Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1
- Basis of Presentation
Nature of Operations
Advanced Emissions Solutions, Inc. ("ADES" or the "Company") is a Delaware corporation with its principal office located in 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 ("NOx") and mercury from coal burned to generate electrical power. The Company’s sales occur principally throughout the United States. See
Note 13
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") used in mercury capture for the coal-fired power plant, industrial and water treatment markets. Carbon Solutions also owns an associated lignite mine that supplies the primary raw material for manufacturing powdered activated carbon. 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 complementary AC markets.
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements of ADES are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") and with Article 10 of Regulation S-X of the Securities and Exchange Commission. In compliance with those instructions, certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
The unaudited Condensed Consolidated Financial Statements of ADES in this quarterly report ("Quarterly Report") are presented on a consolidated basis and include ADES and its wholly-owned subsidiaries (collectively, the "Company"). Also included within the unaudited Condensed Consolidated Financial Statements are the Company's unconsolidated equity investments, Tinuum Group, Tinuum Services, LLC ("Tinuum Services"), and GWN Manager, LLC ("GWN Manager"), which are accounted for under the equity method of accounting, and Highview Enterprises Limited (the "Highview Investment"), which is accounted for in accordance with U.S. GAAP applicable to equity investments that do not qualify for the equity method of accounting.
Results of operations and cash flows for the interim periods are not necessarily indicative of the results that may be expected for the entire year. All significant intercompany transactions and accounts were eliminated for all periods presented in this Quarterly Report.
In the opinion of management, these Condensed Consolidated Financial Statements include all normal and recurring adjustments considered necessary for a fair presentation of the results of operations, financial position, stockholders' equity and cash flows for the interim periods presented. These Condensed Consolidated Financial Statements of ADES should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
(the "2018 Form 10-K"). Significant accounting policies disclosed therein have not changed, except as described later in Note 1.
Earnings Per Share
Basic earnings per share is computed using the two-class method, which is an earnings allocation formula that determines earnings 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 for the period is allocated between common stockholders and the holders of the participating securities based on the weighted-average number of common shares outstanding during the period, excluding
participating, unvested RSA's ("common shares"), and the weighted-average number of participating unvested RSA's outstanding during the period, respectively. The allocated, undistributed income for the period is then divided by the weighted-average number of common shares and participating, unvested RSA's outstanding during the period to arrive at basic earnings per common share and participating security for the period, respectively. Pursuant to U.S. GAAP, the Company has elected not to separately present basic or diluted earnings per share attributable to participating securities in the Condensed Consolidated Statements of Operations.
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 per share when their effect is anti-dilutive. When there is a net loss for a period, all Potential dilutive shares are anti-dilutive and are excluded from the calculation of diluted loss per share for that period.
The following table sets forth the calculations of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands, except per share amounts)
|
|
2019
|
|
2018
|
Net income
|
|
$
|
14,402
|
|
|
$
|
7,662
|
|
Less: Dividends and undistributed income allocated to participating securities
|
|
20
|
|
|
25
|
|
Income attributable to common stockholders
|
|
$
|
14,382
|
|
|
$
|
7,637
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
18,268
|
|
|
20,502
|
|
Add: dilutive effect of equity instruments
|
|
165
|
|
|
82
|
|
Diluted weighted-average shares outstanding
|
|
18,433
|
|
|
20,584
|
|
Earnings per share - basic
|
|
$
|
0.79
|
|
|
$
|
0.37
|
|
Earnings per share - diluted
|
|
$
|
0.78
|
|
|
$
|
0.37
|
|
For the
three months ended
March 31, 2019
and
2018
, RSA's and Stock Options convertible to
0.3 million
and
0.2 million
shares, respectively, of common stock for each of the periods presented were outstanding but were not included in the computation of diluted net income per share because the effect would have been anti-dilutive. For the
three months ended
March 31, 2018
, Stock Options to purchase
0.2 million
of common stock, which vest based on the Company achieving specified performance targets, were outstanding, but were 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 financial statements in conformity with U.S. GAAP requires management to makes estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. There have been no changes in the Company’s critical accounting estimates from those that were disclosed in the 2018 Form 10-K. Actual results could differ from these estimates.
Risks and Uncertainties
The Company’s earnings are significantly affected by equity earnings it receives from Tinuum Group. As of
March 31, 2019
, Tinuum Group has
20
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 the prior year to conform to the current year presentation. No reclassifications have any impact to income before income taxes or net income.
New Accounting Standards
Recently Adopted
In February 2016, the FASB issued ASU 2016-02,
Leases
(Topic 842) ("ASU 2016-2"), which created ASC Topic 842 -
Leases
("ASC 842"), requiring 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. ASC 842 retains the distinction between finance leases (formerly defined as capital leases) and operating leases. On January 1, 2019, the Company adopted ASC 842 retrospectively beginning with the date of adoption. Under this adoption method, the application date is the beginning of the reporting period in which the Company first applies the provisions of ASC 842. Accordingly, the Company’s reporting for the comparative periods presented in the financial statements and related disclosures continues in accordance with legacy U.S. GAAP under ASC Topic 840 - Leases ("ASC 840"). The adoption of ASC 842 had no impact to the opening balance of retained earnings.
As of the adoption date, the Company recorded
$7.0 million
and
$7.0 million
of "right of use" assets and incremental lease liabilities, respectively. The cumulative effect of the change from the adoption of ASC 842 to the Consolidated Balance Sheet as of January 1, 2019 is shown in the table that follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
Impact of
|
|
Balance as of
|
(in thousands)
|
|
December 31, 2018
|
|
Adoption
|
|
January 1, 2019
|
Balance Sheet
|
|
|
|
|
|
|
Other long-term assets
|
|
$
|
7,993
|
|
|
$
|
6,956
|
|
|
$
|
14,949
|
|
Other liabilities
|
|
$
|
50,058
|
|
|
$
|
3,085
|
|
|
$
|
53,143
|
|
Other long-term liabilities
|
|
$
|
940
|
|
|
$
|
3,871
|
|
|
$
|
4,811
|
|
See
Note 6
for additional disclosures required under ASC 842 in the year of adoption.
Additionally, Tinuum Group adopted 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 recorded a cumulative effect increase of
$28.8 million
to Retained earnings as of January 1, 2019 related to the Company's percentage of Tinuum Group's cumulative effect adjustment. As a result of this adjustment, the Company increased its investment balance in Tinuum Group in the amount of
$37.2 million
and established a deferred tax liability of
$8.4 million
. The Company no longer has cumulative cash distributions in excess of our cumulative pro-rata share of Tinuum Group's net income. Therefore, the Company recognized equity earnings by recording its pro-rata share of Tinuum Group’s net income rather than based upon cash distributions for the three months ended March 31, 2019.
In June 2018, the FASB issued ASU No. 2018-07-
Compensation-Stock Compensation (Topic 718): Improvements to Non-Employee Share-Based Payment Accounting
, to align accounting for non-employee share-based payment transactions with the guidance for share-based payments to employees. Under the new standard, the measurement of equity-classified non-employee awards will be fixed at the grant date. The Company adopted this standard on January 1, 2019 and it did not have a material impact on the Company's financial statements and disclosures.
Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments
("ASU 2016-13"). The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in ASU 2016-13 replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for 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. The Company funded the cash consideration from cash on hand and the proceeds from the Term Loan and Security Agreement (the "Senior Term Loan") in the principal amount of
$70.0 million
, as more fully described in
Note 5
.
During the three months ended March 31, 2019, there were no material adjustments to the estimated fair values of the assets acquired and liabilities assumed as of the Acquisition Date.
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
|
|
|
|
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 the period presented has been calculated after applying the Company’s accounting policies in effect for 2017 and 2018. In addition, pro forma net income for the period presented includes: (1) the impact on Carbon Solutions of the adoption of ASC 606 effective January 1, 2018, which resulted in a reclassification of
$2.0 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
$1.0 million
in transaction costs incurred for the
three months ended March 31, 2018
together with the income tax effect on (1) through (4). The pro forma results do not 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.
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
|
March 31, 2018
|
Revenues
|
|
$
|
18,495
|
|
Net income
|
|
$
|
3,727
|
|
Note 3
- Inventories
The following table summarizes the Company's inventories recorded at the lower of average cost or net realizable value as of
March 31, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
(in thousands)
|
|
March 31, 2019
|
|
December 31, 2018
|
Product inventory (1)
|
|
$
|
16,721
|
|
|
$
|
19,523
|
|
Raw material inventory
|
|
1,558
|
|
|
2,388
|
|
Allowance
|
|
(226
|
)
|
|
(120
|
)
|
|
|
$
|
18,053
|
|
|
$
|
21,791
|
|
(1) As of March 31, 2019 and December 31, 2018, this amount includes
$1.4 million
and
$5.0 million
, respectively, attributed to the increase in fair value of inventory acquired from the Carbon Solutions Acquisition.
Note 4
- Equity Method Investments
Tinuum Group, LLC
The Company's ownership interest in Tinuum Group was
42.5%
as of
March 31, 2019
and
December 31, 2018
. Tinuum Group supplies technology equipment and technical services at select coal-fired generators, but its primary purpose is to put into operation facilities that produce and sell RC that lower emissions and therefore qualify for Section 45 tax credits. Tinuum Group has been determined to be a variable interest entity ("VIE"); however, the Company does not have the power to direct the activities that most significantly impact Tinuum Group's economic performance and has therefore accounted for the investment under the equity method of accounting. The Company determined that the voting partners of Tinuum Group have identical voting rights, equity control interests and board control interests, and therefore, concluded that the power to direct the activities that most significantly impact Tinuum Group's economic performance was shared.
The following table summarizes the results of operations of Tinuum Group:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
|
2019
|
|
2018
|
Gross profit
|
|
$
|
41,200
|
|
|
$
|
26,413
|
|
Operating, selling, general and administrative expenses
|
|
6,582
|
|
|
6,007
|
|
Income from operations
|
|
34,618
|
|
|
20,406
|
|
Other income (expenses)
|
|
51
|
|
|
(1,869
|
)
|
Class B preferred return
|
|
—
|
|
|
(12
|
)
|
Loss attributable to noncontrolling interest
|
|
15,776
|
|
|
10,775
|
|
Net income available to members
|
|
$
|
50,445
|
|
|
$
|
29,300
|
|
ADES equity earnings from Tinuum Group
|
|
$
|
19,767
|
|
|
$
|
11,050
|
|
The difference between the Company's proportionate share of Tinuum Group's net income available to members (at its equity interest of
42.5%
) during the three months ended March 31, 2018, as presented in the table below, and the Company's earnings from its Tinuum Group equity method investment as reported in the
Condensed Consolidated Statements of Operations
relates to the Company receiving distributions in excess of the carrying value of the equity investment, and therefore recognizing such excess distributions as equity method earnings in the period the distributions occur, as discussed below.
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 its 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. For the
three months ended
March 31, 2019
and
2018
, the Company recognized equity earnings from Tinuum Group of
$19.8 million
and
$11.1 million
, respectively. As of
March 31, 2019
and
2018
, the Company's carrying value in Tinuum Group was
$40.2 million
and
zero
, respectively.
Thus, the amount of equity earnings or loss reported on the Company's Condensed Consolidated Statement of Operations may differ from a mathematical calculation of net income or loss attributable to the equity interest based upon the factor of the equity interest and the net income or loss attributable to 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 Tinuum Group are reported on the Condensed 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 Condensed Consolidated Statements of Cash Flows as "Distributions from equity method investees in excess of investment basis" within Investing cash flows.
The following tables present the Company's investment balance, equity earnings and cash distributions in excess of the investment balance for the
three months ended
March 31, 2019
and
2018
(
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Date(s)
|
|
Investment balance
|
|
ADES equity earnings (loss)
|
|
Cash distributions
|
|
Memorandum Account: Cash distributions and equity earnings in (excess) of investment balance
|
Beginning balance
|
|
12/31/2018
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,672
|
)
|
Impact of adoption of accounting standards (1)
|
|
First Quarter
|
|
37,232
|
|
|
—
|
|
|
—
|
|
|
—
|
|
ADES proportionate share of income from Tinuum Group
|
|
First Quarter
|
|
21,439
|
|
|
21,439
|
|
|
—
|
|
|
—
|
|
Recovery of prior cash distributions in excess of investment balance (prior to cash distributions)
|
|
First Quarter
|
|
(1,672
|
)
|
|
(1,672
|
)
|
|
—
|
|
|
1,672
|
|
Cash distributions from Tinuum Group
|
|
First Quarter
|
|
(16,788
|
)
|
|
—
|
|
|
16,788
|
|
|
—
|
|
Total investment balance, equity earnings (loss) and cash distributions
|
|
03/31/19
|
|
$
|
40,211
|
|
|
$
|
19,767
|
|
|
$
|
16,788
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Date(s)
|
|
Investment balance
|
|
ADES equity earnings (loss)
|
|
Cash distributions
|
|
Memorandum Account: Cash distributions and equity earnings in (excess) of investment balance
|
Beginning balance
|
|
12/31/2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(12,218
|
)
|
ADES proportionate share of income from Tinuum Group (2)
|
|
First Quarter
|
|
12,458
|
|
|
12,458
|
|
|
—
|
|
|
—
|
|
Recovery of prior cash distributions in excess of investment balance (prior to cash distributions)
|
|
First Quarter
|
|
(12,218
|
)
|
|
(12,218
|
)
|
|
—
|
|
|
12,218
|
|
Cash distributions from Tinuum Group
|
|
First Quarter
|
|
(11,050
|
)
|
|
—
|
|
|
11,050
|
|
|
—
|
|
Adjustment for current year cash distributions in excess of investment balance
|
|
First Quarter
|
|
10,810
|
|
|
10,810
|
|
|
—
|
|
|
(10,810
|
)
|
Total investment balance, equity earnings (loss) and cash distributions
|
|
3/31/2018
|
|
$
|
—
|
|
|
$
|
11,050
|
|
|
$
|
11,050
|
|
|
$
|
(10,810
|
)
|
(1) As discussed in
Note 1
, Tinuum Group adopted ASC 606 and ASC 842 as of January 1, 2019. As a result of Tinuum Group’s adoption of these standards, the Company recorded a cumulative adjustment of
$28.8 million
, net of the impact of taxes, related to the Company's percentage of Tinuum Group's cumulative effect adjustment that increased the Company's Retained earnings as of January 1, 2019.
(2) For the three months ended
March 31, 2018
, the amount of the Company's
42.5%
proportionate share of net income available to members as shown in the table above may differ from mathematical calculations of the Company’s
42.5%
equity interest in Tinuum Group multiplied by the amounts of net income available to members as shown in the table above of Tinuum Group results of operations due to adjustments related to the Class B preferred return.
Tinuum Services, LLC
The Company has a
50%
voting and economic interest in Tinuum Services, which is equivalent to the voting and economic interest of NexGen Refined Coal, LLC ("NexGen"). The Company has determined that Tinuum Services is not a VIE and has evaluated its consolidation analysis under the voting interest model. Because the Company does not own greater than
50%
of the outstanding voting shares, either directly or indirectly, it has accounted for its investment in Tinuum Services under the equity method of accounting. The Company’s investment in Tinuum Services as of
March 31, 2019
and
December 31, 2018
was
$5.8 million
and
$6.6 million
, respectively.
The following table summarizes the results of operations of Tinuum Services:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
|
2019
|
|
2018
|
Gross loss
|
|
$
|
(24,735
|
)
|
|
$
|
(21,006
|
)
|
Operating, selling, general and administrative expenses
|
|
49,450
|
|
|
40,704
|
|
Loss from operations
|
|
(74,185
|
)
|
|
(61,710
|
)
|
Other expenses
|
|
(242
|
)
|
|
(58
|
)
|
Loss attributable to noncontrolling interest
|
|
78,270
|
|
|
64,176
|
|
Net income
|
|
$
|
3,843
|
|
|
$
|
2,408
|
|
ADES equity earnings from Tinuum Services
|
|
$
|
1,922
|
|
|
$
|
1,204
|
|
Included within the Consolidated Statements of Operations of Tinuum Services for the
three months ended
March 31, 2019
and
2018
, respectively, were losses related to VIE's of Tinuum Services. These losses do not impact the Company's equity earnings from Tinuum Services as
100%
of those losses are attributable to a noncontrolling interest and eliminated in the calculations of Tinuum Services' net income attributable to the Company's interest.
The following table details the components of the Company's respective equity method investments included within the
Earnings from equity method investments
line item on the
Condensed Consolidated Statements of Operations
:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
|
2019
|
|
2018
|
Earnings from Tinuum Group
|
|
$
|
19,767
|
|
|
$
|
11,050
|
|
Earnings from Tinuum Services
|
|
1,922
|
|
|
1,204
|
|
Earnings from other
|
|
1
|
|
|
(1
|
)
|
Earnings from equity method investments
|
|
$
|
21,690
|
|
|
$
|
12,253
|
|
The following table details the components of the cash distributions from the Company's respective equity method investments included in the
Condensed Consolidated Statements of Cash Flows
. Distributions from equity method investees are reported in the
Condensed Consolidated Statements of Cash Flows
as "
Distributions from equity method investees, return on investment
" within Operating cash flows until such time as the carrying value in an equity method investee company is reduced to zero; thereafter, such distributions are reported as "
Distributions from equity method investees in excess of cumulative earnings
" within Investing cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
|
2019
|
|
2018
|
Distributions from equity method investees, return on investment
|
|
|
|
|
Tinuum Group
|
|
$
|
16,788
|
|
|
$
|
—
|
|
Tinuum Services
|
|
2,700
|
|
|
2,400
|
|
|
|
$
|
19,488
|
|
|
$
|
2,400
|
|
Distributions from equity method investees in excess of investment basis
|
|
|
|
|
Tinuum Group
|
|
$
|
—
|
|
|
$
|
11,050
|
|
|
|
$
|
—
|
|
|
$
|
11,050
|
|
Note 5
- Debt Obligations
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
(in thousands)
|
|
March 31, 2019
|
|
December 31, 2018
|
Senior Term Loan due December 2021, related party
|
|
$
|
64,000
|
|
|
$
|
70,000
|
|
Less net unamortized debt issuance costs
|
|
(1,803
|
)
|
|
(1,990
|
)
|
Less net unamortized debt discount
|
|
(1,859
|
)
|
|
(2,052
|
)
|
Senior Term Loan due December 2021, net
|
|
60,338
|
|
|
65,958
|
|
Finance lease obligations (1)
|
|
7,827
|
|
|
8,167
|
|
|
|
68,165
|
|
|
74,125
|
|
Less: Current maturities
|
|
(24,166
|
)
|
|
(24,067
|
)
|
Total long-term debt
|
|
$
|
43,999
|
|
|
$
|
50,058
|
|
(1) For the year ended December 31, 2018, amounts relate to capital lease obligations.
Senior Term Loan
On December 7, 2018, the Company, and ADA-ES, Inc. ("ADA"), a wholly-owned subsidiary, and certain other subsidiaries of the Company as guarantors, The Bank of New York Mellon as administrative agent, and Apollo Credit Strategies Master Fund Ltd and Apollo A-N Credit Fund (Delaware) L.P. (collectively "Apollo”), affiliates of a beneficial owner of greater than
five
percent of the Company's common stock and a related party, entered into the Senior Term Loan in the amount of
$70.0 million
less original issue discount of
$2.1 million
. Proceeds from the Senior Term Loan were used to fund the Carbon Solutions Acquisition as disclosed in
Note 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
$6.0 million
were required beginning in March 2019, and the Company may prepay the Senior Term Loan at any time without penalty. The Senior Term Loan is secured by substantially all of the assets of the Company,
including the cash flows from Tinuum Group and Tinuum Services (collectively, the "Tinuum Entities"), but excluding the Company's equity interests in the Tinuum entities.
The Senior Term Loan includes, among others, the following covenants: (1) Beginning December 31, 2018 and 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
$30.0 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
$100.0 million
.
Line of Credit
On September 30, 2018, ADA, as borrower, the Company, as guarantor, and a bank (the "Lender") entered into an amendment (the "Twelfth Amendment") to the 2013 Loan and Security Agreement (the "Line of Credit"). The Twelfth Amendment decreased the borrowing availability of 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 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
March 31, 2019
, there were
no
outstanding borrowings under the Line of Credit.
Note 6
- Leases
The financial statement impact from the adoption of ASC 842 as of January 1, 2019 is due to recording the ROU assets and related lease liabilities for operating lease commitments that were outstanding as of December 31, 2018. The Company has elected the transitional practical expedients allowed under ASC 842, which include among other things that the Company need not reassess: (1) whether any existing contracts are or contain leases, inclusive of land easements; (2) the lease classification or lease term for existing leases; and (3) initial direct costs for any existing leases.
ASC 842 defines a lease as a contract, or part of a contract, that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of an identified asset means that an entity has both the right to obtain substantially all of the economic benefits from the use of an identified asset and the right to direct the use of that identified asset. The determination of whether a contract contains a lease may require significant assumptions and judgments.
Historically, Carbon Solutions has used leasing to fund the majority of its capital needs for mining and manufacturing equipment. As of
March 31, 2019
, the Company has obligations under finance and operating leases in the amounts of
$7.8 million
and
$6.3 million
, respectively. ROU assets under finance leases are primarily mining equipment used at the Company’s lignite mine, which provides the key raw materials for manufacturing the Company’s products. ROU assets under operating leases are primarily plant equipment used at the Company’s manufacturing facility, but also include other office equipment, vehicles and office facilities. As of
March 31, 2019
, the Company has ROU assets, net of accumulated amortization under finance leases and operating leases of
$7.5 million
and
$6.2 million
, respectively.
Certain of the finance and operating leases have options permitting renewals for additional periods and buy-out options. Renewal and buy-out options for applicable leases have not been included in the measurement of the respective lease liabilities as the Company is not reasonably certain that it will exercise the respective option or the lessor does not have an exclusive right to exercise the option.
Variable lease payments represent payments made by a lessee for the right to use an underlying asset that vary because of changes in facts or circumstances occurring after the commence date of a lease other than the passage of time. Variable lease payments that are based on an index or rate, calculated by using the index or rate that exists on the lease commencement date are included in the measurement of a lease liability. Certain of the Company’s operating leases for office facilities contain variable lease components that are not based on an index or rate and the Company recognizes these payments as lease expense in the period in which the obligation for those payments is incurred.
The Company calculates lease liabilities based on the present value of lease payments discounted by the rate implicit in the lease or, if not readily determinable, the Company’s incremental borrowing rate.
The Company records lease liabilities and related ROU assets for all leases that have a term of greater than one year. For short-term leases (leases with terms of less than one year), the Company expenses lease payments on a straight-line basis over the lease term.
Finance leases
Leases classified as capital leases under ASC 840 and the related assets and liabilities were carried forward at their carrying values of
$8.1 million
and
$8.2 million
, respectively, as of December 31, 2018, and were classified as finance leases as of January 1, 2019. ROU assets under finance leases and finance lease liabilities are included in Property, plant and equipment and Current portion and Long-term portion of borrowings, respectively, in the Condensed Consolidated Balance Sheet as of
March 31, 2019
.
Finance lease liabilities are subsequently measured by increasing the carrying amount to reflect interest expense on the finance lease liability and reducing the carrying amount of the lease liability to reflect lease payments made during the period. Interest on finance lease liabilities is determined in each period during the lease term as the amount that produces a constant periodic discount rate on the remaining balance of the lease liability. ROU assets under finance leases are amortized over the remaining lease term on a straight-line basis. Interest expense related to finance lease liabilities and amortization of ROU assets under finance leases are included in Interest expense and Depreciation, amortization, depletion and accretion, respectively, in the Condensed Consolidated Statement of Operations for the three months ended
March 31, 2019
.
Operating leases
Operating lease liabilities as of January 1, 2019 were calculated at the present value, using a discount rate of the lease, of the remaining minimum rental payments (as defined under ASC 840). As the rate implicit in all of the operating leases was not readily determinable, the Company determined its discount rate as of January 1, 2019 based on an estimate of its incremental borrowing rate. This rate was based on the Company’s effective borrowing rate on the Senior Term Loan, considering the collateral requirements contained therein, in effect as of January 1, 2019. ROU assets under operating leases as of January 1, 2019 were determined as the calculated value of the operating lease liabilities less accrued lease payments and accrued lease incentives. As of December 31, 2018, the total amount of accrued lease payments and accrued lease incentives was approximately
$0.1 million
. ROU assets under operating leases and operating lease liabilities are included in Other long-term assets and Other liabilities and Other long-term liabilities, respectively, in the Condensed Consolidated Balance Sheet as of
March 31, 2019
.
Operating lease liabilities are subsequently measured at the present value of the lease payments not yet paid discounted using the discount rate for the lease established at the inception date of the lease (or January 1, 2019 for operating leases in effect as of December 31, 2018). ROU assets under operating leases are subsequently measured at the amounts of the related operating lease liability, adjusted for, as applicable, prepaid or accrued lease payments, the remaining balance of any lease incentives received, unamortized initial direct costs and impairment. Lease expense from operating leases is recognized as a single lease cost over the remaining lease term on a straight-line basis. Variable lease payments not included in operating lease liabilities are recognized as expense in the period in which the obligation for those payments is incurred. Lease expense for operating leases for the three months ended
March 31, 2019
was
$1.2 million
, of which
$1.1 million
is included in Consumables - cost of revenue, exclusive of depreciation and amortization and
$0.1 million
is included in General and administrative in the Condensed Consolidated Statement of Operations for the three months ended
March 31, 2019
.
Lease financial information as of and for the three months ended
March 31, 2019
is provided in the following table:
|
|
|
|
|
|
(in thousands)
|
|
Lease Cost
|
Finance lease cost:
|
|
|
Amortization of right-of-use assets
|
|
$
|
536
|
|
Interest on lease liabilities
|
|
131
|
|
Operating lease cost
|
|
929
|
|
Short-term lease cost
|
|
171
|
|
Variable lease cost (1)
|
|
82
|
|
Total lease cost
|
|
$
|
1,849
|
|
|
|
|
Other Information:
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
|
$
|
949
|
|
Finance cash flows from finance leases
|
|
$
|
344
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
49
|
|
Weighted-average remaining lease term - finance leases
|
|
4.9 years
|
|
Weighted-average remaining lease term - operating leases
|
|
2.5 years
|
|
Weighted-average discount rate - finance leases
|
|
6.1
|
%
|
Weighted-average discount rate - operating leases
|
|
8.6
|
%
|
(1) Primarily includes common area maintenance, property taxes and insurance payable to lessors.
The following table summarizes the Company’s future lease payments under finance and operating leases as of
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Operating
Lease
Commitments
|
|
Finance
Lease
Commitments
|
2019 (remaining nine months)
|
|
$
|
2,823
|
|
|
$
|
1,307
|
|
2020
|
|
2,328
|
|
|
1,707
|
|
2021
|
|
1,632
|
|
|
1,802
|
|
2022
|
|
310
|
|
|
951
|
|
2023
|
|
221
|
|
|
951
|
|
Thereafter
|
|
—
|
|
|
2,482
|
|
Total lease payments
|
|
7,314
|
|
|
9,200
|
|
Less: Imputed interest
|
|
(1,007
|
)
|
|
(1,374
|
)
|
Present value of lease payments
|
|
$
|
6,307
|
|
|
$
|
7,826
|
|
Disclosures under ASC 840
Rent expense for the three months ended March 31, 2018 was
$0.1 million
and was included in General and administrative expense in the Condensed Consolidated Statement of Operations.
As of December 31, 2018, mining equipment financed under capital leases in the amount of
$8.1 million
, net of accumulated amortization of
$0.1 million
, was included in Property, plant and equipment in the Condensed Consolidated Balance Sheet.
The following table summarizes the Company’s future minimum non-cancellable lease payments due under capital and operating leases as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Operating
Lease
Commitments
|
|
Capital
Lease
Commitments
|
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: Imputed interest
|
|
|
|
(1,475
|
)
|
Present value of minimum lease payments
|
|
|
|
$
|
8,167
|
|
Note 7
- Revenues
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.
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.
Trade receivables, net
The following table shows the components of Trade receivables, net:
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
(in thousands)
|
|
March 31, 2019
|
|
December 31, 2018
|
Trade receivables
|
|
$
|
8,339
|
|
|
$
|
10,121
|
|
Less: Allowance for doubtful accounts
|
|
(567
|
)
|
|
(567
|
)
|
Trade receivables, net
|
|
$
|
7,772
|
|
|
$
|
9,554
|
|
For the
three months ended March 31, 2019
and
2018
, the Company recognized
zero
and
$0.2 million
, respectively, related to specific accounts whose ultimate collection was in doubt. During the
three months ended March 31, 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
three months ended
March 31, 2019
and
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 13
to the condensed consolidated financial statements. The following
tables disaggregate revenues by major source for the
three months ended
March 31, 2019
and
2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
Segment
|
|
|
|
|
|
|
PGI
|
|
RC
|
|
Other
|
|
Total
|
Revenue component
|
|
|
|
|
|
|
|
|
Consumables
|
|
$
|
14,553
|
|
|
$
|
—
|
|
|
$
|
556
|
|
|
$
|
15,109
|
|
License royalties, related party
|
|
—
|
|
|
4,220
|
|
|
—
|
|
|
4,220
|
|
Revenues from customers
|
|
14,553
|
|
|
4,220
|
|
|
556
|
|
|
19,329
|
|
|
|
|
|
|
|
|
|
|
Earnings from equity method investments
|
|
—
|
|
|
21,690
|
|
|
—
|
|
|
21,690
|
|
|
|
|
|
|
|
|
|
|
Total revenues and earnings from equity method investments
|
|
$
|
14,553
|
|
|
$
|
25,910
|
|
|
$
|
556
|
|
|
$
|
41,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
|
Segment
|
|
|
|
|
|
|
PGI
|
|
RC
|
|
Other
|
|
Total
|
Revenue component
|
|
|
|
|
|
|
|
|
Consumables
|
|
$
|
621
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
621
|
|
License royalties, related party
|
|
—
|
|
|
3,230
|
|
|
—
|
|
|
3,230
|
|
Other
|
|
48
|
|
|
—
|
|
|
—
|
|
|
48
|
|
Revenues from customers
|
|
669
|
|
|
3,230
|
|
|
—
|
|
|
3,899
|
|
|
|
|
|
|
|
|
|
|
Earnings from equity method investments
|
|
—
|
|
|
12,253
|
|
|
—
|
|
|
12,253
|
|
|
|
|
|
|
|
|
|
|
Total revenues and earnings from equity method investments
|
|
$
|
669
|
|
|
$
|
15,483
|
|
|
$
|
—
|
|
|
$
|
16,152
|
|
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 to outcomes, the financial impacts of which are not predictable with assurance and that may not be known for extended periods of time. The Company records a liability in its consolidated financial statements for costs related to claims, settlements, and judgments where management has assessed that a loss is probable and an amount can be reasonably estimated. There were no significant legal proceedings as of
March 31, 2019
.
Restricted Cash
As of
March 31, 2019
and
December 31, 2018
, the Company had long-term restricted cash of
$5.2 million
and
$5.2 million
, respectively, which primarily consisted of minimum cash balance requirements under the Senior Term Loan. As of
March 31, 2019
and
December 31, 2018
, the Company had short-term restricted cash of
$0.1 million
and
$0.1 million
, respectively, related to other commitments.
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 an affiliate of the Goldman Sachs Group, Inc. with limited guaranties (the "Tinuum Group Party Guaranties") related to certain losses it may suffer as a result of inaccuracies or breach of representations and covenants. The Company also is a party to a contribution agreement with NexGen under which any party called upon to pay on a Tinuum Group Party Guaranty is entitled to receive contributions from the other party equal to
50%
of the amount paid. No liability or expense provision has been recorded by the Company related to this contingent obligation as the Company believes that it is not probable that a loss will occur with respect to Tinuum Group Party Guaranties.
Note 9
- Stockholders' Equity
Stock Repurchase Programs
In November 2018, the Company's Board of Directors (the "Board") authorized the Company to purchase up to
$20.0 million
of its outstanding common stock. 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.
For the three months ended
March 31, 2019
and
2018
under the collective stock repurchase programs authorized by the Board,
the Company purchased
63,876
and
149,217
shares of its common stock for cash of
$0.7 million
and
$1.6 million
, respectively, inclusive of commissions and fees.
Quarterly Cash Dividend
Dividends declared by the Board, and paid quarterly per share on all outstanding shares of common stock during the
three months ended
March 31, 2019
and
2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
Per share
|
|
Date paid
|
|
Per share
|
|
Date paid
|
Dividends declared during quarter ended:
|
|
|
|
|
|
|
|
|
March 31
|
|
$
|
0.25
|
|
|
March 7, 2019
|
|
$
|
0.25
|
|
|
March 8, 2018
|
A portion of the dividends declared remains accrued subsequent to the payment dates and represents dividends accumulated on nonvested shares of common stock held by employees and directors of the Company that contain forfeitable dividend rights that are not payable until the underlying shares of common stock vest. These amounts are included in both Other current liabilities and Other long-term liabilities on the Condensed Consolidated Balance Sheet as of
March 31, 2019
.
Tax Asset Protection Plan
U.S. federal income tax rules, and Section 382 of the Internal Revenue Code in particular, could substantially limit the use of net operating losses and other tax assets if the Company experiences an "ownership change" (as defined in the Internal Revenue Code). In general, an ownership change occurs if there is a cumulative change in the ownership of the Company by "5 percent stockholders" that exceeds 50 percentage points over a rolling three-year period.
On May 5, 2017, the Board approved the declaration of a dividend of rights to purchase Series B Junior Participating Preferred Stock for each outstanding share of common stock as part of a tax asset protection plan (the "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 "First Amendment") that amends the Tax Asset Protection Plan dated May 5, 2017. The Amendment amends the definition of "Final Expiration Date" under the Tax Asset Protection Plan to extend the duration of the TAPP and makes associated changes in connection therewith.
At the Company's 2018 annual meeting of stockholders, the Company's stockholders approved the Amendment, thus the Final Expiration Date will be the close of business on December 31, 2019.
On April 5, 2019, the Board approved the Second Amendment to the Tax Asset Protection Plan (the "Second Amendment") that amends the Tax Asset Protection Plan dated May 5, 2017, as amended by the First Amendment to Tax Asset Protection Plan, dated April 6, 2018 (the “TAPP”) between the Company and the Rights Agent. The Second Amendment amends the definition of “Final Expiration Date” under the TAPP to extend the duration of the TAPP and makes associated changes in connection therewith. Pursuant to the Second Amendment, the Final Expiration Date shall be the close of business on the earlier of (i) December 31, 2020 or (ii) December 31, 2019 if stockholder approval for the Second Amendment has not been obtained prior to such date.
Note 10
- Stock-Based Compensation
The Company grants equity-based awards to employees, non-employee directors, and consultants that may include, but are not limited to RSA's, restricted stock units ("RSU's") and stock options. Stock-based compensation expense related to employees is included within the
Payroll and benefits
line item in the
Condensed Consolidated Statements of Operations
. Stock-based compensation expense related to non-employee directors and consultants is included within the
General and administrative
line item in the
Condensed Consolidated Statements of Operations
.
Total stock-based compensation expense for the
three months ended
March 31, 2019
and
2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
|
2019
|
|
2018
|
RSA expense
|
|
$
|
317
|
|
|
$
|
277
|
|
Stock option expense
|
|
—
|
|
|
58
|
|
Total stock-based compensation expense
|
|
$
|
317
|
|
|
$
|
335
|
|
The amount of unrecognized compensation cost as of
March 31, 2019
, and the expected weighted-average period over which the cost will be recognized is as follows:
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019
|
(in thousands)
|
|
Unrecognized Compensation Cost
|
|
Expected Weighted-
Average Period of
Recognition (in years)
|
RSA expense
|
|
$
|
3,818
|
|
|
2.13
|
|
Total unrecognized stock-based compensation expense
|
|
$
|
3,818
|
|
|
2.13
|
|
Restricted Stock
Restricted stock is typically granted with vesting terms of
three
years. The fair value of RSA's and RSU's is determined based on the closing price of the Company’s common stock on the authorization date of the grant multiplied by the number of shares subject to the stock award. Compensation expense for RSA's is generally recognized on a straight-line basis over the entire vesting period. Compensation expense for RSU's is generally recognized on a straight-line basis over the service period of the award. A summary of RSA and RSU activity under the Company's various stock compensation plans for the
three months ended March 31, 2019
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
Weighted-Average Grant Date Fair Value
|
(in thousands, except for share and per share amounts)
|
|
Awards
|
|
Units
|
|
RSA's
|
|
RSU's
|
Non-vested at January 1, 2019
|
|
280,852
|
|
|
20,000
|
|
|
$
|
9.92
|
|
|
$
|
10.52
|
|
Granted
|
|
218,465
|
|
|
—
|
|
|
$
|
10.84
|
|
|
$
|
—
|
|
Vested
|
|
(69,345
|
)
|
|
—
|
|
|
$
|
9.33
|
|
|
$
|
—
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-vested at March 31, 2019
|
|
429,972
|
|
|
20,000
|
|
|
$
|
10.48
|
|
|
$
|
10.52
|
|
Stock Options
Stock options generally vest over
three
years or upon satisfaction of performance-based conditions and have a contractual limit of
five
years from the date of grant to exercise. The fair value of stock options granted is determined on the date of grant using the Black-Scholes option pricing model and the related expense is recognized on a straight-line basis over the entire vesting period.
A summary of stock option activity for the
three months ended March 31, 2019
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
Outstanding and
Exercisable
|
|
Weighted-Average
Exercise Price
|
|
Aggregate Intrinsic Value (in thousands)
|
|
Weighted-Average
Remaining Contractual
Term (in years)
|
Options outstanding, January 1, 2019
|
|
529,780
|
|
|
$
|
12.23
|
|
|
|
|
|
Options granted
|
|
—
|
|
|
—
|
|
|
|
|
|
Options exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
Options expired / forfeited
|
|
—
|
|
|
—
|
|
|
|
|
|
Options outstanding, March 31, 2019
|
|
529,780
|
|
|
$
|
12.23
|
|
|
$
|
508
|
|
|
1.21
|
Options exercisable, March 31, 2019
|
|
529,780
|
|
|
$
|
12.23
|
|
|
$
|
508
|
|
|
1.21
|
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 Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
(in thousands)
|
March 31,
2019
|
|
December 31,
2018
|
Prepaid expenses and other assets:
|
|
|
|
|
Prepaid expenses
|
|
$
|
1,400
|
|
|
$
|
1,233
|
|
Prepaid income taxes
|
|
2,597
|
|
|
2,940
|
|
Other
|
|
1,507
|
|
|
1,397
|
|
|
|
$
|
5,504
|
|
|
$
|
5,570
|
|
Other long-term assets:
|
|
|
|
|
Spare parts
|
|
$
|
3,255
|
|
|
$
|
3,278
|
|
Mine development costs, net
|
|
2,802
|
|
|
2,531
|
|
Prepaid royalty expense, long-term
|
|
955
|
|
|
955
|
|
Highview Investment
|
|
552
|
|
|
552
|
|
Right of use assets, operating leases, net
|
|
6,230
|
|
|
—
|
|
Other long-term assets
|
|
702
|
|
|
677
|
|
|
|
$
|
14,496
|
|
|
$
|
7,993
|
|
Spare parts include critical spares required to support plant operations. Parts and supply costs are determined using the lower of cost or estimated replacement cost. Parts are recorded as maintenance expenses in the period in which they are consumed.
Mine development costs include acquisition costs, the cost of other development work and mitigation costs related to the Company's mining operations. 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. There were no indicators of impairment as of March 31, 2019.
Included within
Highview Investment
is the Company's investment ("Highview Investment") in Highview Enterprises Limited ("Highview"), a London, England based developmental stage company specializing in power storage. In November 2014, the Company acquired an
8%
ownership interest in the common stock of Highview for
$2.8 million
in cash. The Company accounts for the Highview Investment as an investment recorded at cost, less impairment, plus or minus observable changes in price for identical or similar investments of the same issuer.
The Highview Investment is evaluated for indicators of impairment such as an event or change in circumstances that may have a significant adverse effect on the fair value of the investment. There were no changes to the carrying value of the Highview Investment for the three months ended
March 31, 2019
as there were no indicators of impairment or observable price changes for equity issued by Highview.
The following table details the components of
Other current liabilities
and
Other long-term liabilities
as presented in the Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
(in thousands)
|
|
March 31,
2019
|
|
December 31,
2018
|
Other current liabilities:
|
|
|
|
|
Accrued interest
|
|
$
|
727
|
|
|
$
|
407
|
|
Income and other taxes payable
|
|
2,602
|
|
|
479
|
|
Current portion of operating lease obligations
|
|
3,004
|
|
|
—
|
|
Other
|
|
762
|
|
|
1,252
|
|
|
|
$
|
7,095
|
|
|
$
|
2,138
|
|
Other long-term liabilities:
|
|
|
|
|
Operating lease obligations, long-term
|
|
$
|
3,302
|
|
|
$
|
—
|
|
Deferred rent
|
|
—
|
|
|
106
|
|
Mine reclamation liability
|
|
684
|
|
|
624
|
|
Other long-term liabilities
|
|
85
|
|
|
210
|
|
|
|
$
|
4,071
|
|
|
$
|
940
|
|
Supplemental Condensed Consolidated Statements of Operations Information
The following table details the components of Interest expense in the Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
|
2019
|
|
2018
|
453A interest
|
|
$
|
322
|
|
|
$
|
336
|
|
Interest on Senior Term Loan
|
|
1,270
|
|
|
—
|
|
Debt discount and debt issuance costs
|
|
381
|
|
|
—
|
|
Other
|
|
131
|
|
|
—
|
|
|
|
$
|
2,104
|
|
|
$
|
336
|
|
Note 12
- Income Taxes
For the
three months ended
March 31, 2019
and
2018
, the Company's income tax expense and effective tax rates based on forecasted pre-tax income were:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands, except for rate)
|
|
2019
|
|
2018
|
Income tax expense
|
|
$
|
1,699
|
|
|
$
|
2,569
|
|
Effective tax rate
|
|
11
|
%
|
|
25
|
%
|
The effective tax rate for the
three months ended
March 31, 2019
was different from the federal statutory rate primarily due to a net reduction in the valuation allowance against deferred tax assets. Additionally, the effective tax rates for the
three months ended
March 31, 2019
and
2018
were different from the federal statutory rates as a result of state income tax expense, net of federal benefit. As of
March 31, 2019
, we reduced the valuation allowance by
$4.0 million
primarily from changes in forecasts of future taxable income, which included the impact of an additional RC invested facility that was closed during the
three months ended
March 31, 2019
.
The income tax expense recorded for the
three months ended
March 31, 2019
was comprised of estimated federal income tax expense of
$0.8 million
and estimated state income tax expense of
$0.9 million
. The income tax expense recorded for the
three months ended
March 31, 2018
was comprised of estimated federal income tax expense of
$2.1 million
and estimated state income tax expense of
$0.5 million
.
The Company assesses the valuation allowance recorded against deferred tax assets at each reporting date. The determination of whether a valuation allowance for deferred tax assets is appropriate requires the evaluation of positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available to realize the deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating income taxes, the Company assesses the relative merits and risks of the appropriate income tax treatment of transactions taking into account statutory, judicial, and regulatory guidance.
Note 13
- 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
March 31, 2019
, the Company's CODM was the Company's CEO. The Company's operating and reportable segments are identified by products and services provided.
As of
March 31, 2019
, the Company has
two
reportable segments: (1) Refined Coal ("RC"); and (2) Power Generation and Industrials ("PGI").
The business segment measurements provided to and evaluated by the CODM are computed in accordance with the principles listed below:
|
|
•
|
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the
2018
Form 10-K.
|
|
|
•
|
Segment revenues include equity method earnings and losses from the Company's equity method investments.
|
|
|
•
|
Segment operating income (loss) includes segment revenues and allocation of certain "Corporate general and administrative expenses," which include
Payroll and benefits
,
Rent and occupancy
,
Legal and professional fees
and
General and administrative
.
|
|
|
•
|
RC segment operating income includes interest expense directly attributable to the RC segment.
|
As of
March 31, 2019
and
December 31, 2018
, 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
three months ended
March 31, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
|
2019
|
|
2018
|
Revenues:
|
|
|
|
|
Refined Coal:
|
|
|
|
|
Earnings in equity method investments
|
|
$
|
21,690
|
|
|
$
|
12,253
|
|
Royalties, related party
|
|
4,220
|
|
|
3,230
|
|
|
|
25,910
|
|
|
15,483
|
|
Power Generation and Industrials:
|
|
|
|
|
Consumables
|
|
14,553
|
|
|
621
|
|
Other
|
|
—
|
|
|
48
|
|
|
|
14,553
|
|
|
669
|
|
Total segment reporting revenues
|
|
40,463
|
|
|
16,152
|
|
|
|
|
|
|
Adjustments to reconcile to reported revenues:
|
|
|
|
|
Earnings in equity method investments
|
|
(21,690
|
)
|
|
(12,253
|
)
|
Corporate and other
|
|
556
|
|
|
—
|
|
Total reported revenues
|
|
$
|
19,329
|
|
|
$
|
3,899
|
|
|
|
|
|
|
Segment operating income (loss):
|
|
|
|
|
Refined Coal (1)
|
|
$
|
25,383
|
|
|
$
|
14,702
|
|
Power Generation and Industrials (2)
|
|
(3,462
|
)
|
|
(938
|
)
|
Total segment operating income
|
|
$
|
21,921
|
|
|
$
|
13,764
|
|
(1) Included within the RC segment operating income for the
three months ended
March 31, 2019
and
2018
is 453A interest expense of
$0.3 million
and
$0.3 million
, respectively.
(2) Included within the PGI segment operating loss for the
three months ended
March 31, 2019
was
$3.4 million
of costs recognized as a result of the step-up in inventory fair value recorded from the Carbon Solutions Acquisition. Also included within the PGI segment operating loss for the
three months ended
March 31, 2019
was
$2.0 million
of depreciation, amortization, and depletion expense on mine and plant long-lived assets.
A reconciliation of reportable segment operating income to the Company's consolidated net income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
|
2019
|
|
2018
|
Total reported segment operating income
|
|
$
|
21,921
|
|
|
$
|
13,764
|
|
Other operating loss
|
|
(398
|
)
|
|
—
|
|
|
|
21,523
|
|
|
13,764
|
|
Adjustments to reconcile to net income attributable to the Company:
|
|
|
|
|
Corporate payroll and benefits
|
|
(432
|
)
|
|
(1,147
|
)
|
Corporate legal and professional fees
|
|
(1,961
|
)
|
|
(1,448
|
)
|
Corporate general and administrative
|
|
(1,434
|
)
|
|
(941
|
)
|
Corporate depreciation and amortization
|
|
(13
|
)
|
|
(52
|
)
|
Corporate interest (expense) income, net
|
|
(1,651
|
)
|
|
—
|
|
Other income (expense), net
|
|
69
|
|
|
55
|
|
Income tax expense
|
|
(1,699
|
)
|
|
(2,569
|
)
|
Net income
|
|
$
|
14,402
|
|
|
$
|
7,662
|
|
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
|
(in thousands)
|
|
March 31,
2019
|
|
December 31,
2018
|
Assets:
|
|
|
|
|
Refined Coal (1)
|
|
$
|
50,802
|
|
|
$
|
11,468
|
|
Power Generation and Industrials
|
|
82,818
|
|
|
85,786
|
|
Total segment assets
|
|
133,620
|
|
|
97,254
|
|
All Other and Corporate (2)
|
|
60,191
|
|
|
62,410
|
|
Consolidated
|
|
$
|
193,811
|
|
|
$
|
159,664
|
|
(1) Includes
$46.1 million
and
$6.6 million
of investments in equity method investees, respectively.
(2) Includes the Company's deferred tax assets.
Note 14
- Fair Value Measurements
Fair value of financial instruments
The carrying amounts of financial instruments, including cash, cash equivalents and restricted cash, accounts receivable, accounts payable and accrued expenses, approximate fair value due to the short maturity of these instruments. Accordingly, these instruments are not presented in the table below. The following table provides the estimated fair values of the remaining financial instruments:
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|
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|
|
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|
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As of March 31, 2019
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|
As of December 31, 2018
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(in thousands)
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Financial Instruments:
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Highview Investment
|
|
$
|
552
|
|
|
$
|
552
|
|
|
$
|
552
|
|
|
$
|
552
|
|
Highview Obligation
|
|
$
|
219
|
|
|
$
|
219
|
|
|
$
|
213
|
|
|
$
|
213
|
|
Concentration of credit risk
The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents. The Company holds cash and cash equivalents at five financial institutions as of
March 31, 2019
. If that institution
was unable to perform its obligations, the Company would be at risk regarding the amount of cash and investments in excess of the Federal Deposit Insurance Corporation limits (currently
$250 thousand
) that would be returned to the Company.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of
March 31, 2019
and
December 31, 2018
, the Company had no 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
.
The fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market.
Note 15
- Restructuring
In December 2018, the Company recorded restructuring charges in connection with the departures of certain executives of
Carbon Solutions in conjunction with the Carbon Solutions Acquisition. As part of the Carbon Solutions Acquisition, the
Company also assumed a salary severance liability for an additional executive of Carbon Solutions in the amount of
$0.6 million
. 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.
Restructuring charges, net of change in estimates, were
$0.1 million
during the
three months ended
March 31, 2019
. There were
no
material restructuring charges during the
three months ended
March 31, 2018
.
The following table summarizes the Company's change in restructuring accruals for the
three months ended March 31, 2019
:
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|
|
|
|
|
(in thousands)
|
|
Employee Severance
|
Remaining accrual as of December 31, 2018
|
|
$
|
2,208
|
|
Expense provision
|
|
172
|
|
Cash payments and other
|
|
(740
|
)
|
Change in estimates
|
|
(104
|
)
|
Remaining accrual as of March 31, 2019
|
|
$
|
1,536
|
|
Restructuring accruals are included within the
Accrued payroll and related liabilities
line item in the
Condensed Consolidated Balance Sheets
. Restructuring expenses are included within the
Payroll and benefits
line item in the
Condensed Consolidated Statements of Operations
.
Note 16
- Subsequent Events
Unless disclosed elsewhere within the notes to the Condensed Consolidated Financial Statements, the following are the significant matters that occurred subsequent to
March 31, 2019
.
Dividends
On
May 6, 2019
, the Company's Board declared a quarterly dividend of
$0.25
per share of common stock, which is payable on
June 7, 2019
to stockholders of record at the close of business on
May 20, 2019
.