Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
This Form 10-K for the year ended
December 31, 2018
is filed by Advanced Emissions Solutions, Inc. together with its consolidated subsidiaries (collectively, "ADES," the "Company," "we," "us," or "our" unless the context indicates otherwise).
We are a leader in emissions reductions technologies through consumables that utilize powdered activated carbon (“PAC”) and chemical based technologies, primarily serving the coal-fired power generation and industrial boiler industries. Our proprietary environmental technologies and specialty chemicals enable our customers to reduce emissions of mercury and other pollutants, maximize utilization levels and improve operating efficiencies to meet the challenges of existing and potential emissions control regulations. See further discussion of our business included in Item 1 -
"Business" ("Item 1") of this Report. Discussion regarding segment information is included within the discussion of our consolidated results under this Item 7. Additionally, discussion related to our reportable segments is included in Item 1 and
Note 14
of the Consolidated Financial Statements included in Item 8 of this Report.
On December 7, 2018 (the “Acquisition Date”), we acquired all of the outstanding equity interests (the "Carbon Solutions Acquisition”) of ADA Carbon Solutions, LLC (“CS” or “Carbon Solutions”). Carbon Solutions is an activated carbon company and the North American leader in mercury capture using powdered activated carbon for the coal-fired power plant, industrial and water treatment markets. Carbon Solutions owns and operates an activated carbon (“AC”) manufacturing and processing facility. It also owns an associated lignite mine that supplies the raw material for the powdered activated carbon plant (“Five Forks Mine”). Our operating results for 2018 include the operating results of Carbon Solutions for the period from December 7, 2018 to December 31, 2018.
On December 7, 2018, ADES 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 related parties, entered into the Term Loan and Security Agreement (the "Senior Term Loan") in the principal 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.
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 costs of revenue
Consumables
We sell PAC and proprietary chemical blends to coal-fired utilities and other industrial boilers that allow the respective utilities to comply with the regulatory emissions standards. Additionally, we also sell PAC to water treatment plants to remove contaminants from the water. Revenue is generally recorded upon delivery of our product.
Certain customer contracts are comprised of evaluation tests ("Evaluation Tests") of the Company's chemicals' effectiveness and efficiency in reducing emissions and entail the delivery of products to the customer and the Company evaluating results of emissions reduction over the term of the contract. The Company generally recognizes revenue from Evaluation Tests over the duration of the contract based on the cost of product consumed by the customer.
License royalties, related party
We license our M-45
TM
and M-45-PC
TM
emission control technologies ("M-45 License") to Tinuum Group and realize royalty income based upon a percentage of the per-ton, pre-tax margin as defined in the M-45 License.
Equipment sales
Equipment sales represent the sale of activated carbon injection ("ACI") systems to control mercury, dry sorbent injection ("DSI") systems to control sulfur dioxide (SO
2)
, sulfur trioxide (SO
3)
, and hydrogen chloride (HCl) and electrostatic precipitator ("ESP") liquid flue gas conditioning systems. Revenue from extended equipment contracts was recorded using the completed contract method of accounting.
We also may enter into other non-extended equipment contracts for which we generally recognize revenues on a time and material basis as services to build equipment systems are performed or as equipment is delivered.
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.
Rent and occupancy
Rent and occupancy costs include rent, insurance, and other occupancy-related expenses.
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 intangibles. Depletion and accretion expense consists of depletion expense related to the depletion of mine development costs and the accretion of a mine reclamation liability.
Other Income (Expense), net
Earnings from equity method investments
Earnings from equity method investments relates to our share of earnings (losses) related to our equity method investments.
Our equity method earnings in Tinuum Group, LLC ("Tinuum Group"), a related party in which we own a
42.5%
equity interest and a 50% voting interest, are positively impacted when Tinuum Group obtains an investor in a refined coal ("RC") facility and receives lease payments from the lessee, or purchase payments from the sale, of the RC facility. If Tinuum Group operates a retained RC facility, the Company's equity method earnings will be 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, will increase our consolidated net income as a result of a reduction in income tax expense.
Tinuum Services, LLC ("Tinuum Services"), a related party in which we own both a 50% equity and voting interest, operates and maintains RC facilities under operating and maintenance agreements. Tinuum Group or the lessee/owner of the RC facilities 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. For
2017
, miscellaneous items included an adjustment to a litigation loss accrual and changes in estimate related to royalty indemnity expense.
We record interest expense related to our Senior Term Loan and capital leases, as well as through our share of Tinuum Group's equity method earnings for RC facility leases or sales that are treated as installment sales for tax purposes. IRC Section 453A ("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. We refer to this as "453A interest."
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 results for the year ended December 31, 2018 include the results of operations of Carbon Solutions from the Acquisition Date through December 31. 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, 2018
Compared to
Year ended December 31, 2017
Total Revenue and Cost of Revenue
A summary of the components of revenues and cost of revenue for the years ended
December 31, 2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
(
Amounts in thousands except percentages
)
|
|
2018
|
|
2017
|
|
($)
|
|
(%)
|
Revenues:
|
|
|
|
|
|
|
|
|
Consumables
|
|
$
|
8,733
|
|
|
$
|
4,246
|
|
|
$
|
4,487
|
|
|
106
|
%
|
License royalties, related party
|
|
15,140
|
|
|
9,672
|
|
|
5,468
|
|
|
57
|
%
|
Equipment sales
|
|
72
|
|
|
31,446
|
|
|
(31,374
|
)
|
|
(100
|
)%
|
Total revenues
|
|
$
|
23,945
|
|
|
$
|
45,364
|
|
|
$
|
(21,419
|
)
|
|
(47
|
)%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Consumables cost of revenue, exclusive of depreciation and amortization
|
|
$
|
6,606
|
|
|
$
|
3,434
|
|
|
$
|
3,172
|
|
|
92
|
%
|
Equipment cost of revenue, exclusive of depreciation and amortization
|
|
$
|
(353
|
)
|
|
$
|
28,451
|
|
|
$
|
(28,804
|
)
|
|
(101
|
)%
|
Consumables
and consumables cost of revenue
For the years ended
December 31, 2018
and
2017
, consumables revenue
increased
year over year primarily due to the Carbon Solutions Acquisition on December 7, 2018. Carbon Solutions contributed consumables revenue of
$5.6 million
of the total consumables revenue for the
year ended December 31, 2018
. Excluding Carbon Solutions' consumables revenues, consumables revenues decreased year over year primarily due to a significant decrease in sales to two customers, partially offset by increased sales to new customers in
2018
. The total pounds of our chemicals sold decreased year over year and gross margins decreased year over year primarily due to ongoing price compression. During the
year ended December 31, 2018
, revenues from Evaluation Tests increased year over year primarily from two significant customer contracts that were completed in
2018
. Cost of consumables revenue for Carbon Solutions for 2018 was
$3.4 million
and excluding this amount cost of consumables revenue increased year over year. This increase was primarily due to significant costs incurred that exceeded revenues by $0.5 million on one of the Evaluation Test contracts, which was the primary negative impact on our overall consumables gross margin for
2018
.
Consumables cost of revenue will be negatively impacted in 2019 due to the amortization of a step-up in inventory fair value of approximately $5.0 million related to the Carbon Solutions Acquisition.
License royalties, related party
Royalty income increased in
2018
compared to
2017
primarily due to Tinuum Group obtaining tax equity investors for
two
incremental RC facilities during
2018
and to the full year of operations in
2018
of the four incremental RC facilities sold or leased to tax equity investors in
2017
, all of which use our M-45 License. The total facilities that use our M-45 License increased from
10
facilities in
2017
to
12
facilities in
2018
. The increase in facilities resulted in an increase in rental and sales payments to Tinuum Group and an increase in the related tons produced and sold subject to the M-45 License. During the years ended
December 31, 2018
and
2017
, there were
37.3 million
tons and
22.6 million
tons, respectively, of RC produced using the M-45 License.
Equipment sales
and Equipment sales cost of revenue
During the years ended
December 31, 2018
and
2017
, we did not enter into any long-term (6 months or longer) fixed price contracts to supply ACI systems. As of
December 31, 2017
, all ACI system contracts were completed. During the year ended
December 31, 2017
, we completed
four
ACI systems, recognizing revenues of
$3.4 million
and cost of revenue of
$2.4 million
.
During the years ended
December 31, 2018
and
2017
, we did not enter into any long term (6 months or longer) fixed price contracts to supply DSI systems. During the year ended
December 31, 2017
, we completed
five
DSI systems, recognizing revenues of
$27.8 million
and cost of revenue of
$26.0 million
. As of January 1, 2018, all revenues and costs of revenues were recognized on the three DSI system uncompleted contracts as of December 31, 2017 upon the adoption of the new revenue accounting standard,
ASC 606 - Revenue from Contracts with Customers
.
The remaining changes were due to other equipment sales.
Demand for ACI and DSI system contracts historically was driven by coal-fired power plant utilities that need to comply with Federal Mercury and Air Toxics Standards ("MATS") and Maximum Achievable Control Technology Standards ("MACT"). As
the deadline for these standards has passed, we do not expect to enter into any future long-term fixed price contracts for ACI and DSI systems.
Additional information related to revenue concentrations and contributions by class and reportable segment can be found within the segment discussion below and in
Note 6
and
Note 15
to the Consolidated Financial Statements included in Item 8 of this Report.
Other Operating Expenses
A summary of the components of our operating expenses, exclusive of cost of revenue items (presented above), for the years ended
December 31, 2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
(in thousands, except percentages)
|
|
2018
|
|
2017
|
|
($)
|
|
(%)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Payroll and benefits
|
|
$
|
10,639
|
|
|
$
|
7,669
|
|
|
$
|
2,970
|
|
|
39
|
%
|
Rent and occupancy
|
|
1,141
|
|
|
795
|
|
|
346
|
|
|
44
|
%
|
Legal and professional fees
|
|
8,230
|
|
|
4,354
|
|
|
3,876
|
|
|
89
|
%
|
General and administrative
|
|
3,359
|
|
|
4,014
|
|
|
(655
|
)
|
|
(16
|
)%
|
Depreciation, amortization, depletion, and accretion
|
|
723
|
|
|
789
|
|
|
(66
|
)
|
|
(8
|
)%
|
|
|
$
|
24,092
|
|
|
$
|
17,621
|
|
|
$
|
6,471
|
|
|
37
|
%
|
Payroll and benefits
Payroll and benefits expenses
increased
in
2018
compared to
2017
primarily due to restructuring expenses in connection with the departure of certain executive officers and management's alignment of the business with strategic objectives during 2018, as well as the elimination of certain duplicative positions in connection with the Carbon Solutions Acquisition. During the year ended
December 31, 2018
, we recorded net restructuring charges of
$3.1 million
. As of December 31, 2018,
$2.2 million
of this expense remained accrued. Payment of accrued amounts is expected to occur during 2019 from cash on hand. There were no material restructuring expenses recorded in
2017
. Additionally, payroll-related expenses increased due to the increase in headcount of personnel from the Carbon Solutions Acquisition, which resulted in an increase in average headcount of
10%
for
2018
compared to
2017
. We expect an increase in future recurring payroll-related expense due to the Carbon Solutions Acquisition.
Rent and occupancy
Rent and occupancy expenses
increased
in
2018
compared to
2017
primarily due to lower rent and occupancy expense in
2017
as a result of the relocation of our corporate headquarters in the first quarter of
2017
and the acceleration of deferred rent and tenant improvement allowances recorded in
2017
associated with the termination of the lease agreement of our former corporate headquarters.
Legal and professional fees
Legal and professional fees expenses
increased
in
2018
compared to
2017
as a result of costs incurred related to the Carbon Solutions Acquisition of approximately
$4.5 million
as well as an increase in consulting fees related to ongoing clarification of federal income tax reform of
$0.5 million
. These costs were partially offset by a decrease in costs related to outsourced shared service costs, including legal and audit fees.
General and administrative
General and administrative expenses decreased in
2018
compared to
2017
primarily due to a $0.4 million reserve on an asset related to a letter of credit drawn by a former customer that was recorded during the year ended December 31, 2017. Additional decreases included a reduction in general operating expenses of approximately $0.4 million, which included decreases in outsourced IT costs and outside director expenses. Offsetting these decreases was an increase in bad debt expense incurred of $0.2 million.
Depreciation, amortization, depletion, and accretion
Depreciation and amortization expense
decreased
in
2018
compared to
2017
primarily due to higher depreciation recorded in 2017 related to the acceleration of depreciation on certain fixed assets that were disposed of in connection with our corporate office relocation, which was completed in the first quarter of
2017
. This decrease is offset by the addition of long-lived assets
acquired as part of the Carbon Solutions Acquisition, which contributed approximately $0.4 million of depreciation expense for the period between Acquisition Date and December 31, 2018.
Other Income (Expense), net
A summary of the components of our other income (expense), net for the years ended
December 31, 2018
and
2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
(Amounts in thousands, except percentages)
|
|
2018
|
|
2017
|
|
($)
|
|
(%)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Earnings from equity method investments
|
|
$
|
54,208
|
|
|
$
|
53,843
|
|
|
$
|
365
|
|
|
1
|
%
|
Interest income
|
|
239
|
|
|
54
|
|
|
185
|
|
|
343
|
%
|
Interest expense
|
|
(2,151
|
)
|
|
(3,024
|
)
|
|
873
|
|
|
(29
|
)%
|
Litigation settlement and royalty indemnity expense, net
|
|
—
|
|
|
3,269
|
|
|
(3,269
|
)
|
|
(100
|
)%
|
Other
|
|
(19
|
)
|
|
2,025
|
|
|
(2,044
|
)
|
|
(101
|
)%
|
Total other income
|
|
$
|
52,277
|
|
|
$
|
56,167
|
|
|
$
|
(3,890
|
)
|
|
(7
|
)%
|
Earnings in equity method investments
The following table presents the equity method earnings, by investee, for the years ended
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
(in thousands)
|
|
2018
|
|
2017
|
|
($)
|
|
(%)
|
Earnings from Tinuum Group
|
|
$
|
47,175
|
|
|
$
|
48,875
|
|
|
$
|
(1,700
|
)
|
|
(3
|
)%
|
Earnings from Tinuum Services
|
|
7,033
|
|
|
4,963
|
|
|
2,070
|
|
|
42
|
%
|
Earnings from other
|
|
—
|
|
|
5
|
|
|
(5
|
)
|
|
(100
|
)%
|
Earnings from equity method investments
|
|
$
|
54,208
|
|
|
$
|
53,843
|
|
|
$
|
365
|
|
|
1
|
%
|
Earnings from equity method investments, and changes related thereto, are impacted by our most significant equity method investees: Tinuum Group and Tinuum Services. Earnings from equity method investments
increased
during the year ended
December 31, 2018
compared to
2017
primarily as a result of the addition of
two
invested facilities during
2018
. However, cash distributions to us from Tinuum Group, and related equity earnings, during
2018
were negatively impacted as a result of $17.6 million of capital expenditures incurred by Tinuum Group related to the engineering and installation of RC facilities. See the discussion below regarding the accounting of earnings from Tinuum Group.
During the year ended
December 31, 2018
, we recognized
$47.2 million
in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of
$57.7 million
for the year. During the year ended
December 31, 2017
, we recognized
$48.9 million
in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of
$46.6 million
for the year. The difference between our pro-rata share of Tinuum Group's net income and our earnings from our Tinuum Group equity method investment as reported on the Consolidated Statements of Operations relates to us receiving cumulative distributions in excess of the carrying value of the investment, and therefore recognizing such excess distributions as equity method earnings in the period the distributions occur, as discussed in more detail below.
As a result of cash flows from invested RC facilities, Tinuum Group distributions to us during the year ended
December 31, 2018
were
$47.2 million
, which resulted in us continuing to have cumulative cash distributions that exceeded our cumulative pro-rata share of Tinuum Group's net income as of
December 31, 2018
.
The following table for Tinuum Group presents our investment balance, equity earnings, cash distributions received and cash distributions in excess of the investment balance for the years ended
December 31, 2018
and
2017
(
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
|
|
12/31/2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(9,894
|
)
|
ADES proportionate share of net income from Tinuum Group (1)
|
|
2017 activity
|
|
46,551
|
|
|
46,551
|
|
|
—
|
|
|
—
|
|
Recovery of cash distributions in excess of investment balance (prior to cash distributions)
|
|
2017 activity
|
|
(9,894
|
)
|
|
(9,894
|
)
|
|
—
|
|
|
9,894
|
|
Cash distributions from Tinuum Group
|
|
2017 activity
|
|
(48,875
|
)
|
|
—
|
|
|
48,875
|
|
|
—
|
|
Adjustment for current year cash distributions in excess of investment balance
|
|
2017 activity
|
|
12,218
|
|
|
12,218
|
|
|
—
|
|
|
(12,218
|
)
|
Total investment balance, equity earnings (loss) and cash distributions
|
|
12/31/2017
|
|
—
|
|
|
48,875
|
|
|
48,875
|
|
|
(12,218
|
)
|
ADES proportionate share of net income from Tinuum Group (1)
|
|
2018 activity
|
|
57,721
|
|
|
57,721
|
|
|
—
|
|
|
—
|
|
Recovery of cash distributions in excess of investment balance (prior to cash distributions)
|
|
2018 activity
|
|
(12,218
|
)
|
|
(12,218
|
)
|
|
—
|
|
|
12,218
|
|
Cash distributions from Tinuum Group
|
|
2018 activity
|
|
(47,175
|
)
|
|
—
|
|
|
47,175
|
|
|
—
|
|
Adjustment for current year cash distributions in excess of investment balance
|
|
2018 activity
|
|
1,672
|
|
|
1,672
|
|
|
—
|
|
|
(1,672
|
)
|
Total investment balance, equity earnings and cash distributions
|
|
12/31/2018
|
|
$
|
—
|
|
|
$
|
47,175
|
|
|
$
|
47,175
|
|
|
$
|
(1,672
|
)
|
(1) The amounts of our
42.5%
proportionate share of net income as shown in the table above differ from mathematical calculations of the Company’s
42.5%
equity interest in Tinuum Group multiplied by the amounts of Net Income available to Class A members as shown in the table above of Tinuum Group results of operations due to adjustments related to the Class B preferred return.
Tinuum Group plans to adopt Accounting Standard Update (“ASU”) No. 2014-09 (Topic 606),
Revenue from Contracts with Customers
(“ASU 2014-09”) and ASU 2016-02 (Topic 842),
Leases
(“ASU 2016-02”) as of January 1, 2019. As a result of Tinuum Group’s adoption, we expect to record a cumulative adjustment of $37.2 million related to our portion of Tinuum Group's cumulative effect adjustment that will increase our Retained Earnings as of January 1, 2019. We expect that this adjustment will result in us no longer having cumulative cash distributions that exceed our cumulative pro-rata share of Tinuum Group's net income. Additionally, we expect that we will recognize equity earnings by recording our pro-rata share of Tinuum Group’s net income rather than based upon cash distributions on a go-forward basis. Upon adoption, we will assess the impact of the adjustment to our income tax position.
Tinuum Group's consolidated financial statements as of
December 31, 2018
and
2017
and for the years ended
December 31, 2018
and
2017
are included in Item 15 of this Report.
Equity earnings from our interest in Tinuum Services
increased
by
$2.1 million
in
2018
compared to
2017
. As of
December 31, 2018
and
2017
, Tinuum Services provided operating and maintenance services to
18
and 16 RC facilities, respectively. Tinuum Services derives earnings from both fixed-fee arrangements as well as fees that are tied to actual RC production, depending upon the specific RC facility operating and maintenance agreement.
Additional information related to equity method investments can be found in
Note 5
to the Consolidated Financial Statements included in Item 8 of this Report.
Tax Credits
We earned the following tax credits that may be available for future benefit related to the production of RC from the operation of retained RC facilities under the Internal Revenue Code ("IRC")
Section 45 - Production Tax Credit
("Section 45 tax credits"):
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Section 45 tax credits earned
|
|
$
|
7,031
|
|
|
$
|
3,496
|
|
The increase in the Section 45 tax credits earned during the year ended
December 31, 2018
compared to
December 31, 2017
was due to our direct ownership and Tinuum Group's ownership in an RC facility that generated tax credits for the entirety of 2018 compared to a six-month period in 2017.
As discussed in Item 1 of this Report, Tinuum Group operates and leases or sells facilities used in the production and sale of RC to third party tax equity investors. All dispositions of such facilities are treated as installment sales for federal income tax purposes at Tinuum Group. The resulting gain from these sales is reported by Tinuum Group pursuant to the installment method under IRC Section 453. Under Section 453A taxpayers using the installment method for income tax purposes are required to pay 453A interest that is calculated on the portion of the tax liability that is deferred under the installment method. As of
December 31, 2018
, ADES’s allocable share of the gross deferred installment sale gain from Tinuum Group to be recognized in future years was approximately
$170 million
.
Due to the production and sale of RC from the operation of retained RC facilities, Tinuum Group has generated Section 45 tax credits ("GBC's"). These GBC's are allocated to the owners of Tinuum Group, including us, who may benefit to the extent that the GBC's are realized from the operation of retained RC facilities. As of
December 31, 2018
, we had approximately $104.6 million in GBC carryforwards.
In the hypothetical event of an ownership change, as defined by IRC Section 382, utilization of the 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, 2018
, as defined by IRC Section 382. Such analysis for the period from January 1, 2019 through the date of this Report has not been completed. Therefore, it is possible that we experienced an ownership change between January 1, 2019 and the date of this filing, thus subjecting our GBC carryforwards to limitation. Should a limitation exist, however, we would likely be in a position to substantially increase the limitation amount by virtue of our approximately
$170 million
deferred installment sale gain at Tinuum Group.
Specifically, IRC Section 382 provides that a corporation with a net unrealized built-in gain ("NUBIG") immediately before an ownership change may increase its limitation by the amount of recognized built-in gain ("RBIG") arising from the sale of a built-in gain asset during a recognition period, which is generally the five-year period immediately following an ownership change. Built-in gain reported on the installment sale method that is attributable to assets sold by the corporation before or during the recognition period may increase the corporation’s limitation during and after the recognition period. Therefore, it is likely that any IRC Section 382 limitation imposed upon an ownership change may be increased by our share of RBIG from Tinuum Group’s installment sale gain attributable to RC facilities sold before or during the period in which the change in ownership occurred.
There are numerous assumptions, listed below, that must be considered in calculating the RBIG related to Tinuum Group and the increase to our IRC Section 383 limitation. Assuming these assumptions, we may be able to increase the total limitation by approximately
$170 million
over the duration of the installment sale. As of
December 31, 2018
, after increasing the total hypothetical limitation, we would likely not have been able to utilize approximately $43.0 million of tax credits.
|
|
•
|
The Tinuum Group RBIG is a result of the sale of RC facilities by Tinuum Group and its election to utilize the installment sale method for tax purposes;
|
|
|
•
|
Investors in RC facilities will not terminate existing contracts as completion of an installment sale transaction is necessary to realize RBIG;
|
|
|
•
|
We have no net unrealized built-in loss to offset the NUBIG from Tinuum Group;
|
|
|
•
|
Our RBIG is equal to the deferred gain allocated from Tinuum Group, which is approximately
$170 million
;
|
|
|
•
|
We will have a NUBIG immediately before a hypothetical ownership change such that the Tinuum Group RBIG is available to increase the IRC Section 382 limitation;
|
|
|
•
|
We will continue our historic business operations for at least two years following a hypothetical ownership change; and
|
|
|
•
|
A second ownership change does not occur.
|
The annual limitation will be increased by the amount of RBIG that is included in taxable income each year.
Interest expense
453A interest expense
decreased
in
2018
compared to
2017
by
$1.0 million
. This reduction was driven by a lower tax rate of 21% in
2018
compared to 35% in
2017
as well as fewer principal payments remaining, partially offset by an increase in invested RC facilities in which Tinuum Group recognized as installment sales for tax purposes from
17
as of
December 31, 2017
to
19
as of
December 31, 2018
.
The following table shows the balance of the tax liability that has been deferred and the applicable interest rate to calculate 453A interest:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Tax liability deferred on installment sales (1)
|
|
$
|
35,703
|
|
|
$
|
70,739
|
|
Interest rate
|
|
5.00
|
%
|
|
4.00
|
%
|
(1) Represents the approximate tax effected liability utilizing the federal tax rate in effect for the applicable years ended related to the deferred gain on installment sales (approximately
$170 million
as of
December 31, 2018
).
Based on the interest rate in effect as of the date of this filing, the 453A interest rate for the year ended December 31, 2019 is expected to be 6%.
Offsetting the decrease in 453A interest expense was an increase due to $0.5 million in interest related to the Senior Term Loan entered into on December 7, 2018 to fund the Carbon Solutions Acquisition.
Other
The components of Other income (expense) include the following significant items:
Indemnity Settlement Agreement
In December 2017, prior to the Carbon Solutions Acquisition, we, Carbon Solutions and the former parent company of Carbon Solutions agreed to terminate certain provisions of the Indemnity Settlement Agreement (the " Indemnity Termination Agreement"). Pursuant to an agreement executed concurrently with the Indemnity Termination Agreement, the Company, Norit International B.V. and one of its an affiliates (collectively referred to as “Norit”) agreed to a final payment in the amount of
$3.3 million
(the "Settlement Payment") to settle all outstanding royalty obligations (the "Royalty Award") owed under the terms of a settlement agreement executed in 2011 between the Company and Norit. We paid this amount on December 29, 2017.
Under the Indemnity Termination Agreement, and upon payment of the Settlement Payment, we were relieved of certain financial and indemnity obligations required by the terms of the settlement agreement with Norit, including the obligation to maintain LC's securing future royalty payment obligations. As of December 31, 2017,
$3.5 million
in LC's related to the Royalty Award were outstanding, but were canceled by all parties in January 2018, pursuant to the Indemnity Termination Agreement.
Settlement with service provider
In November 2017, we entered into a settlement agreement with a former third-party service provider and as part of the settlement we received cash in the amount of
$3.5 million
. Cash from this settlement was received in December 2017.
Advanced Emission Solutions, Inc. Profit Sharing Retirement Plan
In 2016, the DOL opened an investigation into the Advanced Emissions Solutions, Inc. Profit Sharing Retirement Plan (the “401(k) Plan”), and we, as Plan Sponsor, cooperated with that investigation. In February 2018, as part of ongoing discussions, we and the DOL came to an agreement whereby we would make a restorative payment to the 401(k) Plan in the amount of $1.0 million as an estimate of lost earnings for 401(k) Plan participants as of January 1, 2015. Thereafter, the DOL would close the investigation with no further action against the 401(k) Plan or its fiduciaries, including any further investigation. We determined this contingency to be both probable and reasonably estimable and accrued $1.0 million as of December 31, 2017. The liability was recorded in the Other current liabilities line item on the Consolidated Balance Sheet. The expense recognized related to this accrual was included in the Other line item in the Consolidated Statements of Operations for the year ended December 31, 2017. We made a payment of $1.0 million to the 401(k) Plan on June 1, 2018 and no liability existed as of December 31, 2018. On September 7, 2018, we received notification that the DOL had closed its investigation and no further action is required by us.
Impairment of cost method investment
In November 2014, we acquired an 8% ownership interest in the common stock of Highview ("Highview"), a London, England based development stage company specializing in power storage. We accounted for our investment in Highview (the "Highview Investment") in accordance with U.S. GAAP applicable to equity investments that do not qualify for the equity method of accounting. As of
December 31, 2017
, we recorded an impairment charge of
$0.5 million
for the Highview Investment based on an estimated fair value of
£1.00
per share compared to the estimated carrying value prior to the impairment charge of
£2.00
per share. The impairment charge was included in the
Other
line item in the
Consolidated Statements of Operations
for the year ended
December 31, 2017
.
Income tax expense
On December 22, 2017 (the "Enactment Date"), the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act made broad and complex changes to the U.S. tax code and key provisions applicable to the Company, or certain of Tinuum Group's existing or potential customers, for 2018 included the following: (1) reduction of the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) elimination of the corporate alternative minimum tax (AMT); (3) a new limitation on deductible interest expense; (4) limitations on the deductibility of certain executive compensation; (5) limitations on the use of federal tax credits ("FTCs") to reduce the U.S. income tax liability; (6) limitations on net operating losses ("NOL’s") generated after December 31, 2017, to 80 percent of taxable income; and the introduction of the Base Erosion Anti-Abuse Tax (“BEAT”) for tax years beginning after December 31, 2017.
As a result of the reduction of the U.S. federal corporate rate from 35 percent to 21 percent, we recorded an adjustment to our recorded deferred tax assets and deferred tax liabilities as of the Enactment Date for those temporary differences expected to reverse after the Enactment Date. During 2018, we did not make any accounting adjustments related to the Tax Act.
For the year ended December 31, 2018, our reported income tax expense of
$10.4 million
differed from income tax expense computed by applying the U.S. statutory federal income tax rate (the "Federal Rate") of
$9.6 million
primarily due to a reduction in income tax expense from tax credits realized of
$7.0 million
, offset by increases in income tax expense from state income tax expense, net of federal benefit of
$3.6 million
and an increase in the valuation adjustment on our deferred tax assets of
$4.5 million
. For the year ended December 31, 2017, our reported income tax expense of
$24.2 million
differed from income tax expense computed using the Federal Rate of
$18.2 million
primarily due to increases in income tax expense from state income tax expense, net of federal benefit of
$1.7 million
and from a reduction in our net deferred tax assets of
$5.8 million
from the change in federal tax rates from 35% to 21%, offset by a decrease in income tax expense from tax credits realized of
$1.9 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, 2018
, we concluded it is more likely than not we will generate sufficient taxable income within the applicable NOL and tax credit carry-forward periods to realize
$32.5 million
of our net deferred tax assets, and therefore, reversed
$4.5 million
of the valuation allowance. In reaching this conclusion, we most significantly considered: (1) forecasts of continued future taxable income and (2) impacts of additional RC invested facilities during 2018. As of
December 31, 2018
and
2017
, we had a valuation allowance recorded of
$79.9 million
and
$75.4 million
, respectively, against our deferred tax assets.
During 2019, due to the impact of Tinuum Group selling an additional RC facility during the three months ended March 31, 2019, as well as the impacts of Tinuum Group’s adoption of ASU 2014-09 and ASU 2016-02, we expect that we will record an adjustment to our valuation allowance against our net 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, multiple internal scenarios and assumptions, as well as external data that we believe is reasonable. If events are identified that affect our ability to utilize our deferred tax assets, or if additional deferred tax assets are generated, the analysis will be updated to determine if any
adjustments to the valuation allowance are required. If actual results differ negatively from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the remaining valuation allowance may need to be increased. Such an increase could have a material adverse effect on our financial condition and results of operations. Conversely, better than expected results and continued positive results and trends could result in further releases to the deferred tax valuation allowance, and any such decreases could have a material positive effect on our financial condition and results of operations.
See additional discussion in
Note 13
of the Consolidated Financial Statements included in Item 8 of this Report.
Business Segments
As of
December 31, 2018
, we have
two
reportable segments: (1) Refined Coal ("RC'); and (2) Power Generation and Industrials ("PGI") (f/k/a "Emissions Control").
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
,
Rent and occupancy
,
Legal and professional fees
, and
General and administrative
.
|
|
|
•
|
RC segment operating income includes interest expense directly attributable to the RC segment.
|
The principal products and services of our segments are:
|
|
1.
|
RC - Our RC segment derives its earnings from equity method investments as well as royalty payment streams and other revenues related to enhanced combustion of and reduced emissions of both NO
X
and mercury from the burning of RC. Our equity method investments related to the RC segment include Tinuum Group, Tinuum Services as well as other immaterial equity method investments. Segment revenues include equity method earnings (losses) from our equity method investments and royalty earnings from Tinuum Group. These earnings are included within the
Earnings from equity method investments
and
License royalties, related party
line items in the
Consolidated Statements of Operations
included in Item 8 of this Report. Key drivers to RC segment performance are the produced and sold RC from both operating and retained RC facilities, royalty-bearing tonnage, and the number of operating (leased or sold) and retained RC facilities. These key drivers impact our earnings and cash distributions from equity method investments.
|
|
|
2.
|
PGI - Our PGI segment includes revenues and related expenses from the sale of consumable products that utilize PAC and chemical technologies as well as historically the sale of ACI and DSI equipment systems. These options provide coal-powered utilities and industrial boilers with mercury control solutions working in conjunction with ACI and DSI systems and other pollution control equipment, generally without the requirement for significant ongoing capital outlays. These amounts are included within the respective revenue and cost of revenue line items in the
Consolidated Statements of Operations
included in Item 8 of this Report.
|
The following table presents our operating segment results for the years ended
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
(in thousands)
|
|
2018
|
|
2017
|
|
($)
|
Revenues:
|
|
|
|
|
|
|
Refined Coal:
|
|
|
|
|
|
|
Earnings in equity method investments
|
|
$
|
54,208
|
|
|
$
|
53,843
|
|
|
$
|
365
|
|
Royalties, related party
|
|
15,140
|
|
|
9,672
|
|
|
5,468
|
|
|
|
69,348
|
|
|
63,515
|
|
|
5,833
|
|
Power Generation and Industrials:
|
|
|
|
|
|
|
Equipment sales
|
|
72
|
|
|
31,446
|
|
|
(31,374
|
)
|
Consumables
|
|
8,628
|
|
|
4,246
|
|
|
4,382
|
|
|
|
8,700
|
|
|
35,692
|
|
|
(26,992
|
)
|
Total segment reporting revenues
|
|
78,048
|
|
|
99,207
|
|
|
(21,159
|
)
|
|
|
|
|
|
|
|
Adjustments to reconcile to reported revenues:
|
|
|
|
|
|
|
Earnings in equity method investments
|
|
(54,208
|
)
|
|
(53,843
|
)
|
|
(365
|
)
|
Corporate and other
|
|
105
|
|
|
—
|
|
|
105
|
|
Total reported revenues
|
|
$
|
23,945
|
|
|
$
|
45,364
|
|
|
$
|
(21,419
|
)
|
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
|
|
|
|
|
Refined Coal (1)
|
|
$
|
65,454
|
|
|
$
|
59,908
|
|
|
$
|
5,546
|
|
Power Generation and Industrials (2)
|
|
(2,621
|
)
|
|
379
|
|
|
(3,000
|
)
|
Total segment operating income
|
|
$
|
62,833
|
|
|
$
|
60,287
|
|
|
$
|
2,546
|
|
(1) Included within the RC segment operating income for the years ended
December 31, 2018
and
2017
is 453A interest expense of
$1.6 million
and
$2.6 million
, respectively. Also included within the RC segment operating income for the year ended
December 31, 2018
was
$0.4 million
of severance expense.
(2) Included within the PGI segment operating income for the year ended
December 31, 2018
was approximately $1.0 million of amortization related to a step up in basis of the fair value of inventory. Also included within the PGI segment operating income for the year ended
December 31, 2018
was
$1.0 million
of severance expense.
A reconciliation of segment operating income to consolidated net income is included in
Note 14
of the Consolidated Financial Statements included in Item 8 of this Report.
RC
The following table details the segment revenues of our respective equity method investments for the years ended
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Earnings from Tinuum Group
|
|
$
|
47,175
|
|
|
$
|
48,875
|
|
Earnings from Tinuum Services
|
|
7,033
|
|
|
4,963
|
|
Earnings from other
|
|
—
|
|
|
5
|
|
Earnings from equity method investments
|
|
$
|
54,208
|
|
|
$
|
53,843
|
|
RC earnings increased primarily due to increased equity earnings from Tinuum Services during the year ended
December 31, 2018
compared to the year ended
December 31, 2017
, as presented above. Our equity earnings increased primarily due to an increase in Tinuum Services' earnings as a result of the addition of two invested facilities. Cash distributions decreased year over year as a result of incurred costs related to the engineering and installation phases of RC facilities, which have reduced distributions to Tinuum Group's equity members even though Tinuum Group did obtain two additional invested facilities. For the year ended
December 31, 2018
, Tinuum Group's consolidated earnings
increased
$26.0 million
from the comparable
December 31, 2017
period due to an increase in lease revenues driven by increased sales of facilities to third-party investors.
As discussed above and in
Note 5
of the Consolidated Financial Statements included in Item 8 of this Report, our earnings in Tinuum Group may not equal our pro-rata share due to the accounting related to our equity method investment.
RC operating income in
2018
was also positively impacted for the following:
|
|
•
|
An increase in earnings from Tinuum Services, which was primarily due to an increase in the number of RC facilities operated by Tinuum Services during
2018
;
|
|
|
•
|
An increase in M-45 royalties earned as a result of increased tonnage; and
|
|
|
•
|
A decrease in 453A interest expense as a result of the decreased federal tax rate and the declining deferred tax liability.
|
PGI
PGI segment operating income
decreased
during the year ended
December 31, 2018
compared to
2017
primarily due to a decrease in revenues year over year, as discussed within the consolidated results. The decrease in PGI segment operating income was driven by a decrease in Equipment sales revenue, less equipment sales cost of revenue, as no further revenue from equipment sales is expected. Additionally, PGI operating income was positively impacted by incremental Carbon Solutions revenues of
$5.6 million
, offset by cost of revenues of
$3.4 million
, inclusive of $1.0 million related to the amortization of a step up in basis of acquired finished goods inventory related to Carbon Solutions Acquisition. The decrease in operating income is also due to an increase in restructuring expense of
$0.9 million
during the year ended
December 31, 2018
compared to
2017
.
Liquidity and Capital Resources
Overview of Factors Affecting Our Liquidity
During
2018
, our liquidity position was positively affected primarily from distributions from Tinuum Group and Tinuum Services, royalty payments from Tinuum Group and borrowing availability under our bank ("Lender") line of credit (the "Line of Credit").
Our principal sources of liquidity currently include:
|
|
•
|
cash and cash equivalents on hand;
|
|
|
•
|
distributions from Tinuum Group and Tinuum Services;
|
|
|
•
|
royalty payments from Tinuum Group;
|
|
|
•
|
the Line of Credit; and
|
|
|
•
|
operations in the PGI segment.
|
Our principal uses of liquidity during the year ended
December 31, 2018
included:
|
|
•
|
acquisition of Carbon Solutions
|
|
|
•
|
repurchases of shares of our common stock pursuant to a stock repurchase program by which we may repurchase up to
$20.0 million
of our outstanding common stock, from time to time;
|
|
|
•
|
our business operating expenses, including federal and state tax payments; and
|
|
|
•
|
delivering on our existing contracts and customer commitments.
|
Our ability to continue to generate sufficient cash flow required to meet ongoing operational needs and obligations, as well as future expected dividend payments and potential future share repurchases, depends upon several factors, including 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 PGI consumables as well as expansion of our overall PAC business into additional adjacent markets. Increased distributions from Tinuum Group will likely be dependent upon both preserving existing contractual relationships and the securing of additional tax equity investors for those Tinuum Group facilities that are currently not operating.
Our use of liquidity for capital expenditures has not been significant for the periods presented. Due to the acquisition of Carbon Solutions, we expect that use of liquidity for capital expenditures will increase in future periods. Carbon Solutions has historically incurred costs for capital expenditures related to the PAC manufacturing facility under normal operations and planned outages and for mine development at the Five Forks. Certain of Carbon Solutions' recent historical planned capital expenditures were delayed due to the sales process. During due diligence and validated upon acquisition, we evaluated capital expenditure needs and anticipate additional material capital resources will be needed to maintain or improve capital assets.
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, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
|
|
|
|
|
Tinuum Group
|
|
$
|
47,175
|
|
|
$
|
48,875
|
|
Tinuum Services
|
|
5,500
|
|
|
4,638
|
|
Distributions from equity method investees
|
|
$
|
52,675
|
|
|
$
|
53,513
|
|
Future cash flows from Tinuum through 2021 are expected to range from $200 to $225 million, and key drivers in achieving these future cash flows are based on the following:
|
|
•
|
19 invested facilities as of
December 31, 2018
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 capital expenditures or unusual operating expenses;
|
|
|
•
|
Tax equity lease renewals on invested facilities are not terminated or repriced; and
|
|
|
•
|
Coal-fired power generation remains constant.
|
Future incremental invested RC facilities would positively impact our expectation of future cash flows.
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 has a term of
36
months 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
are required beginning in March 2019, and we may prepay the Senior Term Loan at any time without penalty. The Senior Term Loan is secured by substantially all 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) Beginning December 31, 2018 and as of the end of each fiscal quarter thereafter, we must maintain a minimum cash balance of
$5.0 million
and shall not permit "expected future net cash flows from the refined coal business" (as defined in the Senior Term Loan) to be less than
1.75
times the outstanding principal amount of the Senior Term Loan; (2) Beginning in January 2019, 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
.
Stock Repurchases and Dividends
In November 2018, the Board authorized us to purchase up to
$20.0 million
of our outstanding common stock. This stock repurchase program will remain in effect until December 31, 2019 unless otherwise modified by the Board. Previously, in December 2017, the Board had authorized us to purchase up to
$20.0 million
of our outstanding common stock under a separate repurchase program that was in effect until July 31, 2018. During the year ended
December 31, 2018
, under these two stock repurchase programs, we purchased
2,350,422
shares of our common stock for cash of
$25.3 million
, inclusive of commissions and fees.
During the year ended
December 31, 2018
, we declared and paid quarterly cash dividends to stockholders of
$20.2 million
, which were paid on
March 8, 2018
,
June 8, 2018
,
September 6, 2018
and
December 6, 2018
.
Line of Credit
As of
December 31, 2018
, there were
no
outstanding borrowings under the Line of Credit.
On September 30, 2018, ADA, as borrower, ADES, as guarantor, and the Lender entered into an amendment (the "Twelfth Amendment") to the Line of Credit. The Twelfth Amendment decreased the Line of Credit to
$5.0 million
due to decreased collateral requirements, extended the maturity date of the Line of Credit to September 30, 2020 and permitted the Line of Credit to be used as collateral (in place of restricted cash) for letters of credit ("LC's") up to
$5.0 million
related to equipment projects and certain other agreements. Under the Twelfth Amendment, there was no minimum cash balance requirement based on us meeting certain conditions and maintaining minimum trailing twelve-month EBITDA (earnings before interest, taxes, depreciation and amortization), as previously defined in the "Eleventh Amendment" to the Line of Credit, of
$24.0 million
.
On December 7, 2018, ADA, as borrower, ADES as guarantor, and the Lender entered into an amendment to the Line of Credit, which provided, among other things, for ADA to be able to enter into the Senior Term Loan as a guarantor so long as the principal amount of the Senior Term Loan does not exceed
$70 million
. Additionally, the financial covenants in the Line of Credit were amended and restated to be consistent with the aforementioned Senior Term Loan covenants, including maintaining a minimum cash balance of
$5.0 million
.
Sources and Uses of Cash
Cash, cash equivalents and restricted cash
decreased
from
$30.7 million
as of
December 31, 2017
to
$23.8 million
as of
December 31, 2018
,
a decrease
of
$6.9 million
. The following table summarizes our cash flows for the years ended
December 31, 2018
and
2017
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
(in thousands)
|
|
2018
|
|
2017
|
|
Change
|
Cash provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(9,889
|
)
|
|
$
|
(11,748
|
)
|
|
$
|
1,859
|
|
Investing activities
|
|
(16,543
|
)
|
|
48,386
|
|
|
(64,929
|
)
|
Financing activities
|
|
19,511
|
|
|
(32,889
|
)
|
|
52,400
|
|
Net change in Cash and Cash Equivalents and Restricted Cash
|
|
$
|
(6,921
|
)
|
|
$
|
3,749
|
|
|
$
|
(10,670
|
)
|
Cash flows from operating activities
Cash flows from operating activities for the year ended
December 31, 2018
increased by
$1.9 million
compared to the year ended
December 31, 2017
and were positively impacted primarily by the following: (1) an increase in net income of
$7.6 million
; (2) a change in
Legal settlements and accruals
due to settlement of obligation results in cash outflow of
$16.1 million
in 2017; and (3) an increase in
Distributions from equity method investees, return on investment
of
$0.9 million
. Offsetting these increases to operating cash flows were primarily the following: (1) a decrease of
$17.5 million
due to the change in deferred tax assets as a result of utilization to offset taxable income in 2017 and changes to the valuation allowance in 2018; and (2) a net increase in working capital and other liabilities of $4.6 million, primarily due to an increase in receivables from Tinuum Group related to revenues from license royalties and an increase in receivables from customers as a result of the addition of new customers from the Carbons Solutions Acquisition.
Cash flows from investing activities
Distributions from equity method investees
Our cash flows from investing activities are significantly impacted by cash distributions from equity method investees that represent a return in excess of cumulative earnings, which
decreased
from
$48.9 million
in
2017
to
$47.2 million
in
2018
. All of these cash distributions were received from Tinuum Group.
Acquisition of business, net of cash acquired
The Carbon Solutions Acquisition completed in 2018 resulted in total cash consideration paid of
$65.8 million
less cash acquired of
$3.3 million
. In addition, the total purchase consideration included
$0.7 million
payable to Carbon Solutions' previous debt holder, which was paid in March 2019. Also as part of the Carbon Solutions Acquisition, we also assumed capital leases and other contractual commitments of
$11.8 million
.
Purchase of and contribution to equity method investee
During the year ended
December 31, 2018
we made a contribution to Tinuum Services of $0.8 million due to a capital call.
Cash flows from financing activities
Borrowings on long-term debt, related party and debt issuance costs paid
We funded the Carbon Solutions Acquisition through cash on hand and the proceeds of the Senior Term Loan in the principal amount of
$70.0 million
, net of original issue discount of
$2.1 million
. In addition, we paid debt issuance costs of
$2.0 million
.
Dividends Paid and Stock Repurchases
During the years ended
December 31, 2018
and
2017
, we made payments of
$20.2 million
and
$15.7 million
, respectively, related to dividends declared on our common stock.
Stock Repurchases
As described under this Item 7 and in
Note 9
of the Consolidated Financial Statements, during the years ended
December 31, 2018
and
2017
, under stock repurchase programs authorized by the Board, we purchased
2,350,422
shares and
1,713,766
shares of our common stock for cash of
$25.3 million
and
$16.4 million
, respectively, inclusive of commissions and fees. The total shares of common stock repurchased for the year ended
December 31, 2017
is inclusive of a dutch tender offer completed in June 2017 in which we acquired
1,370,891
shares of common stock for
$13.0 million
.
Equity Award Activity
During the years ended
December 31, 2018
and
2017
, we used cash of
$0.8 million
and
$0.6 million
, respectively, for the repurchase of shares to satisfy tax withholdings upon the vesting of equity-based awards.
Borrowings and repayments on Line of Credit
In March 2017, a customer drew on an LC related to an equipment system in the amount of $0.8 million, which was funded by borrowing availability under the Line of Credit. We subsequently repaid this amount to the Lender as of March 31, 2017.
Contractual Obligations
Our contractual obligations as of
December 31, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
(in thousands)
|
|
Total
|
|
Less than 1 year
|
|
1-3 years
|
|
4-5 years
|
|
After 5 years
|
Senior Term Note
|
|
$
|
70,000
|
|
|
$
|
24,000
|
|
|
$
|
46,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Capital lease obligations
|
|
9,642
|
|
|
1,749
|
|
|
3,509
|
|
|
1,902
|
|
|
2,482
|
|
Operating leases
|
|
8,055
|
|
|
3,619
|
|
|
3,905
|
|
|
531
|
|
|
—
|
|
|
|
$
|
87,697
|
|
|
$
|
29,368
|
|
|
$
|
53,414
|
|
|
$
|
2,433
|
|
|
$
|
2,482
|
|
We have not included obligations related to 453A interest payments due to uncertainty of amounts payable in future periods relating to matters impacting future obligations such as the deferred tax liability balance under the installment method at each future balance sheet date and changes in interest rates. If no additional RC facilities become invested in the future, the deferred liability balance would decrease and interest payments, assuming no changes in the applicable tax and interest rates, would also decrease throughout the periods in the table above.
Outstanding letters of credit were historically issued in connection with equipment sales agreements, collateral support for future obligations due under the Royalty Award and other items. There were no outstanding letters of credit as of
December 31, 2018
.
Off-Balance Sheet Arrangements
During
2018
and
2017
, we did not engage in any off-balance sheet financing activities other than those included in the “Contractual Obligations” discussion above and those reflected in
Note 8
to the Consolidated Financial Statements included in Item 8 of this Report.
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 accounting principles generally accepted in the United States ("U.S. 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
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. The purchase price allocation process requires us to make significant estimates and assumptions with respect to property, plant and equipment, intangible assets and certain obligations. 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 companies 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.
|
Carrying value of long-lived assets;
We review and evaluate our long-lived assets 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 based on the estimated fair value of the long-lived assets being tested for impairment and their carrying amounts. 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.
Stock-Based Compensation Expense
We grant certain executives stock options that generally vest based on performance measures and the grantee's continuous service with us. Compensation expense is recognized for these options on a straight-line basis over the estimated service period based on the estimated fair value at the date of grant using a Black-Scholes model. Different estimates of key inputs in the Black-Scholes model such as the expected term of an option and the expected volatility of our stock price, the estimate of dividends, as well as the estimate of the service period, could impact the share-based compensation expense we would recognize over the award period in our
Consolidated Statements of Operations
. Refer to
Note 10
of our Consolidated Financial Statements included in Item 8 of this Report for additional information regarding our stock option awards.
Asset Retirement Obligation
Reclamation costs 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. Reclamation obligations are based on when the spending for an existing environmental disturbance will occur. We review, on at least an annual basis, the reclamation obligation at the mine.
Remediation costs are accrued based on management’s best estimate at the end of each period of the costs expected to be incurred at the mine site. Such cost estimates may include ongoing care, maintenance and monitoring costs.
Accounting for reclamation and remediation obligations requires management to make estimates unique to the mining operation of the future costs 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.
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, 2018
and
2017
, 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, then the valuation allowances are adjusted through the provision for income taxes in the period in which this determination is made. Refer to
Note 13
of our Consolidated Financial Statements included in Item 8 of this Report for additional information regarding our net deferred tax assets and related 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
|
|
|
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, 2018 and 2017, the related consolidated statements of operations, 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, 2018 and 2017, and the consolidated results of its operations and its cash flows for the two years then ended, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 18, 2019 expressed an unqualified opinion on the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for revenues from contracts with customers in 2018 due to the adoption of Accounting Standards Codification (ASC) 606.
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 audit
s
. We are a public accounting firm registered with the 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. 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.
/s/ Moss Adams LLP
Denver, Colorado
March 18, 2019
We have served as the Company’s auditor since 2017.
Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands, except share data)
|
|
2018
|
|
2017
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
18,577
|
|
|
$
|
30,693
|
|
Receivables, net
|
|
9,554
|
|
|
1,113
|
|
Receivables, related party
|
|
4,284
|
|
|
3,247
|
|
Inventories
|
|
21,791
|
|
|
74
|
|
Prepaid expenses and other assets
|
|
5,570
|
|
|
1,761
|
|
Total current assets
|
|
59,776
|
|
|
36,888
|
|
Restricted cash, long-term
|
|
5,195
|
|
|
—
|
|
Property and equipment, net of accumulated depreciation of $1,499 and $1,486, respectively
|
|
42,697
|
|
|
410
|
|
Intangible assets, net
|
|
4,830
|
|
|
805
|
|
Equity method investments
|
|
6,634
|
|
|
4,351
|
|
Deferred tax assets
|
|
32,539
|
|
|
38,661
|
|
Other long-term assets
|
|
7,993
|
|
|
1,503
|
|
Total Assets
|
|
$
|
159,664
|
|
|
$
|
82,618
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
6,235
|
|
|
$
|
1,000
|
|
Accrued payroll and related liabilities
|
|
8,279
|
|
|
1,384
|
|
Current portion of borrowings
|
|
24,067
|
|
|
—
|
|
Other current liabilities
|
|
2,138
|
|
|
4,494
|
|
Total current liabilities
|
|
40,719
|
|
|
6,878
|
|
Long-term portion of borrowings
|
|
50,058
|
|
|
—
|
|
Other long-term liabilities
|
|
940
|
|
|
2,285
|
|
Total Liabilities
|
|
91,717
|
|
|
9,163
|
|
Commitments and contingencies (Notes 7 and 8)
|
|
|
|
|
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, 22,640,677 and 22,465,821 shares issued and 18,576,489 and 20,752,055 shares outstanding at December 31, 2018 and 2017, respectively
|
|
23
|
|
|
22
|
|
Treasury stock, at cost: 4,064,188 and 1,713,766 shares as of December 31, 2018 and 2017, respectively
|
|
(41,740
|
)
|
|
(16,397
|
)
|
Additional paid-in capital
|
|
96,750
|
|
|
105,308
|
|
Retained earnings (accumulated deficit)
|
|
12,914
|
|
|
(15,478
|
)
|
Total stockholders’ equity
|
|
67,947
|
|
|
73,455
|
|
Total Liabilities and Stockholders’ equity
|
|
$
|
159,664
|
|
|
$
|
82,618
|
|
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)
|
|
2018
|
|
2017
|
Revenues:
|
|
|
|
|
Consumables
|
|
$
|
8,733
|
|
|
$
|
4,246
|
|
License royalties, related party
|
|
15,140
|
|
|
9,672
|
|
Equipment sales
|
|
72
|
|
|
31,446
|
|
Total revenues
|
|
23,945
|
|
|
45,364
|
|
Operating expenses:
|
|
|
|
|
Consumables cost of revenue, exclusive of depreciation and amortization
|
|
6,606
|
|
|
3,434
|
|
Equipment cost of revenue, exclusive of depreciation and amortization
|
|
(353
|
)
|
|
28,451
|
|
Payroll and benefits
|
|
10,639
|
|
|
7,669
|
|
Rent and occupancy
|
|
1,141
|
|
|
795
|
|
Legal and professional fees
|
|
8,230
|
|
|
4,354
|
|
General and administrative
|
|
3,359
|
|
|
4,014
|
|
Depreciation, amortization, depletion, and accretion
|
|
723
|
|
|
789
|
|
Total operating expenses
|
|
30,345
|
|
|
49,506
|
|
Operating loss
|
|
(6,400
|
)
|
|
(4,142
|
)
|
Other income (expense):
|
|
|
|
|
Earnings from equity method investments
|
|
54,208
|
|
|
53,843
|
|
Interest income
|
|
239
|
|
|
54
|
|
Interest expense
|
|
(2,151
|
)
|
|
(3,024
|
)
|
Litigation settlement and royalty indemnity expense, net
|
|
—
|
|
|
3,269
|
|
Other
|
|
(19
|
)
|
|
2,025
|
|
Total other income
|
|
52,277
|
|
|
56,167
|
|
Income before income tax expense
|
|
45,877
|
|
|
52,025
|
|
Income tax expense
|
|
10,423
|
|
|
24,152
|
|
Net income
|
|
$
|
35,454
|
|
|
$
|
27,873
|
|
Earnings per common share (Note 1):
|
|
|
|
|
Basic
|
|
$
|
1.78
|
|
|
$
|
1.30
|
|
Diluted
|
|
$
|
1.76
|
|
|
$
|
1.29
|
|
Weighted-average number of common shares outstanding:
|
|
|
|
|
Basic
|
|
19,901
|
|
|
21,367
|
|
Diluted
|
|
20,033
|
|
|
21,413
|
|
Cash dividends declared per common share outstanding:
|
|
$
|
1.00
|
|
|
$
|
0.75
|
|
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 (Deficit)
|
Balances, January 1, 2017
|
|
22,322,022
|
|
|
$
|
22
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
119,494
|
|
|
$
|
(43,351
|
)
|
|
$
|
76,165
|
|
Stock-based compensation
|
|
199,734
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,209
|
|
|
—
|
|
|
2,209
|
|
Repurchase of shares to satisfy tax withholdings
|
|
(55,935
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(566
|
)
|
|
—
|
|
|
(566
|
)
|
Dividends declared on common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,829
|
)
|
|
—
|
|
|
(15,829
|
)
|
Repurchase of common shares
|
|
—
|
|
|
—
|
|
|
(1,713,766
|
)
|
|
(16,397
|
)
|
|
—
|
|
|
—
|
|
|
(16,397
|
)
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
27,873
|
|
|
27,873
|
|
Balances, December 31, 2017
|
|
22,465,821
|
|
|
$
|
22
|
|
|
(1,713,766
|
)
|
|
$
|
(16,397
|
)
|
|
$
|
105,308
|
|
|
$
|
(15,478
|
)
|
|
$
|
73,455
|
|
Cumulative effect of change in accounting principle (Note 6)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,950
|
|
|
2,950
|
|
Stock-based compensation
|
|
217,174
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
2,489
|
|
|
—
|
|
|
2,490
|
|
Issuance of stock upon exercise of options, net
|
|
18,667
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Repurchase of shares to satisfy tax withholdings
|
|
(60,985
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(769
|
)
|
|
—
|
|
|
(769
|
)
|
Dividends declared on common stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,278
|
)
|
|
(10,012
|
)
|
|
(20,290
|
)
|
Repurchase of common shares
|
|
—
|
|
|
—
|
|
|
(2,350,422
|
)
|
|
(25,343
|
)
|
|
—
|
|
|
—
|
|
|
(25,343
|
)
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35,454
|
|
|
35,454
|
|
Balances, December 31, 2018
|
|
22,640,677
|
|
|
$
|
23
|
|
|
(4,064,188
|
)
|
|
$
|
(41,740
|
)
|
|
$
|
96,750
|
|
|
$
|
12,914
|
|
|
$
|
67,947
|
|
See Notes to the Consolidated Financial Statements.
Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Cash flows from operating activities
|
|
|
|
|
Net income
|
|
$
|
35,454
|
|
|
$
|
27,873
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
Increase (decrease) in valuation allowance on deferred tax assets
|
|
4,462
|
|
|
(474
|
)
|
Depreciation, amortization, depletion, and accretion
|
|
723
|
|
|
789
|
|
Amortization of debt issuance costs
|
|
94
|
|
|
109
|
|
Provision for accounts receivable and other receivables
|
|
153
|
|
|
385
|
|
Share-based compensation expense, net
|
|
2,490
|
|
|
2,209
|
|
Earnings from equity method investments
|
|
(54,208
|
)
|
|
(53,843
|
)
|
Other non-cash items, net
|
|
136
|
|
|
508
|
|
Changes in operating assets and liabilities, net of effects of acquired businesses:
|
|
|
|
|
Receivables
|
|
(1,847
|
)
|
|
6,743
|
|
Related party receivables
|
|
(1,037
|
)
|
|
(1,313
|
)
|
Prepaid expenses and other assets
|
|
(757
|
)
|
|
(351
|
)
|
Costs incurred on uncompleted contracts
|
|
15,945
|
|
|
27,048
|
|
Inventories
|
|
237
|
|
|
—
|
|
Deferred tax asset, net
|
|
771
|
|
|
23,208
|
|
Other long-term assets
|
|
(753
|
)
|
|
41
|
|
Accounts payable
|
|
(197
|
)
|
|
(920
|
)
|
Accrued payroll and related liabilities
|
|
(59
|
)
|
|
(738
|
)
|
Other current liabilities
|
|
(869
|
)
|
|
(1,586
|
)
|
Billings on uncompleted contracts
|
|
(15,945
|
)
|
|
(30,140
|
)
|
Other long-term liabilities
|
|
(182
|
)
|
|
154
|
|
Legal settlements and accruals
|
|
—
|
|
|
(16,088
|
)
|
Distributions from equity method investees, return on investment
|
|
5,500
|
|
|
4,638
|
|
Net cash used in operating activities
|
|
(9,889
|
)
|
|
(11,748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Cash flows from investing activities
|
|
|
|
|
Distributions from equity method investees in excess of cumulative earnings
|
|
$
|
47,175
|
|
|
$
|
48,875
|
|
Acquisition of business, net of cash acquired
|
|
(62,501
|
)
|
|
—
|
|
Acquisition of property, equipment, and intangible assets, net
|
|
(467
|
)
|
|
(428
|
)
|
Purchase of and contributions to equity method investee
|
|
(750
|
)
|
|
(61
|
)
|
Net cash (used in) provided by investing activities
|
|
(16,543
|
)
|
|
48,386
|
|
Cash flows from financing activities
|
|
|
|
|
Borrowings, net of debt discount - related party
|
|
67,900
|
|
|
—
|
|
Debt issuance costs paid
|
|
(2,036
|
)
|
|
—
|
|
Dividends paid
|
|
(20,165
|
)
|
|
(15,690
|
)
|
Repurchase of common shares
|
|
(25,343
|
)
|
|
(16,397
|
)
|
Repurchase of shares to satisfy tax withholdings
|
|
(769
|
)
|
|
(566
|
)
|
Borrowings on Line of Credit
|
|
—
|
|
|
808
|
|
Repayments on Line of Credit
|
|
—
|
|
|
(808
|
)
|
Short-term borrowing loan costs
|
|
—
|
|
|
(236
|
)
|
Other
|
|
(76
|
)
|
|
—
|
|
Net cash provided by (used in) financing activities
|
|
19,511
|
|
|
(32,889
|
)
|
Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash
|
|
(6,921
|
)
|
|
3,749
|
|
Cash, Cash Equivalents and Restricted Cash, beginning of year
|
|
30,693
|
|
|
26,944
|
|
Cash, Cash Equivalents and Restricted Cash, end of year
|
|
$
|
23,772
|
|
|
$
|
30,693
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,400
|
|
|
$
|
3,644
|
|
Cash paid for income taxes, net of refunds received
|
|
$
|
7,460
|
|
|
$
|
1,672
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
Acquisition consideration payable
|
|
$
|
661
|
|
|
$
|
—
|
|
Dividends payable
|
|
$
|
125
|
|
|
$
|
139
|
|
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 Highlands Ranch, Colorado and operations located in Louisiana. The Company is principally engaged in consumable mercury control options including powdered activated carbon (“PAC”) and chemical technologies. The Company's proprietary environmental technologies in the power generation and industrial ("PGI") market enable customers to reduce emissions of mercury and other pollutants, maximize utilization levels and improve operating efficiencies to meet the challenges of existing and pending emission control regulations. The Company generates substantial earnings and tax credits under Section 45 ("Section 45 tax credits") of the Internal Revenue Code ("IRC") from its equity investments in certain entities and earns royalties for technologies that are licensed to Tinuum Group, LLC, a Colorado limited liability company ("Tinuum Group"). Such technologies allow Tinuum Group to provide their customers with various solutions to enhance combustion and reduced emissions of nitrogen oxide ("NO
x
") and mercury from coal burned to generate electrical power. The Company’s sales occur principally throughout the United States. See
Note 14
for additional information regarding the Company's operating segments.
On
December 7, 2018
(the "Acquisition Date"), the Company acquired (the "Carbon Solutions Acquisition")
100%
of the equity interests of ADA Carbon Solutions, LLC (“Carbon Solutions”). Carbon Solutions is a manufacturer and seller of activated carbon ("AC") and the North American leader in mercury capture using PAC for the coal-fired power plant, industrial and water treatment markets. Carbon Solutions also owns an associated lignite mine that supplies the raw material for the powdered activated carbon plant. Carbon Solutions was formed in 2008 as a 50/50 joint venture by the Company and Energy Capital Partners LLC. The Company relinquished its ownership in 2011 as part of a legal settlement agreement as described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017. The Company acquired Carbon Solutions primarily to expand the Company's product offerings within the mercury control industry and other complimentary AC markets.
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, 2018
, 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, cash equivalents include bank deposits and other highly liquid investments purchased with an original maturity of three months or less.
As of
December 31, 2018
, restricted cash primarily consisted of minimum cash balance requirements under the Term Loan and Security Agreement (the "Senior Term Loan") and is classified according to the period at which it will no longer be restricted. As of
December 31, 2017
, all cash and cash equivalents were unrestricted and all cash requirements for contractual performance guarantees and payments were satisfied under the borrowing availability of the 2013 Loan and Security Agreement (the "Line of Credit").
Inventories
Inventories 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 PAC and chemical product offerings. The cost of inventory is determined using the average cost method. Inventory acquired was measured at fair value as of the Acquisition Date.
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 based on these assumptions 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 3
.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2018
|
|
2017
|
(in thousands, except years)
|
|
Weighted average amortization (in years)
|
|
Initial Cost
|
|
Net of Accumulated Amortization
|
|
Initial Cost
|
|
Net of Accumulated Amortization
|
Customer relationships
|
|
5
|
|
$
|
2,100
|
|
|
$
|
2,071
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Patents
|
|
16
|
|
1,244
|
|
|
891
|
|
|
1,079
|
|
|
805
|
|
Developed technology
|
|
5
|
|
1,600
|
|
|
1,578
|
|
|
—
|
|
|
—
|
|
Trade name
|
|
2
|
|
300
|
|
|
290
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
|
$
|
5,244
|
|
|
$
|
4,830
|
|
|
$
|
1,079
|
|
|
$
|
805
|
|
Included in the
Consolidated Statements of Operations
is amortization expense related to intangible assets of
$0.2 million
and
$0.1 million
for the years ended
December 31, 2018
and
2017
, respectively. The estimated future amortization expense for existing intangible assets as of
December 31, 2018
is expected to be
$0.9 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 within 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, nor is it 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, 2018
and
2017
, 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, nor is it 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 losses. As a result, equity income or loss reported on 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 upon the percentage ownership of the Company's equity interest and the net income or loss attributable to equity owners as shown on the investee company's statements of operations. Likewise, distributions from equity method investees are reported on the
Consolidated Statements of Cash Flows
as “return on investment” within Operating cash flows until such time as the carrying value in an equity method investee company is reduced to zero; thereafter, such distributions are reported as “distributions in excess of cumulative earnings” within Investing cash flows. See
Note 5
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 principles generally accepted in the United States ("U.S. GAAP") 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.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 and if any adjustment is warranted. Amortization of capital leased assets is included in depreciation expense and is calculated using the straight-line method over the term of the lease.
Other Assets
Mine Development Costs
Mine development costs 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
18
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 acquired in the Carbon Solutions Acquisition were measured at fair value as of the Acquisition Date. Mine development costs are reported in the "Other assets" line item on 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 acquired in the Carbon Solutions Acquisition were measured at fair value as of the Acquisition Date. Spare parts are reported in the "Other assets" line item on the Consolidated Balance Sheet.
Revenue Recognition
On January 1, 2018, the Company adopted ASC 606 -
Revenue from Contracts with Customers
("ASC 606") using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. The Company recognized the cumulative effect of initially applying ASC 606 to the opening balance of the Accumulated deficit. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. See further discussion of the impact of the adoption of ASC 606 in
Note 6
.
Effective with the Acquisition Date, Carbon Solutions adopted ASC 606 using the modified retrospective method applied to those contracts that were not completed as of December 7, 2018. There was no impact to the consolidated financial statements of the Company upon Carbon Solutions’ adoption of ASC 606, except for a reclassification from revenues to cost of revenue for Carbon Solutions for freight costs billed to its customers in conjunction with product sales, which historically were recorded as revenues. This reclassification of freight costs billed to customers to cost of revenue results in an offset to Carbon Solutions' actual freight costs recorded in cost of revenue and has no impact to Carbon Solutions' operating results. This presentation is consistent with ADES' policy of reporting freight costs, net of freight costs billed to customers, under cost of revenue. ADES adopted this policy effective with its adoption of ASC 606 on January 1, 2018.
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.
The Company’s principal revenue components are Consumables sales and License royalties.
Consumables
Consumables are comprised of the sale of AC and chemicals for mercury capture for the coal-fired power plant, industrial and water treatment markets. Customer contracts for consumables are short duration and performance obligations generally do not extend beyond one year. Certain customer contracts for consumables are comprised of evaluation tests of the Company's
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
consumables' effectiveness and efficiency in reducing emissions. These contracts entail the delivery of consumables to the customer and the Company's evaluation of results of emissions reduction over the term of the contract. Under these types of arrangements, which are generally for durations that are short term, the Company has determined that the customer is simultaneously receiving benefits of emissions reduction from the consumption of the consumables over the testing period and this represents a single performance obligation that is satisfied over time. This determination may require significant judgment. The Company recognizes revenue over time using an input model that is generally based on the cost of consumables used by the customer during the testing period. The use of an input model and the use of total costs as the measure of progress in the satisfaction of the performance obligations may require significant judgment. In addition, under these types of contracts, the Company has determined that the services performed and related costs incurred by the Company during the testing period represent costs to fulfill a contract.
License royalties, related party
The Company generates revenues from royalties ("M-45 Royalties") earned under a licensing arrangement ("M-45 License") of its M-45
TM
and M-45-PC
TM
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.
Equipment sales
Prior to 2017, the Company entered into construction-type contracts that entailed the design and construction of emissions control systems ("extended equipment contracts"). Revenues from such extended equipment contracts were recorded using the percentage of completion, cost to cost method based on costs incurred to date compared with total estimated contract costs. However, if the Company did not have sufficient information to estimate either costs incurred or total estimated costs for extended equipment contracts at the time contracts were entered into, the completed contract method was used. Under the completed contract method, revenues and costs from extended equipment contracts are deferred and recognized when contract obligations are substantially complete. The Company defined substantially complete as delivery of equipment and start-up at the customer site or, as applicable to dry sorbent injection (“DSI”) systems contracts, the completion of any major warranty service period. Provisions for estimated losses on uncompleted contracts were recognized when it was determined that a loss was probable.
For the year ended December 31, 2017, the Company did not have sufficient information to measure ongoing performance for its extended equipment contracts and accounted for these contracts under the completed contract method. For uncompleted contracts as of December 31, 2017, the Company reported deferred revenue and related costs in the
Costs in excess of billings on uncompleted contracts
or
Billings in excess of costs on uncompleted contracts
in the
Consolidated Balance Sheets
.
Historically, the Company also entered into other non-extended equipment contracts for which the Company recognized revenues as services to build equipment systems were performed or as equipment was delivered.
Arrangements with Multiple Performance Obligations
Contracts with customers may include multiple performance obligations, which are comprised of the sale of chemicals, equipment and services performed as part of an emissions reduction arrangement. For such arrangements, the Company allocates revenue to each performance obligation based on its relative SSP. When a directly observable SSP for a performance obligation is not available, the Company primarily estimates SSPs based on the expected cost plus a margin method. These estimates as well as the timing of the satisfaction of performance obligations associated with the services component represent significant judgments made by the Company. These arrangements are generally short duration and performance obligations generally do not extend beyond one year.
Contract Assets and Liabilities
Contract assets are comprised of unbilled receivables and are included in Receivables, net in the Condensed Consolidated Balance Sheet. 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. Bad debt expense is included within the General and administrative line item in the Consolidated Statements of Operations.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 Condensed Consolidated Balance Sheet and, if deliverable outside of one year, is included in Other long-term liabilities in the Condensed Consolidated Balance Sheet.
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 has elected to account 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 of the Condensed 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 within sales and marketing expenses within the
General and administrative
line item of the Condensed Consolidated Statement of Operations.
Cost of Revenue
Costs of revenue include 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.
Rent and Occupancy
Rent and occupancy costs include rent, insurance and other occupancy-related expenses.
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, bad debt expense, impairments 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
.
Asset Retirement Obligations
Reclamation obligations are recognized when incurred and recorded as liabilities at fair value. The liability is accreted over time through periodic charges to earnings. In addition, the asset retirement cost is capitalized as part of the asset’s carrying value and amortized over the life of the related asset. Reclamation costs 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. The estimated reclamation obligation is based on when spending for an existing disturbance is expected to occur. The Company reviews, on an annual basis, unless otherwise deemed necessary, the reclamation obligation at the mine site in accordance with ASC guidance for asset retirement obligations.
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 the 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.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 lease income or sale is treated as installment sales for 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. These costs are recorded in the
Payroll and benefits
or
General and administrative
, for director related expense, line items in the
Consolidated Statements of Operations
.
Dividends
When a sufficient amount of available earnings exists at the time of declaration, dividends are charged as a reduction to Retained earnings in the
Consolidated Balance Sheets
when declared. If sufficient Retained earnings is not available, dividends declared are charged as a reduction to
Additional paid-in capital
in the
Consolidated Balance Sheets
.
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-forfeitable rights to dividends or dividend equivalents and are deemed to be participating securities. RSA's granted subsequent to December 31, 2016 do not contain non-forfeitable rights to dividends and are not deemed to be participating securities.
Under the two-class method, net income (loss) for the period is allocated between common stockholders and the holders of the participating securities based on the weighted-average of common shares outstanding during the period, excluding participating, unvested RSA's ("common shares"), and the weighted-average number of participating, unvested RSA's outstanding during the period, respectively. The allocated, undistributed income for the period is then divided by the weighted-average number of common shares and participating, unvested RSA's outstanding during the period to determine basic earnings per common share and participating security for the period, respectively. Pursuant to U.S. GAAP, the Company has elected not to separately present basic or diluted earnings per share attributable to participating securities in the Consolidated Statements 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 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 10
for additional information related to PSU's.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table sets forth the calculations of basic and diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands, except per share amounts)
|
|
2018
|
|
2017
|
Net income
|
|
$
|
35,454
|
|
|
$
|
27,873
|
|
Less: Dividends and undistributed income allocated to participating securities
|
|
112
|
|
|
171
|
|
Income attributable to common stockholders
|
|
$
|
35,342
|
|
|
$
|
27,702
|
|
|
|
|
|
|
|
|
Basic weighted-average number of common shares outstanding
|
|
19,901
|
|
|
21,367
|
|
Add: dilutive effect of equity instruments
|
|
132
|
|
|
46
|
|
Diluted weighted-average shares outstanding
|
|
20,033
|
|
|
21,413
|
|
Earnings per share - basic
|
|
$
|
1.78
|
|
|
$
|
1.30
|
|
Earnings per share - diluted
|
|
$
|
1.76
|
|
|
$
|
1.29
|
|
For the years ended
December 31, 2018
and
2017
, options to purchase
0.3 million
and
0.3 million
shares of common stock for each of the years presented were outstanding, however were not included in the computation of diluted net income per share because the exercise price exceeded the average price of the underlying shares and the effect would have been anti-dilutive. For the years ended
December 31, 2018
and
2017
, options to purchase of
zero
and
0.2 million
shares of common stock, respectively, which vest based on the Company achieving specified performance targets, were outstanding, but not included in the computation of diluted net income per share because they were determined not to be contingently issuable.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with 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:
|
|
•
|
the carrying value of its long-lived assets;
|
|
|
•
|
stock compensation costs;
|
|
|
•
|
asset retirement obligation; and
|
|
|
•
|
income taxes, including the valuation allowance for deferred tax assets and uncertain tax positions.
|
Risks and Uncertainties
The Company’s earnings are significantly affected by equity earnings it receives from Tinuum Group. Tinuum Group has
19
invested RC facilities of which
11
are leased to a single customer. A majority of these leases are periodically renewed and the loss of this customer by Tinuum Group would have a significant adverse impact on its financial position, results of operations and cash flows, which in turn would have 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.
New Accounting Guidance
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02,
Leases (Topic 842)
("ASU 2016-02"), which requires lessees to recognize a right of use asset and related lease liability for those leases classified as operating leases at the commencement date and have lease terms of more than 12 months. This topic retains the distinction between finance leases and operating leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, and must be applied under a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842)
: Targeted Improvements ("ASU 2018-11"). The amendments in ASU 2018-11 provide entities with an additional (and optional) transition method to adopt the new lease requirements by allowing entities to initially apply the requirements by recognizing a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which the entity adopts the new lease requirements would continue to be in accordance with current U.S. GAAP (Topic 840). An entity electing this additional (and optional) transition method must provide the required Topic 840 disclosures for all periods that continue to be in accordance with Topic 840. The amendments do not change the existing disclosure requirements
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
in Topic 840. The Company intends to adopt ASC 2016-02 effective January 1, 2019 using the additional (and optional) transition method provided under ASU 2018-11.
As of the date of this filing, the Company has materially completed its assessment of ASU 2016-02 and related amendments for the impact to the financial statements as of the adoption date, completed a detailed review of existing lease agreements, continued its review of controls and procedures that may need to be revised or added from the adoption of ASU 2016-02 and completed the documentation of the standard's financial statement impact at adoption and financial statement disclosure changes. Based on the Company's current assessment of ASU 2016-02, it has determined that at adoption it will record approximately
$6.9 million
of "right of use" assets and
$7.0 million
of incremental lease liabilities with no impact to the opening balance of Retained earnings; however, the Company is continuing to evaluate ASU 2016-02's potential additional impact to the opening balance sheet as of January 1, 2019.
Additionally, Tinuum Group plans to adopt ASU 2014-09 (Topic 606),
Revenue from Contracts with Customers
(“ASU 2014-09”) and ASU 2016-02 as of January 1, 2019. As a result of Tinuum Group’s adoption, the Company expects to record a cumulative adjustment of
$37.2 million
related to the Company's percentage of Tinuum Group's cumulative effect adjustment that will increase the Company's Retained earnings as of January 1, 2019. The Company expects that this adjustment will result in no longer having cumulative cash distributions that exceed our cumulative pro-rata share of Tinuum Group's net income. Additionally, the Company expects that we will recognize equity earnings by recording our pro-rata share of Tinuum Group’s net income rather than based upon cash distributions on a go-forward basis. Upon adoption, the Company will assess the impact of the adjustment to its income tax position.
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 fiscal years beginning after December 15, 2019, 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. The Company does not believe this standard will have a material impact on the Company's financial statements and disclosures.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820) Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
("ASU 2018-13"). The amendments in ASU 2018-13 improve the effectiveness of fair value measurement disclosures and modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement ("Topic 820"), based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting - Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date. The Company is currently evaluating the provisions of this Update and assessing its impact on the Company's financial statement disclosures. The Company does not believe this standard will have a material impact on the Company's financial statement disclosures.
Note 2
- Acquisition
As described in
Note 1
, on the Acquisition Date, the Company completed the Carbon Solutions Acquisition for a total purchase price of
$75.0 million
(the "Purchase Price"). The results of Carbon Solutions have been included in the Company’s consolidated financial statements since the Acquisition Date. 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) during the year ended December 31, 2018 that are included in
Legal and professional fees
line item in the Consolidated Statement of Operations. The Company funded the cash consideration from cash on hand and the proceeds from the Senior Term Loan in the principal amount of
$70.0 million
, as more fully described in
Note 7
.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the Acquisition Date:
|
|
|
|
|
|
Fair value of assets acquired:
|
|
Purchase Price Allocation
|
Cash
|
|
$
|
3,284
|
|
Receivables
|
|
6,409
|
|
Inventories
|
|
22,100
|
|
Prepaid expenses and other current assets
|
|
2,992
|
|
Spare parts
|
|
3,359
|
|
Property, plant and equipment
|
|
43,033
|
|
Mine leases and development
|
|
2,500
|
|
Intangible assets
|
|
4,000
|
|
Other assets
|
|
168
|
|
Amount attributable to assets acquired
|
|
87,845
|
|
|
|
|
Fair value of liabilities assumed:
|
|
|
Accounts payable
|
|
4,771
|
|
Accrued liabilities
|
|
7,354
|
|
Equipment leases payable
|
|
8,211
|
|
Mine reclamation liability
|
|
626
|
|
Other liabilities
|
|
437
|
|
Amount attributable to liabilities assumed
|
|
21,399
|
|
|
|
|
Net assets acquired
|
|
$
|
66,446
|
|
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
|
|
$
|
2,100
|
|
|
5
|
Developed technology
|
|
1,600
|
|
|
5
|
Trade name
|
|
300
|
|
|
2
|
Total intangibles acquired
|
|
$
|
4,000
|
|
|
|
The amounts of revenues and income before income taxes for the period from the Acquisition Date to December 31, 2018 for Carbon Solutions are as follows:
|
|
|
|
|
|
(in thousands)
|
|
Year ended December 31, 2018
|
Revenues
|
|
$
|
5,580
|
|
Net loss
|
|
$
|
(391
|
)
|
Unaudited Pro Forma Financial Information
The following represents the pro forma effects of the Carbon Solutions Acquisition as if it had occurred on January 1, 2017. The pro forma pre-tax income for each of the two years presented has been calculated after applying the Company’s accounting policies in effect for those years. In addition, pro forma net income for each of the two years presented includes: (1) the impact on Carbon Solutions of the adoption of ASC 606 effective January 1, 2018, which resulted in a reclassification of
$5.9 million
from Revenues to Cost of Revenue for freight costs billed to customers, with no impact to income from operations; (2) the reduction in depletion, depreciation and amortization resulting from the purchase price adjustments to Property, plant and equipment and Mine development costs; (3) the adjustment to interest expense from the combination of the Senior Term Loan that was used to fund the Carbon Solutions Acquisition and the elimination of certain debt of Carbon Solutions as a result of pay-offs by the Company as of the Acquisition Date; and (4) the removal of
$9.7 million
and
$0.9 million
in transaction costs incurred in 2018 and 2017, respectively, together with the income tax effect on (1) through (4). The pro forma results do not
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
include any anticipated synergies or other expected benefits of the Carbon Solutions Acquisition. The unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the Carbon Solutions Acquisition been consummated as of January 1, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Revenues
|
|
$
|
78,591
|
|
|
$
|
110,663
|
|
Net income
|
|
$
|
31,562
|
|
|
$
|
32,524
|
|
Note 3
- Inventories
The following table summarizes the Company's inventories recorded at the lower of average cost or net realizable value as of
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Product inventory
(1)
|
|
$
|
19,523
|
|
|
$
|
74
|
|
Raw material inventory
|
|
2,388
|
|
|
—
|
|
Reserves
|
|
(120
|
)
|
|
—
|
|
|
|
$
|
21,791
|
|
|
$
|
74
|
|
(1) As of December 31, 2018, this amount includes
$5.0 million
attributed to the increase in fair value of inventory acquired.
Note 4
- Property, Plant and Equipment
The carrying basis and accumulated depreciation of property, plant and equipment at
December 31, 2018
and
2017
are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life in Years
|
|
As of December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Land and land improvements
|
|
0-31
|
|
$
|
2,302
|
|
|
$
|
—
|
|
Plant and operating equipment
|
|
2-31
|
|
32,999
|
|
|
—
|
|
Furniture and fixtures
|
|
1-7
|
|
701
|
|
|
262
|
|
Machinery and equipment
|
|
1-31
|
|
1,277
|
|
|
1,429
|
|
Leasehold improvements
|
|
1-3
|
|
249
|
|
|
205
|
|
Construction in progress
|
|
|
|
6,668
|
|
|
—
|
|
|
|
|
|
44,196
|
|
|
1,896
|
|
Less accumulated depreciation
|
|
|
|
(1,499
|
)
|
|
(1,486
|
)
|
Total property, plant and equipment, net
|
|
|
|
$
|
42,697
|
|
|
$
|
410
|
|
Included in plant and operating equipment as of December 31, 2018 is mining equipment financed under various lease facilities, and obligations due under these facilities are included in capital lease obligations in the Consolidated Balance Sheet. The total amount recorded as capital lease mining assets as of
December 31, 2018
was
$8.1 million
, net of accumulated depreciation of
$0.1 million
.
Depreciation expense for the years ended
December 31, 2018
and
2017
was
$0.5 million
and
$0.7 million
, respectively.
Note 5
- Equity Method Investments
Tinuum Group, LLC
As of
December 31, 2018
and
2017
, 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, including a guaranteed
15%
annual return on GSFS' unrecovered investment balance, which is calculated as the original GSFS investment, plus a
15%
annual return thereon, less any distributions, including the allocation of Section 45 tax
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
credits to the members. In February 2018, the unrecovered investment balance associated with the Class B units was repaid in full.
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)
|
|
2018
|
|
2017
|
Current assets
|
|
$
|
54,958
|
|
|
$
|
31,605
|
|
Non-current assets
|
|
$
|
92,991
|
|
|
$
|
75,055
|
|
Current liabilities
|
|
$
|
50,908
|
|
|
$
|
48,280
|
|
Non-current liabilities
|
|
$
|
14,446
|
|
|
$
|
8,350
|
|
Redeemable Class B equity
|
|
$
|
—
|
|
|
$
|
821
|
|
Members equity attributable to Class A members
|
|
$
|
49,102
|
|
|
$
|
40,452
|
|
Members equity attributable to Class B members
|
|
$
|
16,983
|
|
|
$
|
—
|
|
Noncontrolling interests
|
|
$
|
16,510
|
|
|
$
|
8,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Gross profit
|
|
$
|
107,135
|
|
|
$
|
95,552
|
|
Operating, selling, general and administrative expenses
|
|
23,662
|
|
|
22,958
|
|
Income from operations
|
|
83,473
|
|
|
72,594
|
|
Other expenses
|
|
(5,674
|
)
|
|
(4,520
|
)
|
Class B preferred return
|
|
(12
|
)
|
|
(1,712
|
)
|
Loss attributable to noncontrolling interest
|
|
58,013
|
|
|
43,474
|
|
Net income available to Class A and B members
|
|
$
|
135,800
|
|
|
$
|
109,836
|
|
ADES equity earnings from Tinuum Group
|
|
$
|
47,175
|
|
|
$
|
48,875
|
|
As shown above, the Company reported earnings from its equity investment in Tinuum Group of
$47.2 million
and
$48.9 million
for the years ended
December 31, 2018
and
2017
, respectively.
As shown in the table below, the Company’s carrying value in Tinuum Group was reduced to
zero
for all years presented as cumulative cash distributions received from Tinuum Group exceeded the Company's pro-rata share of cumulative earnings in Tinuum Group. The carrying value of the Company's investment in Tinuum Group shall remain
zero
as long as the cumulative amount of distributions received from Tinuum Group continues to exceed 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 of
December 31, 2018
, the Company's carrying value in Tinuum Group has been reduced to
zero
, as the cumulative cash distributions received from Tinuum Group have exceeded the Company's pro-rata share of cumulative earnings in Tinuum Group. If Tinuum Group subsequently reports net income, the Company will not record its pro-rata share of such net income until the cumulative share of pro-rata income equals or exceeds the amount of its cumulative income recognized due to the receipt of cash distributions. Until such time, the Company will only report income from Tinuum Group to the extent of cash distributions received during the period.
Thus, the amount of equity earnings or loss reported on the Consolidated Statement of Operations may differ from a mathematical calculation of earnings or loss attributable to the equity interest based upon the factor of the equity interest and the net income or loss available to Class A members as shown on Tinuum Group’s statement of operations. Additionally, for periods during which the carrying value of the Company's investment in Tinuum Group is greater than zero, distributions from
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Tinuum Group are reported on the Consolidated Statements of Cash Flows as "Distributions from equity method investees, return on investment" within Operating cash flows. For periods during which the carrying value of the Company's investment in Tinuum Group is zero, such cash distributions are reported on the Consolidated Statements of Cash Flows as "Distributions from equity method investees in excess of investment basis" within Investing cash flows.
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, 2017
and
December 31, 2018
(
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
|
|
12/31/2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(9,894
|
)
|
ADES proportionate share of net income from Tinuum Group (1)
|
|
2017 activity
|
|
$
|
46,551
|
|
|
$
|
46,551
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Recovery of cash distributions in excess of investment balance (prior to cash distributions)
|
|
2017 activity
|
|
(9,894
|
)
|
|
(9,894
|
)
|
|
—
|
|
|
9,894
|
|
Cash distributions from Tinuum Group
|
|
2017 activity
|
|
(48,875
|
)
|
|
—
|
|
|
48,875
|
|
|
—
|
|
Adjustment for current year cash distributions in excess of investment balance
|
|
2017 activity
|
|
12,218
|
|
|
12,218
|
|
|
—
|
|
|
(12,218
|
)
|
Total investment balance, equity earnings (loss) and cash distributions
|
|
12/31/2017
|
|
$
|
—
|
|
|
$
|
48,875
|
|
|
$
|
48,875
|
|
|
$
|
(12,218
|
)
|
ADES proportionate share of net income from Tinuum Group (1)
|
|
2018 activity
|
|
$
|
57,721
|
|
|
$
|
57,721
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Recovery of cash distributions in excess of investment balance (prior to cash distributions)
|
|
2018 activity
|
|
(12,218
|
)
|
|
(12,218
|
)
|
|
—
|
|
|
12,218
|
|
Cash distributions from Tinuum Group
|
|
2018 activity
|
|
(47,175
|
)
|
|
—
|
|
|
47,175
|
|
|
—
|
|
Adjustment for current year cash distributions in excess of investment balance
|
|
2018 activity
|
|
1,672
|
|
|
1,672
|
|
|
—
|
|
|
(1,672
|
)
|
Total investment balance, equity earnings and cash distributions
|
|
12/31/2018
|
|
$
|
—
|
|
|
$
|
47,175
|
|
|
$
|
47,175
|
|
|
$
|
(1,672
|
)
|
(1) The amounts of the Company's
42.5%
proportionate share of net income as shown in the table above differ from mathematical calculations of the Company’s
42.5%
equity interest in Tinuum Group multiplied by the amounts of Net Income available to Class A members as shown in the table above of Tinuum Group's results of operations due to adjustments related to the Class B preferred return.
Additional information related to Tinuum Group pursuant to Regulation S-X Rule 3-09 ("Rule 3-09") of the Securities and Exchange Act of 1934 (the "Exchange Act") is included within 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 the consolidation analysis under the Voting Interest Model. The Company has a
50%
voting and economic interest in Tinuum Services, which is equivalent to the voting and economic interest of NexGen. Therefore, as the Company does not hold greater than
50%
of the outstanding voting interests, either directly or indirectly, it has accounted for the investment under the equity method of accounting.
As of
December 31, 2018
and
2017
, the Company’s
50%
investment in Tinuum Services was
$6.6 million
and
$4.3 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)
|
|
2018
|
|
2017
|
Current assets
|
|
$
|
300,288
|
|
|
$
|
546,681
|
|
Non-current assets
|
|
$
|
100,233
|
|
|
$
|
98,640
|
|
Current liabilities
|
|
$
|
219,959
|
|
|
$
|
178,376
|
|
Non-current liabilities
|
|
$
|
66,760
|
|
|
$
|
75,717
|
|
Equity
|
|
$
|
13,134
|
|
|
$
|
8,569
|
|
Noncontrolling interests
|
|
$
|
100,668
|
|
|
$
|
382,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Gross loss
|
|
$
|
(85,377
|
)
|
|
$
|
(64,796
|
)
|
Operating, selling, general and administrative expenses
|
|
173,500
|
|
|
147,917
|
|
Loss from operations
|
|
(258,877
|
)
|
|
(212,713
|
)
|
Other expenses
|
|
37
|
|
|
(68
|
)
|
Loss attributable to noncontrolling interest
|
|
272,905
|
|
|
222,707
|
|
Net income
|
|
$
|
14,065
|
|
|
$
|
9,926
|
|
ADES equity earnings from Tinuum Services
|
|
$
|
7,033
|
|
|
$
|
4,963
|
|
Included within the Consolidated Statement of Operations of Tinuum Services for the years ended
December 31, 2018
and
2017
were losses related to VIE entities that are consolidated within Tinuum Services of
$272.9 million
and
$222.7 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 within 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)
|
|
2018
|
|
2017
|
Equity method investment in Tinuum Group
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity method investment in Tinuum Services
|
|
6,567
|
|
|
4,284
|
|
Equity method investment in other
|
|
67
|
|
|
67
|
|
Total equity method investments
|
|
$
|
6,634
|
|
|
$
|
4,351
|
|
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, 2018
and
2017
.
The following table details the components of the Company's respective earnings or loss from equity method investments included within the
Earnings from equity method investments
line item on the
Consolidated Statements of Operations
:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Earnings from Tinuum Group
|
|
$
|
47,175
|
|
|
$
|
48,875
|
|
Earnings from Tinuum Services
|
|
7,033
|
|
|
4,963
|
|
Earnings from other
|
|
—
|
|
|
5
|
|
Earnings from equity method investments
|
|
$
|
54,208
|
|
|
$
|
53,843
|
|
The following table details the components of the cash distributions from the Company's respective equity method investments included within the
Consolidated Statements of Cash Flows
. Distributions from equity method investees are reported on the
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows
as “return on investment” within Operating cash flows until such time as the carrying value in an equity method investee company is reduced to
zero
; thereafter, such distributions are reported as “distributions in excess of cumulative earnings” within Investing cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Distributions from equity method investees, return on investment
|
|
|
|
|
Tinuum Services
|
|
$
|
5,500
|
|
|
$
|
4,638
|
|
Included in Operating Cash Flows
|
|
$
|
5,500
|
|
|
$
|
4,638
|
|
Distributions from equity method investees in excess of cumulative earnings
|
|
|
|
|
Tinuum Group
|
|
$
|
47,175
|
|
|
$
|
48,875
|
|
Included in Investing Cash Flows
|
|
$
|
47,175
|
|
|
$
|
48,875
|
|
During the years ended
December 31, 2018
and
2017
, the Company, in the aggregate, made purchases of and contributions to equity method investments of
$0.8 million
and
$0.1 million
, respectively.
Note 6
- Revenues
Adoption of ASC 606
The financial statement impact from the adoption of ASC 606 as of January 1, 2018 was due to the following:
|
|
•
|
The recognition of revenues and related cost of revenue from Equipment Sales for three uncompleted DSI systems contracts as of December 31, 2017, which were accounted for under the guidance in ASC 605-35,
Revenue Recognition - Construction-Type and Production-Type Contracts
("ASC 605-35"). Under ASC 605-35, the Company accounted for revenues and associated cost of revenue for equipment systems from inception of the contract under the completed contract method and recognized revenue and cost of revenue when the equipment systems were deemed substantially complete. As of December 31, 2017, none of the DSI systems had met the revenue recognition criteria under the completed contract method. As of January 1, 2018, the Company determined that the performance obligation associated with each DSI system has been satisfied under ASC 606 guidance.
|
|
|
•
|
The recognition of revenues and related cost of revenue for a licensing arrangement with a related party (the "Licensing Arrangement") in which the Company satisfied its performance obligation under ASC 606 as of January 1, 2018.
|
As a result, the Company’s deferred revenue and related deferred project costs on the three DSI systems and the Licensing Arrangement, and the resultant income tax effects, were recognized through a cumulative effect adjustment to the Accumulated deficit as of January 1, 2018. In addition, the Company recorded a contract asset in the amount of
$0.3 million
related to one DSI system contract for which the Company completed its performance obligations but was not contractually able to bill the customer until the end of the warranty period.
The cumulative effect of the change from the adoption of ASC 606 to the Consolidated Balance Sheet as of January 1, 2018 is shown in the table that follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
Impact of
|
|
Balance as of
|
(in thousands)
|
|
December 31, 2017
|
|
Adoption
|
|
January 1, 2018
|
Balance Sheet
|
|
|
|
|
|
|
Receivables, net
|
|
$
|
1,113
|
|
|
$
|
339
|
|
|
$
|
1,452
|
|
Deferred tax assets
|
|
$
|
38,661
|
|
|
$
|
(889
|
)
|
|
$
|
37,772
|
|
Other long-term assets
|
|
$
|
1,503
|
|
|
$
|
(322
|
)
|
|
$
|
1,181
|
|
Other current liabilities
|
|
$
|
4,494
|
|
|
$
|
(1,821
|
)
|
|
$
|
2,673
|
|
Other long-term liabilities
|
|
$
|
2,285
|
|
|
$
|
(2,000
|
)
|
|
$
|
285
|
|
Accumulated deficit
|
|
$
|
(15,478
|
)
|
|
$
|
2,950
|
|
|
$
|
(12,528
|
)
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following tables show the impact of the adoption of ASC 606 on the Consolidated Balance Sheet and Consolidated Statement of Operations as of and for the
year ended December 31, 2018
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as Reported
|
|
Impact of
|
|
Balance as Adjusted
|
(in thousands)
|
|
December 31, 2018
|
|
Adoption
|
|
December 31, 2018
|
Balance Sheet
|
|
|
|
|
|
|
Receivables, net
|
|
$
|
9,554
|
|
|
$
|
—
|
|
|
$
|
9,554
|
|
Deferred tax assets
|
|
$
|
32,539
|
|
|
$
|
425
|
|
|
$
|
32,964
|
|
Other long-term assets
|
|
$
|
7,993
|
|
|
$
|
322
|
|
|
$
|
8,315
|
|
Other current liabilities
|
|
$
|
2,138
|
|
|
$
|
—
|
|
|
$
|
2,138
|
|
Other long-term liabilities
|
|
$
|
940
|
|
|
$
|
2,000
|
|
|
$
|
2,940
|
|
Retained earnings
|
|
$
|
12,914
|
|
|
$
|
(1,253
|
)
|
|
$
|
11,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
|
As Reported
|
|
Impact of
|
|
As Adjusted
|
(in thousands)
|
|
December 31, 2018
|
|
Adoption
|
|
December 31, 2018
|
Statement of Operations
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Equipment sales
|
|
$
|
72
|
|
|
$
|
18,115
|
|
|
$
|
18,187
|
|
License royalties, related party
|
|
$
|
15,140
|
|
|
$
|
(15,140
|
)
|
|
$
|
—
|
|
Total revenues
|
|
$
|
23,945
|
|
|
$
|
2,975
|
|
|
$
|
26,920
|
|
Operating expenses:
|
|
|
|
|
|
|
Equipment sales cost of revenue
|
|
$
|
(353
|
)
|
|
$
|
15,945
|
|
|
$
|
15,592
|
|
Total operating expenses
|
|
$
|
30,345
|
|
|
$
|
15,945
|
|
|
$
|
46,290
|
|
Operating loss
|
|
$
|
(6,400
|
)
|
|
$
|
(12,970
|
)
|
|
$
|
(19,370
|
)
|
Other income (expense)
|
|
|
|
|
|
|
Royalties, related party
|
|
$
|
—
|
|
|
$
|
15,140
|
|
|
$
|
15,140
|
|
Total other income (expense)
|
|
$
|
52,277
|
|
|
$
|
15,140
|
|
|
$
|
67,417
|
|
Income before income tax expense
|
|
$
|
45,877
|
|
|
$
|
2,170
|
|
|
$
|
48,047
|
|
Income tax expense
|
|
10,423
|
|
|
464
|
|
|
10,887
|
|
Net income
|
|
$
|
35,454
|
|
|
$
|
1,706
|
|
|
$
|
37,160
|
|
As of and for the
year ended December 31, 2018
, the significant difference between the financial statement balances reported compared to the financial statement balances without the adoption of ASC 606 were as follows:
|
|
•
|
Equipment sales
-As of adoption, the Company derecognized contract assets of
$15.9 million
and contract liabilities of
$17.8 million
and recorded a contract asset of
$0.3 million
related to the three DSI systems contracts that met the revenue recognition requirements under ASC 606. After tax, the net adjustment for the three DSI systems was
$1.7 million
. Under revenue recognition guidance in effect prior to the adoption of ASC 606, all three of the DSI systems contracts would have met revenue recognition criteria as of
December 31, 2018
, and for the year ended
December 31, 2018
, the Company would have recognized
$18.1 million
of Equipment sales and
$15.9 million
of Equipment sales cost of revenue, respectively.
|
|
|
•
|
Licensing Arrangement
- As of adoption, the Company derecognized a contract liability of
$2.0 million
and a contract asset of
$0.3 million
related to the Licensing Arrangement, which met the revenue recognition requirements under ASC 606. After tax, the net adjustment for this contract was
$1.3 million
. Under revenue recognition guidance in effect prior to the adoption of ASC 606, this contract would not have met revenue recognition criteria as of
December 31, 2018
.
|
|
|
•
|
Royalties, related party
- As of adoption, and based on guidance provided in ASC 606 related to licensing arrangements where royalties are earned on a usage-based royalty arrangement, for the
year ended December 31, 2018
, as well as the corresponding periods from the prior year, the Company has reported the M-45 Royalties earned from Tinuum Group as revenues rather than as non-operating income under financial statement presentation guidance in effect prior to the adoption of ASC 606. This reclassification had no impact to the Company’s income before income tax expense or net income for all periods presented.
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Trade receivables, net
The following table shows the components of Trade receivables, net:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Trade receivables
|
|
$
|
10,121
|
|
|
$
|
1,240
|
|
Less: Allowance for doubtful accounts
|
|
(567
|
)
|
|
(127
|
)
|
Trade receivables, net
|
|
$
|
9,554
|
|
|
$
|
1,113
|
|
During the years ended
December 31, 2018
and
2017
, the Company recognized
$0.2 million
and
zero
, respectively, related to specific accounts whose ultimate collection was in doubt. During the first quarter of 2018, the Company settled a previously recorded commitment for additional work related to a contract with a customer, which resulted in a reduction to Equipment sales cost of revenue, exclusive of depreciation and amortization of
$0.3 million
and bad debt expense of
$0.2 million
. Bad debt expense is included within the
General and administrative
line item in the
Consolidated Statements of Operations
.
Disaggregation of Revenue
During the
year ended December 31, 2018
, 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 14
to the consolidated financial statements. The following tables disaggregate revenues by major source for the
year ended December 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2018
|
|
|
Segment
|
|
|
|
|
PGI
|
|
RC
|
|
Other
|
|
Total
|
Revenue component
|
|
|
|
|
|
|
|
—
|
|
Consumables
|
|
$
|
8,628
|
|
|
$
|
—
|
|
|
105
|
|
|
$
|
8,733
|
|
License royalties, related party
|
|
—
|
|
|
15,140
|
|
|
—
|
|
|
15,140
|
|
Equipment sales
|
|
72
|
|
|
—
|
|
|
—
|
|
|
72
|
|
Revenues from customers
|
|
8,700
|
|
|
15,140
|
|
|
105
|
|
|
23,945
|
|
|
|
|
|
|
|
|
|
|
Earnings from equity method investments
|
|
—
|
|
|
54,208
|
|
|
—
|
|
|
54,208
|
|
|
|
|
|
|
|
|
|
|
Total revenues and earnings from equity method investments
|
|
$
|
8,700
|
|
|
$
|
69,348
|
|
|
$
|
105
|
|
|
$
|
78,153
|
|
Note 7
- Borrowings
|
|
|
|
|
|
|
|
Years ended December 31,
|
(in thousands)
|
|
2018
|
Senior Term Loan due December 2021, related party
|
|
$
|
70,000
|
|
Less net unamortized debt issuance costs
|
|
(1,990
|
)
|
Less net unamortized debt discount
|
|
(2,052
|
)
|
Senior Term Loan due December 2021, net
|
|
65,958
|
|
Capital lease obligations
|
|
8,167
|
|
Line of Credit
|
|
—
|
|
|
|
74,125
|
|
Less: Current maturities
|
|
(24,067
|
)
|
Total long-term borrowings
|
|
$
|
50,058
|
|
Senior Term Loan
In December 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
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 2
. The Company also paid debt issuance costs of
$2.0 million
related to the Senior Term Loan. The Senior Term Loan has a term of
36
months 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 million
are required beginning in March 2019, and the Company may prepay the Senior Term Loan at any time without penalty. The Senior Term Loan is secured by substantially all of the assets of the Company, including the cash flows from Tinuum Group and Tinuum Services (collectively, the "Tinuum Entities"), but excluding the Company's equity interests in the Tinuum entities.
The Senior Term Loan includes, among others, the following covenants: (1) Beginning December 31, 2018 and as of the end of each fiscal quarter thereafter, the Company must maintain a minimum cash balance of
$5.0 million
and shall not permit "expected future net cash flows from the refined coal business" (as defined in the Senior Term Loan) to be less than
1.75
times the outstanding principal amount of the Senior Term Loan; (2) Beginning in January 2019, annual collective dividends and buybacks of Company shares in an aggregate amount, not to exceed
$30 million
, is 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 million
.
The following table presents the future aggregate annual maturities of the Company’s Senior Term Loan excluding unamortized discounts and deferred financing cost:
|
|
|
|
|
|
Year ended December 31,
|
|
|
(in thousands)
|
|
Principal Amount
|
2019
|
|
$
|
24,000
|
|
2020
|
|
24,000
|
|
2021
|
|
22,000
|
|
2022
|
|
—
|
|
2023
|
|
—
|
|
Thereafter
|
|
—
|
|
Total
|
|
$
|
70,000
|
|
Line of Credit
In September 2013, ADA, as borrower, and the Company, as guarantor, entered into the Line of Credit with a bank (the "Lender") for an aggregate principal amount of
$10 million
that was secured by certain amounts due to the Company from certain Tinuum Group RC leases. The Line of Credit has been amended 13 times from the period from December 2, 2013 through December 31, 2018, including two amendments executed in 2018.
On September 30, 2018, ADA, as borrower, the Company, as guarantor, and the Lender entered into an amendment (the "Twelfth Amendment") to the Line of Credit. The Twelfth Amendment decreased the Line of Credit to
$5.0 million
due to decreased collateral requirements, extended the maturity date of the Line of Credit to September 30, 2020 and permitted the Line of Credit to be used as collateral (in place of restricted cash) for letters of credit ("LC's") up to
$5.0 million
related to equipment projects and certain other agreements. Under the Twelfth Amendment, there was no minimum cash balance requirement based on the Company meeting certain conditions and maintaining minimum trailing twelve-month EBITDA (earnings before interest, taxes, depreciation and amortization), as previously defined in the "Eleventh Amendment" to the Line of Credit, of
$24.0 million
.
On December 7, 2018, ADA, as borrower, the Company, as guarantor, and the Lender entered into an amendment to the Line of Credit, which provided, among other things, for ADA to be able to enter into the Senior Term Loan as a guarantor so long as the principal amount of the Senior Term Loan does not exceed
$70.0 million
. Additionally, the financial covenants in the Line of Credit were amended and restated to be consistent with the aforementioned Senior Term Loan covenants, including maintaining a minimum cash balance of
$5.0 million
.
As of
December 31, 2018
, there were
no
outstanding borrowings under the Line of Credit.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Other
During March 2017, a customer drew on a letter of credit ("LC") related to an equipment system in the amount of
$0.8 million
("LC Draw"), which was funded by borrowing availability under the Line of Credit. The Company subsequently repaid the LC Draw to the Lender as of March 31, 2017. The Company is contesting the LC Draw and is pursuing legal actions to recover the entire amount of the LC Draw from the customer. The Company recorded an asset for the LC Draw net of estimated allowance of
$0.4 million
, which is included in
Other long-term assets
on the Consolidated Balance Sheets.
As of
December 31, 2018
, there were
no
outstanding borrowings under LC's. As of December 31, 2017, there was one LC outstanding in the amount of
$3.5 million
related to an obligation under a settlement agreement as further discussed in
Note 8
. In January 2018, this LC was terminated by all parties to the LC as a result of the full the settlement of the obligation on December 29, 2017.
Note 8
- 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’s significant legal proceedings are discussed below.
Indemnity Settlement Agreement
In December 2017, prior to the Carbon Solutions Acquisition, the Company, Carbon Solutions and the former parent company of Carbon Solutions agreed to terminate certain provisions of the Indemnity Settlement Agreement (the " Indemnity Termination Agreement"). Pursuant to an agreement executed concurrently with the Indemnity Termination Agreement, the Company, Norit International B.V. ("Norit") and an affiliate of Norit (collectively referred to as “Norit”) agreed to a final payment in the amount of
$3.3 million
(the "Settlement Payment") to settle all outstanding royalty obligations (the "Royalty Award") owed under the terms of a settlement agreement executed in 2011 between the Company and Norit (the "Norit Settlement Agreement"). This amount was paid by the Company on December 29, 2017.
Under the Indemnity Termination Agreement, and upon payment of the Settlement Payment, the Company was relieved of certain financial and indemnity obligations required by the terms of the Norit Settlement Agreement, including the obligation to maintain LC's securing future royalty payment obligations. As of December 31, 2017,
$3.5 million
in LC's related to the Royalty Award were outstanding, but were canceled by all parties in January 2018, pursuant to the Indemnity Termination Agreement.
Advanced Emission Solutions, Inc. Profit Sharing Retirement Plan
The Advanced Emissions Solutions, Inc. Profit Sharing Retirement Plan (the “401(k) Plan”) is subject to the jurisdiction of the Internal Revenue Service ("IRS") and the Department of Labor ("DOL").
In February 2018, as part of an agreement reached with the DOL from its investigation, which had commenced in 2016, in the 401(k) Plan and the Company as the Plan Sponsor, the Company agreed to make a restorative payment to the 401(k) Plan in the amount of
$1.0 million
as an estimate of lost earnings for 401(k) Plan participants as of January 1, 2015. The Company determined this contingency to be both probable and reasonably estimable and accrued
$1.0 million
as of
December 31, 2017
. The liability and related charge were recorded in the Other current liabilities line item on the Consolidated Balance Sheet and in the Other line item in the Consolidated Statements of Operations for the year ended
December 31, 2017
, respectively. On June 1, 2018, the Company made the restorative payment of
$1.0 million
to the 401(k) Plan. On September 7, 2018, the Company received notification that the DOL had closed its investigation and no further action was required by the Company.
Other Commitments and Contingencies
Tinuum Group
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.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Purchase Obligations
The Company does not have any future purchase obligations as of
December 31, 2018
.
U.S. Department of Energy ("DOE") Audits
Certain of the Company's completed and current contracts awarded by the DOE and related industry participants remain subject to adjustments as a result of future government audits. The Company's historical experience with these audits has not resulted in significant adverse adjustments to amounts previously received; however, the Company currently remains subject to audits for the years 2014 and later.
Lease Obligations
The Company leases certain of its mining, plant and operating equipment, as well as office equipment and vehicles under capital and operating lease agreements, of which original lease terms ranged from
one
to
seven
years. Certain of these leases have options permitting renewals for additional periods and buy-out options. In addition to minimum fixed payments, a number of leases contain annual escalation clauses that are related to increases in the inflation index.
Annual minimum commitments under the leases as of
December 31, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
Operating
Lease
Commitments
(in thousands)
|
|
Capital
Lease
Commitments
(in thousands)
|
2019
|
|
$
|
3,619
|
|
|
$
|
1,749
|
|
2020
|
|
2,273
|
|
|
1,707
|
|
2021
|
|
1,632
|
|
|
1,802
|
|
2022
|
|
310
|
|
|
951
|
|
2023
|
|
221
|
|
|
951
|
|
Thereafter
|
|
—
|
|
|
2,482
|
|
Total minimum lease payments
|
|
$
|
8,055
|
|
|
9,642
|
|
Less amounts representing interest
|
|
|
|
(1,475
|
)
|
Present value of minimum capital lease payments
|
|
|
|
$
|
8,167
|
|
Rent expense incurred for the years ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Rent expense
(1)
|
|
$
|
302
|
|
|
$
|
(60
|
)
|
(1) During the year ended
December 31, 2017
, the Company accelerated deferred rent and tenant improvement allowances in connection with the termination of the lease agreement of its former corporate office.
Note 9
- 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, 2018
and
2017
, 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.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Stock Repurchase
Tender Offer
On
May 5, 2017
, the Board authorized the commencement of a modified Dutch Auction tender offer ("Tender Offer") to purchase for cash up to
925,000
shares of the Company's common stock at a price per share of not less than
$9.40
nor greater than
$10.80
, for a maximum aggregate purchase price of
$10.0 million
, with an option to purchase an additional
2%
of the outstanding shares of common stock if the Tender Offer was oversubscribed. The Tender Offer expired on
June 6, 2017
and a total of
2,858,425
shares were validly tendered and not properly withdrawn at or below the final purchase price of
$9.40
per share.
Because the Tender Offer was oversubscribed, the Company purchased a prorated portion of the shares properly tendered by each tendering stockholder (other than "odd lot" holders whose shares were purchased on a priority basis) at the final per share purchase price. Accordingly, the Company acquired
1,370,891
shares of its common stock ("Tendered Shares") at a price of
$9.40
per share, for a total cost of approximately
$12.9 million
, excluding fees and other expenses related to the Tender Offer. The Tendered Shares represented approximately
6.2%
of the Company's outstanding shares prior to the Tender Offer. The Tendered Shares included the
925,000
shares the Company initially offered to purchase and
445,891
additional shares that the Company elected to purchase pursuant to its right to purchase up to an additional
2%
of its outstanding shares of common stock. The Company recorded the Tendered Shares at cost, which included fees and expenses related to the Tender Offer, and reported the Tendered Shares as Treasury Stock on the Condensed Consolidated Balance Sheet as of
December 31, 2018
.
The Company’s Board and executive officers did not participate in the Tender Offer, except for one director of the Board, who is a manager of a financial institution and holds dispositive powers over the shares of the Company's common stock held by the financial institution that tendered
70,178
of its shares of the Company's common stock.
Stock Repurchase Programs
In November 2018, the Board authorized the Company to purchase up to
$20.0 million
of its outstanding common stock. This stock repurchase program will remain in effect until December 31, 2019 unless otherwise modified by the Board. Previously, the Board had authorized the Company to purchase up to
$20.0 million
of its outstanding common stock under a separate repurchase program that was in effect until July 31, 2018.
During the years ended
December 31, 2018
and
2017
, under the collective stock repurchase programs authorized by the Board, the Company purchased
2,350,422
and
342,875
shares of its common stock for cash of
$25.3 million
and
$3.4 million
, inclusive of commissions and fees, respectively. Of these amounts,
$15.6 million
was purchased in single blocks through privately negotiated transactions.
Quarterly Cash Dividend
Dividends declared to holders of the Company's common shares during the years ended
December 31, 2018
and
December 31, 2017
were
$20.3 million
and
$15.8 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 that contain forfeitable dividend rights that are not payable until the underlying shares of common stock vest. These amounts are included in both Other current liabilities and Other long-term liabilities on the Consolidated Balance Sheet as of
December 31, 2018
and
2017
.
Dividends declared and paid quarterly per share on all outstanding shares of common stock during the years ended
December 31, 2018
and
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
Per share
|
|
Date paid
|
|
Per share
|
|
Date paid
|
Dividends declared during quarter ended:
|
|
|
|
|
|
|
|
|
March 31
|
|
$
|
0.25
|
|
|
March 8, 2018
|
|
$
|
—
|
|
|
—
|
|
June 30
|
|
0.25
|
|
|
June 8, 2018
|
|
0.25
|
|
|
July 17, 2017
|
|
September 30
|
|
0.25
|
|
|
September 6, 2018
|
|
0.25
|
|
|
September 7, 2017
|
|
December 31
|
|
0.25
|
|
|
December 6, 2018
|
|
0.25
|
|
|
December 6, 2017
|
|
|
|
$
|
1.00
|
|
|
|
|
$
|
0.75
|
|
|
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Tax Asset Protection Plan
United States federal income tax rules, and Section 382 of the Internal Revenue Code in particular, could substantially limit the use of net operating losses and other tax assets if ADES experiences an "ownership change" (as defined in the Internal Revenue Code). In general, an ownership change occurs if there is a cumulative change in the ownership of 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 "Tax Asset Protection Plan") designed to protect the Company’s ability to utilize its net operating losses and tax credits. The Tax Asset Protection Plan 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 6, 2018, the Board approved the First Amendment to the Tax Asset Protection Plan (the "Amendment") that amends the Tax Asset Protection Plan dated May 5, 2017 (the "TAPP"). The Amendment amends the definition of "Final Expiration Date" under the TAPP to extend the duration of the TAPP and makes associated changes in connection therewith. At the Company's 2018 annual meeting, the Company's stockholders approved the Amendment, thus the Final Expiration Date will be the close of business on December 31, 2019.
Note 10
- 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 Internal Revenue Code Section 409A compliance. Upon the adoption of the 2017 Plan in June 2017, the Company no longer grants any awards from the 2010 Plan.
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. The Company reserved
2,000,000
shares of its common stock 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, 2018
and
2017
.
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.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
PSU's
-
Performance share units ("PSU's") vest 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. Vesting of the PSU's, if at all, occurs no later than January 2 after the conclusion of the third year of the performance period, subject to the grantee’s continuous service and the achievement of certain pre-established performance goals. Amounts vested are measured as of December 31, immediately prior to the end of the service period, unless the PSU's vest sooner at the target amount as a result of certain transactions pursuant to Section 11 of the Amended and Restated 2007 Equity Incentive Plan, as amended ("2007 Plan").
The number of shares of common stock a participant receives will be increased (up to
200 percent
of target levels) or reduced (down to
zero
) based on the level of achievement of performance goals. The number of PSU's that may be earned by a participant is determined at the end of the performance period based on the relative placement of the Company’s total stockholder return (“TSR”) for that period with approximately
75%
of the award based on the relative performance of the Company’s TSR performance compared to the respective TSRs of a specified group of peer companies and the remaining portion of the award based on the Company’s TSR performance compared to the Russell 3000 Index.
Compensation expense is recognized for PSU awards on a straight-line basis over a
3
-year service 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 years ended
December 31, 2018
or
2017
.
When PSU's are granted, the Company uses historical data to estimate inputs used in the Monte Carlo pricing model.
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 and the 2007 Plan:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
RSA expense
|
|
$
|
2,222
|
|
|
$
|
1,400
|
|
Stock option expense
|
|
58
|
|
|
672
|
|
RSU expense
|
|
210
|
|
|
—
|
|
PSU expense
|
|
—
|
|
|
137
|
|
Total stock-based compensation expense
|
|
$
|
2,490
|
|
|
$
|
2,209
|
|
The Company recorded stock-based compensation expense related to awards granted to the Board in the General and administrative expense line and all other awards within the Payroll and benefit expense line in the Consolidated Statements of Operations.
During the year ended
December 31, 2018
, the Company modified the terms of awards granted to
13
employees in connection with its restructuring plans and termination of the impacted employees discussed in
Note 18
. These modifications resulted in the accelerated vesting and incremental expense related to certain performance-based awards and restricted stock awards. As a result, during
2018
, the Company recognized incremental stock-based compensation of
$0.8 million
, which was included in the Payroll and benefits line item in the Consolidated Statements of Operations. There were no material modifications to awards during the year ended
December 31, 2017
.
The amount of unrecognized compensation cost as of
December 31, 2018
, and the expected weighted-average period over which the cost will be recognized is as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
(in thousands)
|
|
Unrecognized Compensation Cost
|
|
Expected Weighted-Average Period of Recognition (in years)
|
RSA expense
|
|
$
|
1,767
|
|
|
1.58
|
Total unrecognized stock-based compensation expense
|
|
$
|
1,767
|
|
|
1.58
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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, 2018
|
|
|
|
|
|
|
|
|
Non-vested at January 1, 2018
|
|
276,607
|
|
|
—
|
|
|
$
|
9.03
|
|
|
$
|
—
|
|
Granted
|
|
205,998
|
|
|
20,000
|
|
|
$
|
11.00
|
|
|
$
|
10.52
|
|
Vested
|
|
(200,618
|
)
|
|
—
|
|
|
$
|
9.79
|
|
|
$
|
—
|
|
Forfeited
|
|
(1,135
|
)
|
|
—
|
|
|
$
|
10.44
|
|
|
$
|
—
|
|
Non-vested at December 31, 2018
|
|
280,852
|
|
|
20,000
|
|
|
$
|
9.92
|
|
|
$
|
10.52
|
|
The weighted-average grant date fair value of RSA's granted or modified during the years ended
December 31, 2018
and
2017
was
$11.00
and
$9.50
, respectively. The weighted-average grant date fair value of RSU's granted or modified during the years ended
December 31, 2018
and
2017
was
$10.52
and
zero
, respectively. The total grant-date fair value of RSA's vested during the years ended
December 31, 2018
and
2017
was
$2.0 million
and
$1.7 million
, respectively. There were
no
RSU's vested during the years ended
December 31, 2018
and
2017
. The aggregate intrinsic value of non-vested RSA's and RSU's outstanding as of
December 31, 2018
was
$3.0 million
and
$0.2 million
, respectively.
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, 2018
|
|
|
|
|
|
|
|
|
Options outstanding at January 1, 2018
|
|
622,446
|
|
|
$
|
11.64
|
|
|
|
|
|
Options granted
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Options exercised
|
|
(92,666
|
)
|
|
$
|
8.25
|
|
|
|
|
|
Options expired / forfeited
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Options outstanding at December 31, 2018
|
|
529,780
|
|
|
$
|
12.23
|
|
|
$
|
296
|
|
|
1.46
|
Options vested and exercisable at December 31, 2018
|
|
529,780
|
|
|
$
|
12.23
|
|
|
$
|
296
|
|
|
1.46
|
The weighted-average grant-date fair value of options vesting during the years ended
December 31, 2018
and
2017
was
$0.3 million
and
$0.7 million
, respectively. The weighted-average grant-date fair value of options exercised during the year ended
December 31, 2018
was
$0.3 million
. The Company did not receive cash from the exercise of stock options during the year ended
December 31, 2018
as
67,715
shares were withheld as payment of the exercise price. There were
no
options exercised during the year ended
December 31, 2017
.
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, settled PSU'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, 2018
and
2017
.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
PSU's
A summary of the status and activity of non-vested PSU's is presented in the following table:
|
|
|
|
|
|
|
|
|
(in thousands, except for per share amounts)
|
|
Units
|
|
Weighted-Average
Grant-Date
Fair Value
|
For year ended December 31, 2018
|
|
|
|
|
Non-vested at beginning of year
|
|
19,406
|
|
|
$
|
25.20
|
|
Granted (1)
|
|
—
|
|
|
$
|
—
|
|
Vested (1)
|
|
(19,406
|
)
|
|
$
|
25.20
|
|
Forfeited / Canceled (1)
|
|
—
|
|
|
$
|
—
|
|
Non-vested at end of year
|
|
—
|
|
|
$
|
—
|
|
(1) The number of units shown in the table above are based on target performance. The final number of shares of common stock issued may vary depending on the achievement of market conditions established within the awards, which could result in the actual number of shares issued ranging from zero to a maximum of two times the number of units shown in the above table.
There were
no
PSU's granted during the years ended
December 31, 2018
and
2017
. PSU's outstanding remained unvested until the third anniversary date of their issuance, at which time the actual number of vested shares was 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.
The following table shows the PSU's that were settled by issuing the Company's common stock relative to a peer group performance index and broad stock index.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of Grant
|
|
Net Number of Issued Shares upon Vesting
|
|
Shares Withheld to Settle Tax Withholding Obligations
|
|
TSR Multiple Range
|
|
Russell 3000 Multiple
|
|
|
|
|
|
Low
|
|
High
|
|
Low
|
|
High
|
For the year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
12,311
|
|
|
4,061
|
|
|
112.50
|
|
|
112.50
|
|
|
—
|
|
|
—
|
|
For the year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
6,476
|
|
|
3,573
|
|
|
0.75
|
|
|
1.00
|
|
|
—
|
|
|
—
|
|
|
|
2015
|
|
3,869
|
|
|
2,310
|
|
|
0.60
|
|
|
0.60
|
|
|
—
|
|
|
—
|
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 11
- Supplemental Financial Information
Supplemental Balance Sheet Information
The following table summarizes the components of
Prepaid expenses and other assets
and
Other long-term assets
as presented in the
Consolidated Balance Sheets
:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Other current assets:
|
|
|
|
|
Prepaid expenses
|
|
$
|
1,233
|
|
|
$
|
1,678
|
|
Prepaid income taxes
|
|
2,940
|
|
|
—
|
|
Other
|
|
1,397
|
|
|
83
|
|
|
|
$
|
5,570
|
|
|
$
|
1,761
|
|
Other long-term assets:
|
|
|
|
|
Spare parts
|
|
$
|
3,278
|
|
|
$
|
—
|
|
Mine development costs, net
|
|
2,531
|
|
|
—
|
|
Long-term receivable, net
|
|
408
|
|
|
—
|
|
Deposits
|
|
269
|
|
|
223
|
|
Highview investment
|
|
552
|
|
|
552
|
|
Other long-term assets
|
|
955
|
|
|
728
|
|
|
|
$
|
7,993
|
|
|
$
|
1,503
|
|
Included within Other long-term assets is the Company's investment ("Highview Investment") in Highview Enterprises Limited ("Highview"). 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 impairment upon an indicator of impairment such as an event or change in circumstances that may have a significant adverse effect on the fair value of the investment. As of
December 31, 2017
, the Company recorded an impairment charge of
$0.5 million
based on an estimated fair value of
£1.00
per share, compared to the carrying value prior to the impairment charge of
£2.00
per share. The estimated fair value as of
December 31, 2017
was based on an equity raise that was completed during the first quarter of 2017 at a price of
£1.00
per share.
There were no changes to the carrying value of the Highview Investment during the year ended
December 31, 2018
, as there were no indicators of impairment or observable price changes for equity issued by Highview.
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)
|
|
2018
|
|
2017
|
Other current liabilities:
|
|
|
|
|
Accrued interest
|
|
$
|
407
|
|
|
$
|
—
|
|
Sales and other taxes payable
|
|
479
|
|
|
207
|
|
Estimated Company contribution to 401(k) Plan
|
|
—
|
|
|
1,000
|
|
Accrued losses on equipment contracts
|
|
—
|
|
|
69
|
|
Billings in excess of costs on uncompleted contracts
|
|
—
|
|
|
1,830
|
|
Warranty liabilities
|
|
12
|
|
|
316
|
|
Other
|
|
1,240
|
|
|
1,072
|
|
|
|
$
|
2,138
|
|
|
$
|
4,494
|
|
Other long-term liabilities:
|
|
|
|
|
Deferred revenue, related party
|
|
$
|
—
|
|
|
$
|
2,000
|
|
Deferred rent
|
|
106
|
|
|
192
|
|
Mine reclamation liability
|
|
624
|
|
|
—
|
|
Other long-term liabilities
|
|
210
|
|
|
93
|
|
|
|
$
|
940
|
|
|
$
|
2,285
|
|
The tables below detail components of
Other current liabilities
as presented above:
Included within
Other current liabilities
is the Company's asset retirement obligation. Changes in the Company's asset retirement obligation were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Asset retirement obligation, beginning of year
|
|
$
|
—
|
|
|
$
|
1,312
|
|
Asset retirement obligation assumed in Carbon Solutions Acquisition
|
|
626
|
|
|
—
|
|
Accretion
|
|
2
|
|
|
37
|
|
Liabilities settled
|
|
(4
|
)
|
|
(527
|
)
|
Changes due to scope and timing of reclamation
|
|
—
|
|
|
(822
|
)
|
Asset retirement obligations, end of year
|
|
$
|
624
|
|
|
$
|
—
|
|
As part of the Carbon Solutions Acquisition, the Company assumed an asset retirement obligation related to the Company's lignite mine, the Five Forks Mine. The Company recorded the liability at its estimated the fair value and periodically adjusts 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.
The Company’s mining activities are subject to various domestic laws and regulations governing the protection of the environment. The Company conducts its operations 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.
The Company previously had recorded an asset retirement obligation related to a pilot facility it installed for conducting research activities. The Company settled its asset retirement obligation during the year ended
December 31, 2017
for less than its estimate as the scope of the asset retirement obligation was reduced. The change in estimate was recorded within the Research and development, net line item of the Consolidated Statements of Operations as the asset retirement obligation related to a research project of which expenses were originally recorded within the same line item.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Prior to the adoption of ASC 606 on January 1, 2018, costs incurred on uncompleted contracts represented the gross costs as of the balance sheet dates. Billings on uncompleted contracts represented the gross billings as of the balance sheet dates. Costs and billings are netted on an individual contract basis, with contracts that were in a net cost position aggregated and presented as
Prepaid expenses and other assets
in the
Consolidated Balance Sheets
, and contracts that were in a net billing position aggregated and presented as Billing in excess of costs on uncompleted contracts in the
Consolidated Balance Sheets
. The below table shows the components of these items:
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
|
2017
|
Costs incurred on uncompleted contracts (gross)
|
|
$
|
15,945
|
|
Billings on uncompleted contracts (gross)
|
|
(17,775
|
)
|
|
|
$
|
(1,830
|
)
|
Included in the accompanying balance sheets under the following captions (1):
|
|
|
Costs in excess of billings on uncompleted contracts
(2)
|
|
$
|
—
|
|
Billings in excess of costs on uncompleted contracts
(3)
|
|
(1,830
|
)
|
|
|
$
|
(1,830
|
)
|
(1)
Amounts presented after netting of costs and billings on an individual contract basis.
(2)
Costs in excess of billings on uncompleted contracts was included in the
Prepaid expenses and other assets
caption on the Consolidated Balance Sheets.
(3)
Billings in excess of costs on uncompleted contracts was included in the Other current liabilities caption on the Consolidated Balance Sheets.
For discussion on the impact of adopting ASC 606, see
Note 6
.
Supplemental Consolidated Statements of Operations Information
The following table details the components of
Interest expense
in the
Consolidated Statements of Operations
:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
453A interest
|
|
$
|
1,585
|
|
|
$
|
2,555
|
|
Interest on Senior Term Loan
|
|
460
|
|
|
—
|
|
Line of Credit interest and letters of credit fees
|
|
—
|
|
|
417
|
|
Other
|
|
106
|
|
|
52
|
|
|
|
$
|
2,151
|
|
|
$
|
3,024
|
|
The following table details the components of
Other
in the
Consolidated Statements of Operations
:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Impairment of Highview investment
|
|
$
|
—
|
|
|
$
|
(464
|
)
|
Settlement agreement (1)
|
|
—
|
|
|
3,500
|
|
Company contribution to 401(k) Plan
|
|
—
|
|
|
(1,000
|
)
|
Other
|
|
(19
|
)
|
|
(11
|
)
|
|
|
$
|
(19
|
)
|
|
$
|
2,025
|
|
(1) On November 6, 2017, the Company entered into a settlement agreement with a former third-party service provider and as part of the settlement the Company received cash in the amount of $
3.5 million
. This amount was paid to the Company during the fourth quarter of 2017.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 12
- 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. 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, 2018
|
|
As of December 31, 2017
|
(in thousands)
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Financial Instruments:
|
|
|
|
|
|
|
|
|
Highview Investment
|
|
$
|
552
|
|
|
$
|
552
|
|
|
$
|
552
|
|
|
$
|
552
|
|
Highview Obligation
|
|
$
|
213
|
|
|
$
|
213
|
|
|
$
|
210
|
|
|
$
|
210
|
|
Concentration of credit risk
As of
December 31, 2018
, 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 five financial institutions as of December 31, 2018. If those institutions were to be unable to perform its obligations, the Company would be at risk regarding the amount of investment in excess of the federal deposit insurance corporation limits (
$250 thousand
) that would be returned to the Company.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of
December 31, 2018
and
December 31, 2017
, 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
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 2
.
As discussed in
Note 11
, during the year ended
December 31, 2017
, the Company recorded impairment charges of approximately
$0.5 million
, to reduce the carrying value of the Highview Investment to its estimated fair value.
The fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market.
Note 13
- Income Taxes
On December 22, 2017 (the "Enactment Date"), the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act made broad and complex changes to the U.S. tax code and key provisions applicable to the Company, or certain of Tinuum Group's existing or potential customers, for 2018 included the following: (1) reduction of the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) elimination of the corporate alternative minimum tax (AMT); (3) a new limitation on deductible interest expense; (4) limitations on the deductibility of certain executive compensation; (5) limitations on the use of federal tax credits ("FTCs") to reduce the U.S. income tax liability; (6) limitations on net operating losses (“NOL’s”) generated after December 31, 2017, to
80 percent
of taxable income; and the introduction of the Base Erosion Anti-Abuse Tax (“BEAT”) for tax years beginning after December 31, 2017.
As of the Enactment Date, the Company recorded an adjustment to its recorded deferred tax assets and deferred tax liabilities as a result of the reduction of the U.S. federal corporate rate from 35 percent to 21 percent, which resulted in a reduction of
$5.8 million
to net deferred tax assets as of the Enactment Date for those temporary differences expected to reverse after the Enactment Date. The reduction in the net deferred assets resulted in the recognition of
$5.8 million
of deferred tax expense for the year ended
December 31, 2017
. During 2018, the Company did not make any accounting adjustments related to the Tax Act.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands, except for rate)
|
|
2018
|
|
2017
|
Current portion of income tax expense:
|
|
|
|
|
Federal
|
|
$
|
882
|
|
|
$
|
519
|
|
State and other
|
|
4,308
|
|
|
894
|
|
|
|
5,190
|
|
|
1,413
|
|
Deferred portion of income tax expense (benefit):
|
|
|
|
|
Federal
|
|
4,766
|
|
|
23,003
|
|
State and other
|
|
467
|
|
|
(264
|
)
|
|
|
5,233
|
|
|
22,739
|
|
Total income tax expense
|
|
$
|
10,423
|
|
|
$
|
24,152
|
|
Effective tax rate
|
|
23
|
%
|
|
46
|
%
|
For the year ended
December 31, 2018
, the Company recorded income tax expense of
$10.4 million
compared to income tax expense of
$24.2 million
for
2017
. The income tax expense for the year ended
December 31, 2018
includes
$4.5 million
due to an increase in the valuation allowance recorded against deferred tax assets. Income tax expense during the year ended December 31, 2017 included
$5.8 million
associated with the reduction of the net deferred tax assets as of the Enactment Date of the Tax Act. Excluding the impact of the Tax Act, the Company would have recorded a tax benefit of approximately
$14.0 million
during the fourth quarter of 2017 due to a reduction in the valuation allowance recorded against the deferred tax assets. However, after the impact of the Tax Act, the Company recorded tax expense of
$11.5 million
.
Income tax expense differs from the amount that would be computed by applying the U.S. statutory federal income tax rates of 21% and 35% for the years ended
December 31, 2018
and
2017
, respectively, to income before income taxes as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Federal statutory rate
|
|
$
|
9,634
|
|
|
$
|
18,209
|
|
State income taxes, net of federal benefit
|
|
3,625
|
|
|
1,721
|
|
Permanent differences
|
|
130
|
|
|
777
|
|
Tax credits
|
|
(7,031
|
)
|
|
(1,949
|
)
|
Valuation allowances
|
|
4,462
|
|
|
(474
|
)
|
Changes in tax rates
|
|
(464
|
)
|
|
5,818
|
|
Stock-based compensation
|
|
(216
|
)
|
|
303
|
|
Other
|
|
283
|
|
|
(253
|
)
|
Expense for the provision for income taxes
|
|
$
|
10,423
|
|
|
$
|
24,152
|
|
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
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Deferred tax assets
|
|
|
|
|
Tax credits
|
|
$
|
104,553
|
|
|
$
|
100,367
|
|
Deferred revenues and loss contract provisions
|
|
—
|
|
|
906
|
|
Employee related liabilities
|
|
1,515
|
|
|
393
|
|
Intangible assets
|
|
1,623
|
|
|
914
|
|
Equity method investments
|
|
9,588
|
|
|
8,457
|
|
Net operating loss carryforwards
|
|
2,479
|
|
|
2,004
|
|
Other investments
|
|
583
|
|
|
563
|
|
Other
|
|
380
|
|
|
648
|
|
Total deferred tax assets
|
|
120,721
|
|
|
114,252
|
|
Less valuation allowance
|
|
(79,898
|
)
|
|
(75,436
|
)
|
Deferred tax assets
|
|
40,823
|
|
|
38,816
|
|
Less: Deferred tax liabilities
|
|
|
|
|
Property and equipment and other
|
|
(8,284
|
)
|
|
(155
|
)
|
Total deferred tax liabilities
|
|
(8,284
|
)
|
|
(155
|
)
|
Net deferred tax assets
|
|
$
|
32,539
|
|
|
$
|
38,661
|
|
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, 2018
, the Company concluded it is more likely than not the Company will generate sufficient taxable income within the applicable NOL and tax credit carry-forward periods to realize
$32.5 million
of its net deferred tax assets, and therefore, increased its valuation allowance by
$4.5 million
. In reaching this conclusion, the Company most significantly considered: (1) forecasts of continued future taxable income, (2) changes to forecasts of future utilization of DTA's and (3) impacts of additional RC invested facilities during
2018
.
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)
|
|
2018
|
|
Beginning expiration year
|
|
Ending expiration year
|
State net operating loss carryforwards
|
|
$
|
52,126
|
|
|
2032
|
|
2038
|
Federal tax credit carryforwards
|
|
$
|
104,553
|
|
|
2032
|
|
2038
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Balance as of January 1
|
|
$
|
54
|
|
|
$
|
54
|
|
Increases for tax positions of current year
|
|
—
|
|
|
—
|
|
Balance as of December 31
|
|
$
|
54
|
|
|
$
|
54
|
|
The Company did not record any adjustments or recognize interest expense for uncertain tax positions for the years ended
December 31, 2018
and
2017
. 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 tax treatment of RC facilities at Tinuum Group in the
Interest expense
line item in the Consolidated Statements of Operations. Additional information related to these interest amounts is included in
Note 11
.
The Company files income tax returns in the U.S. and in various states. The Company is no longer subject to U.S. federal examinations by tax authorities for years before
2014
. The Company is generally no longer subject to state examinations by tax authorities for years before
2013
.
Note 14
- 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, 2018
, 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, 2018, the Company has
two
reportable segments: (1) Refined Coal ("RC"); and (2) Power Generation and Industrials ("PGI"). The majority of Carbon Solutions operations has been included within the PGI segment; whereas a portion has been included within All Other and Corporate.
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.
|
|
|
•
|
Segment operating income (loss) includes segment revenues and allocation of certain "Corporate general and administrative expenses," which includes
Payroll and benefits
,
Rent and occupancy
,
Legal and professional fees
, and
General and administrative
.
|
|
|
•
|
RC segment operating income includes interest expense directly attributable to the RC segment.
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of
December 31, 2018
and
December 31, 2017
, 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, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Revenues:
|
|
|
|
|
Refined Coal:
|
|
|
|
|
Earnings in equity method investments
|
|
$
|
54,208
|
|
|
$
|
53,843
|
|
Royalties, related party
|
|
15,140
|
|
|
9,672
|
|
|
|
69,348
|
|
|
63,515
|
|
Power Generation and Industrials:
|
|
|
|
|
Equipment sales
|
|
72
|
|
|
31,446
|
|
Consumables
|
|
8,628
|
|
|
4,246
|
|
|
|
8,700
|
|
|
35,692
|
|
Total segment reporting revenues
|
|
78,048
|
|
|
99,207
|
|
|
|
|
|
|
Adjustments to reconcile to reported revenues:
|
|
|
|
|
Earnings in equity method investments
|
|
(54,208
|
)
|
|
(53,843
|
)
|
Corporate and other
|
|
105
|
|
|
—
|
|
Total reported revenues
|
|
$
|
23,945
|
|
|
$
|
45,364
|
|
|
|
|
|
|
Segment operating income (loss)
|
|
|
|
|
Refined Coal (1)
|
|
$
|
65,454
|
|
|
$
|
59,908
|
|
Power Generation and Industrials (2)
|
|
(2,621
|
)
|
|
379
|
|
Total segment operating income
|
|
$
|
62,833
|
|
|
$
|
60,287
|
|
(1) Included within the RC segment operating income for the years ended
December 31, 2018
and
2017
is 453A interest expense of
$1.6 million
and
$2.6 million
, respectively. Also included within the RC segment operating income for the year ended
December 31, 2018
was
$0.4 million
of severance expense.
(2) Included within the PGI segment operating income for the year ended
December 31, 2018
was approximately
$1.0 million
of amortization expense related to the fair value of inventory. Also included within the PGI segment operating income for the year ended
December 31, 2018
was
$1.0 million
of severance expense.
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)
|
|
2018
|
|
2017
|
Segment operating income
|
|
|
|
|
Total reported segment operating income
|
|
$
|
62,833
|
|
|
$
|
60,287
|
|
Corporate and other operating income
|
|
2
|
|
|
—
|
|
Consolidated operating income
|
|
62,835
|
|
|
60,287
|
|
|
|
|
|
|
Adjustments to reconcile to net income attributable to the Company
|
|
|
|
|
Corporate payroll and benefits
|
|
(4,970
|
)
|
|
(5,565
|
)
|
Corporate rent and occupancy
|
|
(616
|
)
|
|
(293
|
)
|
Corporate legal and professional fees
|
|
(7,978
|
)
|
|
(4,010
|
)
|
Corporate general and administrative
|
|
(3,011
|
)
|
|
(3,400
|
)
|
Corporate depreciation and amortization
|
|
(134
|
)
|
|
(342
|
)
|
Corporate interest (expense) income, net
|
|
(521
|
)
|
|
(432
|
)
|
Other income (expense), net
|
|
272
|
|
|
5,780
|
|
Income tax expense
|
|
(10,423
|
)
|
|
(24,152
|
)
|
Net income
|
|
$
|
35,454
|
|
|
$
|
27,873
|
|
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)
|
|
2018
|
|
2017
|
Assets:
|
|
|
|
|
Refined Coal
(1)
|
|
$
|
11,468
|
|
|
$
|
8,092
|
|
Power Generation and Industrial
|
|
85,786
|
|
|
3,755
|
|
Total segment assets
|
|
97,254
|
|
|
11,847
|
|
All Other and Corporate
(2)
|
|
62,410
|
|
|
70,771
|
|
Consolidated
|
|
$
|
159,664
|
|
|
$
|
82,618
|
|
(1) Includes
$6.6 million
of investments in equity method investees.
(2) Includes the Company's net deferred tax assets of
$32.5 million
.
Note 15
- Major Customers
Revenues from external customers who represent
10%
or more of the Company’s revenues for the years ended
December 31, 2018
and
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
Customer
|
|
Revenue Type
|
|
Segment(s)
|
|
2018
|
|
2017
|
A
|
|
License royalties, related party
|
|
RC
|
|
63%
|
|
21%
|
B
|
|
Equipment sales
|
|
PGI
|
|
—%
|
|
48%
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 16
- Related Party Transactions
Accounts Receivable
The following table shows the Company's receivable balance associated with related parties as of
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Receivable from related party - Tinuum Group
|
|
$
|
4,284
|
|
|
$
|
3,247
|
|
Revenues
The following table shows the other income recognized with related parties during the years ended
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
Royalties, related party - Tinuum Group
|
|
$
|
15,140
|
|
|
$
|
9,672
|
|
The above Tinuum Group royalties are included within the
License royalties, related party
line in the
Consolidated Statements of Operations
.
Note 17
- Defined Contribution Savings Plans
The Company sponsors two qualified defined contribution savings plans (collectively the "401(k) Plans") that allow participation by eligible employees who may defer a portion of their gross pay. The Company makes contributions to the 401(k) Plans based on percentages of an employee's eligible compensation as specified in the 401(k) Plans, and such employer contributions are in the form of cash.
The following table presents the amount of the Company's contributions made to the 401(k) Plan, which is reflected within the
Payroll and benefits
line item in the
Consolidated Statements of Operations
:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2018
|
|
2017
|
401(k) Plans employer contributions
|
|
$
|
139
|
|
|
$
|
56
|
|
Due to the usage of forfeitures within the 401(k) Plan to offset the Company's contribution related to the year ended December 31, 2017, there was an increase in employer contributions made to the 401(k) Plan for the
year ended December 31, 2018
.
As discussed in
Note 8
, the Company made an additional employer contribution of
$1.0 million
in June 2018 to one of its 401(k) Plans as part of an agreement with the DOL that required a restorative payment to be made to that 401(k) Plan. The Company had accrued this amount as of December 31, 2017 and the liability was included in
Other current liabilities
on the Consolidated Balance Sheet as of December 31, 2017 and the related expense was reflected within the
Other income (expense):
Other
line item in the Consolidated Statement of Operations for the year ended December 31, 2017.
Note 18
- Restructuring
In December 2018, the Company recorded restructuring charges in connection with the departures of certain executives of Carbon Solutions in conjunction with the Carbon Solutions Acquisition. As part of the Carbon Solutions Acquisition, the Company also assumed a salary severance liability for an additional executive of Carbon Solutions in the amount of
$0.6 million
. Additionally, the Company recorded restructuring charges in 2018 in connection with a reduction in force that commenced in May 2018 as part of the Company's further alignment of the business with strategic objectives, which included the departure of certain executive officers. These charges related to cash severance arrangements with departing employees and executives, as well as stock-based compensation charges related to the acceleration of vesting of certain stock awards.
During the year ended
December 31, 2017
, the Company did not record material restructuring charges.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A summary of the net pretax charges incurred by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax Charge
|
(in thousands, except employee data)
|
|
Approximate Number of Employees
|
|
Refined Coal
|
|
PGI
|
|
All Other and Corporate
|
|
Total
|
Year ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
16
|
|
|
$
|
448
|
|
|
$
|
996
|
|
|
$
|
1,685
|
|
|
$
|
3,129
|
|
Changes in estimates
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total pretax charge, net of reversals
|
|
|
|
$
|
448
|
|
|
$
|
996
|
|
|
$
|
1,685
|
|
|
$
|
3,129
|
|
The following table summarizes the Company's utilization of restructuring accruals for the years ended
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Employee Severance
|
|
Facility Closures
|
Beginning accrual as of January 1, 2017
|
|
$
|
452
|
|
|
$
|
247
|
|
Expense provision (1)
|
|
56
|
|
|
—
|
|
Cash payments and other (1)
|
|
(508
|
)
|
|
(250
|
)
|
Change in estimates (1)
|
|
—
|
|
|
3
|
|
Accrual as of December 31, 2017
|
|
—
|
|
|
—
|
|
Expense provision (1)
|
|
3,129
|
|
|
—
|
|
Cash payments and other (1)
|
|
(1,491
|
)
|
|
—
|
|
Severance liability acquired
|
|
570
|
|
|
—
|
|
Accrual as of December 31, 2018
|
|
$
|
2,208
|
|
|
$
|
—
|
|
(1) For the year ended
December 31, 2018
, included within the Expense provision and Cash payments and other line items in the above table is stock-based compensation of
$0.8 million
resulting from the accelerated vesting of modified equity-based compensation awards for certain terminated employees.
Restructuring accruals related to personnel are included within the
Accrued payroll and related liabilities
line item in the
Consolidated Balance Sheets
. Restructuring expenses related to personnel are included within the
Payroll and benefits
and
Research and development, net
line items in the
Consolidated Statements of Operations
. Restructuring accruals related to facilities are included within the
Other current liabilities
line item in the
Consolidated Balance Sheets
. Restructuring expenses related to facilities are included within the
Rent and occupancy
line item in the
Consolidated Statements of Operations
.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 19
- Quarterly Financial Results (unaudited)
Summarized quarterly results for the two years ended
December 31, 2018
and
December 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
(in thousands, except per share data)
|
|
December 31, 2018
|
|
September 30, 2018
|
|
June 30, 2018
|
|
March 31, 2018
|
Revenues
|
|
$
|
10,626
|
|
(1)
|
$
|
5,147
|
|
|
$
|
4,273
|
|
|
$
|
3,899
|
|
Cost of revenues, exclusive of operating expenses shown below
|
|
4,032
|
|
(1)
|
954
|
|
|
704
|
|
|
563
|
|
Other operating expenses
|
|
9,745
|
|
(1), (2)
|
4,161
|
|
|
5,138
|
|
|
5,048
|
|
Operating (loss) income
|
|
(3,151
|
)
|
|
32
|
|
|
(1,569
|
)
|
|
(1,712
|
)
|
Earnings from equity method investments
|
|
16,351
|
|
|
9,715
|
|
|
15,889
|
|
|
12,253
|
|
Other income (expenses), net
|
|
(930
|
)
|
|
(313
|
)
|
|
(378
|
)
|
|
(310
|
)
|
Income before income tax expense
|
|
12,270
|
|
(1), (2)
|
9,434
|
|
|
13,942
|
|
|
10,231
|
|
Income tax expense (benefit)
|
|
5,272
|
|
(3)
|
3,931
|
|
|
(1,349
|
)
|
|
2,569
|
|
Net income
|
|
$
|
6,998
|
|
|
$
|
5,503
|
|
|
$
|
15,291
|
|
|
$
|
7,662
|
|
Earnings per common share – basic
|
|
$
|
0.36
|
|
|
$
|
0.28
|
|
|
$
|
0.76
|
|
|
$
|
0.37
|
|
Earnings per common share – diluted
|
|
$
|
0.36
|
|
|
$
|
0.28
|
|
|
$
|
0.75
|
|
|
$
|
0.37
|
|
Weighted-average number of common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
19,339
|
|
|
19,726
|
|
|
20,062
|
|
|
20,502
|
|
Diluted
|
|
19,439
|
|
|
19,876
|
|
|
20,195
|
|
|
20,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
(in thousands, except per share data)
|
|
December 31, 2017
|
|
September 30, 2017
|
|
June 30, 2017
|
|
March 31, 2017
|
Revenues
|
|
$
|
3,791
|
|
|
$
|
5,098
|
|
|
$
|
27,331
|
|
|
$
|
9,144
|
|
Cost of revenues, exclusive of operating expenses shown below
|
|
648
|
|
|
2,041
|
|
|
23,295
|
|
|
5,901
|
|
Other operating expenses
|
|
4,205
|
|
|
4,197
|
|
|
4,020
|
|
|
5,199
|
|
Operating (loss) income
|
|
(1,062
|
)
|
|
(1,140
|
)
|
|
16
|
|
|
(1,956
|
)
|
Earnings from equity method investments
|
|
17,754
|
|
|
12,120
|
|
|
10,155
|
|
|
13,814
|
|
Other income (expenses), net
|
|
1,831
|
|
|
(1,602
|
)
|
|
(121
|
)
|
|
2,216
|
|
Income before income tax expense
|
|
18,523
|
|
|
9,378
|
|
|
10,050
|
|
|
14,074
|
|
Income tax expense
|
|
11,538
|
|
(4)
|
3,586
|
|
|
3,642
|
|
|
5,386
|
|
Net income
|
|
$
|
6,985
|
|
|
$
|
5,792
|
|
|
$
|
6,408
|
|
|
$
|
8,688
|
|
Earnings per common share – basic
|
|
$
|
0.34
|
|
|
$
|
0.28
|
|
|
$
|
0.29
|
|
|
$
|
0.39
|
|
Earnings per common share – diluted
|
|
$
|
0.33
|
|
|
$
|
0.28
|
|
|
$
|
0.29
|
|
|
$
|
0.39
|
|
Weighted-average number of common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
20,767
|
|
|
20,808
|
|
|
21,866
|
|
|
22,056
|
|
Diluted
|
|
20,864
|
|
|
20,854
|
|
|
21,880
|
|
|
22,243
|
|
(1) During the fourth quarter of 2018, the Company completed the Carbon Solutions Acquisition and the operating results for the fourth quarter of 2018 include the operations of Carbon Solutions for the period from December 7 to December 31, 2018. For this period, Carbon Solutions contributed
$5.6 million
to Revenues,
$3.4 million
to Cost of Revenue,
$2.6 million
to Other Operating Expenses and
$0.4 million
to Loss before income tax expense.
(2) During the fourth quarter of 2018, the Company incurred
$3.4 million
in transaction costs and
$1.1 million
in severance charges for executives related to the Carbon Solutions Acquisition that were recorded in Other Operating Expenses.
(3) During the fourth quarter of 2018, the Company recorded income tax expense of
$5.3 million
primarily due to an increase of
$4.5 million
to the valuation allowance on its deferred tax assets.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(4) During the fourth quarter of 2017, the Company recorded income tax expense of
$11.5 million
primarily related to statutory federal and state taxes of
$5.7 million
at the statutory rates, and the impact of the Tax Act, which increased the Company's income tax expense by $
5.8 million
.
Note 20
- Subsequent Events
Unless disclosed elsewhere within the notes to the Consolidated Financial Statements, the following are the significant matters that occurred subsequent to December 31, 2018.
Invested RC Facility
On January 16, 2019, the Company announced that Tinuum Group completed a transaction for an additional RC facility. The RC facility is located at a coal plant that has historically burned in excess of
3.5 million
tons of coal per year and is royalty bearing to ADES. With this addition, Tinuum Group has
20
invested facilities in full-time operation.
Dividends
On February 5, 2019, the Board declared a quarterly dividend of
$0.25
per share of common stock, which was paid on March 7, 2019 to stockholders of record at the close of business on February 19, 2019.