Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Through December 31, 2021, we operated two segments: RC and APT. Our RC segment is comprised of our equity ownership in Tinuum Group and Tinuum Services, both of which are unconsolidated entities from which we generated substantial earnings. Tinuum Group provides reduction of mercury and NOx emissions at select coal-fired power generators through the production and sale of RC that qualifies for Section 45 tax credits under IRC Section 45. We benefited from Tinuum Group's production and sale of RC, which generated Section 45 tax credits, as well as its revenue from selling or leasing RC facilities to tax equity investors. We also earned royalties for technologies that we licensed to Tinuum Group, which were used at certain RC facilities to enhance combustion and reduce emissions of NOx and mercury from coal burned to generate electrical power. Tinuum Services operated and maintained the RC facilities under operating and maintenance agreements with Tinuum Group and owners or lessees of the RC facilities. Effective December 31, 2021, the Section 45 tax credit period expired and as a result both Tinuum Group and Tinuum Services have substantially ceased their operations. As such, our earnings and distributions from our RC segment substantially ceased as of December 31, 2021. We expect to receive limited, additional cash distributions from Tinuum Group and Tinuum Services during the first half of 2022.
Our APT segment is primarily comprised of operations of our wholly-owned subsidiary, Carbon Solutions, which we acquired on December 7, 2018. We sell consumable products that utilize AC and chemical based technologies to a broad range of customers, including coal-fired utilities, industrials, water treatment plants and other diverse markets. Our primary products are comprised of AC, which is produced from lignite coal. Our AC products include PAC and GAC. Our proprietary technologies and associated product offerings provide purification solutions to enable our customers to reduce certain contaminants and pollutants to meet the challenges of existing and potential regulations. Additionally, we own an associated lignite mine which supplies the primary raw material for manufacturing our products.
See further discussion of our business included in Item 1 - "Business" ("Item 1") of this Report. Discussion regarding segment information is included in the discussion of our consolidated results under this Item 7. Additionally, discussion related to our reportable segments is included in Item 1 and Note 19 of the Consolidated Financial Statements, which is included in Item 8 of this Report.
We believe there are opportunities and are continuing to pursue diverse markets for our purification products outside of coal-fired power generation, including industrial applications and water. The Supply Agreement with Cabot, as discussed below, continues to expand sales of our AC products to those diverse end-markets and drive the Company’s post-Refined Coal future.
Review of Strategic Alternatives
In May 2021, we announced that we had retained Ducera Partners, LLC as our financial advisor to assist in a strategic review process to assess a range of strategic alternatives to enhance value for our stockholders. We cannot provide any assurance that the exploration of strategic alternatives will result in the identification or consummation of any transaction. Similarly, any strategic decision will involve risks and uncertainties, and we cannot provide any assurance that any strategic alternative, if identified, evaluated and consummated, will provide the anticipated benefits or otherwise enhance stockholder value. The process is ongoing and our board of directors has not set a timetable for completion of the evaluation.
Drivers of Demand and Key Factors Affecting Profitability
Drivers of demand and key factors affecting our profitability differ by segment. Historically, we derived substantial earnings and cash distributions from the RC segment through our equity ownership in Tinuum Group and Tinuum Services as well as the royalties earned from a licensing arrangement with Tinuum Group for use of our M-45 Technology. With the expiration of the Section 45 tax credit period, we will no longer generate earnings from either Tinuum Group or Tinuum Services. Additionally, we do not expect our overall selling, general and administrative portions of our operating expenses to materially decrease in 2022 as a result of the wind down of our RC segment.
Demand in the APT segment is driven primarily by consumables-based solutions for coal-fired power generation, municipal water treatment and other industrial customers; and since the fourth quarter of 2020, demand from Cabot's customers through the Supply Agreement discussed below. Operating results in the APT segment have been influenced by: (1) changes in our sales volumes; (2) changes in price and product mix; (3) changes related to non-integrated supply chain inputs and (4) changes in coal-fired dispatch and electricity power generation sources. For the year ended December 31, 2021, we observed significant
increases in demand for our AC product. As such, we continue to purchase inventory to meet our customer demands to supplement products manufactured at our Red River Plant.
Customer Supply Agreement
On September 30, 2020, we and Cabot entered into the Supply Agreement, pursuant to which we agreed to sell and deliver to Cabot, and Cabot agreed to purchase and accept from us, Furnace Products. The term of the Supply Agreement is for 15 years with 10-year renewal terms that are automatic unless either party provides three years prior notice of intention not to renew before the end of any term.
The Supply Agreement has provided material incremental volume and allowed us to capture operating cost efficiencies at our Red River manufacturing plant. The incremental volumes from the Supply Agreement have improved fixed cost absorption and resulted in increased gross margins. Further, the Supply Agreement has expanded our AC products to diverse end markets that are outside of markets we historically served.
Acquisition of Marshall Mine
Concurrently with the execution of the Supply Agreement, on September 30, 2020, we entered into the Mine Purchase Agreement from Cabot for 100% of the membership interests in Marshall Mine, LLC (the "Marshall Mine Acquisition") for a nominal purchase price. Marshall Mine, LLC owns a lignite mine located outside of Marshall, Texas (the "Marshall Mine"). We independently determined to immediately commence activities to shutter the Marshall Mine and to incur the associated reclamation costs.
In conjunction with the execution of the Supply Agreement and the Mine Purchase Agreement, on September 30, 2020, we entered into the Reclamation Contract with a third party that provides a capped cost, subject to certain contingencies, in the amount of approximately $19.7 million plus an obligation to pay certain direct costs of approximately $3.6 million (collectively, the "Reclamation Costs") over the estimated reclamation period of 10 years. Under the terms of the Supply Agreement, Cabot is obligated to reimburse us for approximately $10.2 million of Reclamation Costs (the "Reclamation Reimbursement"), which are payable semi-annually over 13 years and inclusive of interest.
On February 25, 2022, we received $10.6 million in cash from Cabot (the "Cabot Payment") as a result of a change in control provision in the Supply Agreement (the "Change in Control"), which occurred as a result of the sale of Cabot by its parent, Cabot Corporation. Under the Change in Control, we received from Cabot full payment of all amounts outstanding under the Reclamation Reimbursement, payment of all unbilled amounts related to certain capital expenditures incurred by us through February 28, 2022 for specific use in manufacturing Furnace Products and payment of additional Reclamation Costs (the "Cabot Reclamation Costs"). Under the Reclamation Contract, we are obligated to remit payment for the Cabot Reclamation Costs to the third party operator of Marshall Mine within a specified timeframe. We will account for the Cabot Payment in its March 31, 2022 quarter and we do not anticipate any impacts to the Supply Agreement except as described above.
As the owner of the Marshall Mine, we were required to post a surety bond to ensure performance of our reclamation activities. As of December 31, 2021, the amount outstanding under this surety bond was $16.6 million. For the obligations due under the Reclamation Contract, we were required to post collateral of $10.0 million.
As of June 30, 2021 and December 31, 2021, we revised our estimate of future obligations owed for reclamation of the Marshall Mine primarily based on scope reductions related to future reclamation requirements. As a result, we reduced the Marshall Mine ARO by $1.9 million and $0.8 million as of June 30, 2021 and December 31, 2021, respectively, and recorded a corresponding gain on change in estimate in the aggregate of $2.7 million in the Consolidated Statements of Operations for the year ended December 31, 2021.
Settlement with Former Customer
On December 29, 2020, we and a former customer (the "Parties") reached a settlement (the "Settlement") on various litigation matters (the "Litigation Matters") that resulted in the former customer (the "Former Customer") agreeing to pay to us cash of $2.5 million (the "Settlement Amount"), which was received on January 27, 2021. This payment was in exchange for full dissolution of all claims and counterclaims that the two Parties have asserted or could have asserted against each other in the Litigation Matters, or which have arisen or may arise against each other but are presently unknown, arising out of or related to the Litigation Matters and related to any other of the Parties’ business dealings, conduct and/or transactions through the date of the Settlement, including all claims for damages, fees, costs, sanctions, or any other amounts due or to become due in connection with the foregoing. We applied the Settlement Amount cash proceeds to both an outstanding trade account
receivable and a note receivable due from the Former Customer and recognized the excess cash received as a gain from the Settlement of $1.1 million, which is included as a reduction of operating expenses for the year ended December 31, 2020, See further discussion under "Results of Operations" under this Item 7.
Impact of COVID-19
In March 2020, the World Heath Organization declared COVID-19 a global pandemic. We follow the COVID-19 guidelines from the Centers for Disease Control concerning the health and safety of our personnel, including remote working for those that have the ability to do so, sequestered employees at our plant and other heath safety measures. Additionally, we have taken proactive and precautionary steps to ensure the safety of our employees, customers and suppliers, including frequent cleaning and disinfection of workspaces, property, plant and equipment, instituting social distancing measures and mandating remote working environments, where possible, for all employees.
In response to the COVID-19 outbreak, in March 2020, the federal government passed the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The CARES Act provided, among other things, the deferral of payroll tax payments for all payroll taxes incurred through December 31, 2020 and created the Paycheck Protection Program ("PPP"), which was sponsored and administered by the Small Business Administration ("SBA"). In June 2020, the Paycheck Protection Program Flexibility Act of 2020 (the "PPPFA") was signed into law and established the payment dates in the event that amounts borrowed under the PPP are not forgiven. See further discussion below of the loan made to us under the PPP under the section "PPP Loan" under this Item.
We elected to defer payments of payroll taxes of $0.4 million for the periods allowed under the CARES Act, which allowed for a deferral of 50% of the total amount to December 31, 2021 and 50% of the total amount to December 31, 2022. As of December 31, 2021, we had repaid $0.2 million and will repay the outstanding balance by December 31, 2022.
For 2020, we incurred costs of $0.4 million related to sequestration of certain of our employees at our Red River plant. These costs included hazard pay, lodging and meal expenses for 30 days. For 2021, we did not incur similar costs.
Our customers may also be impacted by COVID-19 pandemic as we believe the utilization of energy has changed. We cannot predict the long-term impact on our customers and the subsequent impact on our business.
Components of Revenue, Expenses and Equity Method Investees
The following briefly describes the components of revenues and expenses as presented in the Consolidated Statements of Operations. Descriptions of the revenue recognition policies are included in Note 1 to the Consolidated Financial Statements included in Item 8 of this Report.
Revenues and cost of revenues
Consumables
We sell AC and products and other chemical-based technology products to a broad range of customers, including coal-fired utilities, industrials, water treatment plants and other diverse markets. Currently, our products mostly serve coal-fired utilities and other industrial boilers that allow the respective utilities to comply with the regulatory air emissions standards and water treatment plants to remove contaminants from the water. Additionally, we sell AC to Cabot and its customers through the Supply Agreement.
License royalties, related party
We recognize license royalties under the M-45 License with Tinuum Group. License royalties from our M-45 Technology are based on a percentage of the per-ton, pre-tax margin, inclusive of depreciation expense and other allocable expenses, as defined in the M-45 License. Because Section 45 tax credits from the production and sale of RC are not available to be generated after 2021 and both Tinuum Group and Tinuum Services significantly wound down their operations by the end of 2021, we do not expect to earn license royalties after 2021.
Other Operating Expenses
Payroll and benefits
Payroll and benefits costs include personnel related fringe benefits, sales and administrative staff labor costs and stock compensation expenses. Payroll and benefits costs exclude direct labor included in Cost of revenues.
Legal and professional fees
Legal and professional costs include external legal, audit and consulting expenses.
General and administrative
General and administrative costs include director fees and expenses, bad debt expense, research and development expense and other general costs of conducting business. Research and development costs, net of reimbursements from cost-sharing arrangements, are charged to expense in the period incurred and are reported in the General and administrative line item in the Consolidated Statements of Operations.
Depreciation, amortization, depletion and accretion
Depreciation and amortization expense consists of depreciation expense related to property, plant and equipment and the amortization of long-lived intangible assets. Depletion and accretion expense consists of depletion expense related to the depletion of mine development costs and the accretion of mine reclamation liabilities.
Other Income (Expense), net
Earnings from equity method investments
Earnings from equity method investments represent our share of earnings (losses) related to our equity method investments.
We own a 42.5% equity interest and a 50% voting interest in Tinuum Group. Our equity method earnings in Tinuum Group are positively impacted when Tinuum Group obtains an investor in a RC facility and receives cash payments under either a lease arrangement or sales arrangement of the RC facility. If Tinuum Group operates a retained RC facility, the Company's equity method earnings are negatively impacted as operating retained RC facilities generate operating losses. However, we benefit on an after-tax basis if we are able to utilize tax credits associated with the production and sale of RC from operation of retained RC facilities by Tinuum Group. These benefits, if utilized, increase our consolidated net income as a result of a reduction in income tax expense.
We own both a 50% equity and voting interest in Tinuum Services, which operates and maintains RC facilities under operating and maintenance agreements. The lessee/owner of an RC facility pays Tinuum Services, subject to certain limitations, the costs of operating and maintaining the RC facilities plus certain fees. Tinuum Services also arranges for the purchase and delivery of certain chemical additives under chemical agency agreements necessary for the production of RC.
Other income (expense)
The remaining components of other income (expense) include interest income, interest expense and other miscellaneous items.
Results of Operations
Presentation of Financial Results
For the year ended December 31, 2020, we have restated our "Revenues - Consumables" and "Cost of revenues, excluding depreciation and amortization" line items in our Consolidated Statement of Operations for the impact of previously reporting shipping and handling costs billed to our customers as a reduction to cost of revenue rather than as a component of consumables revenue. This restatement was a result of a reassessment of our accounting and presentation of shipping and handling costs billed to our customers under accounting principles generally accepted in the United States ("GAAP") in our Consolidated Statement of Operations for the year ended December 31, 2021. Historically, we have accounted for and presented shipping and handling costs billed to customers as a reduction of consumables cost of revenue rather than as a component of consumables revenue as required under Accounting Standards Codification 606 - Revenue from Contracts with Customers. Accordingly, we have restated both consumables revenues and consumable cost of revenues for the year ended December 31, 2020 by increasing the previously reported amounts by $5.8 million, respectively.
For the year ended December 31, 2020, there was no impact of the restatement to previously reported amounts for gross margin, operating loss, loss before income taxes, net loss or loss per share. Further there was no impact of this error to the previously reported Consolidated Balance Sheet as of December 31, 2020 or the Consolidated Statement of Stockholders' Equity or Consolidated Statement of Cash Flows for the year ended December 31, 2020. See further discussion of this restatement in Note 2 to the Consolidated Financial Statements under Item 8 of this Report.
For comparison purposes, the following tables set forth our results of operations for the years presented in the Consolidated Financial Statements included in Item 8 of this Report. The year-to-year comparison of financial results is not necessarily indicative of financial results that may be achieved in future years. Our Annual Report on Form 10-K for the year ended December 31, 2020 includes a discussion and analysis of our financial condition and results of operations for the year ended December 31, 2019 in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Year ended December 31, 2021 Compared to Year ended December 31, 2020
Total Revenues and Cost of Revenues
A summary of the components of revenues and cost of revenue for the years ended December 31, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | Change |
(Amounts in thousands except percentages) | | 2021 | | 2020 | | ($) | | (%) |
| Revenues: | | | | | | | | |
| Consumables | | $ | 85,882 | | | $ | 53,908 | | | $ | 31,974 | | | 59 | % |
| License royalties, related party | | 14,368 | | | 13,440 | | | 928 | | | 7 | % |
| Other | | 44 | | | 15 | | | 29 | | | 193 | % |
| | | | | | | | |
| | | | | | | | |
| Total revenues | | $ | 100,294 | | | $ | 67,363 | | | $ | 32,931 | | | 49 | % |
| | | | | | | | |
| Consumables cost of revenues, exclusive of depreciation and amortization | | $ | 65,576 | | | $ | 50,962 | | | $ | 14,614 | | | 29 | % |
| Other cost of revenues, exclusive of depreciation and amortization | | — | | | (563) | | | 563 | | | (100) | % |
| | | | | | | | |
Consumables revenues and consumables cost of revenues
For the years ended December 31, 2021 and 2020, consumables revenue increased year over year primarily due to higher product volumes, which comprised approximately $25.0 million of the total change in consumables revenues. Product volumes were higher in power generation primarily due to higher natural gas prices compared to the prior year, which contributed to increased utilization of coal-fired generation and increased demand for our products. In addition, product sales increased under the Supply Agreement from the prior year as we began product shipments under this agreement beginning in the fourth quarter of 2020. Total revenues also increased due to a favorable price impact of our products by approximately $1.0 million as well as favorable product mix impact on consumables revenue of approximately $4.1 million. Consumables revenue for 2021 also increased $0.9 million related to an increase in shipping and handling costs billed to our customers, driven by increases in volumes and costs to ship our products.
Our gross margin, exclusive of depreciation and amortization, increased for the year ended December 31, 2021 compared to 2020 primarily due to the higher product volumes, which resulted in lower fixed costs per pound of product sold. Additionally, gross margin was positively impacted by product price increases. Offsetting these improvements for the year ended December 31, 2021, gross margin was negatively impacted by having to supplement the Red River production of our AC product, due to higher customer demand related to requirements-based contracts, with AC product purchases from third party suppliers at higher costs per pound. We expect to continue to purchase inventory from third party suppliers in 2022 due to ongoing increased demand for our products and Red River Plant capacity impacted by customer and product mix.
Consumables revenue is affected by electricity demand, driven by seasonal weather and related power generation needs, as well as competitor prices related to alternative power generation sources such as natural gas. According to data provided by the U.S. Energy Information Administration, for the year ended December 31, 2021, power generation from coal-fired power dispatch was up approximately 18.0% compared to the corresponding period in 2020. Additionally, there was an increase in total power generation from all sources of approximately 3.1% in 2021 compared to the corresponding period in 2020.
For 2022, and based on current market estimates and the expected benefits from the Supply Agreement, we believe that both consumables revenue and volumes will increase compared to 2021. We expect that consumables revenues and gross margin will be positively impacted by price increases announced in 2021 and our efforts to improve product mix to higher margin products through changes in our customer base. We anticipate that the product price increases will also help offset the increase
in operating costs from purchasing inventory from third party suppliers, as well as expected increases in pricing related to certain additives necessary for our manufacturing operations.
License royalties, related party
License royalties increased in 2021 compared to 2020 primarily due to an increase in the royalty rate per ton. This increase was primarily a result of an increase year over year in rent revenues generated from RC facilities even though the tonnage produced remained relatively flat. The tons of RC produced from RC produced using the M-45 Technology under the M-45 License were 49.3 million and 49.4 million for the year ends December 31, 2021 and 2020, respectively.
As a result of the Section 45 tax credit period ending as of December 31, 2021, both Tinuum Group and Tinuum Services ceased operations and, as such, we do not expect to earn M-45 License royalties after December 31, 2021.
Other cost of revenues
For the year ended December 31, 2020, we recognized a credit of $0.6 million to Other cost of revenues related to the Settlement with the Former Customer. See further discussion below of the reversal of an allowance on a note receivable due from the Former Customer in this section under the caption "General and administrative."
Additional information related to revenue concentrations and contributions by class and reportable segment is included in the "Business Segments" section of this Item and in Note 13 and Note 19 to the Consolidated Financial Statements included in Item 8 of this Report.
Other Operating Expenses
A summary of the components of our operating expenses, exclusive of cost of revenues items (presented above), for the years ended December 31, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | Change |
(in thousands, except percentages) | | 2021 | | 2020 | | ($) | | (%) |
| Operating expenses: | | | | | | | | |
| Payroll and benefits | | $ | 11,315 | | | $ | 10,621 | | | $ | 694 | | | 7 | % |
| Legal and professional fees | | 6,260 | | | 5,585 | | | 675 | | | 12 | % |
| General and administrative | | 7,060 | | | 8,228 | | | (1,168) | | | (14) | % |
| Depreciation, amortization, depletion and accretion | | 7,933 | | | 8,537 | | | (604) | | | (7) | % |
| Gain on change in estimate, asset retirement obligation | | (2,702) | | | — | | | (2,702) | | | * |
| Impairment of long-lived assets | | — | | | 26,103 | | | (26,103) | | | (100) | % |
| Gain on settlement | | — | | | (1,129) | | | 1,129 | | | (100) | % |
| | | | | | | | |
| | $ | 29,866 | | | $ | 57,945 | | | $ | (28,079) | | | (48) | % |
* Calculation not meaningful
Payroll and benefits
Payroll and benefits expenses increased year over year primarily due to expenses of $1.1 million related to the agreements with our executive officers and certain other key employees executed in June 2021 ("Retention Agreements") as well as $1.3 million related to an increase in incentive expense for the year ended December 31, 2021 compared to 2020. These increases were offset by a decrease in expenses taken during the year ended December 31, 2020 of $1.4 million associated with the resignation of a former executive officer. Additionally, payroll expense decreased by approximately $0.5 million due to a decrease in headcount.
Legal and professional fees
Legal and professional fees increased year over year primarily due to an increase in legal and consulting fees of $0.9 million and $1.2 million, respectively, related to our continuing evaluation of strategic alternatives. Offsetting these increases was $0.9 million related to a reduction in outsourced shared service costs, which included legal and general consulting contractors, and $0.5 million in outsourced IT costs specific to the completion of the integration of Carbon Solutions in 2020.
General and administrative
General and administrative expenses decreased year over year primarily due to decreases in product development expenses of approximately $0.6 million related to the Supply Agreement, costs incurred due to the sequestration of certain of our employees at the Red River Plant in 2020 of approximately $0.4 million, rent and occupancy related expenses of $0.3 million and other general and administrative expenses, including recruiting, travel and licenses and fees of approximately $0.7 million.
Offsetting the net decrease in general and administrative expenses year over year was the offset to general and administrative expenses in 2020 from the reversal of an allowance on a note receivable from the Former Customer of $0.4 million. See further discussion below in this section under the caption "Gain on settlement." Further increases year over year included an increase in insurance premiums of approximately $0.4 million.
Depreciation, amortization, depletion and accretion
Depreciation and amortization expense decreased year over year primarily due to lower absorption from the drawdown of inventory, partially offset by increase in sales volumes for 2021, resulting in a decrease of depreciation expense of $0.2 million. Further, depreciation and amortization expense decreased by approximately $1.1 million related to a lower depreciable base for 2021 compared to 2020 as a result of an impairment charge recorded in the second quarter of 2020 which reduced the carrying value of our property, plant and equipment. Offsetting these decreases was an increase in accretion expense of $0.6 million related to the Marshall Mine ARO and an increase in depletion expense of $0.2 million due to increased production volume at the Five Forks Mine.
Gain on change in estimate, asset retirement obligation
As previously discussed under this Item, for the year ended December 31, 2021, we recorded a gain on change in estimate of $2.7 million related to a reduction in scope of our estimated future reclamation efforts of the Marshall Mine.
Impairment of long-lived assets
As of June 30, 2020, we recorded an impairment charge of $26.1 million, which is included in the Statement of Operations for the year ended December 31, 2020 and was solely attributable to our APT segment. This impairment charge was necessitated by an analysis of the carrying values of our APT segment's long-lived assets and certain other long-lived assets (the "Asset Group"), which are comprised of our manufacturing plant and related assets and our lignite mine assets, to their respective fair values.
Gain on settlement
In connection with the Settlement discussed above, the Former Customer paid us the cash Settlement Amount of $2.5 million on January 27, 2021 in exchange for a full release of claims in the Litigation Matters. As a result of the Settlement, we recognized a gain of $1.1 million for the year ended December 31, 2020.
Other Income (Expense), net
A summary of the components of our other income (expense), net for the years ended December 31, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | Change |
(Amounts in thousands, except percentages) | | 2021 | | 2020 | | ($) | | (%) |
| Other income (expense): | | | | | | | | |
| Earnings from equity method investments | | $ | 68,726 | | | $ | 30,978 | | | $ | 37,748 | | | 122 | % |
| Gain on extinguishment of debt | | 3,345 | | | — | | | 3,345 | | | * |
| | | | | | | | |
| Interest expense | | (1,490) | | | (3,920) | | | 2,430 | | | (62) | % |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Other | | 640 | | | 132 | | | 508 | | | 385 | % |
| Total other income | | $ | 71,221 | | | $ | 27,190 | | | $ | 44,031 | | | 162 | % |
* Calculation not meaningful
Earnings from equity method investments
The following table presents the equity method earnings by investee for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | | | Change | | |
| (in thousands) | | 2021 | | 2020 | | | | ($) | | (%) | | | | |
| Earnings from Tinuum Group | | $ | 61,837 | | | $ | 24,396 | | | | | $ | 37,441 | | | 153 | % | | | | |
| Earnings from Tinuum Services | | 6,952 | | | 6,582 | | | | | 370 | | | 6 | % | | | | |
| Loss from other | | (63) | | | — | | | | | (63) | | | * | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Earnings from equity method investments | | $ | 68,726 | | | $ | 30,978 | | | | | $ | 37,748 | | | 122 | % | | | | |
* Calculation not meaningful
For the year ended December 31, 2021, we recognized $61.8 million in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of $40.1 million for the year. The difference between our pro-rata share of Tinuum Group's net income and our earnings from Tinuum Group equity method investment as reported on the Consolidated Statements of Operations is the result of cumulative distributions received from Tinuum Group being in excess of the carrying value of the investment, and therefore we recognize such excess distributions as equity method earnings in the period the distributions occur.
For the year ended December 31, 2020, we recognized $24.4 million in equity earnings from Tinuum Group, which was equal to our proportionate share of Tinuum Group's net income for the year.
As of December 31, 2021, we concluded the carrying amount of our investment in Tinuum Services was not fully recoverable due to the remaining expected future cash distributions to be received as Tinuum Services shutters its operations in 2022 as a result of the expiration of the Section 45 tax credit period as of December 31, 2021. As a result, we wrote-down our investment in the amount of $0.7 million, which is included in the "Earnings from equity method investments" line item in the Consolidated Statement of Operations for the year ended December 31, 2021.
See further discussion of year over year changes in Earnings from Equity Investments in "Business Segments" under this Item. Additional information related to equity method investments is included in Note 8 to the Consolidated Financial Statements included in Item 8 of this Report.
Tinuum Group's audited consolidated financial statements as of December 31, 2021 and 2020 and for the years then ended are included in Item 15 - "Exhibits and Financial Statement Schedules" ("Item 15") of this Report.
Gain on extinguishment of debt
On July 27, 2021, we received formal notification in the form of a letter dated July 19, 2021 from Bank of Oklahoma ("BOK") that the SBA approved our PPP Loan forgiveness application for the PPP Loan in the amount of $3.3 million (including accrued interest). For the year ended December 31, 2021, we recorded a gain on extinguishment of the PPP Loan in the amount of $3.3 million in the Consolidated Statement of Operations, which is included as a component of "Other income (expense)."
Tax Credits and Obligations
Historically, we have earned Section 45 tax credits that may be available for future benefit related to the production of RC from the operation of RC facilities in which we have held both direct ownership and indirect ownership through Tinuum's direct ownership. We refer to these RC facilities as "retained facilities." The Section 45 tax credit period ended December 31, 2021 and we will not earn Section 45 tax credits beyond this date. As of December 31, 2021, we had approximately $86.1 million in Section 45 tax carryforwards.
In the hypothetical event of an ownership change, as defined by IRC Section 382, utilization of general business credits ("GBC's") generated prior to the change would be subject to an annual limitation imposed by IRC Section 383 for GBC's. The results of a recent analysis indicated that we had not experienced an ownership change as of December 31, 2021, as defined by IRC Section 382. Such analysis for the period from January 1, 2022 through the date of this Report has not been completed. Therefore, it is possible that we experienced an ownership change between January 1, 2022 and the date of the filing of this Report, thus subjecting our GBC carryforwards to limitation.
Interest expense
Interest expense decreased year over year by $2.4 million primarily due to principal payments made in 2021 on a senior term loan (the "Senior Term Loan") that resulted in lower coupon interest expense of $1.5 million. Interest expense for debt discount and debt issuance costs related to the Senior Term Loan also decreased by $0.5 million pursuant to the decrease in the Senior Term Loan principal. On June 1, 2021 and prior to the Senior Term Loan's maturity date, we paid the remaining principal balance of the Senior Term Loan and all remaining accrued interest through this date.
The remaining decrease in interest expense year over year related to lower interest expense ("Section 453A interest") related to IRS section 453A ("Section 453A"), which decreased by $0.3 million primarily due to a decrease in Tinuum Group's the tax liability year over year associated with RC facilities in which Tinuum Group recognized as installment sales for tax purposes.
The following table shows the balance of the tax liability that has been deferred and the applicable interest rate used to calculate the 453A interest liability:
| | | | | | | | | | | | |
| | | | As of December 31, | | |
| (in thousands) | | | | 2020 | | |
Tax liability deferred on installment sales (1) | | | | $ | 10,653 | | | |
| Interest rate | | | | 3.00 | % | | |
(1) Represents the approximate tax effected liability utilizing the federal tax rate in effect for the applicable year ended related to the deferred gain on installment sales, which was approximately zero as of December 31, 2021.
Income tax expense
For the year ended December 31, 2021, our reported income tax expense was $15.7 million and was based on an effective rate of 21%. While the U.S. statutory federal income tax rate (the "Federal Rate") was also 21%, our effective tax rate was primarily increased for state income tax expense, net of federal benefit, and decreased from a reduction in the valuation allowance on our deferred tax assets.
For the year ended December 31, 2020, our reported income tax expense of $6.5 million and was based on an inverse effective rate of 47%, which differed from the Federal Rate of 21% due to primarily an increase in the valuation allowance on our deferred tax assets. This increase in the valuation allowance resulted in income tax expense rather than expected income tax benefit based on the pretax loss.
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 a 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, 2021, we concluded it is more likely than not we will not generate sufficient taxable income within the allowable carryforward periods to realize any of our net deferred tax assets, and fully reserved for such assets as of December 31, 2021. In reaching this conclusion, we primarily considered forecasts of future taxable losses. As of December 31, 2021 and 2020, we had a valuation allowance of $87.5 million and $88.8 million, respectively, on our deferred tax assets.
The ability to recognize the remaining deferred tax assets that continue to be subject to a valuation allowance is evaluated on a quarterly basis to determine if there are any significant events that would affect the ability to utilize those deferred tax assets. Our estimate of future taxable income or losses is based on internal projections that consider historical performance, assumptions on future performance and external data. If events are identified that affect our ability to utilize our deferred tax assets, or if additional deferred tax assets are generated, we update our analysis to determine if an increase to a valuation allowance is required. Such an increase could have a material adverse effect on our financial condition and results of operations. Conversely, better than expected results and continued positive results and trends could result in a decrease to a valuation allowance, and any such decreases could have a material positive effect on our financial condition and results of operations.
See additional discussion in Note 18 of the Consolidated Financial Statements included in Item 8 of this Report.
Non-GAAP Financial Measures
To supplement our financial information presented in accordance with GAAP, we are providing non-GAAP measures of certain financial performance. These non-GAAP measures include Consolidated EBITDA, Consolidated Adjusted EBITDA, RC Segment EBITDA, RC Segment Adjusted EBITDA, APT Segment EBITDA and APT Segment Adjusted EBITDA. We have included non-GAAP measures because management believes that they help to facilitate period to period comparisons of our operating results. We believe the non-GAAP measures provide useful information to both management and users of the financial statements by excluding certain expenses, gains and losses that may not be indicative of core operating results and business outlook. Management uses these non-GAAP measures in evaluating the performance of our business.
These non-GAAP measures are not in accordance with, or an alternative to, measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. These measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures.
We define Consolidated EBITDA as net income adjusted for the impact of the following items that are either non-cash or that we do not consider representative of our ongoing operating performance: depreciation, amortization, depletion, accretion, amortization of upfront customer consideration that was recorded as a component of the Marshall Mine Acquisition ("Upfront Customer Consideration"), interest expense, net and income tax expense. We define Consolidated Adjusted EBITDA as Consolidated EBITDA, reduced by the non-cash impacts of equity earnings from equity method investments, gain on change in estimate of asset retirement obligations, gain on extinguishment of debt and gain on customer settlement, and increased by cash distributions from equity method investments and impairment of long-lived assets. Because Consolidated Adjusted EBITDA omits certain non-cash items, we believe that the measure is less susceptible to variances that affect our operating performance.
We define APT Segment EBITDA (loss) as APT Segment operating loss adjusted for the impact of the following items that are either non-cash or that we do not consider representative of our ongoing operating performance: depreciation, amortization, depletion, accretion, amortization of Upfront Customer Consideration and interest expense, net. We define APT Segment Adjusted EBITDA (loss) as APT Segment EBITDA (loss), reduced by gain on customer settlement, gain on change in estimate of asset retirement obligation, gain on extinguishment of debt and gain on customer settlement, and increased by impairment of long-lived assets.
We define RC Segment EBITDA as RC Segment operating income adjusted for the impact of the following items that are either non-cash or that we do not consider representative of our ongoing operating performance: depreciation, amortization, depletion, accretion and interest expense. We define RC Segment Adjusted EBITDA as RC Segment EBITDA, reduced by the non-cash impact of equity earnings from equity method investments and gain on extinguishment of debt, and increased by cash distributions from equity method investments.
When used in conjunction with GAAP financial measures, we believe these non-GAAP measures are supplemental measures of operating performance that explain our operating performance for our period to period comparisons and against our competitors' performance. Generally, we believe these non-GAAP measures are less susceptible to variances that affect our operating performance results.
With the exception of extinguishment of debt, gain on change in estimate, asset retirement obligation, impairment on long-lived assets and gain on settlement, the adjustments to Consolidated Adjusted EBITDA and APT Segment Adjusted EBITDA in future periods are generally expected to be similar. These non-GAAP measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analyzing our results as reported under GAAP.
Reconciliation of Net income (loss) to Consolidated EBITDA (Loss) and Consolidated Adjusted EBITDA
The following table reconciles net income (loss), our most directly comparable as-reported financial measure calculated in accordance with GAAP, to Consolidated EBITDA (Loss) and Consolidated Adjusted EBITDA. A reconciliation of RC Segment EBITDA, RC Segment Adjusted EBITDA, APT Segment EBITDA and APT Segment Adjusted EBITDA to our most directly comparable as-reported financial measure calculated in accordance with GAAP is included below following the discussion of the results of each respective segment.
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| | | | Year ended December 31, |
| | | | | | 2021 | | 2020 |
| Net income (loss) | | | | | | $ | 60,401 | | | $ | (20,302) | |
| Depreciation, amortization, depletion and accretion | | | | | | 7,933 | | | 8,537 | |
| Amortization of Upfront Customer Consideration | | | | | | 508 | | | 158 | |
| Interest expense, net | | | | | | 1,164 | | | 3,793 | |
| Income tax expense | | | | | | 15,672 | | | 6,511 | |
| Consolidated EBITDA (loss) | | | | | | 85,678 | | | (1,303) | |
| Cash distributions from equity method investees | | | | | | 74,026 | | | 62,441 | |
| Equity earnings | | | | | | (68,726) | | | (30,978) | |
| Gain on extinguishment of debt | | | | | | (3,345) | | | — | |
| Gain on change in estimate, asset retirement obligation | | | | | | (2,702) | | | — | |
| Impairment | | | | | | — | | | 26,103 | |
| Gain on settlement | | | | | | — | | | (1,129) | |
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| Consolidated Adjusted EBITDA | | | | | | $ | 84,931 | | | $ | 55,134 | |
Business Segments
As of December 31, 2021, we have two reportable segments, RC and APT.
The business segment measurements provided to and evaluated by our chief operating decision maker are computed in accordance with the principles listed below:
•The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except as described below.
•Segment revenues include equity method earnings and losses from our equity method investments.
•Segment operating income (loss) includes segment revenues, gains related to sales of equity method investments and allocation of certain "Corporate general and administrative expenses," which include Payroll and benefits, Legal and professional fees, General and administrative, and Depreciation, amortization, depletion and accretion.
•RC segment operating income includes interest expense directly attributable to the RC segment.
The principal products and services of our segments are described in Item 1 of this Report. The following table presents our operating segment results for the years ended December 31, 2021 and 2020:
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| | | Years Ended December 31, | | | | Change |
| (in thousands) | | 2021 | | 2020 | | | | ($) | | |
| Revenues: | | | | | | | | | | |
| Refined Coal: | | | | | | | | | | |
| Earnings in equity method investments | | $ | 68,726 | | | $ | 30,978 | | | | | $ | 37,748 | | | |
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| License royalties, related party | | 14,368 | | | 13,440 | | | | | 928 | | | |
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| | 83,094 | | | 44,418 | | | | | 38,676 | | | |
| Advanced Purification Technologies: | | | | | | | | | | |
Consumables (1) | | 85,882 | | | 53,908 | | | | | 31,974 | | | |
| Other | | 44 | | | 15 | | | | | 29 | | | |
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| | 85,926 | | | 53,923 | | | | | 32,003 | | | |
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| Total segment reporting revenues | | 169,020 | | | 98,341 | | | | | 70,679 | | | |
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| Adjustments to reconcile to reported revenues: | | | | | | | | | | |
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| Earnings in equity method investments | | (68,726) | | | (30,978) | | | | | (37,748) | | | |
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| Total reported revenues | | $ | 100,294 | | | $ | 67,363 | | | | | $ | 32,931 | | | |
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| Segment operating income (loss) | | | | | | | | | | |
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Refined Coal | | $ | 82,634 | | | $ | 42,689 | | | | | $ | 39,945 | | | |
Advanced Purification Technologies (2) | | 5,649 | | | (39,958) | | | | | 45,607 | | | |
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| Total segment operating income | | $ | 88,283 | | | $ | 2,731 | | | | | $ | 85,552 | | | |
(1) Included in the APT segment operating income (loss) for the years ended December 31, 2021 and 2020 was $7.4 million and $7.9 million, respectively, of depreciation, amortization, depletion and accretion expenses on mine- and plant-related long-lived assets and liabilities. Further included in the APT segment operating income (loss) for the year ended December 31, 2021 was $2.7 million related to the gain on change in estimate, asset retirement obligation. Included in the APT segment operating loss for the year ended December 31, 2020 was an impairment charge of $26.1 million offset by gain on settlement with the Former Customer of $1.1 million.
A reconciliation of segment operating income to consolidated net income is included in Note 19 of the Consolidated Financial Statements included in Item 8 of this Report.
Refined Coal
The following table provides the segment revenues of our respective equity method investments for the years ended December 31, 2021 and 2020:
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| | Year ended December 31, | | |
| (in thousands) | | 2021 | | 2020 | | |
| Earnings from Tinuum Group | | $ | 61,837 | | | $ | 24,396 | | | |
| Earnings from Tinuum Services | | 6,952 | | | 6,582 | | | |
| Loss from other | | (63) | | | — | | | |
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| Earnings from equity method investments | | $ | 68,726 | | | $ | 30,978 | | | |
For 2021, equity earnings from Tinuum Group were positively impacted by an increase in overall coal-fired power generation demand and higher production volume from coal-fired sources, which was driven by higher prices related to alternative power generation sources such as natural gas. Also, this increase was driven by higher RC facility count for the majority of 2021 compared to 2020. Further, for the year ended December 31, 2020, we recognized equity earnings from Tinuum Group equal to
our proportionate share of Tinuum Group's net income for the period, which was less than cash distributions received for the same period.
In the fourth quarter of 2020, Tinuum Group recorded an impairment charge of $3.0 million on certain of its assets located at RC facilities and a retention accrual related to the wind down of its operations upon the expected expiration of Section 45 on December 31, 2021.
RC earnings related to M-45 license royalties increased from 2021 to 2020 as a result of an increase in the royalty rate per ton year over year offset by a reduction in RC facilities subject to the M-45 License due to the expected expiration of Section 45 on December 31, 2021.
Equity earnings from Tinuum Services increased by $0.4 million in 2021 compared to 2020 primarily as a result of recording an impairment charge of $2.9 million for year ended December 31, 2020 as well as an increase in tonnage for the RC facilities that Tinuum Services operated in 2021 compared to 2020. As of December 31, 2021 and 2020, Tinuum Services provided operating and maintenance services to zero and 22 RC facilities, respectively. Tinuum Services derived earnings from both fixed-fee arrangements as well as fees that are tied to actual RC production, as determined by the specific RC facility operating and maintenance agreement.
As discussed above, as of December 31, 2021, the Company reduced its investment in Tinuum Services in the amount of $0.7 million, which is included in the "Earnings from equity method investments" line item in the Consolidated Statement of Operations for the year ended December 31, 2021.
Outlook
As a result of the expiration of the ability to generate Section 45 tax credits after December 31, 2021, both Tinuum Group and Tinuum Services ceased operations and are in reclamation of their respective businesses. The loss of equity earnings, distributions and M-45 Royalties beginning in 2022 will have a material adverse effect on our financial condition and consolidated operating results compared to historical periods.
Reconciliation of RC Segment operating income to RC Segment EBITDA and RC Segment Adjusted EBITDA
The following table reconciles RC Segment operating income, our most directly comparable as-reported financial measure calculated in accordance with GAAP, to RC Segment EBITDA and RC Adjusted EBITDA.
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| | Year ended December 31, |
| (in thousands) | | 2021 | | 2020 |
| RC Segment operating income | | $ | 82,634 | | | $ | 42,689 | |
| Depreciation, amortization, depletion and accretion | | 40 | | | 116 | |
| Interest expense | | 12 | | | 331 | |
| RC Segment EBITDA | | 82,686 | | | 43,136 | |
| Cash distributions from equity method investees | | 74,026 | | | 62,441 | |
| Equity earnings | | (68,726) | | | (30,978) | |
| Gain on extinguishment of debt | | (97) | | | — | |
| RC Segment Adjusted EBITDA | | $ | 87,889 | | | $ | 74,599 | |
Advanced Purification Technologies
APT segment operating income increased during the year ended December 31, 2021 compared to 2020 primarily due to the Impairment Charge of $26.1 million recorded for the year end December 31, 2020. Further, for the year ended December 31, 2021, consumable revenues and associated gross margin increased, driven by an increase in volume year over year, specifically related to the Supply Agreement, as well as an increase in demand for our products by our current customer base and from new customers.
During the year ended December 31, 2020, we incurred costs of $0.4 million related to sequestration of certain of our employees at our Red River plant. These costs included hazardous pay, lodging expense and other related costs for 60 days.
Outlook
Based on current market estimates, we believe that the APT segment will continue to be affected, both positively and negatively, by power generation and the pricing of other sources, including natural gas and renewable energy, as well as weather throughout the U.S. In 2022, we expect demand from our current customers to be consistent with 2021 based on current market trends. Further, we see opportunities and are continuing to pursue diverse markets for our purification products outside of coal-fire power generation, including industrial application, water treatment plants and other end markets.
Reconciliation of APT Segment operating income (loss) to APT Segment EBITDA (loss) and APT Segment Adjusted EBITDA (loss)
The following table reconciles APT Segment income (loss), our most directly comparable as-reported financial measure calculated in accordance with GAAP, to APT Segment EBITDA (loss) and Adjusted EBITDA (loss).
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| | Year ended December 31, |
| (in thousands) | | 2021 | | 2020 |
| APT Segment operating income (loss) | | $ | 5,649 | | | $ | (39,958) | |
| Depreciation, amortization, depletion and accretion | | 7,388 | | | 7,870 | |
| Amortization of Upfront Customer Consideration | | 508 | | | 158 | |
| Interest expense, net | | 297 | | | 402 | |
| APT Segment EBITDA (loss) | | 13,842 | | | (31,528) | |
| Gain on extinguishment of debt | | (2,562) | | | — | |
| Gain on change in estimate, asset retirement obligation | | (2,702) | | | — | |
| Impairment | | — | | | 26,103 | |
| Gain on settlement | | — | | | (1,129) | |
| APT Segment Adjusted EBITDA (loss) | | $ | 8,578 | | | $ | (6,554) | |
Liquidity and Capital Resources
Current Resources and Factors Affecting Our Liquidity
As of December 31, 2021, our principal future sources of liquidity include:
•$88.8 million of cash, cash equivalents and restricted cash; and
•operations of the APT segment
For the year ended December 31, 2021, our principal uses of liquidity included:
•our business operating expenses, including capital expenditures, reclamation costs, federal and state tax payments and cash severance payments; and
•payment of debt principal and interest.
During 2021, our liquidity position was positively affected primarily from cash distributions from Tinuum Group and Tinuum Services, royalty payments from Tinuum Group and borrowing availability under our line of credit with a bank ("Line of Credit"). Due to the expiration of the Section 45 tax period as of December 31, 2021 and the resultant wind down of Tinuum Group's and Tinuum Services' operations at the end of 2021, distributions from Tinuum Group will no longer be a material source of liquidity after 2021. Our line of credit expired on December 31, 2021.
Our ability to continue to generate sufficient cash flow required to meet ongoing operational needs and obligations, and make potential future dividend payments and share repurchases depends upon several factors. These include: (1) executing on our contracts and initiatives; (2) increasing our share of the market for APT consumables, including expanding our overall AC business into additional adjacent markets and improving our customer and product mix; and (3) receiving final, expected M-45 License royalty payments from Tinuum Group and distributions from Tinuum Group and Tinuum Services in 2022.
For 2022 and beyond, our primary sources of liquidity are expected to be from cash on hand and through the ongoing operations of our APT segment. We believe our existing operations and related contract volumes will continue to provide operating cost efficiencies of the Red River Plant, providing additional sources of operating cash flows in the future. Full and partial reimbursements on capital expenditures from Cabot will offset our uses of investing cash flows. As discussed above, on February 25, 2022, we received the Cabot Payment in the amount of $10.6 million, which provides a source of cash for us in 2022.
Tinuum Group and Tinuum Services Distributions
The following table summarizes the cash distributions from our equity method investments, which most significantly affected our consolidated cash flow results, for the years ended December 31, 2021 and 2020:
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| | Year ended December 31, | | |
| (in thousands) | | 2021 | | 2020 | | |
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| Tinuum Group | | $ | 65,224 | | | $ | 53,289 | | | |
| Tinuum Services | | 8,802 | | | 9,152 | | | |
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| Distributions from equity method investees | | $ | 74,026 | | | $ | 62,441 | | | |
Cash distributions from Tinuum Group for 2021 increased by $11.9 million compared to 2020 primarily due to higher production volume driven by high competitor prices related to alternative power generation sources such as natural gas. Also, this increase was driven by higher average RC facility count for the year ended December 31, 2021 compared to 2020.
Both Tinuum Group and Tinuum Services ceased their operations as of December 31, 2021 due to the expiration of the Section 45 tax credit period as of December 31, 2021. As such, our distributions from our RC segment will substantially cease as of December 31, 2021.
During the first half of 2022, we expect to receive final cash distributions from Tinuum Group and Tinuum Services in the range of $4.0 to $5.0 million.
PPP Loan
On April 20, 2020, we entered into the PPP Loan under the PPP, evidenced by a promissory note, with BOK providing for $3.3 million in proceeds, which was funded on April 21, 2020. The PPP Loan had a maturity date of April 21, 2022. The PPP Loan
principal was eligible for forgiveness subject to the terms of the PPP and approval by the SBA. The interest rate on the PPP Loan was 1.00%. The PPP Loan was unsecured and contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or BOK, or breaching the terms of the PPP Loan. The occurrence of an event of default could result in the repayment of all amounts outstanding, collection of all amounts owing from us, or filing suit and obtaining judgment against us.
On July 27, 2021, we received formal notification in the form of a letter dated July 19, 2021 from BOK that the SBA approved the forgiveness of our PPP Loan forgiveness application for the PPP Loan in the amount of $3.3 million (including accrued interest). For the year ended December 31, 2021, the Company recorded a gain on extinguishment of the PPP Loan in the amount of $3.3 million in the Consolidated Statements of Operations, which is included as a component of "Other income (expense)."
Restricted Cash
As of December 31, 2021, we had long-term restricted cash of $10.0 million as required under the Surety Agreement related to the Reclamation Contract.
Senior Term Loan
On December 7, 2018, we and ADA-ES, Inc. ("ADA"), a wholly-owned subsidiary, and certain other subsidiaries of the Company as guarantors, The Bank of New York Mellon as administrative agent, and Apollo Credit Strategies Master Fund Ltd and Apollo A-N Credit Fund (Delaware) L.P., affiliates of a beneficial owner of greater than five percent of our common stock and a related party, entered into the Senior Term Loan in the amount of $70.0 million, less original issue discount of $2.1 million. Proceeds from the Senior Term Loan were used to fund the acquisition of Carbon Solutions. We also paid debt issuance costs of $2.0 million related to the Senior Term Loan. The Senior Term Loan bore interest at a rate equal to 3-month LIBOR (subject to a 1.5% floor) + 4.75% per annum, which was adjusted quarterly to the current 3-month LIBOR rate, and interest was payable quarterly in arrears. The Senior Term Loan was secured by substantially all the assets of the Company, including the cash flows from the Tinuum Entities, but excluding our equity interests in the Tinuum entities.
On June 1, 2021 and prior to the Senior Term Loan's maturity date, we paid the remaining principal outstanding on the Senior Term Loan and all remaining accrued interest through this date. We did not incur any prepayment fees associated with the early pay-off.
Stock Repurchases and Dividends
In November 2018, our Board authorized us to purchase up to $20.0 million of our outstanding common stock under a stock repurchase program (the "Stock Repurchase Program"), which was to remain in effect until December 31, 2019 unless otherwise modified by the Board. As of November 2019, $2.9 million remained outstanding related to Stock Repurchase Program. In November 2019, the Board authorized an incremental $7.1 million to the Stock Repurchase Program and provided that it will remain in effect until all amounts are utilized or it is otherwise modified by the Board. We did not make any stock repurchases during the year ended December 31, 2021.
During the year ended December 31, 2021, we did not pay quarterly cash dividends to stockholders. We paid our most recent dividend in March 2020 of $0.25 per share.
Line of Credit
In September 2013, ADA, as borrower, ADES, as guarantor, entered into the Line of Credit with a bank for an aggregate principal amount of $10.0 million that was secured by certain amounts due to us from certain Tinuum Group RC leases. The Line of Credit was amended 16 times from the period from December 2, 2013 through March 23, 2021, which included a reduction in the principal amount to $5.0 million in September 2018. The Line of Credit expired on December 31, 2021.
Cash Flows
Cash, cash equivalents and restricted cash increased from $35.9 million as of December 31, 2020 to $88.8 million as of December 31, 2021, an increase of $52.8 million. The following table summarizes our cash flows for the years ended December 31, 2021 and 2020, respectively:
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| | Years Ended December 31, | | | | | | |
| (in thousands) | | 2021 | | 2020 | | | | Change | | |
| Cash provided by (used in): | | | | | | | | | | |
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| Operating activities | | $ | 25,999 | | | $ | 54,048 | | | | | $ | (28,049) | | | |
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| Investing activities | | 44,378 | | | (7,466) | | | | | 51,844 | | | |
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| Financing activities | | (17,529) | | | (27,730) | | | | | 10,201 | | | |
| Net change in Cash and Cash Equivalents and Restricted Cash | | $ | 52,848 | | | $ | 18,852 | | | | | $ | 33,996 | | | |
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Cash flows from operating activities
Cash flows provided by operating activities for the year ended December 31, 2021 decreased by $28.0 million compared to the year ended December 31, 2020 and the net decrease was primarily due to the following: (1) a decrease in Distributions from equity method investees, return on investment of $39.5 million year over year; (2) an increase in Earnings from equity method investments of $37.7 million year over year; (3)Impairment of long-lived assets of $26.1 million recorded in 2020; and (4) Gain on extinguishment of debt of $3.3 million recorded in 2021. Offsetting the net decrease in cash flows provided by operating activities year over year was a net change in net income of $80.7 million year over year as a result of net loss recognized for the year ended December 31, 2020.
Cash flows from investing activities
Cash flows provided by investing activities for the year ended December 31, 2021 were $44.4 million compared to cash flows used in investing activities of $7.5 million for the year ended December 31, 2020. This net increase in cash flows provided by investing activities was primarily due to increases in distributions from equity earnings in excess of cumulative earnings of $51.1 million year over year as well as proceeds from the sale of property and equipment in 2021.
Cash flows from financing activities
Cash flows used in financing activities for the year ended December 31, 2021 decreased by $10.2 million compared to the year ended December 31, 2020 primarily due to lower principal payments on the Senior Term Loan of $8.0 million. Also contributing to the decrease was a decrease year over year in dividends paid and shares repurchased of $4.9 million and $0.2 million, respectively, and a reduction in repurchases of shares of our common stock to satisfy tax withholdings of $0.3 million. Offsetting the net decrease year over year was $3.3 million of cash proceeds received in 2021 from the forgiveness of the PPP Loan.
Material Cash Requirements
For 2022, we expect to spend $13.0 million in capital expenditures compared to $7.6 million incurred in 2021. This increase is primarily the result of forecasted improvements to the plant, which are estimated to be $7.0 million, product specific capital expenditures related to the Supply Agreement, which are estimated to be $1.0 million and routine, scheduled maintenance improvements.
As of June 30, 2021, we entered into the Retention Agreements for the purpose of retaining officers and key employees in order to maintain our current business operations, while we pursue and execute on our strategic initiatives. The total amount due at time of payment pursuant to the Retention Agreements is $2.0 million, which we expect to pay in 2022.
We intend to fund the remaining portion of the Reclamation Costs from cash on hand as well as cash generated from the Supply Agreement. We believe that as reclamation activities proceed and the related bonded amounts required under the Surety Agreement are able to be reduced, there may be an opportunity to further reduce the collateral requirement. On a normalized basis, our annual capital expenditures, exclusive of any capital specifically procured for Cabot under the Supply Agreement or capital for major improvements to the plant, are expected to average approximately $5.0 million.
We expect that our cash on hand as of December 31, 2021 will provide sufficient liquidity to fund operations for the next 12 months.
Contractual obligations as of December 31, 2021 are as follows:
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| | Payment Due by Period |
| (in thousands) | | Total | | Less than 1 year | | 1-3 years | | 4-5 years | | After 5 years |
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| Finance lease obligations | | 4,486 | | | 1,008 | | | 2,909 | | | 569 | | | — | |
| Operating lease obligations | | 7,249 | | | 2,502 | | | 2,744 | | | 1,132 | | | 871 | |
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Reclamation liability, Marshall Mine (1) | | 7,631 | | | 2,104 | | | 2,885 | | | 1,231 | | | 1,411 | |
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| | $ | 19,366 | | | $ | 5,614 | | | $ | 8,538 | | | $ | 2,932 | | | $ | 2,282 | |
(1) Includes payments due under a capped fee contract with a third-party mining operator for reclamation of the Marshall Mine (the "Marshall Mine ARO"). Payments on this contract are due through approximately 2031. Reclamation costs related to the Marshall Mine ARO are based on a stated fee by month structure based on the initial estimate of the total costs of reclamation, which provides for certain contingencies that could increase or decrease the reclamation fee over time. The timing and amount of future payments may change from original estimates, and the Company assesses changes in estimated future amounts on a quarterly basis.
The table above also excludes our asset retirement obligation ("ARO") related to reclamation of the Five Forks Mine (the "Five Forks ARO"). As of December 31, 2021, our consolidated balance sheet reflects a liability of $3.6 million for the Five Forks ARO. The Five Forks Mine ARO was recorded at fair value. The timing and amount of payments to satisfy the Five Forks ARO are uncertain and are based on numerous factors including, but not limited to, the Five Forks Mine expected closure date.
We had no outstanding letters of credit as of December 31, 2021. We expect that our cash on hand as of December 31, 2021 will provide sufficient liquidity to fund operations for the next 12 months.
As of December 31, 2021, we had outstanding surety bonds of $24.1 million related to performance requirements under reclamation contracts associated with both the Five Forks Mine and the Marshall Mine. As of December 31, 2021, we had restricted cash of $10.0 million securing the Surety Agreement. We expect that the obligations secured by these surety bonds will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the obligations are performed, the related surety bonds should be released, and we should not have any continuing obligations. However, in the event any surety bond is called, our indemnity obligations could require us to reimburse the issuer of the surety bond.
Critical Accounting Policies and Estimates
Our significant accounting policies are discussed in Note 1 to the Consolidated Financial Statements included in Item 8 of this Report. In presenting our financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. Our estimates are based on historical experience and other assumptions believed to be reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the accounting estimates discussed below are critical to understanding our historical and future performance, as these estimates relate to the more significant areas involving management’s judgments and estimates.
Business Combinations, including asset acquisitions
We apply the acquisition method to acquisitions of both businesses and assets and allocate the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The purchase price allocation process requires us to make significant estimates and assumptions with respect to assets acquired and liabilities assumed. We believe the assumptions and estimates we make are reasonable, they are based in part on historical experience, market conditions and information obtained from management of the acquired company or group of assets and are inherently uncertain.
Examples of critical estimates in valuing certain of long-lived assets, including intangible assets, we have acquired or may acquire in the future include but are not limited to:
•future expected cash flows from revenues;
•historical and expected customer attrition rates and anticipated growth in revenues from acquired customers;
•the acquired company’s developed technology as well as assumptions about the period of time the acquired developed technology will continue to be used in the combined company's product portfolio;
•the expected use and useful lives of the acquired assets; and
•valuation methods and discount rates used in estimating the values of the assets acquired and liabilities assumed.
In regard to the Marshall Mine Acquisition, which we accounted for as an asset acquisition, we recorded the fair value of assumed assets, which included property, plant and equipment and spare parts and assumed liabilities. In addition, we recorded other assets, including Upfront Customer Consideration and the Cabot Receivable, and a liability for the Marshall Mine ARO.
Carrying value of long-lived assets and intangibles
We review and evaluate our long-lived assets and intangibles for impairment at least annually, or more frequently when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment loss is measured and recorded for long-lived assets and intangibles based on the excess of their carrying amounts over their estimated fair values. Fair value is typically determined through the use of an income approach utilizing estimates of discounted pretax future cash flows or a market approach utilizing recent transaction activity for comparable assets.
Asset Retirement Obligations
Accounting for AROs requires us to make estimates of future costs unique to a specific mining operation that we will incur to complete the reclamation and remediation work required to comply with existing laws and regulations. Any such changes in future costs, the timing of reclamation activities, scope or the exclusion of certain costs not considered reclamation and remediation costs could materially impact the amounts charged to earnings for reclamation and remediation. Additionally, future changes to environmental laws and regulations could increase the scope of reclamation and remediation work required.
Five Forks Mine ARO - Reclamation costs related to the Five Forks Mine ARO are allocated to expense over the life of the related mine assets and are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. Remediation costs for the Five Forks Mine are accrued based on management’s best estimate of the costs expected to be incurred. Such cost estimates may include ongoing care, maintenance and monitoring costs. Reclamation obligations are based on the timing of estimated spending for an existing environmental disturbance. We review, on at least an annual basis, the future expected costs and the timing of such costs for the Five Forks Mine ARO.
Marshall Mine ARO - Reclamation costs related to the Marshall Mine are based on a capped fee structure for a significant portion of the ARO liability based on the initial estimate of the total costs of reclamation, which provides for certain contingencies that could increase or decrease the reclamation fee based on the reclamation agreement executed between us and the Marshall Mine operator. The timing of payments may vary, and in valuing the the Marshall Mine ARO, we account for these timing differences, as well as changes in actual reclamation costs, on a quarterly basis.
Income Taxes
We account for income taxes under the asset and liability method, which requires judgment in determining income tax expense and the related balance sheet amounts. This 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 on changes in income tax laws, actual results of operations, state apportionment and, if applicable, final audits of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. Changes in the estimates and assumptions used for calculating income tax expense and potential differences in actual results from estimates could have a material impact on our results of operations and financial condition.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations.
We establish a valuation allowance against our deferred tax assets when, based upon the weight of all available evidence, we believe it is more likely than not that some portion or all of the deferred tax assets will not be realized. In making this determination, we consider 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. If and when our estimates change, or there is a change in the value of deferred tax assets or liabilities warranting the need to reassess the realizability of deferred tax assets, we adjust a valuation allowance through the provision for income taxes in the period in which this determination is made. Refer to Note 18 of our Consolidated Financial Statements included in Item 8 of this Report for additional information regarding our deferred tax assets and liabilities and related deferred income tax expense (benefit).
Recently Issued Accounting Standards
Refer to Note 1 of the Consolidated Financial Statements included in Item 8 of this Report for information regarding recently issued accounting standards.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information under this Item is not required to be provided by smaller reporting companies.
Item 8. Financial Statements and Supplementary Data
Advanced Emissions Solutions, Inc.
Index to Financial Statements
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| Advanced Emissions Solutions, Inc. | |
| Consolidated Financial Statements: | |
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Advanced Emissions Solutions, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Advanced Emissions Solutions, Inc. and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021 and 2020, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Income Taxes – Realizability of Deferred Tax Assets
As described in Notes 1 and 18 to the consolidated financial statements, the Company recognizes deferred income taxes for the effects of temporary differences between the tax basis of an asset or liability and their reported amounts in the accompanying consolidated balance sheet. These temporary differences result in taxable or deductible amounts in future years. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. As of December 31, 2021, the Company concluded it is more likely than not that the Company will not generate sufficient taxable income within the applicable net operating loss and tax credit carry-forward periods to realize any of its net deferred tax assets, which resulted in a valuation allowance of $87.5 million.
We identified the realizability of deferred tax assets as a critical audit matter due to the Company’s tax structure and the significant judgments and estimates made by management to determine that sufficient taxable income will not be generated to realize a portion of deferred tax assets prior to expiration. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate management’s estimates of taxable income prior to expiration.
The primary procedures we performed to address this critical audit matter included:
•Recalculating the mathematical accuracy of management’s accounting for the previously described taxes, which included supporting calculations, schedules, and reconciliations.
•Reading and evaluating management’s documentation of the accounting for income taxes, including their analysis of the valuation allowance. This includes relevant significant accounting policies, and information obtained by management from third party tax specialists which details management’s basis for the accounting and impact to the consolidated financial statements, inclusive of relevant positive and negative evidence available and utilized in performing the analysis.
•Obtaining and evaluating the supporting tax analyses and documentation prepared by management as a framework and initial support for audit procedures. This includes gaining an understanding of the Company’s estimation process, the Company’s deferred tax calculations, which also integrates management’s analysis of valuation allowances, current tax expenses (benefits), and IRC Section 45 credits.
•Consulting with internal tax specialists in evaluating management’s calculation of its provision for income taxes and that the significant judgments used were applied consistently with the tax code.
•Evaluating whether significant estimates and judgments used were consistent with past performance related to said estimates, the consistency of future forecasts and projections based on current operating and market conditions and future expectations, and that all were consistent with evidence obtained in procedures performed in other areas of the audit.
•Evaluating the adequacy of the Company’s disclosure in Notes 1 and 18 in relation to the income taxes.
/s/ Moss Adams LLP
Denver, Colorado
March 8, 2022
We have served as the Company’s auditor since 2017.
Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
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| | As of December 31, |
| (in thousands, except share data) | | 2021 | | 2020 |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash, cash equivalents and restricted cast | | $ | 78,753 | | | $ | 30,932 | |
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| Receivables, net | | 12,622 | | | 13,125 | |
| Receivables, related party | | 2,481 | | | 3,453 | |
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| Inventories, net | | 7,850 | | | 9,882 | |
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| Prepaid expenses and other current assets | | 6,661 | | | 4,597 | |
| Total current assets | | 108,367 | | | 61,989 | |
| Restricted cash, long-term | | 10,027 | | | 5,000 | |
Property, plant and equipment, net of accumulated depreciation of $7,684 and $3,340, respectively | | 30,171 | | | 29,433 | |
| Intangible assets, net | | 1,237 | | | 1,964 | |
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| Equity method investments | | 2,391 | | | 7,692 | |
| Deferred tax assets, net | | — | | | 10,604 | |
| Other long-term assets, net | | 33,243 | | | 29,989 | |
| Total Assets | | $ | 185,436 | | | $ | 146,671 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
| Current liabilities: | | | | |
| Accounts payable | | $ | 10,009 | | | $ | 7,849 | |
| Accrued payroll and related liabilities | | 6,477 | | | 3,257 | |
| Current portion of long-term debt | | 1,011 | | | 18,441 | |
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| Other current liabilities | | 5,124 | | | 12,996 | |
| Total current liabilities | | 22,621 | | | 42,543 | |
| Long-term debt, net of current portion | | 3,152 | | | 5,445 | |
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| Other long-term liabilities | | 12,362 | | | 13,473 | |
| Total Liabilities | | 38,135 | | | 61,461 | |
| Commitments and contingencies (Note 14) | | | | |
| Stockholders’ equity: | | | | |
Preferred stock: par value of $.001 per share, 50,000,000 shares authorized, none outstanding | | — | | | — | |
Common stock: par value of $.001 per share, 100,000,000 shares authorized, 23,460,212 and 23,141,284 shares issued and 18,842,066 and 18,523,138 shares outstanding at December 31, 2021 and 2020, respectively | | 23 | | | 23 | |
Treasury stock, at cost: 4,618,146 and 4,618,146 shares as of December 31, 2021 and 2020, respectively | | (47,692) | | | (47,692) | |
| Additional paid-in capital | | 102,106 | | | 100,425 | |
| Retained earnings | | 92,864 | | | 32,454 | |
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| Total stockholders’ equity | | 147,301 | | | 85,210 | |
| Total Liabilities and Stockholders’ equity | | $ | 185,436 | | | $ | 146,671 | |
See Notes to the Consolidated Financial Statements.
Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Statements of Operations
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| | Years Ended December 31, | | |
| (in thousands, except per share data) | | 2021 | | 2020 | | |
| Revenues: | | | | | | |
| Consumables | | $ | 85,882 | | | $ | 53,908 | | | |
| License royalties, related party | | 14,368 | | | 13,440 | | | |
| Other | | 44 | | | 15 | | | |
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| Total revenues | | 100,294 | | | 67,363 | | | |
| Operating expenses: | | | | | | |
| Consumables cost of revenues, exclusive of depreciation and amortization | | 65,576 | | | 50,962 | | | |
| Other cost of revenues, exclusive of depreciation and amortization | | — | | | (563) | | | |
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| Payroll and benefits | | 11,315 | | | 10,621 | | | |
| Legal and professional fees | | 6,260 | | | 5,585 | | | |
| General and administrative | | 7,060 | | | 8,228 | | | |
| Depreciation, amortization, depletion and accretion | | 7,933 | | | 8,537 | | | |
| Gain on change in estimate, asset retirement obligation | | (2,702) | | | — | | | |
| Impairment of long-lived assets | | — | | | 26,103 | | | |
| Gain on settlement | | — | | | (1,129) | | | |
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| Total operating expenses | | 95,442 | | | 108,344 | | | |
| Operating income (loss) | | 4,852 | | | (40,981) | | | |
| Other income (expense): | | | | | | |
| Earnings from equity method investments | | 68,726 | | | 30,978 | | | |
| Gain on extinguishment of debt | | 3,345 | | | — | | | |
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| Interest expense | | (1,490) | | | (3,920) | | | |
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| Other | | 640 | | | 132 | | | |
| Total other income | | 71,221 | | | 27,190 | | | |
| Income (loss) before income tax expense | | 76,073 | | | (13,791) | | | |
| Income tax expense | | 15,672 | | | 6,511 | | | |
| Net income (loss) | | $ | 60,401 | | | $ | (20,302) | | | |
| Earnings (loss) per common share (Note 1): | | | | | | |
| Basic | | $ | 3.31 | | | $ | (1.12) | | | |
| Diluted | | $ | 3.27 | | | $ | (1.12) | | | |
| Weighted-average number of common shares outstanding: | | | | | | |
| Basic | | 18,258 | | | 18,044 | | | |
| Diluted | | 18,461 | | | 18,044 | | | |
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See Notes to the Consolidated Financial Statements.
Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
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| | Common Stock | | Treasury Stock | | | | | | | | |
| (in thousands, except share data) | | Shares | | Amount | | Shares | | Amount | | Additional Paid-in Capital | | Retained Earnings/(Accumulated Deficit) | | | | Total Stockholders’
Equity |
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| Balances, January 1, 2020 | | 22,960,157 | | | $ | 23 | | | (4,597,533) | | | $ | (47,533) | | | $ | 98,466 | | | $ | 57,336 | | | | | $ | 108,292 | |
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| Stock-based compensation | | 278,910 | | | — | | | — | | | — | | | 2,496 | | | — | | | | | 2,496 | |
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| Repurchase of common shares to satisfy tax withholdings | | (97,783) | | | — | | | — | | | — | | | (537) | | | — | | | | | (537) | |
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| Cash dividends declared on common stock | | — | | | — | | | — | | | — | | | — | | | (4,580) | | | | | (4,580) | |
| Repurchase of common shares | | — | | | — | | | (20,613) | | | (159) | | | — | | | — | | | | | (159) | |
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| Net loss | | — | | | — | | | — | | | — | | | — | | | (20,302) | | | | | (20,302) | |
| Balances, December 31, 2020 | | 23,141,284 | | | $ | 23 | | | (4,618,146) | | | $ | (47,692) | | | $ | 100,425 | | | $ | 32,454 | | | | | $ | 85,210 | |
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| Stock-based compensation | | 364,657 | | | — | | | — | | | — | | | 1,927 | | | — | | | | | 1,927 | |
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| Repurchase of common shares to satisfy tax withholdings | | (45,729) | | | — | | | — | | | — | | | (246) | | | — | | | | | (246) | |
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| Accrued dividends cancelled on common stock | | — | | | — | | | — | | | — | | | — | | | 9 | | | | | 9 | |
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| Net income | | — | | | — | | | — | | | — | | | — | | | 60,401 | | | | | 60,401 | |
| Balances, December 31, 2021 | | 23,460,212 | | | $ | 23 | | | (4,618,146) | | | $ | (47,692) | | | $ | 102,106 | | | $ | 92,864 | | | | | $ | 147,301 | |
See Notes to the Consolidated Financial Statements.
Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
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| | Years Ended December 31, | | |
| (in thousands) | | 2021 | | 2020 | | |
| Cash flows from operating activities | | | | | | |
| Net income (loss) | | $ | 60,401 | | | $ | (20,302) | | | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
| Deferred income tax expense | | 10,604 | | | 3,491 | | | |
| Depreciation, amortization, depletion and accretion | | 7,933 | | | 8,537 | | | |
| Amortization of debt discount and debt issuance costs | | 945 | | | 1,418 | | | |
| Operating lease expense | | 2,038 | | | 3,559 | | | |
| Gain on extinguishment of debt | | (3,345) | | | — | | | |
| Gain on change in estimate, asset retirement obligation | | (2,702) | | | — | | | |
| Impairment of long-lived assets | | — | | | 26,103 | | | |
| Gain on settlement | | — | | | (1,129) | | | |
| Recovery of accounts receivable and other receivables | | (36) | | | (990) | | | |
| | | | | | |
| | | | | | |
| Stock-based compensation expense | | 1,927 | | | 2,496 | | | |
| | | | | | |
| Earnings from equity method investments | | (68,726) | | | (30,978) | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Other non-cash items, net | | (173) | | | 192 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Changes in operating assets and liabilities, net of effects of acquired businesses: | | | | | | |
| Receivables, net | | 540 | | | (2,541) | | | |
| Related party receivables | | 972 | | | 794 | | | |
| Prepaid expenses and other current assets | | (2,064) | | | 3,234 | | | |
| | | | | | |
| Inventories, net | | 1,394 | | | 4,748 | | | |
| | | | | | |
| Other long-term assets, net | | 1,838 | | | (1,005) | | | |
| Accounts payable | | 1,977 | | | (196) | | | |
| Accrued payroll and related liabilities | | 3,220 | | | 233 | | | |
| Other current liabilities | | (8,279) | | | (520) | | | |
| | | | | | |
| Operating lease liabilities | | (2,764) | | | (2,200) | | | |
| Other long-term liabilities | | (2,645) | | | (3,337) | | | |
| | | | | | |
| Distributions from equity method investees, return on investment | | 22,944 | | | 62,441 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net cash provided by operating activities | | 25,999 | | | 54,048 | | | |
| | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | |
| (in thousands) | | 2021 | | 2020 | | |
| Cash flows from investing activities | | | | | | |
| Distributions from equity method investees in excess of cumulative earnings | | $ | 51,082 | | | $ | — | | | |
| Acquisition of property, equipment and intangible assets, net | | (6,201) | | | (6,685) | | | |
| Mine development costs | | (1,398) | | | (781) | | | |
| | | | | | |
| Proceeds from sale of property and equipment | | 895 | | | — | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net cash provided by (used in) investing activities | | 44,378 | | | (7,466) | | | |
| Cash flows from financing activities | | | | | | |
| Principal payments on term loan | | (16,000) | | | (24,000) | | | |
| Principal payments on finance lease obligations | | (1,190) | | | (1,360) | | | |
| | | | | | |
| | | | | | |
| Dividends paid | | (93) | | | (4,979) | | | |
| Borrowings from Paycheck Protection Program Loan | | — | | | 3,305 | | | |
| Repurchase of shares to satisfy tax withholdings | | (246) | | | (537) | | | |
| Repurchase of common shares | | — | | | (159) | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net cash used in financing activities | | (17,529) | | | (27,730) | | | |
| Increase in Cash, Cash Equivalents and Restricted Cash | | 52,848 | | | 18,852 | | | |
| Cash, Cash Equivalents and Restricted Cash, beginning of year | | 35,932 | | | 17,080 | | | |
| Cash, Cash Equivalents and Restricted Cash, end of year | | $ | 88,780 | | | $ | 35,932 | | | |
| Supplemental disclosure of cash flow information: | | | | | | |
| Cash paid for interest | | $ | 524 | | | $ | 2,489 | | | |
| Cash paid (received) for income taxes | | $ | 8,882 | | | $ | (84) | | | |
| Supplemental disclosure of non-cash investing and financing activities: | | | | | | |
| Change in accrued purchases for property and equipment | | $ | 183 | | | $ | — | | | |
| Change in asset retirement obligation | | $ | 121 | | | $ | 421 | | | |
| Acquisition of property and equipment under finance lease | | $ | — | | | $ | 158 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Dividends payable | | $ | — | | | $ | 32 | | | |
See Notes to the Consolidated Financial Statements.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Summary of Operations and Significant Accounting Policies
Nature of Operations
Advanced Emissions Solutions, Inc. ("ADES" or the "Company") is a Delaware corporation with its principal office located in Greenwood Village, Colorado and operations located in Louisiana. The Company is principally engaged in the sale of consumable air and water treatment options including activated carbon ("AC") and chemical technologies. The Company's proprietary technologies in the advanced purification technologies ("APT") market enable customers to reduce air and water contaminants, including mercury and other pollutants, to maximize utilization levels and to improve operating efficiencies to meet the challenges of existing and pending emission control regulations. Through its wholly-owned subsidiary, ADA Carbon Solutions, LLC ("Carbon Solutions"), the Company manufactures and sells AC used to capture and remove contaminants for coal-fired power plants, industrial and water treatment markets. Carbon Solutions also owns an associated lignite mine ("Five Forks Mine") that supplies the primary raw material for manufacturing AC.
Through its equity ownership in Tinuum Group, LLC ("Tinuum Group") and Tinuum Services, LLC ("Tinuum Services"), both of which are unconsolidated entities, the Company generates substantial earnings. Tinuum Group provides reduction of mercury and nitrogen oxide ("NOx") emissions at select coal-fired power generators through the production and sale of refined coal ("RC") that qualifies for tax credits ("Section 45 tax credits") under the Internal Revenue Code ("IRC") Section 45 - Production Tax Credit (the "Section 45 tax credit program"). The Company also earns royalties for technologies that are licensed to Tinuum Group and used at certain RC facilities to enhance combustion and reduced emissions of NOx and mercury from coal burned to generate electrical power. Tinuum Services operates and maintains the RC facilities under operating and maintenance agreements with Tinuum Group and owners or lessees of the RC facilities.
Effective December 31, 2021, the Section 45 tax credit program expired and, as a result, both Tinuum Group and Tinuum Services ceased operations and are winding down their respective businesses. Beginning in 2022, our equity earnings generated from both Tinuum Group and Tinuum Services are expected to be minimal. In addition, license royalties earned from Tinuum Group ceased as of December 31, 2021.
Principles of Consolidation
The Consolidated Financial Statements include accounts of wholly-owned subsidiaries and variable interest entities ("VIEs") in which the Company is the primary beneficiary. 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 are included in the Equity method investments line item in the Consolidated Balance Sheets. As of December 31, 2021, the Company holds equity interests of 42.5% and 50.0% in Tinuum Group and Tinuum Services, LLC ("Tinuum Services"), respectively.
Cash, cash equivalents and restricted cash
Cash and cash equivalents include bank deposits and other highly liquid investments purchased with an original maturity of three months or less.
Restricted cash primarily consists of a surety bond indemnification agreement (the "Surety Agreement") associated with reclamation of a mine. As of December 31, 2020, restricted cash also consisted of minimum cash balance requirements under a line of credit agreement (the "Line of Credit") with a bank (the "Lender"). Restricted cash is classified consistent with the underlying obligation.
Receivables, net
Receivables, net are recorded at net realizable value, which includes an appropriate allowance for estimated uncollectible amounts to reflect any loss anticipated on the receivables balances. Increases and decreases in the allowance for doubtful accounts are established based upon changes in the credit quality of receivables and are included as a component of the General and administrative line item in the Consolidated Statements of Operations. The allowance for doubtful accounts is based on historical experience, general economic conditions and the credit quality of specific accounts.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Inventories, net
Inventories, net are stated at the lower of average cost or net realizable value and consist principally of raw materials and finished goods related to the Company's AC and chemical product offerings. The cost of inventory is determined using the average cost method.
Inventories are periodically reviewed for both potential obsolescence and potential declines in anticipated selling prices. In this review, the Company makes assumptions about the future demand for and market value of the inventory and estimates the amount of any obsolete, unmarketable, slow moving or overvalued inventory. If applicable, the Company will write down the value of inventories by an amount equal to the difference between the cost of the inventory and its estimated net realizable value.
Additional details regarding Inventory balances are included in Note 9.
Intangible Assets
Intangible assets consist of patents, licensed technology, customer relationships, developed technologies and trade names.
The Company has developed technologies resulting in patents being granted by the U.S. Patent and Trademark Office or other regulatory offices. Legal costs associated with securing the patent are capitalized and amortized over the legal or useful life beginning on the patent filing date.
The following table details the components of the Company's intangible assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, |
| | | | 2021 | | 2020 |
| (in thousands, except years) | | Weighted Average Useful Life (in years) | | Cost | | Net of Accumulated Amortization | | Cost(1) | | Net of Accumulated Amortization |
| Customer relationships | | 5 | | $ | 835 | | | $ | 470 | | | $ | 835 | | | $ | 713 | |
| Patents | | 15 | | 1,454 | | | 426 | | | 1,306 | | | 733 | |
| Developed technology | | 5 | | 607 | | | 341 | | | 607 | | | 518 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total | | | | $ | 2,896 | | | $ | 1,237 | | | $ | 2,748 | | | $ | 1,964 | |
(1) As of December 31, 2020, cost was inclusive of the write down of intangibles to fair value based on the impairment charge taken during the year ended December 31, 2020 and further described in Note 6.
Included in the Consolidated Statements of Operations is amortization expense related to intangible assets of $0.9 million and $1.0 million for the years ended December 31, 2021 and 2020, respectively. The estimated future amortization expense for existing intangible assets as of December 31, 2021 is expected to be $0.2 million for each of the five succeeding fiscal years.
Investments
The investments in entities in which the Company does not have a controlling interest (financial or operating), but where it has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method of accounting. Whether or not the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including, among others, representation on the investee company’s board of directors and the Company's ownership level. Under the equity method of accounting, an investee company’s financial statements are not consolidated in the Company’s Consolidated Balance Sheets and Consolidated Statements of Operations; however, the Company’s share of the earnings or losses of the investee company is reported in the "Earnings from equity method investments" line item in the Consolidated Statements of Operations, and the Company’s carrying value in an equity method investee company is reported in the "Equity method investments"line in the Consolidated Balance Sheets.
When the Company receives distributions in excess of the carrying value of the investment and has not guaranteed any obligations of the investee and/or is not required to provide additional funding to the investee, the Company recognizes such excess distributions as equity method earnings in the period the distributions occur. When the investee subsequently reports income, the Company does not record its share of such income until it equals the amount of distributions in excess of carrying value that were previously recognized in income. During the years ended December 31, 2021 and 2020, the Company had no guarantees or requirements to provide additional funding to investees.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Additionally, when the Company's carrying value in an equity method investment is zero, and the Company has not guaranteed any obligations of the investee and/or is not required to provide additional funding to the investee, the Company will not recognize its share of any reported losses by the investee until future earnings are generated to offset previously unrecognized losses. As a result, equity income or loss reported in the Company's Consolidated Statements of Operations for certain equity method investees may differ from a mathematical calculation of net income or loss attributable to its equity interest based on the percentage ownership of the Company's equity interest and the net income or loss attributable to equity owners as shown in the investee company's statements of operations. Likewise, distributions from equity method investees are reported in the Consolidated Statements of Cash Flows as "return on investment" in Operating cash flows until such time as the carrying value in an equity method investee company is reduced to zero; thereafter, such distributions are reported as "distributions in excess of cumulative earnings" in Investing cash flows. See Note 8 for additional information regarding the Company's equity method investments.
Investments in partially-owned subsidiaries for which the Company has less-than-20% ownership are accounted for in accordance with accounting guidance applicable to equity investments that do not qualify for the equity method of accounting. The Company evaluates these types of investments for changes in fair value and, if there is change, recognizes the change in the Consolidated Statement of Operations. If no such events or changes in circumstances have occurred related to these types of investments, the fair value is estimated only if practicable to do so.
Property, Plant and Equipment
Property, plant and equipment are 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 31 years). Maintenance and repairs that do not extend the useful life of the respective asset are charged to Operating expenses as incurred. When assets are retired, or otherwise disposed of, the property accounts are relieved of costs and accumulated depreciation and any resulting gain or loss is credited or charged to income. The Company performs an evaluation of the recoverability of the carrying value of property, plant and equipment to determine if facts and circumstances indicate that their carrying values may be impaired. Impairment charges are recorded to "Operating expenses" in the Consolidated Statements of Operations. Amortization of finance leased assets is included in depreciation expense and is calculated using the straight-line method over the term of the lease.
Leases
The Company records a right of use ("ROU") asset and related liability under a contract or part of a contract when it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of an identified asset occurs when an entity has both the right to obtain substantially all of the economic benefits from the use of an identified asset and the right to direct the use of that identified asset. The determination of whether a contract contains a lease may require significant assumptions and judgments.
For all classes of underlying assets, the Company does not separate nonlease components from lease components and accounts for each separate lease component and the nonlease components associated with that lease component as a single lease component. The Company records lease liabilities and related ROU assets for all leases that have a term of greater than one year. For short-term leases (leases with terms of less than one year), the Company expenses lease payments on a straight-line basis over the lease term.
Variable lease payments represent payments made by a lessee for the right to use an underlying asset that vary because of changes in facts or circumstances occurring after the commencement date of a lease other than the passage of time. Variable lease payments that are based on an index or rate, calculated by using the index or rate that exists on the lease commencement date, are included in the measurement of a lease liability. Certain of the Company’s operating leases for office facilities contain variable lease components that are not based on an index or rate, and the Company recognizes these payments as lease expense in the period in which the obligation for those payments is incurred.
The Company calculates lease liabilities based on the present value of lease payments discounted by the rate implicit in the lease or, if not readily determinable, the Company’s incremental borrowing rate.
Finance lease liabilities are subsequently measured by increasing the carrying amount to reflect interest expense on the finance lease liability and reducing the carrying amount of the lease liability to reflect lease payments made during the period. Interest on finance lease liabilities is determined in each period during the lease term as the amount that produces a constant periodic discount rate on the remaining balance of the lease liability. ROU assets under finance leases are amortized over the remaining
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
lease term on a straight-line basis. Interest expense related to finance lease liabilities and amortization of ROU assets under finance leases are included in the "Interest expense" and "Depreciation, amortization, depletion and accretion" line item, respectively, in the Consolidated Statements of Operations.
Operating lease liabilities are subsequently measured at the present value of the lease payments not yet paid, discounted using the discount rate for the lease established at the inception date of the lease. ROU assets under operating leases are subsequently measured at the amounts of the related operating lease liability, adjusted for, as applicable, prepaid or accrued lease payments, the remaining balance of any lease incentives received, unamortized initial direct costs and impairment. Lease expense from operating leases is recognized as a single lease cost over the remaining lease term on a straight-line basis. Variable lease payments not included in operating lease liabilities are recognized as expense in the period in which the obligation for those payments is incurred. Lease expense from operating leases is included in the "General and administrative" and "Consumables Cost of revenues, excluding depreciation and amortization" line items in the Consolidated Statements of Operations.
Other Assets
Mine Development Costs
Mine development costs are related to the Five Forks Mine and are stated at cost less accumulated depletion and include acquisition costs, the cost of other development work and mitigation costs. Costs are amortized over the estimated life of the related mine reserves, which as of December 31, 2021 is estimated to be 13 years. The Company performs an evaluation of the recoverability of the carrying value of mine development costs to determine if facts and circumstances indicate that their carrying value may be impaired and if any adjustment is warranted. Mine development costs are reported in the "Other long-term assets, net" line item in the Consolidated Balance Sheets.
Spare Parts
Spare parts include critical spares required to support plant operations. Parts and supply costs are determined using the lower of cost or estimated replacement cost. Parts are recorded as maintenance expenses in the period in which they are consumed. Spare parts are reported in the "Other long-term assets, net" line item in the Consolidated Balance Sheets.
Revenue Recognition
The Company recognizes revenue from a contract with a customer when a performance obligation under the terms of a contract with a customer is satisfied, which is when the customer controls the promised goods or services that are transferred in satisfaction of the performance obligation. Revenue is measured as the amount of consideration that is expected to be received in exchange for transferring goods or providing services, and the transaction price is generally fixed and generally does not contain variable or noncash consideration. In addition, the Company’s contracts with customers generally do not contain customer refund or return provisions or other similar obligations. Transfer of control and satisfaction of performance obligations are further discussed in each of the revenue components listed below.
The Company uses estimates and judgments in determining the nature and timing of satisfaction of performance obligations, the standalone selling price ("SSP") of performance obligations and the allocation of the transaction price to multiple performance obligations, if any.
The Company’s revenue components are Consumables sales and License royalties.
Consumables
The Company is principally engaged in the sale of consumable products that utilize AC and chemical based technologies to a broad range of customers, including coal-fired utilities, water treatment plants, and other diverse markets. Our proprietary technologies and associated product offerings provide purification solutions to enable our customers to reduce certain contaminants and pollutants and thus maximize utilization levels and improve operating efficiencies to meet the challenges of existing and potential regulations.
The sale of consumable products is comprised of a single performance obligation and is recognized at the point in time when control transfers and our obligation has been fulfilled, which is when the product is shipped or delivered to a customer. Performance obligations for the sale of consumable products do not extend beyond one year.
The Company performs shipping and handling activities through the use of third-party shippers and such activities occur prior to a customer obtaining control of goods. As such, the Company accounts for these these activities as fulfillment activities and not as separate performance obligations. Shipping and handling costs incurred by the Company in delivering products to
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
customers are billed to customers and are included in the transaction price and included in the "Revenues - Consumables" line item in the Consolidated Statements of Operations. Costs for shipping and handling activities incurred by the Company are included in the "Consumables Cost of revenues, excluding depreciation and amortization" line item in the Consolidated Statements of Operations.
License royalties, related party
The Company generates revenues from royalties ("M-45 Royalties") earned under a licensing arrangement ("M-45 License") of its M-45TM and M-45-PCTM emissions control technologies ("M-45 Technology") between the Company and Tinuum Group. The Company recognizes M-45 Royalties at a point in time based on the use of the M-45 Technology at certain RC facilities or through Tinuum Group’s use of licensed technology for rates in excess of amounts allowed for RC application. The amount of M-45 Royalties recognized is generally based on a percentage of pre-tax margins (as defined in the M-45 License) of the RC facilities using the M-45 Technology.
Practical Expedients and Exemptions
The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Sales and other taxes that are collected concurrently with revenue-producing activities are excluded from revenue.
The Company generally expenses sales commissions when incurred because the amortization period of the asset that the Company would have recognized is one year or less. These costs are recorded in sales and marketing expenses in the "General and administrative" line item in the Consolidated Statements of Operations.
Cost of Revenues
Cost of revenues includes all labor, fringe benefits, subcontract labor, additive and coal costs, materials, equipment, supplies, travel costs and any other costs and expenses directly related to the Company’s production of revenues.
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 revenues.
Legal and Professional
Legal and professional costs include external legal, audit and consulting expenses.
General and Administrative
General and administrative costs include director fees and expenses, rent, insurance and occupancy-related expenses, bad debt expense, impairments and other general costs of conducting business.
Research and development costs are charged to expense in the period incurred and are reported in the "General and administrative" line item in the Consolidated Statements of Operations. For the years ended December 31, 2021 and 2020, the Company recorded research and development costs of $0.4 million and $1.0 million, respectively.
Asset Retirement Obligations
Asset retirement obligations ("ARO") are comprised of mine reclamation activities required under operating agreements related to the Five Forks Mine and the Marshall Mine (as defined in Note 4) and are recognized when incurred and recorded as liabilities at fair value. An ARO is accreted over time through periodic charges to earnings. Accounting for reclamation and remediation obligations requires the Company to make estimates of future costs unique to a specific mining operation that the Company expects to incur to complete the reclamation and remediation work required to comply with existing laws and regulations. AROs are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Five Forks Mine
For the Five Forks Mine ARO, a corresponding ARO asset is depreciated over its estimated life. Reclamation costs related to the Five Forks Mine are allocated to expense over the life of the related mine assets, and are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. Remediation costs for the Five Forks Mine are accrued based on management’s best estimate at the end of each period of the costs expected to be incurred. Such cost estimates may include ongoing care, maintenance and monitoring costs. Reclamation obligations are based on the timing of estimated spending for an existing environmental disturbance. On an annual basis, unless otherwise deemed necessary, the Company reviews its estimates and assumptions of the Five Forks Mine ARO.
The Company’s mining activities at the Five Forks Mine are subject to various domestic laws and regulations governing the protection of the environment. The Company conducts its mining activities to protect public health and the environment and believes its operations are in compliance with applicable laws and regulations in all material respects. The Company has made, and expects to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures. Estimated future reclamation costs are based principally on current legal and regulatory requirements.
Marshall Mine (refer to Note 4)
Reclamation costs related to the Marshall Mine are largely based on a capped fee structure based on the initial estimate of the total costs of reclamation, which provides for certain contingencies that could increase or decrease the reclamation fee based on the reclamation agreement executed between the Company and the Marshall Mine operator. The timing of payments and actual reclamation costs may change and the Company accounts for these changes on a quarterly basis.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred income taxes are provided for temporary differences between the financial reporting basis and tax basis of the Company's assets and liabilities and are tax-effected using enacted tax rates in effect for the year in which the temporary 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 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.
Based on its ownership in Tinuum Group, the Company records its pro-rata share for interest expense resulting from the sale of, or lease income generated from, RC facilities that are treated as installment sales for federal income purposes, pursuant to IRS section 453A ("Section 453A"). Section 453A requires taxpayers using the installment method to pay an interest charge ("453A interest") on the portion of the tax liability that is deferred under the installment method. The Company recognizes 453A interest and other interest and penalties related to unrecognized tax benefits in the "Interest expense" line item in the Consolidated Statements of Operations.
Stock-Based Compensation
Stock-based compensation expense is measured at the grant date based on the estimated fair value of the stock-based award and is generally expensed on a straight-line basis over the requisite service period and/or performance period of the award. Forfeitures are recognized when incurred. Stock-based compensation expense related to manufacturing employees and administrative employees is included in the "Consumables Cost of revenues, exclusive of depreciation and amortization" and "Payroll and benefits" line items, respectively, in the Consolidated Statements of Operations. Stock-based compensation expense related to non-employee directors and consultants is included in the "General and administrative" line item in the Consolidated Statements of Operations.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Dividends
When a sufficient amount of available earnings exists at the time of a dividend declaration, dividends are charged to Retained earnings when declared. If a sufficient amount of available earnings is not available, dividends declared are charged as a reduction to Additional paid-in capital.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed using the weighted-average number of shares of common stock outstanding during the reporting period. Diluted earnings per share is computed in a manner consistent with that of basic earnings per share, while considering other potentially dilutive securities. The treasury stock method is used to determine the dilutive effect of potentially dilutive securities.
Potentially dilutive securities consist of restricted stock awards ("RSA's"), as well as outstanding options to purchase common stock ("Stock Options") and contingent performance stock units ("PSU's") (collectively, "Potential dilutive shares"). The dilutive effect, if any, for non-participating RSA's, Stock Options and PSU's is determined using the greater of dilution as calculated under the treasury stock method or the two-class method. Potential dilutive shares are excluded from diluted earnings (loss) per share when their effect is anti-dilutive. When there is a net loss for a period, all Potential dilutive shares are anti-dilutive and are excluded from the calculation of diluted loss per share for that period.
Each PSU represents a contingent right to receive shares of the Company’s common stock, and the number of shares may range from zero to two times the number of PSU's granted on the award date depending upon the price performance of the Company's common stock as measured against a general index and a specific peer group index over requisite performance periods. The number of Potential dilutive shares related to PSU's is based on the number of shares of the Company's common stock, if any, that would be issuable at the end of the respective reporting period, assuming that the end of the reporting period is the end of the contingency period applicable to such PSU's. See Note 16 for additional information related to PSU's.
The following table sets forth the calculations of basic and diluted earnings per common share:
| | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | |
| (in thousands, except per share amounts) | | 2021 | | 2020 | | |
| Net income (loss) | | $ | 60,401 | | | $ | (20,302) | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Basic weighted-average number of common shares outstanding | | 18,258 | | | 18,044 | | | |
| Add: dilutive effect of equity instruments | | 203 | | | — | | | |
| | | | | | |
| | | | | | |
| Diluted weighted-average shares outstanding | | 18,461 | | | 18,044 | | | |
| Earnings (loss) per share - basic | | $ | 3.31 | | | $ | (1.12) | | | |
| Earnings (loss) per share - diluted | | $ | 3.27 | | | $ | (1.12) | | | |
For the years ended December 31, 2021 and 2020, zero and 0.6 million weighted-average equity instruments, respectively, were outstanding but were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States ("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. Significant financial statement components in which the Company makes assumptions include
•business combinations, including asset acquisitions;
•the carrying value of its long-lived assets;
•AROs; and
•income taxes, including the valuation allowance for deferred tax assets and assessment of uncertain tax positions.
Due to the coronavirus ("COVID-19") pandemic, there has been uncertainty and disruption in the global economy and financial markets. Additionally, due to COVID-19, overall power generation and coal-fired power demand may change, which could also
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
have a material adverse effect on the Company. The Company is not aware of any specific event or circumstance due to COVID-19 that would require an update to its estimates or judgments or a revision of the carrying values of its assets or liabilities through the date of this Report. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions
Risks and Uncertainties
As of December 31, 2021, all RC facilities had ceased operations and Tinuum is expected to complete reclamation activities, as required, during 2022. The loss of earnings from both Tinuum Group and Tinuum Services will have a significant adverse impact on our financial position, results of operations and cash flows beginning in 2022 and beyond.
Reclassifications
Certain balances have been reclassified from prior years to conform to the current year presentation. Such reclassifications had no effect on the Company’s results of operations or financial position in any of the periods presented.
New Accounting Guidance
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 GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for "smaller reporting companies" (as defined by the Securities and Exchange Commission) for fiscal years beginning after December 15, 2022, including interim periods within those years, and must be adopted under a modified retrospective method approach. Entities may adopt ASU 2016-13 earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those years. The Company intends to adopt ASU 2016-13 effective January 1, 2023 and is currently evaluating the provisions of this standard 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 - Restatement
Subsequent to the filing of its Quarterly Report for the quarterly period ended September 30, 2021, the Company reassessed its presentation of shipping and handling costs billed to its customers in its Consolidated Statement of Operations for the year ended December 31, 2021. Historically, the Company has accounted for shipping and handling costs billed to customers as a reduction of consumables cost of revenues, as presented in the Consumables cost of revenues, exclusive of depreciation and amortization line item in the Consolidated Statements of Operations. Under Accounting Standards Codification 606 - Revenue from Contracts with Customers, shipping and handling costs billed to customers are considered a component of the total transaction price in a contract with a customer and should be presented as revenues.
The Company concluded that its historical presentation of shipping and handling costs billed to customers as a component of cost of revenues rather than as a component of revenues was incorrect and that the Company's presentation of both the "Revenues - Consumables" and "Consumables cost of revenues, exclusive of depreciation and amortization" line items for the year ended December 31, 2020 should be restated. The impact of this error resulted in an understatement of both the "Revenues - Consumables" and "Consumables cost of revenues, exclusive of depreciation and amortization" line items in the Consolidated Statements of Operations for the year ended December 31, 2020, but had no impact to operating income (loss), income (loss) before income taxes, net income (loss) or earnings (loss) per share for these years. Further, there was no impact of this error to the Consolidated Balance Sheets, Consolidated Statements of Stockholders' Equity or Consolidated Statements of Cash Flow as of and for the year ended December 31, 2020.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A summary of the impact of this restatement for the year ended December 31, 2020 is included in the table below. A summary of the impact of this restatement for the quarterly periods ended March 31, 2021 and 2020: June 30, 2021 and 2020; September 30, 2021 and 2020 and December 31, 2020 are contained in Note 24.
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2020 |
| (in thousands, except per share data) | | As previously reported | | Increase/(Decrease) | | As Restated |
| Revenues: | | | | | | |
| Consumables | | $ | 48,122 | | | $ | 5,786 | | | $ | 53,908 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Total revenues | | 61,577 | | | 5,786 | | | 67,363 | |
| | | | | | |
| Consumables cost of revenues, exclusive of depreciation and amortization | | $ | 45,176 | | | $ | 5,786 | | | 50,962 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Total operating expenses | | 102,558 | | | 5,786 | | | 108,344 | |
| Operating loss | | $ | (40,981) | | | $ | — | | | $ | (40,981) | |
Note 3 - Customer Supply Agreement
On September 30, 2020, the Company and Cabot Norit Americas, Inc., ("Cabot") entered into a supply agreement (the "Supply Agreement") pursuant to which the Company agreed to sell and deliver to Cabot, and Cabot agreed to purchase and accept from the Company certain lignite-based AC products ("Furnace Products"). The term of the Supply Agreement is for 15 years with 10-year renewal terms that are automatic unless either party provides three years prior notice of intention not to renew before the end of any term.
In addition to the sale by the Company and purchase by Cabot of Furnace Products, the Company and Cabot have agreed to additional terms whereby Cabot reimburses the Company for certain capital expenditures incurred by the Company that are necessary to manufacture the Furnace Products. Reimbursements are comprised of revenues earned from capital expenditures incurred that will benefit both the Company and Cabot (referred to as "Shared Capital") and revenues earned from capital expenditures incurred that will benefit Cabot exclusively (referred to as "Specific Capital"). In the event that Cabot ceases to make purchases under the Supply Agreement, Cabot is obligated to pay the balance of any outstanding payments for Specific Capital.
Note 4 - Acquisition of Marshall Mine
Concurrently with the execution of the Supply Agreement, on September 30, 2020, the Company entered into an agreement to purchase (the "Mine Purchase Agreement") from Cabot 100% of the membership interests in Marshall Mine, LLC (the "Marshall Mine Acquisition") for a nominal purchase price. Marshall Mine, LLC owns a lignite mine located outside of Marshall, Texas (the "Marshall Mine"). The Company independently determined to immediately commence activities to shutter the Marshall Mine and to incur the associated reclamation costs.
In conjunction with the execution of the Supply Agreement and the Mine Purchase Agreement, on September 30, 2020, the Company entered into a reclamation contract (the "Reclamation Contract") with a third party that provides a capped cost, subject to certain contingencies, in the initial amount of approximately $19.7 million plus an obligation to pay certain direct costs of approximately $3.6 million (collectively, the "Reclamation Costs") over the estimated reclamation period of 10 years (the "Reclamation Period"). Under the terms of the Supply Agreement, Cabot is obligated to reimburse the Company for $10.2 million of the Reclamation Costs (the "Reclamation Reimbursement"), payments of which are due semi-annually over the estimated reclamation period and are inclusive of interest. In the event that Cabot has a change in control as described in the Supply Agreement, all outstanding balances of the Reclamation Reimbursement shall be due and payable in full. See further discussion of the Reclamation Costs and Reclamation Reimbursement in Note 5.
As the owner of the Marshall Mine, the Company is required to post a surety bond to ensure performance of its reclamation activities and entered into the Surety Agreement on September 30, 2020. As of December 31, 2021, the Company had a $16.6 million surety bond (the "Surety Bond") posted with the local regulatory agency. The Surety Bond will remain in place until the Marshall Mine is fully shuttered, and it may be reduced in amount from time to time as the Company progresses with its reclamation activities. As of December 31, 2021 and 2020, for the obligations due under the Reclamation Contract, the
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Company posted cash collateral of $10.0 million and $5.0 million, respectively, which is reported as "Restricted Cash, long-term" in the Consolidated Balance Sheets.
The Marshall Mine Acquisition included the acquisition of certain assets that will be consumed and the assumption of certain liabilities that will be paid in reclamation of the Marshall Mine, in addition to the incurrence of an obligation for the Reclamation Costs. The Company determined that the Marshall Mine Acquisition should be accounted for as an asset acquisition as it did not meet the definition of a business. The Company's conclusion was based on the Marshall Mine not having any economic reserves, as the Company commenced full reclamation as of September 30, 2020, and therefore lacked inputs.
As the Marshall Mine Acquisition represented a transaction with a customer of net assets acquired and liabilities assumed from Cabot, the Company accounted for the excess of the fair value of liabilities assumed over assets acquired as upfront consideration transferred to a customer, Cabot (the "Upfront Customer Consideration"). The amount of the Upfront Customer Consideration was recognized net of an additional asset recognized in the Marshall Mine Acquisition, which was comprised of a receivable from Cabot (the "Cabot Receivable") for the Reclamation Reimbursements. The Cabot Receivable is further discussed in Note 5.
The total Upfront Customer Consideration is amortized on a straight-line basis as a reduction to revenue over the expected 15-year contractual period of the Supply Agreement.
The Company paid a nominal cash amount to Cabot in the form of cash for the Marshall Mine and also assumed liabilities whose fair value exceeded the fair value of assets acquired. The net assets acquired and liabilities assumed and the additional assets recorded for the Marshal Mine Acquisition as of September 30, 2020 are shown in the table below. Subsequent to this date, the Company completed additional analysis and adjustments were made as noted in the table below:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | As Originally Reported | | Adjustments | | As Adjusted |
| Assets acquired: | | | | | | |
| Receivables | | $ | — | | | $ | 513 | | | $ | 513 | |
| Property, plant and equipment | | 3,863 | | | — | | | 3,863 | |
| Spare parts | | 100 | | | — | | | 100 | |
| | | | | | |
| Liabilities assumed: | | | | | | |
| Accounts payable and accrued expenses | | (673) | | | 160 | | | (513) | |
| Asset retirement obligation | | (21,328) | | | — | | | (21,328) | |
| Net assets acquired and liabilities assumed from Marshall Mine acquisition | | (18,038) | | | 673 | | | (17,365) | |
| Cabot receivable | | 9,749 | | | — | | | 9,749 | |
| Upfront Customer Consideration | | $ | 8,289 | | | $ | (673) | | | $ | 7,616 | |
The Company also evaluated the Marshall Mine entity as a VIE, and determined that because of its structure and closing-stage status, it does not have sufficient equity at-risk and would not likely be able to obtain additional subordinated financial support to complete its closing stage obligations. The Company purchased all of the membership interests in Marshall Mine, LLC and determined that it met the definition of a VIE and that the Company is the primary beneficiary. Therefore, Marshall Mine, LLC’s assets and liabilities are consolidated.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following tables summarize the assets and liabilities of Marshall Mine and their classification in the Company's Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, | | |
| (in thousands) | | 2021 | | 2020 | | Balance sheet component |
| Cash | | $ | 914 | | | $ | 495 | | | Current assets |
| Cabot receivable, short-term | | 2,056 | | | 921 | | | Current assets |
| Property and equipment, net | | 1,968 | | | 3,254 | | | Non-current assets |
| Cabot receivable, long-term | | 6,846 | | | 8,852 | | | Non-current assets |
| Restricted cash | | 10,027 | | | 5,000 | | | Non-current assets |
| Upfront customer consideration | | 6,982 | | | 7,490 | | | Non-current assets |
| Other | | — | | | 50 | | | Non-current assets |
| | $ | 28,793 | | | $ | 26,062 | | | |
| | | | | | |
| Accounts payable and accrued liabilities | | $ | 1,065 | | | $ | 407 | | | Current liabilities |
| Asset retirement obligation, short-term | | 1,775 | | | 9,370 | | | Current liabilities |
| Asset retirement obligation, long-term | | 4,546 | | | 8,760 | | | Non-current liabilities |
| | $ | 7,386 | | | $ | 18,537 | | | |
Note 5 - Marshall Mine Asset Retirement Obligation and related Cabot Receivable
Asset Retirement Obligation
In connection with the Supply Agreement, Mine Purchase Agreement and the Reclamation Contract, the Company assumed the obligation to reclaim and restore the land associated with the Marshall Mine. The Company determined that the Marshall Mine did not have any remaining economic reserves. As of September 30, 2020, the Company recorded an ARO (the "Marshall Mine ARO") as its best estimate for the total Reclamation Costs of $21.3 million as measured at the estimated future cash flows of $23.7 million, inclusive of contingency costs, discounted to their present value using a discount rate based on a credit-adjusted, risk-free rate of 7.0%.
As of June 30, 2021 and December 31, 2021, the Company revised its estimate of future obligations owed for the reclamation of the Marshall Mine primarily based on scope reductions related to future reclamation requirements. As a result, the Company reduced the Marshall Mine ARO by $1.9 million as of June 30, 2021 and $0.8 million as of December 31, 2021 and recorded a corresponding gain on change in estimate of $2.7 million for the year ended December 31, 2021. This is included as "Gain on change in estimate, asset retirement obligation" in the Consolidated Statement of Operations for the year ended December 31, 2021.
Cabot Receivable
As previously disclosed, under the terms of the related Supply Agreement, Cabot is obligated to pay the Reclamation Reimbursement to the Company for $10.2 million of the Reclamation Costs, inclusive of interest. As of September 30, 2020, the Company recorded the Cabot Receivable for the Reclamation Reimbursement at its estimated fair value, which was measured using a discounted cash flows valuation model that considered the estimated credit risk associated with the obligor’s (Cabot’s) future performance. Interest is accreted on a monthly basis and recognized as interest income. There were no significant related fees or costs associated with the Cabot Receivable.
As of September 30, 2020, the Company recorded the Cabot Receivable at its estimated fair value of $9.7 million, reflecting a discount rate of approximately 1.5% or $0.5 million. Allowances for this asset are assessed periodically, and no allowance was deemed necessary as of December 31, 2021 or 2020.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 6 - Impairment
As part of its periodic review of the carrying value of long-lived assets, the Company assessed its long-lived assets for potential impairment. In assessing impairment of its APT segment's long-lived asset groups as of June 30, 2021, the Company considered factors such as the significant decline in both the APT segment's trailing twelve months revenues and current and future years’ forecasted revenues. These factors were largely due to the significant drop in coal-fired power dispatch amid historically low prices of alternative power generation sources, such as natural gas, leading to an increase in natural gas usage as well as other competing energy sources.
As of June 30, 2020, the Company completed an undiscounted cash flow analysis of its APT segment's long-lived assets (the "Asset Group"), which were comprised of its manufacturing plant and related assets and its lignite mine assets. The estimated undiscounted cash flows from the Asset Group was $54.7 million, which was less than the carrying value of the Asset Group of $58.3 million. Accordingly, the Company completed an assessment of the Asset Group’s fair value and estimated the fair value of the Asset Group at $32.2 million. This resulted in an impairment and write-down of the Asset Group (the "Impairment Charge") of $26.1 million as of June 30, 2020. The Impairment Charge is reflected as "Impairment of long-lived assets" in the Consolidated Statement of Operations for the year ended December 31, 2020, and was allocated to the APT segment.
The following table summarizes the allocation to the Asset Group of the Impairment Charge of $26.1 million recorded as of June 30, 2020:
| | | | | | | | |
| (in thousands) | | |
| Property, plant and equipment, net | | $ | 18,986 | |
| Intangible assets, net | | 1,445 | |
| Other long-term assets, net | | 5,672 | |
| | |
| Total impairment | | $ | 26,103 | |
The Company engaged an independent third party to perform the valuation of the Asset Group in order to determine the estimated fair value of the Asset Group. This valuation was based on the use of several established valuation models including an expected future discounted cash flow model using Level 3 inputs.
Note 7 - COVID-19
In March 2020, the federal government passed the Coronavirus Aid, Relief, and Security Act (the "CARES Act"), which
provided among other things the creation of the Paycheck Protection Plan ("PPP"), which was sponsored and administered by the U.S. Small Business Administration ("SBA"). On April 20, 2020, the Company executed a loan agreement (the "PPP Loan") under the PPP, evidenced by a promissory note, with BOK, NA dba Bank of Oklahoma ("BOK"), providing for $3.3 million in proceeds, which was funded to the Company on April 21, 2020. The PPP Loan was scheduled to mature on April 21, 2022, unless forgiven subject to terms and conditions established by the SBA. The Company initially recorded the PPP Loan as a debt obligation and accrued interest over its term.
On July 27, 2021, the Company received formal notification in the form of a letter dated July 19, 2021 from BOK that the SBA
approved the Company’s PPP Loan forgiveness application for the PPP Loan in the amount of $3.3 million (including accrued
interest). For the year ended December 31, 2021, the Company recorded a gain on extinguishment of the PPP Loan in the amount of $3.3 million in the Consolidated Statement of Operations, which is included as a component of "Other income (expense)."
The CARES Act also provided the deferral of payroll tax payments for all payroll taxes incurred through December 31, 2020. The Company elected to defer payments of payroll taxes for the periods allowed under the CARES Act in the amount of $0.4 million and paid $0.2 million during the fourth quarter of 2021, with the balance due no later than December 31, 2022.
Note 8 - Equity Method Investments
Tinuum Group, LLC
As of December 31, 2021 and 2020, 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
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Refined Coal, LLC ("NexGen") and GSFS Investments I Corp. ("GSFS"), an affiliate of The Goldman Sachs Group, Inc. ("GS"), own the remaining 42.5% and 15.0%, respectively of Tinuum Group. GSFS' ownership interest is in the form of Class B units that do not have voting rights but provide certain preferences over ADA and NexGen as to liquidation and profit distribution.
The Company determined that Tinuum Group is a VIE, however, it concluded that it was not the primary beneficiary and therefore did not consolidate Tinuum Group, and accounted for it under the equity method of accounting. The Company's conclusion that it was not the primary beneficiary was based on the Company's and NexGen's shared power of Tinuum Group.
The following tables summarize the assets, liabilities and results of operations of Tinuum Group:
| | | | | | | | | | | | | | |
| | As of December 31, |
| (in thousands) | | 2021 | | 2020 |
| Current assets | | $ | 39,387 | | | $ | 142,440 | |
| Non-current assets | | $ | 220 | | | $ | 28,649 | |
| Current liabilities | | $ | 15,558 | | | $ | 44,278 | |
| Non-current liabilities | | $ | — | | | $ | 5,186 | |
| | | | |
| Members equity attributable to Class A members | | $ | 8,890 | | | $ | 59,221 | |
| Member equity attributable to Class B members | | $ | 9,887 | | | $ | 18,769 | |
| Noncontrolling interests | | $ | 5,272 | | | $ | 43,635 | |
| | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | |
| (in thousands) | | 2021 | | 2020 | | |
| Gross profit | | $ | 6,995 | | | $ | 6,649 | | | |
| Operating, selling, general and administrative expenses | | 49,414 | | | 58,008 | | | |
| Loss from operations | | (42,419) | | | (51,359) | | | |
| Other income | | 9,726 | | | 17,260 | | | |
| | | | | | |
| Loss attributable to noncontrolling interest | | 126,948 | | | 91,501 | | | |
| Net income available to Class A and B members | | $ | 94,255 | | | $ | 57,402 | | | |
| ADES equity earnings from Tinuum Group | | $ | 61,837 | | | $ | 24,396 | | | |
For the year ended December 31, 2021, the Company recognized earnings from Tinuum Group's net income available to members that was different from its pro-rata share of Tinuum Group's net income available to members, as cash distributions for the year ended December 31, 2021 exceeded the carrying value of the Tinuum Group equity investment. For the year ended December 31, 2020, the Company recognized its pro-rata share of Tinuum Group's net income available to its members.
The carrying value of the Company's investment in Tinuum Group is zero as long as the cumulative amount of distributions received from Tinuum Group exceeds the Company's cumulative pro-rata share of Tinuum Group's net income available to Class A members. For periods during which the ending balance of the Company's investment in Tinuum Group is zero, the Company only recognizes equity earnings from Tinuum Group to the extent that cash distributions are received from Tinuum Group during the period. For periods during which the ending balance of the Company's investment is greater than zero (e.g., when the cumulative earnings in Tinuum Group exceeds cumulative cash distributions received), the Company recognizes its pro-rata share of Tinuum Group's net income available to Class A members for the period, less any amount necessary to recover the cumulative earnings short-fall balance as of the end of the immediately preceding period. As shown in the table below, the Company’s carrying value in Tinuum Group for the years ended December 31, 2021 and 2020 was zero and $3.4 million, respectively.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Date(s) | | Investment balance | | ADES equity earnings (loss) | | Cash distributions | | Memorandum Account: Cash distributions and equity loss in (excess) of investment balance |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Beginning balance | | 12/31/2019 | | $ | 32,280 | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | |
| ADES proportionate share of net income from Tinuum Group | | 2020 activity | | 24,396 | | | 24,396 | | | — | | | — | |
| | | | | | | | | | |
| Cash distributions from Tinuum Group | | 2020 activity | | (53,289) | | | — | | | 53,289 | | | — | |
| | | | | | | | | | |
| Total investment balance, equity earnings (loss) and cash distributions | | 12/31/2020 | | $ | 3,387 | | | $ | 24,396 | | | $ | 53,289 | | | $ | — | |
| ADES proportionate share of net income from Tinuum Group | | 2021 activity | | 40,058 | | | 40,058 | | | — | | | — | |
| | | | | | | | | | |
| Cash distributions from Tinuum Group | | 2021 activity | | (65,224) | | | — | | | 65,224 | | | — | |
| Adjustment for current year cash distributions in excess of investment balance | | 2021 activity | | 21,779 | | | 21,779 | | | — | | | (21,779) | |
| Total investment balance, equity earnings and cash distributions | | 12/31/2021 | | $ | — | | | $ | 61,837 | | | $ | 65,224 | | | $ | (21,779) | |
Additional information related to Tinuum Group is included in Item 15 - "Exhibits and Financial Statement Schedules" ("Item 15") of this Report.
Tinuum Services, LLC
In 2010, the Company, together with NexGen, formed Tinuum Services for the purpose of operating and maintaining RC facilities, including those RC facilities leased or sold to third parties. The Company determined that Tinuum Services is not a VIE and evaluated Tinuum Services for potential consolidation under the voting interest model. Because the Company does not own greater than 50% of the outstanding voting shares, it has accounted for its investment in Tinuum Services under the equity method of accounting. As of December 31, 2021 and 2020, the Company’s investment in Tinuum Services was $2.4 million and $4.2 million, respectively.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following tables summarize the assets, liabilities and results of operations of Tinuum Services:
| | | | | | | | | | | | | | |
| | | As of December 31, |
| (in thousands) | | 2021 | | 2020 |
| Current assets | | $ | 159,013 | | | $ | 301,670 | |
| Non-current assets | | $ | 19 | | | $ | 45,575 | |
| Current liabilities | | $ | 14,343 | | | $ | 187,097 | |
| Non-current liabilities | | $ | — | | | $ | 6,451 | |
| Equity | | $ | 6,263 | | | $ | 8,483 | |
| Noncontrolling interests | | $ | 138,426 | | | $ | 145,214 | |
| | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | |
| (in thousands) | | 2021 | | 2020 | | |
| Gross loss | | $ | (68,465) | | | $ | (87,723) | | | |
| Operating, selling, general and administrative expenses | | 166,075 | | | 171,095 | | | |
| Loss from operations | | (234,540) | | | (258,818) | | | |
| Other income (expenses) | | 3,830 | | | (1,282) | | | |
| Loss attributable to noncontrolling interest | | 246,094 | | | 273,262 | | | |
| Net income | | $ | 15,384 | | | $ | 13,162 | | | |
| | | | | | |
Included in the Consolidated Statement of Operations of Tinuum Services for the years ended December 31, 2021 and 2020 were losses related to VIE entities that are consolidated within Tinuum Services. These losses do not impact the Company's equity earnings from Tinuum Services as 100% of those losses are attributable to a noncontrolling interest and eliminated in the calculations of Tinuum Services' net income attributable to the Company's interest.
The following table details the carrying value of the Company's respective equity method investments included in the "Equity method investments" line item on the Consolidated Balance Sheets and indicates the Company's maximum exposure to loss:
| | | | | | | | | | | | | | |
| | | As of December 31, |
| (in thousands) | | 2021 | | 2020 |
| Equity method investment in Tinuum Group | | $ | — | | | $ | 3,387 | |
| Equity method investment in Tinuum Services | | 2,391 | | | 4,242 | |
| Equity method investment in other | | — | | | 63 | |
| | | | |
| | | | |
| Total equity method investments | | $ | 2,391 | | | $ | 7,692 | |
The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. As of December 31, 2021, the Company concluded the carrying amount of its investment in Tinuum Services was not fully recoverable due to the remaining expected future cash distributions to be received as Tinuum Services shutters its operations in 2022 as a result of the expiration of the Section 45 tax credit period as of December 31, 2021. As a result, the Company wrote-down its investment in the amount of $0.7 million, which is included in the "Earnings from equity method investments" line item in the Consolidated Statement of Operations for the year ended December 31, 2021.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table details the components of the Company's respective earnings or loss from equity method investments included in the "Earnings from equity method investments" line item in the Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | |
| | Year ended December 31, | | |
| (in thousands) | | 2021 | | 2020 | | |
| Earnings from Tinuum Group | | $ | 61,837 | | | $ | 24,396 | | | |
| Earnings from Tinuum Services | | 6,952 | | | 6,582 | | | |
| Loss from other | | (63) | | | — | | | |
| | | | | | |
| | | | | | |
| Earnings from equity method investments | | $ | 68,726 | | | $ | 30,978 | | | |
The following table details the components of the cash distributions from the Company's respective equity method investments included as a component of cash flows from operating activities in the Consolidated Statements of Cash Flows. Distributions from equity method investees are reported in the Consolidated Statements of Cash Flows as "return on investment" in Operating cash flows until such time as the carrying value in an equity method investee company is reduced to zero; thereafter, such distributions are reported as "distributions in excess of cumulative earnings" as a component of cash flows from investing activities.
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| (in thousands) | | 2021 | | 2020 |
| Distributions from equity method investees, return on investment | | | | |
| Tinuum Group | | $ | 14,142 | | | $ | 53,289 | |
| Tinuum Services | | 8,802 | | | 9,152 | |
| | | | |
| | | | |
| | | | |
| | $ | 22,944 | | | $ | 62,441 | |
| Distributions from equity method investees in excess of cumulative earnings | | | | |
| Tinuum Group | | $ | 51,082 | | | $ | — | |
| | | | |
| | | | |
| | | | |
| | | | |
| | $ | 51,082 | | | $ | — | |
Note 9 - Inventories, net
The following table summarizes the Company's inventories recorded at the lower of average cost or net realizable value as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | |
| | As of December 31, |
| (in thousands) | | 2021 | | 2020 |
| Product inventory | | $ | 4,901 | | | $ | 8,361 | |
| Raw material inventory | | 2,949 | | | 1,521 | |
| | | | |
| | $ | 7,850 | | | $ | 9,882 | |
| | | | |
| | | | |
| | | | |
| | | | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 10 - Property, Plant and Equipment
The cost basis and accumulated depreciation of property, plant and equipment at December 31, 2021 and 2020 are summarized in the table below:
| | | | | | | | | | | | | | | | | | | | |
| | Life in Years | | As of December 31, |
| (in thousands) | | 2021 | | 2020 |
| Land and land improvements | | 0-31 | | $ | 1,225 | | | $ | 891 | |
| Plant and operating equipment | | 2-29 | | 31,266 | | | 25,703 | |
| Furniture and fixtures | | 2-11 | | 1,388 | | | 1,259 | |
| Machinery and equipment | | 2-10 | | 697 | | | 688 | |
| Leasehold improvements | | 2-3 | | 2,089 | | | 2,089 | |
| Construction in progress | | | | 1,190 | | | 2,143 | |
| | | | 37,855 | | | 32,773 | |
| Less accumulated depreciation | | | | (7,684) | | | (3,340) | |
| Total property, plant and equipment, net | | | | $ | 30,171 | | | $ | 29,433 | |
Included in plant and operating equipment as of December 31, 2021 and 2020 is mining equipment financed under various lease facilities, and obligations due under these facilities are included in finance lease obligations in the Consolidated Balance Sheets. The total amount recorded for ROU assets as of December 31, 2021 and 2020 related to finance lease obligations was $1.7 million and $2.4 million, respectively, net of accumulated depreciation of $1.1 million and $0.5 million.
Depreciation expense for the years ended December 31, 2021 and 2020 was $5.5 million and $6.8 million, respectively.
Note 11 - Debt Obligations
| | | | | | | | | | | | | | |
| | Years ended December 31, |
| (in thousands) | | 2021 | | 2020 |
| Finance lease obligations | | $ | 4,163 | | | $ | 5,526 | |
| Senior Term Loan principal, related party | | — | | | 16,000 | |
| Less: net unamortized debt issuance costs | | — | | | (465) | |
| Less: net unamortized debt discount | | — | | | (480) | |
| Senior Term Loan, net | | — | | | 15,055 | |
| PPP Loan | | — | | | 3,305 | |
| | | | |
| Total borrowings | | 4,163 | | | 23,886 | |
| Less: Current maturities | | (1,011) | | | (18,441) | |
| Total long-term borrowings | | $ | 3,152 | | | $ | 5,445 | |
Senior Term Loan
On December 7, 2018, the Company, and ADA-ES, Inc. ("ADA"), a wholly-owned subsidiary, and certain other subsidiaries of the Company as guarantors, The Bank of New York Mellon as administrative agent, and Apollo Credit Strategies Master Fund Ltd and Apollo A-N Credit Fund (Delaware) L.P., affiliates of a beneficial owner of greater than five percent of the Company's common stock and a related party, entered into the Senior Term Loan in the amount of $70.0 million, less original issue discount of $2.1 million. The Company also paid debt issuance costs of $2.0 million related to the Senior Term Loan.
On June 1, 2021 and prior to the Senior Term Loan's maturity date, the Company paid the remaining principal balance of the Senior Term Loan and all remaining accrued interest through this date. The Company did not incur any prepayment fees associated with the early pay-off.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Line of Credit
In September 2013, ADA, as borrower, the Company, as guarantor, entered into the Line of Credit with the Lender for an aggregate principal amount of $10.0 million that was secured by certain amounts due to the Company from certain Tinuum Group RC leases. The Line of Credit was amended 16 times from the period from December 2, 2013 through March 23, 2021, which included a reduction in the principal amount to $5.0 million in September 2018.
On March 23, 2021, ADA, the Company and the Lender entered into an amendment to the Line of Credit (the "Fifteenth Amendment"), which extended the maturity date of the Line of Credit to December 31, 2021 and increased the minimum cash requirement from $5.0 million to $6.0 million.
On July 29, 2021, the Company and the Lender entered into the Sixteenth Amendment (the "Sixteenth Amendment") to the Line of Credit. The Sixteenth Amendment amends certain terms and conditions related to collateral securing the Line of Credit. As of December 31, 2021 and 2020, there were no outstanding borrowings under the Line of Credit. The Line of Credit expired on December 31, 2021.
Note 12 - Leases
The Company's operating and finance lease right-of-use ("ROU") assets and liabilities as of December 31, 2021 and 2020 consisted of the following items (in thousands):
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| Leases | | 2021 | | 2020 |
| Operating Leases | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Operating lease right-of-use assets, net of accumulated amortization (1) | | $ | 6,000 | | | $ | 1,930 | |
| | | | |
| Operating lease obligations, current | | $ | 2,157 | | | $ | 1,883 | |
| Long-term operating lease obligations | | 4,178 | | | 1,109 | |
| Total operating lease obligation | | $ | 6,335 | | | $ | 2,992 | |
| | | | |
| Finance Leases | | | | |
| | | | |
| | | | |
| | | | |
Finance lease right-of-use assets, net of accumulated amortization (2) | | $ | 1,743 | | | $ | 2,385 | |
| | | | |
| Finance lease obligations, current | | $ | 1,011 | | | $ | 1,550 | |
| Long-term finance lease obligations | | 3,152 | | | 3,976 | |
| Total finance lease obligations | | $ | 4,163 | | | $ | 5,526 | |
(1) Operating lease assets are reported net of accumulated amortization of $1.9 million and $0.8 million as of December 31, 2021 and 2020, respectively.
(2) Finance lease assets are reported net of accumulated amortization of $1.1 million and $0.5 million as of December 31, 2021 and 2020, respectively.
Finance leases
ROU assets under finance leases are reported in the "Property, plant and equipment line item, and finance lease liabilities are included in the "Current portion of long-term debt" and "Long-term debt, net of current portion" line items in the Consolidated Balance Sheets as of December 31, 2021 and 2020.
Interest expense related to finance lease liabilities and amortization of ROU assets under finance leases are included in the "Interest expense" and "Depreciation, amortization, depletion and accretion" line respectively, in the Consolidated Statement of Operations for the years ended December 31, 2021 and 2020.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Operating leases
ROU assets under operating leases are included in the "Other long-term assets line item, and operating lease liabilities are included in "Other liabilities" and "Other long-term liabilities" line items, respectively, in the Consolidated Balance Sheets as of December 31, 2021 and 2020.
Lease expense for operating leases for the year ended December 31, 2021 was $4.0 million, of which $3.5 million is included in "Consumables cost of revenues, exclusive of depreciation and amortization" line item and $0.5 million is included in "General and administrative" line item in the Consolidated Statement of Operations for the year ended December 31, 2021. Lease expense for operating leases for the year ended December 31, 2020 was $4.4 million, of which $3.8 million is included in the "Consumables cost of revenues, exclusive of depreciation and amortization" line item and $0.6 million is included in the "General and administrative" line item in the Consolidated Statement of Operations for the year ended December 31, 2020.
Lease financial information as of and for the years ended December 31, 2021 and 2020 is provided in the following table:
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| (in thousands) | | 2021 | | 2020 |
| Finance lease cost: | | | | |
| Amortization of right-of-use assets | | $ | 642 | | | $ | 1,471 | |
| Interest on lease liabilities | | 288 | | | 401 | |
| Operating lease cost | | 2,430 | | | 2,340 | |
| Short-term lease cost | | 1,650 | | | 2,067 | |
Variable lease cost (1) | | 40 | | | 163 | |
| | | | |
| Total lease cost | | $ | 5,050 | | | $ | 6,442 | |
| | | | |
| Other Information: | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows from finance leases | | $ | 288 | | | $ | 401 | |
| Operating cash flows from operating leases | | $ | 2,764 | | | $ | 2,200 | |
| Financing cash flows from finance leases | | $ | 1,190 | | | $ | 1,360 | |
| Right-of-use assets obtained in exchange for new finance lease liabilities | | $ | — | | | $ | 158 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | 6,108 | | | $ | 59 | |
| Weighted-average remaining lease term - finance leases | | 2.9 years | | 3.5 years |
| Weighted-average remaining lease term - operating leases | | 4.3 years | | 1.8 years |
| Weighted-average discount rate - finance leases | | 6.4 | % | | 6.2 | % |
| Weighted-average discount rate - operating leases | | 6.7 | % | | 8.5 | % |
(1) Primarily includes common area maintenance, property taxes and insurance payable to lessors.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table summarizes the Company's future lease payments under finance and operating leases as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Operating
Lease
Commitments | | Finance
Lease
Commitments | | Total Lease Commitments |
| 2022 | | $ | 2,502 | | | $ | 1,008 | | | $ | 3,510 | |
| 2023 | | 2,005 | | | 980 | | | 2,985 | |
| 2024 | | 739 | | | 1,929 | | | 2,668 | |
| 2025 | | 566 | | | 569 | | | 1,135 | |
| 2026 | | 566 | | | — | | | 566 | |
| Thereafter | | 871 | | | — | | | 871 | |
| Total lease payments | | 7,249 | | | 4,486 | | | 11,735 | |
| Less: Imputed interest | | (914) | | | (323) | | | (1,237) | |
| Present value of lease payments | | $ | 6,335 | | | $ | 4,163 | | | $ | 10,498 | |
Note 13 - Revenues
Trade receivables
Trade receivables represent an unconditional right to consideration in exchange for goods or services transferred to a customer. The Company invoices its customers in accordance with the terms of the contract. Credit terms are generally net 30 from the date of invoice. The timing between the satisfaction of performance obligations and when payment is due from the customer is generally not significant. The Company records allowances for doubtful trade receivables when it is probable that the balances will not be collected.
The following table shows the components of Trade receivables, net:
| | | | | | | | | | | | | | |
| | | As of December 31, |
| (in thousands) | | 2021 | | 2020 |
| Trade receivables | | $ | 10,476 | | | $ | 12,241 | |
| Less: Allowance for doubtful accounts | | — | | | (37) | |
| Trade receivables, net | | $ | 10,476 | | | $ | 12,204 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| | | | |
| | | | |
| | | | |
| | | | |
Cabot Receivable
The following table shows the components of the Cabot Receivable:
| | | | | | | | | | | | | | |
| | As of |
| (in thousands) | | December 31, 2021 | | December 31, 2020 |
| Receivables, net | | $ | 2,146 | | | $ | 921 | |
| Other long-term assets, net | | 6,846 | | | 8,852 | |
| Total Cabot Receivable | | $ | 8,992 | | | $ | 9,773 | |
Upfront Customer Consideration
As described in Note 4, as of September 30, 2020, the Company recorded an asset for Upfront Customer Consideration of $7.6 million in connection with the Supply Agreement, which is amortized on a straight-line basis as a reduction to revenue over the expected 15-year contractual period of the Supply Agreement. The unamortized balance is included in Other long-term assets, net on the Company's Consolidated Balance Sheets as of December 31, 2021 and 2020.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Disaggregation of Revenue and Earnings from Equity Method Investments
For the years ended December 31, 2021 and 2020, all performance obligations related to revenues recognized were satisfied at a point in time. The Company disaggregates its revenues by its major components its two operating segments, which are further discussed in Note 19 to the consolidated financial statements. In the APT segment for the year ended December 31, 2021 and 2020, approximately 13% and 15%, respectively, of APT revenue was generated in Canada. The following tables disaggregate revenues by major source for the year ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2021 |
| | Segment | | | | |
| (in thousands) | | APT | | RC | | | | Total |
| Revenue component | | | | | | | | |
| Consumables | | $ | 85,882 | | | $ | — | | | | | $ | 85,882 | |
| License royalties, related party | | — | | | 14,368 | | | | | 14,368 | |
| Other | | 44 | | | — | | | | | 44 | |
| | | | | | | | |
| Revenues from customers | | 85,926 | | | 14,368 | | | | | 100,294 | |
| | | | | | | | |
| Earnings from equity method investments | | — | | | 68,726 | | | | | 68,726 | |
| | | | | | | | |
| Total revenues and earnings from equity method investments | | $ | 85,926 | | | $ | 83,094 | | | | | $ | 169,020 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2020 |
| | Segment | | | | |
| (in thousands) | | APT | | RC | | | | Total |
| Revenue component | | | | | | | | |
Consumables (1) | | $ | 53,908 | | | $ | — | | | | | $ | 53,908 | |
| License royalties, related party | | — | | | 13,440 | | | | | 13,440 | |
| Other | | 15 | | | — | | | | | 15 | |
| | | | | | | | |
| Revenues from customers | | 53,923 | | | 13,440 | | | | | 67,363 | |
| | | | | | | | |
| Earnings from equity method investments | | — | | | 30,978 | | | | | 30,978 | |
| | | | | | | | |
| Total revenues and earnings from equity method investments | | $ | 53,923 | | | $ | 44,418 | | | | | $ | 98,341 | |
(1) Consumables revenues for the year ended December 31, 2020 have been restated. See restatement discussion in Note 2.
Note 14 - Commitments and Contingencies
Legal Proceedings
The Company is from time to time subject to, and is presently involved in, various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of its business. Such matters are subject to many uncertainties and outcomes, the financial impacts of which are not predictable with assurance and that may not be known for extended periods of time. The Company records a liability in its consolidated financial statements for costs related to claims, settlements, and judgments where management has assessed that a loss is probable, and an amount can be reasonably estimated. The Company did not have any significant legal proceedings.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Restricted Cash
As of December 31, 2021 and 2020, the Company had long-term restricted cash of $10.0 million and $5.0 million, respectively, as required under the Surety Agreement related to the Reclamation Contract. As of December 31, 2020, the Company had short-term restricted cash of $5.0 million as required under a minimum cash balance requirement of a Senior Term Loan covenant.
Surety Bonds
As of December 31, 2021, the Company had outstanding surety bonds of $24.1 million related to performance requirements under reclamation contracts associated with both the Five Forks Mine and the Marshall Mine.
Other Commitments and Contingencies
The Company also has certain limited obligations contingent upon future events in connection with the activities of Tinuum Group. The Company, NexGen and two entities affiliated with NexGen have provided GSFS with limited guaranties (the "Tinuum Group Party Guaranties") related to certain losses it may suffer as a result of inaccuracies or breach of representations and covenants. The Company also is a party to a contribution agreement with NexGen under which any party called upon to pay on a Tinuum Group Party Guaranty is entitled to receive contribution from the other party equal to 50% of the amount paid. No liability or expense provision has been recorded by the Company related to this contingent obligation as the Company believes that it is not probable that a loss will occur with respect to Tinuum Group Party Guaranties.
Note 15 - Stockholders' Equity
The Company has two classes of capital stock authorized, common stock and preferred stock, which are described as follows:
Preferred Stock
The Company's Board of Directors (the "Board") is authorized to provide out of the unissued shares of Preferred Stock and to fix the number of shares constituting a series of Preferred Stock and, with respect to each series, to fix the number of shares and designation of such series, the voting powers, if any, the preferences and relative, participating, option or other special rights, if any, and any qualifications, limitations or restrictions thereof, of the shares of such series. As of December 31, 2021 and 2020, there were no shares of Preferred Stock designated or outstanding.
Common Stock
Holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Additionally, holders of common stock are entitled to receive dividends when and if declared by the Board, subject to any statutory or contractual restrictions on payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding shares of preferred stock.
Upon dissolution, liquidation or the sale of all or substantially all of the Company's assets, after payment in full of any amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of shares of common stock will be entitled to receive the Company's remaining assets for distribution on a pro rata basis.
Stock Repurchase Programs
In November 2018, the Board authorized the Company to purchase up to $20.0 million of its outstanding common stock under a stock repurchase program (the "Stock Repurchase Program"), which was to remain in effect until December 31, 2019 unless otherwise modified by the Board. In November 2019, the Board authorized an incremental $7.1 million to the Stock Repurchase Program and provided that it will remain in effect until all amounts are utilized or it is otherwise modified by the Board.
For the years ended December 31, 2021 and 2020, under the Stock Repurchase Program, the Company purchased zero and 20,613 shares of its common stock for cash of zero and $0.2 million, inclusive of commissions and fees, respectively. As of December 31, 2021, the Company had $7.0 million remaining under the Stock Repurchase Program.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Tax Asset Protection Plan
U.S. federal income tax rules, and Section 382 of the Internal Revenue Code in particular, could substantially limit the use of net operating losses and other tax assets if the Company experiences an "ownership change" (as defined in the Internal Revenue Code). In general, an ownership change occurs if there is a cumulative change in the ownership of the Company by "5 percent stockholders" that exceeds 50 percentage points over a rolling three-year period.
On May 5, 2017, the Board approved the declaration of a dividend of rights to purchase Series B Junior Participating Preferred Stock for each outstanding share of common stock as part of a tax asset protection plan (the "TAPP") designed to protect the Company’s ability to utilize its net operating losses and tax credits. The TAPP is intended to act as a deterrent to any person acquiring beneficial ownership of 4.99% or more of the Company’s outstanding common stock.
On April 9, 2021, the Board approved the Fourth Amendment to the TAPP ("Fourth Amendment") that amends the TAPP, as previously amended by the First, Second and Third Amendments that were approved the Board on April 6, 2018, April 5, 2019 and April 9, 2020, respectively. The Fourth Amendment amends the definition of "Final Expiration Date" under the TAPP to extend the duration of the TAPP and makes associated changes in connection therewith. At the Company's 2021 annual meeting of stockholders, the Company's stockholders approved the Fourth Amendment, thus the Final Expiration Date will be the close of business on December 31, 2022.
Note 16 - Stock-Based Compensation
On June 20, 2017, the Company's stockholders approved the 2017 Omnibus Incentive Plan (the "2017 Plan"), which permits grants of awards to employees, directors and non-employees. Awards may be in the form of shares, rights to purchase restricted stock, bonuses of restricted stock, or other rights or benefits as described under the 2017 Plan. As of December 31, 2021, the Company has 644,540 shares of its common stock authorized for issuance under the 2017 Plan.
Expense
RSA's - Restricted Stock Awards ("RSA's") are typically granted with vesting terms of three years. The fair value of RSA's is determined based on the closing price of the Company’s common stock on the authorization date of the grant multiplied by the number of shares subject to the stock award. Compensation expense for RSA's is generally recognized over the vesting term on a straight-line basis.
PSU's - Performance share units ("PSU's") generally vest over three years and are based on the grantee’s continuous service with the Company, performance measures or a combination of both. Each PSU represents a contingent right to receive shares of the Company’s common stock if the Company meets certain performance measures over the requisite period.
Compensation expense is recognized for PSU awards on a straight-line basis over the vesting period based on the estimated fair value at the date of grant using a Monte Carlo simulation model.
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 the PSU's granted receive dividend equivalent units, no discount was applied for any dividends declared.
Expected volatility - To calculate expected volatility, the historical volatility of the Company's common stock was used.
Performance period - The Company’s performance period is based upon the vesting term of the Company’s PSU awards.
The Company recorded the following compensation expense related to the Stock Plans:
| | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | |
| (in thousands) | | 2021 | | 2020 | | |
| RSA expense | | $ | 1,816 | | | $ | 2,304 | | | |
| | | | | | |
| | | | | | |
| PSU expense | | 111 | | | 192 | | | |
| Total stock-based compensation expense | | $ | 1,927 | | | $ | 2,496 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Stock-based compensation expense related to manufacturing employees and administrative employees is included in the "Consumables cost of revenues, excluding depreciation and amortization and "Payroll and benefits line items" in
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
the Consolidated Statements of Operations. Stock-based compensation expense related to non-employee directors and consultants is included in the "General and administrative" line item in the Consolidated Statements of Operations.
The amount of unrecognized compensation cost as of December 31, 2021, and the expected weighted-average period over which the cost will be recognized is as follows:
| | | | | | | | | | | | | | |
| | As of December 31, 2021 |
| (in thousands) | | Unrecognized Compensation Cost | | Expected Weighted-Average Period of Recognition (in years) |
| RSA expense | | $ | 1,961 | | | 1.79 |
| | | | |
| | | | |
| PSU expense | | 282 | | | 1.71 |
| Total unrecognized stock-based compensation expense | | $ | 2,243 | | | 1.62 |
Activity
Restricted Stock
A summary of activity of RSA's for the year ended December 31, 2021 is presented in the following table:
| | | | | | | | | | | | | | | | | | |
| | Restricted Stock | | | | Weighted-Average Grant Date Fair Value | | |
| (in thousands, except for share and per share amounts) | | Awards | | | | RSA's | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| For the year ended December 31, 2021 | | | | | | | | |
| Non-vested at January 1, 2021 | | 373,860 | | | | | $ | 7.25 | | | |
| Granted | | 445,383 | | | | | $ | 5.54 | | | |
| Vested | | (206,894) | | | | | $ | 7.47 | | | |
| Forfeited | | (80,726) | | | | | $ | 5.90 | | | |
| Non-vested at December 31, 2021 | | 531,623 | | | | | $ | 5.94 | | | |
The weighted-average grant date fair value of RSA's granted or modified for the years ended December 31, 2021 and 2020 was $5.54 and $5.20, respectively. The total grant-date fair value of RSA's vested for the years ended December 31, 2021 and 2020 was $1.5 million and $3.4 million, respectively. The aggregate intrinsic value of non-vested RSA's outstanding as of December 31, 2021 was $3.5 million.
PSU's
PSU's outstanding remain unvested until the third anniversary of their issuance date, at which time the actual number of vested shares will be determined based on the actual price performances of the Company’s common stock relative to a broad stock index and a peer group performance index.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A summary of PSU activity for the year ended December 31, 2021 is presented in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Units | | Weighted-Average
Grant Date
Fair Value | | Aggregate Intrinsic Value (in thousands) | | Weighted-Average
Remaining
Contractual
Term (in years) |
| For the year ended December 31, 2021 | | | | | | | | |
| PSU's outstanding, January 1, 2021 | | 50,127 | | | $ | 6.17 | | | | | |
| Granted | | 62,448 | | | 7.09 | | | | | |
| Vested / Settled | | — | | | — | | | | | |
| Forfeited / Canceled | | (24,549) | | | 6.78 | | | | | |
| PSU's outstanding, December 31, 2021 | | 88,026 | | | $ | 6.17 | | | $ | 583 | | | 1.71 |
Note 17 - Supplemental Financial Information
Supplemental Balance Sheet Information
The following table summarizes the components of "Prepaid expenses and other current assets" and "Other long-term assets, net"as presented in the Consolidated Balance Sheets:
| | | | | | | | | | | | | | |
| | | As of December 31, |
| (in thousands) | | 2021 | | 2020 |
| Prepaid expenses and other current assets: | | | | |
| Prepaid expenses | | $ | 2,571 | | | $ | 1,690 | |
| Prepaid income taxes and income tax refunds | | 2,782 | | | 1,605 | |
| | | | |
| Other | | 1,308 | | | 1,302 | |
| | $ | 6,661 | | | $ | 4,597 | |
| Other long-term assets: | | | | |
Upfront customer consideration (1) | | $ | 6,982 | | | $ | 7,490 | |
Cabot receivable (1) | | 6,846 | | | 8,852 | |
| Right of use assets, operating leases, net | | 6,000 | | | 1,930 | |
| Spare parts, net | | 4,598 | | | 3,727 | |
| Mine development costs, net | | 5,330 | | | 4,338 | |
| Mine reclamation asset, net | | 1,742 | | | 1,712 | |
| Highview investment | | 552 | | | 552 | |
| Other long-term assets | | 1,193 | | | 1,388 | |
| | $ | 33,243 | | | $ | 29,989 | |
(1) See further discussion of Upfront Customer Consideration in Note 4 and Cabot Receivable in Note 5.
Spare parts include critical spares required to support plant operations. Parts and supply costs are determined using the lower of cost or estimated replacement cost. Parts are recorded as maintenance expenses in the period in which they are consumed.
Mine development costs include acquisition costs, the cost of other development work and mitigation costs related to the Five Forks Mine and are depleted over the estimated life of the related mine reserves, which is estimated to be 13 years as of December 31, 2021. The Company performs an evaluation of the recoverability of the carrying value of mine development costs to determine if facts and circumstances indicate that their carrying value may be impaired and if any adjustment is warranted. Mine reclamation asset represents the ARO asset related to the Five Forks Mine and is depreciated over its estimated life.
The Company holds a long-term investment (the "Highview Investment") in Highview Enterprises Limited ("Highview"), a London, England based developmental stage company specializing in power storage. In November 2014, the Company acquired an 8% ownership interest in the common stock of Highview for $2.8 million in cash. The Company accounts for the
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Highview Investment as an investment recorded at cost, less impairment, plus or minus observable changes in price for identical or similar investments of the same issuer.
The Highview Investment is evaluated for indicators of impairment such as an event or change in circumstances that may have a significant adverse effect on the fair value of the investment. There were no changes to the carrying value of the Highview Investment for the years ended December 31, 2021 and 2020 as there were no indicators of impairment or observable price changes for equity issued by Highview. Since inception of Highview Investment, the Company has recognized $2.2 million of cumulative impairment losses.
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) | | 2021 | | 2020 |
| Other current liabilities: | | | | |
| Current portion of operating lease obligations | | $ | 2,157 | | | $ | 1,883 | |
| Accrued interest | | — | | | 69 | |
| Income and other taxes payable | | 807 | | | 1,305 | |
| Current portion of mine reclamation liability | | 1,775 | | | 9,370 | |
| | | | |
| | | | |
| | | | |
| | | | |
| Other current liabilities | | 385 | | | 369 | |
| | $ | 5,124 | | | $ | 12,996 | |
| Other long-term liabilities: | | | | |
| Operating lease obligations, long-term | | $ | 4,178 | | | $ | 1,109 | |
| Mine reclamation liabilities | | 8,184 | | | 12,077 | |
| | | | |
| | | | |
| Other | | — | | | 287 | |
| | $ | 12,362 | | | $ | 13,473 | |
The Mine reclamation liability related to the Five Forks Mine is included in Other long-term liabilities. The Mine reclamation liability related to Marshall Mine, which was assumed in the Marshall Mine Acquisition is included in Other current liabilities" and "Other long-term liabilities." The Mine reclamation liabilities represent AROs. Changes in the AROs were as follows:
| | | | | | | | | | | | | | |
| | As of December 31, |
| (in thousands) | | 2021 | | 2020 |
| Asset retirement obligations, beginning of year | | $ | 21,447 | | | $ | 2,721 | |
| Asset retirement obligations assumed | | — | | | 21,328 | |
| Accretion | | 1,102 | | | 543 | |
| Liabilities settled | | (10,010) | | | (3,565) | |
| Changes due to scope and timing of reclamation | | (2,580) | | | 420 | |
| Asset retirement obligations, end of year | | 9,959 | | | 21,447 | |
| Less current portion | | 1,775 | | | 9,370 | |
| Asset retirement obligations, long-term | | $ | 8,184 | | | $ | 12,077 | |
Supplemental Consolidated Statements of Operations Information
Gain on Settlement
On December 29, 2020, the Company and a former customer (the "Parties") reached a settlement (the "Settlement") on various litigation matters (the "Litigation Matters") that resulted in the former customer (the "Former Customer") agreeing to pay to the Company cash of $2.5 million (the "Settlement Amount"), which was received on January 27, 2021. This payment was in exchange for full dissolution of all claims and counterclaims that the two Parties asserted or could have asserted against each other in the Litigation Matters, or which have arisen or may arise against each other but are presently unknown, arising out of or related to the Litigation Matters and related to any other of the Parties’ business dealings, conduct and/or transactions through
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
the date of the Settlement, including all claims for damages, fees, costs, sanctions, or any other amounts due or to become due in connection with the foregoing.
The Company applied the Settlement Amount cash proceeds to both an outstanding trade account receivable and note receivable due from the Former Customer and recognized the excess cash received as a gain of $1.1 million, which is reported as "Gain on settlement" as a component of operating expenses in the Consolidated Statements of Operations for the year ended December 31, 2020.
Gain on Change in estimate, asset retirement obligation
As discussed in Note 4, for the year ended December 31, 2021, recorded a gain on change in estimate of $2.7 million based on its revisions in its estimate of future obligations owed for the reclamation of Marshall Mine.
The following table details the components of "Interest expense" in the Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | |
| (in thousands) | | 2021 | | 2020 | | |
| Interest on Senior Term Loan | | $ | 206 | | | $ | 1,708 | | | |
| Debt discount and debt issuance costs | | 945 | | | 1,418 | | | |
| 453A interest | | 13 | | | 331 | | | |
| | | | | | |
| Other | | 326 | | | 463 | | | |
| | $ | 1,490 | | | $ | 3,920 | | | |
The following table details the components of "Other"in the Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | |
| (in thousands) | | 2021 | | 2020 | | |
| Interest income | | $ | 326 | | | $ | 127 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Other | | 314 | | | 5 | | | |
| | $ | 640 | | | $ | 132 | | | |
Note 18 - Income Taxes
The provision for income taxes consists of the following:
| | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | |
| (in thousands, except for rate) | | 2021 | | 2020 | | |
| Current portion of income tax expense: | | | | | | |
| Federal | | $ | 2,741 | | | $ | 1,666 | | | |
| State and other | | 2,326 | | | 1,354 | | | |
| | | | | | |
| | 5,067 | | | 3,020 | | | |
| Deferred portion of income tax expense (benefit): | | | | | | |
| Federal | | 9,527 | | | 5,068 | | | |
| State and other | | 1,078 | | | (1,577) | | | |
| | | | | | |
| | 10,605 | | | 3,491 | | | |
| Total income tax expense | | $ | 15,672 | | | $ | 6,511 | | | |
| Effective tax rate | | 21 | % | | (47) | % | | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Income tax expense differed from the amount that would be computed by applying the U.S. statutory federal income tax rate of 21% to income before income taxes for the years ended December 31, 2021 and 2020 as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | | | | | |
| (in thousands) | | 2021 | | | | 2020 | | | | | | |
| | | | | | | | | | | | |
| Federal statutory rate | | $ | 15,975 | | | | | $ | (2,896) | | | | | | | |
| State income taxes, net of federal benefit | | 2,283 | | | | | (410) | | | | | | | |
| | | | | | | | | | | | |
| Permanent differences | | (680) | | | | | 326 | | | | | | | |
| Tax credits | | (443) | | | | | (417) | | | | | | | |
| Valuation allowances | | (1,290) | | | | | 9,148 | | | | | | | |
| Changes in tax rates | | (33) | | | | | (97) | | | | | | | |
| Stock-based compensation | | 86 | | | | | 285 | | | | | | | |
| Return to provision and other true-ups | | (40) | | | | | 572 | | | | | | | |
| Other | | (186) | | | | | — | | | | | | | |
| Income tax expense | | $ | 15,672 | | | | | $ | 6,511 | | | | | | | |
Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and their reported amounts in the accompanying Consolidated Balance Sheets. These temporary differences result in taxable or deductible amounts in future years. Details of the Company’s deferred tax assets and liabilities are summarized as follows:
| | | | | | | | | | | | | | |
| | | As of December 31, |
| (in thousands) | | 2021 | | 2020 |
| Deferred tax assets | | | | |
| Tax credits | | $ | 86,097 | | | $ | 93,874 | |
| Equity method investments | | 1,584 | | | 5,149 | |
| Net operating loss carryforwards | | 2,388 | | | 2,906 | |
| Intangible assets | | 5,126 | | | 2,765 | |
| ARO, net of reimbursements | | — | | | 2,167 | |
| Employee related liabilities | | 1,971 | | | 827 | |
| Other investments | | 556 | | | 548 | |
| Operating lease obligations | | 1,585 | | | 508 | |
| | | | |
| Other | | 138 | | | 69 | |
| Total deferred tax assets | | 99,445 | | | 108,813 | |
| Less valuation allowance | | (87,468) | | | (88,758) | |
| Deferred tax assets | | 11,977 | | | 20,055 | |
| Less: Deferred tax liabilities | | | | |
| Property and equipment and other | | (8,203) | | | (7,039) | |
| | | | |
| Upfront customer consideration | | (1,747) | | | (1,847) | |
| Right of use operating lease assets | | (1,497) | | | (270) | |
| Inventory | | (197) | | | (295) | |
| ARO, net of reimbursements | | (333) | | | — | |
| | | | |
| Total deferred tax liabilities | | (11,977) | | | (9,451) | |
| Net deferred tax assets | | $ | — | | | $ | 10,604 | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against a 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 a valuation allowance recorded against deferred tax assets at each reporting date. The determination of whether a valuation allowance is appropriate requires the evaluation of positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available to realize a deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating taxes, the Company assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance.
As of December 31, 2021, the Company concluded it is more likely than not the Company will not generate sufficient taxable income within the applicable net operating loss and tax credit carry-forward periods to realize any of its net deferred tax assets. For the year ended December 31, 2021, the Company reduced a valuation allowance from December 31, 2020 by $1.3 million, but as of December 31, 2021 has a valuation allowance equal to 100% of its net deferred tax assets. In reaching this conclusion, the Company primarily considered forecasts of future taxable losses.
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) | | 2021 | | Beginning expiration year | | Ending expiration year |
| | | | | | |
| State and other operating loss carryforwards | | $ | 2,388 | | | 2026 | | 2036 |
| Federal tax credit carryforwards | | $ | 86,097 | | | 2032 | | 2040 |
The following table sets forth a reconciliation of the beginning and ending unrecognized tax positions on a gross basis for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | |
| (in thousands) | | 2021 | | 2020 | | |
| Balance as of January 1 | | $ | 946 | | | $ | 946 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Lapse of applicable statute of limitations | | (892) | | | — | | | |
| Balance as of December 31 | | $ | 54 | | | $ | 946 | | | |
For the years ended December 31, 2021 and 2020, the Company did not record any adjustments or recognize interest expense for uncertain tax positions. Interest and penalties related to uncertain tax positions are accrued and included in the "Interest expense"line item in the Consolidated Statements of Operations. Additionally, the Company recognizes interest expense related to the federal tax treatment of RC facilities at Tinuum Group in the "Interest expense "line item in the Consolidated Statements of Operations. Additional information related to the components of "Interest expense"is included in Note 17.
The Company files income tax returns in the U.S. and various states. The Company is no longer subject to U.S. federal examinations by tax authorities for years before 2018. The Company is generally no longer subject to state examinations by tax authorities for years before 2014.
Note 19 - Business Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by a company's chief operating decision maker ("CODM"), or a decision making group, in deciding how to allocate resources and in assessing financial performance. As of December 31, 2021, the Company's CODM was the Company's CEO. The Company's operating and reportable segments are organized by products and services provided.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2021, the Company has two reportable segments: (1) Refined Coal ("RC"); and (2) Advanced Purification Technologies ("APT").
The business segment measurements provided to and evaluated by the CODM are computed in accordance with the principles listed below:
•The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except as described below.
•Segment revenues include equity method earnings and losses from the Company's equity method investments.
•Segment operating income (loss) includes segment revenues and allocation of certain corporate general and administrative expenses, which includes Payroll and benefits, General and administrative, and Depreciation, amortization, depletion and accretion.
•RC segment operating income includes interest expense directly attributable to the RC segment.
As of December 31, 2021 and 2020, substantially all of the Company's material assets were located in the U.S. and the majority of its customers are U.S. companies. The following table presents the Company's operating segment results for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | |
| (in thousands) | | 2021 | | 2020 | | |
| Revenues: | | | | | | |
| Refined Coal: | | | | | | |
| Earnings in equity method investments | | $ | 68,726 | | | $ | 30,978 | | | |
| | | | | | |
| License royalties, related party | | 14,368 | | | 13,440 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | 83,094 | | | 44,418 | | | |
| Advanced Purification Technologies: | | | | | | |
Consumables (1) | | 85,882 | | | 53,908 | | | |
| Other | | 44 | | | 15 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | 85,926 | | | 53,923 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Total segment reporting revenues | | 169,020 | | | 98,341 | | | |
| | | | | | |
| Adjustments to reconcile to reported revenues: | | | | | | |
| | | | | | |
| Earnings in equity method investments | | (68,726) | | | (30,978) | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Total reported revenues | | $ | 100,294 | | | $ | 67,363 | | | |
| | | | | | |
| Segment operating income (loss) | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Refined Coal | | $ | 82,634 | | | $ | 42,689 | | | |
| | | | | | |
| | | | | | |
Advanced Purification Technologies (2) | | 5,649 | | | (39,958) | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Total segment operating income | | $ | 88,283 | | | $ | 2,731 | | | |
(1) Revenues - Consumables for the year ended December 31, 2020 have been restated. See restatement discussion in Note 2.
(2) Included in APT segment operating income (loss) for the years ended December 31, 2021 and 2020 was $7.4 million and $7.9 million, respectively, of depreciation, amortization, depletion and accretion expenses on mine and plant related long-lived assets and liabilities. Further included in the APT segment operating income for the year ended December 31, 2021 was $2.7 million related to a gain on change in estimate, asset retirement obligation. Additionally, included in APT segment operating loss for the year ended December 31, 2020 was an impairment charge of $26.1 million and the Gain on Settlement of $1.1 million.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A reconciliation of reportable segment operating income to consolidated income (loss) before income taxes is as follows:
| | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | |
| (in thousands) | | 2021 | | 2020 | | |
| | | | | | |
| Total reported segment operating income | | $ | 88,283 | | | $ | 2,731 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Adjustments to reconcile to income (loss) before income tax expense attributable to the Company: | | | | | | |
| Corporate payroll and benefits | | (2,478) | | | (2,866) | | | |
| | | | | | |
| Corporate legal and professional fees | | (6,014) | | | (4,954) | | | |
| Corporate general and administrative | | (3,358) | | | (5,096) | | | |
| Corporate depreciation and amortization | | (505) | | | (551) | | | |
| | | | | | |
| Corporate interest expense, net | | (854) | | | (3,060) | | | |
| | | | | | |
| | | | | | |
| Other income, net | | 999 | | | 5 | | | |
| | | | | | |
| Income (loss) before income tax expense | | $ | 76,073 | | | $ | (13,791) | | | |
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) | | 2021 | | 2020 |
| Assets: | | | | |
Refined Coal (1) | | $ | 4,884 | | | $ | 11,516 | |
Advanced Purification Technologies (2) | | 83,516 | | | 80,877 | |
| Total segment assets | | 88,400 | | | 92,393 | |
| | | | |
Corporate (3) | | 97,036 | | | 54,278 | |
| Consolidated | | $ | 185,436 | | | $ | 146,671 | |
(1) Includes $2.4 million and $7.7 million of investments in equity method investees as of December 31, 2021 and 2020, respectively.
(2) Includes $36.7 million and $34.6 million of long-lived assets, net. Expenditures for additions to long-lived assets were $7.4 million and $7.3 million, respectively, for the years ended December 31, 2021 and 2020.
(3) Includes the Company's net deferred tax assets of zero and $10.6 million as of December 31, 2021 and 2020, respectively.
Note 20 - Fair Value Measurements
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, deposits and accrued expenses, approximate their fair values due to the short maturity of these instruments. The carrying amounts of the Senior Term Loan and other obligations, including finance leases, approximate their fair values based on credit terms and market interest rates currently available for similar instruments. Accordingly, these instruments are not presented in the table below. The following table provides the estimated fair values of the remaining financial instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 | | As of December 31, 2020 |
| (in thousands) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Financial Instruments: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Highview Investment | | $ | 552 | | | $ | 552 | | | $ | 552 | | | $ | 552 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Highview Obligation | | $ | 227 | | | $ | 227 | | | $ | 228 | | | $ | 228 | |
| | | | | | | | |
| | | | | | | | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Concentration of credit risk
As of December 31, 2021, the Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents. The Company holds cash and cash equivalents at three financial institutions as of December 31, 2021. If those institutions were unable to perform their obligations, the Company would be at risk regarding the amount of its cash balance in excess of the federal deposit insurance corporation limits ($250 thousand).
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of December 31, 2021 and December 31, 2020, the Company had no material financial instruments carried and measured at fair value on a recurring basis.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
As disclosed in Note 4, the Company completed the asset acquisition of Marshall Mine, LLC. The estimated fair values of the assets acquired and liabilities assumed were determined based on Level 3 inputs.
As disclosed in Note 6, the Company recorded an impairment charge related to the Asset Group based on a valuation model that included an expected future discounted cash flow model using Level 3 inputs.
As noted in Note 17, the Company accounts for the Highview Investment as an investment recorded at cost, less impairment, plus or minus observable changes in price for identical or similar investments of the same issuer. Fair value measurements, if any, represent either Level 2 or Level 3 measurements.
Note 21 - Major Customers
Revenues from external customers who represent 10% or more of the Company’s revenues for the years ended December 31, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Years ended December 31, | | |
| Customer | | Revenue Type | | Segment(s) | | 2021 | | 2020 | | |
| A | | License royalties, related party | | RC | | 14% | | 20% | | |
| B | | Consumables (1) | | APT | | 14% | | 6% | | |
| C | | Consumables (1) | | APT | | 10% | | 11% | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
(1) Consumables revenues for the year ended December 31, 2020 have been restated. See restatement discussion in Note 2.
Note 22 - Related Party Transactions
Accounts Receivable
The following table shows the Company's receivable balance associated with related parties as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | |
| | | As of December 31, |
| (in thousands) | | 2021 | | 2020 |
| Receivable from related party - Tinuum Group | | $ | 2,481 | | | $ | 3,453 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Revenues
The following table shows the income recognized with related parties during the years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | |
| (in thousands) | | 2021 | | 2020 | | |
| License royalties, related party - Tinuum Group | | $ | 14,368 | | | $ | 13,440 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
The above Tinuum Group royalties are included in the "License royalties, related party" line in the Consolidated Statements of Operations.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 23 - Defined Contribution Savings Plans
The Company sponsors a qualified defined contribution savings plan (the "401(k) Plan") that allows participation by eligible employees who may defer a portion of their gross pay. The Company makes contributions to the 401(k) Plan based on percentages of an employee's eligible compensation as specified in the 401(k) Plan, and such employer contributions are in the form of cash.
The following table presents the amount of the Company's contributions made to the 401(k) Plans:
| | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (in thousands) | | 2021 | | 2020 | | |
| 401(k) Plans employer contributions | | $ | 479 | | | $ | 484 | | | |
Note 24 - Quarterly Financial Results (unaudited)
Summarized quarterly results for the two years ended December 31, 2021 and December 31, 2020 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Quarter Ended |
| (in thousands, except per share data) | | December 31, 2021 | | September 30, 2021 | | June 30, 2021 | | March 31, 2021 |
| Revenues | | $ | 25,764 | | | $ | 30,858 | | | $ | 21,065 | | | $ | 22,607 | |
| Cost of revenues | | 16,904 | | | 19,956 | | | 14,732 | | | 13,984 | |
| Other operating expenses | | 8,076 | | (1) | 7,603 | | | 5,894 | | | 8,293 | |
| Operating income | | 784 | | | 3,299 | | | 439 | | | 330 | |
| Earnings from equity method investments | | 6,782 | | | 22,195 | | | 21,437 | | | 18,312 | |
| | | | | | | | |
| Other (expenses) income, net | | (86) | | | 3,340 | | | (343) | | | (416) | |
| Income before income tax expense | | 7,480 | | | 28,834 | | | 21,533 | | | 18,226 | |
| Income tax expense | | 1,659 | | | 4,581 | | | 4,943 | | | 4,489 | |
| Net income | | $ | 5,821 | | | $ | 24,253 | | | $ | 16,590 | | | $ | 13,737 | |
| Earnings per common share – basic | | $ | 0.32 | | | $ | 1.33 | | | $ | 0.91 | | | $ | 0.76 | |
| Earnings per common share – diluted | | $ | 0.31 | | | $ | 1.31 | | | $ | 0.90 | | | $ | 0.75 | |
| Weighted-average number of common shares outstanding | | | | | | | | |
| Basic | | 18,302 | | | 18,292 | | | 18,271 | | | 18,166 | |
| Diluted | | 18,545 | | | 18,489 | | | 18,398 | | | 18,274 | |
(1) During the fourth quarter of 2021, the Company recorded a gain on change in estimate, asset retirement obligation of $0.8 million related to the Company revising its estimate of future obligations owed for the reclamation of Marshall Mine as further described in Note 17.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Quarter Ended |
| (in thousands, except per share data) | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 | | March 31, 2020 |
| Revenues | | $ | 19,743 | | | $ | 21,270 | | | $ | 12,726 | | | $ | 13,624 | |
| Cost of revenues | | 12,076 | | | 16,812 | | | 8,659 | | | 12,852 | |
| Other operating expenses | | 6,117 | | (1) | 7,283 | | | 35,132 | | | 9,413 | |
| Operating income (loss) | | 1,550 | | | (2,825) | | | (31,065) | | | (8,641) | |
| Earnings from equity method investments | | 5,019 | | | 9,518 | | | 8,168 | | | 8,273 | |
| | | | | | | | |
| Other expenses, net | | (943) | | | (864) | | | (814) | | | (1,167) | |
| Income (loss) before income tax expense | | 5,626 | | | 5,829 | | | (23,711) | | | (1,535) | |
| Income tax expense | | 5,196 | | (2) | 854 | | | 103 | | | 358 | |
| Net income (loss) | | $ | 430 | | | $ | 4,975 | | | $ | (23,814) | | | $ | (1,893) | |
| Earnings (loss) per common share – basic | | $ | 0.02 | | | $ | 0.27 | | | $ | (1.32) | | | $ | (0.11) | |
| Earnings (loss) per common share – diluted | | $ | 0.02 | | | $ | 0.27 | | | $ | (1.32) | | | $ | (0.11) | |
| Weighted-average number of common shares outstanding | | | | | | | | |
| Basic | | 18,109 | | | 18,093 | | | 18,014 | | | 17,932 | |
| Diluted | | 18,167 | | | 18,103 | | | 18,014 | | | 17,932 | |
(1) During the fourth quarter of 2020, the Company recorded a gain of 1.1 million related to the Settlement reached with the Former Customer as further described in Note 17.
(2) During the fourth quarter of 2020, the Company recorded income tax expense of $5.2 million primarily due to an increase in the valuation allowance as of December 31, 2020 related to the Company's deferred tax assets.
As discussed in Note 2, the Company concluded that its historical presentation of shipping and handling costs billed to customers as a component of cost of revenues rather than as a component of revenues was incorrect and that the Company's presentation of both the "Revenues - Consumables" and "Consumables cost of revenues, exclusive of depreciation and amortization" line items for the year ended December 31, 2020 should be restated. The impact of this error resulted in an understatement of both the "Revenues - Consumables" and "Consumables cost of revenues, exclusive of depreciation and amortization" line items in the Consolidated Statements of Operations for each of the quarters included in 2020 and for the quarters ended March 31, 2021, June 30, 2021 and September 30, 2021 and is shown below for those periods. The amounts reported above for the three months ended March 31, 2021 and 2020, the three months ended June 30, 2021 and 2020, the three months ended September 30, 2021 and 2020 and the three months ended December 31, 2020 have been restated for this error. There was no impact to operating income (loss), income (loss) before income taxes, net income (loss) or earnings (loss) to any of the 2021 or 2020 periods.
The adjustments for restatement of the quarters ended September 30, 2021, June 30, 2021, and March 31, 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | For the Quarter Ended |
| | | | September 30, 2021 (Restated) | | June 30, 2021 (Restated) | | March 31, 2021 (Restated) |
| | | | Increase / (Decrease) | | Increase / (Decrease) | | Increase / (Decrease) |
| Revenues | | | | 2,004 | | | 1,432 | | | 1,510 | |
| Cost of revenues | | | | 2,004 | | | 1,432 | | | 1,510 | |
| Operating income | | | | — | | | — | | | — | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The adjustments for restatement of the quarters ended December 31, 2020, September 30, 2020, June 30, 2020, and March 31, 2020 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Quarter Ended |
| | December 31, 2020 (Restated) | | September 30, 2020 (Restated) | | June 30, 2020 (Restated) | | March 31, 2020 (Restated) |
| | Increase / (Decrease) | | Increase / (Decrease) | | Increase / (Decrease) | | Increase / (Decrease) |
| Revenues | | 1,383 | | | 1,799 | | | 1,243 | | | 1,361 | |
| Cost of revenues | | 1,383 | | | 1,799 | | | 1,243 | | | 1,361 | |
| Operating income | | — | | | — | | | — | | | — | |
Note 25 - Subsequent Events
Unless disclosed elsewhere in the notes to the Consolidated Financial Statements, the following is the significant matter that occurred subsequent to December 31, 2021.
On February 25, 2022, the Company received $10.6 million in cash from Cabot (the "Cabot Payment") as a result of a change in control provision in the Supply Agreement (the "Change in Control"), which occurred as a result of the sale of Cabot by its parent, Cabot Corporation. Under the Change in Control, the Company received from Cabot full payment of all amounts outstanding under the Reclamation Reimbursement, payment of all unbilled amounts related to Specific Capital for expenditures incurred through February 28, 2022 and payment of additional Reclamation Costs (the "Cabot Reclamation Costs"). Under the Reclamation Contract, the Company is obligated to remit payment for the Cabot Reclamation Costs to the third party operator of Marshall Mine within a specified timeframe. The Company will account for the Cabot Payment in its March 31, 2022 quarter and does not anticipate any impacts to the Supply Agreement except as described above.