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, 2017
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 and associated specialty chemicals, 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 ("EC") 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 13
of the Consolidated Financial Statements included in Item 8 of this Report.
Components of Revenue, Expenses and Equity Method Investees
The following briefly describes the components of revenues and expenses as presented in the Consolidated Statement 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
Equipment sales
Equipment sales represent the sale of activated carbon injection ("ACI") systems to control mercury, dry sorbent injection ("DSI") systems to control SO
2
, SO
3
, and HCl and electrostatic precipitator ("ESP") liquid flue gas conditioning systems. Revenue from extended equipment contracts is recorded using the completed contract method of accounting.
We also 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.
Chemicals
We sell proprietary chemical blends to coal-fired utilities that allow the respective utilities to comply with the regulatory emissions standards. Revenue is generally recorded upon delivery of the chemicals.
Certain chemicals customer contracts are comprised of evaluation tests of the Company's chemicals' effectiveness and efficiency in reducing emissions and entail the delivery of chemicals to the customer and the Company evaluating results of emissions reduction over the term of the contract. The Company generally recognizes revenue from these types of contracts over the duration of the contract based on the cost of chemicals consumed by the customer.
Consulting services and other
We provide consulting services to assist electric power generators and others in planning and implementing strategies to meet the new and increasingly stringent government emission standards requiring reductions in SO
2
, NO
x
, particulates, acid gases and mercury.
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.
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 and other general costs of conducting business.
Research and development, net
Research and development expense consists of research relating to continued product development for our ongoing business and various other projects. Historically, we have entered into reimbursement contracts with the Department of Energy ("DOE") related to certain of our research and development contracts. These contracts were best-effort-basis contracts. We have often included and continued to include industry cost-share partners to offset the costs incurred in excess of funded amounts from the DOE or from our own research and development project budgets. We recognize amounts funded by the DOE and industry partners under research-and-development-cost-sharing arrangements as an offset to our aggregate research and development expenses within the
Research and development, net
line in the
Consolidated Statements of Operations
included in Item 8 of this Report.
Depreciation and amortization
Depreciation and amortization expense consists of depreciation expense related to property and equipment and the amortization of long lived intangibles.
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. In addition, our equity method earnings in Tinuum Group are negatively impacted due to an annual preferred return to which one of Tinuum Group's equity owners, GSFS, is entitled. Therefore, Tinuum Group's equity earnings available to its common members are equal to Tinuum Group's net income less the preferred return due to GSFS. In February 2018, the unrecovered investment balance associated with the preferred return was repaid in full.
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 refined coal. Tinuum Services consolidates certain RC facilities leased or owned by tax equity investors that are deemed to be 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.
On
July 27, 2017
, we obtained a
50%
membership interest in GWN Manager, LLC ("GWN Manager") in exchange for a capital contribution of
$0.1 million
. GWN Manager subsequently purchased a
0.2%
membership interest in a subsidiary of Tinuum Group, which owns a single RC facility that produces RC that qualifies for Section 45 tax credits. Tinuum Group sold
49.9%
of the subsidiary that owns the RC facility to an unrelated third party and retained ownership of the remaining
49.9%
. GWN Manager is subject to monthly capital calls based on estimated working capital needs.
Through March 3, 2016, we owned a
24.95%
equity interest in RCM6, LLC ("RCM6"), a related party, which owned a single RC facility that was managed by Tinuum Group. The economics to us were consistent with an invested facility discussed above except that we were subject to funding our share of RCM6's operating costs during 2014 and 2015 and through March 3, 2016.
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.
Other income (expense)
The remaining components of other income (expense) include interest income, interest expense and other miscellaneous items. For
2017
, miscellaneous items included various items related to litigation accruals and settlement with a third-party service provider. For
2016
, miscellaneous items included an adjustment to a litigation loss accrual and change in estimate related to royalty indemnity expense.
We record interest expense due to our share of Tinuum Group's equity method earnings for RC facility leases or sales that are 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 was 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 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, 2017
Compared to
Year ended December 31, 2016
Total Revenue and Cost of Revenue
A summary of the components of revenues and cost of revenue for the years ended
December 31, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
(
Amounts in thousands except percentages
)
|
|
2017
|
|
2016
|
|
($)
|
|
(%)
|
Revenues:
|
|
|
|
|
|
|
|
|
Equipment sales
|
|
$
|
31,401
|
|
|
$
|
46,949
|
|
|
$
|
(15,548
|
)
|
|
(33
|
)%
|
Chemicals
|
|
4,246
|
|
|
3,025
|
|
|
1,221
|
|
|
40
|
%
|
Consulting services and other
|
|
45
|
|
|
648
|
|
|
(603
|
)
|
|
(93
|
)%
|
Total revenues
|
|
35,692
|
|
|
50,622
|
|
|
(14,930
|
)
|
|
(29
|
)%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Equipment sales cost of revenue, exclusive of depreciation and amortization
|
|
28,438
|
|
|
37,741
|
|
|
(9,303
|
)
|
|
(25
|
)%
|
Chemicals cost of revenue, exclusive of depreciation and amortization
|
|
3,434
|
|
|
1,700
|
|
|
1,734
|
|
|
102
|
%
|
Consulting services and other cost of revenue, exclusive of depreciation and amortization
|
|
13
|
|
|
376
|
|
|
(363
|
)
|
|
(97
|
)%
|
Equipment sales
and Equipment sales cost of revenue
During the years ended
December 31, 2017
and
2016
, we entered into
zero
and
five
long-term (6 months or longer) fixed price contracts to supply ACI systems with aggregate contract values, net of change orders of
$0.1 million
and
$2.9 million
, respectively. During the years ended
December 31, 2017
and
2016
, we completed
four
and
17
ACI systems, recognizing revenues of
$3.4 million
and
$26.9 million
and cost of revenue of
$2.4 million
and
$20.5 million
, respectively. We recognized
zero
and
$0.5 million
in loss provisions related to ACI system contracts during the years ended
December 31, 2017
and
2016
, respectively. As of
December 31, 2017
, all ACI system contracts are complete.
During the years ended
December 31, 2017
and
2016
, we did not enter into any long term (6 months or longer) fixed price contracts to supply DSI systems and other material handling equipment with contract values including associated change orders of
zero
and
$1.5 million
, respectively. During the years ended
December 31, 2017
and
2016
, we completed
five
and
11
DSI systems, recognizing revenues of
$27.8 million
and
$15.8 million
and cost of revenue of
$26.0 million
and
$14.8 million
, respectively. During the year ended
December 31, 2017
, we recognized
zero
in loss provisions related to DSI system contracts. During the year ended
December 31, 2016
, we recorded a reduction of
$0.1 million
in previously recognized loss provisions included in cost of revenue related to DSI system contracts.
Additionally, in 2016, we executed sales-type lease agreements related to ACI and DSI systems and recognized revenue of
$3.4 million
and cost of revenue of
$1.2 million
during the year ended December 31, 2016.
The remaining changes were due to other equipment sales.
As a result of using the completed contract method for revenue recognition on long-term equipment contracts, our revenue and cost of revenue information may not be comparable to the information of our competitors who do not use the completed contract method. For example, due to the long-term revenue recognition period on certain contracts, we may recognize less revenue and related cost of revenue during a particular period, but record significant deferred revenue and deferred project costs. This impacts our outstanding backlog as is discussed in more detail in Item 1 of this Report.
Demand for ACI and DSI system contracts during 2015 and 2016 was driven by coal-fired power plant utilities that need to comply with the Mercury and Air Toxics Standards ("MATS") and the Maximum Achievable Control Technology ("MACT") standards by 2016. Revenues related to ACI and DSI system contracts have historically fluctuated due to changes in the number of contracts entered into as well as the long duration of completing certain contracts, which involve long-lead time requirements for manufacturing, installation and testing of the equipment. As the deadline for these standards has now passed, we do not anticipate entering into long-term fixed price contracts for ACI or DSI systems in the future.
Chemicals
and Chemical cost of revenue
During the years ended
December 31, 2017
and
2016
, revenues
increased
year over year primarily due to an overall increase in pounds of our chemicals sold. Gross margins on sales of chemicals for the
year ended December 31, 2017
were lower than
2016
due to price compression in the EC consumables market and increased field testing of our M-Prove
TM
("M-Prove") consumable, which results in significantly lower gross margins compared to recurring sales. Future period revenues are expected to be negatively impacted by a major customer who is not expected to purchase chemicals going forward, as well as the effects of continued price compression compared to historical periods. As we continue to expand our customer base and attempt to increase the volume, size and duration of chemical sale arrangements, we are faced with the challenge of a competitive market with a long lead-to-sale cycle. Increasing future sales of chemicals is our primary focus of the EC business at this time.
Consulting services and other
and Consulting services cost of revenue
We reported minimal revenue related to consulting services for the
year ended December 31, 2017
. Due to diminishing market demand related to historical services provided, we do not believe this revenue component will be material in the near term. We also provide consulting services related to emissions regulations.
Additional information related to revenue concentrations and contributions by class and reportable segment can be found within the segment discussion below and in
Note 14
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, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
(in thousands, except percentages)
|
|
2017
|
|
2016
|
|
($)
|
|
(%)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Payroll and benefits
|
|
$
|
7,669
|
|
|
$
|
12,390
|
|
|
$
|
(4,721
|
)
|
|
(38
|
)%
|
Rent and occupancy
|
|
795
|
|
|
2,168
|
|
|
(1,373
|
)
|
|
(63
|
)%
|
Legal and professional fees
|
|
4,354
|
|
|
8,293
|
|
|
(3,939
|
)
|
|
(47
|
)%
|
General and administrative
|
|
3,857
|
|
|
3,721
|
|
|
136
|
|
|
4
|
%
|
Research and development, net
|
|
157
|
|
|
(648
|
)
|
|
805
|
|
|
(124
|
)%
|
Depreciation and amortization
|
|
789
|
|
|
979
|
|
|
(190
|
)
|
|
(19
|
)%
|
|
|
$
|
17,621
|
|
|
$
|
26,903
|
|
|
$
|
(9,282
|
)
|
|
(35
|
)%
|
Payroll and benefits
Payroll and benefits expenses
decreased
in
2017
compared to
2016
primarily due to a decrease in average headcount of approximately
40%
during
2017
. Additionally, restructuring expenses decreased during the year ended
December 31, 2017
compared to
2016
in connection with the departure of certain executive officers and management's alignment of the business with strategic objectives in 2016. During the years ended
December 31, 2017
and
December 31, 2016
, we recorded net restructuring charges of
zero
and
$1.6 million
, respectively. In addition, bonuses and stock-based compensation decreased by $1.4 million in
2017
compared to
2016
.
Rent and occupancy
Rent and occupancy expenses
decreased
in
2017
compared to
2016
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
decreased
in
2017
compared to
2016
as a result of a reduction in the professional resources deployed to address the restatement of our consolidated financial statements, including litigation associated with such restatement. Expenses related to the restatement during the year ended
December 31, 2017
and
2016
were
zero
and
$2.0 million
, respectively. Additional decreases during the year ended
December 31, 2017
were driven by a decrease in costs related to outsourced shared service costs, including accounting consultants, legal fees and audit fees.
General and administrative
General and administrative expenses remained relatively flat in
2017
compared to
2016
as we began to experience normalization of our operating expenses in most categories following our cost-containment initiatives implemented in 2016. During the year ended December 31, 2017, we incurred expenses related to the implementation of a new enterprise resource planning ("ERP") system and a
$0.4 million
reserve on an asset related to a letter of credit asset draw made by a former customer that we are contesting and pursing legal actions. These increases were offset by decreases in travel and professional expenses. During the year ended
December 31, 2016
, we recognized impairment charges on property and equipment and inventory of
$0.5 million
, as projected future cash flows from operations related to such property and equipment and inventory did not support the carrying value of these assets.
Research and development, net
Research and development expense
increased
in
2017
compared to
2016
primarily due to the reimbursements of research and development expense recognized in
2016
from final billings to the DOE on one research and development contract, which resulted in negative research and development expense for
2016
, and an increase in research and development activities during
2017
incurred in pursuit of the expansion of potential product offerings within the emissions reduction consumables market to complement our existing chemicals solutions. The net increase in
2017
was offset by a decrease in our asset retirement obligation estimate, which was primarily driven by a reduction in the scope of the obligation.
Depreciation and amortization
Depreciation and amortization expense
decreased
in
2017
compared to
2016
primarily due to higher depreciation recorded in 2016 as a result of the acceleration of depreciation on certain fixed assets that were disposed of in
2016
in connection with our corporate office relocation, which resulted in a lower depreciable base in
2017
. Additionally, during
2016
, we terminated a technology license arrangement, which resulted in approximately $0.1 million decrease in the related amortization expense. in
2017
.
Other Income (Expense), net
A summary of the components of our other income (expense), net for the years ended
December 31, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
(Amounts in thousands, except percentages)
|
|
2017
|
|
2016
|
|
($)
|
|
(%)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Earnings from equity method investments
|
|
$
|
53,843
|
|
|
$
|
45,584
|
|
|
$
|
8,259
|
|
|
18
|
%
|
Royalties, related party
|
|
9,672
|
|
|
6,125
|
|
|
3,547
|
|
|
58
|
%
|
Interest income
|
|
54
|
|
|
268
|
|
|
(214
|
)
|
|
(80
|
)%
|
Interest expense
|
|
(3,024
|
)
|
|
(5,066
|
)
|
|
2,042
|
|
|
(40
|
)%
|
Litigation settlement and royalty indemnity expense, net
|
|
3,269
|
|
|
3,464
|
|
|
(195
|
)
|
|
(6
|
)%
|
Other
|
|
2,025
|
|
|
2,463
|
|
|
(438
|
)
|
|
(18
|
)%
|
Total other income
|
|
$
|
65,839
|
|
|
$
|
52,838
|
|
|
$
|
13,001
|
|
|
25
|
%
|
Earnings in equity method investments
The following table presents the equity method earnings, by investee, for the years ended
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
(in thousands)
|
|
2017
|
|
2016
|
|
($)
|
|
(%)
|
Earnings from Tinuum Group
|
|
$
|
48,875
|
|
|
$
|
41,650
|
|
|
$
|
7,225
|
|
|
17
|
%
|
Earnings from Tinuum Services
|
|
4,963
|
|
|
4,491
|
|
|
472
|
|
|
11
|
%
|
Earnings (losses) from other
|
|
5
|
|
|
(557
|
)
|
|
562
|
|
|
(101
|
)%
|
Earnings from equity method investments
|
|
$
|
53,843
|
|
|
$
|
45,584
|
|
|
$
|
8,259
|
|
|
18
|
%
|
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, 2017
compared to
2016
primarily as a result of an increase in cash distributions due to the addition of four invested facilities, three of which were fully invested by third parties during
2017
. See the discussion below regarding the accounting of earnings from Tinuum Group.
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. During the year ended
December 31, 2016
, we recognized
$41.7 million
in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of
$35.0 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 Condensed 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, 2017
were
$48.9 million
, which exceeded our pro-rata share of Tinuum Group's net income, resulting in us having cumulative cash distributions that exceeded our cumulative pro-rata share of Tinuum Group's net income as of
December 31, 2017
.
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, 2017
and
2016
(
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
|
Total investment balance, equity earnings (loss) and cash distributions
|
|
12/31/2015
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3,263
|
)
|
ADES proportionate share of net income from Tinuum Group
(1)
|
|
2016 activity
|
|
35,019
|
|
|
35,019
|
|
|
—
|
|
|
—
|
|
Recovery of cash distributions in excess of investment balance (prior to cash distributions)
|
|
2016 activity
|
|
(3,263
|
)
|
|
(3,263
|
)
|
|
—
|
|
|
3,263
|
|
Cash distributions from Tinuum Group
|
|
2016 activity
|
|
(41,650
|
)
|
|
—
|
|
|
41,650
|
|
|
—
|
|
Adjustment for current year cash distributions in excess of investment balance
|
|
2016 activity
|
|
9,894
|
|
|
9,894
|
|
|
—
|
|
|
(9,894
|
)
|
Total investment balance, equity earnings (loss) and cash distributions
|
|
12/31/2016
|
|
—
|
|
|
41,650
|
|
|
41,650
|
|
|
(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 and cash distributions
|
|
12/31/2017
|
|
$
|
—
|
|
|
$
|
48,875
|
|
|
$
|
48,875
|
|
|
$
|
(12,218
|
)
|
(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 and the elimination of Tinuum Group's earnings attributable to RCM6, of which we owned
24.95%
, for the period from January 1 to March 3, 2016.
Tinuum Group's consolidated financial statements as of
December 31, 2017
and
2016
, and for the years ended
December 31, 2017
,
2016
and
2015
are included in Item 15 of this Report.
Equity earnings from our interest in Tinuum Services
increased
by
$0.5 million
in
2017
compared to
2016
. As of
December 31, 2017
and
2016
, Tinuum Services provided operating and maintenance services to
16
and
13
RC facilities, respectively. However, the weighted-average number of RC facilities for which Tinuum Services provided operating and maintenance services, based upon the number of months each facility was operated during the respective years, did not change year over year. 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.
On March 3, 2016, we sold our
24.95%
membership interest in RCM6 for a cash payment of
$1.8 million
and assumption of a note payable (the "RCM6 Note Payable") made by us in connection with our purchase of the RCM6 membership interest from Tinuum Group in February 2014. Through March 3, 2016, we recognized equity losses related to our investment in RCM6 of
$0.6 million
.
On July 27, 2017, we obtained a
50%
membership interest in GWN Manager in exchange for a capital contribution of
$0.1 million
. GWN Manager subsequently purchased a
0.2%
membership interest in a subsidiary of Tinuum Group, which owns a single RC facility that produces RC that qualifies for Section 45 tax credits. Tinuum Group sold
49.9%
of the subsidiary that owns the RC facility to an unrelated third party and retained ownership of the remaining
49.9%
. We are subject to monthly capital calls to GWN Manager based on estimated working capital needs. Our investment in GWN Manager as of
December 31, 2017
, was
$0.1 million
. Equity earnings from our interest in GWN Manager included our share of net income from inception to
December 31, 2017
.
Additional information related to equity method investments can be found in
Note 2
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)
|
|
2017
|
|
2016
|
Section 45 tax credits earned
|
|
$
|
3,496
|
|
|
$
|
2,956
|
|
The increase in the Section 45 tax credits earned during the year ended December 31, 2017 compared to December 31, 2016 was collectively due to our membership interest in GWN Manager and Tinuum Group's ownership in the single RC facility that is generating tax credits.
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 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 IRC Section 453A ("453A"), taxpayers using the installment method for income tax purposes are required to pay interest ("453A interest") calculated on the portion of the tax liability that is deferred under the installment method. As of
December 31, 2017
, ADES’s allocable share of the gross deferred installment gain from Tinuum Group to be recognized in future years was approximately
$202 million
.
Due to the production and sale of RC from the operation of retained RC facilities, Tinuum Group has generated production tax credits ("PTCs") that qualify as General Business Credits ("GBCs"). 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, 2017
, we had approximately $100.2 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, 2017
, as defined by IRC Section 382. Such analysis for the period from January 1, 2018 through the date of this Report has not been completed. Therefore, it is possible that we experienced an ownership change between January 1, 2018 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
$202 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 that must be considered in calculating the RBIG related to Tinuum Group and the increase to our IRC Section 383 limitation. Assuming the following assumptions below, we may be able to increase the total limitation by approximately
$202 million
over the duration of the installment sale. As of
December 31, 2017
, after increasing the total hypothetical limitation, we would likely not have been able to utilize approximately $41.0 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 or, approximately
$202 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.
Royalties, related party
Royalty income increased in
2017
compared to
2016
primarily due to obtaining additional tax equity investors for
four
incremental new facilities during
2017
compared to 2016, all of which use our M-45 License. The total facilities that use our M-45 License increased from
six
facilities in
2016
to
10
facilities in
2017
. 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, 2017
and
2016
, there were
22.6 million
tons and
16.2 million
tons, respectively, of RC produced using the M-45 License.
Interest expense
Interest expense
decreased
in
2017
compared to
2016
primarily due to interest expense incurred in 2016 related to a credit agreement for a
$15.0 million
short-term loan with a related party (the "Credit Agreement"), which was terminated in June 2016 and resulted in a decrease of
$2.1 million
. In addition, interest expense decreased in
2017
compared to
2016
by
$0.3 million
related to the RCM6 Note Payable, which was eliminated in March 2016.
Offsetting these decreases in interest expense was an increase of
$0.1 million
related to 453A, which was primarily due to an increase in
2017
in the aggregate deferred tax liability, which was primarily driven by an increase in invested RC facilities in which Tinuum Group recognized as installment sales for tax purposes from
13
as of
December 31, 2016
to
17
as of
December 31, 2017
.
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)
|
|
2017
|
|
2016
|
Tax liability deferred on installment sales
(1)
|
|
$
|
70,739
|
|
|
$
|
71,559
|
|
Interest rate
|
|
4.00
|
%
|
|
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
$202 million
as of
December 31, 2017
).
Based on the interest rate in effect as of the date of this filing, the 453A interest rate for the year ended December 31, 2018 is expected to be 5%.
Revision of estimated litigation settlement and royalty indemnity expense, net
During the years ended
December 31, 2017
and
2016
, management revised its estimate for future Royalty Award (as defined in
Note 4
to the Consolidated Financial Statements included in Item 8 of this Report) payments based in part on updated forecasts provided to us by ADA Carbon Solutions, LLC ("Carbon Solutions"). As discussed in
Note 4
to the Consolidated Financial Statements, we were required to pay additional damages related to certain future revenues generated from Carbon Solutions. These forecasts provided in
2017
and
2016
included a material reduction in estimated future revenues generated at the specific activated carbon plant from which the royalties are generated.
In December 2017, we, Carbon Solutions and the 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 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 owed under the terms of the Norit Settlement Agreement. This amount was paid by the Company on December 29, 2017. As a result of changes in estimates and the final Settlement Payment, the Litigation settlement and royalty indemnity expense, net line item was positively impacted by
$3.3 million
and
$3.5 million
during the years ended
December 31, 2017
and
2016
, respectively.
Other
The components of Other income (expense) include the following significant items:
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
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"). The DOL opened an investigation into the 401(k) Plan, and we are responding to all requests for documents and information from the DOL. The DOL has not issued any formal findings as of the date of this Report. Although we believe there has been no breach of fiduciary duty with respect to the 401(k) Plan, we believe a liability for contributions to the 401(k) Plan is probable and estimable and, as such, should be accrued for in the amount of
$1.0 million
as of
December 31, 2017
. The liability is recorded in the
Other current liabilities
line item on the Consolidated Balance Sheets. The expense recognized related to this accrual is included in the
Other
line item in the Consolidated Statements of Operations for the year ended
December 31, 2017
.
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") under the cost method. As of September 30, 2017, we recorded an impairment charge of
$0.5 million
for the Highview Investment based on an estimated fair value of
£1.00
compared to the estimated carrying value prior to the impairment charge of
£2.00
per share. As of
December 31, 2017
, the estimated fair value of the Highview Investment was based on an equity raise that commenced during the third quarter of 2017 at a price of
£1.00
per share. The impairment charge is included in the
Other
line item in the
Consolidated Statements of Operations
for the year ended
December 31, 2017
.
As of
December 31, 2016
, we recorded an impairment charge of
$1.8 million
for the Highview Investment based on an estimated fair value of
£2.00
per share compared to the estimated carrying value prior to the impairment charge of
£4.25
per share. The impairment charge is included in the
Other
line item in the
Consolidated Statements of Operations
for the year ended
December 31, 2016
.
Gain on sale of equity method investment
On March 3, 2016, we sold our
24.95%
membership interest in RCM6 for a cash payment of
$1.8 million
and the assumption, by the buyer, of the RCM6 Note Payable. The outstanding balance on the RCM6 Note Payable at the time of the sale was
$13.2 million
. With the sale of our membership interest in RCM6, we recognized a gain on the sale of
$2.1 million
, which is included within the
Other
line item in the
Consolidated Statements of Operations
for the year ended
December 31, 2016
.
Gain on settlement of note payable
During the first quarter of 2016, we entered into an agreement to settle the remaining amounts owed to the former owner of the DSI equipment assets that we acquired in 2014 (the "DSI Business Owner"), resulting in a gain of approximately
$0.9 million
, which is included in the
Other
line item in the
Consolidated Statements of Operations
for the year ended
December 31, 2016
.
Gain on settlement of licensed technology obligation
On June 15, 2016, we entered into an agreement with Highview to terminate a license agreement (the "Highview License") in exchange for a one-time payment by us of
£0.2 million
(approximately
$0.2 million
). According to the agreement, this payment will only be made upon the sale of our shares in Highview to satisfy the liability. As a result of terminating the Highview License, we eliminated the licensed technology asset, reduced the corresponding long-term liability to the amount of the one-time payment, and recognized a gain of approximately
$0.2 million
, which is included in the
Other
line item in the
Consolidated Statements of Operations
for the year ended
December 31, 2016
.
Gain on lease termination
On September 30, 2016, we and the lessee terminated a sale-type lease, and we recorded a lease termination fee of
$3.6 million
, which was in excess of the carrying value of the net investment in sales-type lease of
$2.7 million
. As a result of this lease termination, we recognized a gain of
$0.9 million
, which is included in the
Other
line item in the
Consolidated Statements of Operations
for the year ended
December 31, 2016
.
Income tax expense (benefit)
New Tax Legislation
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 makes broad and complex changes to the U.S. tax code and key provisions applicable, or that may be applicable, to us or certain of Tinuum Group's existing or potential customers for 2018 include 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 foreign 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 (7) the introduction of the Base Erosion Anti-Abuse Tax (“BEAT”) for tax years beginning after December 31, 2017.
Concurrent with the enactment of the Tax Act, in December 2017, the SEC staff issued Staff Accounting Bulletin 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Enactment Date for companies to complete the accounting under Accounting Standards Codification 740
- Income Taxes
("ASC 740"). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that an entity's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
Our assessment and accounting for the income tax effects of the Tax Act affecting our consolidated financial statements is generally complete, subject to continued evaluation under SAB 118, and as such, we recorded an adjustment to our recorded deferred tax assets and deferred tax liabilities as of the Enactment Date from 35 percent to 21 percent. Accordingly, we have recorded a reduction of
$5.8 million
to our net deferred tax assets as of December 22, 2017 with a corresponding entry to deferred tax expense for the year ended December 31, 2017 for those temporary differences expected to reverse after the Enactment Date. This adjustment is reflected in our income tax expense for the year ended December 31, 2017 and was the primary factor that increased our effective income tax rate to
46%
for 2017. We do not anticipate any other accounting impacts of the Tax Act during the period within one year from the Enactment Date, however, we will continue to assess any potential impact from the Tax Act through this period.
Beginning January 1, 2018, our effective income tax rate for 2018 and future years will be substantially lower as a result of the lowering of the U.S. federal corporate tax rate to 21%, however, this decrease in tax rate may also result in decreased utilization of deferred tax assets prior to their expiration.
For the year ended
December 31, 2017
, we recorded income tax expense of
$24.2 million
compared to an income tax benefit of
$60.9 million
for
2016
. The federal income tax expense for the year ended
December 31, 2017
includes
$5.8 million
associated with the reduction of our net deferred tax asset as of the Enactment Date of the Tax Act. Excluding the impact of the Tax Act,
we 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 our deferred tax assets. However, after the impact of the Tax Act, we recorded tax expense of
$11.5 million
. The income tax benefit for 2016 primarily reflects a
$61.4 million
reversal of the valuation allowance of our deferred tax assets. As of
December 31, 2017
and
2016
, we had a valuation allowance recorded of
$75.4 million
and
$75.9 million
, respectively, against our deferred tax assets.
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, 2017
, 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
$38.7 million
of our net deferred tax assets, and therefore, reversed
$0.5 million
of the valuation allowance. In reaching this conclusion, we most significantly considered: (1) forecasts of continued future taxable income, (2) changes to the current deferred tax asset ("DTA") balances related to the effects of the Tax Act, (3) changes to forecasts of future utilization of DTA's related to the effects of the Tax Act, and (4) impacts of additional RC invested facilities during 2017.
Prior to 2016, we had recorded a valuation allowance for all of our deferred tax assets, primarily due to our historical three-year cumulative loss position. However, as of December 31, 2016, we concluded it was more likely than not that we would generate sufficient taxable income within the applicable NOL and tax credit carry-forward periods to realize $61.4 of our net deferred tax assets, and therefore, reversed $61.4 million of the valuation allowance, after utilizing $11.0 million during 2016. This conclusion was reached after weighing all of the evidence and determining that the positive evidence outweighed the negative evidence. The positive evidence considered by management in arriving at its conclusion to partially reverse the valuation allowance includes factors such as: (1) emergence from the previous three-year cumulative loss position during the fourth quarter of 2016, (2) completion of four consecutive quarters of profitability and (3) forecasts of continued future profitability.
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 which 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 12
of the Consolidated Financial Statements included in Item 8 of this Report.
Year ended December 31, 2016
Compared to
Year ended December 31, 2015
Total Revenue and Cost of Revenue
A summary of the components of revenues and costs of revenue for the years ended
December 31, 2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
(
in thousands except percentages
)
|
|
2016
|
|
2015
|
|
($)
|
|
(%)
|
Revenues:
|
|
|
|
|
|
|
|
|
Equipment sales
|
|
$
|
46,949
|
|
|
$
|
60,099
|
|
|
$
|
(13,150
|
)
|
|
(22
|
)%
|
Chemicals
|
|
3,025
|
|
|
888
|
|
|
2,137
|
|
|
241
|
%
|
Consulting services and other
|
|
648
|
|
|
1,752
|
|
|
(1,104
|
)
|
|
(63
|
)%
|
Total revenues
|
|
50,622
|
|
|
62,739
|
|
|
(12,117
|
)
|
|
(19
|
)%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Equipment sales cost of revenue, exclusive of depreciation and amortization
|
|
37,741
|
|
|
45,433
|
|
|
(7,692
|
)
|
|
(17
|
)%
|
Chemicals cost of revenue, exclusive of depreciation and amortization
|
|
1,700
|
|
|
601
|
|
|
1,099
|
|
|
183
|
%
|
Consulting services and other cost of revenue, exclusive of depreciation and amortization
|
|
376
|
|
|
1,518
|
|
|
(1,142
|
)
|
|
(75
|
)%
|
Equipment sales
and Equipment sales cost of revenue
During the years ended December 31, 2016 and 2015, we entered into five and four long-term (six months or longer) fixed price contracts to supply ACI systems with aggregate contract values including change orders of $2.9 million and $5.5 million, respectively. During the years ended December 31, 2016 and 2015, we completed 17 and 32 ACI systems, recognizing revenues of $26.9 million and $51.7 million and cost of revenue of $20.5 million and $38.4 million, respectively. We recognized $0.5 million and $0.1 million in loss provisions related to ACI system contracts during the years ended December 31, 2016 and 2015, respectively.
During the years ended December 31, 2016 and 2015, we entered into zero and one long-term (6 months or longer) fixed price contracts to supply DSI systems and other material handling equipment with contract values including associated change orders of $1.5 million and $2.4 million, respectively. During the years ended December 31, 2016 and 2015, we completed 11 and seven DSI systems and zero and two other material handling equipment systems, recognizing revenues of $15.8 million and $7.2 million and cost of revenue of $14.8 million and $5.9 million, respectively. During the year ended December 31, 2016, we recognized a reduction of $0.1 million in previously recognized loss provisions included in cost of revenue related to DSI system contracts. During the year ended December 31, 2015, we recognized $0.2 million in loss provisions included in costs of revenue related to DSI systems contracts.
Additionally, in 2016, we executed sales-type lease agreements related to ACI and DSI systems and recognized revenue of $3.4 million and cost of revenue of $1.2 million during the year ended December 31, 2016
The remaining changes were due to other equipment projects.
Demand for ACI and DSI system contracts during 2016 and 2015 was driven by coal-fired electric generating units that needed to comply with MATS and MACT standards by 2016. Revenues related to ACI and DSI system contracts in these years fluctuated due to changes in the number of contracts entered into as well as the long duration of completing certain contracts, which involved long-lead time requirements for manufacturing, installation and testing of the equipment.
Chemicals
and Chemicals cost of revenue
During the years ended December 31, 2016 and 2015, revenues increased year over year primarily due to an overall increase in pounds of our chemicals sold, most significantly driven by higher sales of our M-Prove consumable during the second half of 2016. The increase in revenue was largely due to our increased focus on selling these products to coal-fired power plants to be in compliance with applicable regulations.
Consulting services and other
and Consulting services cost of revenue
During the years ended December 31, 2016 and 2015, revenues decreased year over year due to a decrease in the number of consulting service engagements performed. The decrease in the number of consulting services engagements was due in part to us no longer performing consulting services engagements for one customer.
Additional information related to revenue concentrations and contributions by class and reportable segment can be found within the segment discussion below and in
Note 13
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, 2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
(in thousands, except percentages)
|
|
2016
|
|
2015
|
|
($)
|
|
(%)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Payroll and benefits
|
|
$
|
12,390
|
|
|
$
|
23,589
|
|
|
$
|
(11,199
|
)
|
|
(47
|
)%
|
Rent and occupancy
|
|
2,168
|
|
|
3,309
|
|
|
(1,141
|
)
|
|
(34
|
)%
|
Legal and professional fees
|
|
8,293
|
|
|
16,604
|
|
|
(8,311
|
)
|
|
(50
|
)%
|
General and administrative
|
|
3,721
|
|
|
6,104
|
|
|
(2,383
|
)
|
|
(39
|
)%
|
Research and development, net
|
|
(648
|
)
|
|
5,362
|
|
|
(6,010
|
)
|
|
(112
|
)%
|
Depreciation and amortization
|
|
979
|
|
|
2,019
|
|
|
(1,040
|
)
|
|
(52
|
)%
|
Total operating expenses
|
|
$
|
26,903
|
|
|
$
|
56,987
|
|
|
$
|
(30,084
|
)
|
|
(53
|
)%
|
Payroll and benefits
Payroll and benefits expenses decreased in 2016 compared to 2015 primarily due to a decrease in restructuring expenses in connection with the departure of certain executive officers and management's alignment of the business with strategic objectives. During the years ended December 31, 2016 and December 31, 2015, we recorded net restructuring charges of $1.6 million and $10.4 million, respectively, including the modification and acceleration of equity awards of $0.4 million and $3.4 million, respectively. Additionally, we had a decrease in headcount of approximately 70% during 2016 compared to 2015 in connection with employees impacted by management's alignment of the business with strategic objectives.
Rent and occupancy
Rent and occupancy expenses decreased in 2016 compared to 2015 primarily due to the shutdown of our office and fabrication facilities located in Pennsylvania in the fourth quarter of 2015. During the first quarter of 2016, we entered into an agreement to terminate various lease agreements covering approximately 207 thousand square feet of manufacturing, warehouse and office space in Pennsylvania. As consideration for terminating the leases, we agreed to pay the lessor a termination fee of $0.3 million in April 2016 and the same amount in April 2017. During the first quarter of 2016, we recorded a gain of $0.2 million related to the difference between the amount accrued as of the cease-use date of December 31, 2015 and the settlement amount. In December 2016, we entered into an agreement to terminate approximately 37 thousand square feet of office space and relocate our corporate office in Colorado. In exchange for terminating the lease, we agreed to pay the lessor a termination fee of $0.3 million. The amount was paid in full in December 2016.
Legal and professional fees
Legal and professional fees expenses decreased in 2016 compared to 2015 as a result of a reduction in the professional resources deployed to address the restatement of our consolidated financial statements, including litigation associated with such restatement. Expenses related to the restatement during the year ended December 31, 2016 and 2015 were $2.0 million and $9.5 million, respectively. In addition, legal and professional fees decreased as a result of a reduction in other consulting fees during 2016.
General and administrative
General and administrative expenses decreased in 2016 compared to 2015 due to a $0.5 million allowance recorded during 2015 against the entire principal balance of a note receivable. Additionally, during the year ended December 31, 2016, there was a decrease in expenses of $1.6 million due to the shutdown of our Pennsylvania office and fabrication facilities in the fourth quarter of 2015. Other decreases during the year ended December 31, 2016 were due to decreases in general operating expenses, including travel and professional expenses. These decreases were partially offset by impairment charges recognized
during the year ended December 31, 2016 on property and equipment and inventory of $0.5 million, as projected future cash flows from operations related to such property and equipment and inventory did not support the carrying value of these assets.
Research and development, net
Research and development expense decreased in 2016 compared to 2015 primarily due to a decrease in research and development activities in 2016, as we concluded all material research and development activities except for continued product development necessary to our ongoing business. We also reduced research and development expense by $0.8 million during the year ended December 31, 2016 due to final billings made during this period to the DOE for one research and development contract, which resulted in negative expense during 2016. Additional decreases in research and development expense were due to expenses incurred during 2015 related to our investment in ADA Analytics of $2.6 million, of which $1.9 million related to an impairment charge we recognized in 2015.
Depreciation and amortization
Depreciation and amortization expense decreased in 2016 compared to 2015 by approximately $0.8 million due to the shutdown of our Pennsylvania office and fabrication facility in 2015 and by approximately $0.2 million due to the termination of the Highview License.
Other Income (Expense), net
A summary of the components of our other income (expense), net for the years ended December 31,
2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
(in thousands, except percentages)
|
|
2016
|
|
2015
|
|
($)
|
|
(%)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Earnings from equity method investments
|
|
$
|
45,584
|
|
|
$
|
8,921
|
|
|
$
|
36,663
|
|
|
411
|
%
|
Royalties, related party
|
|
6,125
|
|
|
10,642
|
|
|
(4,517
|
)
|
|
(42
|
)%
|
Interest income
|
|
268
|
|
|
24
|
|
|
244
|
|
|
*
|
|
Interest expense
|
|
(5,066
|
)
|
|
(8,402
|
)
|
|
3,336
|
|
|
(40
|
)%
|
Litigation settlement and royalty indemnity expense, net
|
|
3,464
|
|
|
—
|
|
|
3,464
|
|
|
*
|
|
Other
|
|
2,463
|
|
|
494
|
|
|
1,969
|
|
|
399
|
%
|
Total other income
|
|
$
|
52,838
|
|
|
$
|
11,679
|
|
|
$
|
41,159
|
|
|
352
|
%
|
Earnings in equity method investments
The following table shows the equity method earnings, by investee, for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
(in thousands)
|
|
2016
|
|
2015
|
|
($)
|
|
(%)
|
Earnings from Tinuum Group
|
|
$
|
41,650
|
|
|
$
|
8,651
|
|
|
$
|
32,999
|
|
|
381
|
%
|
Earnings from Tinuum Services
|
|
4,491
|
|
|
4,838
|
|
|
(347
|
)
|
|
(7
|
)%
|
Earnings (losses) from other
|
|
(557
|
)
|
|
(4,568
|
)
|
|
4,011
|
|
|
(88
|
)%
|
Earnings from equity method investments
|
|
$
|
45,584
|
|
|
$
|
8,921
|
|
|
$
|
36,663
|
|
|
411
|
%
|
Earnings from equity method investments, and changes related thereto, were impacted by our equity method investees: Tinuum Group, Tinuum Services and RCM6 (through the date of the sale of our interest in RCM6 on March 3, 2016). Earnings from equity method investments increased during the year ended December 31, 2016 compared to 2015 primarily as a result of an increase in cash distributions, as Tinuum Group did not invest significant capital expenditures related to the installation of RC facilities or incur significant costs to operate retained RC facilities during 2016 as they had done during 2015. See discussion below regarding the accounting of earnings from Tinuum Group.
During the year ended December 31, 2016, we recognized $41.7 million in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of $35.0 million for the year. During the year ended December 31, 2015, we recognized $8.7 million in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of $35.3 million for the year. The difference between our pro-rata share of Tinuum Group's net income and our earnings recognized from our Tinuum Group equity method investment as reported on the Condensed 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.
The following table for Tinuum Group shows our investment balance, equity earnings, cash distributions received and cash distributions in excess of the investment balance for the years ended
December 31, 2016
and
2015
(
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
|
|
12/31/2014
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(29,877
|
)
|
ADES proportionate share of net income from Tinuum Group
(1)
|
|
2015 activity
|
|
35,265
|
|
|
35,265
|
|
|
—
|
|
|
—
|
|
Recovery of cash distributions in excess of investment balance (prior to cash distributions)
|
|
2015 activity
|
|
(29,877
|
)
|
|
(29,877
|
)
|
|
—
|
|
|
29,877
|
|
Cash distributions from Tinuum Group
|
|
2015 activity
|
|
(8,651
|
)
|
|
—
|
|
|
8,651
|
|
|
—
|
|
Adjustment for current year cash distributions in excess of investment balance
|
|
2015 activity
|
|
3,263
|
|
|
3,263
|
|
|
—
|
|
|
(3,263
|
)
|
Total investment balance, equity earnings (loss) and cash distributions
|
|
12/31/2015
|
|
$
|
—
|
|
|
$
|
8,651
|
|
|
$
|
8,651
|
|
|
$
|
(3,263
|
)
|
ADES proportionate share of net income from Tinuum Group
(1)
|
|
2016 activity
|
|
35,019
|
|
|
35,019
|
|
|
—
|
|
|
—
|
|
Recovery of cash distributions in excess of investment balance (prior to cash distributions)
|
|
2016 activity
|
|
(3,263
|
)
|
|
(3,263
|
)
|
|
—
|
|
|
3,263
|
|
Cash distributions from Tinuum Group
|
|
2016 activity
|
|
(41,650
|
)
|
|
—
|
|
|
41,650
|
|
|
—
|
|
Adjustment for current year cash distributions in excess of investment balance
|
|
2016 activity
|
|
9,894
|
|
|
9,894
|
|
|
—
|
|
|
(9,894
|
)
|
Total investment balance, equity earnings (loss) and cash distributions
|
|
12/31/2016
|
|
$
|
—
|
|
|
$
|
41,650
|
|
|
$
|
41,650
|
|
|
$
|
(9,894
|
)
|
(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 and the elimination of Tinuum Group earnings attributable to RCM6, of which we owned 24.95%, for the period from January 1 to March 3, 2016 and for the year ended December 31, 2015.
Equity earnings from our interest in Tinuum Services decreased by $0.3 million in 2016 compared to 2015 primarily due to a decrease in the number of RC facilities being operated by Tinuum Services throughout the year. The weighted-average number of RC facilities for which Tinuum Services provided operating and maintenance services, based upon the number of months each facility was operated during the respective years, decreased year over year. As of December 31, 2016 and 2015, Tinuum Services provided operating and maintenance services to 13 and 14 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. The reduction in operating facilities during the year ended December 31, 2016 compared to the year ended December 31, 2015 was due to suspending operations on retained facilities to reduce operating expenses.
Equity losses from our interest in RCM6 decreased during the year ended December 31, 2016 compared to the year ended December 31, 2015 due to the sale of our 24.95% membership interest in RCM6 on March 3, 2016.
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:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2016
|
|
2015
|
Section 45 tax credits earned
|
|
$
|
2,956
|
|
|
$
|
38,998
|
|
The decrease in production and sale of RC, and the related tax credits earned during the year ended December 31, 2016 compared to December 31, 2015 was due to the suspension of retained RC facilities, as described above.
Royalties, related party
Royalty income decreased in 2016 compared to 2015 primarily due to a decrease from 2015 to 2016 in the number of RC facilities and related tons of RC produced using the M-45 License, which resulted in 16.2 million and 22.0 tons produced during 2016 and 2015, respectively. The decrease in tonnage was primarily due to the suspension of retained operations at facilities during the fourth quarter of 2015 and the first quarter of 2016 to reduce operating expenses. The decrease in royalties we earned in 2016 was also the result of higher Tinuum Group operating expenses in 2016 due to higher payments made to secure the location for an RC facility in advance of securing a lease or a sale with a tax equity investor.
Interest expense
Interest expense decreased in 2016 compared to 2015 due to a decrease in 453A interest and the elimination of the RCM6 Note Payable. These decreases were $2.1 million and $2.2 million, respectively, for the year ended December 31, 2016 compared to 2015. These decreases were offset by an increase in interest expense in 2016 of $0.7 million related to the Credit Agreement, which was entered into during the fourth quarter of 2015 and was paid off as of June 30, 2016.
During the year ended December 31, 2016 compared to 2015, there was an increase in RC facilities from 12 to 13 in which Tinuum Group recognized installment sales for tax purposes and are therefore subject to 453A interest.
The following table shows the balance of the tax liability that has been deferred and the applicable interest rate to calculate section 453A interest:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
|
2016
|
|
2015
|
Tax liability deferred on installment sales
(1)
|
|
$
|
71,559
|
|
|
$
|
111,905
|
|
Interest rate
|
|
4.00
|
%
|
|
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 $204 million as of December 31, 2016).
Revision of estimated litigation settlement and royalty indemnity expense, net
During the fourth quarter of 2016, management revised its estimate for future Royalty Award payments based on an updated forecast provided to the Company by a former equity method investment for which we are required to pay additional damages related to certain future revenues generated from the former equity method investment. This forecast included a material reduction in estimated future revenues generated at the specific activated carbon plant from which the royalties are generated. Based primarily on the updated forecast, management recorded a $4.0 million reduction to its Royalty Award accrual as of December 31, 2016.
During the year ended December 31, 2016, we recorded an expense for the estimated payment of monetary penalties in connection with litigation in the amount of $0.5 million.
Other
Gain on sale of equity method investment
On March 3, 2016, we sold our 24.95% membership interest in RCM6 for a cash payment of $1.8 million and the assumption, by the buyer, of the RCM6 Note Payable. The outstanding balance on the RCM6 Note Payable at the time of the sale was $13.2 million. With the sale of our membership interest in RCM6, we recognized a gain on the sale of $2.1 million, which is included within the Other line item in the Consolidated Statements of Operations for the year ended December 31, 2016.
Gain on settlement of note payable
In February 2016, we entered into an agreement with the DSI Business Owner to settle the remaining amounts owed (the "DSI Business Owner Note Payable") of approximately $1.1 million for a one-time payment of $0.3 million. The one-time payment was made during the first quarter of 2016, and we recognized a gain of approximately $0.9 million, which is included in the Other line item in the Consolidated Statements of Operations for the year ended December 31, 2016.
Gain on settlement of licensed technology obligation
On June 15, 2016, we entered into an agreement with Highview to terminate the Highview License in exchange for a one-time payment by us of £0.2 million (approximately $0.2 million). According to the agreement, this amount is only payable upon the
sale of our shares in Highview to satisfy the liability. As a result of terminating this license agreement, we eliminated the licensed technology asset, reduced the corresponding long-term liability to the amount of the one-time payment, and recognized a gain of approximately $0.2 million, which is included in the Other line item in the Consolidated Statements of Operations for the year ended December 31, 2016.
Impairment of cost method investment
As of December 31, 2016, we estimated the fair value of the Highview Investment based upon an anticipated equity raise by Highview at a price of £2.00 per share, which was less than our cost per share of £4.25. As a result, we recorded an impairment charge of $1.8 million, which is included in the Other line item in the Consolidated Statements of Operations for the year ended December 31, 2016.
Gain on lease termination
In 2016, we and the lessee terminated a sale-type lease, and we recorded a lease termination fee of $3.6 million, which was in excess of the carrying value of the net investment in sales-type lease of $2.7 million. As a result of this lease termination, we recognized a gain of $0.9 million, which is included in the Other line item in the Consolidated Statements of Operations for the year ended December 31, 2016.
Income tax expense (benefit)
As of December 31, 2016 and 2015, we had a valuation allowance recorded of $75.9 million and $148.3 million, respectively, against our deferred tax assets. During 2016, we recorded an income tax benefit of $60.9 million compared to income tax expense of zero for 2015. The income tax benefit for 2016 primarily reflects a $61.4 million reversal of the valuation allowance of our deferred tax assets. Historically, we had recorded a valuation allowance for all of our deferred tax assets primarily due to a historical three-year cumulative loss position. However, as of December 31, 2016, we concluded that it was more likely than we will generate sufficient taxable income within the applicable NOL and tax credit carry-forward periods to realize $61.4 million of our net deferred tax assets and, therefore, reversed the valuation allowance by this amount. This conclusion was reached after weighing all of the evidence and determining that the positive evidence outweighed the negative evidence. The positive evidence considered by management in arriving at its conclusion to partially reverse the valuation allowance included factors such as the emergence from the previous three-year cumulative loss position during the fourth quarter of 2016, achievement of four consecutive quarters of profitability and forecasts of continued future profitability under several potential scenarios derived from currently contracted business within the RC segment. We believed these factors supported the partial utilization of deferred tax assets attributable to temporary differences that do not expire and NOL's and tax credits prior to their expiration between 2031 through 2036.
Business Segments
As of
December 31, 2017
, we have
two
reportable segments: (1) RC; and (2) EC.
The business segment measurements provided to and evaluated by our chief operating decision maker ("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 our equity method investments. Segment revenue also includes royalty earnings from Tinuum Group and income related to sales-type leases.
|
|
|
•
|
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
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 operating and retained produced and
|
sold RC, 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.
|
EC - Our EC segment includes revenues and related expenses from the sale of ACI and DSI equipment systems, chemical sales, consulting services and other sales related to the reduction of emissions in the coal-fired power generation and industrial boiler industries. 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.
|
Management uses segment operating income (loss) to measure profitability and performance at the segment level. Management believes segment operating income (loss) provides investors with a useful measure of our operating performance and underlying trends of the businesses. Segment operating income (loss) may not be indicative of our overall consolidated performance and therefore, should be read in conjunction with our Consolidated Results of Operations.
The following table presents our operating segment results for the years ended
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
($)
|
|
($)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Refined Coal:
|
|
|
|
|
|
|
|
|
|
|
Earnings in equity method investments
|
|
$
|
53,843
|
|
|
$
|
45,584
|
|
|
$
|
8,921
|
|
|
$
|
8,259
|
|
|
$
|
36,663
|
|
Consulting services
|
|
—
|
|
|
—
|
|
|
55
|
|
|
—
|
|
|
(55
|
)
|
Royalties, related party
|
|
9,672
|
|
|
6,125
|
|
|
10,642
|
|
|
3,547
|
|
|
(4,517
|
)
|
|
|
63,515
|
|
|
51,709
|
|
|
19,618
|
|
|
11,806
|
|
|
32,091
|
|
Emissions Control:
|
|
|
|
|
|
|
|
|
|
|
Equipment sales
|
|
31,401
|
|
|
46,949
|
|
|
60,099
|
|
|
(15,548
|
)
|
|
(13,150
|
)
|
Chemicals
|
|
4,246
|
|
|
3,025
|
|
|
888
|
|
|
1,221
|
|
|
2,137
|
|
Consulting services
|
|
45
|
|
|
648
|
|
|
1,697
|
|
|
(603
|
)
|
|
(1,049
|
)
|
|
|
35,692
|
|
|
50,622
|
|
|
62,684
|
|
|
(14,930
|
)
|
|
(12,062
|
)
|
Total segment reporting revenues
|
|
$
|
99,207
|
|
|
$
|
102,331
|
|
|
$
|
82,302
|
|
|
$
|
(3,124
|
)
|
|
$
|
20,029
|
|
Adjustments to reconcile to reported revenues:
|
|
|
|
|
|
|
|
|
|
|
Refined Coal:
|
|
|
|
|
|
|
|
|
|
|
Earnings in equity method investments
|
|
$
|
(53,843
|
)
|
|
$
|
(45,584
|
)
|
|
$
|
(8,921
|
)
|
|
(8,259
|
)
|
|
(36,663
|
)
|
Royalties, related party
|
|
(9,672
|
)
|
|
(6,125
|
)
|
|
(10,642
|
)
|
|
(3,547
|
)
|
|
4,517
|
|
|
|
(63,515
|
)
|
|
(51,709
|
)
|
|
(19,563
|
)
|
|
(11,806
|
)
|
|
(32,146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total reported revenues
|
|
35,692
|
|
|
50,622
|
|
|
62,739
|
|
|
(14,930
|
)
|
|
(12,117
|
)
|
Segment operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
Refined Coal
(1)
|
|
$
|
59,908
|
|
|
$
|
51,264
|
|
|
$
|
12,131
|
|
|
$
|
8,644
|
|
|
$
|
39,133
|
|
Emissions Control
(2)
|
|
379
|
|
|
7,334
|
|
|
(7,583
|
)
|
|
(6,955
|
)
|
|
14,917
|
|
Total segment operating income
|
|
$
|
60,287
|
|
|
$
|
58,598
|
|
|
$
|
4,548
|
|
|
$
|
1,689
|
|
|
$
|
54,050
|
|
(1) Included within the RC segment operating income for the year ended
December 31, 2016
is a
$2.1 million
gain on the sale of RCM6 and for the years ended
December 31, 2017
,
2016
and
2015
453A interest expense of
$2.6 million
,
$2.5 million
and
$4.6 million
, respectively, and interest expense related to the RCM6 Note Payable of
zero
,
$0.3 million
, and
$2.5 million
, respectively.
(2) Included within the EC segment operating income for the year ended
December 31, 2016
is a
$0.9 million
gain related to a termination of a sales-type lease.
A reconciliation of segment operating income to consolidated net income (loss) is included in
Note 13
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, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Earnings from Tinuum Group
|
|
$
|
48,875
|
|
|
$
|
41,650
|
|
|
$
|
8,651
|
|
Earnings from Tinuum Services
|
|
4,963
|
|
|
4,491
|
|
|
4,838
|
|
Earnings (losses) from other
|
|
5
|
|
|
(557
|
)
|
|
(4,568
|
)
|
Earnings from equity method investments
|
|
$
|
53,843
|
|
|
$
|
45,584
|
|
|
$
|
8,921
|
|
RC earnings increased primarily due to increased equity earnings from Tinuum Group during the year ended
December 31, 2017
compared to the year ended
December 31, 2016
, as presented above. Our equity earnings increased primarily due to an increase in cash distributions from Tinuum Group due to the addition of four invested facilities, three of which were fully invested by third parties, as discussed in the consolidated results above. For the year ended
December 31, 2017
, Tinuum Group's consolidated earnings
increased
$26.6 million
from the comparable
December 31, 2016
period due to an increase in lease revenues driven by significant sales of facilities to third-party investors.
As discussed above and in
Note 2
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. As such, our earnings in Tinuum Group
increased
by
$7.2 million
during the year ended
December 31, 2017
compared to the year ended
December 31, 2016
in part due to
$48.9 million
of cash distributions received that were in excess of our pro-rata share of cumulative earnings in Tinuum Group.
RC operating income in
2017
was also positively impacted for the following:
|
|
•
|
The sale of RCM6 in
2016
, which had incurred losses from inception;
|
|
|
•
|
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
2017
;
|
|
|
•
|
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 declining deferred tax liability.
|
EC
Discussion of revenues derived from our EC segment and costs related thereto are included within our consolidated results in Item 8 of this Report.
EC segment operating income
decreased
during the year ended
December 31, 2017
compared to
2016
primarily due to the decrease in revenues year over year, as discussed within the consolidated results. The decrease in EC segment operating income was offset by decreases in segment operating expenses. Specifically, Payroll and benefits decreased year over year by
$1.2 million
, primarily due to a decrease in severance expense of
$1.0 million
. Additional decreases in segment operating expenses were primarily due to a decrease in impairment charges of
$1.3 million
related to the Highview investment. Offsetting the net decrease in segment operating expenses was the
$0.9 million
gain on settlement recognized in
2016
of the DSI Business Owner Note Payable as well as a
$0.4 million
reserve recorded in
2017
on an asset related to a letter of credit asset draw made by a former customer that we are contesting and pursing legal actions.
Liquidity and Capital Resources
Overview of Factors Affecting Our Liquidity
During
2017
, our liquidity position was positively affected primarily due to distributions from Tinuum Group and Tinuum Services and borrowing availability under our bank ("Lender") line of credit (the "Line of Credit"). As a result, our working capital position as of
December 31, 2017
improved by
$14.8 million
compared to
December 31, 2016
.
Our principal sources of liquidity currently include:
|
|
•
|
distributions from Tinuum Group and Tinuum Services;
|
|
|
•
|
royalty payments from Tinuum Group; and
|
Our principal uses of liquidity during the year ended
December 31, 2017
included:
|
|
•
|
repurchases of shares of common stock pursuant to a modified Dutch Auction tender offer ("Tender Offer");
|
|
|
•
|
repurchases of shares of common stock pursuant to a stock repurchase program by which the Company may repurchase up to
$10.0 million
of the Company's outstanding common stock, from time to time;
|
|
|
•
|
our business operating expenses, including federal and state tax payments;
|
|
|
•
|
delivering on our existing contracts and customer commitments; and
|
|
|
•
|
repayments on the Line of Credit.
|
The following table summarizes the cash distributions from our equity method investments, which most significantly impact our consolidated cash flow results, for the years ended
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Tinuum Group
|
|
$
|
48,875
|
|
|
$
|
41,650
|
|
|
$
|
8,651
|
|
Tinuum Services
|
|
4,638
|
|
|
4,500
|
|
|
5,019
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
Distributions from equity method investees
|
|
$
|
53,513
|
|
|
$
|
46,150
|
|
|
$
|
13,670
|
|
On
May 5, 2017
, our Board authorized the commencement of the Tender Offer to purchase for cash up to
925,000
shares of our 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, we 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, we acquired
1,370,891
shares of our 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 our outstanding shares of our common stock prior to the Tender Offer. The Tendered Shares include the
925,000
shares we initially offered to purchase and
445,891
additional shares that we elected to purchase pursuant to our right to purchase up to an additional 2% of our outstanding shares of common stock.
During December 2017, our Board authorized the repurchase of up to
$10.0 million
of outstanding common stock in open market transactions. As of December 31, 2017, we had purchased
342,875
shares of common stock for cash payments of
$3.4 million
, inclusive of commissions and fees.
Our Board declared quarterly cash dividends of
$0.25
per share on the outstanding shares of our common stock on each of
June 14, 2017
,
August 7, 2017
, and
November 6, 2017
, payable to stockholders of record as of the close of business on
June 28, 2017
,
August 21, 2017
, and
November 17, 2017
, respectively. The payments of
$5.2 million
,
$5.3 million
and
$5.2 million
were subsequently made in July, September, and December 2017, respectively. The total amount of dividends paid by the Company during the twelve months ended
December 31, 2017
was
$15.7 million
. Dividends in the amount of
$0.1 million
have been accrued and represent dividends accumulated on nonvested shares of our common stock held by our employees and directors that contain dividend rights that are forfeitable and not payable until the underlying shares vest.
During the third quarter of 2017, we amended the Line of Credit ("Eleventh Amendment") with the Lender. The Eleventh Amendment decreased the Line of Credit to
$10.0 million
due to decreased collateral requirements for the Company's outstanding letters of credit ("LC's"), extended the maturity date of the Line of Credit to September 30, 2018, and permitted the Line of Credit to be used as collateral (in place of restricted cash) for LC's up to
$8.0 million
related to equipment projects, the remaining estimated payments due under the Royalty Award and certain other agreements. Additionally, under the Eleventh Amendment there is 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 defined in the Eleventh Amendment) of
$24.0 million
.
As of
December 31, 2017
, there were no outstanding borrowings under the Line of Credit, however, LC's in the aggregate amount of
$3.5 million
related to obligations due under the Royalty Award ("Royalty Award LC's") were secured under the Line of Credit, resulting in borrowing availability of
$6.5 million
. On December 29, 2017, pursuant to the execution of the Indemnity Termination Agreement on December 29, 2017, we settled all remaining obligations due under the Royalty Award in exchange for the Settlement Payment of
$3.3 million
resulting in remaining LC availability of
$4.5 million
. Pursuant to the Indemnity Settlement Agreement, the LC’s were terminated in January 2018.
As of December 31, 2016, we had Royalty Award LC's totaling
$7.2 million
outstanding that were collateralized by restricted cash.
During 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 during the three months ended March 31, 2017. We are contesting the draw on this LC and are pursuing actions to recover this amount from the customer.
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 EC products, and, in particular EC chemicals sales. 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.
Sources and Uses of Cash
Year ended December 31, 2017
Compared to
Year ended December 31, 2016
Cash, cash equivalents and restricted cash
increased
from
$26.9 million
as of
December 31, 2016
to
$30.7 million
as of
December 31, 2017
,
an increase
of
$3.7 million
. The following table summarizes our cash flows for the years ended
December 31, 2017
and
2016
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
(
in thousands)
|
|
2017
|
|
2016
|
|
Change
|
Cash provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(11,748
|
)
|
|
$
|
(18,257
|
)
|
|
$
|
6,509
|
|
Investing activities
|
|
48,386
|
|
|
39,899
|
|
|
8,487
|
|
Financing activities
|
|
(32,889
|
)
|
|
(15,671
|
)
|
|
(17,218
|
)
|
Net change in Cash and Cash Equivalents and Restricted Cash
|
|
$
|
3,749
|
|
|
$
|
5,971
|
|
|
$
|
(2,222
|
)
|
Cash flows from operating activities
Cash flows from operating activities for the year ended
December 31, 2017
increased by
$6.5 million
compared to the year ended
December 31, 2016
and were positively impacted primarily by the following: (1) a decrease in deferred tax benefit of
$60.9 million
, which was recorded in 2016 as a result of the release of a portion of our valuation allowance on our deferred tax assets; (2) a decrease in deferred tax assets during 2017 of
$23.2 million
as a result of utilization in
2017
as we generated taxable income; (3) net changes in working capital and other liabilities of $10.6 million, primarily due to significant reductions to Accounts payable, Accrued payroll, Other current liabilities and Other long-term liabilities that occurred in 2016 as a result of the Company becoming current on, or settling, significant amounts related to these liabilities. Offsetting these increases to operating cash flows were primarily the following: (1) a decrease in net income of
$69.8 million
, which was primarily due to
the deferred tax benefit recorded in
2016
; (2) an increase in earnings from equity method investees of
$8.3 million
; (3) a net decrease in the Royalty Award of
$7.6 million
in
2017
as a result of the final payments and settlement of all remaining royalties due; and (4) a decrease in cash distributions from equity method investees, return on investment of
$3.3 million
, primarily from a decrease in cash distributions received from Tinuum Group, as all of its cash distributions for 2017 were reported as distributions in excess of cumulative earnings within Investing cash flows.
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
increased
from
$38.3 million
in
2016
to
$48.9 million
in
2017
. All of these cash distributions were received from Tinuum Group. During the year ended
December 31, 2016
, Tinuum Group distributions of
$3.4 million
were reported within operating cash flows, and
$38.3 million
were reported within investing cash flows.
Equity method investment
Cash flows from investing activities for the year ended
December 31, 2017
also decreased as a result of the cash proceeds received of
$1.8 million
from the sale of RCM6 in 2016, as discussed in
Note 2
of the Consolidated Financial Statements included in Item 8 of this Report.
Cash flows from financing activities
Dividends Paid and Stock Repurchases
During the year ended
December 31, 2017
, we paid Dividends of
$15.7 million
. In addition, during the year ended
December 31, 2017
, we repurchased
1,370,891
shares of our common stock in the amount of
$13.0 million
pursuant to the Tender Offer conducted in May and June of 2017 and
342,875
shares of our common stock in the amount of
$3.4 million
in open market transactions that occurred in December 2017.
Short term borrowings
During the year ended
December 31, 2016
, we repaid all principal amounts due under the Credit Agreement of $13.3 million, including the pay-off amount of
$9.9 million
, which occurred as a result of the termination of the Credit Agreement on June 30, 2016. During the year ended December 31, 2016, we paid
$0.8 million
in debt issuance costs related to the Second Amendment of the Credit Agreement and amendment fees related to the Line of Credit. Additionally, during the year ended
December 31, 2016
, we paid a debt prepayment penalty of
$0.2 million
for the pay-off the Credit Agreement prior to maturity. During the year ended
December 31, 2017
, we paid fees in connection with amendments to the Line of Credit of approximately
$0.1 million
.
Notes payable activity
During the year ended
December 31, 2016
, we repaid $1.2 million of principal on the RCM6 and the DSI Business Owner Notes Payable.
Equity Award Activity
During the years ended
December 31, 2017
and
2016
, we used cash of
$0.6 million
and
$0.2 million
, respectively, for the repurchase of shares to satisfy tax withholdings upon the vesting of equity-based awards.
Year ended
December 31, 2016
Compared to Year ended
December 31, 2015
Cash, cash equivalents and restricted cash
increased
from
$21.0 million
as of
December 31, 2015
to
$26.9 million
as of
December 31, 2016
,
an increase
of
$6.0 million
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
(
in thousands)
|
|
2016
|
|
2015
|
|
Change
|
Cash provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(18,257
|
)
|
|
$
|
(29,869
|
)
|
|
$
|
11,612
|
|
Investing activities
|
|
39,899
|
|
|
4,334
|
|
|
35,565
|
|
Financing activities
|
|
(15,671
|
)
|
|
10,029
|
|
|
(25,700
|
)
|
Net change in Cash and Cash Equivalents and Restricted Cash
|
|
$
|
5,971
|
|
|
$
|
(15,506
|
)
|
|
$
|
21,477
|
|
Cash flows from operating activities
Cash flows from operating activities for the year ended
December 31, 2016
increased by
$11.6 million
compared to the year ended
December 31, 2015
and were positively impacted primarily by the following: (1) an increase in net income, which was
$97.7 million
for the year ended
December 31, 2016
, compared to a net loss of
$30.1 million
in 2015; (2) an increase in cash distributions from equity method investees, return on investment of
$2.9 million
; and (3) net changes in working capital and other liabilities, primarily due to significant reductions as a result of a reduction in the professional resources deployed to address the restatement. Offsetting these increases to operating cash flows were primarily the following: (1) a decrease in deferred tax benefit of
$61.4 million
, which was a result of the release of a portion of our valuation allowance on our deferred tax assets; (2) an increase in earnings from equity method investees of
$36.7 million
, primarily received from Tinuum Group; and (3) deferred revenue and project costs resulted in a change in a use of operating cash flows on a net basis of $6.0 million due to production of ACI and DSI equipment systems.
Cash flow 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 increased from $8.7 million in 2015 to $36.3 million in 2016. All of these cash distributions were received from Tinuum Group.
Maturity of investments in securities, restricted
During 2016, we ceased to pledge investments to support letters of credit and instead used restricted cash as necessary.
Acquisition and disposal of property and equipment, net
Acquisitions of property and equipment were $0.3 million and $0.5 million for the years ended December 31, 2016 and December 31, 2015, respectively.
Proceeds from the sale of property and equipment, net
Proceeds from the sale of property and equipment were $0.1 million and $0.9 million for the years ended December 31, 2016 and December 31, 2015, respectively. During 2015, we disposed of property and equipment related to the termination of manufacturing operations at our Pennsylvania fabrication facility.
Advance on note receivable
In December 2014, we loaned $0.5 million to an independent third party to provide financing for the pursuit of emissions technology projects, bearing annual interest of 8%. Interest and principal were payable at maturity of the agreement in June 2015. In March 2015, we loaned an additional $0.5 million to the third party, also bearing annual interest at 8%. All interest and principal payments under both loans were then deferred until March 2018.
Acquisition of a business
During March 2015, we acquired certain assets of Clearview Monitoring Solutions Ltd. ("Clearview"), which operated as ADA Analytics, for $2.4 million cash, $2.1 million of which was paid during 2015. We acquired the in-process research and development assets of Clearview in order to potentially commercialize and expand our analytics services available to customers. However, in August 2015, as part of a broader strategic restructuring of our business to simplify our operating structure in a manner to increase customer focus, better support sales and product delivery and also align our cost structure as the EC market shifted towards compliance solutions for MATS, our management approved an action to wind down operations of ADA Analytics.
Equity method investment
On February 10, 2014, we purchased a 24.95% membership interest in RCM6, which owned a single RC facility that produced RC that qualified for Section 45 tax credits. As part of the purchase, we were subject to quarterly capital calls and variable payments based upon differences in originally forecasted RC production as of the purchase date and actual quarterly production. During the years ended December 31, 2016 and 2015, we funded capital calls and made variable payments of $0.2 million and $2.4 million, respectively. We sold our investment in RCM6 in March 2016 and received proceeds from the sale of $1.8 million in cash and the assumption, by the buyer, of all unpaid amounts outstanding under the RCM6 Note Payable.
Cash flow from financing activities
Short term borrowings
During the year ended
December 31, 2016
, we repaid all principal amounts due under the Credit Agreement of $13.3 million, including the pay-off amount of
$9.9 million
, which occurred as a result of the termination of the Credit Agreement on June 30, 2016. During the year ended December 31, 2016, we paid $0.8 million in debt issuance costs related to the Second Amendment of the Credit Agreement and amendment fees related to the Line of Credit. Additionally, during the year ended December 31, 2016, we paid a debt prepayment penalty of $0.2 million for the pay-off the Credit Agreement prior to maturity.
Notes payable activity
During the year ended December 31, 2016 and 2015 we used $1.2 million and $1.5 million cash, respectively, for repayments of principal on the RCM6 and the DSI Business Owner Notes Payable,
Contractual Obligations
Our contractual obligations as of
December 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
(in thousands)
|
|
Total
|
|
Less than 1 year
|
|
1-3 years
|
|
4-5 years
|
|
After 5 years
|
Operating leases
|
|
$
|
585
|
|
|
$
|
298
|
|
|
$
|
287
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
585
|
|
|
$
|
298
|
|
|
$
|
287
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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 issued in connection with equipment sales agreements, collateral support for future obligations due under the Royalty Award and other items. A summary of the information related to our letters of credit is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Outstanding
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Expiration of Letters of Credit as of December 31, 2017
|
(in thousands)
|
|
2017
|
|
Less than 1 year
|
|
1-3 years
|
|
4-5 years
|
|
After 5 years
|
LC's
|
|
$
|
3,500
|
|
|
$
|
3,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Additional information related to the letters of credit is included in
Note 4
to the Consolidated Financial Statements included in Item 8 of this Report.
Off-Balance Sheet Arrangements
During
2017
,
2016
and
2015
, 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 4
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.
Revenue Recognition
We recognize revenue when: (i) persuasive evidence of a customer arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (v) product delivery has occurred or services have been rendered and it is probable that performance guarantees, if any, will be met.
Equipment sales
We have entered into contracts that require, over a period of months, the design and construction of emissions control systems ("extended equipment contracts"). Revenue from such extended equipment contracts is recorded using the percentage of completion, cost to cost method based on costs incurred to date compared with total estimated contract costs. However, if there is not sufficient information to estimate costs for extended equipment contracts at the time the contract was entered into, the completed contract method is used.
Under the completed contract method, revenues and costs from extended equipment contracts are deferred and recognized when contract obligations are substantially complete. We define substantially complete as delivery of equipment and start-up at the customer site, and, as applicable to DSI systems, the completion of any major warranty service. Such costs are accumulated in the
Costs in excess of billings on uncompleted contracts
line item in the
Consolidated Balance Sheets
included in Item 8 of this Report and typically include direct materials, direct labor and subcontractor costs, and indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. Based on the above factors, for each of the years ended
December 31, 2017
,
2016
and
2015
, we recognized revenue under the completed contract method in which revenues and costs were deferred until the equipment was placed into service and contract obligations were substantially complete.
When multiple contracts exist with a single counterparty, we evaluate revenue recognition on a contract by contract basis. Provisions for estimated losses on uncompleted contracts are recognized when it has been determined that a loss is probable.
Costs of revenue include all labor, fringe benefits, subcontract labor, chemical and coal costs, materials, equipment, supplies, travel costs and any other costs and expenses directly related to the production of revenue. To the extent that they occur, we recognize estimated loss provisions related to contracts in the period that the potential loss is identified.
In addition, warranty costs for ACI equipment systems are estimated based on historical experience and are recorded as a percentage of revenue when the equipment is substantially complete. Warranty costs, comprised of the cost of replacement materials and direct labor, are included within the Equipment sales cost of revenue line of the
Consolidated Statements of Operations
included in Item 8 of this Report.
Warranty costs for DSI equipment systems could not be estimated at the time the contracts were entered into due to a lack of historical experience manufacturing DSI systems and the resulting claims history, if any, needed to determine an appropriate warranty cost estimate. As warranty claims are incurred, such costs have been deferred within the
Costs in excess of billings on uncompleted contracts
line item in the
Consolidated Balance Sheets
included in Item 8 of this Report until such time that revenue and cost of revenue are recognized.
Demand for ACI and DSI system contracts was historically driven by coal-fired electric generating units that needed to comply with MATS and MACT. As the deadline for these standards has passed, we do not expect to enter into any future extended equipment contracts for ACI and DSI systems.
Additional details related to long-term equipment revenues, and the expected impact to the Company's consolidated financial statements upon the adoption of the FASB's ASC 606 -
Revenue from Contracts with Customers
("ASC 606"), which we will adopt effective January 1, 2018,
are described in
Note 1
of the Consolidated Financial Statements included in Item 8 of this Report.
Royalty Award
During 2015, 2016 and 2017, we estimated future obligations due under the Royalty Award, which represented significant liabilities to us. Our estimates of amounts due under the Royalty Award were based upon projections of future revenues, as provided by Carbon Solutions. During the years ended
December 31, 2017
and
2016
, we revised our estimates and recorded reductions of
$3.4 million
and
$4.0 million
to the Royalty Award liability. In December 2017, we settled all future obligations due under the Royalty Award through the execution of the Indemnity Termination Agreement and the related Settlement Payment of
$3.3 million
. Refer to
Note 4
of our Consolidated Financial Statements included in Item 8 of this Report for additional information regarding the Royalty Award.
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 our 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 6
of our Consolidated Financial Statements included in Item 8 of this Report for additional information regarding our stock option awards.
Estimated Company Contribution to the 401(k) Plan
As part of an ongoing investigation of our 401(k) Plan by the Department of Labor ("DOL"), we have estimated and recorded a liability in the amount of $1.0 million for a potential contribution we may need to make to the 401(k) Plan. The estimate is based on information currently available to us and involves elements of judgment and significant uncertainties. The DOL has not issued any formal findings as of the date of this Report and, although we believe there has been no breach of fiduciary duty with respect to the 401(k) Plan, we believe that it is probable that the DOL will require us to make some contribution to the 401(k) Plan in order to close the investigation. We have determined that this amount is both probable and reasonably estimable and, as such, we have recorded a liability and related expense of $1.0 million as of
December 31, 2017
and for the year ended
December 31, 2017
, respectively. Refer to
Note 4
of our Consolidated Financial Statements included in Item 8 of this Report for additional information regarding this matter.
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.
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 income in the period that includes the enactment date.
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, 2017
and
2016
, 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 12
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
Interest Rate Risk
We are exposed to market risk from changes in interest rates. Our assets include cash equivalents subject to variable interest rates. As of
December 31, 2017
,
$30.7 million
of cash was earning interest at
0.35%
.
We are exposed to interest rate risk related to our obligations to pay 453A interest to the IRS. As of
December 31, 2017
, the applicable 453A interest rate, which, according to the applicable rules is rounded to the nearest full percentage to determine interest due, which as of December 31, 2017 was
4.00%
. A change of 1% in the applicable interest rate during the year ended
December 31, 2017
would have caused a change in pretax income of
$0.6 million
.
We are also exposed to interest rate risk in connection with the Line of Credit, if amounts are drawn, which bears interest at a variable rate, which is the higher of 5% or the "Prime Rate" plus 1%. As of
December 31, 2017
the Prime Rate was
4.50%
, but no amounts were outstanding on the Line of Credit.
Using the
December 31, 2017
cash balances, a
10%
proportionate increase in short-term interest rates on an annualized basis compared to the actual interest rates as of
December 31, 2017
, and a corresponding and parallel shift in the remainder of the yield curve, would result in
an increase to pretax income
of
$12 thousand
. Conversely, a corresponding decrease in interest rates would result in a comparable decrease to pretax income. Actual interest rates could change significantly more than
10%
. There are inherent limitations in the sensitivity analysis presented, primarily due to the assumption that interest rate movements are not linear and instantaneous. As a result, the analysis is unable to reflect the potential effects of more complex market changes that could arise, which may positively or negatively affect pretax income.
Commodity Price Risk
In the normal course of our business, we are exposed to market risk or price fluctuations related to the goods we procure related to our revenue-producing activities. The manufacturing of our chemical products is dependent upon certain discrete chemicals that are prone to significant price fluctuations and supply constraints. Further, there are a limited number of suppliers that provide ingredients needed to manufacture our proprietary chemicals that are used at a customer's power plant, which makes us vulnerable to potential price increases from our suppliers that could negatively impact our gross margins if we are unable to increase the selling price to our customers. We do not engage in commodity hedging transactions for raw materials, though we have committed and will continue to commit to purchase certain materials for specified periods of time. Significant increases in the prices of our products due to increases in our suppliers' cost of discrete chemicals could have a negative effect on demand for products and on profitability. We may not be able to pass cost increases on to our customers, and our margins maybe negatively impacted given the competitive prices of other products within the mercury control market.
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 sheet of Advanced Emissions Solutions, Inc. and subsidiaries (the “Company”) as of
December 31, 2017
, the related consolidated statements of operations, stockholders’ equity and cash flows for the year 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, 2017
, and the consolidated results of its operations and its cash flows for the year 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, 2017
, 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 12, 2018
, expressed an unqualified opinion on the Company’s internal control over financial reporting.
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. 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 audit 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 audit 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 audit 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 audit provide
s
a reasonable basis for our opinion.
/s/ Moss Adams LLP
Denver, Colorado
March 12, 2018
We have served as the Company’s auditor since 2017.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Advanced Emissions Solutions, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Advanced Emissions Solutions, Inc. and subsidiaries as of December 31, 2016, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Advanced Emissions Solutions, Inc. and subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
/s/ Hein & Associates LLP
Denver, Colorado
March 13, 2017
Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands, except share data)
|
|
2017
|
|
2016
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
30,693
|
|
|
$
|
13,208
|
|
Restricted cash
|
|
—
|
|
|
13,736
|
|
Receivables, net
|
|
1,113
|
|
|
8,648
|
|
Receivables, related party
|
|
3,247
|
|
|
1,934
|
|
Prepaid expenses and other assets
|
|
1,835
|
|
|
1,382
|
|
Total current assets
|
|
36,888
|
|
|
38,908
|
|
Property and equipment, net of accumulated depreciation of $1,486 and $2,920, respectively
|
|
410
|
|
|
735
|
|
Equity method investments
|
|
4,351
|
|
|
3,959
|
|
Deferred tax assets
|
|
38,661
|
|
|
61,396
|
|
Other assets
|
|
2,308
|
|
|
2,298
|
|
Total Assets
|
|
$
|
82,618
|
|
|
$
|
107,296
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
1,000
|
|
|
$
|
1,920
|
|
Accrued payroll and related liabilities
|
|
1,384
|
|
|
2,121
|
|
Billings in excess of costs on uncompleted contracts
|
|
1,830
|
|
|
4,947
|
|
Legal settlements and accruals
|
|
—
|
|
|
10,706
|
|
Other current liabilities
|
|
2,664
|
|
|
4,017
|
|
Total current liabilities
|
|
6,878
|
|
|
23,711
|
|
Legal settlements and accruals, long-term
|
|
—
|
|
|
5,382
|
|
Other long-term liabilities
|
|
2,285
|
|
|
2,038
|
|
Total Liabilities
|
|
9,163
|
|
|
31,131
|
|
Commitments and contingencies (Notes 3 and 4)
|
|
|
|
|
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, 22,465,821 and 22,322,022 shares issued and 20,752,055 and 22,024,675 shares outstanding at December 31, 2017 and 2016, respectively
|
|
22
|
|
|
22
|
|
Treasury stock, at cost: 1,713,766 and zero shares as of December 31, 2017 and 2016, respectively
|
|
(16,397
|
)
|
|
—
|
|
Additional paid-in capital
|
|
105,308
|
|
|
119,494
|
|
Accumulated deficit
|
|
(15,478
|
)
|
|
(43,351
|
)
|
Total stockholders’ equity
|
|
73,455
|
|
|
76,165
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
82,618
|
|
|
$
|
107,296
|
|
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
)
|
|
2017
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
|
Equipment sales
|
|
$
|
31,401
|
|
|
$
|
46,949
|
|
|
$
|
60,099
|
|
Chemicals
|
|
4,246
|
|
|
3,025
|
|
|
888
|
|
Consulting services and other
|
|
45
|
|
|
648
|
|
|
1,752
|
|
Total revenues
|
|
35,692
|
|
|
50,622
|
|
|
62,739
|
|
Operating expenses:
|
|
|
|
|
|
|
Equipment sales cost of revenue, exclusive of depreciation and amortization
|
|
28,438
|
|
|
37,741
|
|
|
45,433
|
|
Chemicals cost of revenue, exclusive of depreciation and amortization
|
|
3,434
|
|
|
1,700
|
|
|
601
|
|
Consulting services and other cost of revenue, exclusive of depreciation and amortization
|
|
13
|
|
|
376
|
|
|
1,518
|
|
Payroll and benefits
|
|
7,669
|
|
|
12,390
|
|
|
23,589
|
|
Rent and occupancy
|
|
795
|
|
|
2,168
|
|
|
3,309
|
|
Legal and professional fees
|
|
4,354
|
|
|
8,293
|
|
|
16,604
|
|
General and administrative
|
|
3,857
|
|
|
3,721
|
|
|
6,104
|
|
Research and development, net
|
|
157
|
|
|
(648
|
)
|
|
5,362
|
|
Depreciation and amortization
|
|
789
|
|
|
979
|
|
|
2,019
|
|
Total operating expenses
|
|
49,506
|
|
|
66,720
|
|
|
104,539
|
|
Operating loss
|
|
(13,814
|
)
|
|
(16,098
|
)
|
|
(41,800
|
)
|
Other income (expense):
|
|
|
|
|
|
|
Earnings from equity method investments
|
|
53,843
|
|
|
45,584
|
|
|
8,921
|
|
Royalties, related party
|
|
9,672
|
|
|
6,125
|
|
|
10,642
|
|
Interest income
|
|
54
|
|
|
268
|
|
|
24
|
|
Interest expense
|
|
(3,024
|
)
|
|
(5,066
|
)
|
|
(8,402
|
)
|
Litigation settlement and royalty indemnity expense, net
|
|
3,269
|
|
|
3,464
|
|
|
—
|
|
Other
|
|
2,025
|
|
|
2,463
|
|
|
494
|
|
Total other income
|
|
65,839
|
|
|
52,838
|
|
|
11,679
|
|
Income (loss) before income tax expense
|
|
52,025
|
|
|
36,740
|
|
|
(30,121
|
)
|
Income tax expense (benefit)
|
|
24,152
|
|
|
(60,938
|
)
|
|
20
|
|
Net income (loss)
|
|
$
|
27,873
|
|
|
$
|
97,678
|
|
|
$
|
(30,141
|
)
|
Earnings (loss) per common share (Note 1):
|
|
|
|
|
|
|
Basic
|
|
$
|
1.30
|
|
|
$
|
4.40
|
|
|
$
|
(1.37
|
)
|
Diluted
|
|
$
|
1.29
|
|
|
$
|
4.34
|
|
|
$
|
(1.37
|
)
|
Weighted-average number of common shares outstanding:
|
|
|
|
|
|
|
Basic
|
|
21,367
|
|
|
21,931
|
|
|
21,773
|
|
Diluted
|
|
21,413
|
|
|
22,234
|
|
|
21,773
|
|
Cash dividends declared per common share outstanding:
|
|
$
|
0.75
|
|
|
$
|
—
|
|
|
$
|
—
|
|
See Notes to the Consolidated Financial Statements.
Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Treasury Stock
|
|
|
|
|
|
|
(
in thousands, except share data
)
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
|
Total Stockholders’
Equity (Deficit)
|
Balances, January 1, 2015
|
|
21,853,263
|
|
|
$
|
22
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
110,169
|
|
|
$
|
(110,888
|
)
|
|
$
|
(697
|
)
|
Stock-based compensation
|
|
127,867
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,462
|
|
|
—
|
|
|
6,462
|
|
Clawback of equity awards
|
|
(20,656
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(325
|
)
|
|
—
|
|
|
(325
|
)
|
Repurchase of shares to satisfy tax withholdings
|
|
(16,602
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(277
|
)
|
|
—
|
|
|
(277
|
)
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(30,141
|
)
|
|
(30,141
|
)
|
Balances, December 31, 2015
|
|
21,943,872
|
|
|
$
|
22
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
116,029
|
|
|
$
|
(141,029
|
)
|
|
$
|
(24,978
|
)
|
Stock-based compensation
|
|
405,354
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,762
|
|
|
—
|
|
|
2,762
|
|
Repurchase of shares to satisfy tax withholdings
|
|
(27,204
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(196
|
)
|
|
—
|
|
|
(196
|
)
|
Reclassification and settlement of equity awards
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
899
|
|
|
—
|
|
|
899
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
97,678
|
|
|
97,678
|
|
Balances, December 31, 2016
|
|
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
|
|
See Notes to the Consolidated Financial Statements.
Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(
in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
27,873
|
|
|
$
|
97,678
|
|
|
$
|
(30,141
|
)
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
Deferred tax benefit from release of valuation allowance
|
|
(474
|
)
|
|
(61,396
|
)
|
|
—
|
|
Depreciation and amortization
|
|
789
|
|
|
979
|
|
|
2,019
|
|
Debt prepayment penalty and amortization of debt issuance costs
|
|
109
|
|
|
1,380
|
|
|
987
|
|
Impairment of property, equipment, inventory, intangibles and cost method investment
|
|
464
|
|
|
2,280
|
|
|
2,087
|
|
Provision for accounts receivable and other receivables
|
|
385
|
|
|
13
|
|
|
633
|
|
Interest costs added to principal balance of notes payable
|
|
—
|
|
|
—
|
|
|
923
|
|
Share-based compensation expense, net
|
|
2,209
|
|
|
2,868
|
|
|
6,879
|
|
Earnings from equity method investments
|
|
(53,843
|
)
|
|
(45,584
|
)
|
|
(8,921
|
)
|
Gain on sale of equity method investment
|
|
—
|
|
|
(2,078
|
)
|
|
—
|
|
Gain on settlement of note payable, licensed technology, and sales-type lease
|
|
—
|
|
|
(1,910
|
)
|
|
—
|
|
Other non-cash items, net
|
|
44
|
|
|
35
|
|
|
285
|
|
Changes in operating assets and liabilities, net of effects of acquired businesses:
|
|
|
|
|
|
|
Receivables
|
|
6,743
|
|
|
(301
|
)
|
|
8,361
|
|
Related party receivables
|
|
(1,313
|
)
|
|
(16
|
)
|
|
(479
|
)
|
Prepaid expenses and other assets
|
|
(351
|
)
|
|
1,195
|
|
|
(107
|
)
|
Costs incurred on uncompleted contracts
|
|
27,048
|
|
|
29,623
|
|
|
6,492
|
|
Deferred tax asset, net
|
|
23,208
|
|
|
—
|
|
|
—
|
|
Other long-term assets
|
|
41
|
|
|
961
|
|
|
205
|
|
Accounts payable
|
|
(920
|
)
|
|
(4,254
|
)
|
|
(1,340
|
)
|
Accrued payroll and related liabilities
|
|
(738
|
)
|
|
(2,887
|
)
|
|
(102
|
)
|
Other current liabilities
|
|
(1,586
|
)
|
|
(3,105
|
)
|
|
(812
|
)
|
Billings on uncompleted contracts
|
|
(30,140
|
)
|
|
(32,272
|
)
|
|
(15,186
|
)
|
Advance deposit, related party
|
|
—
|
|
|
(2,980
|
)
|
|
(3,544
|
)
|
Other long-term liabilities
|
|
154
|
|
|
(2,175
|
)
|
|
595
|
|
Legal settlements and accruals
|
|
(16,088
|
)
|
|
(4,211
|
)
|
|
(3,722
|
)
|
Distributions from equity method investees, return on investment
|
|
4,638
|
|
|
7,900
|
|
|
5,019
|
|
Net cash used in operating activities
|
|
(11,748
|
)
|
|
(18,257
|
)
|
|
(29,869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(
in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Cash flows from investing activities
|
|
|
|
|
|
|
Distributions from equity method investees in excess of cumulative earnings
|
|
48,875
|
|
|
38,250
|
|
|
8,651
|
|
Maturity of investment securities, restricted
|
|
—
|
|
|
336
|
|
|
—
|
|
Acquisition of property and equipment
|
|
(485
|
)
|
|
(289
|
)
|
|
(507
|
)
|
Proceeds from sale of property and equipment
|
|
57
|
|
|
52
|
|
|
942
|
|
Advance on note receivable
|
|
—
|
|
|
—
|
|
|
(500
|
)
|
Acquisition of business
|
|
—
|
|
|
—
|
|
|
(2,124
|
)
|
Purchase of and contributions to equity method investee
|
|
(61
|
)
|
|
(223
|
)
|
|
(2,128
|
)
|
Proceeds from sale of equity method investment
|
|
—
|
|
|
1,773
|
|
|
—
|
|
Net cash provided by investing activities
|
|
48,386
|
|
|
39,899
|
|
|
4,334
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Borrowings on Line of Credit
|
|
808
|
|
|
—
|
|
|
—
|
|
Repayments on Line of Credit
|
|
(808
|
)
|
|
—
|
|
|
—
|
|
Short-term borrowings
|
|
—
|
|
|
—
|
|
|
13,539
|
|
Repayments on short-term borrowings and notes payable, related party
|
|
—
|
|
|
(14,496
|
)
|
|
(3,234
|
)
|
Short-term borrowing loan costs and debt prepayment penalty
|
|
(236
|
)
|
|
(979
|
)
|
|
—
|
|
Repurchase of shares to satisfy tax withholdings
|
|
(566
|
)
|
|
(196
|
)
|
|
(276
|
)
|
Dividends paid
|
|
(15,690
|
)
|
|
—
|
|
|
—
|
|
Repurchase of common shares
|
|
(16,397
|
)
|
|
—
|
|
|
—
|
|
Net cash (used in) provided by financing activities
|
|
(32,889
|
)
|
|
(15,671
|
)
|
|
10,029
|
|
Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash
|
|
3,749
|
|
|
5,971
|
|
|
(15,506
|
)
|
Cash and Cash Equivalents and Restricted Cash, beginning of year
|
|
26,944
|
|
|
20,973
|
|
|
36,479
|
|
Cash and Cash Equivalents and Restricted Cash, end of year
|
|
$
|
30,693
|
|
|
$
|
26,944
|
|
|
$
|
20,973
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
3,644
|
|
|
$
|
3,647
|
|
|
$
|
6,274
|
|
Cash paid for income taxes, net of refunds received
|
|
$
|
1,672
|
|
|
$
|
541
|
|
|
$
|
29
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
Settlement of RCM6 note payable
|
|
$
|
—
|
|
|
$
|
13,234
|
|
|
$
|
—
|
|
Non-cash reduction of equity method investment
|
|
$
|
—
|
|
|
$
|
11,156
|
|
|
$
|
—
|
|
Stock award reclassification (liability to equity)
|
|
$
|
—
|
|
|
$
|
899
|
|
|
$
|
—
|
|
Dividends payable
|
|
$
|
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. The Company is principally engaged in emissions control ("EC") technologies and associated equipment, consumables and services. Our proprietary environmental technologies 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 EC 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 royalty payment streams related to 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 13
for additional information regarding the Company's operating segments.
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, 2017
, the Company holds equity interests of
42.5%
,
50.0%
and
50.0%
in Tinuum Group, Tinuum Services, LLC ("Tinuum Services") and GWN Manager, LLC ("GWN Manager"), respectively. As discussed in
Note 2
, the Company purchased its interest in GWN Manager in July 2017 and sold its equity method investment in RCM6, LLC ("RCM6") in March 2016. 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 and Cash Equivalents
Cash and cash equivalents include bank deposits and other highly liquid investments purchased with an original maturity of three months or less.
Restricted Cash
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 ("Line of Credit"). As of
December 31, 2016
, restricted cash primarily consisted of funds withheld to provide collateral support for certain letters of credit issued to i) customers related to certain contractual performance and payment guarantees, ii) certain settlement parties to provide security for continuing royalty indemnification payments related to the settlement of certain litigation (the "Royalty Award"), and iii) minimum cash balance requirements under the Line of Credit.
Receivables and Credit Policies
Receivable balances represent unsecured, customer obligations due under trade terms typically requiring payment within
30
-
45
days from the invoice date and are stated net of allowance for doubtful accounts. The Company records allowances for doubtful accounts when it is probable that the accounts receivable balances will not be collected. The following tables show the receivables balances:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
Trade receivables
|
|
$
|
1,240
|
|
|
$
|
4,289
|
|
Less: Allowance for doubtful accounts
|
|
(127
|
)
|
|
(200
|
)
|
Trade receivables, net
|
|
1,113
|
|
|
4,089
|
|
Other receivables
(1)
|
|
—
|
|
|
4,559
|
|
Total
|
|
$
|
1,113
|
|
|
$
|
8,648
|
|
(1) As of
December 31, 2016
, Other receivables included settlement amounts subsequently funded by the Company's insurance carriers for legal proceedings described in
Note 4
.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
During the years ended
December 31, 2017
,
2016
and
2015
, the Company recognized
zero
,
zero
and
$0.1 million
, respectively, of bad debt expense related to the write-off of specific accounts whose ultimate collection was in doubt. Bad debt expense is included within the
General and administrative
line item in the
Consolidated Statements of Operations
.
Notes receivable are reported at their outstanding principal balances, adjusted for any amounts determined to be uncollectible.
As of
December 31, 2017
and
2016
, the Company had a Note Receivable outstanding in the amount of
$1.0 million
, which is fully reserved as substantial doubt exists as to collectability.
Interest income is accrued and credited to income based on the unpaid principal balance outstanding. The accrual of interest is discontinued when substantial doubt exists about the ability to collect principal and interest based upon the contractual terms. Current portion of notes receivable is included within
Prepaid expenses and other assets
and long-term portion is included in the
Other assets
line item in the
Consolidated Balance Sheets
. Additional details regarding Note receivable balances are included in
Note 10
.
Inventory
Inventories are stated at the lower of cost or market and consist principally of finished goods related to the Company's chemical product offerings. The cost of inventory is determined using the first-in-first-out ("FIFO") method. Inventories are included within the
Other assets
line item in the
Consolidated Balance Sheets
. As of
December 31, 2017
and
2016
, the balance of inventory was comprised of finished goods of
$0.1 million
and
zero
, respectively.
Other Intangible Assets
Other Intangible assets consist of patents and licensed technology and are included in the
Other assets
line item in the
Consolidated Balance Sheets
.
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 weighted-average amortization period for the Company's patents is
16
years.
All research and development costs associated with the technology development are expensed as incurred.
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, 2017
,
2016
and
2015
, 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 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 2
for additional information regarding the Company's equity method investments.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Investments in partially-owned subsidiaries for which the Company has less-than-20% ownership are accounted for using the cost method. Cost method investments are 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. If no such events or changes in circumstances have occurred, the fair value is estimated only if practicable to do so.
Royalties, Related Party
The Company licenses its M-45
TM
and M-45-PC
TM
emission control technologies ("M-45 License") to Tinuum Group and realizes royalty income based upon a percentage of the per-ton, pre-tax margin as defined in the M-45 License.
Property and Equipment
Property 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
2
to
7
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 long-lived assets to determine if facts and circumstances indicate that the carrying value of assets may be impaired and if any adjustment is warranted.
Revenue Recognition
The Company recognizes revenues when: (i) persuasive evidence of a customer arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonable assured; and (iv) product delivery has occurred or services have been rendered and it is probable that performance guarantees, if any, will be met.
Equipment sales
The Company has entered into construction-type contracts that entail the design and construction of emissions control systems ("extended equipment contracts"). Revenues from such extended equipment contracts are 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 does not have sufficient information to estimate either costs incurred or total estimated costs for extended equipment contracts at the time contracts are entered into, the completed contract method is used. For all of its Dry Sorbent Injection ("DSI") contracts, the Company has used the completed contract method from inception of the contract to recognize revenues and related cost of revenue.
Under the completed contract method, revenues and costs from extended equipment contracts are deferred and recognized when contract obligations are substantially complete. The Company defines substantially complete as delivery of equipment and start-up at the customer site or, as applicable to DSI systems, the completion of any major warranty service period. For each of the years ended
December 31, 2017
,
2016
and
2015
, the Company did not have sufficient information to measure ongoing performance for its extended equipment contracts. Accordingly, the completed contract method of revenue recognition has been used for each of these years, and revenues and costs are deferred until the equipment is placed into service and contract obligations are substantially complete. For the years ended
December 31, 2017
and
2016
, the Company did not enter into any extended equipment contracts.
Deferred revenue and related costs are accumulated in the
Costs in excess of billings on uncompleted contracts
or
Billings in excess of costs on uncompleted contracts
line items in the
Consolidated Balance Sheets
, and typically include direct materials, direct labor and subcontractor costs, and indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs.
When multiple contracts exist with a single counterparty, the Company evaluates revenue recognition on a contract-by-contract basis. Provisions for estimated losses on uncompleted contracts are recognized when it has been determined that a loss is probable.
The Company also enters into other non-extended equipment contracts for which the Company recognizes revenues as services to build equipment systems are performed or as equipment is delivered.
Chemicals
Revenues for direct sales of chemicals are recognized at the date of delivery to, and acceptance by, the customer.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Certain chemicals customer contracts are comprised of evaluation tests of the Company's chemicals' effectiveness and efficiency in reducing emissions and entail the delivery of chemicals to the customer and the Company evaluating results of emissions reduction over the term of the contract. The Company generally recognizes revenue from these types of contracts over the duration of the contract based on the cost of chemicals consumed by the customer.
Consulting services and other
The Company recognizes revenues on time and material contracts as services are performed.
Cost of Revenue
Costs of revenue include all labor, fringe benefits, subcontract labor, chemical 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.
Warranty costs for Activated Carbon Injection ("ACI") equipment systems are estimated based on historical experience and are recorded as a percentage of revenue when the equipment is substantially complete. Warranty costs, comprised of the cost of replacement materials and direct labor, are included within the Equipment sales cost of revenue line in the
Consolidated Statements of Operations
.
Warranty costs for DSI equipment systems have not been estimable at the time the contracts were entered into, as the Company lacked historical experience in manufacturing DSI systems and was unable to reasonably estimate costs to complete as well as warranty claims. Therefore, revenue recognition on DSI equipment systems has been deferred until the end of the warranty period, which has generally been
12
to
24
months following substantial completion.
As warranty claims are incurred, such costs are deferred within the
Costs in excess of billings on uncompleted contracts
line item in the
Consolidated Balance Sheets
, until such time that revenues and cost of revenue are recognized. Subsequent to revenues being recognized, warranty claims are included within the Other long-term liabilities line item in the
Consolidated Balance Sheets
and within Cost of revenue line of the
Consolidated Statements of Operations
. The changes in the carrying amount of the Company’s warranty obligations, which do not include amounts for DSI systems as revenues, are deferred until the end of the warranty period, and are disclosed in
Note 10
.
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
Research and development costs are charged to expense in the period incurred.
Research and development expense consists of research relating to continued product development for the Company's ongoing business and various other projects including the CO
2
capture and control market. The Company historically entered into development and cost-sharing contracts with the U.S. Department of Energy (the "DOE"). These contracts were best-effort-basis contracts, and the Company generally included industry cost-share partners to offset the costs incurred that are anticipated to be in excess of funded amounts from the DOE. The Company accounts for these contracts with the DOE and industry cost-share partners by recognizing amounts funded by the DOE under research-and-development-cost-sharing arrangements as an offset to research and development expense, which is reported in the
Research and development, net
line in the
Consolidated Statements of Operations
.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Asset Retirement Obligations
Asset retirement obligations, or "ARO liabilities," consist of estimated costs to remove equipment and reclaim the land associated with one research and development project. The Company estimates ARO liabilities for final reclamation based upon bids obtained from independent third parties and other exit alternatives, which are adjusted for inflation and then discounted at a credit-adjusted risk-free rate. Changes in estimates could occur due to revisions of estimated costs and changes in timing and performance of the reclamation activities. ARO liabilities are included within the
Other long-term liabilities
line item in the
Consolidated Balance Sheets
and discussed further in
Note 10
. As of
December 31, 2017
and
December 31, 2016
, the ARO liability was
zero
and
$1.3 million
, respectively.
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.
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
.
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 accounting principles generally accepted in the United States ("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.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 6
for additional information related to PSU's.
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)
|
|
2017
|
|
2016
|
|
2015
|
Net income (loss)
|
|
$
|
27,873
|
|
|
$
|
97,678
|
|
|
$
|
(30,141
|
)
|
Less: Dividends and undistributed income (loss) allocated to participating securities
|
|
171
|
|
|
1,105
|
|
|
(275
|
)
|
Income (loss) attributable to common stockholders
|
|
$
|
27,702
|
|
|
$
|
96,573
|
|
|
$
|
(29,866
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average number of common shares outstanding
|
|
21,367
|
|
|
21,931
|
|
|
21,773
|
|
Add: dilutive effect of equity instruments
|
|
46
|
|
|
303
|
|
|
—
|
|
Diluted weighted-average shares outstanding
|
|
21,413
|
|
|
22,234
|
|
|
21,773
|
|
Earnings (loss) per share - basic
|
|
$
|
1.30
|
|
|
$
|
4.40
|
|
|
$
|
(1.37
|
)
|
Earnings (loss) per share - diluted
|
|
$
|
1.29
|
|
|
$
|
4.34
|
|
|
$
|
(1.37
|
)
|
For the years ended
December 31, 2017
and
2016
, options to purchase
0.3 million
and
0.2 million
shares of common stock for each of the years presented were outstanding, but 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 year ended December 31,
2015
,
0.4 million
shares of the Company's outstanding equity awards were excluded from the calculation of diluted loss per share because their inclusion would have been anti-dilutive. For the years ended
December 31, 2017
,
2016
and
2015
, options to purchase of
0.2 million
,
0.2 million
and
0.1 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:
|
|
•
|
revenue recognition and warranty estimates accruals related to the Company's extended equipment contracts;
|
|
|
•
|
the carrying value of its long-lived assets;
|
|
|
•
|
the allowance for doubtful accounts receivable;
|
|
|
•
|
stock compensation costs;
|
|
|
•
|
estimates related to future obligations, including the Royalty Award, and other legal accruals; 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
17
invested RC facilities of which
11
are leased to a single customer. A majority of these leases are periodically renewed and the
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
("ASU 2014-09"), which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 and its related amendments are effective for reporting periods (including interim periods) beginning after December 31, 2017. The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption ("modified retrospective method"). The Company will adopt the standard under the modified retrospective method effective January 1, 2018, which will be reflected in its financial statements as of and for the three months ended March 31, 2018.
As of the date of this filing, the Company has completed its assessment of ASU 2014-09 for the impact to the financial statements as of the adoption date, completed a detailed review of individual customer contracts, completed its review of controls and procedures that will be revised or added from the adoption of the standard, and completed its documentation of the standard's financial statement impact at adoption, financial statement presentation and disclosure changes and changes to existing revenue recognition policies, controls and procedures.
As of the adoption date of ASU 2014-09, the Company has determined that deferred revenue and deferred project costs on uncompleted contracts as of December 31, 2017 related to equipment sales projects will be derecognized through a cumulative effect adjustment, which will reduce the opening balance of the Accumulated deficit in the amount of approximately
$1.7 million
, net of income taxes. In addition, as of the adoption date, the Company will also derecognize deferred revenue and deferred project costs as of December 31, 2017 for a technology licensing arrangement through a cumulative effect adjustment, which will reduce the Accumulated deficit in the amount of approximately
$1.3 million
, net of income taxes. Except for the reclassification of the Company's royalties received from related parties from Other income to Revenue, the Company expects that there will be no material financial statement impact as of the adoption date from other uncompleted contracts.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments (Subtopic 825-10) - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
("ASU 2016-01"). This standard provides guidance on how entities measure certain equity investments and present changes in the fair value. This standard requires that entities measure certain equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income. ASU 2016-01 is effective for fiscal years beginning after December 31, 2017. 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 February 2016, the 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. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures.
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
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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.
Note 2
- Equity Method Investments
Tinuum Group, LLC
As of
December 31, 2017
and
2016
, 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 which 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 credits to the members. Additionally, on the
10
-year anniversary of the date the last RC facility owned by Tinuum Group or one of its subsidiaries is placed into service, but no later than December 31, 2021, if GSFS's unrecovered investment balance has not been reduced to zero, GSFS may require Tinuum Group to redeem its Class B units for an amount equal to the then unrecovered investment balance, payable within
180
days of the notice of redemption. GSFS has no further capital call requirements and does not have a voting interest, but does have approval rights over certain corporate transactions. However, the Class B units do not have voting rights and ADA and NexGen each maintain a
50%
voting interest in Tinuum Group. 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)
|
|
2017
|
|
2016
|
Current assets
|
|
$
|
31,068
|
|
|
$
|
24,584
|
|
Non-current assets
|
|
$
|
75,592
|
|
|
$
|
83,621
|
|
Current liabilities
|
|
$
|
48,280
|
|
|
$
|
43,117
|
|
Non-current liabilities
|
|
$
|
8,350
|
|
|
$
|
11,456
|
|
Redeemable Class B equity
|
|
$
|
821
|
|
|
$
|
18,250
|
|
Members equity attributable to Class A members
|
|
$
|
40,452
|
|
|
$
|
26,475
|
|
Noncontrolling interests
|
|
$
|
8,757
|
|
|
$
|
8,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Gross profit
|
|
$
|
95,552
|
|
|
$
|
92,305
|
|
|
$
|
108,416
|
|
Operating, selling, general and administrative expenses
|
|
22,958
|
|
|
23,662
|
|
|
23,405
|
|
Income from operations
|
|
72,594
|
|
|
68,643
|
|
|
85,011
|
|
Other expenses
|
|
(4,520
|
)
|
|
(8,775
|
)
|
|
(2,203
|
)
|
Class B preferred return
|
|
(1,712
|
)
|
|
(3,901
|
)
|
|
(6,157
|
)
|
Loss attributable to noncontrolling interest
|
|
43,474
|
|
|
27,234
|
|
|
10,675
|
|
Net income available to Class A members
|
|
$
|
109,836
|
|
|
$
|
83,201
|
|
|
$
|
87,326
|
|
ADES equity earnings from Tinuum Group
|
|
$
|
48,875
|
|
|
$
|
41,650
|
|
|
$
|
8,651
|
|
As shown above, the Company reported earnings from its equity investment in Tinuum Group of
$48.9 million
,
$41.7 million
and
$8.7 million
for the years ended
December 31, 2017
,
2016
and
2015
, 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
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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, 2017
, 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 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, 2015
through
December 31, 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
|
|
12/31/2014
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(29,877
|
)
|
ADES proportionate share of net income from Tinuum Group
(1)
|
|
2015 activity
|
|
35,265
|
|
|
35,265
|
|
|
—
|
|
|
—
|
|
Recovery of cash distributions in excess of investment balance (prior to cash distributions)
|
|
2015 activity
|
|
(29,877
|
)
|
|
(29,877
|
)
|
|
—
|
|
|
29,877
|
|
Cash distributions from Tinuum Group
|
|
2015 activity
|
|
(8,651
|
)
|
|
—
|
|
|
8,651
|
|
|
—
|
|
Adjustment for current year cash distributions in excess of investment balance
|
|
2015 activity
|
|
3,263
|
|
|
3,263
|
|
|
—
|
|
|
(3,263
|
)
|
Total investment balance, equity earnings (loss) and cash distributions
|
|
12/31/2015
|
|
$
|
—
|
|
|
$
|
8,651
|
|
|
$
|
8,651
|
|
|
$
|
(3,263
|
)
|
ADES proportionate share of net income from Tinuum Group
(1)
|
|
2016 activity
|
|
$
|
35,019
|
|
|
$
|
35,019
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Recovery of cash distributions in excess of investment balance (prior to cash distributions)
|
|
2016 activity
|
|
(3,263
|
)
|
|
(3,263
|
)
|
|
—
|
|
|
3,263
|
|
Cash distributions from Tinuum Group
|
|
2016 activity
|
|
(41,650
|
)
|
|
—
|
|
|
41,650
|
|
|
—
|
|
Adjustment for current year cash distributions in excess of investment balance
|
|
2016 activity
|
|
9,894
|
|
|
9,894
|
|
|
—
|
|
|
(9,894
|
)
|
Total investment balance, equity earnings (loss) and cash distributions
|
|
12/31/2016
|
|
$
|
—
|
|
|
$
|
41,650
|
|
|
$
|
41,650
|
|
|
$
|
(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 and cash distributions
|
|
12/31/2017
|
|
$
|
—
|
|
|
$
|
48,875
|
|
|
$
|
48,875
|
|
|
$
|
(12,218
|
)
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(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 and the elimination of Tinuum Group's earnings attributable to RCM6, of which the Company owned
24.95%
during the year ended December 31, 2015 and for the period from January 1 through March 3, 2016. As noted below, the Company sold its interest in RCM6 on March 3, 2016.
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 Form 10-K.
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, 2017
and
2016
, the Company’s
50%
investment in Tinuum Services was
$4.3 million
and
$4.0 million
, respectively.
The following tables summarize the assets, liabilities and results of operations of Tinuum Services:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
Current assets
|
|
$
|
546,681
|
|
|
$
|
278,001
|
|
Non-current assets
|
|
$
|
98,640
|
|
|
$
|
3,426
|
|
Current liabilities
|
|
$
|
178,376
|
|
|
$
|
97,093
|
|
Non-current liabilities
|
|
$
|
75,717
|
|
|
$
|
1,488
|
|
Equity
|
|
$
|
8,569
|
|
|
$
|
7,918
|
|
Noncontrolling interests
|
|
$
|
382,659
|
|
|
$
|
174,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Gross loss
|
|
$
|
(64,796
|
)
|
|
$
|
(54,644
|
)
|
|
$
|
(42,496
|
)
|
Operating, selling, general and administrative expenses
|
|
147,917
|
|
|
134,782
|
|
|
161,456
|
|
Loss from operations
|
|
(212,713
|
)
|
|
(189,426
|
)
|
|
(203,952
|
)
|
Other expenses
|
|
(68
|
)
|
|
(56
|
)
|
|
(118
|
)
|
Loss attributable to noncontrolling interest
|
|
222,707
|
|
|
198,464
|
|
|
213,746
|
|
Net income
|
|
$
|
9,926
|
|
|
$
|
8,982
|
|
|
$
|
9,676
|
|
ADES equity earnings from Tinuum Services
|
|
$
|
4,963
|
|
|
$
|
4,491
|
|
|
$
|
4,838
|
|
Included within the Consolidated Statement of Operations of Tinuum Services during the years ended
December 31, 2017
,
2016
and
2015
were losses related to VIE entities that are consolidated within Tinuum Services of
$222.7 million
,
$198.5 million
and
$213.7 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.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Other
On March 3, 2016, the Company sold its
24.95%
membership interest in RCM6 for a cash payment of
$1.8 million
and the assumption, by the buyer, of an outstanding note payable made (the ("RCM6 Note Payable") by the Company in connection with its purchase of RCM6 membership interests from Tinuum Group. In doing so, the Company recognized a gain on the sale of
$2.1 million
for the year ended
December 31, 2016
, which is included within the
Other
line item in the
Consolidated Statements of Operations
. As a result of the sale of its ownership interest, the Company ceased to be a member of RCM6 and, as such, is no longer subject to any quarterly capital calls and variable payments to RCM6. In addition, the Company has no future obligations related to the RCM6 Note Payable. However, the Company still receives its pro-rata share of income and cash distributions through its ownership in Tinuum Group based on the RCM6 lease payments made to Tinuum Group.
Prior to the sale of its ownership interest, the Company recognized equity losses related to its investment in RCM6 of
$0.6 million
for the three months ended March 31, 2016.
On July 27, 2017, the Company obtained a
50%
membership interest in GWN Manager in exchange for a capital contribution of
$0.1 million
. GWN Manager subsequently purchased a
0.2%
membership interest in a subsidiary of Tinuum Group, which owns a single RC facility that produces RC that qualifies for Section 45 tax credits. Tinuum Group sold
49.9%
of the subsidiary that owns the RC facility to an unrelated third party and retained ownership of the remaining
49.9%
. GWN Manager is subject to monthly capital calls based on estimated working capital needs.
The Company has determined that GWN Manager is not a VIE and has evaluated the 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 GWN Manager under the equity method of accounting.
As
December 31, 2017
, the Company's ownership in GWN Manager was
50%
. The Company's investment in GWN Manager as of
December 31, 2017
, was
$0.1 million
.
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)
|
|
2017
|
|
2016
|
Equity method investment in Tinuum Group
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity method investment in Tinuum Services
|
|
4,284
|
|
|
3,959
|
|
Equity method investment in other
|
|
67
|
|
|
—
|
|
Total equity method investments
|
|
$
|
4,351
|
|
|
$
|
3,959
|
|
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, 2017
,
2016
and
2015
.
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)
|
|
2017
|
|
2016
|
|
2015
|
Earnings from Tinuum Group
|
|
$
|
48,875
|
|
|
$
|
41,650
|
|
|
$
|
8,651
|
|
Earnings from Tinuum Services
|
|
4,963
|
|
|
4,491
|
|
|
4,838
|
|
Earnings (losses) from other
|
|
5
|
|
|
(557
|
)
|
|
(4,568
|
)
|
Earnings from equity method investments
|
|
$
|
53,843
|
|
|
$
|
45,584
|
|
|
$
|
8,921
|
|
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
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.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Distributions from equity method investees, return on investment
|
|
|
|
|
|
|
Tinuum Group
(1)
|
|
$
|
—
|
|
|
$
|
3,400
|
|
|
$
|
—
|
|
Tinuum Services
|
|
4,638
|
|
|
4,500
|
|
|
5,019
|
|
Included in Operating Cash Flows
|
|
$
|
4,638
|
|
|
$
|
7,900
|
|
|
$
|
5,019
|
|
Distributions from equity method investees in excess of cumulative earnings
|
|
|
|
|
|
|
Tinuum Group
|
|
$
|
48,875
|
|
|
$
|
38,250
|
|
|
$
|
8,651
|
|
Included in Investing Cash Flows
|
|
$
|
48,875
|
|
|
$
|
38,250
|
|
|
$
|
8,651
|
|
(1) During the three months ended March 31, 2016, the Company's cumulative share of pro-rata Tinuum Group's net income available to Class A members exceeded the amount of its cumulative earnings recognized due to cash being distributed. As such, the Company recognized
$3.4 million
as "return on investment."
During the years ended
December 31, 2017
,
2016
and
2015
, the Company, in the aggregate, made purchases of and contributions to equity method investments of
$0.1 million
,
$0.2 million
and
$2.4 million
, respectively.
Note 3
- Borrowings
Line of Credit
In September 2013, ADA, as borrower, and the Company, as guarantor, entered into the 2013 Loan and Security Agreement 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"). The Line of Credit was amended nine times from the period from December 2, 2013 through November 25, 2016, most notably to extend the maturity date with each amendment. In addition, during this period, the Lender also granted 10 waivers related to various transactions and obligations to provide financial information to the Lender. Covenants in the Line of Credit included a borrowing base limitation that was based on a percentage of the net present value of ADA’s portion of payments due to Tinuum Group from the RC leases. The Line of Credit also contained other affirmative and negative covenants and customary indemnification obligations of ADA to the Lender and provided for the issuance of letters of credit ("LC's") provided that the aggregate amount of the LC's plus all advances then outstanding did not exceed the calculated borrowing base. The Company guarantees the obligations and agreements of ADA under the Line of Credit. Amounts outstanding under the Line of Credit bear interest payable monthly at a rate per annum equal to the higher of
5%
or the “Prime Rate” (as defined in the Line of Credit) plus
1%
. As a result of various covenant violations, the Company had
no
borrowing availability under the Line of Credit from inception through November 29, 2016.
On November 30, 2016, ADA-ES, Inc., a wholly-owned subsidiary of the Company, as borrower, the Company, as guarantor, and a bank (the "Lender") entered into an amendment (the "Tenth Amendment") to the Line of Credit. The Tenth Amendment increased the Line of Credit to
$15.0 million
, extended the maturity date of the Line of Credit to September 30, 2017 and permitted the Line of Credit to be used as collateral (in place of restricted cash) for LC's related to equipment projects, the Royalty Award, as defined in
Note 4
, and certain other agreements. Additionally, this amendment collateralized the Line of Credit with amounts due to the Company from an additional existing RC facility lease, which amounts also factor into the borrowing base limitation, and amended certain financial covenants. Pursuant to the Tenth Amendment, the Company was required to maintain a deposit account with the Lender, initially with a minimum balance of
$6.0 million
, which was reduced to
$3.0 million
based on the Company meeting certain conditions and maintaining minimum trailing twelve-month EBITDA (earnings before interest, taxes, depreciation and amortization as defined in the Tenth Amendment) of
$24.0 million
. The minimum deposit balance was classified as Restricted Cash on the Consolidated Balance Sheets as of
December 31, 2016
.
On September 30, 2017, ADA, as borrower, the Company, as guarantor, and the Lender entered into an amendment (the "Eleventh Amendment") to the Line of Credit. The Eleventh Amendment decreased the Line of Credit to
$10.0 million
due to decreased collateral requirements for the Company's outstanding LC's, extended the maturity date of the Line of Credit to September 30, 2018, and permitted the Line of Credit to be used as collateral (in place of restricted cash) for LC's up to
$8.0 million
related to equipment projects, the Royalty Award and certain other agreements. Additionally, under the Eleventh Amendment there is 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 defined in the Eleventh Amendment) of
$24.0 million
.
As of
December 31, 2017
, there were
no
outstanding borrowings under the Line of Credit, however, LC's in the aggregate amount of
$3.5 million
were secured under the Line of Credit, resulting in borrowing availability of
$6.5 million
and LC availability of
$4.5 million
.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Letters of Credit
The Company has LC's related to the Royalty Award (as described in
Note 4
), equipment projects, certain other agreements. During March 2017, a customer drew on an LC related to an equipment system in the amount of
$0.8 million
("LC Draw"), which was funded by borrowing availability under the LOC. 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 assets
on the Consolidated Balance Sheets.
The following tables summarize the LC's outstanding and collateral, by asset type, reported on the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
(in thousands)
|
|
LC Outstanding
|
|
Utilization of LOC Availability
|
|
Restricted Cash
|
Royalty Award
(1)
|
|
$
|
3,500
|
|
|
$
|
3,500
|
|
|
$
|
—
|
|
Total LC outstanding
|
|
$
|
3,500
|
|
|
$
|
3,500
|
|
|
$
|
—
|
|
(1) As further discussed in
Note 4
, the Company settled the liability related to the Royalty Award on December 29, 2017. The Company and other parties associated with the LC, executed the termination of the LC in January 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
(in thousands)
|
|
LC Outstanding
|
|
Utilization of LOC Availability
|
|
Restricted Cash
|
Contract performance - equipment systems
|
|
$
|
1,855
|
|
|
$
|
1,776
|
|
|
$
|
86
|
|
Royalty Award
|
|
7,150
|
|
|
—
|
|
|
7,150
|
|
Other
|
|
6,500
|
|
|
—
|
|
|
6,500
|
|
Total LC outstanding
|
|
$
|
15,505
|
|
|
$
|
1,776
|
|
|
$
|
13,736
|
|
The following tables summarizes the expiration periods of the LC's based on the ultimate maturity date of the LC's as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration of Letters of Credit as of December 31, 2017
|
(in thousands)
|
|
Less than 1 year
|
|
1-3 years
|
|
4-5 years
|
|
After 5 years
|
LC's
|
|
$
|
3,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Credit Agreement
On June 30, 2016, the Company, the required lenders and the administrative agent under a
$15.0 million
short-term loan (the "Credit Agreement") agreed to terminate the Credit Agreement prior to the maturity date of July 8, 2016, effective upon the Company’s prepayment on June 30, 2016 of
$9.9 million
, which was comprised of the total principal balance of the loan and advances made to or for the benefit of the Company, together with all accrued, but unpaid, interest and the total amount of all fees, costs, expenses and other amounts owed by the Company thereunder, including a prepayment premium.
The Lenders were beneficial owners of common stock in the Company. The Credit Agreement was approved by the Board and the Audit Committee as a related party transaction.
Tinuum Group - RCM6 Note Payable
The Company acquired a
24.95%
membership interest in RCM6 from Tinuum Group in February 2014 through an up-front payment and the RCM6 Note Payable. Due to the payment terms of the note purchase agreement, the RCM6 Note Payable periodically added interest to the outstanding principal balance. The stated rate associated with the RCM6 Note Payable was
1.65%
and the effective rate of the RCM6 Note Payable at inception was
20%
. As discussed in
Note 2
, on March 3, 2016, the Company sold its
24.95%
membership interest in RCM6 and, as a result, the Company has no future obligations related to the RCM6 Note Payable.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
DSI Business Owner
In February 2016, the Company entered into an agreement to settle an outstanding note payable of approximately
$1.1 million
for
$0.3 million
with the former owner of a business ("DSI Business Owner") acquired by the Company in 2012, which was paid during the first quarter of 2016. The Company recognized a gain related to the settlement of
$0.9 million
, which is included in the Other line item in the Condensed Consolidated Statements of Operations for the year ended December 31, 2016.
Note 4
- 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. The Company’s significant legal proceedings are discussed below.
Securities class action lawsuit:
United Food and Commercial Workers Union v. Advanced Emissions Solutions, Inc.
, No. 14-cv-01243-CMA-KMT (U.S. District Court, D. Colo.)
As of December 31, 2016, the Company had a recorded liability and insurance receivable of
$4.0 million
in connection with this lawsuit as the losses in connection with this matter were probable and reasonably estimable under U.S. GAAP. The liability was originally recorded as of June 30, 2016 in the Legal settlements and accruals line item of the Consolidated Balance Sheet. The Company's insurance carriers funded the full settlement in November 2016. On February 10, 2017, the Company received an order and final judgment that the lawsuit was settled, and the entire case had been dismissed with prejudice.
Stockholder derivative lawsuits:
In Re Advanced Emissions Solutions, Inc. Shareholder Derivative Litigation
, No. 2014CV-30709 (District Court, Douglas County, Colorado) (consolidated actions).
As of December 31, 2016, the Company had a recorded liability and insurance receivable of
$0.6 million
in connection with this lawsuit as the losses in connection with this matter were probable and reasonably estimable under U.S. GAAP. The liability was originally recorded as of June 30, 2016 in the Legal settlements and accruals line item of the Consolidated Balance Sheet. A settlement for this lawsuit was approved and the case was closed on January 4, 2017, and the Company's insurance carriers funded the full settlement in January 2017. As of March 31, 2017, the Company no longer had any amounts impacting its consolidated financial statements as the order and judgment related to the lawsuit was received during the first quarter of 2017.
SEC Inquiry
On March 29, 2017, the Company and the Securities and Exchange Commission reached a settlement to resolve a previously disclosed investigation into certain accounting issues, as described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014. Without admitting or denying the SEC’s allegations, the Company agreed to the terms of the settlement and agreed to pay a civil monetary penalty of
$0.5 million
. The Company had fully reserved for this penalty as of June 30, 2016. The penalty was paid in the first quarter of 2017.
Settlement and Royalty Indemnity
In 2011, the Company and Norit International B.V. ("Norit") entered into a settlement agreement (the "Norit Settlement Agreement") whereby the Company paid amounts related to a non-solicitation breach of contract claim ("Norit Litigation"), and was also required to pay additional damages (the "Royalty Award") related to certain future revenues generated from an activated carbon manufacturing plant (the "Red River Plant") that the Company owned through a joint venture with ADA Carbon Solutions, LLC ("Carbon Solutions"). Payments due under the Royalty Award were due quarterly in arrears through June 2018. Additionally, in 2011, the Company entered into the Settlement Agreement Regarding ADA-ES’ Indemnity Obligations (the "Indemnity Settlement Agreement") whereby the Company agreed to settle certain indemnity obligations asserted against the Company related to the Norit Litigation and relinquished all of its equity interest in Carbon Solutions.
Under the Norit Settlement Agreement, the Company was required to pledge LC's as collateral for a portion of Royalty Award future payments due. In March 2017, the Company was required to increase its LC's under the Royalty Award based on a provision that required additional amounts be pledged because the Company had achieved annual earnings in excess of
$20.0 million
for the fiscal year ended December 31, 2016. Under this provision, the Company was required to provide an additional LC of
$5.0 million
, which was secured under the Line of Credit in March 2017. Under a separate provision of the Norit Settlement Agreement effective during 2017, the Company was required to increase the LC's, subject to the aggregate amount of estimated future payments due related to the Royalty Award, for any dividends issued by the Company prior to January 1, 2018 in amount equal to
50%
of the aggregate fair market value of such dividends (the "Dividends Provision"). Based on the
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
estimated remaining future payments due under the Royalty Award, the Dividends Provision did not impact the amount of LC's pledged during 2017.
During the years ended
December 31, 2017
and
2016
, the Company revised its estimate for future Royalty Award payments based in part on updated forecasts provided to the Company from Carbon Solutions. These forecasts included significant reductions in estimated future revenues generated at the Red River Plant. Based primarily on these updated forecasts, the Company recorded reductions to the Royalty Award accrual of
$3.4 million
and
$4.0 million
for the years ended
December 31, 2017
and
2016
, respectively.
In December 2017, the Company, Carbon Solutions and the 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 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 owed under the terms of 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.
As of
December 31, 2016
, the Company carried the components of the Royalty Award in
Legal settlements and accruals
in the
Consolidated Balance Sheets
of
$5.7 million
, and in
Legal settlements and accruals, long-term
of
$5.4 million
.
The following table summarizes the Company's legal settlements and accruals as described above, which are presented in the
Consolidated Balance Sheets
:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
Settlement and Royalty Indemnification
|
|
$
|
—
|
|
|
$
|
5,656
|
|
Legal settlements
|
|
—
|
|
|
5,050
|
|
Legal settlements and accruals, current
|
|
—
|
|
|
10,706
|
|
Settlement and Royalty Indemnification, long-term
|
|
—
|
|
|
5,382
|
|
Total legal settlements and accruals
|
|
$
|
—
|
|
|
$
|
16,088
|
|
As of
December 31, 2016
, the receivables related to the legal settlements above are shown with the
Receivables, net
line item in the Consolidated Balance Sheets in the same amounts as the respective liabilities.
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"). The DOL opened an investigation into the 401(k) Plan, and the Company is responding to all requests for documents and information from the DOL. The DOL has not issued any formal findings as of the date of this filing. Although the Company believes there has been no breach of fiduciary duty with respect to the 401(k) Plan, the Company believes that it is probable that the DOL will require some payment to the 401(k) Plan in order to close the investigation. The Company determined that this amount is reasonably estimable and, as such, the Company has accrued
$1.0 million
as of
December 31, 2017
. The liability was recorded in the Other current liabilities line item on the Consolidated Balance Sheets. 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
. The estimate is based on information currently available and involves elements of judgment and significant uncertainties. As additional information becomes available and the resolution of the uncertainties becomes more apparent, it is possible that actual payment may exceed the accrued amount.
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
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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.
Performance Guarantee on Equipment Systems
In the normal course of business related to ACI and DSI systems, the Company may guarantee certain performance thresholds during a discrete performance testing period that do not extend beyond six months from the initial test date, the commencement of which is determined by the customer. Performance thresholds include such matters as the achievement of a certain level of mercury removal and other emissions based upon the injection of a specified quantity of a qualified activated carbon or other chemical at a specified rate given other plant operating conditions, and availability of equipment and electric power usage. In the event the equipment fails to perform as specified during the testing period, the Company may have an obligation to correct or replace the equipment. In the event the performance thresholds are not achieved, the Company may have a “make right” obligation within the contract limits.
During 2015, the Company began working to modify and correct
two
performance guarantee issues related to EC systems that were installed during 2015.
No
revenue was recognized on these two contracts until the performance guarantees were resolved and contract obligations were substantially complete. During 2016, the Company passed performance testing on both systems and revenues on both systems were recognized. As a result of the resolution of the performance guarantees, the Company incurred approximately
$0.9 million
of costs on the ACI systems to pass the performance guarantees. During the year ended
December 31, 2016
, the Company satisfied all outstanding performance guarantees on its remaining ACI and DSI contracts and it did not incur any additional claims.
Purchase Obligations
The Company does not have any future purchase obligations as of
December 31, 2017
.
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 2013 and later.
Operating Lease Obligations
The Company leases office, warehouse and laboratory space in Highlands Ranch, Colorado under operating leases. As of
December 31, 2017
, the Company leased approximately
17,344
square feet under
two
leases. Original lease terms ranged from
four
to
seven
years. Certain of these leases have options permitting renewals for additional periods. In addition to minimum fixed payments, a number of leases contain annual escalation clauses that are related to increases in the inflation index.
In December 2016, the Company entered into a lease termination related to its leased office space, in which the Company paid a
$0.3 million
lease termination fee. The lease termination was effective February 2017.
Also in December 2016, the Company entered into a new office lease in Highlands Ranch, Colorado effective February 2017.
Annual minimum commitments under the leases as of
December 31, 2017
are as follows:
|
|
|
|
|
Years Ending December 31,
|
Operating
Lease
Commitments
(in thousands)
|
2018
|
$
|
298
|
|
2019
|
205
|
|
2020
|
82
|
|
2021
|
—
|
|
Thereafter
|
—
|
|
Total
|
$
|
585
|
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Rent expense incurred for the years ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Rent expense
(1)
|
|
$
|
(60
|
)
|
|
$
|
847
|
|
|
$
|
1,838
|
|
(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 5
- Stockholders Equity
The Company has two classes of capital stock authorized, common stock and preferred stock, which are described as follows:
Preferred Stock
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, 2017
and
2016
, there were
no
shares of Preferred Stock designated or outstanding.
Common Stock
Holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Additionally, holders of common stock are entitled to receive dividends when and if declared by the Board, subject to any statutory or contractual restrictions on payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding shares of preferred stock.
Upon dissolution, liquidation or the sale of all or substantially all of the Company's assets, after payment in full of any amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of shares of common stock will be entitled to receive the Company's remaining assets for distribution on a pro rata basis.
Stock Repurchase
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, 2017
.
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 Program
During December 2017, and under a stock repurchase program authorized by the Board, the Company purchased
342,875
shares of its common stock for cash of
$3.4 million
, inclusive of commissions and fees, in open market transactions. Under the stock repurchase program, the Company is authorized to purchase up to
$10.0 million
of its outstanding common stock. This stock repurchase program will remain in effect until December 31, 2018 unless otherwise modified by the Board.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Quarterly Cash Dividend
Dividends declared and paid to holders of the Company's common shares during the years ended
December 31, 2017
,
2016
and
2015
were
$15.7 million
,
zero
, and
zero
, 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 Condensed Consolidated Balance Sheet as of
December 31, 2017
.
Dividends declared and paid quarterly per share on all outstanding shares of common stock during the year ended
December 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
Per share
|
|
Date paid
|
Dividends declared during quarter ended:
|
|
|
|
|
June 30
|
|
$
|
0.25
|
|
|
July 17, 2017
|
September 30
|
|
0.25
|
|
|
September 7, 2017
|
December 31
|
|
0.25
|
|
|
December 6, 2017
|
|
|
$
|
0.75
|
|
|
|
Tax Asset Protection Plan
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 designed to protect the Company’s ability to utilize its net operating losses and tax credits.
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.
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 and will expire on the earlier of (a) May 4, 2018, or (b) the date of the 2018 Annual Meeting of Stockholders. The Tax Asset Protection Plan may also be terminated earlier in accordance with the terms thereof.
Note 6
- 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.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Expense
Restricted Stock
- Restricted stock is typically granted with vesting terms of
three
or
five
years. The fair value of Restricted Stock Awards ("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 entire vesting period 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. The following table indicates the weighted-average assumptions that were used related to the stock options granted for the years ended
December 31, 2016
and
2015
, respectively.
No
stock options were granted during the year ended
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
Stock options granted:
|
|
|
|
|
Risk-free interest rate
|
|
1.3
|
%
|
|
1.8
|
%
|
Dividend yield
|
|
—
|
%
|
|
—
|
%
|
Volatility
|
|
78.8
|
%
|
|
74.5
|
%
|
Expected term (in years)
|
|
2.6
|
|
|
5.0
|
|
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.
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.
Stock Appreciation Rights
- Stock Appreciation Rights ("SAR's") generally vest over
three
years and have a contractual limit of
five
years from the date of grant to exercise. The fair value of SAR's 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 derived service period of the respective awards. During 2015, the Company granted a SAR award, and as settlement of the award was out of the control of the Company, the awards were classified as liability-based equity awards and were recorded at the estimated fair value at the grant and remeasured as a liability-based award as of each reporting period. This SAR award was converted to a stock option as of June 30, 2016 as discussed below. The following table indicates the weighted-average assumptions that were used related to the awards granted for the year ended
December 31, 2015
.
No
SAR's were granted during the year ended
December 31, 2017
or
2016
.
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2015
|
SAR's granted:
|
|
|
Risk-free interest rate
|
|
1.8
|
%
|
Dividend yield
|
|
—
|
%
|
Volatility
|
|
74.5
|
%
|
Expected term (in years)
|
|
5.0
|
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 SAR'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 have 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.
Expected term
- The Company’s expected term of SAR's was based upon consideration of the contractual term of the Company’s SAR's of
5
years.
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. The following table indicates the weighted-average assumptions that were used related to the awards granted for the year ended December 31,
2015
.
No
PSU's were granted during the years ended
December 31, 2017
or
2016
.
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2015
|
PSUs granted:
|
|
|
Risk-free interest rate
|
|
1.0
|
%
|
Dividend yield
|
|
—
|
%
|
Volatility
|
|
64.3
|
%
|
Performance period (in years)
|
|
3.0
|
|
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.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Company recorded the following compensation expense related to the Stock Plans and the 2007 Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
RSA expense
|
|
$
|
1,400
|
|
|
$
|
2,021
|
|
|
$
|
2,909
|
|
Stock option expense
|
|
672
|
|
|
285
|
|
|
658
|
|
SAR expense
|
|
—
|
|
|
106
|
|
|
742
|
|
PSU expense
|
|
137
|
|
|
456
|
|
|
2,895
|
|
Total stock-based compensation expense
|
|
$
|
2,209
|
|
|
$
|
2,868
|
|
|
$
|
7,204
|
|
The Company recorded stock-based compensation expense related to awards to Directors 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 years ended
December 31, 2016
and
2015
, the Company modified the terms of awards granted to
27
and
37
employees, respectively, 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
2016
and
2015
the Company recognized incremental stock-based compensation of
$0.4 million
and
$3.4 million
respectively, 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, 2017
, and the expected weighted-average period over which the cost will be recognized is as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
(in thousands)
|
|
Unrecognized Compensation Cost
|
|
Expected Weighted-Average Period of Recognition (in years)
|
RSA expense
|
|
$
|
1,735
|
|
|
1.93
|
Stock option expense
|
|
58
|
|
|
0.25
|
PSU expense
|
|
—
|
|
|
0
|
Total unrecognized stock-based compensation expense
|
|
$
|
1,793
|
|
|
1.88
|
Activity
Restricted Stock
A summary of the status and activity of non-vested RSA's is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31.
|
|
2017
|
|
2016
|
|
2015
|
(in thousands, except for share and per share amounts)
|
Shares
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Shares
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
Shares
|
|
Weighted-Average
Grant-Date
Fair Value
|
Non-vested at beginning of year
|
297,347
|
|
|
$
|
8.03
|
|
|
134,708
|
|
|
$
|
8.49
|
|
|
209,921
|
|
|
$
|
13.59
|
|
Granted
|
191,076
|
|
|
$
|
9.50
|
|
|
363,758
|
|
|
$
|
7.46
|
|
|
127,943
|
|
|
$
|
14.97
|
|
Vested
|
(210,129
|
)
|
|
$
|
8.03
|
|
|
(175,956
|
)
|
|
$
|
11.96
|
|
|
(165,796
|
)
|
|
$
|
17.51
|
|
Forfeited
(1)
|
(1,687
|
)
|
|
$
|
9.17
|
|
|
(25,163
|
)
|
|
$
|
15.58
|
|
|
(37,360
|
)
|
|
$
|
19.30
|
|
Non-vested at end of year
|
276,607
|
|
|
$
|
9.03
|
|
|
297,347
|
|
|
$
|
8.03
|
|
|
134,708
|
|
|
$
|
8.49
|
|
(1) Included within the 2015 forfeited / canceled units are RSA's related to a former executive that were clawed back. The Company recognized
$0.1 million
within
Other
Income line item on the Consolidated Statement of Operations related to these awards.
The weighted-average grant-date fair value of RSA's granted or modified during the years ended
December 31, 2017
,
2016
, and
2015
was
$1.8 million
,
$2.7 million
, and
$1.9 million
, respectively. The total fair value of RSA's vested during the years ended
December 31, 2017
,
2016
and
2015
was
$1.7 million
,
$2.1 million
and
$2.9 million
, respectively.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Stock Options
A summary of option activity under the 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, 2015
|
|
|
|
|
|
|
|
|
Options outstanding, January 1, 2015
|
|
74,200
|
|
|
$
|
13.76
|
|
|
|
|
|
Options granted
|
|
56,250
|
|
|
$
|
13.87
|
|
|
|
|
|
Options exercised
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Options expired / forfeited
|
|
(24,200
|
)
|
|
$
|
7.59
|
|
|
|
|
|
Options outstanding, December 31, 2015
|
|
106,250
|
|
|
$
|
15.22
|
|
|
$
|
—
|
|
|
3.8
|
Options vested and exercisable, December 31, 2015
|
|
82,915
|
|
|
$
|
14.04
|
|
|
$
|
—
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2016
|
|
|
|
|
|
|
|
|
Options outstanding, January 1, 2016
|
|
106,250
|
|
|
$
|
15.22
|
|
|
|
|
|
Options granted
(1)
|
|
546,196
|
|
|
$
|
11.10
|
|
|
|
|
|
Options exercised
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Options expired / forfeited
|
|
(20,000
|
)
|
|
$
|
16.90
|
|
|
|
|
|
Options outstanding, December 31, 2016
|
|
632,446
|
|
|
$
|
11.61
|
|
|
$
|
183
|
|
|
4.0
|
Options vested and exercisable, December 31, 2016
|
|
247,780
|
|
|
$
|
13.30
|
|
|
$
|
69
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2017
|
|
|
|
|
|
|
|
|
Options outstanding, January 1, 2017
|
|
632,446
|
|
|
$
|
11.61
|
|
|
|
|
|
Options granted
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Options exercised
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Options expired / forfeited
|
|
(10,000
|
)
|
|
$
|
9.77
|
|
|
|
|
|
Options outstanding, December 31, 2017
|
|
622,446
|
|
|
$
|
11.64
|
|
|
$
|
119
|
|
|
2.24
|
Options vested and exercisable, December 31, 2017
|
|
429,780
|
|
|
$
|
11.47
|
|
|
$
|
119
|
|
|
2.03
|
|
|
(1)
|
Included in options granted are
243,750
awards granted that were initially granted on a contingent basis and became exercisable as a result of the automatic expiration of the same number of SAR's, as a result of stockholder approval of Amendment No. 4 of the 2007 Plan. See "SAR's" section below for a discussion of the provisions of the exchange and incremental expense recognized.
|
The weighted-average grant-date fair value of options granted during the years ended
December 31, 2017
,
2016
, and
2015
was
zero
,
$0.5 million
, and
$0.8 million
, respectively. There were
no
options exercised during the years ended
December 31, 2017
,
2016
and
2015
. The weighted-average grant-date fair value of options vesting during the years ended
December 31, 2017
,
2016
, and
2015
was
$0.7 million
,
$0.5 million
, and
$0.7 million
, respectively.
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, 2017
,
2016
, and
2015
.
During 2015, approximately
$0.5 million
of stock-based compensation expense was recognized as a result of granting an executive officer stock options which were immediately vested, with an exercise price of
$13.87
per option.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
SAR's
A summary of SAR activity under the Plans is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except for share and per share amounts)
|
|
Number of
SAR's
Outstanding and
Exercisable
|
|
Weighted-
Average
Exercise
Price
|
|
Aggregate Intrinsic Value
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
For the year ended December 31, 2015
|
|
|
|
|
|
|
|
|
SAR's outstanding, January 1, 2015
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Granted
|
|
243,750
|
|
|
$
|
13.87
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Expired / forfeited
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
SAR's outstanding, December 31, 2015
|
|
243,750
|
|
|
$
|
13.87
|
|
|
$
|
—
|
|
|
4.5
|
|
SAR's vested and exercisable, December 31, 2015
|
|
43,750
|
|
|
$
|
13.87
|
|
|
$
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2016
|
|
|
|
|
|
|
|
|
SAR's outstanding, January 1, 2016
|
|
243,750
|
|
|
$
|
13.87
|
|
|
|
|
|
|
Granted
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Expired / forfeited
|
|
(243,750
|
)
|
|
$
|
13.87
|
|
|
|
|
|
SAR's outstanding, December 31, 2016
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
SAR's vested and exercisable, December 31, 2016
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
In June 2016, the Company's stockholders approved Amendment No. 4 to the 2007 Plan, which triggered an automatic expiration of the SAR's and an equal number of stock options being exercisable and no longer granted on a contingent basis. Upon approval, all existing SAR's expired under this provision. The Company recorded incremental expense of
$0.1 million
to stock-based compensation related to the change in fair value of the SAR's prior to the reclassification date. Upon reclassification, the impact to
Additional paid-in capital
was a
$0.9 million
increase. The Company had no SAR's outstanding as of
December 31, 2017
.
PSU's
A summary of the status and activity of non-vested PSU's is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31.
|
|
|
2017
|
|
2016
|
|
2015
|
(in thousands, except for unit and per unit amounts)
|
|
Units
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
Units
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
Units
|
|
Weighted-Average
Grant-Date
Fair Value
|
Non-vested at beginning of year
|
|
49,516
|
|
|
$
|
25.20
|
|
|
169,334
|
|
|
$
|
26.38
|
|
|
142,357
|
|
|
$
|
30.65
|
|
Granted
(1)
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
69,218
|
|
|
$
|
20.10
|
|
Vested
(1)
|
|
(30,110
|
)
|
|
$
|
26.87
|
|
|
(119,818
|
)
|
|
$
|
26.87
|
|
|
(13,763
|
)
|
|
$
|
30.52
|
|
Forfeited / Canceled
(1) (2)
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
(28,478
|
)
|
|
$
|
30.44
|
|
Non-vested at end of year
|
|
19,406
|
|
|
$
|
19.95
|
|
|
49,516
|
|
|
$
|
25.20
|
|
|
169,334
|
|
|
$
|
26.38
|
|
(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.
(2) Included within the 2015 forfeited / canceled units are PSU's related to a former executive that were clawed back. The Company recognized
$0.2 million
within
Other
Income line item on the Consolidated Statement of Operations related to these awards
.
The weighted-average grant date fair value of PSU's granted during the years ended
December 31, 2017
,
2016
, and
2015
was
zero
,
zero
, and
$1.4 million
, respectively. The PSU's granted will remain unvested until the third anniversary date of their
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
issuance, at which time the actual number of vested shares will be determined based upon the actual price performances of the Company’s common stock relative to a broad stock index and a peer group performance index.
The following table shows the PSUs 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, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
6,476
|
|
|
3,573
|
|
|
0.75
|
|
|
1.00
|
|
|
—
|
|
|
—
|
|
|
|
2015
|
|
3,869
|
|
|
2,310
|
|
|
0.60
|
|
|
0.60
|
|
|
—
|
|
|
—
|
|
For the year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
38,706
|
|
|
1,572
|
|
|
0.63
|
|
|
1.00
|
|
|
—
|
|
|
—
|
|
|
|
2014
|
|
11,487
|
|
|
—
|
|
|
0.63
|
|
|
0.63
|
|
|
—
|
|
|
—
|
|
|
|
2015
|
|
13,529
|
|
|
—
|
|
|
0.50
|
|
|
0.50
|
|
|
—
|
|
|
—
|
|
For the year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
8,768
|
|
|
3,954
|
|
|
1.75
|
|
|
1.75
|
|
|
2.00
|
|
|
2.00
|
|
|
|
2014
|
|
2,506
|
|
|
1,145
|
|
|
0.63
|
|
|
0.75
|
|
|
—
|
|
|
0.75
|
|
Note 7
- Property and Equipment
The carrying basis and accumulated depreciation of property and equipment at
December 31, 2017
and
2016
are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life in
Years
|
|
As of December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
Machinery and equipment
|
|
2-7
|
|
$
|
1,429
|
|
|
$
|
1,634
|
|
Leasehold improvements
|
|
3
|
|
205
|
|
|
1,244
|
|
Furniture and fixtures
|
|
3-7
|
|
262
|
|
|
777
|
|
|
|
|
|
1,896
|
|
|
3,655
|
|
Less accumulated depreciation and amortization
|
|
|
|
(1,486
|
)
|
|
(2,920
|
)
|
Total property and equipment, net
|
|
|
|
$
|
410
|
|
|
$
|
735
|
|
Depreciation expense for the years ended
December 31, 2017
,
2016
and
2015
was
$0.7 million
,
$0.9 million
and
$1.7 million
, respectively.
During the year ended
December 31, 2016
, the Company recorded impairments totaling approximately
$0.5 million
to reduce the carrying value of certain property and equipment that the Company intended to sell at its estimated sales value, less estimated costs to sell. The property and equipment was subsequently sold at auction. No gain or loss was recognized on the sale of the property and equipment.
During the year ended
December 31, 2016
, the Company accelerated depreciation of approximately
$0.2 million
related to property and equipment that will be no longer be in service due to the lease termination described in
Note 4
.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 8
- Costs and Billings on Uncompleted Contracts
Costs incurred on uncompleted contracts represent the gross costs as of the balance sheet dates. Billings on uncompleted contracts represent the gross billings as of the balance sheet dates. Costs and billings are netted on an individual contract basis, with contracts in a net cost position aggregated and presented as Costs in excess of billings on uncompleted contracts in the
Consolidated Balance Sheets
, and contracts in a net billing position aggregated and presented as
Prepaid expenses and other assets
in the
Consolidated Balance Sheets
. The below table shows the components of these items:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
Costs incurred on uncompleted contracts (gross)
|
|
$
|
15,945
|
|
|
$
|
42,993
|
|
Billings on uncompleted contracts (gross)
|
|
(17,775
|
)
|
|
(47,915
|
)
|
|
|
$
|
(1,830
|
)
|
|
$
|
(4,922
|
)
|
Included in the accompanying balance sheets under the following captions
(1)
:
|
|
|
|
|
Costs in excess of billings on uncompleted contracts
(2)
|
|
$
|
—
|
|
|
$
|
25
|
|
Billings in excess of costs on uncompleted contracts
|
|
(1,830
|
)
|
|
(4,947
|
)
|
|
|
$
|
(1,830
|
)
|
|
$
|
(4,922
|
)
|
(1)
Amounts presented after netting of costs and billings on an individual contract basis.
(2)
Costs in excess of billings on uncompleted contracts is included in the
Prepaid expenses and other assets
caption on the Consolidated Balance Sheets.
When the Company determines that a contract will ultimately be completed at a loss, the Company estimates such loss and accrues the loss as a loss contract accrual in the period that the loss determination is made. Loss contract accruals of
$0.1 million
and
$0.2 million
as of
December 31, 2017
and
2016
, respectively, are included in
Other current liabilities
line item in the
Consolidated Balance Sheets
. During the years ended
December 31, 2017
,
2016
and
2015
, the Company recorded loss contract provisions of
$0.1 million
,
$0.4 million
and
$0.3 million
, respectively. Loss contract provisions are included within the
Equipment sales cost of revenue, exclusive of depreciation and amortization
line item in the
Consolidated Statements of Operations
.
Note 9
- Research and Development and Government and Industry Funded Contracts
Research and development expense consists of research relating to continued product development for the Company’s ongoing business and various other projects, including the CO
2
capture and control market. The Company historically entered into certain development and cost-sharing contracts with the DOE and generally included industry cost-share partners to offset the costs incurred that are anticipated to be in excess of funded amounts from the DOE. Contracts with the DOE can take the form of grants or cooperative agreements and are considered financial assistance awards. The deliverables required by the DOE agreements include various technical and financial reports that the Company submits on a prescribed schedule. The agreements require the Company to perform the negotiated scope of work in agreed phases, which includes testing and demonstration of technologies.
The Company typically invoices the DOE and industry cost-share partners monthly for labor and expenditures plus estimated overhead factors, less any cost share amounts. The contracts under which the Company has performed are subject to audit, the result of which may require the Company to reimburse the DOE for disallowed costs and other adjustments. The Company has not experienced any material adverse adjustments as a result of completed government audits. However, the potential government audits for years ended 2013 through 2015 have not yet been finalized. The following table shows the impact to Research and development expense amounts recognized in the Consolidated Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Research and development expense
|
|
$
|
979
|
|
|
$
|
173
|
|
|
$
|
6,737
|
|
Less:
|
|
|
|
|
|
|
Changes due to amount and timing of ARO reclamation
|
|
822
|
|
|
—
|
|
|
—
|
|
DOE funding
|
|
—
|
|
|
821
|
|
|
1,375
|
|
Research and development expense, net
|
|
$
|
157
|
|
|
$
|
(648
|
)
|
|
$
|
5,362
|
|
Included within the above research and development expenses during 2015 is net impairment expense of
$1.9 million
for the entire carrying value of the Company's ADA Analytics Israel Ltd's ("ADA Analytics") assets, as discussed in
Note 17
and
Note 18
.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 10
- Supplemental Financial Information
Supplemental Balance Sheet Information
The following table summarizes the components of
Prepaid expenses and other assets
and
Other assets
as presented in the
Consolidated Balance Sheets
:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
Other current assets:
|
|
|
|
|
Prepaid expenses
|
|
$
|
1,678
|
|
|
$
|
1,169
|
|
Inventory
|
|
74
|
|
|
16
|
|
Costs in excess of billings
|
|
—
|
|
|
25
|
|
Other
|
|
83
|
|
|
172
|
|
|
|
$
|
1,835
|
|
|
$
|
1,382
|
|
Other long-term assets:
|
|
|
|
|
Deposits
|
|
$
|
223
|
|
|
$
|
263
|
|
Intangibles
|
|
805
|
|
|
696
|
|
Cost method investment
|
|
552
|
|
|
1,016
|
|
Other long-term assets
|
|
728
|
|
|
323
|
|
|
|
$
|
2,308
|
|
|
$
|
2,298
|
|
The Company's cost method investment relates to its 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 "Highview Investment"). The Company evaluated the Highview Investment and determined that it should account for the investment under the cost method.
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, 2016
, the Company recorded an impairment charge of
$1.8 million
based on an estimated fair value of
£2.00
per share, compared to the carrying value prior to the impairment charge of
£4.25
per share. The estimated fair value as of
December 31, 2016
was based on an equity raise that was completed during the first quarter of 2017 at a price of
£2.00
per share.
During the year ended
December 31, 2017
, the Company recorded an impairment charge of
$0.5 million
, which is included in the
Other
line item in the Consolidated Statement of Operations, 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 commenced during the third quarter of 2017 at a price of
£1.00
per share.
The following table details the components of the Company's intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2017
|
|
2016
|
(in thousands, except years)
|
|
Initial Cost
|
|
Net of Accumulated Amortization
|
|
Initial Cost
|
|
Net of Accumulated Amortization
|
Patents
|
|
$
|
1,079
|
|
|
$
|
805
|
|
|
$
|
913
|
|
|
$
|
696
|
|
Licensed technology
|
|
—
|
|
|
—
|
|
|
1,525
|
|
|
—
|
|
Total
|
|
$
|
1,079
|
|
|
$
|
805
|
|
|
$
|
2,438
|
|
|
$
|
696
|
|
Included in the
Consolidated Statements of Operations
is amortization expense related to intangible assets of
$0.1 million
,
$0.1 million
and
$0.4 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. The estimated future amortization expense for existing intangible assets as of
December 31, 2017
is expected to be
$0.1 million
for each of the five succeeding fiscal years.
During the year ended December 31, 2016, the Company entered into an agreement with Highview to terminate a license agreement (the "Highview License") to certain technology ("Licensed Technology") in exchange for a one-time payment by the Company of
£0.2 million
(approximately
$0.2 million
). Under the termination, payment of the termination fee, if any, will only be settled by relinquishing shares of Highview currently owned by the Company equal to
£0.2 million
. As a result of terminating the Highview License, the Company wrote off the Licensed Technology, reduced the corresponding long-term
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
liability ("Highview Obligation") to the amount of the one-time payment, and recognized a gain of approximately
$0.2 million
. The gain on the settlement of the Highview Obligation is included in the Other income line on the Company's Consolidated Statement of Operations for the year ended December 31, 2016.
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)
|
|
2017
|
|
2016
|
Other current liabilities:
|
|
|
|
|
Estimated Company contribution to 401(k) Plan
|
|
$
|
1,000
|
|
|
$
|
—
|
|
Accrued interest
|
|
—
|
|
|
618
|
|
Accrued losses on equipment contracts
|
|
69
|
|
|
183
|
|
Taxes payable
|
|
207
|
|
|
244
|
|
Deferred revenue
|
|
—
|
|
|
76
|
|
Warranty liabilities
|
|
316
|
|
|
287
|
|
Deferred rent
|
|
—
|
|
|
369
|
|
Asset retirement obligation
|
|
—
|
|
|
1,312
|
|
Other
|
|
1,072
|
|
|
928
|
|
|
|
$
|
2,664
|
|
|
$
|
4,017
|
|
Other long-term liabilities:
|
|
|
|
|
Deferred revenue, related party
|
|
$
|
2,000
|
|
|
$
|
2,000
|
|
Deferred rent
|
|
192
|
|
|
38
|
|
Other long-term liabilities
|
|
93
|
|
|
—
|
|
|
|
$
|
2,285
|
|
|
$
|
2,038
|
|
The tables below detail components of
Other current liabilities
as presented above:
The changes in the carrying amount of the Company’s warranty obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
Balance, beginning of year
|
|
$
|
287
|
|
|
$
|
1,197
|
|
Warranties accrued, net
|
|
580
|
|
|
89
|
|
Warranty claims
|
|
(635
|
)
|
|
(899
|
)
|
Change in estimate related to previous warranties accrued
|
|
84
|
|
|
(100
|
)
|
Balance, end of year
|
|
$
|
316
|
|
|
$
|
287
|
|
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)
|
|
2017
|
|
2016
|
Asset retirement obligation, beginning of year
|
|
$
|
1,312
|
|
|
$
|
1,248
|
|
Accretion
|
|
37
|
|
|
64
|
|
Liabilities settled
|
|
(527
|
)
|
|
—
|
|
Changes due to scope and timing of reclamation
|
|
(822
|
)
|
|
—
|
|
Asset retirement obligations, end of year
|
|
$
|
—
|
|
|
$
|
1,312
|
|
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
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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.
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)
|
|
2017
|
|
2016
|
|
2015
|
453A interest
|
|
$
|
2,555
|
|
|
$
|
2,490
|
|
|
$
|
4,639
|
|
Line of Credit interest and letters of credit fees
|
|
417
|
|
|
89
|
|
|
49
|
|
Credit Agreement interest
|
|
—
|
|
|
2,112
|
|
|
1,180
|
|
Interest on RCM6 Note Payable, related party
|
|
—
|
|
|
263
|
|
|
2,468
|
|
Other
|
|
52
|
|
|
112
|
|
|
66
|
|
|
|
$
|
3,024
|
|
|
$
|
5,066
|
|
|
$
|
8,402
|
|
The following table details the components of
Other
in the
Consolidated Statements of Operations
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Impairment of cost method investment
|
|
$
|
(464
|
)
|
|
$
|
(1,760
|
)
|
|
$
|
—
|
|
Settlement agreement
(1)
|
|
3,500
|
|
|
—
|
|
|
—
|
|
Estimate of Company contribution to 401(k) Plan
|
|
(1,000
|
)
|
|
—
|
|
|
—
|
|
Gain on sale of equity method investment
|
|
—
|
|
|
2,078
|
|
|
—
|
|
Gain on settlement of note payable and licensed technology
|
|
—
|
|
|
1,019
|
|
|
—
|
|
Gain on termination of sales-type lease
|
|
—
|
|
|
891
|
|
|
—
|
|
Other
|
|
(11
|
)
|
|
235
|
|
|
494
|
|
|
|
$
|
2,025
|
|
|
$
|
2,463
|
|
|
$
|
494
|
|
(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.
Note 11
- 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, 2017
|
|
As of December 31, 2016
|
(in thousands)
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Financial Instruments:
|
|
|
|
|
|
|
|
|
Highview Investment
|
|
$
|
552
|
|
|
$
|
552
|
|
|
$
|
1,016
|
|
|
$
|
1,016
|
|
Highview Obligation
|
|
$
|
210
|
|
|
$
|
210
|
|
|
$
|
207
|
|
|
$
|
207
|
|
Concentration of credit risk
As of
December 31, 2017
, 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 one financial institution as of December 31, 2017. If that institution was to be unable to perform its obligations, the Company would be at risk regarding the
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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, 2017
and
December 31, 2016
, 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
As discussed in
Note 10
, during the years ended
December 31, 2017
and
2016
, the Company recorded impairment charges approximately
$0.5 million
and
$1.8 million
, respectively, to reduce the carrying value of the Highview Investment to its estimated fair value.
During
2016
, the Company recorded impairments totaling approximately
$0.5 million
to reduce the carrying value of certain property and equipment that the Company intended to sell at its estimated sales value, less estimated costs to sell. The property and equipment was subsequently sold at auction. Proceeds from the sale of the impaired assets totaled approximately
$0.1 million
. No gain or loss was recognized on the sale of the property and equipment. Additionally, the Company recorded an impairment of approximately
$0.8 million
included within Equipment sales cost of revenue for the year ended December 31, 2016.
During December 2014 and March 2015, the Company loaned to an independent technology development company exploring energy storage a total of
$1.0 million
to provide financing to pursue emissions technology projects. This note bore annual interest of
8%
, and interest and principal were payable at maturity in March 2018. Based on uncertainty of collectability, the Company recorded an allowance against the entire principal balance reversed accrued interest and put the note on non-accrual status as of December 31, 2015.
The fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market.
Note 12
- 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 makes 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 include 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.
Concurrent with the enactment of the Tax Act, in December 2017, the SEC staff issued Staff Accounting Bulletin 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Enactment Date for companies to complete the accounting under Accounting Standards Codification 740
- Income Taxes
("ASC 740"). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that an entity's accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
The Company's accounting for the income tax effects of the Tax Act affecting its consolidated financial statements as of December 31, 2017 is generally complete, subject to continued evaluation under SAB 118, and as such, the Company recorded an adjustment to its recorded deferred tax assets and deferred tax liabilities as of the Enactment Date from 35 percent to 21 percent. Accordingly, the Company has recorded a reduction of
$5.8 million
to its net deferred tax asset as of December 22, 2017 with a corresponding entry to deferred tax expense for the year ended December 31, 2017 for those temporary differences expected to reverse after the Enactment Date. The Company does not anticipate any other accounting impacts of the Tax Act during the period within one year from the Enactment Date however, it will continue to assess any potential impact from the Tax Act through this period.
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)
|
|
2017
|
|
2016
|
|
2015
|
Current portion of income tax expense:
|
|
|
|
|
|
|
Federal
|
|
$
|
519
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
894
|
|
|
458
|
|
|
20
|
|
|
|
1,413
|
|
|
458
|
|
|
20
|
|
Deferred portion of income tax (benefit) expense:
|
|
|
|
|
|
|
Federal
|
|
23,003
|
|
|
(61,396
|
)
|
|
—
|
|
State
|
|
(264
|
)
|
|
—
|
|
|
—
|
|
|
|
22,739
|
|
|
(61,396
|
)
|
|
—
|
|
Total income tax (benefit) expense
|
|
$
|
24,152
|
|
|
$
|
(60,938
|
)
|
|
$
|
20
|
|
Effective tax rate
|
|
46
|
%
|
|
(166
|
)%
|
|
—
|
%
|
A reconciliation of expected federal income taxes on income from operations at statutory rates with the expense (benefit) for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Federal statutory rate
|
|
$
|
18,209
|
|
|
$
|
12,859
|
|
|
$
|
(10,542
|
)
|
State income taxes, net of federal benefit
|
|
1,721
|
|
|
987
|
|
|
(781
|
)
|
Permanent differences
|
|
777
|
|
|
84
|
|
|
35
|
|
Tax credits
|
|
(1,949
|
)
|
|
(2,419
|
)
|
|
(38,998
|
)
|
Valuation allowances
|
|
(474
|
)
|
|
(72,359
|
)
|
|
50,066
|
|
Changes in tax rates
|
|
5,818
|
|
|
(125
|
)
|
|
(243
|
)
|
Stock-based compensation
|
|
303
|
|
|
36
|
|
|
487
|
|
Other
|
|
(253
|
)
|
|
(1
|
)
|
|
(4
|
)
|
Expense (benefit) for the provision for income taxes
|
|
$
|
24,152
|
|
|
$
|
(60,938
|
)
|
|
$
|
20
|
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the accompanying Consolidated Balance Sheets. These temporary differences result in taxable or deductible amounts in future years. Details of the Company’s deferred tax assets and liabilities are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
Deferred tax assets
|
|
|
|
|
Tax credits
|
|
$
|
100,367
|
|
|
$
|
99,903
|
|
Deferred revenues and loss contract provisions
|
|
906
|
|
|
268
|
|
Employee related liabilities
|
|
393
|
|
|
3,796
|
|
Intangible assets
|
|
914
|
|
|
1,518
|
|
Equity method investments
|
|
8,457
|
|
|
12,326
|
|
Net operating loss carryforwards
|
|
2,004
|
|
|
13,341
|
|
Settlement and Royalty Indemnification
|
|
—
|
|
|
4,264
|
|
Other investments
|
|
563
|
|
|
680
|
|
Other
|
|
648
|
|
|
1,429
|
|
Total deferred tax assets
|
|
114,252
|
|
|
137,525
|
|
Less valuation allowance
|
|
(75,436
|
)
|
|
(75,910
|
)
|
Deferred tax assets
|
|
38,816
|
|
|
61,615
|
|
Less: Deferred tax liabilities
|
|
|
|
|
Property and equipment and other
|
|
(155
|
)
|
|
(219
|
)
|
Total deferred tax liabilities
|
|
(155
|
)
|
|
(219
|
)
|
Net deferred tax assets
|
|
$
|
38,661
|
|
|
$
|
61,396
|
|
For
2017
, the Company recorded an income tax expense of
$24.2 million
compared to an income tax benefit of
$60.9 million
for
2016
. The income tax expense for the year ended
December 31, 2017
was primarily related to federal and state taxes of
$19.9 million
, plus the aforementioned adjustment related to the Tax Act, which increased the Company's income tax expense by
$5.8 million
. The income tax benefit for the year ended
December 31, 2016
was primarily due to reversals of the valuation allowance of the Company’s net deferred tax assets of
$61.4 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.
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 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, 2017
, 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
$38.7 million
of its net deferred tax assets, and therefore, reversed
$0.5 million
of the valuation allowance. In reaching this conclusion, the Company most significantly considered: (1) forecasts of continued future taxable income, (2) changes to the current DTA balances related to the effects of the Tax Act, (3) changes to forecasts of future utilization of DTA's related to the effects of the Tax Act, and (4) impacts of additional RC invested facilities during 2017.
Prior to 2016, the Company had recorded a valuation allowance for all of its deferred tax assets, primarily due to its historical three-year cumulative loss position. However, as of December 31, 2016, the Company concluded it was more likely than not the Company would generate sufficient taxable income within the applicable NOL and tax credit carry-forward periods to realize
$61.4 million
of its net deferred tax assets, and therefore, reversed
$61.4 million
of the valuation allowance, after utilizing
$11.0 million
during 2016. This conclusion was reached after weighing all of the evidence and determining that the positive evidence outweighed the negative evidence. The positive evidence considered by management in arriving at its conclusion to partially
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
reverse the valuation allowance includes factors such as: (1) emergence from the previous three-year cumulative loss position during the fourth quarter of 2016, (2) completion of four consecutive quarters of profitability and (3) forecasts of continued future profitability.
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)
|
|
2017
|
|
Beginning expiration year
|
|
Ending expiration year
|
State net operating loss carryforwards
|
|
$
|
41,071
|
|
|
2021
|
|
2037
|
Federal tax credit carryforwards
|
|
$
|
100,367
|
|
|
2031
|
|
2037
|
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, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Balance as of January 1
|
|
$
|
54
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Increases for tax positions of current year
|
|
—
|
|
|
54
|
|
|
—
|
|
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, 2017
,
2016
and
2015
. 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 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 10
.
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 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
December 31, 2017
, 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, 2016, the Company has
two
reportable segments: (1) Refined Coal ("RC"); and (2) Emissions Control ("EC").
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 and royalties earned from Tinuum Group and income related to sales-type leases.
|
|
|
•
|
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 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, 2017
and
December 31, 2016
, 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, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
|
Refined Coal:
|
|
|
|
|
|
|
Earnings in equity method investments
|
|
$
|
53,843
|
|
|
$
|
45,584
|
|
|
$
|
8,921
|
|
Consulting services
|
|
—
|
|
|
—
|
|
|
55
|
|
Royalties, related party
|
|
9,672
|
|
|
6,125
|
|
|
10,642
|
|
|
|
63,515
|
|
|
51,709
|
|
|
19,618
|
|
Emissions Control:
|
|
|
|
|
|
|
Equipment sales
|
|
31,401
|
|
|
46,949
|
|
|
60,099
|
|
Chemicals
|
|
4,246
|
|
|
3,025
|
|
|
888
|
|
Consulting services
|
|
45
|
|
|
648
|
|
|
1,697
|
|
|
|
35,692
|
|
|
50,622
|
|
|
62,684
|
|
Total segment reporting revenues
|
|
99,207
|
|
|
102,331
|
|
|
82,302
|
|
|
|
|
|
|
|
|
Adjustments to reconcile to reported revenues:
|
|
|
|
|
|
|
Refined Coal:
|
|
|
|
|
|
|
Earnings in equity method investments
|
|
(53,843
|
)
|
|
(45,584
|
)
|
|
(8,921
|
)
|
Royalties, related party
|
|
(9,672
|
)
|
|
(6,125
|
)
|
|
(10,642
|
)
|
|
|
(63,515
|
)
|
|
(51,709
|
)
|
|
(19,563
|
)
|
|
|
|
|
|
|
|
Total reported revenues
|
|
$
|
35,692
|
|
|
$
|
50,622
|
|
|
$
|
62,739
|
|
Segment operating income (loss)
|
|
|
|
|
|
|
Refined Coal
(1)
|
|
$
|
59,908
|
|
|
$
|
51,264
|
|
|
$
|
12,131
|
|
Emissions Control
(2)
|
|
379
|
|
|
7,334
|
|
|
(7,583
|
)
|
Total segment operating income
|
|
$
|
60,287
|
|
|
$
|
58,598
|
|
|
$
|
4,548
|
|
(1) Included within the RC segment operating income for the year ended
December 31, 2016
is a
$2.1 million
gain on the sale of RCM6 and for the years ended
December 31, 2017
,
2016
and
2015
, 453A interest expense of
$2.6 million
,
$2.5 million
and
$4.6 million
, respectively. Also included within the RC segment operating income for the years ended
December 31, 2016
and
2015
is interest expense related to the RCM6 Note Payable of
$0.3 million
and
$2.5 million
, respectively.
(2) Included within the EC segment operating income for the year ended
December 31, 2016
is a
$0.9 million
gain related to a termination of a sales-type lease.
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)
|
|
2017
|
|
2016
|
|
2015
|
Segment operating income
|
|
|
|
|
|
|
Total reported segment operating income
|
|
$
|
60,287
|
|
|
$
|
58,598
|
|
|
$
|
4,548
|
|
Adjustments to reconcile to net income (loss) attributable to the Company
|
|
|
|
|
|
|
Corporate payroll and benefits
|
|
(5,565
|
)
|
|
(9,415
|
)
|
|
(14,842
|
)
|
Corporate rent and occupancy
|
|
(293
|
)
|
|
(1,187
|
)
|
|
(707
|
)
|
Corporate legal and professional fees
|
|
(4,010
|
)
|
|
(8,230
|
)
|
|
(15,199
|
)
|
Corporate general and administrative
|
|
(3,400
|
)
|
|
(3,811
|
)
|
|
(3,640
|
)
|
Corporate depreciation and amortization
|
|
(342
|
)
|
|
(608
|
)
|
|
(578
|
)
|
Corporate interest (expense) income, net
|
|
(432
|
)
|
|
(2,334
|
)
|
|
24
|
|
Other income (expense), net
|
|
5,780
|
|
|
3,727
|
|
|
273
|
|
Income tax (expense) benefit
|
|
(24,152
|
)
|
|
60,938
|
|
|
(20
|
)
|
Net income (loss)
|
|
$
|
27,873
|
|
|
$
|
97,678
|
|
|
$
|
(30,141
|
)
|
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)
|
|
2017
|
|
2016
|
Assets:
|
|
|
|
|
Refined Coal
(1)
|
|
$
|
8,092
|
|
|
$
|
6,310
|
|
Emissions Control
|
|
3,755
|
|
|
24,551
|
|
Total segment assets
|
|
11,847
|
|
|
30,861
|
|
All Other and Corporate
(2)
|
|
70,771
|
|
|
76,435
|
|
Consolidated
|
|
$
|
82,618
|
|
|
$
|
107,296
|
|
(1) Includes
$4.4 million
of investments in equity method investees.
(2) Included within All Other and Corporate are the Company's deferred tax assets.
Note 14
- Major Customers
Revenues from unaffiliated customers who represent
10%
or more of the Company’s revenues in for the years ended
December 31, 2017
,
2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Customer
|
|
Revenue Type
|
|
Segment(s)
|
|
2017
|
|
2016
|
|
2015
|
A
|
|
Equipment sales
|
|
EC
|
|
62%
|
|
21%
|
|
3%
|
B
|
|
Equipment sales, Consulting services
|
|
EC
|
|
—%
|
|
14%
|
|
16%
|
C
|
|
Consulting services
|
|
EC
|
|
—%
|
|
—%
|
|
11%
|
D
|
|
Equipment sales
|
|
EC
|
|
—%
|
|
—%
|
|
15%
|
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 15
- Related Party Transactions
Accounts Receivable
The following table shows the Company's receivable balance associated with related parties as of
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
Receivable from related party - Tinuum Group
|
|
$
|
3,247
|
|
|
$
|
1,934
|
|
Other Income
The following table shows the other income recognized with related parties during the years ended
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(in thousands)
|
|
2017
|
|
2016
|
|
2015
|
Royalties, related party - Tinuum Group
|
|
$
|
9,672
|
|
|
$
|
6,125
|
|
|
$
|
10,642
|
|
The above Tinuum Group royalties are included within the
Royalties, related party
line in the
Consolidated Statements of Operations
.
DSI Business Owner
As of December 31, 2014, the Company terminated the consulting portion of the agreements with the DSI Business Owner. However, according to the terms of the remaining agreements, the Company was required to make all remaining payments structured as a note payable (the "DSI Business Owner Note Payable") through the third quarter of 2017. In February 2016, the Company entered into an agreement with the DSI Business Owner and settled the remaining amounts owed under the DSI Business Owner Note Payable as of the date of the agreement of approximately
$1.1 million
for
$0.3 million
, which was paid during the first quarter of 2016. The difference between the remaining amounts owed and the settlement amount was included within the Gain on settlement of note payable and licensed technology line item in the Consolidated Statements of Operations for the year ended
December 31, 2016
.
Highview License
As discussed in
Note 10
, the Company has an obligation of
£0.2 million
(approximately
$0.2 million
) as a result of the termination of the Highview License, which will only be settled by relinquishing shares of Highview currently owned by the Company equal to
£0.2 million
.
Arch Coal License
In June 2010, the Company entered into a Development and License Agreement with Arch Coal, Inc. ("Arch"), a related party as an Arch designee held a Board seat through June 2017, pursuant to which the Company licensed, on an exclusive, non-transferable basis, the use of certain of its technology to enhance coal by a proprietary treatment process. The Company received a non-refundable license fee payment from Arch in the amount of
$2.0 million
and incurred non-reimbursable costs associated with this agreement in the amount of $
0.3 million
.
Note 16
- Defined Contribution Savings Plan
The Company sponsors a qualified defined contribution savings plan (the "401(k) Plan") that allows participation by eligible employees who may defer a portion of their gross pay. The Company makes contributions to the 401(k) Plan based on percentages of an employee's eligible compensation as specified in the 401(k) Plan, and such employer contributions are in the form of cash.
The following table presents the amount of the Company' 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)
|
|
2017
|
|
2016
|
|
2015
|
401(k) Plan employer contributions
|
|
$
|
56
|
|
|
$
|
172
|
|
|
$
|
439
|
|
Due to the prior year Restructuring actions discussed in
Note 18
as well as usage of forfeitures within the 401(k) Plan, there was a decrease in employer contributions made to the 401(k) Plan for the
year ended December 31, 2017
.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 17
- Acquisition
2015 Acquisition
In
March 2015
, the Company acquired the certain assets of InSyst Ltd. and ClearView Monitoring Solutions Ltd. (collectively "ClearView"), to be operated under the Company's wholly-owned subsidiary, ADA Analytics, for total cash payments of
$2.4 million
, which was inclusive of value-add tax of
$0.4 million
. The acquisition was accounted for under the acquisition method of accounting, which requires the total purchase consideration to be allocated to the assets acquired and liabilities assumed based on estimates of fair value. Operating results related to the acquired assets were consolidated into the Company’s results of operations beginning
March 6, 2015
.
A summary of the purchase consideration and allocation of the purchase consideration is as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
Purchase consideration:
|
|
|
Cash paid
|
|
$
|
2,360
|
|
Fair value of liabilities assumed:
|
|
|
Accrued liabilities
|
|
10
|
|
Contingent consideration
|
|
451
|
|
Total fair value of liabilities assumed
|
|
461
|
|
|
|
|
Total purchase consideration
|
|
$
|
2,821
|
|
|
|
|
Allocation of purchase consideration
|
|
|
Receivables
|
|
$
|
360
|
|
Property and equipment and other
|
|
82
|
|
Intangibles - in process research and development
|
|
2,379
|
|
Total
|
|
$
|
2,821
|
|
During August 2015, as part of a broader strategic restructuring of the Company's business, the Company’s management approved an action to wind down operations of ADA Analytics. As a result of these actions, the Company fully impaired the carrying value of the assets and reversed the liability for the contingent consideration, thereby recognizing net impairment expense in the amount of
$1.9 million
during 2015. As disclosed in
Note 9
, the impairment expense was included as a component of research and development expense for the year ended
December 31, 2015
.
Note 18
- Restructuring
During the year ended
December 31, 2017
, the Company did not record material restructuring charges.
During the year ended
December 31, 2016
, the Company recorded restructuring charges in connection with a reduction in force, the departure of certain executive officers and management's further alignment of the business with strategic objectives. These charges related to severance arrangements with departing employees and executives as well as non-cash charges related to the acceleration of vesting of certain stock awards.
During the year ended
December 31, 2015
, the Company recorded restructuring charges in connection with a reduction in force, the departure of executive officers and management's further alignment of the business with strategic objectives. These charges related to severance arrangements with departing employees and executives, including non-cash charges related to the acceleration of vesting of certain stock awards. In 2015, the charges also related to the closing of the Pennsylvania office and fabrication facility and the termination of the operations of ADA Analytics, a foreign subsidiary that was involved in the development of certain data analytics and monitoring products. Furthermore, during the fourth quarter of 2015, the Company closed its fabrication facility in Pennsylvania and recorded restructuring charges related thereto.
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
|
|
Emissions Control
|
|
All Other and Corporate
|
|
Total
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
40
|
|
|
$
|
—
|
|
|
$
|
1,164
|
|
|
$
|
881
|
|
|
$
|
2,045
|
|
Changes in estimates
|
|
|
|
—
|
|
|
(210
|
)
|
|
(276
|
)
|
|
(486
|
)
|
Total pretax charge, net of reversals
|
|
|
|
$
|
—
|
|
|
$
|
954
|
|
|
$
|
605
|
|
|
$
|
1,559
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
162
|
|
|
$
|
—
|
|
|
$
|
5,108
|
|
|
$
|
5,264
|
|
|
$
|
10,372
|
|
Changes in estimates
|
|
|
|
$
|
—
|
|
|
$
|
(10
|
)
|
|
$
|
(2
|
)
|
|
$
|
(12
|
)
|
Total pretax charge, net of reversals
|
|
|
|
$
|
—
|
|
|
$
|
5,098
|
|
|
$
|
5,262
|
|
|
$
|
10,360
|
|
The following table summarizes the Company's utilization of restructuring accruals for the years ended
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Employee Severance
|
|
Facility Closures
|
Beginning accrual as of January 1, 2015
|
|
$
|
1,690
|
|
|
$
|
—
|
|
Expense provision
(1)
|
|
8,498
|
|
|
2,650
|
|
Cash payments and other
(1)
|
|
(7,595
|
)
|
|
(1,873
|
)
|
Change in estimates
(1)
|
|
(12
|
)
|
|
—
|
|
Accrual as of December 31, 2015
|
|
2,581
|
|
|
777
|
|
Expense provision
(1)
|
|
2,045
|
|
|
—
|
|
Cash payments and other
(1)
|
|
(3,898
|
)
|
|
(320
|
)
|
Change in estimates
(1)
|
|
(276
|
)
|
|
(210
|
)
|
Accrual as of December 31, 2016
|
|
452
|
|
|
247
|
|
Expense provision
(1)
|
|
56
|
|
|
—
|
|
Cash payments and other
(1)
|
|
(508
|
)
|
|
(250
|
)
|
Change in estimates
(1)
|
|
—
|
|
|
3
|
|
Accrual as of December 31, 2017
|
|
$
|
—
|
|
|
$
|
—
|
|
(1) Included within the Expense provision and Cash payments and other line items in the above table is stock-based compensation of
zero
,
$0.4 million
and
$3.4 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively, resulting from the accelerated vesting of modified equity-based compensation awards for certain terminated employees. Additionally, as discussed in
Note 17
, due to restructuring activities the Company fully impaired the carrying value of certain assets, thereby recognizing net impairment expense in the amount of
$1.9 million
during the year ended December 31, 2015.
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, 2017
and
December 31, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
(in thousands, except per share data)
|
|
December 31, 2017
|
|
September 30, 2017
|
|
June 30, 2017
|
|
March 31, 2017
|
Revenues
|
|
$
|
544
|
|
|
$
|
2,294
|
|
|
$
|
25,465
|
|
|
$
|
7,389
|
|
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
|
|
(4,309
|
)
|
|
(3,944
|
)
|
|
(1,850
|
)
|
|
(3,711
|
)
|
Earnings from equity method investments
|
|
17,754
|
|
|
12,120
|
|
|
10,155
|
|
|
13,814
|
|
Royalties, related party
|
|
3,247
|
|
|
2,804
|
|
|
1,866
|
|
|
1,755
|
|
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
|
|
(1)
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended
|
(in thousands, except per share data)
|
|
December 31, 2016
|
|
September 30, 2016
|
|
June 30, 2016
|
|
March 31, 2016
|
Revenues
|
|
$
|
3,604
|
|
|
$
|
15,710
|
|
|
$
|
8,951
|
|
|
$
|
22,357
|
|
Cost of revenues, exclusive of operating expenses shown below
|
|
3,478
|
|
|
13,259
|
|
|
5,769
|
|
|
17,311
|
|
Other operating expenses
|
|
5,388
|
|
|
5,364
|
|
|
7,794
|
|
|
8,357
|
|
Operating loss
|
|
(5,262
|
)
|
|
(2,913
|
)
|
|
(4,612
|
)
|
|
(3,311
|
)
|
Earnings from equity method investments
|
|
15,518
|
|
|
10,735
|
|
|
13,754
|
|
|
5,577
|
|
Royalties, related party
|
|
2,203
|
|
|
2,064
|
|
|
669
|
|
|
1,189
|
|
Other expenses, net
|
|
1,698
|
|
(2)
|
309
|
|
|
(1,852
|
)
|
|
974
|
|
Income before income tax expense
|
|
14,157
|
|
|
10,195
|
|
|
7,959
|
|
|
4,429
|
|
Income tax (benefit) expense
|
|
(61,673
|
)
|
(3)
|
583
|
|
|
99
|
|
|
53
|
|
Net income
|
|
$
|
75,830
|
|
|
$
|
9,612
|
|
|
$
|
7,860
|
|
|
$
|
4,376
|
|
Loss per common share – basic
|
|
$
|
3.45
|
|
|
$
|
0.44
|
|
|
$
|
0.36
|
|
|
$
|
0.20
|
|
Loss per common share – diluted
|
|
$
|
3.39
|
|
|
$
|
0.43
|
|
|
$
|
0.35
|
|
|
$
|
0.20
|
|
Weighted-average number of common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
21,693
|
|
|
21,740
|
|
|
21,875
|
|
|
21,849
|
|
Diluted
|
|
22,061
|
|
|
22,098
|
|
|
22,187
|
|
|
22,177
|
|
(1) During the fourth quarter of 2017, the Company recorded an 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
.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(2) During the fourth quarter of 2016, the Company revised its estimate for future Royalty Award payments based on an updated forecast provided to the Company from Carbon Solutions. Based primarily on the updated forecast, the Company recorded a
$4.0 million
reduction to its Royalty Award accrual.
(3) During the fourth quarter of 2016, the Company released $
61.4 million
of the valuation allowance related to the deferred tax assets that resulted in an income tax benefit of
$61.7 million
. See further discussion in
Note 12
.
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, 2017.
Dividends
On February 8, 2018, the Company's Board of Directors declared a quarterly dividend of
$0.25
per share of common stock, which was paid on March 8, 2018 to stockholders of record at the close of business on February 21, 2018.