Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We operate two segments: RC and APT. Our RC segment is comprised of our equity ownership in Tinuum Group and Tinuum Services, both of which are unconsolidated entities in which we generate substantial earnings. Tinuum Group provides reduction of mercury and NOx emissions at select coal-fired power generators through the production and sale of RC that qualifies for Section 45 tax credits under IRC Section 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 APT segment is materially operated through a wholly-owned subsidiary, Carbon Solutions, which we acquired on December 7, 2018 (the "Carbon Solutions Acquisition"). We sell consumable products that utilize AC and chemical based technologies to a broad range of customers, including coal-fired utilities, industrials, water treatment plants, and other diverse markets through the customer supply agreement defined below. Our primary products are comprised of AC, which is produced from lignite coal. Our AC products include PAC and GAC. Our 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, through Carbon Solutions, we also own an associated lignite mine that supplies the primary raw material for manufacturing our products.
See further discussion of our business included in Item 1 - "Business" ("Item 1") of this Report. Discussion regarding segment information is included in the discussion of our consolidated results under this Item 7. Additionally, discussion related to our reportable segments is included in Item 1 and Note 19 of the Consolidated Financial Statements, which are included in Item 8 of this Report.
We believe there are opportunities to continue to pursue diverse markets for our purification products outside of coal-fire power generation, including industrial applications and water. The Supply Agreement with Cabot, as discussed below, will help our expansion of our AC products to those diverse end-markets and drive the Company’s post-Refined Coal future.
Drivers of Demand and Key Factors Affecting Profitability
Drivers of demand and key factors affecting our profitability differ by segment. In the RC segment, demand is driven primarily from investors who purchase or lease RC facilities that qualify under the Section 45 tax credit period, which is expected to expire no later than December 31, 2021. Operating results in RC are affected by: (1) the ability to sell, lease or operate RC facilities; (2) lease renegotiation or termination; and (3) changes in tonnage of RC due to changing coal-fired dispatch and electricity power generation sources. Earnings and distributions from our RC segment will substantially cease as of December 31, 2021 as a result the significant wind down of both Tinuum Group and Tinuum Services due to the expected expiration of the Section 45 tax credit period as of December 31, 2021.
In the APT segment, demand is driven primarily by consumables-based solutions for coal-fired power generation and other industrials, municipal water customers, and since September 30, 2020, demand from Cabot's customers through the Supply Agreement discussed below. Operating results in APT has been influenced by: (1) changes in our sales volumes; (2) changes in price and product mix; and (3) changes in coal-fired dispatch and electricity power generation sources.
Customer Supply Agreement
On September 30, 2020, we and Cabot entered into the Supply Agreement pursuant to which we agree to sell and deliver to Cabot, and Cabot agrees to purchase and accept from us, Furnace Products. The term of the Supply Agreement is for 15 years with 10-year renewal terms that are automatic unless either party provides three years prior notice of intention not to renew before the end of any term.
In addition to the sale by us and purchase by Cabot of Furnace Products, we and Cabot have agreed to additional terms whereby Cabot will reimburse us for certain capital expenditures incurred by us that are necessary to manufacture the Furnace Products. Reimbursements will be in the form of revenues earned from capital expenditures incurred that will benefit both us and Cabot (referred to as "Shared Capital") and capital expenditures incurred that will benefit Cabot exclusively (referred to as "Specific Capital").
We believe the Supply Agreement will provide material incremental volume and capture lower operating cost efficiencies of our manufacturing plant. As these incremental volumes come on-line and after our existing inventory balances are sold, we anticipate an increase in gross margins. Further, we expect the Supply Agreement will expand our activated carbon products to diverse end markets that are outside of coal-fired power generation.
Acquisition of Marshall Mine
Concurrently with the execution of the Supply Agreement, on September 30, 2020, we entered into the Mine Purchase Agreement from Cabot 100% of the membership interests in Marshall Mine, LLC (the "Marshall Mine Acquisition") for a nominal purchase price. Marshall Mine, LLC owns a lignite mine located outside of Marshall, Texas (the "Marshall Mine"). We independently determined to immediately commence activities to shutter the Marshall Mine and will incur the associated reclamation costs.
In conjunction with the execution of the Supply Agreement and the Mine Purchase Agreement, on September 30, 2020, we entered into the Reclamation Contract with a third party that provides a capped cost, subject to certain contingencies, in the amount of approximately $19.7 million plus an obligation to pay certain direct costs of approximately $3.6 million (collectively, the "Reclamation Costs") over the estimated reclamation period of 10 years. We are accounting for this obligation as an asset retirement obligation under U.S. GAAP. Under the terms of the Supply Agreement, Cabot is obligated to reimburse us for $10.2 million of Reclamation Costs (the "Reclamation Reimbursements"), which are payable semi-annually over 13 years and inclusive of interest.
As the owner of the Marshall Mine, we were required to post a surety bond to ensure performance of our reclamation activities in the amount of $30.0 million under the Surety Agreement. For the obligations due under the Reclamation Contract, we were required to post collateral of $5.0 million dollars as of September 30, 2020 and to post an additional $5.0 million dollars as of March 31, 2021.
Settlement with Former Customer
On December 29, 2020, we and a former customer (the "Parties") reached a settlement (the "Settlement") on various litigation matters (the "Litigation Matters") that resulted in the former customer (the "Former Customer") agreeing to pay to us cash of $2.5 million (the "Settlement Amount"), which was received on January 27, 2021. This payment was in exchange for full dissolution of all claims and counterclaims that the two Parties have asserted or could have asserted against each other in the Litigation Matters, or which have arisen or may arise against each other but are presently unknown, arising out of or related to the Litigation Matters and related to any other of the Parties’ business dealings, conduct and/or transactions through the date of the Settlement, including all claims for damages, fees, costs, sanctions, or any other amounts due or to become due in connection with the foregoing. We applied the Settlement Amount cash proceeds to both an outstanding trade account receivable and note receivable due from the Former Customer and recognized the excess cash received as a gain from the Settlement of $1.1 million, which is included as a reduction of operating expenses for the year ended December 31, 2020, See further discussion under "Results of Operations" under this Item 7.
Impact of COVID-19
In March 2020, the WHO declared COVID-19 a global pandemic. We are designated by CISA of the Department of Homeland Security as a critical infrastructure supplier to the energy sector. Our operations have been deemed essential and, therefore, our facilities remain open and our employees employed. We follow the COVID-19 guidelines from the Centers for Disease Control concerning the health and safety of our personnel, including remote working for those that have the ability to do so, sequestered employees at our plant and other heath safety measures. Additionally, we have taken proactive and precautionary steps to ensure the safety of our employees, customers and suppliers, including frequent cleaning and disinfection of workspaces, property, plant and equipment, instituting social distancing measures and mandating remote working environments, where possible, for all employees. These measures have resulted in an increase in our personnel costs, operational inefficiencies and the incurrence of incremental costs to allow manufacturing operations to continue; while at the same time we have faced a general downturn in our sales and marketing efforts.
The duration of these measures is unknown, may be extended and additional measures may be imposed. We cannot predict the long-term effects on our business, including our financial position or results of operations, if governmental restrictions or other such directives continue for a prolonged period of time and cause a material negative change in power generation demand, materially disrupt our supply chain, substantially increase our operating costs or limit our ability to serve existing customers and seek new customers.
In response to the COVID-19 outbreak, in March 2020, the federal government passed the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The CARES Act provided, among other things, the deferral of payroll tax payments for all payroll taxes incurred through December 31, 2020 and created the Paycheck Protection Program ("PPP"), which is sponsored and administered by the SBA. "). In June 2020, the Paycheck Protection Program Flexibility Act of 2020 (the "PPPFA") was signed into law and established the payment dates in the event that amounts borrowed under the PPP are not forgiven. See further discussion below of the loan made to us under the PPP under the section "PPP Loan" under this Item.
The Company elected to defer payments of payroll taxes for the periods allowed under the CARES Act and will repay 50% by December 31, 2021 and 50% by December 31, 2022. As of December 31, 2020, total payroll tax payments deferred under the CARES Act were $0.4 million.
For the year ended December 31, 2020, we incurred costs of $0.4 million related to sequestration of certain of our employees at our Red River plant. These costs included hazard pay, lodging and meal expenses for 30 days.
Our customers may also be impacted by COVID-19 pandemic as the utilization of energy has changed. We cannot predict the long-term impact on our customers and the subsequent impact on our business.
Components of Revenue, Expenses and Equity Method Investees
The following briefly describes the components of revenues and expenses as presented in the Consolidated Statements of Operations. Descriptions of the revenue recognition policies are included in Note 1 to the Consolidated Financial Statements included in Item 8 of this Report.
Revenues and cost of revenue
Consumables
We sell AC and proprietary chemical blend technologies for purification of air and water contaminants and other industries. Currently, our products mostly serve coal-fired utilities and other industrial boilers that allow the respective utilities to comply with the regulatory air emissions standards as well as water treatment plants to remove contaminants from the water. Additionally, we sell AC to Cabot and its customers through the Supply Agreement. Revenue is generally recorded upon delivery of our product.
License royalties, related party
We recognize license royalties under the M-45 License, under our M-45 Technology, to Tinuum Group. License royalties are based on a percentage of the per-ton, pre-tax margin, inclusive of depreciation expense and other allocable expenses, as defined in the M-45 License. Because Section 45 tax credits from the production and sale of RC will likely not be available after 2021 and both Tinuum Group and Tinuum Services expect to significantly wind down their operations by the end of 2021, we do not expect to receive license royalties after 2021.
Other Operating Expenses
Payroll and benefits
Payroll and benefits costs include personnel related fringe benefits, sales and administrative staff labor costs and stock compensation expenses. Payroll and benefits costs exclude direct labor included in Cost of revenue.
Legal and professional fees
Legal and professional costs include external legal, audit and consulting expenses.
General and administrative
General and administrative costs include director fees and expenses, bad debt expense, research and development expense and other general costs of conducting business. Research and development costs, net of reimbursements from cost-sharing
arrangements, are charged to expense in the period incurred and are reported in the General and administrative line item in the Consolidated Statements of Operations.
Depreciation, amortization, depletion and accretion
Depreciation and amortization expense consists of depreciation expense related to property, plant and equipment and the amortization of long-lived intangible assets. Depletion and accretion expense consists of depletion expense related to the depletion of mine development costs and the accretion of mine reclamation liabilities.
Other Income (Expense), net
Earnings from equity method investments
Earnings from equity method investments represent our share of earnings (losses) related to our equity method investments.
We own a 42.5% equity interest and a 50% voting interest in Tinuum Group. Our equity method earnings in Tinuum Group are positively impacted when Tinuum Group obtains an investor in a RC facility and receives cash payments under either a lease arrangement or sales arrangement of the RC facility. If Tinuum Group operates a retained RC facility, the Company's equity method earnings are negatively impacted as operating retained RC facilities generate operating losses. However, we benefit on an after-tax basis if we are able to utilize tax credits associated with the production and sale of RC from operation of retained RC facilities by Tinuum Group. These benefits, if utilized, increase our consolidated net income as a result of a reduction in income tax expense.
We own both a 50% equity and voting interest in Tinuum Services, which operates and maintains RC facilities under operating and maintenance agreements. The lessee/owner of an RC facility pays Tinuum Services, subject to certain limitations, the costs of operating and maintaining the RC facilities plus certain fees. Tinuum Services also arranges for the purchase and delivery of certain chemical additives under chemical agency agreements necessary for the production of RC. Tinuum Services consolidates certain RC facilities leased or owned by tax equity investors that are deemed to be variable interest entities ("VIE's"). All net income (loss) associated with these VIE's is allocated to the noncontrolling equity holders of Tinuum Services and therefore does not impact our equity earnings (loss) from Tinuum Services.
Other income (expense)
The remaining components of other income (expense) include interest income, interest expense and other miscellaneous items.
Results of Operations
For comparison purposes, the following tables set forth our results of operations for the years presented in the Consolidated Financial Statements included in Item 8 of this Report. The year-to-year comparison of financial results is not necessarily indicative of financial results that may be achieved in future years.
Year ended December 31, 2020 Compared to Year ended December 31, 2019
Total Revenue and Cost of Revenue
A summary of the components of revenues and cost of revenue for the years ended December 31, 2020 and 2019 is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
|
(Amounts in thousands except percentages)
|
|
2020
|
|
2019
|
|
($)
|
|
(%)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
$
|
48,122
|
|
|
$
|
53,187
|
|
|
$
|
(5,065)
|
|
|
(10)
|
%
|
|
License royalties, related party
|
|
13,440
|
|
|
16,899
|
|
|
(3,459)
|
|
|
(20)
|
%
|
|
Other
|
|
15
|
|
|
—
|
|
|
15
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
61,577
|
|
|
$
|
70,086
|
|
|
$
|
(8,509)
|
|
|
(12)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Consumables cost of revenue, exclusive of depreciation and amortization
|
|
$
|
45,176
|
|
|
$
|
49,443
|
|
|
$
|
(4,267)
|
|
|
(9)
|
%
|
|
Other cost of revenue, exclusive of depreciation and amortization
|
|
(563)
|
|
|
—
|
|
|
(563)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
* Calculation not meaningful
Consumables revenue and consumables cost of revenue
For the years ended December 31, 2020 and 2019, consumables revenue decreased year over year primarily due to less favorable price and product mix of approximately $7.6 million combined. Offsetting these decreases was higher volume resulting in revenue of approximately $2.6 million. However, for the quarterly period ended December 31, 2020, both volumes and revenue increased both sequentially and compared to the quarterly period ended December 31, 2019, primarily due to the Supply Agreement, which was executed on September 30, 2020.
Consumables revenue is affected by electricity demand, driven by seasonal weather and related power generation needs, as well as competitor prices related to alternative power generation sources such as natural gas. According to data provided by the EIA, for the year ended December 31, 2020, power generation from coal-fired power dispatch was down approximately 19.0% compared to the corresponding period in 2019. Additionally, there was a decrease in total power generation from all sources of approximately 4.0% in 2020 compared to the corresponding period in 2019.
Consumables cost of revenue was positively impacted for the year ended December 31, 2020 due to higher volumes driving lower per unit fixed costs. However, we incurred additional expense from safety actions taken by the Company to provide for continued operation of our manufacturing facilities in response to COVID-19 of approximately $0.4 million. For the year ended December 31, 2019, consumables cost of revenue was negatively impacted as a result of $5.0 million of costs recognized as a result of the step-up in inventory fair value recorded from the Carbon Solutions Acquisition.
For 2021, based on current market estimates and the expected benefits from the Supply Agreement, we believe that consumables revenue and volumes will be higher for 2021 compared to 2020. In addition to the Supply Agreement, the most significant drivers related to this expected volume increase are expected higher natural gas prices and the expansion of energy generation sources related to natural gas and renewables. For 2021, we expect to incur additional plant costs that were not incurred in 2020 for the planned plant turnaround occurring in 2021.
License royalties, related party
License royalties decreased in 2020 compared to 2019 primarily due to a reduction in the royalty rate per ton. This decrease was primarily attributable to higher depreciation recognized of approximately $1.7 million on all royalty bearing RC facilities as a result of a reduction in their estimated useful lives as determined by Tinuum Group in the second half of 2019. Further reducing the rate per ton was a decrease in net lease payments of approximately $1.3 million as a result of Tinuum Group restructuring RC facility contracted leases with its largest customer in the second half of 2019. As a result of higher depreciation and lower lease payments, we expect that the lower royalty rate per ton will continue in 2021.
Offsetting the year over year decrease in license royalties from a decrease in the royalty rate per ton, there was an increase year over year in tons of RC produced from RC produced using the M-45 Technology under the M-45 License, which increased from 47.3 million tons in 2019 to 49.4 million tons in 2020.
Other cost of revenue
For the year ended December 31, 2020, we recognized a credit of $0.6 million to Other cost of revenue for the reversal of an allowance, originally recorded as of December 31, 2016, on a trade account receivable due from the Former Customer. We recorded the reversal of this reserve based on our quarterly collectability review of financial assets that was performed as of December 31, 2020. See further discussion below of the reversal of an allowance on a note receivable due from the Former Customer in this section under the caption "General and administrative."
Additional information related to revenue concentrations and contributions by class and reportable segment is included in the "Business Segments" section of this Item and in Note 13 and Note 19 to the Consolidated Financial Statements included in Item 8 of this Report.
Other Operating Expenses
A summary of the components of our operating expenses, exclusive of cost of revenue items (presented above), for the years ended December 31, 2020 and 2019 is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
|
(in thousands, except percentages)
|
|
2020
|
|
2019
|
|
($)
|
|
(%)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Payroll and benefits
|
|
$
|
10,621
|
|
|
$
|
10,094
|
|
|
$
|
527
|
|
|
5
|
%
|
|
Legal and professional fees
|
|
5,585
|
|
|
9,948
|
|
|
(4,363)
|
|
|
(44)
|
%
|
|
General and administrative
|
|
8,228
|
|
|
8,123
|
|
|
105
|
|
|
1
|
%
|
|
Depreciation, amortization, depletion and accretion
|
|
8,537
|
|
|
7,371
|
|
|
1,166
|
|
|
16
|
%
|
|
Impairment of long-lived assets
|
|
26,103
|
|
|
—
|
|
|
26,103
|
|
|
*
|
|
Gain on settlement
|
|
(1,129)
|
|
|
—
|
|
|
(1,129)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,945
|
|
|
$
|
35,536
|
|
|
$
|
22,409
|
|
|
63
|
%
|
* Calculation not meaningful
Payroll and benefits
Payroll and benefits expenses increased year over year primarily due to severance related costs of $1.4 million incurred in 2020 associated with the resignation of an executive officer, offset by a decrease in salaries related to our current headcount, which remained relatively consistent year over year.
Legal and professional fees
Legal and professional fees decreased year over year primarily due to decreased outsourced shared service costs, which included legal, general consulting and audit and accounting fees of approximately $2.8 million, and a reduction in outsourced IT costs specific to the completion of the integration of Carbon Solutions of $1.5 million.
General and administrative
General and administrative expenses increased year over year primarily due to an increase in product development expenses of approximately $0.8 million related to the Supply Agreement, an increase in rent and occupancy of approximately $0.6 million relating to property taxes and office rent, and an increase in costs incurred due to the sequestration of certain of our employees at our Red River plant of approximately $0.4 million.
Offsetting these increases was the reversal of an allowance on a note receivable from the Former Customer (See "Other cost of revenue" discussion of above under this section) of $0.4 million, which we reversed as part of our financial asset collectability review performed as of December 31, 2020. See further discussion below in this section under the caption "Gain on settlement." Further reductions year over year included travel, as a preventative measure related to the COVID-19 pandemic, and recruiting fees.
Depreciation, amortization, depletion and accretion
Depreciation and amortization expense increased year over year primarily due to increased sales volumes in 2020 and lower absorption due to the drawdown of inventory, resulting in an increase of depreciation expense of $1.1 million. Further, the addition of leasehold improvements at our corporate headquarters in 2020 and the addition of accretion expense related to Marshall Mine contributed approximately $0.7 million of depreciation and amortization expense in 2020. Offsetting these increases was a decrease year over year in depreciation and amortization expense of approximately $0.6 million related to impaired property, plant and equipment assets as of June 30, 2020, which resulted in lower net book values of the impaired assets of June 30, 2020 and lower depreciation and amortization recorded in the second half of 2020.
Impairment of long-lived assets
As of June 30, 2020, we recorded an impairment charge of $26.1 million, which is included in the Statement of Operations for the year ended December 31, 2020 and was solely attributable to our APT segment. This impairment charge was necessitated by an analysis of the carrying values of our APT segment's long-lived assets and certain other long-lived assets (the "Asset
Group"), which are comprised of our manufacturing plant and related assets and our lignite mine assets, to their respective fair values.
Gain on settlement
As noted above under this Item 7, for the year ended December 31, 2020, we recognized a gain of $1.1 million on the Settlement with the Former Customer.
Other Income (Expense), net
A summary of the components of our other income (expense), net for the years ended December 31, 2020 and 2019 is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
|
(Amounts in thousands, except percentages)
|
|
2020
|
|
2019
|
|
($)
|
|
(%)
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Earnings from equity method investments
|
|
$
|
30,978
|
|
|
$
|
69,176
|
|
|
$
|
(38,198)
|
|
|
(55)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(3,920)
|
|
|
(7,174)
|
|
|
3,254
|
|
|
(45)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
132
|
|
|
427
|
|
|
(295)
|
|
|
(69)
|
%
|
|
Total other income
|
|
$
|
27,190
|
|
|
$
|
62,429
|
|
|
$
|
(35,239)
|
|
|
(56)
|
%
|
Earnings from equity method investments
The following table presents the equity method earnings by investee for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
Change
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
($)
|
|
(%)
|
|
|
|
|
|
Earnings from Tinuum Group
|
|
$
|
24,396
|
|
|
$
|
60,286
|
|
|
|
|
$
|
(35,890)
|
|
|
(60)
|
%
|
|
|
|
|
|
Earnings from Tinuum Services
|
|
6,582
|
|
|
8,896
|
|
|
|
|
(2,314)
|
|
|
(26)
|
%
|
|
|
|
|
|
Earnings (loss) from other
|
|
—
|
|
|
(6)
|
|
|
|
|
6
|
|
|
(100)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from equity method investments
|
|
$
|
30,978
|
|
|
$
|
69,176
|
|
|
|
|
$
|
(38,198)
|
|
|
(55)
|
%
|
|
|
|
|
For the year ended December 31, 2020, we recognized $24.4 million in equity earnings from Tinuum Group, which was equal to our proportionate share of Tinuum Group's net income for the year. For the year ended December 31, 2019, we recognized $60.3 million in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of $62.0 million for the year. This difference 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 year the distributions occurred. See further discussion of year over year changes in Earnings from Equity Investments in "Business Segments" under this Item. Additional information related to equity method investments is included in Note 7 to the Consolidated Financial Statements included in Item 8 of this Report.
Tinuum Group's audited consolidated financial statements as of December 31, 2020 and 2019 and for the years then ended are included in Item 15 - "Exhibits and Financial Statement Schedules" ("Item 15") of this Report.
Tax Credits and Obligations
Historically, we have earned Section 45 tax credits that may be available for future benefit related to the production of RC from the operation of RC facilities in which we have held both direct ownership and indirect ownership through Tinuum's direct ownership. We refer to these RC facilities as "retained facilities." Future earned Section 45 tax credits for 2021 are expected to be consistent with 2020. As of December 31, 2020, we had approximately $93.9 million in Section 45 tax carryforwards.
In the hypothetical event of an ownership change, as defined by IRC Section 382, utilization of general business credits ("GBC's") generated prior to the change would be subject to an annual limitation imposed by IRC Section 383 for GBC's. The results of a recent analysis indicated that we had not experienced an ownership change as of December 31, 2020, as defined by IRC Section 382. Such analysis for the period from January 1, 2021 through the date of this Report has not been completed.
Therefore, it is possible that we experienced an ownership change between January 1, 2021 and the date of this filing, thus subjecting our GBC carryforwards to limitation.
Interest expense
Interest expense decreased year over year by $3.3 million primarily due to a reduction in the coupon interest of $2.4 million related to senior term loan (the "Senior Term Loan"), as the principal balance was reduced from payments made of $24.0 million in 2020 and the weighted-average interest rate for 2019 compared to 2020 decreased from 7.1% to 5.8%. Interest expense related to debt discount and debt issuance costs related to the Senior Term Loan also decreased by $0.3 million as a result of the decrease in the Senior Term Loan principal. The remaining decrease in interest expense year over year related to lower interest expense ("Section 453A interest") in 2020 compared to 2019 related to IRS section 453A ("Section 453A"), which decreased by $0.7 million in 2020 year over year as a result of a decrease in the tax liability for the year ended December 31, 2020 associated with RC facilities in which Tinuum Group recognized as installment sales for tax purposes.
The following table shows the balance of the tax liability that has been deferred and the applicable interest rate used to calculate 453A interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
Tax liability deferred on installment sales (1)
|
|
$
|
10,653
|
|
|
$
|
20,783
|
|
|
|
|
Interest rate
|
|
3.00
|
%
|
|
5.00
|
%
|
|
|
(1) Represents the approximate tax effected liability utilizing the federal tax rate in effect for the applicable years ended related to the deferred gain on installment sales (approximately $59.8 million as of December 31, 2020).
We expect the tax liability deferred on installment sales to be minimal as of December 31, 2021.
Income tax expense
For the year ended December 31, 2020, our reported income tax expense of $6.5 million differed from federal income tax benefit of $2.9 million, computed by applying the U.S. statutory federal income tax rate (the "Federal Rate") and state income tax benefit of $0.4 million, primarily due to the increase in the valuation allowance on our deferred income tax assets of $9.1 million.
For the year ended December 31, 2019, our reported income tax expense of $12.0 million differed from income tax expense of $10.0 million, computed using the Federal Rate, primarily due to an increase in income tax expense from state income tax expense, net of federal benefit of $1.6 million.
Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against their deferred tax asset based on an assessment of the amount of the deferred tax asset that is “more likely than not” to be realized. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized.
We assess the valuation allowance recorded against deferred tax assets at each reporting date. The determination of whether a valuation allowance for deferred tax assets is appropriate requires the evaluation of positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available to realize the deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating taxes, we assess the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial, and regulatory guidance.
As of December 31, 2020, we concluded it is more likely than not we will generate sufficient taxable income within the applicable net operating loss and tax credit carryforward periods to realize $10.6 million of our net deferred tax assets. In reaching this conclusion, we primarily considered: (1) the future reversal of existing temporary differences; and (2) forecasts of future taxable income. As of December 31, 2020 and 2019, we had a valuation allowance of $88.8 million and $79.6 million, respectively, on our deferred tax assets.
The ability to recognize the remaining deferred tax assets that continue to be subject to a valuation allowance is evaluated on a quarterly basis to determine if there are any significant events that would affect the ability to utilize those deferred tax assets.
Our estimate of future taxable income is based on internal projections that consider historical performance, assumptions on future performance and external data. If events are identified that affect our ability to utilize our deferred tax assets, or if additional deferred tax assets are generated, we update our analysis to determine if an increase to the valuation allowance is required. Such an increase could have a material adverse effect on our financial condition and results of operations. Conversely, better than expected results and continued positive results and trends could result in an decrease to the valuation allowance, and any such decreases could have a material positive effect on our financial condition and results of operations.
See additional discussion in Note 18 of the Consolidated Financial Statements included in Item 8 of this Report.
Non-GAAP Financial Measures
To supplement our financial information presented in accordance with GAAP, we are providing non-GAAP measures of certain financial performance. These non-GAAP measures include Consolidated EBITDA, Consolidated Adjusted EBITDA, RC Segment EBITDA, RC Segment Adjusted EBITDA, APT Segment EBITDA and APT Segment Adjusted EBITDA. We have included non-GAAP measures because management believes that they help to facilitate period to period comparisons of our operating results. We believe the non-GAAP measures provide useful information to both management and users of the financial statements by excluding certain expenses, 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 EBITDA as net income adjusted for the impact of the following items that are either non-cash or that we do not consider representative of our ongoing operating performance: depreciation, amortization, depletion, accretion, interest expense, net and income tax expense. We define Consolidated Adjusted EBITDA as Consolidated EBITDA reduced by the non-cash impacts of equity earnings from equity method investments and gain on settlement, and increased by cash distributions from equity method investments, impairment of long-lived assets and amortization of upfront customer consideration that was recorded as a component of the Marshall Mine Acquisition ("Upfront Customer Consideration"). Because Consolidated Adjusted EBITDA omits certain non-cash items, we believe that the measure is less susceptible to variances that affect our operating performance.
We define APT Segment EBITDA Loss as APT Segment operating 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, accretion and interest expense, net. We define APT Segment Adjusted EBITDA loss as APT Segment EBITDA loss reduced by gain on settlement and increased by impairment of long-lived assets and amortization of Upfront Customer Consideration.
We define RC Segment EBITDA as RC Segment operating income adjusted for the impact of the following items that are either non-cash or that we do not consider representative of our ongoing operating performance: depreciation, amortization, depletion, accretion and 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.
When used in conjunction with GAAP financial measures, we believe these non-GAAP measures are supplemental measures of operating performance that explain our operating performance for our period to period comparisons and against our competitors' performance. Generally, we believe these non-GAAP measures are less susceptible to variances that affect our operating performance results.
With the exception of impairment on long-lived assets and gain on settlement, the adjustments to Consolidated Adjusted EBITDA and APT Segment Adjusted EBITDA in future periods are 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 Consolidated Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Net (loss) income (1)
|
|
|
|
|
|
$
|
(20,302)
|
|
|
$
|
35,537
|
|
|
Depreciation, amortization, depletion and accretion
|
|
|
|
|
|
8,537
|
|
|
7,371
|
|
|
Interest expense, net
|
|
|
|
|
|
3,793
|
|
|
6,913
|
|
|
Income tax expense
|
|
|
|
|
|
6,511
|
|
|
11,999
|
|
|
Consolidated EBITDA (loss)
|
|
|
|
|
|
(1,461)
|
|
|
61,820
|
|
|
Cash distributions from equity method investees
|
|
|
|
|
|
62,441
|
|
|
73,888
|
|
|
Equity earnings
|
|
|
|
|
|
(30,978)
|
|
|
(69,176)
|
|
|
Impairment
|
|
|
|
|
|
26,103
|
|
|
—
|
|
|
Gain on settlement
|
|
|
|
|
|
(1,129)
|
|
|
—
|
|
|
Amortization of Upfront Customer Consideration
|
|
|
|
|
|
158
|
|
|
—
|
|
|
Consolidated Adjusted EBITDA
|
|
|
|
|
|
$
|
55,134
|
|
|
$
|
66,532
|
|
(1) Net income for the year ended December 31, 2019 was inclusive of a $5.0 million adjustment, which increased cost of revenue due to a step-up in basis of inventory acquired related to the Carbon Solutions Acquisition.
Business Segments
As of December 31, 2020, we have two reportable segments, RC and APT.
The business segment measurements provided to and evaluated by our chief operating decision maker are computed in accordance with the principles listed below:
•The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except as described below.
•Segment revenues include equity method earnings and losses from our equity method investments.
•Segment operating income (loss) includes segment revenues, gains related to sales of equity method investments and allocation of certain "Corporate general and administrative expenses," which include Payroll and benefits, Legal and professional fees, General and administrative, and Depreciation, amortization, depletion and accretion.
•RC segment operating income includes interest expense directly attributable to the RC segment.
The principal products and services of our segments are described in Item 1 of this document. The following table presents our operating segment results for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
Change
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
($)
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Refined Coal:
|
|
|
|
|
|
|
|
|
|
|
|
Earnings in equity method investments
|
|
$
|
30,978
|
|
|
$
|
69,176
|
|
|
|
|
$
|
(38,198)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License royalties, related party
|
|
13,440
|
|
|
16,899
|
|
|
|
|
(3,459)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,418
|
|
|
86,075
|
|
|
|
|
(41,657)
|
|
|
|
|
Advanced Purification Technologies:
|
|
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
48,122
|
|
|
53,187
|
|
|
|
|
(5,065)
|
|
|
|
|
Other
|
|
15
|
|
|
—
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,137
|
|
|
53,187
|
|
|
|
|
(5,050)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment reporting revenues
|
|
92,555
|
|
|
139,262
|
|
|
|
|
(46,707)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile to reported revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings in equity method investments
|
|
(30,978)
|
|
|
(69,176)
|
|
|
|
|
38,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reported revenues
|
|
$
|
61,577
|
|
|
$
|
70,086
|
|
|
|
|
$
|
(8,509)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined Coal (1)
|
|
$
|
42,689
|
|
|
$
|
83,471
|
|
|
|
|
$
|
(40,782)
|
|
|
|
|
Advanced Purification Technologies (2)
|
|
(39,958)
|
|
|
(13,600)
|
|
|
|
|
(26,358)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
2,731
|
|
|
$
|
69,871
|
|
|
|
|
$
|
(67,140)
|
|
|
|
(1) Included in the RC segment operating income for the years ended December 31, 2020 and 2019 is 453A interest expense of $0.3 million and $1.0 million, respectively.
(2) Included in the APT segment operating loss for the years ended December 31, 2020 and 2019 was $7.9 million and $7.2 million, respectively, of depreciation, amortization, depletion and accretion expenses on mine- and plant-related long-lived assets and liabilities. Included in the APT segment operating loss for the year ended December 31, 2020 was an impairment charge of $26.1 million offset by gain on settlement of $1.1 million. Included in the APT segment operating loss for the year ended December 31, 2019 was approximately $5.0 million of cost of revenue expense related to a step up in basis of the fair value of inventory and of depreciation, amortization.
A reconciliation of segment operating income to consolidated net income is included in Note 19 of the Consolidated Financial Statements included in Item 8 of this Report.
Refined Coal
The following table details the segment revenues of our respective equity method investments for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
Earnings from Tinuum Group
|
|
$
|
24,396
|
|
|
$
|
60,286
|
|
|
|
|
Earnings from Tinuum Services
|
|
6,582
|
|
|
8,896
|
|
|
|
|
Earnings (loss) from other
|
|
—
|
|
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from equity method investments
|
|
$
|
30,978
|
|
|
$
|
69,176
|
|
|
|
For 2020, equity earnings from Tinuum Group were positively impacted by the addition of two new RC facilities during the second half of 2019, three new RC facilities added during the year ended December 31, 2020 and the sale by Tinuum Group of its 49.9% remaining interest in an RC facility in the quarterly period ended September 30, 2020. However, equity earnings from Tinuum Group for 2020 decreased from 2019 primarily from the point-in-time revenue recognition in 2019 of two new RC facilities and due to higher depreciation recognized of approximately $4.9 million in 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 2020 compared to 2019 was the restructuring of RC facility leases with Tinuum Group's largest customer in 2019, which decreased lease payments and equity earnings beginning in the second half of 2019, and the termination of two RC facility leases in the fourth quarter of 2019 for RC facilities located at two coal-fired utilities that were announced for closure in 2019. Also, in the fourth quarter of 2020, Tinuum Group recorded an impairment charge of $3.0 million on certain of its assets located at RC facilities and a retention accrual related to the wind down of its operations by the end of 2021.
As a result of higher depreciation, lower lease payments and the termination of RC facilities' leases throughout 2021 due to the expiration of the Section 45 tax period applicable to those RC facilities' leases, we expect our earnings in Tinuum Group to decrease in 2021. However, in 2021, and consistent with 2020, we expect that cash distributions will substantially exceed earnings.
RC earnings related to M-45 license royalties decreased from 2020 to 2019 as a result of reduction in the royalty rate per ton year over year offset by an increase in tonnage produced by RC facilities subject to the M-45 License.
Equity earnings from Tinuum Services decreased by $2.3 million in 2020 compared to 2019 primarily as a result of recording an impairment charge of $2.9 million for year ended December 31, 2020 as well as a reduction in tonnage for the RC facilities that Tinuum Services operated in 2020 compared to 2019. As of December 31, 2020 and 2019, Tinuum Services provided operating and maintenance services to 22 and 19 RC facilities, respectively. Tinuum Services derives earnings from both fixed-fee arrangements as well as fees that are tied to actual RC production, as determined by the specific RC facility operating and maintenance agreement.
Outlook
Both Tinuum Group and Tinuum Services expect to significantly wind down their operations by the end of 2021 due to the planned expiration of the Section 45 tax credit period as of December 31, 2021, and the loss of equity earnings, distributions and M-45 Royalties beginning in 2022 will have a material adverse effect on our financial condition and consolidated operating results compared to historical periods. Earnings in the RC segment for 2021 will continue to be impacted by coal-fired dispatch and invested facilities with leases subject to periodic renewals being terminated, repriced, or otherwise subject to renegotiated terms. As a result of higher depreciation and lower lease payments for 2021, as well as the expiration of the Section 45 tax program as of December 31, 2021, we expect our earnings in Tinuum Group to decrease in 2021. However, in 2021, and consistent with 2020, cash distributions will substantially exceed earnings.
RC Segment EBITDA and Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
RC Segment operating income
|
|
$
|
42,689
|
|
|
$
|
83,471
|
|
|
Depreciation, amortization, depletion and accretion
|
|
116
|
|
|
83
|
|
|
Interest expense
|
|
331
|
|
|
1,039
|
|
|
RC Segment EBITDA
|
|
43,136
|
|
|
84,593
|
|
|
Cash distributions from equity method investees
|
|
62,441
|
|
|
73,888
|
|
|
Equity earnings
|
|
(30,978)
|
|
|
(69,176)
|
|
|
RC Segment Adjusted EBITDA
|
|
$
|
74,599
|
|
|
$
|
89,305
|
|
Advanced Purification Technologies
APT segment operating loss increased during the year ended December 31, 2020 compared to 2019 primarily due to the impairment charge of $26.1 million, a reduction in consumable revenue and associated margins and costs incurred related to COVID-19. During the year ended December 31, 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 and a decline in overall U.S. power generation during 2020 of approximately 4.0%.
During the year ended December 31, 2020, we incurred costs of $0.4 million related to sequestration of certain of our employees at our Red River plant. These costs included hazardous pay, lodging expense and other related costs for 60 days.
Outlook
Based on current market estimates, we believe that the APT segment will continue to be negatively impacted, as power generation from coal-fired power plants declines and the market focuses on other sources, including natural gas and renewable energy. Future demand will also be impacted by prices of competing energy sources such as natural gas. Low prices of alternative energy sources and decreasing power generation from coal-fired utilities reduce demand for our products. However, in 2021 and beyond, we expect the Supply Agreement to play significant roles in diversifying our product mix into markets outside of power generation.
APT Segment EBITDA Loss and Adjusted EBITDA Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
APT Segment operating loss (1)
|
|
$
|
(39,958)
|
|
|
$
|
(13,600)
|
|
|
Depreciation, amortization, depletion and accretion
|
|
7,870
|
|
|
7,206
|
|
|
Interest expense, net
|
|
402
|
|
|
368
|
|
|
APT Segment EBITDA loss
|
|
(31,686)
|
|
|
(6,026)
|
|
|
Impairment
|
|
26,103
|
|
|
—
|
|
|
Gain on settlement
|
|
(1,129)
|
|
|
—
|
|
|
Amortization of Upfront Customer Consideration
|
|
158
|
|
|
—
|
|
|
APT Segment Adjusted EBITDA loss
|
|
$
|
(6,554)
|
|
|
$
|
(6,026)
|
|
(1) Segment operating loss for the year ended December 31, 2019 was inclusive of an adjustment of $5.0 million, which increased cost of revenue due to a step-up in basis of inventory acquired related to the Carbon Solutions Acquisition.
Liquidity and Capital Resources
Factors Affecting Our Liquidity
During 2020, our liquidity position was positively affected primarily from cash distributions from Tinuum Group and Tinuum Services, royalty payments from Tinuum Group, PPP Loan distributions and borrowing availability under our bank ("Lender") line of credit (the "Line of Credit").
As of December 31, 2020, our principal future sources of liquidity include:
•cash and cash equivalents;
•distributions from Tinuum Group and Tinuum Services;
•royalty payments from Tinuum Group;
•operations of the APT segment; and
•the Line of Credit.
For the year ended December 31, 2020, our principal uses of liquidity included:
•our business operating expenses, including capital expenditures, reclamation costs, federal and state tax payments and cash severance payments,
•payment of debt principal and interest;
•payment of dividends; and
•repurchases of shares of common stock.
Tinuum Group and Tinuum Services Distributions
The following table summarizes the cash distributions from our equity method investments, which most significantly affected our consolidated cash flow results, for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Tinuum Group
|
|
$
|
53,289
|
|
|
$
|
65,238
|
|
|
|
|
Tinuum Services
|
|
9,152
|
|
|
8,650
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions from equity method investees
|
|
$
|
62,441
|
|
|
$
|
73,888
|
|
|
|
Cash distributions from Tinuum Group for 2020 decreased by $11.9 million compared to 2019 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 invested RC facilities were operating.
Future cash flows from Tinuum are expected to range from $70 to $90 million, and key drivers in achieving these future cash flows are based on the following:
•23 invested facilities as of December 31, 2020 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 existing 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 20, 2020, we entered into the PPP Loan under the PPP, evidenced by a promissory note, with BOK providing for $3.3 million in proceeds, which was funded on April 21, 2020. The PPP Loan matures April 21, 2022. The PPP Loan principal may be forgiven subject to the terms of the PPP and 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 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.
Under the PPPFA, as defined above, 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 has not been forgiven. In January 2021, we submitted an application to the SBA for forgiveness of the PPP Loan and we are awaiting the SBA's response on our application for forgiveness. Accordingly, we have determined that any amounts due under the PPP Loan 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.
Restricted Cash
As of December 31, 2020, we had short-term restricted cash of $5.0 million as required under a minimum cash balance requirement of a Senior Term Loan covenant, and long-term restricted cash of $5.0 million as required under the Surety Agreement related to the Reclamation Contract. Under the Surety Agreement, we are required to increase the restricted cash balance by $5.0 million as of March 31, 2021.
Senior Term Loan
On December 7, 2018, we executed the Senior Term Loan with Apollo in the principal amount of $70.0 million, less original issue discount of $2.1 million. We also paid debt issuance costs of $2.0 million related to the Senior Term Loan. The Senior Term Loan matures 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. As of December 31, 2020, we have $16.0 million in outstanding principal which, per the contractual requirements, we expect to fully repay in 2021. The Senior Term Loan is secured by substantially all of our assets, including the cash flows from Tinuum Group and Tinuum Services, but excluding our equity interests in those Tinuum entities.
The Senior Term Loan includes, among others, the following covenants: (1) As of the end of each fiscal quarter, 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) Annual collective dividends and buybacks of shares of our common stock in an aggregate amount, not to exceed $30.0 million, are 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. As of December 31, 2020, our expected future net cash flows from the refined coal business are less than $100.0 million and we have no plans in 2021 to either declare cash dividends on our stock or repurchase shares of our common stock. See also "Item 1A Risk Factors" of this Report - "Risks relating to our common stock - There can be no assurance that we will continue to declare cash dividends at all or in any particular amounts."
Stock Repurchases and Dividends
In November 2018, our 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 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.
During the year ended December 31, 2020, we paid quarterly cash dividends to stockholders of $4.6 million, which was paid on March 10, 2020.
Line of Credit
As of December 31, 2020, there were no outstanding borrowings under the Line of Credit.
In September 2013, ADA, as borrower, ADES, as guarantor, and the Lender entered into the Line of Credit for an aggregate principal amount of $10.0 million that was secured by certain amounts due to the Company from certain Tinuum Group RC leases. The Line of Credit has been amended 14 times from the period from December 2, 2013 through December 31, 2020, which included a reduction in the principal amount to $5.0 million in September 2018.
On September 29, 2020, ADA, ADES and the Lender entered into an amendment to the Line of Credit (the "Fourteenth Amendment"), which extended the maturity date of the Line of Credit to March 31, 2021. In addition, the Fourteenth Amendment 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.
Cash Flows
Cash, cash equivalents and restricted cash increased from $17.1 million as of December 31, 2019 to $35.9 million as of December 31, 2020, an increase of $18.9 million. The following table summarizes our cash flows for the years ended December 31, 2020 and 2019, respectively:
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|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
Change
|
|
|
|
Cash provided by (used in):
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|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
54,469
|
|
|
$
|
62,262
|
|
|
|
|
$
|
(7,793)
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
(7,887)
|
|
|
(13,238)
|
|
|
|
|
5,351
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
(27,730)
|
|
|
(55,716)
|
|
|
|
|
27,986
|
|
|
|
|
Net change in Cash and Cash Equivalents and Restricted Cash
|
|
$
|
18,852
|
|
|
$
|
(6,692)
|
|
|
|
|
$
|
25,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
Cash flows provided by operating activities for the year ended December 31, 2020 decreased by $7.8 million compared to the year ended December 31, 2019 and were negatively impacted primarily by the following: (1) a decrease in Distributions from equity method investees, return on investment of $11.4 million; (2) a decrease of $5.2 million in deferred income tax expense; and (3) a reduction due to the Gain on settlement of $1.1 million recognized in 2020 . Offsetting these decreases to operating cash flows was primarily a decrease in earnings from equity method investments of $38.2 million and Impairment of long-lived assets of $26.1 million recorded in 2020.
Cash flows from investing activities
Cash flows used in investing activities for the year ended December 31, 2020 decreased by $5.4 million compared to the year ended December 31, 2019 primarily due to a decrease in expenditures for mine development costs of $3.5 million. Also contributing to the decrease in cash flows used in investing activities were decreases in cash flows used in investing activities for acquisition of property, plant, equipment and intangibles of $1.2 million and the final cash payment for the Carbon Solutions Acquisition of $0.7 million, which was made in 2019.
Cash flows from financing activities
Cash flows used in financing activities for the year ended December 31, 2020 were $27.7 million compared to cash flows provided by financing activities of $55.7 million for the year ended December 31, 2019. This net decrease in cash flows used in financing activities was primarily due a decrease in dividends paid and shares repurchased of $13.3 million and $5.6 million, respectively, in an effort to preserve cash due to uncertainties arising from the COVID-19 pandemic in 2020. Also contributing to the decrease were lower principal payments on the Senior Term Loan of $6.0 million and $3.3 million of cash proceeds in 2020 from the PPP Loan .
Liquidity Outlook
Our ability to continue to generate sufficient cash flow required to meet ongoing operational needs and obligations, and make potential future dividend payments and share repurchases depends upon several factors, includes executing on our contracts and initiatives, receiving royalty payments from Tinuum Group and distributions from Tinuum Group and Tinuum Services, and increasing our share of the market for APT consumables, including expanding our overall AC business into additional adjacent markets.
Our liquidity was negatively impacted from COVID-19 due to increased operating losses in our APT 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 Loan as discussed above under this Item.
In 2021, our primary source of liquidity is expected to be distributions from Tinuum Group and Tinuum Services. These distributions in 2021 will provide sufficient cash on hand to fund operations in 2021 and 2022. For 2021, we expect to spend $9.5 million in capital expenditures compared to $7.1 million incurred in 2020. This increase is primarily the result of product specific capital related to the Supply Agreement and routine scheduled maintenance outages planned for 2021.
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 Red River plant, providing additional sources of operating cash flows in the future. Full and partial reimbursements on capital expenditures from Cabot will help limit our uses of investing cash flows. Further, we intend to 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 capital expenditures are expected to average approximately $5.0 million.
Contractual Obligations
Our contractual obligations as of December 31, 2020 are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
(in thousands)
|
|
Total
|
|
Less than 1 year
|
|
1-3 years
|
|
4-5 years
|
|
After 5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Term Note (1)
|
|
$
|
16,000
|
|
|
$
|
16,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Finance lease obligations
|
|
6,344
|
|
|
1,859
|
|
|
1,988
|
|
|
2,497
|
|
|
—
|
|
|
Operating lease obligations
|
|
3,119
|
|
|
1,994
|
|
|
1,125
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclamation liability, Marshall Mine (2)
|
|
20,281
|
|
|
10,257
|
|
|
8,122
|
|
|
1,109
|
|
|
793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,744
|
|
|
$
|
30,110
|
|
|
$
|
11,235
|
|
|
$
|
3,606
|
|
|
$
|
793
|
|
(1) Includes outstanding principal amounts due through the maturity date of the Senior Term Loan.
(2) Includes payments due under a capped fee contract with a third-party mining operator for reclamation of the Marshal Mine (the "Marshall Mine ARO"). Payments on this contract are due through approximately 2031. Reclamation costs related to the Marshall Mine ARO are based on a stated fee by month structure, based on the initial estimate of the total costs of reclamation, which provides for certain contingencies that could increase or decrease the reclamation fee over time. The timing of payments may vary, and the Company accounts for these timing differences in valuing the reclamation on a quarterly basis. As well, the Company accounts for changes in actual reclamation costs on a quarterly basis.
The table above excludes obligations related to 453A interest payments, which are variable due to annual changes in the statutory rate established by the IRS and changes in Tinuum Group's deferred tax liabilities associated with taxes that have been deferred under the installment method for sales or leases of certain of Tinuum Group's RC facilities. We do not expect that our obligations for 453A interest will be material for 2021. During 2021, Tinuum Group will be likely closing RC facilities commensurate with the expiration of the Section 45 tax credit period, which expires 10 years after a respective facility was in service and eligible to generate Section 45 tax credits. As a result, Tinuum Group's composite deferred tax liability will decline through 2021 and our 453A interest payments will also decline in proportion to the decrease in Tinuum Group's deferred tax liability.
The table above also excludes our asset retirement obligation ("ARO") related to reclamation of the Five Forks Mine (the "Five Forks ARO"). As of December 31, 2020, our consolidated balance sheet reflects a liability of $3.3 million for the Five Forks ARO. The Five Forks Mine ARO was recorded at fair value. The timing and amount of payments to satisfy the Five Forks ARO are uncertain and are based on numerous factors including, but not limited to, the Five Forks Mine closure date.
We had no outstanding letters of credit as of December 31, 2020.
Off-Balance Sheet Arrangements
Surety Bonds
As of December 31, 2020, we had outstanding surety bonds of $36.7 million related to performance requirements under reclamation contracts associated with both the Five Forks Mine and the Marshall Mine. As of December 31, 2020, we had restricted cash of $5.0 million securing the Surety Agreement and will be required to post an additional $5.0 million of restricted cash on March 31, 2021. We expect that the obligations secured by these surety bonds will be performed in the 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 are discussed in Note 1 to the Consolidated Financial Statements included in Item 8 of this Report. In presenting our financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. Our estimates are based on historical experience and other assumptions believed to be reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the accounting estimates discussed below are critical to understanding our historical and future performance, as these estimates relate to the more significant areas involving management’s judgments and estimates.
Business Combinations, including asset acquisitions
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. This also includes accounting for asset acquisitions. The purchase price allocation process requires us to make significant estimates and assumptions with respect to assets acquired and liabilities assumed. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions and information obtained from management of the acquired company or group of assets and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
•future expected cash flows from revenues;
•historical and expected customer attrition rates and anticipated growth in revenues from acquired customers;
•the acquired company’s developed technology as well as assumptions about the period of time the acquired developed technology will continue to be used in the combined company's product portfolio;
•the expected use and useful lives of the acquired assets; and
•valuation methods and discount rates used in estimating the values of the assets acquired and liabilities assumed.
In regard to the Marshall Mine Acquisition, which was accounted for as an asset acquisition, we recorded the fair value of assumed assets, which included property, plant and equipment and spare parts and assumed liabilities, which included accrued liabilities. In addition, we recorded assets including, Upfront Customer Consideration and the Cabot Receivable, and liability of Marshall Mine ARO.
Carrying value of long-lived assets and intangibles
We review and evaluate our long-lived assets and intangibles for impairment at least annually, or more frequently when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment loss is measured and recorded for long-lived assets and intangibles based on the excess of their carrying amounts over their estimated fair values. Fair value is typically determined through the use of an income approach utilizing estimates of discounted pre-tax future cash flows or a market approach utilizing recent transaction activity for comparable properties.
Asset Retirement Obligations
Accounting for AROs requires management to make estimates of future costs unique to a specific mining operation that we will incur to complete the reclamation and remediation work required to comply with existing laws and regulations. Any such changes in future costs, the timing of reclamation activities, scope, or the exclusion of certain costs not considered reclamation and remediation costs, could materially impact the amounts charged to earnings for reclamation and remediation. Additionally, future changes to environmental laws and regulations could increase the extent of reclamation and remediation work required.
Five Forks Mine ARO - Reclamation costs related to the Five Forks Mine ARO are allocated to expense over the life of the related mine assets, and are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. Remediation costs for the Five Forks Mine are accrued based on management’s best estimate at the end of each period of the costs expected to be incurred. Such cost estimates may include ongoing care, maintenance and monitoring costs. Reclamation obligations are based on the timing of estimated spending for an existing environmental disturbance. We review, on at least an annual basis, the Five Forks Mine ARO.
Marshall Mine ARO - Reclamation costs related to the Marshall Mine are based on a capped fee structure, based on the initial estimate of the total costs of reclamation, which provides for certain contingencies that could increase or decrease the reclamation fee based on the reclamation agreement executed between us and the Marshall Mine operator. The timing of payments may vary, and the Company accounts for these timing differences in valuing the reclamation on a quarterly basis. As well, the Company accounts for changes in actual reclamation costs on a quarterly basis.
Income Taxes
We account for income taxes as required by U.S. GAAP, under which management judgment is required in determining income tax expense and the related balance sheet amounts. This judgment includes estimating and analyzing historical and projected future operating results, the reversal of taxable temporary differences, tax planning strategies, and the ultimate outcome of uncertain income tax positions. Actual income taxes paid may vary from estimates, depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. Changes in the estimates and assumptions used for calculating income tax expense and potential differences in actual results from estimates could have a material impact on our results of operations and financial condition.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations.
We establish a valuation allowance against our deferred tax assets when, based upon the weight of all available evidence, we believe it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2020 and 2019, we have established valuation allowances for our deferred tax assets that, in our judgment, will not be realized. In making this determination, we have considered the relative impact of all of the available positive and negative evidence regarding future sources of taxable income and tax planning strategies. However, there could be a material impact to our effective tax rate if there is a significant change in our estimates of future taxable income and tax planning strategies. If and when our estimates change, or there is a change in the gross balance of deferred tax assets or liabilities causing the need to reassess the realizability of deferred tax assets, we adjust the valuation allowance through the provision for income taxes in the period in which this determination is made. Refer to Note 18 of our Consolidated Financial Statements included in Item 8 of this Report for additional information regarding our net deferred tax assets and related deferred income tax expense (benefit).
Recently Issued Accounting Standards
Refer to Note 1 of the Consolidated Financial Statements included in Item 8 of this Report for information regarding recently issued accounting standards.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information under this Item is not required to be provided by smaller reporting companies.
Item 8. Financial Statements and Supplementary Data
Advanced Emissions Solutions, Inc.
Index to Financial Statements
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Advanced Emissions Solutions, Inc.
|
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
Advanced Emissions Solutions, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Advanced Emissions Solutions, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Income Taxes – Realizability of Deferred Tax Assets
As described in Notes 1 and 18 to the consolidated financial statements, the Company recognizes deferred income taxes for the effects of temporary differences between the tax basis of an asset or liability and their reported amounts in the accompanying consolidated balance sheet. These temporary differences result in taxable or deductible amounts in future years. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. As of December 31, 2020 the Company concluded it is more likely than not the Company will generate sufficient taxable income within the applicable net operating loss and tax credit carry-forward periods to realize $10.6 million of its net deferred tax assets, which resulted in a valuation allowance of $88.8 million.
We identified the realizability of deferred tax assets as a critical audit matter due to the Company’s tax structure and the significant judgments and estimates made by management to determine that sufficient taxable income will be generated to realize a portion of deferred tax assets prior to expiration. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate management’s estimates of taxable income prior to expiration.
The primary procedures we performed to address this critical audit matter included:
•Recalculating the mathematical accuracy of management’s accounting for the previously described taxes, which included supporting calculations, schedules, and reconciliations.
•Reading and evaluating management’s documentation of the accounting for income taxes, including relevant significant accounting policies, and information obtained by management from third party tax specialists which details management’s basis for the accounting and impact to the consolidated financial statements.
•Obtaining and evaluating the supporting tax analyses and documentation prepared by management, as a framework and initial support for audit procedures. This includes the Company’s deferred tax calculations, which also integrates management’s analysis of valuation allowances, current tax expenses (benefits), and IRC Section 45 credits.
•Consulting with internal tax specialists in evaluating management’s calculation of its provision for income taxes and that the significant judgments used were applied consistently with the tax code.
•Validating the parameters employed by management in their analysis of the partial valuation allowance, in order to gain comfort with relevant positive and negative evidence available and utilized in performing the analysis.
•Evaluating whether significant estimates and judgments used were consistent with past performance related to said estimates, the consistency of future forecasts and projections based on current operating conditions and future expectations, and that all were consistent with evidence obtained in procedures performed in other areas of the audit.
Accounting for Cabot Transactions
As described in Notes 2, 3, and 4 to the consolidated financial statements, on September 30, 2020, the Company entered into a supply agreement (the Supply Agreement) with Cabot Norit Americas, Inc. (Cabot) to sell and deliver certain lignite-based AC products. Concurrently with the execution of the Supply Agreement, the Company entered into an agreement to purchase (the Mine Purchase Agreement) from Cabot 100% of the membership interests in Marshall Mine, LLC for a nominal 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 Purchase Agreement, 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. Under the terms of the Supply Agreement, Cabot is obligated to reimburse the Company for $10.2 million of the Reclamation Costs (the Reclamation Reimbursements). In connection with the Supply Agreement, Purchase Agreement, and the Reclamation Contract, the Company assumed the obligations to reclaim and restore the land associated with the Marshall Mine. As of September 30, 2020, the Company recorded an asset retirement obligation for the total Reclamation Costs of $21.3 million. The Company also recorded a receivable for the Reclamation Reimbursements at its estimated fair value of $9.7 million. These transactions also resulted in the recording of property, plant, and equipment of $3.9 million, spare parts of $0.1 million, receivables of $0.5 million, accounts payable and accrued liabilities of $0.5 million, and upfront customer consideration of $7.6 million. The upfront customer consideration is the excess of the fair value of the liabilities assumed over assets acquired and will be amortized on a straight-line basis as a reduction to revenue over the expected 15-year contractual period of the Supply Agreement.
We identified the accounting for these agreements and contracts as a critical audit matter due to the subjective judgment required to evaluate the appropriateness of the accounting guidance followed in recording these transactions, including the conclusions surrounding the interrelatedness of the transactions and the application of Generally Accepted Accounting Principles surrounding the treatment of the upfront customer consideration.
The primary procedures we performed to address this critical audit matter included:
•Evaluating management’s significant accounting policies related to the various aspects of these transactions for appropriateness, which incorporated the use of a subject matter expert on technical accounting matters.
•Gaining an understanding of the transactions, including the business purpose and terms, by obtaining and reading the related contracts and through discussion with management.
•Evaluating the estimated future cash flows for consistency with the terms laid out in the contract.
Assessment of Impairment of Long-lived Assets
As described in Note 5 to the consolidated financial statements, as part of its periodic review of the carrying value of long-lived assets, the Company assesses its long-lived assets for potential impairment. At June 30, 2020, in assessing impairment of its advanced purification technologies (APT) segment and certain other long-lived asset groups (the Asset Group), based on market conditions such as current and future years’ forecasted revenue and historically low prices of alternative power generation sources, management concluded there should be an impairment analysis of the Asset Group. Accordingly, the Company completed an undiscounted cash flow analysis of the Asset Group and estimated that the undiscounted cash flows from the Asset Group were less than the carrying value of the Asset Group. As such, the Company completed an assessment of the Asset Group’s fair value, resulting in a $26.1 million impairment and write-down of the Asset Group.
We identified the assessment and measurement of the impairment of the Asset Group as a critical audit matter due to the auditor judgment required to evaluate management’s process for assessing and quantifying the impairment. Specifically, assessing certain internally developed assumptions included the need to involve our fair value specialists. These assumptions included cash flow forecasts and revenue growth rates, estimates relating to the cost structure and operating margins, and the discount rate.
The primary procedures we performed to address this critical audit matter included:
•Recalculating the mathematical accuracy of both the undiscounted cash flow analysis and the assessment of the Asset Group’s fair value.
•Evaluating the Company’s estimated cash flow forecasts and long-term revenue growth rates by comparing to historical data, current market conditions, and our knowledge of the Company’s operations and the industry.
•Obtaining and evaluating the fair value report used to estimate the Asset Group’s fair value which was prepared by management’s third-party valuation specialist and was evaluated and approved by the Company’s management team. This evaluation incorporated the use of the expertise of our internal fair value specialists. The work of our fair value specialists included reviews and analysis of the model and related assumptions used for the valuation of the Asset Group and the appropriateness of such modeling for the type of valuation being performed.
/s/ Moss Adams LLP
Denver, Colorado
March 10, 2021
We have served as the Company’s auditor since 2017.
Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands, except share data)
|
|
2020
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
30,932
|
|
|
$
|
12,080
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
13,125
|
|
|
7,430
|
|
|
Receivables, related party
|
|
3,453
|
|
|
4,246
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
9,882
|
|
|
15,460
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
4,597
|
|
|
7,832
|
|
|
Total current assets
|
|
61,989
|
|
|
47,048
|
|
|
Restricted cash, long-term
|
|
5,000
|
|
|
5,000
|
|
|
Property, plant and equipment, net of accumulated depreciation of $3,340 and $7,444, respectively
|
|
29,433
|
|
|
44,001
|
|
|
Intangible assets, net
|
|
1,964
|
|
|
4,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity method investments
|
|
7,692
|
|
|
39,155
|
|
|
Deferred tax assets, net
|
|
10,604
|
|
|
14,095
|
|
|
Other long-term assets, net
|
|
29,989
|
|
|
20,331
|
|
|
Total Assets
|
|
$
|
146,671
|
|
|
$
|
173,799
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
7,849
|
|
|
$
|
8,046
|
|
|
Accrued payroll and related liabilities
|
|
3,257
|
|
|
3,024
|
|
|
Current portion of long-term debt
|
|
18,441
|
|
|
23,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
12,996
|
|
|
4,311
|
|
|
Total current liabilities
|
|
42,543
|
|
|
39,313
|
|
|
Long-term debt, net of current portion
|
|
5,445
|
|
|
20,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
13,473
|
|
|
5,760
|
|
|
Total Liabilities
|
|
61,461
|
|
|
65,507
|
|
|
Commitments and contingencies (Notes 14)
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
Preferred stock: par value of $.001 per share, 50,000,000 shares authorized, none outstanding
|
|
—
|
|
|
—
|
|
|
Common stock: par value of $.001 per share, 100,000,000 shares authorized, 23,141,284 and 22,960,157 shares issued and 18,523,138 and 18,362,624 shares outstanding at December 31, 2020 and 2019, respectively
|
|
23
|
|
|
23
|
|
|
Treasury stock, at cost: 4,618,146 and 4,597,533 shares as of December 31, 2020 and 2019, respectively
|
|
(47,692)
|
|
|
(47,533)
|
|
|
Additional paid-in capital
|
|
100,425
|
|
|
98,466
|
|
|
Retained earnings
|
|
32,454
|
|
|
57,336
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
85,210
|
|
|
108,292
|
|
|
Total Liabilities and Stockholders’ equity
|
|
$
|
146,671
|
|
|
$
|
173,799
|
|
See Notes to the Consolidated Financial Statements.
Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
(in thousands, except per share data)
|
|
2020
|
|
2019
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Consumables
|
|
$
|
48,122
|
|
|
$
|
53,187
|
|
|
|
|
License royalties, related party
|
|
13,440
|
|
|
16,899
|
|
|
|
|
Other
|
|
15
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
61,577
|
|
|
70,086
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Consumables cost of revenue, exclusive of depreciation and amortization
|
|
45,176
|
|
|
49,443
|
|
|
|
|
Other cost of revenue, exclusive of depreciation and amortization
|
|
(563)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and benefits
|
|
10,621
|
|
|
10,094
|
|
|
|
|
Legal and professional fees
|
|
5,585
|
|
|
9,948
|
|
|
|
|
General and administrative
|
|
8,228
|
|
|
8,123
|
|
|
|
|
Depreciation, amortization, depletion and accretion
|
|
8,537
|
|
|
7,371
|
|
|
|
|
Impairment of long-lived assets
|
|
26,103
|
|
|
—
|
|
|
|
|
Gain on settlement
|
|
(1,129)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
102,558
|
|
|
84,979
|
|
|
|
|
Operating loss
|
|
(40,981)
|
|
|
(14,893)
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
Earnings from equity method investments
|
|
30,978
|
|
|
69,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(3,920)
|
|
|
(7,174)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
132
|
|
|
427
|
|
|
|
|
Total other income
|
|
27,190
|
|
|
62,429
|
|
|
|
|
(Loss) income before income tax expense
|
|
(13,791)
|
|
|
47,536
|
|
|
|
|
Income tax expense
|
|
6,511
|
|
|
11,999
|
|
|
|
|
Net (loss) income
|
|
$
|
(20,302)
|
|
|
$
|
35,537
|
|
|
|
|
(Loss) earnings per common share (Note 1):
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.12)
|
|
|
$
|
1.96
|
|
|
|
|
Diluted
|
|
$
|
(1.12)
|
|
|
$
|
1.93
|
|
|
|
|
Weighted-average number of common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
18,044
|
|
|
18,154
|
|
|
|
|
Diluted
|
|
18,044
|
|
|
18,372
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to the Consolidated Financial Statements.
Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Treasury Stock
|
|
|
|
|
|
|
|
|
|
(in thousands, except share data)
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Additional Paid-in Capital
|
|
Retained Earnings/(Accumulated Deficit)
|
|
|
|
Total Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2019
|
|
22,640,677
|
|
|
$
|
23
|
|
|
(4,064,188)
|
|
|
$
|
(41,740)
|
|
|
$
|
96,750
|
|
|
$
|
12,914
|
|
|
|
|
$
|
67,947
|
|
|
Cumulative effect of change in accounting principle (Note 7)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
27,442
|
|
|
|
|
27,442
|
|
|
Stock-based compensation
|
|
298,573
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,011
|
|
|
—
|
|
|
|
|
2,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock upon exercise of options, net
|
|
50,268
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
156
|
|
|
—
|
|
|
|
|
156
|
|
|
Repurchase of common shares to satisfy tax withholdings
|
|
(29,361)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(451)
|
|
|
—
|
|
|
|
|
(451)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared on common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(18,557)
|
|
|
|
|
(18,557)
|
|
|
Repurchase of common shares
|
|
—
|
|
|
—
|
|
|
(533,345)
|
|
|
(5,793)
|
|
|
—
|
|
|
—
|
|
|
|
|
(5,793)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35,537
|
|
|
|
|
35,537
|
|
|
Balances, December 31, 2019
|
|
22,960,157
|
|
|
$
|
23
|
|
|
(4,597,533)
|
|
|
$
|
(47,533)
|
|
|
$
|
98,466
|
|
|
$
|
57,336
|
|
|
|
|
$
|
108,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
278,910
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,496
|
|
|
—
|
|
|
|
|
2,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common shares to satisfy tax withholdings
|
|
(97,783)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(537)
|
|
|
—
|
|
|
|
|
(537)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared on common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,580)
|
|
|
|
|
(4,580)
|
|
|
Repurchase of common shares
|
|
—
|
|
|
—
|
|
|
(20,613)
|
|
|
(159)
|
|
|
—
|
|
|
—
|
|
|
|
|
(159)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(20,302)
|
|
|
|
|
(20,302)
|
|
|
Balances, December 31, 2020
|
|
23,141,284
|
|
|
$
|
23
|
|
|
(4,618,146)
|
|
|
$
|
(47,692)
|
|
|
$
|
100,425
|
|
|
$
|
32,454
|
|
|
|
|
$
|
85,210
|
|
See Notes to the Consolidated Financial Statements.
Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(20,302)
|
|
|
$
|
35,537
|
|
|
|
|
Adjustments to reconcile net (loss) income to net cash used in operating activities:
|
|
|
|
|
|
|
|
Deferred income tax expense
|
|
3,491
|
|
|
8,655
|
|
|
|
|
Depreciation, amortization, depletion and accretion
|
|
8,537
|
|
|
7,371
|
|
|
|
|
Amortization of debt discount and debt issuance costs
|
|
1,418
|
|
|
1,678
|
|
|
|
|
Operating lease expense
|
|
3,559
|
|
|
3,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of long-lived assets
|
|
26,103
|
|
|
—
|
|
|
|
|
Gain on settlement
|
|
(1,129)
|
|
|
—
|
|
|
|
|
Recovery of accounts receivable and other receivables
|
|
(990)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
2,496
|
|
|
2,011
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from equity method investments
|
|
(30,978)
|
|
|
(69,176)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-cash items, net
|
|
192
|
|
|
638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, net of effects of acquired businesses:
|
|
|
|
|
|
|
|
Receivables, net
|
|
(2,541)
|
|
|
2,124
|
|
|
|
|
Related party receivables
|
|
794
|
|
|
37
|
|
|
|
|
Prepaid expenses and other current assets
|
|
3,234
|
|
|
(2,200)
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
4,748
|
|
|
5,505
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term assets, net
|
|
(1,005)
|
|
|
(262)
|
|
|
|
|
Accounts payable
|
|
(196)
|
|
|
2,218
|
|
|
|
|
Accrued payroll and related liabilities
|
|
233
|
|
|
(5,255)
|
|
|
|
|
Other current liabilities
|
|
(520)
|
|
|
(261)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
(2,200)
|
|
|
(3,180)
|
|
|
|
|
Other long-term liabilities
|
|
(2,916)
|
|
|
(258)
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions from equity method investees, return on investment
|
|
62,441
|
|
|
73,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
54,469
|
|
|
62,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property, plant, equipment, and intangible assets, net
|
|
(6,685)
|
|
|
(7,851)
|
|
|
|
|
Mine development costs
|
|
(1,202)
|
|
|
(4,726)
|
|
|
|
|
Acquisition of business, net of cash acquired
|
|
—
|
|
|
(661)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(7,887)
|
|
|
(13,238)
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
Principal payments on term loan
|
|
(24,000)
|
|
|
(30,000)
|
|
|
|
|
Borrowings from Paycheck Protection Program Loan
|
|
3,305
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
(4,979)
|
|
|
(18,274)
|
|
|
|
|
Principal payments on finance lease obligations
|
|
(1,360)
|
|
|
(1,354)
|
|
|
|
|
Repurchase of shares to satisfy tax withholdings
|
|
(537)
|
|
|
(451)
|
|
|
|
|
Repurchase of common shares
|
|
(159)
|
|
|
(5,793)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
—
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
(27,730)
|
|
|
(55,716)
|
|
|
|
|
Increase (decrease) in Cash, Cash Equivalents and Restricted Cash
|
|
18,852
|
|
|
(6,692)
|
|
|
|
|
Cash, Cash Equivalents and Restricted Cash, beginning of year
|
|
17,080
|
|
|
23,772
|
|
|
|
|
Cash, Cash Equivalents and Restricted Cash, end of year
|
|
$
|
35,932
|
|
|
$
|
17,080
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
2,489
|
|
|
$
|
5,650
|
|
|
|
|
Cash (received) paid for income taxes
|
|
$
|
(84)
|
|
|
$
|
4,308
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment under finance lease
|
|
$
|
158
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends payable
|
|
$
|
32
|
|
|
$
|
284
|
|
|
|
See Notes to the Consolidated Financial Statements.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Operations and Significant Accounting Policies
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 technologies in the advanced purification technologies ("APT") market enable customers to reduce air and water containments, 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 "Carbon Solutions Acquisition"), the Company manufactures and sells AC used to capture and remove contaminants for coal-fired power plants, industrial and water treatment markets. Carbon Solutions also owns an associated lignite mine ("Five Forks 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.
Principles of Consolidation
The Consolidated Financial Statements include accounts of wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
All investments in partially owned entities for which the Company has greater than 20% ownership are accounted for using the equity method based on the legal form of the Company's ownership percentage and the applicable ownership percentage of the entity and are included in the Equity method investments line item in the Consolidated Balance Sheets. As of December 31, 2020, the Company holds equity interests of 42.5% and 50.0% in Tinuum Group and Tinuum Services, LLC ("Tinuum Services"), respectively. Tinuum Group is deemed to be variable interest entity ("VIE") under the VIE model of consolidation, but the Company does not consolidate Tinuum Group as it is not deemed to be its primary beneficiary.
Cash, cash equivalents and restricted cash
Cash and cash equivalents include bank deposits and other highly liquid investments purchased with an original maturity of three months or less.
Restricted cash primarily consists of minimum cash balance requirements under the Term Loan and Security Agreement (the "Senior Term Loan") and a surety bond indemnification agreement (the "Surety Agreement") associated with reclamation of a mine. Restricted cash is classified consistent with the underlying obligation.
Receivables, net
Receivables, net are recorded at net realizable value. This carrying value includes an appropriate allowance for estimated uncollectible amounts to reflect any loss anticipated on the receivables balances. Increases and decreases in the allowance for doubtful accounts are established based upon changes in the credit quality of receivables and are included as a component of the General and administrative line item in the Consolidated Statements of Operations. The allowance for doubtful accounts is based on historical experience, general economic conditions and the credit quality of specific accounts.
Inventories, net
Inventories, net are stated at the lower of average cost or net realizable value and consist principally of raw materials and finished goods related to the Company's AC and chemical product offerings. The cost of inventory is determined using the average cost method.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Inventories are periodically reviewed for both potential obsolescence and potential declines in anticipated selling prices. In this review, the Company makes assumptions about the future demand for and market value of the inventory, and estimates the amount of any obsolete, unmarketable, slow moving or overvalued inventory. The Company will write down the value of inventories by an amount equal to the difference between the cost of the inventory and its estimated net realizable value.
Additional details regarding Inventory balances are included in Note 9.
Intangible Assets
Intangible assets consist of patents, licensed technology, customer relationships, developed technologies and trade names.
The Company has developed technologies resulting in patents being granted by the U.S. Patent and Trademark Office or other regulatory offices. Legal costs associated with securing the patent are capitalized and amortized over the legal or useful life beginning on the patent filing date. The remaining intangible assets were recorded at fair value in connection with the Carbon Solutions Acquisition.
The following table details the components of the Company's intangible assets:
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As of December 31,
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2020
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2019
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(in thousands, except years)
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Weighted average amortization (in years)
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Initial Cost (1)
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Net of Accumulated Amortization
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Initial Cost
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Net of Accumulated Amortization
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Customer relationships
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5
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|
$
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835
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|
|
$
|
713
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|
|
$
|
2,200
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|
|
$
|
1,731
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|
|
Patents
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|
9
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|
1,306
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|
|
733
|
|
|
1,489
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|
|
1,039
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|
|
Developed technology
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5
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|
607
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|
|
518
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|
|
1,600
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|
|
1,259
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Trade name
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2
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36
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—
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300
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140
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Total
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$
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2,784
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$
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1,964
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$
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5,589
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$
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4,169
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(1) As of December 31, 2020, initial costs were inclusive of the write down of intangibles to fair value based on the impairment charge taken during the year ended December 31, 2020 and further described in Note 5.
Included in the Consolidated Statements of Operations is amortization expense related to intangible assets of $1.0 million and $1.0 million for the years ended December 31, 2020 and 2019, respectively. The estimated future amortization expense for existing intangible assets as of December 31, 2020 is expected to be $0.3 million for each of the five succeeding fiscal years.
Investments
The investments in entities in which the Company does not have a controlling interest (financial or operating), but where it has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method of accounting. Whether or not the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including, among others, representation on the investee company’s board of directors and the Company's ownership level. Under the equity method of accounting, an investee company’s accounts are not reflected in the Company’s Consolidated Balance Sheets and Consolidated Statements of Operations; however, the Company’s share of the earnings or losses of the investee company is reported in the Earnings from equity method investments line item in the Consolidated Statements of Operations, and the Company’s carrying value in an equity method investee company is reported in the Equity method investments line in the Consolidated Balance Sheets.
When the Company receives distributions in excess of the carrying value of the investment and has not guaranteed any obligations of the investee and/or is not required to provide additional funding to the investee, the Company recognizes such excess distributions as equity method earnings in the period the distributions occur. When the investee subsequently reports income, the Company does not record its share of such income until it equals the amount of distributions in excess of carrying value that were previously recognized in income. During the years ended December 31, 2020 and 2019, the Company had no guarantees or requirements to provide additional funding to investees.
Additionally, when the Company's carrying value in an equity method investment is zero, and the Company has not guaranteed any obligations of the investee and/or is not required to provide additional funding to the investee, the Company will not recognize its share of any reported losses by the investee until future earnings are generated to offset previously unrecognized
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
losses. As a result, equity income or loss reported in the Company's Consolidated Statements of Operations for certain equity method investees may differ from a mathematical calculation of net income or loss attributable to its equity interest based on the percentage ownership of the Company's equity interest and the net income or loss attributable to equity owners as shown in the investee company's statements of operations. Likewise, distributions from equity method investees are reported in the Consolidated Statements of Cash Flows as “return on investment” in Operating cash flows until such time as the carrying value in an equity method investee company is reduced to zero; thereafter, such distributions are reported as "distributions in excess of cumulative earnings" in Investing cash flows. See Note 7 for additional information regarding the Company's equity method investments.
Investments in partially-owned subsidiaries for which the Company has less-than-20% ownership are accounted for in accordance with accounting guidance applicable to equity investments that do not qualify for the equity method of accounting. The Company evaluates these types of investments for changes in fair value and, if there is change, recognizes the change in the Consolidated Statement of Operations. If no such events or changes in circumstances have occurred related to these types of investments, the fair value is estimated only if practicable to do so.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation and includes leasehold improvements. Depreciation on assets is computed using the straight-line method over the lesser of the estimated useful lives of the related assets or the lease term (ranging from 1 to 31 years). Maintenance and repairs that do not extend the useful life of the respective asset are charged to Operating expenses as incurred. When assets are retired, or otherwise disposed of, the property accounts are relieved of costs and accumulated depreciation and any resulting gain or loss is credited or charged to income. The Company performs an evaluation of the recoverability of the carrying value of its property, plant and equipment to determine if facts and circumstances indicate that their carrying value may be impaired. Impairment charges are recorded to Operating expenses in the Consolidated Statements of Operations. Amortization of finance leased assets is included in depreciation expense and is calculated using the straight-line method over the term of the lease.
Leases
The Company records a right of use ("ROU") asset and related liability under a contract or part of a contract when it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of an identified asset means that an entity has both the right to obtain substantially all of the economic benefits from the use of an identified asset and the right to direct the use of that identified asset. The determination of whether a contract contains a lease may require significant assumptions and judgments.
For all classes of underlying assets, the Company does not separate nonlease components from lease components and accounts for each separate lease component and the nonlease components associated with that lease component as a single lease component. The Company records lease liabilities and related ROU assets for all leases that have a term of greater than one year. For short-term leases (leases with terms of less than one year), the Company expenses lease payments on a straight-line basis over the lease term.
Variable lease payments represent payments made by a lessee for the right to use an underlying asset that vary because of changes in facts or circumstances occurring after the commencement date of a lease other than the passage of time. Variable lease payments that are based on an index or rate, calculated by using the index or rate that exists on the lease commencement date, are included in the measurement of a lease liability. Certain of the Company’s operating leases for office facilities contain variable lease components that are not based on an index or rate, and the Company recognizes these payments as lease expense in the period in which the obligation for those payments is incurred.
The Company calculates lease liabilities based on the present value of lease payments discounted by the rate implicit in the lease or, if not readily determinable, the Company’s incremental borrowing rate.
Finance lease liabilities are subsequently measured by increasing the carrying amount to reflect interest expense on the finance lease liability and reducing the carrying amount of the lease liability to reflect lease payments made during the period. Interest on finance lease liabilities is determined in each period during the lease term as the amount that produces a constant periodic discount rate on the remaining balance of the lease liability. ROU assets under finance leases are amortized over the remaining lease term on a straight-line basis. 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 Consolidated Statement of Operations.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Operating lease liabilities are subsequently measured at the present value of the lease payments not yet paid discounted using the discount rate for the lease established at the inception date of the lease. ROU assets under operating leases are subsequently measured at the amounts of the related operating lease liability, adjusted for, as applicable, prepaid or accrued lease payments, the remaining balance of any lease incentives received, unamortized initial direct costs and impairment. Lease expense from operating leases is recognized as a single lease cost over the remaining lease term on a straight-line basis. Variable lease payments not included in operating lease liabilities are recognized as expense in the period in which the obligation for those payments is incurred. Lease expense from operating leases is included in the "General and administrative" line in the Consolidated Statement of Operations.
Other Assets
Mine Development Costs
Mine development costs are related to the Five Forks Mine and are stated at cost less accumulated depletion and include acquisition costs, the cost of other development work and mitigation costs. Costs are amortized over the estimated life of the related mine reserves, which is 16 years. 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. Mine development costs are reported in the "Other long-term assets, net" line item in the Consolidated Balance Sheet.
Spare Parts
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. Spare parts are reported in the "Other long-term assets, net" line item in the Consolidated Balance Sheet.
Revenue Recognition
The Company recognizes revenue from a contract with a customer when a performance obligation under the terms of a contract with a customer is satisfied, which is when the customer controls the promised goods or services that are transferred in satisfaction of the performance obligation. Revenue is measured as the amount of consideration that is expected to be received in exchange for transferring goods or providing services, and the transaction price is generally fixed and generally does not contain variable or noncash consideration. In addition, the Company’s contracts with customers generally do not contain customer refund or return provisions or other similar obligations. Transfer of control and satisfaction of performance obligations are further discussed in each of the revenue components listed below.
The Company uses estimates and judgments in determining the nature and timing of satisfaction of performance obligations, the standalone selling price ("SSP") of performance obligations and the allocation of the transaction price to multiple performance obligations, if any.
The Company’s revenue components are Consumables sales and License royalties.
Consumables
The Company is principally engaged in the sale of consumable products that utilize activated carbon ("AC") and chemical based technologies to a broad range of customers, including coal-fired utilities, water treatment plants, and other diverse markets. Our proprietary technologies and associated product offerings provide purification solutions to enable our customers to reduce certain contaminants and pollutants and thus maximize utilization levels and improve operating efficiencies to meet the challenges of existing and potential regulations.
Generally, customer contracts for consumables are short duration and performance obligations generally do not extend beyond one year.
License royalties, related party
The Company generates revenues from royalties ("M-45 Royalties") earned under a licensing arrangement ("M-45 License") of its M-45TM and M-45-PCTM emissions control technologies ("M-45 Technology") between the Company and Tinuum Group. The Company recognizes M-45 Royalties at a point in time based on the use of the M-45 Technology at certain RC facilities or through Tinuum Group’s use of licensed technology for rates in excess of amounts allowed for RC application. The amount of M-45 Royalties recognized is generally based on a percentage of pre-tax margins (as defined in the M-45 License) of the RC facilities using the M-45 Technology.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Practical Expedients and Exemptions
The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Sales and other taxes that are collected concurrently with revenue-producing activities are excluded from revenue.
The Company accounts for freight costs as activities to fulfill the promise to transfer the goods, and therefore these activities are also not assessed as a separate service to customers.
The Company accounts for all shipping and handling activities that occur after control of the related good transfers as fulfillment activities. These activities are included in Cost of Revenue line items om the Consolidated Statement of Operations.
The Company generally expenses sales commissions when incurred because the amortization period of the asset that the Company would have recognized is one year or less. These costs are recorded in sales and marketing expenses in the Depreciation, amortization, depletion and accretion line item on the Consolidated Statement of Operations.
Cost of Revenue
Cost of revenue includes all labor, fringe benefits, subcontract labor, additive and coal costs, materials, equipment, supplies, travel costs and any other costs and expenses directly related to the Company’s production of revenues. The Company records estimated contract losses, if any, in the period they are determined.
Payroll and Benefits
Payroll and benefits costs include direct payroll, personnel related fringe benefits, sales and administrative staff labor costs and stock compensation expense. Payroll and benefits costs exclude direct labor included in Cost of revenue.
Legal and Professional
Legal and professional costs include external legal, audit and consulting expenses.
General and Administrative
General and administrative costs include director fees and expenses, rent, insurance and occupancy-related expenses, bad debt expense, impairments and other general costs of conducting business.
Research and development costs are charged to expense in the period incurred and are reported in the General and administrative line item in the Consolidated Statements of Operations. During the years ended December 31, 2020 and 2019, the Company recorded research and development costs of $1.0 million and $0.2 million, respectively.
Asset Retirement Obligations
Asset retirement obligations ("ARO") are comprised of mine reclamation activities required under operating agreements related to the Five Forks Mine and the Marshall Mine (as defined in Note 3) and are recognized when incurred and recorded as liabilities at fair value. An ARO is accreted over time through periodic charges to earnings. Accounting for reclamation and remediation obligations requires the Company to make estimates of future costs unique to a specific mining operation that the Company expects to incur to complete the reclamation and remediation work required to comply with existing laws and regulations. AROs are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs.
Five Forks Mine
For the Five Forks Mine ARO, a corresponding ARO asset is depreciated over its estimated life. Reclamation costs related to the Five Forks Mine are allocated to expense over the life of the related mine assets, and are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. Remediation costs for the Five Forks Mine are accrued based on management’s best estimate at the end of each period of the costs expected to be incurred. Such cost estimates may include ongoing care, maintenance and monitoring costs. Reclamation obligations are based on the timing of estimated spending for an existing environmental disturbance. On an annual basis, unless otherwise deemed necessary, the Company reviews its estimates and assumptions of the Five Forks Mine ARO.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Company’s mining activities at the Five Forks Mine are subject to various domestic laws and regulations governing the protection of the environment. The Company conducts its mining activities to protect public health and the environment and believes its operations are in compliance with applicable laws and regulations in all material respects. The Company has made, and expects to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures. Estimated future reclamation costs are based principally on current legal and regulatory requirements.
Marshall Mine (refer to Note 3)
Reclamation costs related to the Marshall Mine are largely based on a capped fee structure, based on the initial estimate of the total costs of reclamation, which provides for certain contingencies that could increase or decrease the reclamation fee based on the reclamation agreement executed between the Company and the Marshall Mine operator. The timing of payments may vary and the Company accounts for these timing differences in valuing the reclamation as well as changes in actual reclamation costs on a quarterly basis.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that includes the enactment date.
The Company recognizes deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.
The Company records uncertain tax positions on the basis of a two-step process whereby (1) the Company determines whether it is more-likely-than-not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
The Company records interest expense due to the Company's share of Tinuum Group's equity method earnings for Refined Coal ("RC") facilities, in which the sale of an RC facility or lease income generated from an RC facility are treated as installment sales for federal income tax purposes. IRS section 453A requires taxpayers using the installment method to pay an interest charge on the portion of the tax liability that is deferred under the installment method. The Company recognizes IRS section 453A interest ("453A interest") and other interest and penalties related to unrecognized tax benefits in the Interest expense line item in the Consolidated Statements of Operations.
Stock-Based Compensation
Stock-based compensation expense is measured at the grant date based on the estimated fair value of the stock-based award and is generally expensed on a straight-line basis over the requisite service period and/or performance period of the award. Forfeitures are recognized when incurred. Stock-based compensation expense related to manufacturing employees and administrative employees is included in the Consumables, Cost of revenues and Payroll and benefits line items, respectively, on the Consolidated Statement of Operations. Stock-based compensation expense related to non-employee directors and consultants is included in the General and administrative line item in the Consolidated Statement of Operations.
Dividends
When a sufficient amount of available earnings exists at the time of a dividend declaration, dividends are charged to Retained earnings when declared. If a sufficient amount of available earnings is not available, dividends declared are charged as a reduction to Additional paid-in capital.
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. The Company's restricted stock awards ("RSA's") granted prior to December 31, 2016 contain non-
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
forfeitable rights to dividends or dividend equivalents and are deemed to be participating securities ("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. As permitted, the Company has elected not to separately present basic or diluted earnings per share attributable to Participating Securities in the Consolidated Statement of Operations.
Diluted earnings 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 Securities and non-participating 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 (loss) 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.
Each PSU represents a contingent right to receive shares of the Company’s common stock, and the number of shares may range from zero to two times the number of PSU's granted on the award date depending upon the price performance of the Company's common stock as measured against a general index and a specific peer group index over requisite performance periods. The number of Potential dilutive shares related to PSU's is based on the number of shares of the Company's common stock, if any, that would be issuable at the end of the respective reporting period, assuming that the end of the reporting period is the end of the contingency period applicable to such PSU's. See Note 16 for additional information related to PSU's.
The following table sets forth the calculations of basic and diluted earnings per common share:
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Years Ended December 31,
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(in thousands, except per share amounts)
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2020
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2019
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Net (loss) income
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$
|
(20,302)
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|
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$
|
35,537
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|
|
|
|
Less: Dividends and undistributed income allocated to Participating Securities
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|
(5)
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44
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|
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|
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(Loss) income attributable to common stockholders
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|
$
|
(20,297)
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|
|
$
|
35,493
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Basic weighted-average number of common shares outstanding
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|
18,044
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|
18,154
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Add: dilutive effect of equity instruments
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|
—
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218
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Diluted weighted-average shares outstanding
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|
18,044
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|
|
18,372
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Earnings (loss) per share - basic
|
|
$
|
(1.12)
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|
|
$
|
1.96
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|
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Earnings (loss) per share - diluted
|
|
$
|
(1.12)
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|
|
$
|
1.93
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|
For the years ended December 31, 2020 and 2019, 0.6 million and 0.3 million weighted-average equity instruments, respectively, were outstanding but were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") requires the Company’s management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates. The Company makes assumptions on the following significant financial statement components including:
•business combinations, including asset acquisitions;
•the carrying value of its long-lived assets;
•the carrying value of its intangible assets;
•AROs; and
•income taxes, including the valuation allowance for deferred tax assets and uncertain tax positions.
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
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 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 December 31, 2020, Tinuum Group has 23 invested RC facilities of which 9 are leased to a single customer. 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 loss of Tinuum Group's customers, reduction in revenue streams as a result of lease renewals and the expiration of Section 45 tax credits will have a significant adverse impact on Tinuum Group's financial position, results of operations and cash flows, which in turn will have a material adverse impact on the Company’s financial position, results of operations and cash flows.
Reclassifications
Certain balances have been reclassified from prior years 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 Guidance
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 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.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes ("ASU 2019-12"). The amendments in ASU 2019-12 simplify various aspects related to accounting for income taxes by removing certain exceptions contained in Topic 740 and also clarifies and amends existing guidance in Topic 740 to improve consistent application. ASU 2019-12 is effective for public business entities beginning after December 15, 2020, including interim periods within those years, and early adoption is permitted. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures and does not believe this standard will have a material impact on the Company's financial statements and disclosures.
Note 2 - 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 agrees to sell and deliver to Cabot, and Cabot agrees 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 to the sale by the Company and purchase by Cabot of Furnace Products, the Company and Cabot have agreed to additional terms whereby Cabot will reimburse 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 benefit both the Company and Cabot (referred to as "Shared Capital") and capital expenditures incurred that will benefit Cabot exclusively (referred to as "Specific Capital").
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Revenues are earned on Shared Capital ("Shared Capital revenues") based on the percentage of planned Furnace Products produced and sold divided by the Company’s total products produced and sold for each year multiplied by a factor, which is based on the cost of Shared Capital assets placed in service amortized as an annuity over the expected asset life (lives) using an interest rate that is mutually agreed to by both the Company and Cabot. Shared Capital revenues are recognized and billable 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 Shared Capital asset(s).
Revenues are earned on Specific Capital ("Specific Capital revenues") and are based on a factor, which is based on the cost of Specific Capital assets placed in service amortized as an annuity over five years using an interest rate that is 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 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.
Note 3 - Acquisition of Marshall Mine
Concurrently with the execution of the Supply Agreement, on September 30, 2020, the Company entered into an agreement to purchase (the "Mine Purchase Agreement") from Cabot 100% of the membership interests in Marshall Mine, LLC (the "Marshall Mine Acquisition") for a nominal 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.
As the owner of the Marshall Mine, the Company was 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 shuttered, and it may be reduced in amount from time to time as the Company progresses with its reclamation activities. For the obligations due under the Reclamation Contract, the Company was required to post collateral of $5.0 million as of September 30, 2020 and to post an additional $5.0 million as of March 31, 2021.
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 that the Marshall Mine Acquisition should be accounted for as an asset acquisition as it did not meet the definition of a business. The Company's conclusion was based on the Marshall Mine not having any economic reserves, as the Company commenced full reclamation as of September 30, 2020, and therefore lacked inputs.
As the Marshall Mine Acquisition represents a transaction with a customer of net assets acquired and liabilities assumed from Cabot, the Company 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 was recognized net of an additional asset recognized in the Marshall Mine Acquisition, which was comprised of a receivable from Cabot (the "Cabot Receivable") for the Reclamation Reimbursements. The Cabot Receivable is further discussed in Note 4.
The total Upfront Customer Consideration is amortized on a straight-line basis as a reduction to revenue over the expected 15-year contractual period of the Supply Agreement.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Company paid a nominal cash amount to Cabot in the form of cash for the Marshall Mine and also assumed liabilities whose fair value exceeded the fair value of assets acquired. The net assets acquired and liabilities assumed and the additional assets recorded for the Marshal Mine Acquisition as of September 30, 2020 are shown in the table below. Subsequent to this date, the Company completed additional analysis and adjustments were made as noted in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
As Originally Reported
|
|
Adjustments
|
|
As Adjusted
|
|
Assets acquired:
|
|
|
|
|
|
|
|
Receivables
|
|
$
|
—
|
|
|
$
|
513
|
|
|
$
|
513
|
|
|
Property, plant and equipment
|
|
3,863
|
|
|
—
|
|
|
3,863
|
|
|
Spare parts
|
|
100
|
|
|
—
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
(673)
|
|
|
160
|
|
|
(513)
|
|
|
Asset retirement obligation
|
|
(21,328)
|
|
|
—
|
|
|
(21,328)
|
|
|
Net assets acquired and liabilities assumed from Marshall Mine acquisition
|
|
(18,038)
|
|
|
673
|
|
|
(17,365)
|
|
|
Cabot receivable
|
|
9,749
|
|
|
—
|
|
|
9,749
|
|
|
Upfront Customer Consideration
|
|
$
|
8,289
|
|
|
$
|
(673)
|
|
|
$
|
7,616
|
|
The Company also evaluated the Marshall Mine entity as a VIE, and determined that because of its structure and closing-stage status, it does 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 membership interests in Marshall Mine, LLC and has determined that it meets the definition of a VIE and that the Company is the primary beneficiary. Therefore, Marshall Mine, LLC’s assets and liabilities are consolidated as of December 31, 2020.
Note 4 - Marshall Mine Asset Retirement Obligation and related Cabot Receivable
Asset Retirement Obligation
In connection with the Supply Agreement, Mine 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 does not have any remaining economic reserves. As of September 30, 2020, the Company recorded an ARO (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%.
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 was measured using a discounted cash flows valuation model that considers the estimated credit risk associated with the obligor’s (Cabot’s) future performance. Interest is 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. Allowances for this asset are assessed periodically, and no allowance was deemed necessary as of December 31, 2020.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 APT segment's long-lived asset groups, the Company considered factors such as the significant decline in both the APT segment's trailing twelve months revenues and current and future years’ forecasted revenues. These factors were largely due to the significant drop in coal-fired power dispatch 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 APT segment's long-lived assets (the "Asset Group"), which were comprised of its manufacturing plant and related assets and its lignite mine assets. The estimated undiscounted cash flows from the Asset Group was $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. The Impairment Charge is reflected as "Impairment of long-lived assets" in the Consolidated Statement of Operations for the year ended December 31, 2020, and was allocated to the APT segment.
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. 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.
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 provided, among other things, the creation of the Paycheck Protection Program ("PPP"), which is sponsored and administered by the U.S. Small Business Administration ("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.
On April 20, 2020, the Company entered into a loan (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. The PPP Loan matures April 21, 2022. The PPP Loan principal may be forgiven subject to the terms of the PPP and approval by the SBA. The Company recorded the PPP Loan as a debt obligation and is accruing interest over the term of the PPP Loan. There is no assurance that the PPP Loan will be forgiven.
The interest rate on the PPP Loan is 1.0%. The PPP Loan is unsecured and contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or BOK, or breaching the terms of the PPP Loan. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, or filing suit and obtaining judgment against the Company.
Under the PPPFA, monthly payments of principal and interest commence on the later of 10 months following the "covered period" (as defined in the PPPFA) or the date that BOK notifies the Company that the SBA has notified BOK that all or a portion of the PPP Loan has not been forgiven. In January 2021, the Company submitted its application to the SBA for
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
forgiveness of the PPP Loan, and the Company is awaiting the SBA's response on its application for forgiveness. Accordingly, the Company has determined that any amounts due under the PPP Loan would commence in August 2021 and, as of December 31, 2020, has classified a portion of the PPP Loan principal and accrued interest as current in the Consolidated Balance Sheet.
The CARES Act also provided 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 50% by December 31, 2021 and 50% by December 31, 2022. As of December 31, 2020, the Company has deferred $0.4 million of payroll tax payments under the CARES Act.
Note 7 - Equity Method Investments
Tinuum Group, LLC
As of December 31, 2020 and 2019, the Company’s ownership in Tinuum Group was 42.5%. Tinuum Group supplies technology, equipment and technical services to cyclone-fired and other boiler users, but its primary purpose is to place into operation facilities that produce and sell RC that lower emissions and therefore qualifies for Section 45 tax credits. NexGen Refined Coal, LLC ("NexGen") and GSFS Investments I Corp. ("GSFS"), an affiliate of The Goldman Sachs Group, Inc. ("GS"), own the remaining 42.5% and 15.0%, respectively of Tinuum Group. GSFS' ownership interest is in the form of Class B units that do not have voting rights but provide certain preferences over ADA and NexGen as to liquidation and profit distribution.
The Company has determined that Tinuum Group is a VIE, however, the Company does not have the power to direct the activities that most significantly impact Tinuum Group's economic performance and has therefore accounted for the investment under the equity method of accounting. The Company determined the voting partners of Tinuum Group have identical voting rights, equity control interests and board control interests, and therefore, concluded that the power to direct the activities that most significantly impact Tinuum Group's economic performance was shared.
The following tables summarize the assets, liabilities and results of operations of Tinuum Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
Current assets
|
|
$
|
142,440
|
|
|
$
|
129,377
|
|
|
Non-current assets
|
|
$
|
28,649
|
|
|
$
|
124,916
|
|
|
Current liabilities
|
|
$
|
44,278
|
|
|
$
|
59,392
|
|
|
Non-current liabilities
|
|
$
|
5,186
|
|
|
$
|
13,340
|
|
|
|
|
|
|
|
|
Members equity attributable to Class A members
|
|
$
|
59,221
|
|
|
$
|
117,006
|
|
|
Members equity attributable to Class B members
|
|
$
|
18,769
|
|
|
$
|
28,967
|
|
|
Noncontrolling interests
|
|
$
|
43,635
|
|
|
$
|
35,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
Gross profit
|
|
$
|
6,649
|
|
|
$
|
104,976
|
|
|
|
|
Operating, selling, general and administrative expenses
|
|
58,008
|
|
|
37,641
|
|
|
|
|
(Loss) income from operations
|
|
(51,359)
|
|
|
67,335
|
|
|
|
|
Other income (expense)
|
|
17,260
|
|
|
(95)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to noncontrolling interest
|
|
91,501
|
|
|
78,544
|
|
|
|
|
Net income available to Class A and B members
|
|
$
|
57,402
|
|
|
$
|
145,784
|
|
|
|
|
ADES equity earnings from Tinuum Group
|
|
$
|
24,396
|
|
|
$
|
60,286
|
|
|
|
As shown above, the Company reported earnings from its equity investment in Tinuum Group of $24.4 million and $60.3 million for the years ended December 31, 2020 and 2019, respectively.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The carrying value of the Company's investment in Tinuum Group shall be zero as long as the cumulative amount of distributions received from Tinuum Group exceeds the Company's cumulative pro-rata share of Tinuum Group's net income available to Class A members. For periods during which the ending balance of the Company's investment in Tinuum Group is zero, the Company only recognizes equity earnings from Tinuum Group to the extent that cash distributions are received from Tinuum Group during the period. For periods during which the ending balance of the Company's investment is greater than zero (e.g., when the cumulative earnings in Tinuum Group exceeds cumulative cash distributions received), the Company recognizes its pro-rata share of Tinuum Group's net income available to Class A members for the period, less any amount necessary to recover the cumulative earnings short-fall balance as of the end of the immediately preceding period. As shown in the table below, the Company’s carrying value in Tinuum Group for the years ended December 31, 2020 and 2019 were $3.4 million and $32.3 million, respectively.
The following table presents the Company's investment balance, equity earnings, cash distributions and cash distributions in excess of the investment balance for the years ended December 31, 2019 and December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Date(s)
|
|
Investment balance
|
|
ADES equity earnings (loss)
|
|
Cash distributions
|
|
Memorandum Account: Cash distributions and equity loss in (excess) of investment balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
12/31/2018
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,672)
|
|
|
Impact of adoption of accounting standards (1)
|
|
2019 activity
|
|
37,232
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
ADES proportionate share of net income from Tinuum Group
|
|
2019 activity
|
|
61,958
|
|
|
61,958
|
|
|
—
|
|
|
—
|
|
|
Recovery of cash distributions in excess of investment balance (prior to cash distributions)
|
|
2019 activity
|
|
(1,672)
|
|
|
(1,672)
|
|
|
—
|
|
|
1,672
|
|
|
Cash distributions from Tinuum Group
|
|
2019 activity
|
|
(65,238)
|
|
|
—
|
|
|
65,238
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment balance, equity earnings (loss) and cash distributions
|
|
12/31/2019
|
|
$
|
32,280
|
|
|
$
|
60,286
|
|
|
$
|
65,238
|
|
|
$
|
—
|
|
|
ADES proportionate share of net income from Tinuum Group
|
|
2020 activity
|
|
24,396
|
|
|
24,396
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions from Tinuum Group
|
|
2020 activity
|
|
(53,289)
|
|
|
—
|
|
|
53,289
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment balance, equity earnings and cash distributions
|
|
12/31/2020
|
|
$
|
3,387
|
|
|
$
|
24,396
|
|
|
$
|
53,289
|
|
|
$
|
—
|
|
(1) Tinuum Group adopted ASC Topic 606, Revenue from Contracts with Customers ("ASC 606") and ASC Topic 842, Leases ("ASC 842") as of January 1, 2019. As a result of Tinuum Group’s adoption of these standards, the Company recorded a cumulative adjustment of $27.4 million, net of the impact of income taxes, related to the Company's percentage of Tinuum Group's cumulative effect adjustment that increased the Company's Retained earnings as of January 1, 2019.
Additional information related to Tinuum Group is included in Item 15 - "Exhibits and Financial Statement Schedules" ("Item 15") of this Report.
Tinuum Services, LLC
In 2010, the Company, together with NexGen, formed Tinuum Services for the purpose of operating and maintaining RC facilities, including those RC facilities leased or sold to third parties. The Company has determined that Tinuum Services is not a VIE and has evaluated Tinuum Services for potential consolidation under the voting interest model. Because the Company does not own greater than 50% of the outstanding voting shares, it has accounted for its investment in Tinuum Services under the equity method of accounting. As of December 31, 2020 and 2019, the Company’s investment in Tinuum Services was $4.2 million and $6.8 million, respectively.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following tables summarize the assets, liabilities and results of operations of Tinuum Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
Current assets
|
|
$
|
301,670
|
|
|
$
|
308,249
|
|
|
Non-current assets
|
|
$
|
45,575
|
|
|
$
|
99,261
|
|
|
Current liabilities
|
|
$
|
187,097
|
|
|
$
|
155,836
|
|
|
Non-current liabilities
|
|
$
|
6,451
|
|
|
$
|
55,277
|
|
|
Equity
|
|
$
|
8,483
|
|
|
$
|
13,626
|
|
|
Noncontrolling interests
|
|
$
|
145,214
|
|
|
$
|
182,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
Gross loss
|
|
$
|
(87,723)
|
|
|
$
|
(102,172)
|
|
|
|
|
Operating, selling, general and administrative expenses
|
|
171,095
|
|
|
199,691
|
|
|
|
|
Loss from operations
|
|
(258,818)
|
|
|
(301,863)
|
|
|
|
|
Other expenses
|
|
(1,282)
|
|
|
(1,422)
|
|
|
|
|
Loss attributable to noncontrolling interest
|
|
273,262
|
|
|
321,077
|
|
|
|
|
Net income
|
|
$
|
13,162
|
|
|
$
|
17,792
|
|
|
|
|
ADES equity earnings from Tinuum Services
|
|
$
|
6,582
|
|
|
$
|
8,896
|
|
|
|
Included in the Consolidated Statement of Operations of Tinuum Services for the years ended December 31, 2020 and 2019 were losses related to VIE entities that are consolidated within Tinuum Services of $273.3 million and $321.1 million, respectively. These losses do not impact the Company's equity earnings from Tinuum Services as 100% of those losses are attributable to a noncontrolling interest and eliminated in the calculations of Tinuum Services' net income attributable to the Company's interest.
The following table details the carrying value of the Company's respective equity method investments included in the Equity method investments line item on the Consolidated Balance Sheets and indicates the Company's maximum exposure to loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
Equity method investment in Tinuum Group
|
|
$
|
3,387
|
|
|
$
|
32,280
|
|
|
Equity method investment in Tinuum Services
|
|
4,242
|
|
|
6,813
|
|
|
Equity method investment in other
|
|
63
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity method investments
|
|
$
|
7,692
|
|
|
$
|
39,155
|
|
The Company evaluates the investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. No impairments were recorded during the years ended December 31, 2020 and 2019.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table details the components of the Company's respective earnings or loss from equity method investments included in the Earnings from equity method investments line item in the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
Earnings from Tinuum Group
|
|
$
|
24,396
|
|
|
$
|
60,286
|
|
|
|
|
Earnings from Tinuum Services
|
|
6,582
|
|
|
8,896
|
|
|
|
|
Earnings (loss) from other
|
|
—
|
|
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from equity method investments
|
|
$
|
30,978
|
|
|
$
|
69,176
|
|
|
|
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 in the Consolidated Statements of Cash Flows. Distributions from equity method investees are reported in the Consolidated Statements of Cash Flows as "return on investment" in Operating cash flows until such time as the carrying value in an equity method investee company is reduced to zero; thereafter, such distributions are reported as "distributions in excess of cumulative earnings" as a component of cash flows from investing activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
Distributions from equity method investees, return on investment
|
|
|
|
|
|
|
|
Tinuum Group
|
|
$
|
53,289
|
|
|
$
|
65,238
|
|
|
|
|
Tinuum Services
|
|
9,152
|
|
|
8,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Operating Cash Flows
|
|
$
|
62,441
|
|
|
$
|
73,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8 - Acquisition of ADA Carbon Solutions
On December 7, 2018 (the "Acquisition Date"), the Company completed the Carbon Solutions Acquisition. The Company acquired Carbon Solutions primarily to expand the Company's product offerings in the consumable air treatment markets.
The Company completed 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 and consisted of cash of $65.8 million and an additional purchase adjustment amount payable to Carbon Solutions' secured lender of $0.7 million, which was paid in March 2019. The Purchase Price was adjusted by assumed debt and contractual commitments of $11.8 million, and less cash acquired of $3.3 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 a senior term loan facility (the "Senior Term Loan") in the principal amount of $70.0 million, as more fully described in Note 11.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table summarizes the final Purchase Price allocation. Subsequent to December 31, 2018, 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
|
|
|
$
|
—
|
|
|
$
|
3,284
|
|
|
Receivables
|
|
6,409
|
|
|
—
|
|
|
6,409
|
|
|
Inventories
|
|
22,100
|
|
|
(356)
|
|
|
21,744
|
|
|
Prepaid expenses and other current assets
|
|
2,992
|
|
|
61
|
|
|
3,053
|
|
|
Spare parts
|
|
3,359
|
|
|
—
|
|
|
3,359
|
|
|
Property, plant and equipment
|
|
43,033
|
|
|
(377)
|
|
|
42,656
|
|
|
Mine leases and development
|
|
2,500
|
|
|
200
|
|
|
2,700
|
|
|
Mine reclamation asset
|
|
—
|
|
|
2,402
|
|
|
2,402
|
|
|
Intangible assets
|
|
4,000
|
|
|
100
|
|
|
4,100
|
|
|
Other assets
|
|
168
|
|
|
—
|
|
|
168
|
|
|
Amount attributable to assets acquired
|
|
87,845
|
|
|
2,030
|
|
|
89,875
|
|
|
|
|
|
|
|
|
|
|
Fair value of liabilities assumed:
|
|
|
|
|
|
|
|
Accounts payable
|
|
4,771
|
|
|
—
|
|
|
4,771
|
|
|
Accrued liabilities
|
|
7,354
|
|
|
254
|
|
|
7,608
|
|
|
Equipment lease liabilities
|
|
8,211
|
|
|
—
|
|
|
8,211
|
|
|
Mine reclamation liability
|
|
626
|
|
|
1,776
|
|
|
2,402
|
|
|
Other liabilities
|
|
437
|
|
|
—
|
|
|
437
|
|
|
Amount attributable to liabilities assumed
|
|
21,399
|
|
|
2,030
|
|
|
23,429
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
66,446
|
|
|
$
|
—
|
|
|
$
|
66,446
|
|
Adjustments 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 asset as a result of the final valuation report from the Company's third-party valuation firm issued in May 2019. During the year ended December 31, 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.
The adjustments were recorded as of June 30, 2019 and were included in the Consolidated Balance Sheet as of that date and the resultant impact to the Statement of Operations was reflected for the year ended December 31, 2019.
The following table represents the intangible assets identified as part of the Carbon Solutions Acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Amount
|
|
Weighted Average Useful Life (years)
|
|
Customer relationships
|
|
$
|
2,200
|
|
|
5
|
|
Developed technology
|
|
1,600
|
|
|
5
|
|
Trade name
|
|
300
|
|
|
2
|
|
Total intangibles acquired
|
|
$
|
4,100
|
|
|
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 9 - Inventories, net
The following table summarizes the Company's inventories recorded at the lower of average cost or net realizable value as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
Product inventory
|
|
$
|
8,361
|
|
|
$
|
13,515
|
|
|
Raw material inventory
|
|
1,521
|
|
|
1,945
|
|
|
|
|
|
|
|
|
|
|
$
|
9,882
|
|
|
$
|
15,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10 - Property, Plant and Equipment
The carrying basis and accumulated depreciation of property, plant and equipment at December 31, 2020 and 2019 are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life in Years
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
Land and land improvements
|
|
0-31
|
|
$
|
891
|
|
|
$
|
1,764
|
|
|
Plant and operating equipment
|
|
1-30
|
|
25,703
|
|
|
44,015
|
|
|
Furniture and fixtures
|
|
3-11
|
|
1,259
|
|
|
1,201
|
|
|
Machinery and equipment
|
|
1-8
|
|
688
|
|
|
1,235
|
|
|
Leasehold improvements
|
|
2-3
|
|
2,089
|
|
|
245
|
|
|
Construction in progress
|
|
|
|
2,143
|
|
|
2,985
|
|
|
|
|
|
|
32,773
|
|
|
51,445
|
|
|
Less accumulated depreciation
|
|
|
|
(3,340)
|
|
|
(7,444)
|
|
|
Total property, plant and equipment, net
|
|
|
|
$
|
29,433
|
|
|
$
|
44,001
|
|
Included in plant and operating equipment as of December 31, 2020 and 2019 is mining equipment financed under various lease facilities, and obligations due under these facilities are included in finance lease obligations in the Consolidated Balance Sheet. The total amount recorded for ROU assets as of December 31, 2020 and 2019 related to finance lease obligations was $2.4 million and $5.9 million, respectively, net of accumulated depreciation of $0.5 million and $2.3 million.
Depreciation expense for the years ended December 31, 2020 and 2019 was $6.8 million and $6.0 million, respectively.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 11 - Debt Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
Senior Term Loan due December 2021, related party
|
|
$
|
16,000
|
|
|
$
|
40,000
|
|
|
Less: net unamortized debt issuance costs
|
|
(465)
|
|
|
(1,163)
|
|
|
Less: net unamortized debt discount
|
|
(480)
|
|
|
(1,200)
|
|
|
Senior Term Loan due December 2021, net
|
|
15,055
|
|
|
37,637
|
|
|
PPP Loan
|
|
3,305
|
|
|
—
|
|
|
Finance lease obligations
|
|
5,526
|
|
|
6,729
|
|
|
|
|
|
|
|
|
|
|
23,886
|
|
|
44,366
|
|
|
Less: Current maturities
|
|
(18,441)
|
|
|
(23,932)
|
|
|
Total long-term borrowings
|
|
$
|
5,445
|
|
|
$
|
20,434
|
|
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 five percent of the Company's common stock and a related party, entered into 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 Carbon Solutions Acquisition as disclosed in Note 8. The Company also paid debt issuance costs of $2.0 million related to the Senior Term Loan. The Senior Term Loan matures on December 7, 2021 and bears interest at a rate equal to 3-month LIBOR (subject to a 1.5% floor) + 4.75% per annum, which is adjusted quarterly to the current 3-month LIBOR rate, and interest is payable quarterly in arrears. Quarterly principal payments of $6.0 million were required beginning in March 2019, and the Company may prepay the Senior Term Loan at any time without penalty. The Senior Term Loan is secured by substantially all of the assets of the Company, including the cash flows from Tinuum Group and Tinuum Services (collectively, the "Tinuum Entities"), but excluding the Company's equity interests in the Tinuum entities.
The Senior Term Loan includes, among others, the following covenants: (1) As of the end of each fiscal quarter, 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) Annual collective dividends and buybacks of Company shares in an aggregate amount, not to exceed $30.0 million, are 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.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2020, the following table presents the future aggregate annual maturities of the Senior Term Loan excluding unamortized discounts and deferred financing costs:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
(in thousands)
|
|
Principal Amount
|
|
2021
|
|
$
|
16,000
|
|
|
2022
|
|
—
|
|
|
2023
|
|
—
|
|
|
2024
|
|
—
|
|
|
2025
|
|
—
|
|
|
|
|
|
|
Total
|
|
$
|
16,000
|
|
Line of Credit
In September 2013, ADA-ES, Inc. ("ADA"), a wholly-owned subsidiary of the Company, as borrower, the Company, as guarantor, entered into a line credit (the "Line of Credit") with a bank (the "Lender") for an aggregate principal amount of $10.0 million that was secured by certain amounts due to the Company from certain Tinuum Group RC leases. The Line of Credit has been amended 14 times from the period from December 2, 2013 through December 31, 2020, which included a reduction in the principal amount to $5.0 million in September 2018.
On September 29, 2020, ADA, the Company and the "Lender entered into an amendment to the Line of Credit (the "Fourteenth Amendment"), which extended the maturity date of the Line of Credit to March 31, 2021. In addition, the Fourteenth Amendment 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 December 31, 2020 and 2019, there were no outstanding borrowings under the Line of Credit.
Note 12 - Leases
As of December 31, 2020 and 2019, the Company has obligations under finance leases of $5.5 million and $6.7 million, respectively, and obligations under operating leases of $3.0 million and $5.2 million, respectively. ROU assets under finance leases are mining equipment used at the Company’s lignite mine, which provides the key raw material for manufacturing the Company’s products. ROU assets under operating leases are primarily plant equipment used at the Company’s manufacturing facility, but also include other office equipment, vehicles and office facilities. As of December 31, 2020 and 2019, the Company has ROU assets, net of accumulated amortization, under finance leases of $2.4 million and $5.9 million and ROU assets, net of accumulated amortization, under operating leases of $1.9 million and $5.1 million, respectively.
Certain of the finance and operating leases have options permitting renewals for additional periods and buy-out options. Renewal and buy-out options for applicable leases have not been included in the measurement of the respective lease liabilities as the Company is not reasonably certain that it will exercise the respective option or the lessor does not have an exclusive right to exercise the option.
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 Consolidated Balance Sheets as of December 31, 2020 and 2019.
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 Consolidated Statement of Operations for the years ended December 31, 2020 and 2019.
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 Consolidated Balance Sheets as of December 31, 2020 and 2019.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Lease expense for operating leases for the year ended December 31, 2020 was $4.4 million, of which $3.8 million is included in Consumables cost of revenue, exclusive of depreciation and amortization, and $0.6 million is included in General and administrative in the Consolidated Statement of Operations for the year ended December 31, 2020. Lease expense for operating leases for the year ended December 31, 2019 was $4.4 million, of which $3.9 million is included in Consumables cost of revenue, exclusive of depreciation and amortization, and $0.5 million is included in General and administrative in the Consolidated Statement of Operations for the year ended December 31, 2019.
In August 2019, the Company entered into a new lease agreement covering approximately 21,000 square feet of office space for a term of 3.5 years and recorded an ROU asset of $1.2 million and a corresponding operating lease liability of $1.2 million.
Lease financial information as of and for the years ended December 31, 2020 and 2019 is provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
Finance lease cost:
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
1,471
|
|
|
$
|
2,149
|
|
|
Interest on lease liabilities
|
|
401
|
|
|
365
|
|
|
Operating lease cost
|
|
2,340
|
|
|
3,673
|
|
|
Short-term lease cost
|
|
2,067
|
|
|
771
|
|
|
Variable lease cost (1)
|
|
163
|
|
|
371
|
|
|
|
|
|
|
|
|
Total lease cost
|
|
$
|
6,442
|
|
|
$
|
7,329
|
|
|
|
|
|
|
|
|
Other Information:
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
Operating cash flows from finance leases
|
|
$
|
401
|
|
|
$
|
365
|
|
|
Operating cash flows from operating leases
|
|
$
|
2,200
|
|
|
$
|
3,180
|
|
|
Financing cash flows from finance leases
|
|
$
|
1,360
|
|
|
$
|
1,354
|
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
$
|
158
|
|
|
$
|
—
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
59
|
|
|
$
|
1,309
|
|
|
Weighted-average remaining lease term - finance leases
|
|
3.5 years
|
|
4.2 years
|
|
Weighted-average remaining lease term - operating leases
|
|
1.8 years
|
|
2.4 years
|
|
Weighted-average discount rate - finance leases
|
|
6.2
|
%
|
|
6.1
|
%
|
|
Weighted-average discount rate - operating leases
|
|
8.5
|
%
|
|
8.5
|
%
|
(1) Primarily includes common area maintenance, property taxes and insurance payable to lessors.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table summarizes the Company's future lease payments under finance and operating leases as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Operating
Lease
Commitments
|
|
Finance
Lease
Commitments
|
|
Total Lease Commitments
|
|
2021
|
|
$
|
1,994
|
|
|
$
|
1,859
|
|
|
$
|
3,853
|
|
|
2022
|
|
748
|
|
|
1,008
|
|
|
1,756
|
|
|
2023
|
|
377
|
|
|
980
|
|
|
1,357
|
|
|
2024
|
|
—
|
|
|
1,928
|
|
|
1,928
|
|
|
2025
|
|
—
|
|
|
569
|
|
|
569
|
|
|
Thereafter
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total lease payments
|
|
3,119
|
|
|
6,344
|
|
|
9,463
|
|
|
Less: Imputed interest
|
|
(127)
|
|
|
(818)
|
|
|
(945)
|
|
|
Present value of lease payments
|
|
$
|
2,992
|
|
|
$
|
5,526
|
|
|
$
|
8,518
|
|
Note 13 - Revenues
Contract Assets and Liabilities
Contract assets are comprised of unbilled receivables and are included in Receivables, net in the Consolidated Balance Sheets. Unbilled receivables represent a conditional right to consideration in exchange for goods or services transferred to a customer.
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.
Contract liabilities are comprised of deferred revenue, which represents an obligation to transfer goods or services to a customer for which the Company has received consideration from the customer and, if deliverable within one year or less, is included in Other current liabilities in the Consolidated Balance Sheets and, if deliverable outside of one year, is included in Other long-term liabilities in the Consolidated Balance Sheets.
Trade receivables, net
The following table shows the components of Trade receivables, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
Trade receivables
|
|
$
|
12,241
|
|
|
$
|
8,057
|
|
|
Less: Allowance for doubtful accounts
|
|
(37)
|
|
|
(627)
|
|
|
Trade receivables, net
|
|
$
|
12,204
|
|
|
$
|
7,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2020 and 2019, the Company recognized zero and $0.1 million, respectively, as bad debt expense related to specific accounts whose ultimate collection was in doubt.
Upfront Customer Consideration
As described in Note 3, as of September 30, 2020, the Company recorded an asset for Upfront Customer Consideration of $7.6 million 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 December 31, 2020. The Upfront Customer Consideration is being amortized on a straight-line basis as a reduction to revenue over the expected 15-year contractual period of the Supply Agreement.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Disaggregation of Revenue and Earnings from Equity Method Investments
For the years ended December 31, 2020 and 2019, all performance obligations related to revenues recognized were satisfied at a point in time. The Company disaggregates its revenues by its major components as well as between its two operating segments, which are further discussed in Note 19 to the consolidated financial statements. The Company does not disaggregate revenue by geographic region as revenue is generated primarily from customers in the United States; however, in the APT segment for the year ended December 31, 2020, approximately 15% of APT revenue was generated in Canada. The following tables disaggregate revenues by major source for the year ended December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2020
|
|
|
|
Segment
|
|
|
|
|
|
(in thousands)
|
|
APT
|
|
RC
|
|
|
|
Total
|
|
Revenue component
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
$
|
48,122
|
|
|
$
|
—
|
|
|
|
|
$
|
48,122
|
|
|
License royalties, related party
|
|
—
|
|
|
13,440
|
|
|
|
|
13,440
|
|
|
Other
|
|
15
|
|
|
—
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from customers
|
|
48,137
|
|
|
13,440
|
|
|
|
|
61,577
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from equity method investments
|
|
—
|
|
|
30,978
|
|
|
|
|
30,978
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues and earnings from equity method investments
|
|
$
|
48,137
|
|
|
$
|
44,418
|
|
|
|
|
$
|
92,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2019
|
|
|
|
Segment
|
|
|
|
|
|
(in thousands)
|
|
APT
|
|
RC
|
|
|
|
Total
|
|
Revenue component
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
$
|
53,187
|
|
|
$
|
—
|
|
|
|
|
$
|
53,187
|
|
|
License royalties, related party
|
|
—
|
|
|
16,899
|
|
|
|
|
16,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from customers
|
|
53,187
|
|
|
16,899
|
|
|
|
|
70,086
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from equity method investments
|
|
—
|
|
|
69,176
|
|
|
|
|
69,176
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues and earnings from equity method investments
|
|
$
|
53,187
|
|
|
$
|
86,075
|
|
|
|
|
$
|
139,262
|
|
As further discussed in Note 19, as of December 31, 2020 the Company had a change in reportable segments. The Company has recast the segment information above for the year ended December 31, 2019 to be consistent with the new reportable segments as of December 31, 2020.
Note 14 - 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. The Company did not have any significant legal proceedings.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Restricted Cash
As of December 31, 2020, the Company had short-term restricted cash of $5.0 million as required under a minimum cash balance requirement of a Senior Term Loan covenant, and long-term restricted cash of $5.0 million as required under the Surety Agreement related to the Reclamation Contract.
Surety Bonds
As of December 31, 2020, the Company had outstanding surety bonds of $36.7 million related to performance requirements under reclamation contracts associated with both the Five Forks Mine and the Marshall Mine. As of December 31, 2020, the Company had restricted cash of $5.0 million securing the Surety Agreement and will be required to post an additional $5.0 million of restricted cash on March 31, 2021.
Other Commitments and Contingencies
The Company also has certain limited obligations contingent upon future events in connection with the activities of Tinuum Group. The Company, NexGen and two entities affiliated with NexGen have provided GSFS 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 contribution from the other party equal to 50% of the amount paid. No liability or expense provision has been recorded by the Company related to this contingent obligation as the Company believes that it is not probable that a loss will occur with respect to Tinuum Group Party Guaranties.
Note 15 - Stockholders' Equity
The Company has two classes of capital stock authorized, common stock and preferred stock, which are described as follows:
Preferred Stock
The Company's Board of Directors (the "Board") is authorized to provide out of the unissued shares of Preferred Stock and to fix the number of shares constituting a series of Preferred Stock and, with respect to each series, to fix the number of shares and designation of such series, the voting powers, if any, the preferences and relative, participating, option or other special rights, if any, and any qualifications, limitations or restrictions thereof, of the shares of such series. As of December 31, 2020 and 2019, there were no shares of Preferred Stock designated or outstanding.
Common Stock
Holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Additionally, holders of common stock are entitled to receive dividends when and if declared by the Board, subject to any statutory or contractual restrictions on payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding shares of preferred stock.
Upon dissolution, liquidation or the sale of all or substantially all of the Company's assets, after payment in full of any amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of shares of common stock will be entitled to receive the Company's remaining assets for distribution on a pro rata basis.
Stock Repurchase Programs
In November 2018, 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 under 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 years ended December 31, 2020 and 2019, under the Stock Repurchase Program, the Company purchased 20,613 and 533,345 shares of its common stock for cash of $0.2 million and $5.8 million, inclusive of commissions and fees, respectively. As of December 31, 2020, the Company had $7.0 million remaining under the Stock Repurchase Program.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Quarterly Cash Dividend
Dividends declared to holders of the Company's common shares during the years ended December 31, 2020 and December 31, 2019 were $4.6 million and $18.6 million, respectively. A portion of the dividends remains accrued subsequent to the payment dates and represents dividends accumulated on nonvested shares of common stock held by employees of the Company which contain forfeitable dividend rights which 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 in the Consolidated Balance Sheets as of December 31, 2020 and 2019.
Dividends declared and paid quarterly per share on all outstanding shares of common stock for the years ended December 31, 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
|
|
—
|
|
|
|
|
0.25
|
|
|
June 7, 2019
|
|
September 30
|
|
—
|
|
|
|
|
0.25
|
|
|
September 6, 2019
|
|
December 31
|
|
—
|
|
|
|
|
0.25
|
|
|
December 13, 2019
|
|
|
|
$
|
0.25
|
|
|
|
|
$
|
1.00
|
|
|
|
Tax Asset Protection Plan
United States federal income tax rules, and Section 382 of the IRC in particular, could substantially limit the use of net operating losses and other tax assets if ADES experiences an "ownership change" (as defined in the IRC). In general, an ownership change occurs if there is a cumulative change in the ownership of ADES 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 8, 2020, the Board approved the Third Amendment to the TAPP ("Third Amendment") that amended the TAPP, as previously amended by the First and Second Amendments that were approved the Board on April 6, 2018 and April 5, 2019, respectively. The Third Amendment amended the definition of "Final Expiration Date" under the TAPP to extend the duration of the TAPP and makes associated changes in connection therewith. At the Company's 2020 annual meeting of stockholders, the Company's stockholders approved the Third Amendment, thus the Final Expiration Date will be the close of business on December 31, 2021.
Note 16 - Stock-Based Compensation
The Plans
The Company currently has incentive plans, including the Amended and Restated 2010 Non-Management Compensation and Incentive Plan, as amended (the “2010 Plan”) and the 2017 Omnibus Incentive Plan (the “2017 Plan”) as described below. Collectively, these plans are called the “Stock Plans" and permit the Company to issue stock-based awards, including common stock, restricted stock, stock options and other rights and benefits under the plans to employees, directors and non-employees.
The 2010 Plan - During 2010, the Company adopted the 2010 Plan which permits grants of stock awards to employees, which may be shares, rights to purchase restricted stock, bonuses of restricted stock, or other rights or benefits under the plan. The Company reserved 600,000 shares of its common stock for these purposes. The Plan was amended and restated as of July 19, 2012 to make non-material changes to assure IRC Section 409A compliance. Upon the adoption of the 2017 Plan in June 2017, the Company no longer grants any awards from the 2010 Plan.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The 2017 Plan - During 2017, the Company adopted the 2017 Plan which permits grants of awards to employees, directors and non-employees, which may be shares, rights to purchase restricted stock, bonuses of restricted stock, or other rights or benefits under the plan. As of December 31, 2020, the Company has 1,135,112 shares of its common stock authorized for issuance under the 2017 Plan.
Expense
RSA's - Restricted Stock Awards ("RSA's") are typically granted with vesting terms of three years. The fair value of RSA'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 over the vesting term on a straight-line basis.
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. No stock options were granted during the years ended December 31, 2020 and 2019.
When options are granted, the Company uses historical data to estimate inputs used in the Black-Scholes option pricing model.
Risk-free interest rate - The risk-free interest rate for stock options granted during the period was determined by using a zero-coupon U.S. Treasury rate for the periods that coincided with the expected terms listed above.
Dividends - As historically no dividends had been paid as of the date by which grants occurred, no dividend yield was included in the calculations when the outstanding options were granted.
Expected volatility - To calculate expected volatility, the historical volatility of the Company's common stock was used.
Expected term - The Company’s expected term of options was based upon historical exercise behavior and consideration of the options' vesting and contractual terms.
RSU's - Restricted Stock Units ("RSU's") are typically granted with vesting terms of one year. The fair value of 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 is generally recognized over the service period of the award on a straight-line basis.
PSU's - Performance share units ("PSU's") generally vest over three years and are based on the grantee’s continuous service with the Company, performance measures or a combination of both. Each PSU represents a contingent right to receive shares of the Company’s common stock if the Company meets certain performance measures over the requisite period.
Compensation expense is recognized for PSU awards on a straight-line basis over the vesting period based on the estimated fair value at the date of grant using a Monte Carlo simulation model. No PSU's were granted during the year ended December 31, 2019.
Risk-free interest rate - The risk-free interest rate for PSU's granted during the period was determined by using a zero-coupon U.S. Treasury rate for the periods that coincided with the expected terms listed above.
Dividends - As historically no dividends had been paid as of the date by which grants occurred, no dividend yield was included in the calculations.
Expected volatility - To calculate expected volatility, the historical volatility of the Company's common stock was used.
Performance period - The Company’s performance period is based upon the vesting term of the Company’s PSU awards.
The Company recorded the following compensation expense related to the Stock Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
RSA expense
|
|
$
|
2,304
|
|
|
$
|
2,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSU expense
|
|
192
|
|
|
—
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
2,496
|
|
|
$
|
2,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Stock-based compensation expense related to manufacturing employees and administrative employees is included in the Consumables cost of revenue and Payroll and benefits line items, respectively, in the Consolidated Statements of Operations. Stock-based compensation expense related to non-employee directors and consultants is included in the General and administrative line item in the Consolidated Statement of Operations.
The amount of unrecognized compensation cost as of December 31, 2020, and the expected weighted-average period over which the cost will be recognized is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
(in thousands)
|
|
Unrecognized Compensation Cost
|
|
Expected Weighted-Average Period of Recognition (in years)
|
|
RSA expense
|
|
$
|
1,788
|
|
|
1.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSU expense
|
|
117
|
|
|
2.19
|
|
Total unrecognized stock-based compensation expense
|
|
$
|
1,905
|
|
|
1.62
|
Activity
Restricted Stock
A summary of the status and activity of RSA's and RSU's is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
Weighted-Average Grant Date Fair Value
|
|
(in thousands, except for share and per share amounts)
|
|
Awards
|
|
Units
|
|
RSA's
|
|
RSU's
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2020
|
|
|
|
|
|
|
|
|
|
Non-vested at January 1, 2020
|
|
451,344
|
|
|
—
|
|
|
$
|
10.65
|
|
|
$
|
—
|
|
|
Granted
|
|
315,383
|
|
|
—
|
|
|
$
|
5.20
|
|
|
$
|
—
|
|
|
Vested
|
|
(356,394)
|
|
|
—
|
|
|
$
|
9.41
|
|
|
$
|
—
|
|
|
Forfeited
|
|
(36,473)
|
|
|
—
|
|
|
$
|
10.42
|
|
|
$
|
—
|
|
|
Non-vested at December 31, 2020
|
|
373,860
|
|
|
—
|
|
|
$
|
7.25
|
|
|
$
|
—
|
|
The weighted-average grant date fair value of RSA's granted or modified during the years ended December 31, 2020 and 2019 was $5.20 and $11.03, respectively. The total grant-date fair value of RSA's vested during the years ended December 31, 2020 and 2019 was $3.4 million and $1.1 million, respectively. The aggregate intrinsic value of non-vested RSA's outstanding as of December 31, 2020 was $2.1 million.
Stock Options
A summary of option activity under the Stock Plans is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except for share and per share amounts)
|
|
Number of
Options
Outstanding and
Exercisable
|
|
Weighted-
Average
Exercise
Price
|
|
Aggregate Intrinsic Value
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2020
|
|
|
|
|
|
|
|
|
|
Options outstanding at January 1, 2020
|
|
300,000
|
|
|
$
|
13.87
|
|
|
|
|
|
|
Options granted
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Options exercised
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Options expired / forfeited
|
|
(300,000)
|
|
|
$
|
13.87
|
|
|
|
|
|
|
Options outstanding at December 31, 2020
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
Options vested and exercisable at December 31, 2020
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The weighted-average grant-date fair value of options vesting during the years ended December 31, 2020 and 2019 was zero and zero, respectively. The weighted-average grant-date fair value of options exercised during the year ended December 31, 2020 and 2019 was zero and $0.6 million, respectively. The Company received proceeds of $0.2 million from the exercise of stock options during the year ended December 31, 2019.
Cash flows resulting from excess tax benefits, if any, are classified as part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for vested RSA's and exercised options in excess of the deferred tax asset attributable to stock compensation costs for such equity awards. The Company recorded no excess tax benefits for the years ended December 31, 2020 and 2019.
PSU's
PSU's outstanding remain unvested until the third anniversary of their issuance date, at which time the actual number of vested shares will be determined based upon the actual price performances of the Company’s common stock relative to a broad stock index and a peer group performance index.
A summary of PSU activity for the year ended December 31, 2020 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Aggregate Intrinsic Value (in thousands)
|
|
Weighted-Average
Remaining
Contractual
Term (in years)
|
|
PSU's outstanding, December 31, 2020
|
|
|
|
|
|
|
|
|
|
PSU's outstanding, January 1, 2020
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Granted
|
|
50,127
|
|
|
6.17
|
|
|
|
|
|
|
Vested / Settled
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Forfeited / Canceled
|
|
—
|
|
|
—
|
|
|
|
|
|
|
PSU's outstanding, December 31, 2020
|
|
50,127
|
|
|
$
|
6.17
|
|
|
$
|
—
|
|
|
2.19
|
There were no PSU's granted during the year ended December 31, 2019.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17 - Supplemental Financial Information
Supplemental Balance Sheet Information
The following table summarizes the components of Prepaid expenses and other current assets and Other long-term assets, net as presented in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
Prepaid expenses and other current assets:
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
1,690
|
|
|
$
|
1,708
|
|
|
Prepaid income taxes
|
|
1,605
|
|
|
4,228
|
|
|
|
|
|
|
|
|
Other
|
|
1,302
|
|
|
1,896
|
|
|
|
|
$
|
4,597
|
|
|
$
|
7,832
|
|
|
Other long-term assets:
|
|
|
|
|
|
Upfront customer consideration (1)
|
|
$
|
7,490
|
|
|
$
|
—
|
|
|
Cabot receivable (1)
|
|
8,852
|
|
|
—
|
|
|
Right of use assets, operating leases, net
|
|
1,930
|
|
|
5,073
|
|
|
Spare parts, net
|
|
3,727
|
|
|
3,453
|
|
|
Mine development costs, net
|
|
4,338
|
|
|
7,084
|
|
|
Mine reclamation asset, net
|
|
1,712
|
|
|
2,451
|
|
|
Highview investment
|
|
552
|
|
|
552
|
|
|
Other long-term assets
|
|
1,388
|
|
|
1,718
|
|
|
|
|
$
|
29,989
|
|
|
$
|
20,331
|
|
(1) See further discussion of Upfront Customer Consideration in Note 3 and Cabot receivable in Note 4.
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 Five Forks Mine and are depleted over the estimated life of the related mine reserves, which is 16 years. 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. Mine reclamation asset represents the ARO asset related to the Five Forks Mine and is depreciated over its estimated life.
The Company holds a long-term investment (the "Highview Investment") in Highview Enterprises Limited ("Highview"), a London, England based developmental stage company specializing in power storage. In November 2014, the Company acquired an 8% ownership interest in the common stock of Highview for $2.8 million in cash. The Company accounts for the Highview Investment as an investment recorded at cost, less impairment, plus or minus observable changes in price for identical or similar investments of the same issuer.
The Highview Investment is evaluated for indicators of impairment such as an event or change in circumstances that may have a significant adverse effect on the fair value of the investment. There were no changes to the carrying value of the Highview Investment for the years ended December 31, 2020 and 2019 as there were no indicators of impairment or observable price changes for equity issued by Highview. Since the purchase date, the Company has recognized $2.2 million of cumulative impairment losses on the Highview Investment.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table details the components of Other current liabilities and Other long-term liabilities as presented in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
Other current liabilities:
|
|
|
|
|
|
Current portion of operating lease obligations
|
|
$
|
1,883
|
|
|
$
|
2,382
|
|
|
Accrued interest
|
|
69
|
|
|
213
|
|
|
Income and other taxes payable
|
|
1,305
|
|
|
678
|
|
|
Current portion of mine reclamation liability
|
|
9,370
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
369
|
|
|
1,038
|
|
|
|
|
$
|
12,996
|
|
|
$
|
4,311
|
|
|
Other long-term liabilities:
|
|
|
|
|
|
Operating lease obligations, long-term
|
|
$
|
1,109
|
|
|
$
|
2,810
|
|
|
Mine reclamation liabilities
|
|
12,077
|
|
|
2,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
287
|
|
|
229
|
|
|
|
|
$
|
13,473
|
|
|
$
|
5,760
|
|
The Mine reclamation liability related to the Five Forks Mine is included in Other long-term liabilities. The Mine reclamation liability related to Marshall Mine, which was assumed in the Marshall Mine Acquisition is included in Other current liabilities and Other long-term liabilities. The Mine reclamation liabilities represent AROs. Changes in the AROs were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
Asset retirement obligations, beginning of year
|
|
$
|
2,721
|
|
|
$
|
624
|
|
|
Asset retirement obligations assumed
|
|
21,328
|
|
|
1,776
|
|
|
Accretion
|
|
543
|
|
|
205
|
|
|
Liabilities settled
|
|
(3,565)
|
|
|
(78)
|
|
|
Changes due to scope and timing of reclamation
|
|
420
|
|
|
194
|
|
|
Asset retirement obligations, end of year
|
|
21,447
|
|
|
2,721
|
|
|
Less current portion
|
|
9,370
|
|
|
—
|
|
|
Asset retirement obligations, long-term
|
|
$
|
12,077
|
|
|
$
|
2,721
|
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Supplemental Consolidated Statements of Operations Information
Gain on Settlement
On December 29, 2020, the Company and a former customer (the "Parties") reached a settlement (the "Settlement") on various litigation matters (the "Litigation Matters") that resulted in the former customer (the "Former Customer") agreeing to pay to the Company cash of $2.5 million (the "Settlement Amount"), which was received on January 27, 2021. This payment was in exchange for full dissolution of all claims and counterclaims that the two Parties have asserted or could have asserted against each other in the Litigation Matters, or which have arisen or may arise against each other but are presently unknown, arising out of or related to the Litigation Matters and related to any other of the Parties’ business dealings, conduct and/or transactions through the date of the Settlement, including all claims for damages, fees, costs, sanctions, or any other amounts due or to become due in connection with the foregoing.
The Company applied the Settlement Amount cash proceeds to both an outstanding trade account receivable and note receivable due from the Former Customer and recognized the excess cash received as a gain on the Settlement of $1.1 million, which is reported as a component of operating expenses in the Consolidated Statements of Operations for the year ended December 31, 2020. The gain on settlement impacted operating income for the quarterly period ended December 31, 2020.
The following table details the components of Interest expense in the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
Interest on Senior Term Loan
|
|
$
|
1,708
|
|
|
$
|
4,112
|
|
|
|
|
Debt discount and debt issuance costs
|
|
1,418
|
|
|
1,678
|
|
|
|
|
453A interest
|
|
331
|
|
|
1,039
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
463
|
|
|
345
|
|
|
|
|
|
|
$
|
3,920
|
|
|
$
|
7,174
|
|
|
|
The following table details the components of Other in the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
Interest income
|
|
$
|
127
|
|
|
$
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
5
|
|
|
166
|
|
|
|
|
|
|
$
|
132
|
|
|
$
|
427
|
|
|
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 18 - Income Taxes
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
(in thousands, except for rate)
|
|
2020
|
|
2019
|
|
|
|
Current portion of income tax expense:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,666
|
|
|
$
|
2,133
|
|
|
|
|
State and other
|
|
1,354
|
|
|
1,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,020
|
|
|
3,344
|
|
|
|
|
Deferred portion of income tax expense (benefit):
|
|
|
|
|
|
|
|
Federal
|
|
5,068
|
|
|
10,491
|
|
|
|
|
State and other
|
|
(1,577)
|
|
|
(1,836)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,491
|
|
|
8,655
|
|
|
|
|
Total income tax expense
|
|
$
|
6,511
|
|
|
$
|
11,999
|
|
|
|
|
Effective tax rate
|
|
(47)
|
%
|
|
25
|
%
|
|
|
Income tax expense differs from the amount that would be computed by applying the U.S. statutory federal income tax rate of 21% for the years ended December 31, 2020 and 2019 to income before income taxes as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
(in thousands)
|
|
2020
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal statutory rate
|
|
$
|
(2,896)
|
|
|
|
|
$
|
10,027
|
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit
|
|
(410)
|
|
|
|
|
1,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permanent differences
|
|
326
|
|
|
|
|
286
|
|
|
|
|
|
|
|
|
Tax credits
|
|
(417)
|
|
|
|
|
(338)
|
|
|
|
|
|
|
|
|
Valuation allowances
|
|
9,148
|
|
|
|
|
(288)
|
|
|
|
|
|
|
|
|
Changes in tax rates
|
|
(97)
|
|
|
|
|
229
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
285
|
|
|
|
|
112
|
|
|
|
|
|
|
|
|
Return to provision and other true-ups
|
|
572
|
|
|
|
|
138
|
|
|
|
|
|
|
|
|
UTP liability
|
|
—
|
|
|
|
|
236
|
|
|
|
|
|
|
|
|
Expense for the provision for income taxes
|
|
$
|
6,511
|
|
|
|
|
$
|
11,999
|
|
|
|
|
|
|
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and their reported amounts in the accompanying Consolidated Balance Sheets. These temporary differences result in taxable or deductible amounts in future years. Details of the Company’s deferred tax assets and liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
Deferred tax assets
|
|
|
|
|
|
Tax credits
|
|
$
|
93,874
|
|
|
$
|
98,541
|
|
|
Equity method investments
|
|
5,149
|
|
|
—
|
|
|
Net operating loss carryforwards
|
|
2,906
|
|
|
2,956
|
|
|
Intangible assets
|
|
2,765
|
|
|
1,574
|
|
|
ARO, net of reimbursements
|
|
2,167
|
|
|
80
|
|
|
Employee related liabilities
|
|
827
|
|
|
1,065
|
|
|
Other investments
|
|
548
|
|
|
555
|
|
|
Operating lease obligations
|
|
508
|
|
|
1,307
|
|
|
Inventory
|
|
—
|
|
|
507
|
|
|
Other
|
|
69
|
|
|
244
|
|
|
Total deferred tax assets
|
|
108,813
|
|
|
106,829
|
|
|
Less valuation allowance
|
|
(88,758)
|
|
|
(79,610)
|
|
|
Deferred tax assets
|
|
20,055
|
|
|
27,219
|
|
|
Less: Deferred tax liabilities
|
|
|
|
|
|
Property and equipment and other
|
|
(7,039)
|
|
|
(11,087)
|
|
|
Equity method investments
|
|
—
|
|
|
(736)
|
|
|
Upfront customer consideration
|
|
(1,847)
|
|
|
—
|
|
|
Right of use operating lease assets
|
|
(270)
|
|
|
(1,301)
|
|
|
Inventory
|
|
(295)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
(9,451)
|
|
|
(13,124)
|
|
|
Net deferred tax assets
|
|
$
|
10,604
|
|
|
$
|
14,095
|
|
Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against their deferred tax asset based on an assessment of the amount of the deferred tax asset that is “more likely than not” to be realized. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized.
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 a deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating taxes, the Company assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial, and regulatory guidance.
As of December 31, 2020, the Company concluded it is more likely than not the Company will generate sufficient taxable income within the applicable net operating loss and tax credit carry-forward periods to realize $10.6 million of its net deferred tax assets, which resulted in an increase in the valuation allowance from December 31, 2019 of $9.1 million. In reaching this conclusion, the Company primarily considered: (1) the future reversal of existing temporary differences; and (2) forecasts of future taxable income.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table presents the approximate amount of state net operating loss carryforwards and federal tax credit carryforwards available to reduce future taxable income, along with the respective range of years that the net operating loss and tax credit carryforwards would expire if not utilized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
Beginning expiration year
|
|
Ending expiration year
|
|
Foreign net operating loss carryforwards
|
|
$
|
656
|
|
|
2041
|
|
2041
|
|
State and other operating loss carryforwards
|
|
$
|
2,250
|
|
|
2021
|
|
2036
|
|
Federal tax credit carryforwards
|
|
$
|
93,874
|
|
|
2032
|
|
2040
|
The following table sets forth a reconciliation of the beginning and ending unrecognized tax benefits on a gross basis for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
Balance as of January 1
|
|
$
|
946
|
|
|
$
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases for tax positions of prior years
|
|
—
|
|
|
892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
$
|
946
|
|
|
$
|
946
|
|
|
|
Included in the balance of unrecognized tax benefits as of December 31, 2020 and December 31, 2019 is $0.7 million of tax benefits that, if utilized, would result in an adjustment to deferred taxes.
The Company did not record any adjustments or recognize interest expense for uncertain tax positions for the years ended December 31, 2020 and 2019. Interest and penalties related to uncertain tax positions are accrued and included in the Interest expense line item in the Consolidated Statements of Operations. Additionally, the Company recognizes interest expense related to the federal tax treatment of RC facilities at Tinuum Group in the Interest expense line item in the Consolidated Statements of Operations. Additional information related to the components of Interest expense is included in Note 17.
The Company files income tax returns in the U.S. and various states. The Company is no longer subject to U.S. federal examinations by tax authorities for years before 2017. The Company is generally no longer subject to state examinations by tax authorities for years before 2013.
Note 19 - 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 assessing financial performance. As of December 31, 2020, the Company's CODM was the Company's CEO. The Company's operating and reportable segments are organized by products and services provided.
As of December 31, 2020, the Company has two reportable segments: (1) Refined Coal ("RC"); and (2) Advanced Purification Technologies ("APT").
Given the downward trends in the coal-fired power generation market, the prices of competing power generation sources as well as the expected expiration of the Section 45 tax credit period as of December 31, 2021, during 2020 we initiated plans to expand our AC products and diversify into new markets. As a result, internal changes, including changes in operating structure and the method in which the Chief Operating Decision Maker ("CODM") allocates resources, resulted in the change in reportable segments. The Company has recast segment information below for the year ended December 31, 2019 to be consistent with the new reportable segments as of December 31, 2020.
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 except as described below.
•Segment revenues include equity method earnings and losses from the Company's equity method investments.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
•Segment operating income (loss) includes segment revenues and allocation of certain "Corporate general and administrative expenses," which includes Payroll and benefits, General and administrative, and Depreciation, amortization, depletion and accretion.
•RC segment operating income includes interest expense directly attributable to the RC segment.
As of December 31, 2020 and 2019, substantially all of the Company's material assets are located in the U.S. and all significant customers are U.S. companies. The following table presents the Company's operating segment results for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Refined Coal:
|
|
|
|
|
|
|
|
Earnings in equity method investments
|
|
$
|
30,978
|
|
|
$
|
69,176
|
|
|
|
|
|
|
|
|
|
|
|
|
License royalties, related party
|
|
13,440
|
|
|
16,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,418
|
|
|
86,075
|
|
|
|
|
Advanced Purification Technologies:
|
|
|
|
|
|
|
|
Consumables
|
|
48,122
|
|
|
53,187
|
|
|
|
|
Other
|
|
15
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,137
|
|
|
53,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment reporting revenues
|
|
92,555
|
|
|
139,262
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile to reported revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings in equity method investments
|
|
(30,978)
|
|
|
(69,176)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reported revenues
|
|
$
|
61,577
|
|
|
$
|
70,086
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refined Coal (1)
|
|
$
|
42,689
|
|
|
$
|
83,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advanced Purification Technologies (2)
|
|
(39,958)
|
|
|
(13,600)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
2,731
|
|
|
$
|
69,871
|
|
|
|
(1) Included in RC segment operating income for the years ended December 31, 2020 and 2019 is 453A interest expense of $0.3 million and $1.0 million, respectively.
(2) Included in APT segment operating loss for the years ended December 31, 2020 and 2019 was $7.9 million and $7.2 million, respectively, of depreciation, amortization, depletion and accretion expenses on mine and plant related long-lived assets and liabilities. Included in APT segment operating loss for the year ended December 31, 2020 was an impairment charge of $26.1 million, offset by a gain on settlement of $1.1 million. Included in APT segment operating loss for the year ended December 31, 2019 was approximately $5.0 million of amortization expense related to the fair value of inventory.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A reconciliation of reportable segment operating income to the Company's consolidated net income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Total reported segment operating income
|
|
$
|
2,731
|
|
|
$
|
69,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile to (loss) income before income tax expense attributable to the Company:
|
|
|
|
|
|
|
|
Corporate payroll and benefits
|
|
(2,866)
|
|
|
(2,592)
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate legal and professional fees
|
|
(4,954)
|
|
|
(7,485)
|
|
|
|
|
Corporate general and administrative
|
|
(5,096)
|
|
|
(6,836)
|
|
|
|
|
Corporate depreciation and amortization
|
|
(551)
|
|
|
(82)
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate interest expense, net
|
|
(3,060)
|
|
|
(5,767)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
5
|
|
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income tax expense
|
|
$
|
(13,791)
|
|
|
$
|
47,536
|
|
|
|
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.
A reconciliation of reportable segment assets to the Company's consolidated assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
Assets:
|
|
|
|
|
|
Refined Coal (1)
|
|
$
|
11,516
|
|
|
$
|
43,953
|
|
|
Advanced Purification Technologies (2)
|
|
80,877
|
|
|
90,083
|
|
|
Total segment assets
|
|
92,393
|
|
|
134,036
|
|
|
|
|
|
|
|
|
Corporate (3)
|
|
54,278
|
|
|
39,763
|
|
|
Consolidated
|
|
$
|
146,671
|
|
|
$
|
173,799
|
|
(1) Includes $7.7 million and $39.2 million of investments in equity method investees as of December 31, 2020 and 2019, respectively.
(2) Includes $34.6 million and $56.5 million of long-lived assets, net. Expenditures for additions to long-lived assets were $7.3 million and $12.6 million, respectively, for the years ended December 31, 2020 and 2019.
(3) Includes the Company's net deferred tax assets of $10.6 million and $14.1 million as of December 31, 2020 and 2019, respectively.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 20 - Fair Value Measurements
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, deposits 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 December 31, 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
|
|
$
|
228
|
|
|
$
|
228
|
|
|
$
|
220
|
|
|
$
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentration of credit risk
As of December 31, 2020, 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 three financial institutions as of December 31, 2020. If those institutions were unable to perform their obligations, the Company would be at risk regarding the amount of its cash balance in excess of the federal deposit insurance corporation limits ($250 thousand).
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of December 31, 2020 and December 31, 2019, the Company had no material 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, the Company recorded an impairment charge related to the Asset Group based on a valuation model that included an expected future discounted cash flow model using Level 3 inputs.
The Company completed the Carbon Solutions Acquisition, in which the fair value of the purchase consideration totaled $66.5 million. The Company's estimated fair values of the assets acquired and liabilities assumed are disclosed in Note 8. The fair value measurements represent Level 3 measurements as they were based on significant inputs not observable in the market.
As noted in Note 17, 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. Fair value measurements, if any, represent either Level 2 or Level 3 measurements.
Note 21 - Major Customers
Revenues from external customers who represent 10% or more of the Company’s revenues for the years ended December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
Customer
|
|
Revenue Type
|
|
Segment(s)
|
|
2020
|
|
2019
|
|
|
|
A
|
|
License royalties, related party
|
|
RC
|
|
22%
|
|
24%
|
|
|
|
B
|
|
Consumables
|
|
APT
|
|
10%
|
|
10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 22 - Related Party Transactions
Accounts Receivable
The following table shows the Company's receivable balance associated with related parties as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
Receivable from related party - Tinuum Group
|
|
$
|
3,453
|
|
|
$
|
4,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
The following table shows the income recognized with related parties during the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
License royalties, related party - Tinuum Group
|
|
$
|
13,440
|
|
|
$
|
16,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above Tinuum Group royalties are included in the License royalties, related party line in the Consolidated Statements of Operations.
Note 23 - Defined Contribution Savings Plans
The Company sponsors a qualified defined contribution savings plan (the "401(k) Plan") that allows participation by eligible employees who may defer a portion of their gross pay. The Company makes contributions to the 401(k) Plan based on percentages of an employee's eligible compensation as specified in the 401(k) Plan, and such employer contributions are in the form of cash. Prior to January 1, 2020, the Company sponsored two 401(k) Plans, which were merged effective January 1, 2020.
The following table presents the amount of the Company's contributions made to the 401(k) Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(in thousands)
|
|
2020
|
|
2019
|
|
|
|
401(k) Plans employer contributions
|
|
$
|
484
|
|
|
$
|
553
|
|
|
|
Note 24 - Restructuring and Other Compensation
Restructuring
For the years ended December 31, 2020 and 2019, the Company did not record material restructuring charges.
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.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A summary of the net pretax charges incurred is as follows: The following table summarizes the Company's utilization of restructuring accruals for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Employee Severance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning accrual as of January 1, 2019
|
|
$
|
2,208
|
|
|
|
|
Expense provision
|
|
172
|
|
|
|
|
Cash payments and other
|
|
(2,051)
|
|
|
|
|
Change in estimates
|
|
(75)
|
|
|
|
|
|
|
|
|
|
|
Accrual as of December 31, 2019
|
|
254
|
|
|
|
|
Expense provision
|
|
1,403
|
|
|
|
|
Cash payments and other
|
|
(1,386)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual as of December 31, 2020
|
|
$
|
271
|
|
|
|
For the years ended December 31, 2020 and 2019, included in the Expense provision and Cash payments and other line items in the above table is stock-based compensation of $0.6 million and zero, respectively, resulting from the accelerated vesting of equity-based compensation awards for certain terminated employees.
Restructuring accruals related to personnel are included in the Accrued payroll and related liabilities line item in the Consolidated Balance Sheets. Restructuring expenses related to personnel are included in the Payroll and benefits and Impairment of long-lived assets line items in the Consolidated Statements of Operations.
Note 25 - Quarterly Financial Results (unaudited)
Summarized quarterly results for the two years ended December 31, 2020 and December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
(in thousands, except per share data)
|
|
December 31, 2020
|
|
September 30, 2020
|
|
June 30, 2020
|
|
March 31, 2020
|
|
Revenues
|
|
$
|
18,360
|
|
|
$
|
19,471
|
|
|
$
|
11,483
|
|
|
$
|
12,263
|
|
|
Cost of revenues, exclusive of operating expenses shown below
|
|
10,693
|
|
|
15,013
|
|
|
7,416
|
|
|
11,491
|
|
|
Other operating expenses
|
|
6,117
|
|
(1)
|
7,283
|
|
|
35,132
|
|
|
9,413
|
|
|
Operating income (loss)
|
|
1,550
|
|
|
(2,825)
|
|
|
(31,065)
|
|
|
(8,641)
|
|
|
Earnings from equity method investments
|
|
5,019
|
|
|
9,518
|
|
|
8,168
|
|
|
8,273
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses, net
|
|
(943)
|
|
|
(864)
|
|
|
(814)
|
|
|
(1,167)
|
|
|
Income (loss) before income tax expense
|
|
5,626
|
|
|
5,829
|
|
|
(23,711)
|
|
|
(1,535)
|
|
|
Income tax expense
|
|
5,196
|
|
(2)
|
854
|
|
|
103
|
|
|
358
|
|
|
Net income (loss)
|
|
$
|
430
|
|
|
$
|
4,975
|
|
|
$
|
(23,814)
|
|
|
$
|
(1,893)
|
|
|
Earnings (loss) per common share – basic
|
|
$
|
0.02
|
|
|
$
|
0.27
|
|
|
$
|
(1.32)
|
|
|
$
|
(0.11)
|
|
|
Earnings (loss) per common share – diluted
|
|
$
|
0.02
|
|
|
$
|
0.27
|
|
|
$
|
(1.32)
|
|
|
$
|
(0.11)
|
|
|
Weighted-average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
|
18,109
|
|
|
18,093
|
|
|
18,014
|
|
|
17,932
|
|
|
Diluted
|
|
18,167
|
|
|
18,103
|
|
|
18,014
|
|
|
17,932
|
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
|
(in thousands, except per share data)
|
|
December 31, 2019
|
|
September 30, 2019
|
|
June 30, 2019
|
|
March 31, 2019
|
|
Revenues
|
|
$
|
16,047
|
|
|
$
|
19,133
|
|
|
$
|
15,577
|
|
|
$
|
19,329
|
|
|
Cost of revenues, exclusive of operating expenses shown below
|
|
11,104
|
|
|
11,939
|
|
|
12,292
|
|
|
14,108
|
|
|
Other operating expenses
|
|
9,630
|
|
|
9,585
|
|
|
7,545
|
|
|
8,776
|
|
|
Operating loss
|
|
(4,687)
|
|
|
(2,391)
|
|
|
(4,260)
|
|
|
(3,555)
|
|
|
Earnings from equity method investments
|
|
12,125
|
|
|
14,426
|
|
|
20,935
|
|
|
21,690
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses, net
|
|
(1,269)
|
|
|
(1,517)
|
|
|
(1,927)
|
|
|
(2,034)
|
|
|
Income before income tax expense
|
|
6,169
|
|
|
10,518
|
|
|
14,748
|
|
|
16,101
|
|
|
Income tax (benefit) expense
|
|
(2,929)
|
|
(3)
|
6,595
|
|
|
6,634
|
|
|
1,699
|
|
|
Net income
|
|
$
|
9,098
|
|
|
$
|
3,923
|
|
|
$
|
8,114
|
|
|
$
|
14,402
|
|
|
Earnings per common share – basic
|
|
$
|
0.50
|
|
|
$
|
0.22
|
|
|
$
|
0.45
|
|
|
$
|
0.79
|
|
|
Earnings per common share – diluted
|
|
$
|
0.50
|
|
|
$
|
0.21
|
|
|
$
|
0.44
|
|
|
$
|
0.78
|
|
|
Weighted-average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
|
18,066
|
|
|
18,112
|
|
|
18,172
|
|
|
18,268
|
|
|
Diluted
|
|
18,275
|
|
|
18,339
|
|
|
18,377
|
|
|
18,433
|
|
(1) During the fourth quarter of 2020, the Company recorded a gain on settlement of 1.1 million related to the Settlement reached with the Former Customer as further described in Note 17.
(2) During the fourth quarter of 2020, the Company recorded income tax expense of $5.2 million primarily due to an increase in the valuation allowance as of December 31, 2020 related to the Company's deferred income tax assets.
(3) During the fourth quarter of 2019, the Company recorded income tax benefit of $2.9 million primarily due to a decrease in current income tax expense compared to current income tax recorded from the nine months ended September 30, 2019. This decrease was primarily due to a decrease in income before income tax expense for the year ended December 31, 2019 compared to the estimated annual income before income tax expense that was used in computing current income tax expense for the nine months ended September 30, 2019.
Note 26 - Subsequent Events
Unless disclosed elsewhere in the notes to the Consolidated Financial Statements, the following are the significant matters that occurred subsequent to December 31, 2020.
In February 2021, the Company entered into a 5-year supply agreement with Cabot Norit Nederland B.V., a subsidiary of Cabot Corporation ("Cabot"), to supply Cabot with lignite activated carbon products and other ADES proprietary products used for mercury removal in utility and industrial coal-fired power plants. Cabot will be the exclusive and sole reseller of the products within Europe, Turkey, the Middle East and Africa.