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 and manufacturing, mining and logistics operations located in Louisiana. The Company is 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, industrial and water treatment markets. The Company also owns an associated lignite mine ("Five Forks Mine") which supplies the primary raw material for manufacturing AC.
Through December 31, 2021, the Company generated substantial earnings from its equity ownership in Tinuum Group, LLC ("Tinuum Group") and Tinuum Services, LLC ("Tinuum Services"), both of which are unconsolidated entities. Both Tinuum Group and Tinuum Services ceased material operations effective December 31, 2021 as a result of the expiration of a tax credit program under Internal Revenue Code Section 45 - Production Tax Credit (the "Section 45 Tax Credit Program"). Tinuum Group provided reduction of mercury and nitrogen oxide ("NOx") emissions at select coal-fired power generators through the production and sale of refined coal ("RC") that qualified for tax credits under the Section 45 Tax Credit Program ("Section 45 tax credits"). The Company also earned royalties for technologies which were licensed to Tinuum Group and 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. Presently, both Tinuum Group and Tinuum Services continue to wind-down their operations, and the Company has received what it anticipates to be final cash distributions from these entities.
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, 2021 (the "2021 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 and nine months ended September 30, 2022 and 2021, potentially dilutive securities consist of unvested restricted stock awards ("RSAs") and contingent performance stock units ("PSUs").
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table sets forth the calculations of basic and diluted (loss) earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands, except per share amounts) | | 2022 | | 2021 | | 2022 | | 2021 |
| Net (loss) income | | $ | (2,391) | | | $ | 24,253 | | | $ | (5,750) | | | $ | 54,580 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Basic weighted-average common shares outstanding | | 18,487 | | | 18,292 | | | 18,435 | | | 18,243 | |
| Add: dilutive effect of equity instruments | | — | | | 197 | | | — | | | 173 | |
| | | | | | | | |
| | | | | | | | |
| Diluted weighted-average shares outstanding | | 18,487 | | | 18,489 | | | 18,435 | | | 18,416 | |
| (Loss) earnings per share - basic | | $ | (0.13) | | | $ | 1.33 | | | $ | (0.31) | | | $ | 2.99 | |
| (Loss) earnings per share - diluted | | $ | (0.13) | | | $ | 1.31 | | | $ | (0.31) | | | $ | 2.96 | |
For the three and nine months ended September 30, 2022, potentially dilutive securities of 0.8 million and 0.7 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. Further, for the three and nine months ended 2021, potentially dilutive securities of zero and 0.1 million shares of common stock, respectively, were outstanding but were not included in the calculation of diluted net (loss) income per share because the effect would have been anti-dilutive.
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 2021 Form 10-K. Actual results could differ from these estimates.
Risks and Uncertainties
The loss of earnings and cash distributions from both Tinuum Group and Tinuum Services will continue to have a material adverse impact on the Company’s financial position, results of operations and cash flows. For 2022, the Company is principally dependent on 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 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 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 holds cash at two financial institutions as of September 30, 2022. 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.
The Company evaluates the creditworthiness of its customers prior to entering into an agreement to sell its products and, as necessary, through the life of the customer relationship.
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.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Segments
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 September 30, 2022, the Company's CODM was the Company's Chief Executive Officer, and the Company concluded that APT was its one reportable segment.
Given the wind-down of Tinuum Group and Tinuum Services and the impact on the Company's financial statements, the Company determined the historical RC segment no longer met the qualitative or quantitative criteria to be considered a reporting segment under U.S. GAAP. As a result, including the method in which the CODM allocates resources, beginning January 1, 2022, the Company determined that it had one reportable segment and therefore has removed its segment disclosures for this Quarterly Report.
New Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in ASU 2016-13 replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form 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. The Company intends to adopt ASU 2016-13 effective January 1, 2023 and is currently evaluating the provisions of this guidance and assessing the impact on its financial statements and disclosures. The Company does not believe this standard will have a material impact on its financial statements and disclosures.
Note 2 - Proposed Merger
On August 19, 2022, the Company entered into a Transaction Agreement (the "Transaction Agreement") with Elbert Holdings, Inc., a Delaware corporation and wholly owned subsidiary of the Company ("New ADES"), Elbert Merger Sub 1, Inc., a Delaware corporation and wholly owned subsidiary of New ADES ("Merger Sub"), and Arq Limited, a company incorporated under the laws of Jersey ("Arq"), pursuant to which (i) New ADES will acquire 100% of the outstanding equity interests of Arq (the "Arq Share Acquisition"), and (ii) stockholders of ADES will have the right to receive shares of New ADES and either their pro rata share of a $10.0 million aggregate cash payment or additional shares in New ADES ((i) and (ii) collectively, the "Merger").
The transactions contemplated by the Transaction Agreement, including but not limited to the ADES Merger (defined below), the Arq Share Acquisition, and the PIPE Investment (defined below), (collectively, the "Transactions") will occur through multiple steps at the time of closing. First, Merger Sub 1 will be merged into ADES, with ADES surviving as a wholly owned subsidiary of New ADES (the "ADES Merger").
In the ADES Merger, stockholders of the Company will be given the election to exchange each share of common stock of the Company for either (i) 1.11 shares of New ADES common stock plus $0.52 in cash (the "Mixed ADES Consideration") or (ii) 1.22 shares of New ADES common stock (the "All-Stock ADES Consideration," and such conversion rate, the "All Stock Conversion Rate"). Stockholders that do not make an affirmative election to receive the Mixed ADES Consideration or the All-Stock ADES Consideration will receive the All-Stock ADES Consideration in the ADES Merger.
Second, following the completion of the ADES Merger pursuant to a Scheme of Arrangement (the "Scheme of Arrangement") and in accordance with the Laws of the Bailiwick of Jersey, existing shareholders of Arq will transfer all of their equity interests in Arq to New ADES in exchange for an aggregate number of 19,729,235 newly issued shares of New ADES common stock (the "Arq Share Acquisition"). The Scheme of Arrangement will become effective at such time as an act of the Royal Court of Jersey sanctioning the Scheme of Arrangement has been delivered to the Registrar of Companies in Jersey. Concurrently with the execution of the Transaction Agreement, persons holding more than 75% of the voting rights of the Arq shareholders delivered irrevocable voting agreements to Arq and ADES pursuant to which those shareholders agreed to vote in favor of the Scheme of Arrangement.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In connection with the Transactions, each ADES equity award made or otherwise denominated in shares of the Company’s common stock that is outstanding immediately prior to the ADES Merger will be assumed by New ADES. Such equity awards will continue to have the same terms and conditions of such awards immediately prior to the ADES Merger, except that each equity award will become exercisable for shares of New ADES common stock, and the number of shares subject to such award will be equal to the number of shares of ADES common stock subject to such award multiplied by the All Stock Conversion Rate.
The closing of the Transactions (the "Closing") is conditioned on the absence of any order, law or injunction preventing the consummation of the Transactions; approval for listing of the shares of New ADES common stock issued in the ADES Merger and the Arq Share Acquisition (subject to official notice of issuance) on the Nasdaq Global Market; approval of the Transaction Agreement by holders of a majority of the outstanding common shares of ADES; the approval of the Scheme of Arrangement by resolution of a majority in number of the Arq shareholders representing three-fourths (75%) or more of the voting rights of the Arq shareholders; expiration of the waiting period under the Hart-Scott-Rodino Act; subject to certain qualifications, the accuracy of representations and warranties of the other party set forth in the Transaction Agreement; the performance by the other party in all material respects of its obligations under the Transaction Agreement, and other customary conditions. In addition, ADES’ obligation to consummate the Transactions is conditioned upon the consummation of term debt financing in the amount of $10.0 million provided by a third-party financial institution (the "Debt Financing") and a PIPE Investment in the amount of $20.0 million from current Arq shareholders (the "PIPE Investment").
On August 18, 2022, the ADES Board unanimously approved and adopted the Transaction Agreement and the Transactions and recommends that the ADES shareholders approve and adopt the Transaction Agreement, subject to certain exceptions set forth in the Transaction Agreement.
Assuming the Merger is consummated, the Company has determined that it will be the accounting acquirer.
Note 3 - Customer Supply Agreement
On September 30, 2020, the Company and Norit Activated Carbon - Americas (f/k/a Cabot Norit Americas, Inc.) ("Norit"), entered into a supply agreement (the "Supply Agreement") pursuant to which the Company agreed to sell and deliver to Norit, and Norit 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.
Under the Supply Agreement, Norit also 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 Norit (referred to as "Shared Capital") and revenues earned from capital expenditures incurred that will benefit Norit exclusively (referred to as "Specific Capital"). In the event that Norit ceases to make purchases under the Supply Agreement, Norit is obligated to pay the balance of any outstanding payments for Specific Capital.
Further, under the terms of the Supply Agreement, Norit was obligated to pay the Reclamation Reimbursement (defined in Note 4 below) to the Company for $10.2 million of the Reclamation Costs (defined in Note 4 below), inclusive of interest. The Company recorded the Norit 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 (Norit's) future performance, which the Company estimated was approximately 1.5%.
On February 25, 2022, the Company received $10.6 million in cash from Norit (the "Norit 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 Norit by its parent, Cabot Corporation. Under the Change in Control, the Company received from Norit 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 $0.8 million related to additional costs due to the third-party operator of Marshall Mine (the "Norit Reclamation Costs"). Under the Reclamation Contract (defined in Note 4 below), the Company was obligated to remit payment for the Norit Reclamation Costs to the third-party operator of Marshall Mine (defined in Note 4 below), and such payment was remitted in March 2022. The Change in Control did not impact any other provisions of the Supply Agreement.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of February 25, 2022, the carrying value of the Reclamation Reimbursement was $9.0 million, which included the principal balance, adjusted for accretion of interest and payments made to date. Under the Change in Control, the Company received $8.5 million in cash for full payment of the outstanding Reclamation Reimbursement. The Company concluded that the cash proceeds received represented an early payment of a receivable based on a change in contractual terms and accounted for the difference between the cash proceeds received and the carrying amount of the Reclamation Reimbursement of $0.5 million as a loss for the three months ended March 31, 2022, which is included in the "Other Income (Expense)" line item in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2022.
Also, under the Change in Control, the Company received $1.3 million in advance of revenue to be recognized in future periods related to Specific Capital and recorded this amount as deferred revenue, which is recognized ratably over the remaining contractual term as stipulated in the Supply Agreement.
Note 4 - Marshall Mine
Acquisition
Concurrently with the execution of the Supply Agreement, on September 30, 2020, the Company entered into an agreement to purchase from Norit 100% of the membership interests in Marshall Mine, LLC (the "Marshall Mine Acquisition") for a nominal cash purchase price. Marshall Mine, LLC owns a lignite mine located outside of Marshall, Texas (the "Marshall Mine"). The Company concluded that the Marshall Mine did not have any remaining economic reserves and independently determined to immediately commence activities to shutter it. Accordingly, on September 30, 2020, the Company and a third party entered into a reclamation contract (the "Reclamation Contract") for full reclamation of the Marshall Mine, which was expected to be completed by 2030. Under the terms of the Supply Agreement, Norit was obligated to reimburse the Company for $10.2 million (the "Reclamation Reimbursement") for a portion of the total costs incurred under the Reclamation Contract (the "Reclamation Costs"), which was payable semi-annually over 13 years and inclusive of interest. As discussed in Note 3, on February 25, 2022 as part of the Change in Control, Norit fully paid the outstanding amount owed under the Reclamation Reimbursement and has no further liability related to the Marshall Mine.
The Company accounted for the Marshall Mine Acquisition as an asset acquisition, and it included the acquisition of certain assets and assumption of certain liabilities as well as the incurrence of an obligation for the Reclamation Costs (the "Marshall Mine ARO"). As of September 30, 2022 and December 31, 2021, the carrying value of the Marshall Mine ARO was $4.6 million and $6.3 million, respectively.
As the Marshall Mine Acquisition represented a transaction with a customer of net assets acquired and liabilities assumed from Norit, the Company accounted for the excess of the fair value of liabilities assumed over assets acquired as upfront consideration transferred to a customer, Norit (the "Upfront Customer Consideration"). The amount of the Upfront Customer Consideration was also recognized net of the Reclamation Reimbursement. The total Upfront Customer Consideration is being amortized as a reduction to revenues on a straight-line basis over the expected 15-year contractual period of the Supply Agreement. Amortization of the Upfront Customer Consideration is approximately $0.5 million per year.
Disposition
On September 2, 2022, (the "Agreement Date"), the Company (the "Seller"), entered into a Membership Interest Purchase Agreement (the "Purchase Agreement") with a third party (the "MM Buyer") to sell all of its membership interests in Marshall Mine, LLC to the MM Buyer (the "MM Sale") in exchange for a cash payment to be made by the Seller to the MM Buyer of approximately $2.4 million (the "Purchase Price") and the assumption by the MM Buyer of certain liabilities of Marshall Mine, LLC. The MM Buyer previously operated the Marshall Mine on behalf of Marshall Mine, LLC and is currently performing reclamation under the Reclamation Contract.
The Purchase Price is subject to adjustments for certain events that may occur during the period from the Agreement Date and the Closing Date (as defined below) as follows: (1) increased or reduced as agreed upon by the Seller and the MM Buyer (collectively, the "Parties"); (2) increased or decreased by income, proceeds, receipts and credits earned with respect to the assets and operations of Marshall Mine, LLC between signing and closing of the MM Sale, (3) increased by any amounts that are, or under US GAAP should be, accrued as liabilities of Marshall Mine LLC as of the closing of the MM Sale, as more fully described in the Purchase Agreement; and (4) decreased by agreed amounts which escalate depending on the timing of closing if it occurs after January 1, 2023.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The obligations of the Parties to close the MM Sale (the "Closing Date") is subject to certain events, including (1) obtaining the approval of the Railroad Commission of Texas (the "Commission") for an operating permit in the name of the MM Buyer or an affiliate of the MM Buyer; and (2) the MM Buyer replacing the Seller’s surety bond with a reclamation performance bond, letter of credit or other form of security to which the MM Buyer or an affiliate of the MM Buyer is the principal that is satisfactory to the Commission. The Purchase Agreement may be terminated: (1) by mutual consent of the MM Buyer and the Seller at any time prior to the Closing Date; (2) by the MM Buyer or Seller, if the Closing has not occurred within one year after the Agreement Date, unless the failure of the consummation of the Closing shall be due to the failure of the party wishing to terminate to comply in all material aspects with the agreements and covenants contained therein; (3) if there is a material breach (by either the MM Buyer or Seller) of any representation, warranty, covenant or agreement contained in the Purchase Agreement that is not cured within a specified time frame; and (4) if the MM Sale is prohibited by governmental authority in a final, non-appealable order or applicable law.
As of September 30, 2022, Marshall Mine, LLC had outstanding liabilities of approximately $5.1 million, which the Company expects to be fully discharged upon payment of the Purchase Price. Because the Closing Date is uncertain, primarily due to a date uncertain for the Parties to receive approval of the MM Buyer's operating permit and surety bond by the Commission, the Company is unable to determine the accounting period in which it will recognize the MM Sale.
The following tables summarize the assets and liabilities of Marshall Mine, LLC and their classification in the Company's Condensed Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | September 30, 2022 | | December 31, 2021 | | Balance sheet component |
| | | | | | |
| Cash | | $ | — | | | $ | 914 | | | Current assets |
| Norit receivable, short-term | | — | | | 2,056 | | | Current assets |
| | | | | | |
| Restricted cash | | 10,000 | | | 10,027 | | | Non-current assets |
| | | | | | |
| Property and equipment, net | | — | | | 1,968 | | | Non-current assets |
| Norit receivable, long-term | | — | | | 6,846 | | | Non-current assets |
| | | | | | |
| | $ | 10,000 | | | $ | 21,811 | | | |
| | | | | | |
| | | | | | |
| Accounts payable and accrued liabilities | | $ | 525 | | | $ | 1,065 | | | Current liabilities |
| Asset retirement obligation, short-term | | 418 | | | 1,775 | | | Current liabilities |
| Asset retirement obligation, long-term | | 4,180 | | | 4,546 | | | Non-current liabilities |
| | $ | 5,123 | | | $ | 7,386 | | | |
Note 5 - 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 Consolidated Balance Sheets and, if deliverable outside of one year, is included in "Other long-term liabilities" in the Consolidated Balance Sheets.
The following table shows the components of the Company's Receivables, net:
| | | | | | | | | | | | | | |
| | As of |
| (in thousands) | | September 30, 2022 | | December 31, 2021 |
| | | | |
| | | | |
| Trade receivables, net | | $ | 13,824 | | | $ | 10,476 | |
| Other receivables | | 79 | | | — | |
| Norit Receivable - current | | — | | | 2,146 | |
| Receivables, net | | $ | 13,903 | | | $ | 12,622 | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
For the three and nine months ended September 30, 2022 and 2021, all material performance obligations related to revenues recognized were satisfied at a point in time. For the three and nine months ended September 30, 2022, approximately 7% and 9%, respectively, of Consumables revenues were generated in Canada, and all other revenues were generated in the U.S. For the three and nine months ended September 30, 2021, approximately 8% and 12%, respectively, of Consumables revenues were generated in Canada, and all other revenues were generated in the U.S.
Note 6 - Inventories, net
The following table summarizes the Company's inventories recorded at the lower of average cost or net realizable value, as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | |
| | As of |
| (in thousands) | | September 30, 2022 | | December 31, 2021 |
| Product inventory, net | | $ | 6,723 | | | $ | 4,901 | |
| Raw material inventory | | 8,538 | | | 2,949 | |
| | | | |
Total inventories, net | | $ | 15,261 | | | $ | 7,850 | |
Note 7 - Leases
The Company's operating and finance lease right-of-use ("ROU") assets and liabilities as of September 30, 2022 and December 31, 2021 consisted of the following items (in thousands):
| | | | | | | | | | | | | | |
| | As of |
| Leases | | September 30, 2022 | | December 31, 2021 |
| Operating Leases | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Operating lease right-of-use assets, net of accumulated amortization (1) | | $ | 7,610 | | | $ | 6,000 | |
| | | | |
| Operating lease obligations, current | | $ | 2,654 | | | $ | 2,157 | |
| Long-term operating lease obligations | | 5,127 | | | 4,178 | |
| Total operating lease obligation | | $ | 7,781 | | | $ | 6,335 | |
| | | | |
| Finance Leases | | | | |
| | | | |
| | | | |
| | | | |
Finance lease right-of-use assets, net of accumulated amortization (2) | | $ | 2,806 | | | $ | 1,743 | |
| | | | |
| Finance lease obligations, current | | $ | 1,182 | | | $ | 1,011 | |
| Long-term finance lease obligations | | 3,731 | | | 3,152 | |
| Total finance lease obligations | | $ | 4,913 | | | $ | 4,163 | |
(1) Operating lease ROU assets are reported net of accumulated amortization of $3.6 million and $1.9 million as of September 30, 2022 and December 31, 2021, respectively.
(2) Finance lease ROU assets are reported net of accumulated amortization of $1.7 million and $1.1 million as of September 30, 2022 and December 31, 2021, 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 September 30, 2022 and December 31, 2021.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Lease expense for operating leases for the three and nine months ended September 30, 2022 was $1.2 million and $3.2 million, respectively, of which $1.1 million and $2.9 million, respectively, is included in the "Consumables - cost of revenue, exclusive of depreciation and amortization" line item, and $0.1 million and $0.3 million, respectively, 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 and nine months ended September 30, 2021 was $1.1 million and $3.1 million, respectively of which $1.0 million and $2.7 million, respectively, is included in the "Consumables - cost of revenue, exclusive of depreciation and amortization" line item, and $0.1 million and $0.4 million, respectively, 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 September 30, 2022 and December 31, 2021. 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 and nine months ended September 30, 2022 and 2021.
Lease financial information as of and for the three and nine months ended September 30, 2022 and 2021 is provided in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Finance lease cost: | | | | | | | | |
| Amortization of right-of-use assets | | $ | 236 | | | $ | 152 | | | $ | 607 | | | $ | 500 | |
| Interest on lease liabilities | | 76 | | | 74 | | | 240 | | | 223 | |
| | | | | | | | |
| Operating lease cost | | 805 | | | 647 | | | 2,389 | | | 1,732 | |
| Short-term lease cost | | 373 | | | 493 | | | 832 | | | 1,293 | |
| Variable lease cost (1) | | 5 | | | 9 | | | 12 | | | 30 | |
| | | | | | | | |
| Total lease cost | | $ | 1,495 | | | $ | 1,375 | | | $ | 4,080 | | | $ | 3,778 | |
| | | | | | | | |
| Other Information: | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
| Operating cash flows for finance leases | | | | | | $ | 240 | | | $ | 223 | |
| Operating cash flows for operating leases | | | | | | $ | 2,118 | | | $ | 2,514 | |
| Financing cash flows for finance leases | | | | | | $ | 913 | | | $ | 1,085 | |
| Right-of-use assets obtained in exchange for new finance lease liabilities | | | | | | $ | 1,641 | | | $ | — | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | | | | | | $ | 3,563 | | | $ | 6,392 | |
| Weighted-average remaining lease term - finance leases | | | | | | 2.9 years | | 3.1 years |
| Weighted-average remaining lease term - operating leases | | | | | | 4.2 years | | 3.1 years |
| Weighted-average discount rate - finance leases | | | | | | 5.9 | % | | 6.4 | % |
| Weighted-average discount rate - operating leases | | | | | | 6.1 | % | | 6.6 | % |
(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
On May 4, 2022, the Compensation Committee of the Board of Directors and the Board of Directors (the "Board") approved the amendment to retention agreements (the "Retention Agreements" and each a "Retention Agreement"), which had been executed in May 2021, between the Company and its executive officers and certain other key employees in order to maintain the Company's business operations while it pursues and executes on its strategic initiatives (the "Amended Retention Agreements"). Under the Amended Retention Agreements, employees will receive (i) 40% of the original amount agreed to in the Retention Agreements ("Retention Pay") in August 2022; (ii) 60% of the Retention Pay on the earliest of (1) the date the employee’s employment is terminated without Cause or for Good Reason (as those terms are defined in the Retention Agreement or the employee’s employment agreement, as applicable), (2) 90 days after a Transaction Date or a Change in Control (as those terms are defined in the Retention Agreement or the employee’s employment agreement, as applicable), or (3) January 18, 2023; and (iii) an additional lump sum payment, ranging from 10% to 40% of the Retention Pay, will also be paid at the earliest of (1) the date the employee’s employment is terminated without Cause or for Good Reason (as those terms are defined in the Retention Agreement or the employee’s employment agreement, as applicable), (2) 90 days after a Transaction Date or a Change in Control (as those terms are defined in the Retention Agreement or the employee’s employment agreement, as applicable), or (3) in January 2023.
In order to receive the Amended Retention Agreements payments, employees must remain employed at the Company through the dates above. In August 2022, the Company paid out $1.0 million pursuant to the payment terms of the Amended Retention Agreements. As of September 30, 2022, the total cash payable pursuant to the Amended Retention Agreements is $1.1 million and is included in the "Other current liabilities" line item in the Condensed Consolidated Balance Sheet.
Surety Bonds and Restricted Cash
As the owner of the Marshall Mine, the Company is required to post a surety bond with a regulatory commission. As of September 30, 2022 and December 31, 2021, the Company had posted a $16.6 million surety bond (the "MM Surety Bond") which will remain in place until the Marshall Mine is fully reclaimed, and may be further reduced in amount from time to time as the Company progresses with its reclamation activities.
As the owner of the Five Forks Mine, the Company is required to post a surety bond with a regulatory commission. As of September 30, 2022 and December 31, 2021, the Company had posted a $7.5 million surety bond related to performance requirements associated with the Five Forks Mine.
As of September 30, 2022 and December 31, 2021, the Company posted cash collateral of $10.0 million for both the Marshall Mine and Five Forks Mine as required by the Company's surety bond provider, which is reported as long-term restricted cash on the Condensed Consolidated Balance Sheets.
Tinuum Group
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 September 30, 2022.
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) | September 30,
2022 | | December 31,
2021 |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Other long-term assets, net: | | | | |
| Right of use assets, operating leases, net | | $ | 7,610 | | | $ | 6,000 | |
| Upfront Customer Consideration | | 6,602 | | | 6,982 | |
| Mine development costs, net | | 5,369 | | | 5,330 | |
| Spare parts, net | | 5,500 | | | 4,598 | |
| Mine reclamation asset, net | | 1,666 | | | 1,742 | |
| Intangible assets, net | | 947 | | | 1,237 | |
| Other | | 1,835 | | | 1,745 | |
| Equity method investments | | — | | | 2,391 | |
| Norit Receivable | | — | | | 6,846 | |
| Total other long-term assets, net | | $ | 29,529 | | | $ | 36,871 | |
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 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 September 30, 2022. 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 September 30, 2022 and December 31, 2021, 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 and nine months ended September 30, 2022 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) | | September 30,
2022 | | December 31,
2021 |
| Other current liabilities: | | | | |
| Current portion of operating lease obligations | | $ | 2,654 | | | $ | 2,157 | |
| Income and other taxes payable | | 1,286 | | | 807 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Other | | 1,421 | | | 2,160 | |
| Total other current liabilities | | $ | 5,361 | | | $ | 5,124 | |
| Other long-term liabilities: | | | | |
| Mine reclamation liabilities | | $ | 7,979 | | | $ | 8,184 | |
| Operating lease obligations, long-term | | 5,127 | | | 4,178 | |
| | | | |
| | | | |
| | | | |
| Other | | 800 | | | — | |
| Total other long-term liabilities | | $ | 13,906 | | | $ | 12,362 | |
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 is included in Other current liabilities and Other long-term liabilities. The Mine reclamation liabilities represent AROs and changes for the three and nine months ended September 30, 2022 and year ended December 31, 2021 were as follows:
| | | | | | | | | | | | | | |
| | As of |
| (in thousands) | | September 30, 2022 | | December 31, 2021 |
| Asset retirement obligations, beginning of period | | $ | 9,959 | | | $ | 21,447 | |
| | | | |
| Accretion | | 460 | | | 1,102 | |
| Liabilities settled | | (2,056) | | | (10,010) | |
| Changes due to scope and timing of reclamation (1) | | 34 | | | (2,580) | |
| | | | |
| Asset retirement obligations, end of period | | 8,397 | | | 9,959 | |
| Less current portion | | 418 | | | 1,775 | |
| Asset retirement obligations, long-term | | $ | 7,979 | | | $ | 8,184 | |
(1) Represent reductions to the Marshall Mine ARO primarily based on scope reductions related to future reclamation requirements for Marshall Mine. Amounts recorded as changes in estimates in the Statement of Operations for the corresponding periods.
Note 10 - Equity Method Investments
Tinuum Group, LLC
As of September 30, 2022 and December 31, 2021, the Company's ownership interest in Tinuum Group was 42.5%. Tinuum Group supplied technology equipment and technical services at select coal-fired generators, but its primary purpose was to put into operation facilities that produced and sold RC that lowered emissions and also qualified for Section 45 tax credits. The Company concluded that Tinuum Group was a VIE, but the Company did not have the power to direct the activities that most significantly impacted Tinuum Group's economic performance, as the voting partners of Tinuum Group have identical voting rights, equity control interests and board control interests, and therefore power was shared. Accordingly, the Company accounted for its investment in Tinuum Group under the equity method of accounting since inception.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes the results of operations of Tinuum Group:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Gross (loss) profit | | $ | — | | | $ | (3,226) | | | $ | 964 | | | $ | 8,269 | |
| Operating, selling, general and administrative expenses | | 457 | | | 12,077 | | | 4,705 | | | 38,308 | |
| Loss from operations | | (457) | | | (15,303) | | | (3,741) | | | (30,039) | |
| Other income (expenses), net | | 6 | | | 6,027 | | | 534 | | | 10,030 | |
| | | | | | | | |
| (Income) loss attributable to noncontrolling interest | | — | | | 34,551 | | | (874) | | | 99,167 | |
| Net (loss) income available to members | | $ | (451) | | | $ | 25,275 | | | $ | (4,081) | | | $ | 79,158 | |
| ADES equity earnings from Tinuum Group | | $ | — | | | $ | 19,975 | | | $ | 3,137 | | | $ | 55,462 | |
For the nine months ended September 30, 2022 and the three and nine months ended September 30, 2021, the Company recognized earnings from Tinuum Group's net (loss) income available to members that were different from its pro-rata share of Tinuum Group's net (loss) income available to members for those periods, as cash distributions for the nine months ended September 30, 2022 and three and nine months ended September 30, 2021 exceeded the carrying value of the Tinuum Group equity investment.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following tables present the Company's investment balance, equity earnings and cash distributions in excess of the investment balance, if any, for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Date(s) | | Investment balance | | ADES equity earnings | | Cash distributions | | Memorandum Account: Cash distributions and equity earnings in (excess) of investment balance |
| Beginning balance | | 12/31/2021 | | $ | — | | | $ | — | | | $ | — | | | $ | (21,779) | |
| | | | | | | | | | |
ADES proportionate share of net loss from Tinuum Group | | First Quarter | | (861) | | | (861) | | | — | | | — | |
| Recovery of prior cash distributions in excess of investment balance (prior to cash distributions) | | First Quarter | | (21,779) | | | (21,779) | | | — | | | 21,779 | |
| Cash distributions from Tinuum Group | | First Quarter | | (1,012) | | | — | | | 1,012 | | | — | |
| Adjustment for current year cash distributions in excess of investment balance | | First Quarter | | 23,652 | | | 23,652 | | | — | | | (23,652) | |
| Total investment balance, equity earnings and cash distributions | | 3/31/2022 | | $ | — | | | $ | 1,012 | | | $ | 1,012 | | | $ | (23,652) | |
| ADES proportionate share of net loss from Tinuum Group | | Second Quarter | | (682) | | | $ | (682) | | | $ | — | | | — | |
| Recovery of prior cash distributions in excess of investment balance (prior to cash distributions) | | Second Quarter | | (23,652) | | | (23,652) | | | — | | | 23,652 | |
| Cash distributions from Tinuum Group | | Second Quarter | | (2,125) | | | — | | | 2,125 | | | — | |
| Adjustment for current year cash distributions in excess of investment balance | | Second Quarter | | 26,459 | | | 26,459 | | | — | | | (26,459) | |
| Total investment balance, equity earnings and cash distributions | | 6/30/2022 | | $ | — | | | $ | 2,125 | | | $ | 2,125 | | | $ | (26,459) | |
| ADES proportionate share of net loss from Tinuum Group | | Third Quarter | | (192) | | | $ | (192) | | | $ | — | | | — | |
| Recovery of prior cash distributions in excess of investment balance (prior to cash distributions) | | Third Quarter | | (26,459) | | | (26,459) | | | — | | | 26,459 | |
| | | | | | | | | | |
| Adjustment for current year cash distributions in excess of investment balance | | Third Quarter | | 26,651 | | | 26,651 | | | | | (26,651) | |
| Total investment balance, equity earnings and cash distributions | | 9/30/2022 | | $ | — | | | $ | — | | | $ | — | | | $ | (26,651) | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Date(s) | | Investment balance | | ADES equity earnings | | Cash distributions | | Memorandum Account: Cash distributions and equity earnings in (excess) of investment balance |
| Beginning balance | | 12/31/2020 | | $ | 3,387 | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | |
| ADES proportionate share of net income from Tinuum Group | | First Quarter | | 10,755 | | | 10,755 | | | — | | | — | |
| | | | | | | | | | |
| Cash distributions from Tinuum Group | | First Quarter | | (19,749) | | | — | | | 19,749 | | | — | |
| Adjustment for current year cash distributions in excess of investment balance | | First Quarter | | 5,607 | | | 5,607 | | | — | | | (5,607) | |
| Total investment balance, equity earnings and cash distributions | | 3/31/2021 | | $ | — | | | $ | 16,362 | | | $ | 19,749 | | | $ | (5,607) | |
| ADES proportionate share of net income from Tinuum Group | | Second Quarter | | 12,146 | | | $ | 12,146 | | | $ | — | | | — | |
| Recovery of prior cash distributions in excess of investment balance (prior to cash distributions) | | Second Quarter | | (5,607) | | | (5,607) | | | — | | | 5,607 | |
| Cash distributions from Tinuum Group | | Second Quarter | | (19,125) | | | — | | | 19,125 | | | — | |
| Adjustment for current year cash distributions in excess of investment balance | | Second Quarter | | 12,586 | | | 12,586 | | | — | | | (12,586) | |
| Total investment balance, equity earnings and cash distributions | | 6/30/2021 | | $ | — | | | $ | 19,125 | | | $ | 19,125 | | | $ | (12,586) | |
| ADES proportionate share of net income from Tinuum Group | | Third Quarter | | 10,742 | | | $ | 10,742 | | | $ | — | | | — | |
| Recovery of prior cash distributions in excess of investment balance (prior to cash distributions) | | Third Quarter | | (12,586) | | | (12,586) | | | — | | | 12,586 | |
| Cash distributions from Tinuum Group | | Third Quarter | | (19,975) | | | — | | | 19,975 | | | — | |
| Adjustment for current year cash distributions in excess of investment balance | | Third Quarter | | 21,819 | | | 21,819 | | | — | | | (21,819) | |
| Total investment balance, equity earnings and cash distributions | | 9/30/2021 | | $ | — | | | $ | 19,975 | | | $ | 19,975 | | | $ | (21,819) | |
Tinuum Services, LLC
As of September 30, 2022 and December 31, 2021, the Company has a 50% voting and economic interest in Tinuum Services. The Company determined that Tinuum Services was not a VIE and further evaluated it for consolidation under the voting interest model. Because the Company did not own greater than 50% of the outstanding voting shares, either directly or indirectly, it has accounted for its investment in Tinuum Services under the equity method of accounting since inception. As of September 30, 2022 and December 31, 2021, the Company’s investment in Tinuum Services was zero and $2.4 million, respectively.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes the results of operations of Tinuum Services:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Gross profit (loss) | | $ | 16 | | | $ | (20,389) | | | $ | 1,062 | | | $ | (61,552) | |
| Operating, selling, general and administrative expenses | | 68 | | | 42,346 | | | 2,785 | | | 144,068 | |
| Loss from operations | | (52) | | | (62,735) | | | (1,723) | | | (205,620) | |
| Other income (expenses), net | | 2 | | | 3,204 | | | 1,159 | | | 2,810 | |
| (Income) loss attributable to noncontrolling interest | | — | | | 63,977 | | | 323 | | | 215,779 | |
| Net (loss) income | | $ | (50) | | | $ | 4,446 | | | $ | (241) | | | $ | 12,969 | |
| ADES equity earnings from Tinuum Services | | $ | — | | | $ | 2,223 | | | $ | 84 | | | $ | 6,485 | |
Included in the Condensed Consolidated Statements of Operations of Tinuum Services for the three and nine months ended September 30, 2022 and 2021 was income (loss) attributable to noncontrolling interests of Tinuum Services' VIE entities, which was eliminated in the calculation of Tinuum Services' net income (loss) attributable to the Company's interest.
For the three and nine months ended September 30, 2022, the Company recognized earnings from Tinuum Services' net income (loss) available to members that were different from its pro-rata share of Tinuum Services' net income (loss) available to members for those periods, as cash distributions for the three and nine months ended September 30, 2022 exceeded the carrying value of the Tinuum Services' equity investment.
The following tables present the Company's investment balance, equity earnings and cash distributions in excess of the investment balance, if any, for the three and nine months ended September 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Date(s) | | Investment balance | | ADES equity earnings | | Cash distributions | | Memorandum Account: Cash distributions and equity earnings in (excess) of investment balance |
| Beginning balance | | 12/31/2021 | | $ | 2,391 | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | |
| ADES proportionate share of net loss from Tinuum Services | | First Quarter | | (180) | | | (180) | | | — | | | — | |
| | | | | | | | | | |
| Cash distributions from Tinuum Services | | First Quarter | | (1,501) | | | — | | | 1,501 | | | — | |
| | | | | | | | | | |
| Total investment balance, equity earnings and cash distributions | | 3/31/2022 | | $ | 710 | | | $ | (180) | | | $ | 1,501 | | | $ | — | |
| ADES proportionate share of net income from Tinuum Services | | Second Quarter | | 85 | | | $ | 85 | | | $ | — | | | — | |
| | | | | | | | | | |
| Cash distributions from Tinuum Services | | Second Quarter | | (974) | | | — | | | 974 | | | — | |
| Adjustment for current year cash distributions in excess of investment balance | | Second Quarter | | 179 | | | 179 | | | — | | | (179) | |
| Total investment balance, equity earnings and cash distributions | | 6/30/2022 | | $ | — | | | $ | 264 | | | $ | 974 | | | $ | (179) | |
| ADES proportionate share of loss from Tinuum Services | | Third Quarter | | (25) | | | $ | (25) | | | $ | — | | | — | |
| Recovery of prior cash distributions in excess of investment balance (prior to cash distributions) | | Third Quarter | | (179) | | | (179) | | | — | | | 179 | |
| | | | | | | | | | |
| Adjustment for current year cash distributions in excess of investment balance | | Third Quarter | | 204 | | | 204 | | | | | (204) | |
| Total investment balance, equity earnings and cash distributions | | 9/30/2022 | | $ | — | | | $ | — | | | $ | — | | | $ | (204) | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 Condensed Consolidated Balance Sheets and indicates the Company's maximum exposure to loss:
| | | | | | | | | | | | | | |
| | | As of |
| (in thousands) | | September 30,
2022 | | December 31,
2021 |
| Equity method investment in Tinuum Services | | $ | — | | | $ | 2,391 | |
| | | | |
| | | | |
| | | | |
| | | | |
| Total equity method investments | | $ | — | | | $ | 2,391 | |
The following table details the components of the Company's respective equity method investments included in the "Earnings from equity method investments" line item on the Condensed Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Earnings from Tinuum Group | | $ | — | | | $ | 19,975 | | | $ | 3,137 | | | $ | 55,462 | |
| Earnings from Tinuum Services | | — | | | 2,223 | | | 84 | | | 6,485 | |
| (Loss) earnings from other | | — | | | (3) | | | 1 | | | (3) | |
| | | | | | | | |
| | | | | | | | |
| Earnings from equity method investments | | $ | — | | | $ | 22,195 | | | $ | 3,222 | | | $ | 61,944 | |
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.
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| (in thousands) | | 2022 | | 2021 |
| Distributions from equity method investees, return on investment | | | | |
| Tinuum Services | | $ | 2,297 | | | $ | 7,902 | |
| Tinuum Group | | — | | | 14,142 | |
| | | | |
| | | | |
| | | | |
| | $ | 2,297 | | | $ | 22,044 | |
| Distributions from equity method investees in excess of investment basis | | | | |
| Tinuum Services | | $ | 179 | | | $ | — | |
| Tinuum Group | | 3,137 | | | 44,707 | |
| | | | |
| | | | |
| | | | |
| | $ | 3,316 | | | $ | 44,707 | |
Note 11 - Stockholders' Equity
Stock Repurchase Program
As of September 30, 2022, 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.
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") 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 March 15, 2022, the Board approved the Fifth Amendment to the TAPP (the "Fifth Amendment"), which amends the TAPP, as previously amended by the First, Second, Third and Fourth Amendments that were approved the Board on April 6, 2018, April 5, 2019, April 9, 2020 and April 9, 2021, respectively. The Fifth 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 Fifth Amendment, the Final Expiration Date shall be the close of business on the earlier of (i) December 31, 2023 or (ii) December 31, 2022 if stockholder approval of the Fifth Amendment has not been obtained prior to such date. At the Company's 2022 annual meeting of stockholders, the Company's stockholders approved the Fifth Amendment, thus the Final Expiration Date will be the close of business on December 31, 2023.
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 and nine months ended September 30, 2022 and 2021 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| RSA expense | | $ | 420 | | | $ | 435 | | | $ | 1,240 | | | $ | 1,353 | |
| | | | | | | | |
| PSU expense | | 87 | | | 54 | | | 215 | | | 123 | |
| | | | | | | | |
| Total stock-based compensation expense | | $ | 507 | | | $ | 489 | | | $ | 1,455 | | | $ | 1,476 | |
The amount of unrecognized compensation cost as of September 30, 2022, and the expected weighted-average period over which the cost will be recognized is as follows:
| | | | | | | | | | | | | | |
| | As of September 30, 2022 |
| (in thousands, expect years) | | Unrecognized Compensation Cost | | Expected Weighted-
Average Period of
Recognition (in years) |
| RSA expense | | $ | 2,767 | | | 1.86 |
| | | | |
| PSU expense | | 648 | | | 1.57 |
| | | | |
| Total unrecognized stock-based compensation expense | | $ | 3,415 | | | 1.81 |
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 nine months ended September 30, 2022 is presented below:
| | | | | | | | | | | | | | | | | | |
| | Restricted Stock | | | | Weighted-Average Grant Date Fair Value | | |
| | | | | | | | |
| Non-vested at January 1, 2022 | | 531,623 | | | | | $ | 5.94 | | | |
| Granted | | 400,301 | | | | | $ | 6.12 | | | |
| Vested | | (249,620) | | | | | $ | 6.44 | | | |
| Forfeited | | (69,737) | | | | | $ | 5.94 | | | |
| Non-vested at September 30, 2022 | | 612,567 | | | | | $ | 5.84 | | | |
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 nine months ended September 30, 2022 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Units | | Weighted-Average
Grant Date
Fair Value | | Aggregate Intrinsic Value (in thousands) | | Weighted-Average
Remaining
Contractual
Term (in years) |
| PSU's outstanding, January 1, 2022 | | 88,026 | | | $ | 6.65 | | | | | |
| Granted | | 60,565 | | | 9.59 | | | | | |
| Vested / Settled | | — | | | — | | | | | |
| Forfeited / Canceled | | — | | | — | | | | | |
| PSU's outstanding, September 30, 2022 | | 148,591 | | | $ | 7.85 | | | $ | 406 | | | 1.57 |
Note 13 - Income Taxes
For the three and nine months ended September 30, 2022 and 2021, the Company's income tax expense and effective tax rates were:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in thousands, except for rate) | | 2022 | | 2021 | | 2022 | | 2021 |
| Income tax (benefit) expense | | $ | — | | | $ | 4,581 | | | $ | — | | | $ | 14,013 | |
| Effective tax rate | | — | % | | 16 | % | | — | % | | 14 | % |
The Company incurred pretax loss for the nine months ended September 30, 2022 and expects to incur pretax loss for the year ending December 31, 2022. As a result, the effective rate for the three and nine months ended September 30, 2022 was zero as the resultant tax benefit was offset by a valuation allowance recorded as of September 30, 2022. The effective rate for the three and nine months ended September 30, 2021 was lower than the federal statutory rate primarily from the impact of a decrease in the valuation allowance recorded against deferred tax assets as of September 30, 2021.
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.