0 million and an increase of $5.5 million in the net change in accrued payroll and related liabilities for the ninethree months ended September 30, 2020March 31, 2021 compared to the ninethree months ended September 30, 2019.March 31, 2020.
Cash flow from investing activities
Cash flows usedprovided in investing activities for the ninethree months ended September 30, 2020 decreasedMarch 31, 2021 increased by $3.6$6.6 million compared to the ninethree months ended September 30, 2019March 31, 2020 primarily from a decreasedistributions from equity earnings in cash paid for acquisitionexcess of property, plant, equipment, and intangible assets and mine development costs of $1.6 million and $1.4 million, respectively. Also included in the decrease was $0.7 million related to cash consideration paid during the nine months ended September 30, 2019 for the acquisition of Carbon Solutions.cumulative earnings.
Cash flow from financing activities
Cash flows used in financing activities for the ninethree months ended September 30, 2020March 31, 2021 decreased by $20.7$0.9 million compared to the ninethree months ended September 30, 2019March 31, 2020 primarily from proceeds received from the PPP Loan of $3.3 million in April 2020 and decreases period over period in dividends paid of $8.8$4.5 million and repurchases of common shares of $0.2 million. Offsetting these decrease was an increase in principal loan repayments on the Senior Term Loan of $6.0 million and repurchases of common shares of $2.8$4.0 million.
Contractual Obligations
During the ninethree months ended September 30, 2020,March 31, 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 except for the incurrence of an asset retirement obligation of $21.3 million recorded as September 30, 2020 related to the Reclamation Contract, Purchase Agreement and Supply Agreement.2020.
Off-Balance Sheet Arrangements
DuringAs of March 31, 2021, we had outstanding surety bonds of $36.7 million related to performance requirements under reclamation contracts associated with both the nine months ended September 30, 2020,Five Forks Mine and the Marshall Mine. As of March 31, 2021, we did not engage in any off-balance sheet arrangements except those discussed in Item 7 - "Management's Discussion and Analysishad restricted cash of Financial Condition and Results 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 nine months ended September 30, 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:
(a)the scope and impact of mercury and other regulations or pollution control requirements, including the impactscheduled expiration of the final MATS;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;credits and associated cash flows from Tinuum expected through 2021;
(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)expected operating cost efficiencies and positive impact to our gross margin from operations tied to our Supply Agreement;
(f)increasing competition in the PGIAPT market;
(g)(f)future level of research and development activities;
(h)(g)the effectiveness of our technologies and the benefits they provide;
(i)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;
(j)(h)probability of any loss occurring with respect to certain guarantees made by Tinuum Group;
(k)(i)the timing of awards of, and work and related testing under, our contracts and agreements and their value;
(l)(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;
(m)(k)the outcomeamount of current legal proceedings;future capital expenditures needed for our business, including, those associated with the Plant Incident;
(n)(l)awards of patents designed to protect our proprietary technologies both in the U.S. and other countries;
(o)(m)whether any legal challenges or EPA actions will have a material impact on the implementationadoption and scope of the MATS or other 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 on our ongoing business;maintain reliability.
(p)expected reclamation costs subject to certain contingencies and timeline for the closing and associated reclamation of the Marshall Mine;
(q)the evolving impact and duration of the COVID-19 pandemic to our business;
(r)whether any amounts under the PPP loan will be forgiven;
(s)the tax impact of the use of or forgiveness of funds received or forgiven under the PPP loan; and
(t)the future output of coal-fired power dispatch which affects that demand and future cash flow for our PGI products and may result in future additional impairment of the Asset Group.
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 September 30, 2020.March 31, 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 September 30, 2020March 31, 2021 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 1311 "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 incurred additional operating costs for the second quarter of fiscal year 2020, which included hazard pay, cleaning costs and sequestration costs related to our operating plant personnel. For 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.
More generally, the pandemic raises the possibility of an extended global economic downturn and has caused volatility in financial markets, which could affect demand for our products and services and impact our results and financial condition even after the pandemic is contained and the shelter-in-place orders are lifted. For example, a decrease in orders in a given period could negatively affect our revenues in future periods, particularly if experienced on a sustained basis. We will continue to evaluate the nature and extent of the impact of COVID-19 to our business.
As previously disclosed, in April 2020, we entered into a loan (the "PPP Loan") in the amount of $3.3 million through a bank under the Paycheck Protection Program sponsored by the U.S. Small Business Administration ("SBA"). 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 were used to cover a portion of our existing payroll and related expenses, including sequestration pay for certain employees, as well as certain other operating costs as permitted under the Paycheck Protection Program. We expect that current cash and cash equivalent balances, inclusive of the PPP Loan, and cash flows that are generated from operations will be sufficient to meet our working capital needs and other capital and liquidity requirements for at least the next 12 months. However, if our business is more adversely impacted by COVID-19 than we expect, and our personnel costs remain higher than budgeted, our cash needs could increase.
Further, we 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. As a result of these procedures and conclusions reached, we did not implement any changes to our internal control over financial reporting as of September 30, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
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. | Exhibit No. | | Description | | Form | | File No. | | Incorporated by Reference Exhibit | | Filing Date | Exhibit No. | | Description | | Form | | File No. | | Incorporated by Reference Exhibit | | Filing Date |
| 10.1 | 10.1 | | | | 8-K | | 001-37822 | | 10.1 | | September 29, 2020 | 10.1 | | | | 8-K | | 001-37822 | | 10.1 | | March 29, 2021 |
10.2 | 10.2 | | | | 8-K | | 001-37822 | | 10.1 | | September 30, 2020 | 10.2 | | | | 8-K | | 001-37822 | | 4.5 | | April 13, 2021 |
10.3 | 10.3 | | | | 8-K | | 001-37822 | | 10.2 | | September 30, 2020 | 10.3 | | | | 8-K | | 001-37822 | | 10.1 | | March 3, 2021 |
| 10.4 | | 10.4 | | | |
10.5 | | 10.5 | | | |
| 31.1 | 31.1 | | | | 31.1 | | | |
31.2 | 31.2 | | | | 31.2 | | | |
32.1 | 32.1 | | | | 32.1 | | | |
95.1 | 95.1 | | | | 95.1 | | | |
101. INS | 101. INS | | XBRL Instance Document | | 101. INS | | XBRL Instance Document | |
101.SCH | 101.SCH | | XBRL Schema Document | | 101.SCH | | XBRL Schema Document | |
101.CAL | 101.CAL | | XBRL Calculation Linkbase Document | | 101.CAL | | XBRL Calculation Linkbase Document | |
101.LAB | 101.LAB | | XBRL Label Linkbase Document | | 101.LAB | | XBRL Label Linkbase Document | |
101.PRE | 101.PRE | | XBRL Presentation Linkbase Document | | 101.PRE | | XBRL Presentation Linkbase Document | |
101.DEF | 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) |
| | |
| | |
November 9, 2020May 10, 2021 | By: | /s/ Greg P. Marken |
| | Greg P. Marken |
| | Interim Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
| | |
November 9, 2020May 10, 2021 | By: | /s/ Christine A. BellinoMorgan Fields |
| | Christine A. BellinoMorgan Fields |
| | ChiefVice President of Accounting Officer |
| | (Principal Financial and Accounting Officer) |