Note 1 - Basis of Presentation
Nature of Operations
Advanced Emissions Solutions, Inc. ("ADES" or the "Company") is a Delaware corporation with its principal office located in Greenwood Village, Colorado, manufacturing and logistics operations located in Louisiana and a manufacturing facility in Kentucky. The Company is an environmental technology company and has been principally engaged in the sale of consumable air and water treatment solutions 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 air quality and water regulations. The Company manufactures and sells AC and other chemicals used to capture and remove contaminants for coal-fired power generation, industrial and water treatment markets. The Company also owns an associated lignite mine ("Five Forks Mine") that currently supplies the primary raw material for manufacturing AC.
Acquisition
On February 1, 2023 (the "Acquisition Date"), the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with Arq Limited ("Arq Ltd."), a company incorporated under the laws of Jersey, pursuant to which the Company acquired all of the direct and indirect equity interests of Arq Ltd.'s subsidiaries (the "Arq Acquisition," and hereafter referred to as "Arq") in exchange for consideration (the "Purchase Consideration") totaling $31.2 million, and consisting of (i) 3,814,864 shares of the Company's common stock, par value $0.001 per share (the "Common Stock") and (ii) 5,294,462 shares (the "Preferred Shares") of the Company's Series A Convertible Preferred Stock, par value $0.001 per share (the "Series A Preferred Stock").
Arq's principal office is located in London, United Kingdom with an additional office located in Corbin, Kentucky near its production facility ("the Corbin Facility"). The Corbin location consists of bituminous coal reserves and a manufacturing facility to recover and purify the bituminous coal fines for sale or further conversion to value-added specialty chemicals. Arq is a pre-revenue, environmental technology company that has developed a process for transforming coal waste into a purified, microfine carbon powder, known as Arq powderTM ("Arq Powder"). The Company expects to begin using Arq Powder to produce granular activated carbon ("GAC") products in the second half of 2024.
See further discussion of the Arq Acquisition in Note 2.
Loan Agreement
As required under the Purchase Agreement, and on February 1, 2023 (the "Closing Date"), the Company, as borrower, certain of its subsidiaries, as guarantors, and CF Global ("CFG"), a related party, as administrative agent and lender (the "Lender"), entered into a term loan (the "Term Loan") in the amount of $10.0 million, less original issue discount ("OID") of $0.2 million, upon execution of a Term Loan and Security Agreement (the "Loan Agreement"). The Company received net cash proceeds of $8.5 million after deducting the OID and debt issuance costs of $1.3 million.
The Loan Agreement also provides for the issuance of a warrant (the "Warrant") to CFG to purchase 325,457 shares of Common Stock (the "Warrant Shares"), which represents 1% of the post-Arq Acquisition and PIPE Investment (as defined below) fully diluted share capital (as defined in the Loan Agreement), at an exercise price of $0.01 per share. The Warrant has a term of 7 years and contains a cashless exercise provision.
See further discussion of the Term Loan in Note 6.
Equity Financing
On February 1, 2023, the Company entered into Subscription Agreements (the "Subscription Agreements") with certain persons (the "Subscribers"), which included existing shareholders of Arq Ltd., three of which were appointed to the Company's Board of Directors (the "Board"), pursuant to which the Subscribers subscribed for and purchased shares of Common Stock for an aggregate purchase price of $15.4 million and at a price per share of $4.00 (such transaction, the "PIPE Investment").
See further discussion of the PIPE Investment in Note 11.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements of ADES are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") and with Article 10 of Regulation S-X of the Securities and Exchange Commission. In compliance with those instructions, certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
The unaudited Condensed Consolidated Financial Statements of ADES in this quarterly report ("Quarterly Report") are presented on a consolidated basis and include ADES and its wholly-owned subsidiaries (collectively, the "Company"). Also included within the unaudited Condensed Consolidated Financial Statements are the Company's unconsolidated equity investments, Tinuum Group and Tinuum Services, which are accounted for under the equity method of accounting, and Highview Enterprises Limited (the "Highview Investment"), which is accounted for in accordance with U.S. GAAP applicable to equity investments that do not qualify for the equity method of accounting.
Results of operations and cash flows for the interim periods are not necessarily indicative of the results that may be expected for the entire year. All significant intercompany transactions and accounts were eliminated in consolidation for all periods presented in this Quarterly Report.
In the opinion of management, these Condensed Consolidated Financial Statements include all normal and recurring adjustments considered necessary for a fair presentation of the results of operations, financial position, stockholders' equity and cash flows for the interim periods presented. These Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the "2022 Form 10-K"). Significant accounting policies disclosed therein have not changed.
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 (loss) per share is computed in a manner consistent with that of basic earnings per share, while considering other potentially dilutive securities.
For the three months ended March 31, 2023 and 2022, potentially dilutive securities consist of unvested restricted stock awards ("RSAs") and contingent performance stock units ("PSUs"). For the three months ended March 31, 2023 potentially dilutive securities also consist of outstanding shares of Series A Preferred Stock, which contain non-forfeitable rights to earnings and dividends in the form of cash or shares of Series A Preferred Stock (the "Preferred Dividends"), determined at the option of the Company, and are deemed to be participating securities ("Participating Securities"). As permitted, the Company has elected not to separately present basic or diluted earnings (loss) per share attributable to Participating Securities in the Consolidated Statement of Operations for the three months ended March 31, 2023.
The following table sets forth the calculations of basic and diluted loss per share:
| | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| (in thousands, except per share amounts) | | 2023 | | 2022 | | | | |
| Net loss | | $ | (7,508) | | | $ | (3,033) | | | | | |
| Less: Dividends declared on redeemable preferred stock | | 157 | | | — | | | | | |
| Loss attributable to common stockholders | | $ | (7,665) | | | $ | (3,033) | | | | | |
| | | | | | | | |
| Basic weighted-average common shares outstanding | | 23,770 | | | 18,344 | | | | | |
| Add: dilutive effect of equity instruments | | — | | | — | | | | | |
| | | | | | | | |
| | | | | | | | |
| Diluted weighted-average shares outstanding | | 23,770 | | | 18,344 | | | | | |
| Loss per share - basic | | $ | (0.32) | | | $ | (0.17) | | | | | |
| Loss per share - diluted | | $ | (0.32) | | | $ | (0.17) | | | | | |
For the three months ended March 31, 2023 and 2022, potentially dilutive securities of 4.2 million and 0.3 million shares of common stock, respectively, were outstanding but were not included in the calculation of diluted net loss per share because the effect would have been anti-dilutive.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. There have been no changes in the Company’s critical accounting estimates from those that were disclosed in the 2022 Form 10-K. Actual results could differ from these estimates.
Risks and Uncertainties
For 2023, the Company is principally dependent on the operations of its APT business and its cash on hand to provide liquidity over the near and long term. The Company's revenues, sales volumes, earnings and cash flows are significantly affected by prices of competing power generation sources such as natural gas and renewable energy. During periods of low natural gas prices, natural gas provides a competitive alternative to coal-fired power generation and therefore, coal consumption for purposes of power generation may be reduced, which in turn reduces the demand for the Company's products. However, during periods of higher prices for competing power generation sources, there is an increase in coal consumption and thus demand for the Company's products also increases.
In addition, coal consumption for purposes of power generation and demand for the Company's products are affected by the demand for electricity, which is higher in the warmer and colder months of the year. As a result, the Company's interim period results are subject to seasonal variations whereby its revenues and cost of revenues tend to be higher in its first and third fiscal quarters compared to its second and fourth fiscal quarters. Abnormal temperatures during the summer and winter months may significantly affect coal consumption and impurities within various municipalities' water sources, and thus impact the demand for the Company's products.
Concentration of credit risk
The Company is exposed to concentrations of credit risk primarily related to cash held at financial institutions and accounts receivable. The Company regularly monitors its credit risk to mitigate the possibility of current and future exposures resulting in a loss. Historically, the losses related to credit risk have been immaterial.
The Company evaluates the creditworthiness of its customers prior to entering into agreements to sell its products and, as necessary, throughout the life of the customer relationship.
The Company holds substantially all of its cash at one financial institution as of March 31, 2023. If a financial institution was unable to perform its obligations, the Company would be at risk regarding the amount of cash and investments in excess of the Federal Deposit Insurance Corporation limits (currently $250 thousand) that would be returned to the Company.
Reclassifications
Certain balances have been reclassified from the prior year 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 Standards
Effective January 1, 2023, the Company adopted 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. The adoption of ASU 2016-13 did not have a material impact on the Company's financial statements and disclosures.
Note 2 - Arq Acquisition
The Company accounted for the Arq Acquisition as an acquisition of a business as of the Acquisition Date. The total Purchase Consideration was $31.2 million and has been preliminarily allocated to the acquired assets and assumed liabilities of Arq based on their estimated fair values as of the Acquisition Date. The Purchase Consideration was comprised of the fair values as of the Acquisition Date of 3,814,864 shares of Common Stock, valued at $12.4 million, and 5,294,462 Preferred Shares, valued at $18.8 million. The Company also incurred $8.7 million in acquisition-related costs, which were expensed as incurred and included in the "General and administrative" line item in the Statements of Operations.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table provides the preliminary estimated fair values of the assets acquired and liabilities assumed as of the Acquisition Date:
| | | | | | | | | | | | |
| (in thousands) | | | | | | Purchase Price Allocation |
| Fair value of assets acquired: | | | | | | |
| Cash | | | | | | $ | 1,411 | |
| | | | | | |
| Prepaid expenses and other current assets | | | | | | 2,229 | |
| Restricted cash, long-term | | | | | | 814 | |
| Property, plant and equipment, net | | | | | | 39,159 | |
| Other long-term assets, net | | | | | | 11,717 | |
| Amount attributable to assets acquired | | | | | | 55,330 | |
| | | | | | |
| Fair Value of liabilities assumed: | | | | | | |
| Accounts payable and accrued expenses | | | | | | 9,806 | |
| Current portion of long-term debt | | | | | | 494 | |
| Other current liabilities | | | | | | 103 | |
| Long-term debt, net of current portion | | | | | | 9,199 | |
| Other long-term liabilities | | | | | | 4,523 | |
| Amount attributable to liabilities assumed | | | | | | 24,125 | |
| | | | | | |
| Net assets acquired | | | | | | $ | 31,205 | |
The following represents the intangible asset identified as part of the Arq Acquisition and which is included in "Other long-term-assets, net" in the table above:
| | | | | | | | | | | | | | |
| (in thousands) | | Amount | | Weighted Average Useful Life (years) |
| | | | |
| Developed technology | | $ | 7,700 | | | 20 |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Redeemable Preferred Stock
In connection with the issuance of the Series A Preferred Stock pursuant to the Purchase Agreement, the Company filed the Certificate of Designations of Preferred Stock for the Series A Preferred Stock (the "Certificate of Designations") with the Secretary of State of the State of Delaware. Under the Certificate of Designations, 8.9 million preferred shares were designated as Series A Preferred Stock.
Each outstanding share of Series A Preferred Stock will be automatically converted into the number of shares of Common Stock described below upon approval by the stockholders of the Company. Each share of Series A Preferred Stock is deemed to have an original issue price of $4.00 per share (the "Original Issue Amount"). The number of shares of Common Stock issued upon conversion of each share of Series A Preferred Stock shall be equal to the product of (i) the sum of (A) the Original Issue Amount plus (B) an amount equal to the cumulative amount of the accrued and unpaid dividends on such share at such time divided by (ii) the Original Issue Amount, subject to adjustment.
Holders of the Series A Preferred Stock are entitled to receive cumulative dividends, which accrue quarterly on the last day of each applicable quarter (whether or not declared or funds for their payment are lawfully available) and are payable quarterly, in arrears, on the earlier to occur of (a) the date any dividend is paid to holders of Common Stock with respect to such quarter and (b) 30 days after the end of each quarter (the "Series A Quarterly Dividend") at the rate per share of Series A Preferred Stock equal to the greater of (i) if the Company declares a cash dividend on the Common Stock with respect to such quarter, the amount of the cash dividend that would be received by a holder of Common Stock in which such share of Series A Preferred Stock would be convertible on the record date for such cash dividend and (ii) an annual rate (the "Rate") of 8.0% of the Original Issue Amount compounded quarterly with respect to such quarter. The Rate will increase by 2.0% on the first day of the first quarter ending on or after the 635th day following the closing date of the first issuance of Series A Preferred Stock and on each subsequent anniversary of such date.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Series A Quarterly Dividend is payable in cash or in additional shares of Series A Preferred Stock (the "Series A PIK Shares"), at the option of the Company. The number of Series A PIK Shares to be issued is determined by dividing (i) the Series A Quarterly Dividend payable with respect to all shares of Series A Preferred Stock held by a holder thereof by (ii) the aggregate Original Issue Amount of all shares of Series A Preferred Stock held by a holder thereof, and each fractional Series A PIK Share is rounded to the nearest whole Series A PIK Share (with 0.5 of a share being rounded down to 0.0).
On March 31, 2023, the Company declared a dividend of 68,464 Series A PIK Shares with respect to the accrued dividends on the Series A Preferred Stock for the first quarter of 2023 (the "First Quarter PIK Dividend"). The First Quarter PIK Dividend was recorded at the estimated fair value of $0.2 million as of March 31, 2023 and was paid on April 21, 2023.
In the event of the Company's liquidation, dissolution or winding up, after payment or provision for payment of its debt and other liabilities, a holder of Series A Preferred Stock will receive a liquidating distribution equal to the amount of the cumulative accrued but unpaid dividends on each share of Series A Preferred Stock held by such holder. After the payment to the holders of Series A Preferred Stock of such liquidation preference, the holders of outstanding shares of Series A Preferred Stock will participate pari passu with the holders of Common Stock on an as-converted basis in any remaining distributions out of the Company’s assets available for distribution to stockholders.
Holders of shares of Series A Preferred Stock generally have no voting rights. However, the Company is restricted from taking certain actions without the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, including, but not limited to, amending the Company's Certificate of Incorporation or Bylaws in a manner that adversely affects the rights of the Series A Preferred Stock or consummating a merger of the Company with or into another party or a sale of substantially of its assets.
If the approval by the stockholders of the Company of conversion of the Series A Preferred Stock has not been obtained, each outstanding share of Series A Preferred Stock will be redeemed by the Company on February 1, 2028 for cash, at a redemption price equal to the sum of (i) the product of (x) 140% and (y) the Original Issue Amount, plus (ii) an amount equal to the cumulative amount of accrued and unpaid dividends on such share of Series A Preferred Stock.
Under the terms of the Purchase Agreement, a total of 833,914 Preferred Shares, are being held in escrow (the "Escrow Shares") based on a contingent redemption feature, (the "Contingent Redemption Feature," as defined below). The fair value of the Preferred Shares issued was determined to be $3.46 per Preferred Share on the Acquisition Date (the "Preferred Share Price") plus the value of the Contingent Redemption Feature related to the Escrow Shares.
The Escrow Shares are being withheld pending a determination by the IRS that no tax withholding is required on the Purchase Consideration issued to Arq Ltd. (the "Arq Ltd. Tax Liability"). The Company estimated the fair value of the potential Arq Ltd. Tax Liability at $3.3 million. In the event that the IRS determines that no withholding is required by Arq Ltd. in connection with the Purchase Consideration received by Arq Ltd., all of the Escrow Shares will be released and delivered to Arq Ltd. In the event that the IRS determines that any amount of withholding is required by Arq Ltd., the Company has agreed to redeem a sufficient number of Escrow Shares to fund the required payment to the IRS, and that number of Escrow Shares will be returned to the Company (the "Contingent Redemption Feature"). The number of Escrow Shares to be returned to the Company is equal to the required withholding amount divided by the Original Issue Amount, not to exceed a maximum of 833,914 Escrow Shares, and is equal to $3.3 million based on the Original Issue Amount (the "Maximum Contingent Redemption Amount"). The fair value of the Escrow Shares is the Maximum Contingent Redemption Amount and the fair value of the non-escrowed Preferred Shares ("Non Escrow Shares") is the Preferred Share Price.
The Series A Preferred Stock contains a mandatory redemption feature in the event the Preferred Shares, including future Preferred Shares issued under dividend requirements, are not converted into shares of Common Stock prior to February 1, 2028. The Company has determined that both the Escrow Shares and the Non Escrow Shares do not meet the definition of mandatorily redeemable financial instruments as there is a substantive conversion feature, and are therefore not classified as liabilities. As both the Escrow Shares and Non Escrow Shares represent financial instruments that are redeemable for cash, SEC guidance mandates that preferred securities which are redeemable upon the occurrence of an event that is not solely within the control of the issuer be classified outside of permanent equity as "temporary equity." Accordingly, the Company has classified all of the Preferred Shares as temporary equity and reported them as "Redeemable preferred stock" in the Consolidated Balance Sheet as of as of March 31, 2023.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Other
The amounts of revenues and net loss for Arq for the period from the Acquisition Date to March 31, 2023 are as follows:
| | | | | | | | |
| | Three Months Ended March 31, |
| (in thousands) | | 2023 |
| Revenues | | $ | — | |
| Net loss | | $ | (3,650) | |
The following represents the pro forma effects of the Arq Acquisition as if it had occurred on January 1, 2022. The pro forma net loss for each of the two years presented has been calculated after applying the Company’s accounting policies in effect for those years. In addition, pro forma net loss includes: (1) for the three months ended March 31, 2022, an increase in Payroll and benefits for compensation expense of $1.9 million payable to certain Arq employees, triggered by change in control provisions in employment agreements, as well as in employee severance agreements that has not been recognized in the historical financial statements, assuming such amounts will be paid in cash; (2) for each of the three months ended March 31, 2023 and 2022, a decrease in depreciation and amortization of $0.2 million and $0.6 million, respectively, resulting from fair value adjustments to Property, plant, equipment; (3) for each of the three months ended March 31, 2023 and 2022, an increase in amortization of $0.1 million and $0.1 million, respectively, resulting from fair value adjustments to intangible assets; (4) for each of the three months ended March 31, 2023 and 2022, increases to Interest expense of $0.2 million and $0.3 million, respectively for: (a) the issuance of the Term Loan (as defined below) including stated interest and the amortization of the Term Loan's discount and issuance costs and (b) amortization of debt discount related to a fair value adjustment to an assumed term loan of Arq; and (5) the removal of $6.6 million of transaction costs incurred for the period from April 1, 2022 to March 31, 2023 but included as additional transaction costs for the three months ended March 31, 2022, together with the income tax effects on (1) through (5). Since Arq had no revenues for the three months ended March 31, 2023 or 2022, pro forma revenues are the same as the Company's reported revenues for those periods.
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| (in thousands) | | 2023 | | 2022 |
| Revenues | | $ | 20,805 | | | $ | 26,402 | |
| Net loss | | $ | (4,069) | | | $ | (13,009) | |
Note 3 - Marshall Mine
On September 2, 2022, (the "MM Purchase Date"), a subsidiary of Advanced Emissions Solutions, Inc., ADA Carbon Solutions (Operations), LLC (the "Seller"), entered into a Membership Interest Purchase Agreement (the "MM Purchase Agreement") with Caddo Creek Resources Company, L.L.C. (the "Buyer") to sell all of its membership interests in Marshall Mine, LLC to the Buyer (the "MM Transaction") in exchange for a cash payment to be made by the Seller to the Buyer and the assumption by the Buyer of certain liabilities of Marshall Mine, LLC. The Buyer previously operated the Marshall Mine on behalf of Marshall Mine, LLC and was performing final mine reclamation under a fixed price contract.
The obligations of the Seller and the Buyer to close the Transaction were subject to certain customary closing conditions (the "Conditions") as set forth in the Purchase Agreement, including, but not limited to, (1) obtaining the approval of the Railroad Commission of Texas (the "Commission") for a change in control of Marshall Mine from Seller to Buyer or an affiliate of the Buyer; and (2) the Buyer replacing the Seller’s surety bond with a reclamation performance bond, letter of credit or other form of security to which the Buyer or an affiliate of the Buyer is the principal that is satisfactory to the Commission.
On March 27, 2023, (the "MM Closing Date") all of the Conditions for closing the MM Transaction were satisfied, and the Company made a cash payment to the Buyer in the amount of $2.2 million (the "MM Purchase Price"). As of the MM Closing Date, Marshall Mine, LLC had outstanding liabilities of approximately $4.9 million that were discharged upon payment of the MM Purchase Price by the Company, and the Company recognized a gain of approximately $2.7 million in the Statement of Operations for the three months ended March 31, 2023.
Subsequent to March 31, 2023, the Company was permitted to reduce its restricted cash requirement by $2.3 million to $7.7 million.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 4 - Revenues
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 - 45 days 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.
Contract liabilities are comprised of deferred revenue, which represents an obligation to transfer goods or services to a customer for which the Company has received consideration from the customer and, if deliverable within one year or less, is included in "Other current liabilities" in the Condensed Consolidated Balance Sheets and, if deliverable outside of one year, is included in "Other long-term liabilities" in the Condensed Consolidated Balance Sheets.
The following table shows the components of the Company's Receivables, net:
| | | | | | | | | | | | | | |
| | As of |
| (in thousands) | | March 31, 2023 | | December 31, 2022 |
| | | | |
| | | | |
| Trade receivables, net | | $ | 9,989 | | | $ | 13,789 | |
| Other receivables | | 72 | | | 75 | |
| | | | |
| Receivables, net | | $ | 10,061 | | | $ | 13,864 | |
For the three months ended March 31, 2023 and 2022, all material performance obligations related to revenues recognized were satisfied at a point in time. For the three months ended March 31, 2023 and 2022, approximately 14% and 11%, respectively, of Consumables revenues were generated in Canada, and all other revenues were generated in the U.S.
Note 5 - Inventories, net
The following table summarizes the Company's inventories recorded at the lower of average cost or net realizable value, as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
| | As of |
| (in thousands) | | March 31, 2023 | | December 31, 2022 |
| Product inventory, net | | $ | 10,356 | | | $ | 9,479 | |
| Raw material inventory | | 9,876 | | | 8,349 | |
| | | | |
Total inventories, net | | $ | 20,232 | | | $ | 17,828 | |
Note 6 - Debt Obligations
| | | | | | | | | | | | | | |
| | As of |
| (in thousands) | | March 31, 2023 | | December 31, 2022 |
| Term Loan due February 2027, related party | | $ | 10,000 | | | $ | — | |
| Arq Loan due January 2036 | | 9,960 | | | — | |
| Finance lease obligations | | 4,287 | | | 4,581 | |
| | 24,247 | | | 4,581 | |
| Unamortized debt discounts | | (1,288) | | | — | |
| Unamortized debt issuance costs | | (1,229) | | | — | |
| | | | |
| | 21,730 | | | 4,581 | |
| Less: Current maturities | | (1,611) | | | (1,131) | |
| Total long-term debt obligations | | $ | 20,119 | | | $ | 3,450 | |
Term Loan
The Term Loan has a term of 48 months and bears interest at a rate equal to either (a) Adjusted Term SOFR (subject to a 1.00% floor and a cap of 2.00%) plus a margin of 9.00% paid in cash and 5.00% paid in kind or (b) Base Rate plus a margin of 8.00% paid in cash and 5.00% paid in kind, which interest on the Term Loan in each case shall be payable (or capitalized, in the case of in kind interest) quarterly in arrears.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company may prepay the Term Loan at any time subject to the following prepayment premium: (i) prior to the twelve month anniversary of the Closing Date, the Make-Whole Amount (as defined below), (ii) thereafter but prior to the thirty-six month anniversary of the Closing Date, 2.00% of the outstanding principal amount of the Term Loan being repaid or prepaid or (iii) thereafter until the maturity date, 1.00% of the outstanding principal amount of the Term Loan being repaid or prepaid. The "Make-Whole Amount," with respect to any repayment or prepayment, is (i) an amount equal to all required interest payable (except for currently accrued and unpaid interest) on the aggregate principal amount of the Term Loan subject to such prepayment or repayment from the date of such prepayment or repayment through but excluding the date that is the first anniversary of the Closing Date calculated using an interest rate equal to (x) Adjusted Term SOFR for an interest period of one month in effect on the third U.S. Government Securities Business Day prior to such prepayment or repayment plus (y) 14.00% per annum and assuming all interest was paid in cash, plus (ii) a prepayment premium of 2.00% on the aggregate principal amount of the Term Loan subject to such prepayment or repayment.
The Term Loan is secured by substantially all of the assets of the Company and its subsidiaries (including those acquired in the Acquisition, but excluding those pledged as collateral under the Arq Loan, as defined and described below), subject to customary exceptions. The Loan Agreement includes, among others, the following covenants: (1) beginning with the first fiscal quarter after March 31, 2023 and as of the end of each fiscal quarter thereafter, the Company must maintain a minimum unrestricted cash balance of $5.0 million; (2) (x) as of December 31, 2023, for the fiscal year then ended, the Company must have a minimum annual revenue, on a consolidated basis, of $70.0 million, (y) as of December 31, 2024, for the fiscal year then ended, the Company must have a minimum annual revenue, on a consolidated basis, of $85.0 million and (z) for any fiscal year thereafter, the Company must have a minimum annual revenue, on a consolidated basis, of $100.0 million; (3) (x) as of December 31, 2024, for the fiscal year then ended, the Company must have a minimum Consolidated EBITDA of $3.0 million and (y) for any fiscal year thereafter, the Company must have a minimum Consolidated EBITDA of $16.0 million; and (4) beginning after the fiscal quarter ending September 30, 2023, during an LTV Trigger Period, ADES must not exceed a loan to value (based on the consolidated total assets of the Company and its subsidiaries) ratio of 0.40:1.00.
The Company allocated the cash proceeds of the Term Loan to both the Term Loan and the Warrant based on their relative fair values. The amount allocated to the Warrant was recorded as a debt discount and is amortized to interest expense over the term of the Term Loan. The standalone fair value of the Term Loan was based on a comparison of borrowings and associated credit ratings consistent with those of the Company. As the Warrant is exercisable for $0.01 per share, the fair value is deemed to be equal to the fair value of the underlying shares, and accordingly, the fair value of the Warrant was determined as the number of shares issuable from the exercise of the Warrant (based on 1.0% of post-transaction fully diluted share capital, as defined in the Purchase Agreement) multiplied by the closing share price of the Company's common stock on the Acquisition Date.
Arq Loan
As consideration in the Arq Acquisition, the Company assumed a term loan (the "Arq Loan") held by certain Arq subsidiaries as set out in the Arq Loan (the "Arq Borrowers") with a financial institution in the principal amount of $10.0 million. The Company recorded the Arq Loan on the Acquisition Date at its estimated fair value of $9.7 million, with the difference between the estimated fair value and the principal amount of $0.3 million recorded as a debt discount. This debt discount is recognized as interest expense over the term of the Arq Loan.
The Arq Loan was executed on January 27, 2021 and is comprised of two promissory notes (the "Notes"): (1) "Note A" in the principal amount of $8.0 million, which is guaranteed by the U.S. Department of Agriculture; and (2) "Note B" in the principal of $2.0 million. The Notes expire on January 27, 2036 and bear interest at 6.0% per annum through January 2026 and at prime plus 2.75% thereafter. Beginning January 27, 2023 and for the balance of the term of the Arq Loan, the Arq Borrowers are required to make combined interest and principal payments monthly in the fixed amount of $0.1 million. Interest is computed and payable on the outstanding principal as of the end of the prior month and the balance of the fixed monthly payment amount is applied to the outstanding principal. The Notes carry a prepayment penalty of 3.0% of the outstanding principal if paid prior to January 27, 2024, 2.0% of the outstanding principal if paid prior to January 27, 2025 and 1.0% of the outstanding principal if paid prior to January 27, 2026. Thereafter, the Arq Loan may be prepaid without penalty.
The Arq Loan is secured by substantially all assets of the Arq Borrowers and includes among others, the following covenants with respect to the Arq Borrowers, which are tested annually (Capitalized terms are defined in the Arq Loan): (a) Total Indebtedness to Net Worth greater than 4 to 1; (b) Balance Sheet Equity greater than or equal to 20% of the book value of all assets of the Arq Borrowers; (c) (i) net income plus interest, taxes, depreciation and amortization divided by (ii) interest expense plus current maturities on long-term debt greater than or equal to 1.25 to 1.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 7 - Leases
The Company's operating and finance lease right-of-use ("ROU") assets and liabilities as of March 31, 2023 and December 31, 2022 consisted of the following items (in thousands):
| | | | | | | | | | | | | | |
| | As of |
| Leases | | March 31, 2023 | | December 31, 2022 |
| Operating Leases | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Operating lease right-of-use assets, net of accumulated amortization (1) | | $ | 10,122 | | | $ | 7,734 | |
| | | | |
| Operating lease obligations, current | | $ | 2,554 | | | $ | 2,724 | |
| Long-term operating lease obligations | | 7,642 | | | 5,133 | |
| Total operating lease obligation | | $ | 10,196 | | | $ | 7,857 | |
| | | | |
| Finance Leases | | | | |
| | | | |
| | | | |
| | | | |
Finance lease right-of-use assets, net of accumulated amortization (2) | | $ | 2,343 | | | $ | 2,565 | |
| | | | |
| Finance lease obligations, current | | $ | 1,117 | | | $ | 1,131 | |
| Long-term finance lease obligations | | 3,170 | | | 3,450 | |
| Total finance lease obligations | | $ | 4,287 | | | $ | 4,581 | |
(1) Operating lease ROU assets are reported net of accumulated amortization of $5.1 million and $4.4 million as of March 31, 2023 and December 31, 2022, respectively.
(2) Finance lease ROU assets are reported net of accumulated amortization of $2.2 million and $2.0 million as of March 31, 2023 and December 31, 2022, respectively.
Operating leases
ROU assets under operating leases and operating lease liabilities are included in the "Other long-term assets" and "Other current liabilities" and "Other long-term liabilities" line items, respectively, in the Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022.
Lease expense for operating leases for the three months ended March 31, 2023 was $1.4 million, of which $1.1 million is included in the "Consumables - cost of revenue, exclusive of depreciation and amortization" line item, and $0.3 million is included in the "General and administrative" line item in the Condensed Consolidated Statements of Operations for those periods. Lease expense for operating leases for the three months ended March 31, 2022 was $1.1 million, of which $1.0 million, is included in the "Consumables - cost of revenue, exclusive of depreciation and amortization" line item, and $0.1 million, is included in "General and administrative" line item in the Condensed Consolidated Statements of Operations for those periods.
Finance leases
ROU assets under finance leases are included in the "Property, plant and equipment" line item in the Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022. Interest expense related to finance lease obligations and amortization of ROU assets under finance leases are included in the "Interest expense" and "Depreciation, amortization, depletion and accretion" line items, respectively, in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Lease financial information as of and for the three months ended March 31, 2023 and 2022 is provided in the following table:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| (in thousands) | | | | | | 2023 | | 2022 |
| Finance lease cost: | | | | | | | | |
| Amortization of right-of-use assets | | | | | | $ | 223 | | | $ | 141 | |
| Interest on lease liabilities | | | | | | 307 | | | 78 | |
| | | | | | | | |
| Operating lease cost | | | | | | 982 | | | 806 | |
| Short-term lease cost | | | | | | 409 | | | 243 | |
Variable lease cost (1) | | | | | | 8 | | | 9 | |
| | | | | | | | |
| Total lease cost | | | | | | $ | 1,929 | | | $ | 1,277 | |
| | | | | | | | |
| Other Information: | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
| Operating cash flows for finance leases | | | | | | $ | 307 | | | $ | 78 | |
| Operating cash flows for operating leases | | | | | | $ | 787 | | | $ | 738 | |
| Financing cash flows for finance leases | | | | | | $ | 295 | | | $ | 226 | |
| Right-of-use assets obtained in exchange for new finance lease liabilities | | | | | | $ | — | | | $ | — | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | | | | | | $ | — | | | $ | 3,418 | |
| Weighted-average remaining lease term - finance leases | | | | | | 2.5 years | | 2.7 years |
| Weighted-average remaining lease term - operating leases | | | | | | 7.7 years | | 4.4 years |
| Weighted-average discount rate - finance leases | | | | | | 5.9 | % | | 6.3 | % |
| Weighted-average discount rate - operating leases | | | | | | 9.8 | % | | 6.0 | % |
(1) Primarily includes common area maintenance, property taxes and insurance payable to lessors.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 8 - Commitments and Contingencies
Retention Agreements
As of December 31, 2022, the Company had an outstanding liability of $1.4 million (the "Retention Liability"), which was included in the "Other current liabilities" line item in the Condensed Consolidated Balance Sheet, related to retention agreements (the "Retention Agreements") executed between the Company and its executive officers and certain other key employees in May 2021 and amended in May 2022 in order to maintain the Company's business operations while it pursued and executed on its strategic initiatives. The Retention Agreements were approved by the Compensation Committee of the Board of Directors and the Board of Directors (the "Board") in May 2021 and May 2022. In August 2022, the Company paid $1.0 million pursuant to the payment terms of the Retention Agreements and the Retention Liability was paid in full in January 2023.
Surety Bonds and Restricted Cash
As the owner of the Marshall Mine, the Company was required to post a surety bond with a regulatory commission. As of December 31, 2022, the Company posted a $16.6 million surety bond that was released upon all of the Conditions for closing the MM Transaction being satisfied, which occurred on March 27, 2023.
As the owner of the Five Forks Mine, the Company is required to post a surety bond with a regulatory commission. As of March 31, 2023 and December 31, 2022, the Company had posted a $7.5 million surety bond related to performance requirements associated with the Five Forks Mine.
As of March 31, 2023 and December 31, 2022, the Company posted cash collateral of $10.0 million as required by the Company's surety bond provider, which is reported as long-term restricted cash on the Condensed Consolidated Balance Sheets. In April 2023, the Company and the surety bond provider agreed to reduce the cash collateral to $7.7 million.
As the lessee of the land adjacent to the Corbin Facility, the Company was required to post surety bonds with a regulatory commission for reclamation. As of March 31, 2023, the amount of these surety bonds was $3.0 million.
Tinuum Group
In addition to those obligations described in Note 10, the Company has certain limited obligations contingent upon future events in connection with the activities of Tinuum Group. The Company, NexGen Refined Coal, LLC ("NexGen") and two entities affiliated with NexGen have provided an affiliate of the Goldman Sachs Group, Inc. with limited guaranties (the "Tinuum Group Party Guaranties") related to certain losses it may suffer as a result of inaccuracies or breach of representations and covenants committed by Tinuum Group. The Company also is a party to a contribution agreement with NexGen under which any party called upon to pay on a Tinuum Group Party Guaranty is entitled to receive contributions from the other party equal to 50% of the amount paid. The Company has not recorded a liability or expense provision related to this contingent obligation as it believes that it is not probable that a loss will occur with respect to the Tinuum Group Party Guaranties.
Legal Proceedings
The Company is from time to time subject to 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. There were no significant legal proceedings as of March 31, 2023.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 9 - Supplemental Financial Information
Supplemental Balance Sheet Information
The following table summarizes the components of Other long-term assets, net as presented in the Condensed Consolidated Balance Sheets:
| | | | | | | | | | | | | | |
| | As of |
| (in thousands) | March 31,
2023 | | December 31,
2022 |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Other long-term assets, net: | | | | |
| Right of use assets, operating leases, net | | $ | 10,122 | | | $ | 7,734 | |
| Intangible assets, net | | 8,424 | | | 847 | |
| Spare parts, net | | 7,444 | | | 6,789 | |
| Upfront Customer Consideration | | 6,348 | | | 6,475 | |
| Mine development costs, net | | 5,657 | | | 5,478 | |
| Mine reclamation asset, net | | 1,616 | | | 1,641 | |
| Other | | 2,174 | | | 1,683 | |
| | | | |
| | | | |
| Total other long-term assets, net | | $ | 41,785 | | | $ | 30,647 | |
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. The Company performs an evaluation of the recoverability of the carrying value of mine development costs to determine if facts and circumstances indicate that their carrying value may be impaired and if any adjustment is warranted. There were no indicators of impairment as of March 31, 2023.
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 or are capitalized if applicable.
Mine reclamation asset, net represents an asset retirement obligation ("ARO") asset related to the Five Forks Mine and is depreciated over its estimated life.
As of March 31, 2023 and December 31, 2022, Other includes the Highview Investment in the amount of $0.6 million and $0.6 million, respectively, that is carried 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 Level 2 measurements. The Highview Investment is evaluated for indicators of impairment such as an event or change in circumstances that may have a significant adverse effect on the fair value of the investment. There were no changes to the carrying value of the Highview Investment for the three months ended March 31, 2023 as there were no indicators of impairment or observable price changes for identical or similar investments.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table details the components of Other current liabilities and Other long-term liabilities as presented in the Condensed Consolidated Balance Sheets:
| | | | | | | | | | | | | | |
| | | As of |
| (in thousands) | | March 31,
2023 | | December 31,
2022 |
| Other current liabilities: | | | | |
| Current portion of operating lease obligations | | $ | 2,554 | | | $ | 2,724 | |
| Income and other taxes payable | | 866 | | | 1,039 | |
| Current portion of mine reclamation liability | | 163 | | | 548 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Other(1) | | 2,605 | | | 2,334 | |
| Total other current liabilities | | $ | 6,188 | | | $ | 6,645 | |
| Other long-term liabilities: | | | | |
| Operating lease obligations, long-term | | $ | 7,642 | | | $ | 5,133 | |
| Mine reclamation liabilities | | 5,259 | | | 7,985 | |
| | | | |
| | | | |
| | | | |
| Other | | 746 | | | 733 | |
| Total other long-term liabilities | | $ | 13,647 | | | $ | 13,851 | |
(1) Included in Other current liabilities is $1.7 million related to the Repayment Agreement as defined in Note 10.
As of March 31, 2023 and December 31, 2022, the Mine reclamation liability related to the Five Forks Mine is included in Other long-term liabilities. As of December 31, 2022, the Mine reclamation liability related to Marshall Mine was included in Other current liabilities and Other long-term liabilities.
As part of the Arq Acquisition, the Company assumed asset retirement obligations related to two sites; a coal waste site adjacent to the Corbin Facility (the "Corbin ARO") and an inactive mine located in West Virginia (the "Mine 4 ARO"). The Company recorded these AROs at their estimated fair values and periodically adjusts them to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. The Corbin ARO was included in Other long-term liabilities and the current portion of the Mine 4 ARO was included in Other current liabilities with the long-term portion included in Other long-term liabilities.
The Mine reclamation liabilities represent AROs and changes for the three months ended March 31, 2023 and year ended December 31, 2022 were as follows: | | | | | | | | | | | | | | |
| | As of |
| (in thousands) | | March 31, 2023 | | December 31, 2022 |
| Asset retirement obligations, beginning of period | | $ | 8,533 | | | $ | 9,959 | |
Asset retirement obligations assumed(1) | | 1,500 | | | — | |
| Accretion | | 168 | | | 611 | |
Liabilities settled(2) | | (4,779) | | | (2,071) | |
| Changes due to scope and timing of reclamation | | — | | | 34 | |
| Asset retirement obligations, end of period | | 5,422 | | | 8,533 | |
| Less current portion | | 163 | | | 548 | |
| Asset retirement obligations, long-term | | $ | 5,259 | | | $ | 7,985 | |
(1) Represents two asset retirement obligations assumed as part of the Arq Acquisition; $0.5 million related to Corbin ARO and $1.0 million related to Mine 4 ARO.
(2) Represent the removal of the Marshall Mine ARO as a result of the MM Transaction as further discussed in Note 3.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table details the components of "Interest expense" in the Condensed Consolidated Statement of Operations:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| (in thousands) | | 2023 | | 2022 |
| Interest on Term Loan | | $ | 261 | | | $ | — | |
| Interest on Arq Loan | | 98 | | | — | |
| Amortization of debt discounts and debt issuance costs | | 94 | | | — | |
| Other | | 81 | | | 86 | |
| | | | |
| | $ | 534 | | | $ | 86 | |
Note 10 - Equity Method Investments
Tinuum Group, LLC
As of March 31, 2023 and December 31, 2022, the Company's ownership interest in Tinuum Group was 42.5%. For the three months ended March 31, 2023 and the three months ended March 31, 2022, the Company recognized earnings from Tinuum Group of $0.6 million and $1.0 million, respectively, which was comprised solely of cash distributions received during these periods.
In December 2022, the Company, certain of the other owners of Tinuum Group (collectively, the "Tinuum Group Owners") and Tinuum Group executed the Distribution and Repayment Agreement (the "Repayment Agreement"). Under the terms of the Repayment Agreement, the Tinuum Group Owners receive cash distributions (the "Distributions") equal to their percentage ownership and also are contractually liable for certain contingent liabilities of Tinuum Group (the "Tinuum Group Obligation") in amounts equal to their percentage ownership. In December 2022, the Company received its percentage share of the Distributions in the amount of $2.0 million and became contractually liable for $1.7 million of the Tinuum Group Obligation. As of March 31, 2023 and December 31, 2022, the Company' portion of the Tinuum Group Obligation is $1.7 million and $1.7 million, respectively and is included in the "Other current liabilities" line item in the Condensed Consolidated Balance Sheets. In the event that the Tinuum Group Obligation is discharged in its entirety or settled for an amount that is less than the total Tinuum Group Obligation, the Company will recognize future equity earnings for the difference in its portion of the Tinuum Group Obligation and its pro rata share of the actual payment made by Tinuum Group, if any, for the Tinuum Group Obligation.
In December 2022, the Company and Tinuum Group entered into an agreement (the "Tinuum Group Royalty Agreement") whereby the Company pays Tinuum Group a royalty (the "Tinuum Group Royalty") for certain of the Company's sales of its M-ProveTM products after the expiration of the Section 45 Tax Credit Program (beginning January 1, 2022) to certain of the former refined coal facilities owned by Tinuum Group and operated by Tinuum Services (the "M-45 Facilities"). The Tinuum Group Royalty is calculated based on "Net Profit" (as defined in the Tinuum Royalty Agreement) on the Company's sales of M-ProveTM product to certain of the M-45 Facilities. The Tinuum Group Royalty Agreement is for an initial term of five years with automatic renewals of five years unless the Company and Tinuum Group agree to terminate it.
For the three months ended March 31, 2023, the Company recognized $0.2 million of Tinuum Group Royalties, which are included in the "Consumables cost of revenues, excluding depreciation and amortization" line item in the Consolidated Statement of Operations.
Tinuum Services, LLC
As of March 31, 2023 and December 31, 2022, the Company has a 50% voting and economic interest in Tinuum Services and the carrying value of the equity investment in Tinuum Services was zero and zero, respectively. For the three months ended March 31, 2023 and the three months ended March 31, 2022, the Company recognized losses from Tinuum Services of zero and $0.2 million, respectively.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Cash Distributions
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 and investing activities in the Condensed Consolidated Statements of Cash Flows. Distributions from equity method investees are reported in the Condensed Consolidated Statements of Cash Flows as "Distributions from equity method investees, return on investment" as a component of cash flows from operations until such time as the carrying value in an equity method investee company is reduced to zero. Thereafter, such distributions are reported as "Distributions from equity method investees in excess of cumulative earnings" as a component of cash flows from investing activities. | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| (in thousands) | | 2023 | | 2022 |
| Distributions from equity method investees, return on investment | | | | |
| Tinuum Services | | $ | — | | | $ | 1,501 | |
| Tinuum Group | | — | | | — | |
| | | | |
| | | | |
| | | | |
| | $ | — | | | $ | 1,501 | |
| Distributions from equity method investees in excess of investment basis | | | | |
| | | | |
| Tinuum Group | | $ | 638 | | | $ | 1,012 | |
| Other | | — | | | 1 | |
| | | | |
| | | | |
| | $ | 638 | | | $ | 1,013 | |
Note 11 - Stockholders' Equity
Arq Acquisition and PIPE Investment
On February 1, 2023, the Company issued 3,814,864 and 3,842,315 shares of its Common Stock pursuant to the Arq Acquisition and the PIPE Investment, respectively. In addition, the Company issued 5,294,462 Preferred Shares pursuant to the Arq Acquisition, which is classified and presented outside of Stockholders' Equity as Redeemable preferred stock in the Consolidated Balance Sheet as of March 31, 2023.
As consideration for the Term Loan, the Company issued 325,857 Warrant Shares, which were deemed to be equity securities and were recorded at their estimated fair value of $0.8 million to Additional paid in capital, with a corresponding amount recorded as debt discount on the Term Loan.
Dividend
On March 31, 2023, the Company declared a dividend of 68,464 Series A PIK Shares with respect to the accrued dividends on the Series A Preferred Stock for the first quarter of 2023 (the "First Quarter PIK Dividend"). The First Quarter PIK Dividend was recorded at the estimated fair value of $0.2 million as of March 31, 2023 and was paid on April 21, 2023.
Stock Repurchase Program
As of March 31, 2023, the Company had $7.0 million remaining under a stock repurchase program, which will remain in effect until all amounts are utilized or is otherwise modified by the Board.
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 tax credits 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.
An entity that experiences an ownership change generally will be subject to an annual limitation on its pre-ownership change tax loss and credit carryforwards equal to the equity value of the entity immediately before the ownership change, multiplied by the long-term, tax-exempt rate posted monthly by the Internal Revenue Service (subject to certain adjustments). The annual limitation would be increased each year to the extent that there is an unused limitation in a prior year.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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"), which is 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 11, 2023, the Board approved the Sixth Amendment to the TAPP (the "Sixth Amendment"), which amends the TAPP, as previously amended by the First, Second, Third, Fourth and Fifth Amendments that were approved the Board on April 6, 2018, April 5, 2019, April 9, 2020, April 9, 2021 and March 15, 2022, respectively. The Sixth Amendment amends the definition of "Final Expiration Date" under the TAPP to extend the duration of the TAPP and makes associated changes in connection therewith. Pursuant to the Sixth Amendment, the Final Expiration Date shall be the close of business on the earlier of (i) December 31, 2024 or (ii) December 31, 2023 if stockholder approval of the Sixth Amendment has not been obtained prior to such date.
Note 12 - Stock-Based Compensation
The Company grants equity-based awards to employees, non-employee directors and consultants that may include, but are not limited to, RSAs, PSUs, restricted stock units and stock options. Stock-based compensation expense related to manufacturing employees and administrative employees is included within the "Cost of revenue" and "Payroll and benefits" line items, respectively, in the Condensed Consolidated Statements of Operations. Stock-based compensation expense related to non-employee directors and consultants is included within the "General and administrative" line item in the Condensed Consolidated Statements of Operations.
Total stock-based compensation expense for the three months ended March 31, 2023 and 2022 was as follows:
| | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| (in thousands) | | 2023 | | 2022 | | | | |
| RSA expense | | $ | 488 | | | $ | 427 | | | | | |
| | | | | | | | |
| PSU expense | | 75 | | | 37 | | | | | |
| | | | | | | | |
| Total stock-based compensation expense | | $ | 563 | | | $ | 464 | | | | | |
The amount of unrecognized compensation cost as of March 31, 2023, and the expected weighted-average period over which the cost will be recognized is as follows:
| | | | | | | | | | | | | | |
| | As of March 31, 2023 |
| (in thousands, expect years) | | Unrecognized Compensation Cost | | Expected Weighted-
Average Period of
Recognition (in years) |
| RSA expense | | $ | 2,897 | | | 2.45 |
| | | | |
| PSU expense | | 485 | | | 2.49 |
| | | | |
| Total unrecognized stock-based compensation expense | | $ | 3,382 | | | 2.46 |
Restricted Stock
Restricted stock is typically granted with vesting terms of three years. The fair value of RSAs 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 RSAs is generally recognized on a straight-line basis over the entire vesting period.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A summary of RSA activity under the Company's various stock compensation plans for the three months ended March 31, 2023 is presented below:
| | | | | | | | | | | | | | | | | | |
| | Restricted Stock | | | | Weighted-Average Grant Date Fair Value | | |
| | | | | | | | |
| Non-vested at January 1, 2023 | | 652,962 | | | | | $ | 5.58 | | | |
| Granted | | 498,541 | | | | | $ | 1.97 | | | |
| Vested | | (237,185) | | | | | $ | 5.67 | | | |
| Forfeited | | (15,299) | | | | | $ | 5.45 | | | |
| Non-vested at March 31, 2023 | | 899,019 | | | | | $ | 3.55 | | | |
Performance Share Units
Compensation expense is recognized for PSUs on a straight-line basis over the applicable service period, which is generally three years, based on the estimated fair value at the date of grant using a Monte Carlo simulation model. A summary of PSU activity for the three months ended March 31, 2023 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Units | | Weighted-Average
Grant Date
Fair Value | | Aggregate Intrinsic Value (in thousands) | | Weighted-Average
Remaining
Contractual
Term (in years) |
| PSUs outstanding, January 1, 2023 | | 148,591 | | | $ | 7.85 | | | | | |
| Granted | | 231,242 | | | 2.48 | | | | | |
Vested / Settled(1) | | (41,855) | | | 6.17 | | | | | |
| Forfeited / Canceled | | — | | | — | | | | | |
| PSUs outstanding, March 31, 2023 | | 337,978 | | | $ | 4.38 | | | $ | 669 | | | 2.49 |
(1) The number of units shown in the table above are based on target performance. The final number of shares of common stock issued may vary depending on the achievement of market conditions established within the awards, which could result in the actual number of shares issued ranging from zero to a maximum of two times the number of units shown in the above table. For the three months ended March 31, 2023, no shares of common stock were issued upon vesting of PSUs.
Note 13 - Income Taxes
For the three months ended March 31, 2023 and 2022, the Company's income tax expense and effective tax rates were:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| (in thousands, except for rate) | | 2023 | | 2022 | | | | |
| Income tax benefit | | $ | 33 | | | $ | — | | | | | |
| Effective tax rate | | — | % | | — | % | | | | |
The Company incurred pretax loss for the three months ended March 31, 2023 and expects to incur pretax loss for the year ending December 31, 2023. As a result, the effective rate for the three months ended March 31, 2023 was zero as the resultant tax benefit was offset by a valuation allowance recorded as of March 31, 2023.
The Company assesses 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 deferred tax assets, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating income taxes, the Company assesses the relative merits and risks of the appropriate income tax treatment of transactions taking into account statutory, judicial and regulatory guidance.