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 located 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 preferred 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 represented 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 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 and six months ended June 30, 2023 and 2022, potentially dilutive securities consist of unvested restricted stock awards ("RSAs") and contingent performance stock units ("PSUs").
The following table sets forth the calculations of basic and diluted loss per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands, except per share amounts) | | 2023 | | 2022 | | 2023 | | 2022 |
| Net loss | | $ | (5,856) | | | $ | (326) | | | $ | (13,364) | | | $ | (3,359) | |
| Less: Dividends declared on redeemable preferred stock | | — | | | — | | | 157 | | | — | |
| Loss attributable to common stockholders | | $ | (5,856) | | | $ | (326) | | | $ | (13,521) | | | $ | (3,359) | |
| | | | | | | | |
| Basic weighted-average common shares outstanding | | 27,360 | | | 18,473 | | | 25,739 | | | 18,409 | |
| Add: dilutive effect of equity instruments | | — | | | — | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
| Diluted weighted-average shares outstanding | | 27,360 | | | 18,473 | | | 25,739 | | | 18,409 | |
| Loss per share - basic | | $ | (0.21) | | | $ | (0.02) | | | $ | (0.53) | | | $ | (0.18) | |
| Loss per share - diluted | | $ | (0.21) | | | $ | (0.02) | | | $ | (0.53) | | | $ | (0.18) | |
For the three and six months ended June 30, 2023 and 2022, potentially dilutive securities of 1.1 million and 0.9 million, and 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.
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.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 June 30, 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.
Note 2 - Arq Acquisition
As of the Acquisition Date, the Company accounted for the Arq Acquisition as an acquisition of a business. The total Purchase Consideration was $31.2 million and was 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" and "Legal and professional fees" line items in the Statements of Operations.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table provides the final purchase price allocation to 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 |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Series A 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.
On June 13, 2023 (the "Conversion Date"), the Company's stockholders approved the conversion of all of the outstanding shares of Series A Preferred Stock, including the "Escrow Shares," as defined below, and the corresponding issuance of shares of Common Stock. Upon such approval, each outstanding share of Series A Preferred Stock was automatically converted into the number of shares of Common Stock described below. Each share of Series A Preferred Stock was 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 was 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 were entitled to receive cumulative dividends, which accrued quarterly on the last day of each applicable quarter (whether or not declared or funds for their payment are lawfully available) and were 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 declared 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.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On March 31, 2023, the Company declared a dividend of 68,464 Series A PIK Shares with respect to the accrued dividends on the Preferred Shares 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.
Under the terms of the Purchase Agreement, a total of 833,914 Preferred Shares, were 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 were converted into shares of Common Stock on the Conversion Date and continue to be held in escrow (the "Escrow Common Shares")
The Escrow Common 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 Common 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 Common Shares to fund the required payment to the IRS, and that number of Escrow Common Shares will be returned to the Company (the "Contingent Redemption Feature"). The number of Escrow Common 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 Common 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 was determined on the Acquisition Date and was comprised of the Maximum Contingent Redemption Amount and the fair value of the non-escrowed Preferred Shares ("Non Escrow Shares").
The Series A Preferred Stock contained a mandatory redemption feature in the event the Preferred Shares, including future issuances of Series A Preferred Stock issued under dividend requirements, were not converted into shares of Common Stock prior to February 1, 2028. The Company concluded that both the Escrow Shares and the Non Escrow Shares did not meet the definition of mandatorily redeemable financial instruments as there was not a substantive conversion feature, and were therefore not classified as liabilities. As both the Escrow Shares and Non Escrow Shares represented financial instruments that were 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 classified and reported the Series A Preferred Stock as temporary equity and in the Consolidated Balance Sheet as of as of March 31, 2023. On the Conversion Date, all shares of Series A Preferred Stock were converted into shares of Common Stock, and the Company reclassified all of the Series A Preferred Stock to Common Stock as of June 30, 2023.
Other
The amounts of year to date revenues and net loss for Arq for the period from the Acquisition Date to June 30, 2023 are as follows:
| | | | | | | | |
| | Six Months Ended June 30, |
| (in thousands) | | 2023 |
| Revenues | | $ | — | |
| Net loss | | $ | (6,756) | |
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 periods presented has been calculated after applying the Company’s accounting policies in effect for those periods. In addition, pro forma net loss includes: (1) for the six months ended June 30, 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 and employee severance agreements that has not been recognized in the historical financial statements, assuming such amounts will be paid in cash; (2) for the six months ended June 30, 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 the six months ended June 30, 2023 and 2022, an increase in amortization of $0.1 million and $0.2 million, respectively, resulting from fair value adjustments to intangible assets; (4) for the six months ended June 30, 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 $6.2 million of transaction costs incurred for the period from July 1, 2022 to June 30, 2023 but included as additional transaction costs for the six months ended June 30, 2022, together with the income tax effects on (1) through (5). Since Arq had
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
no revenues for the six months ended June 30, 2023 or 2022, pro forma revenues are the same as the Company's reported revenues for those periods.
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| (in thousands) | | 2023 | | 2022 |
| Revenues | | $ | 41,250 | | | $ | 51,141 | |
| Net loss | | $ | (9,925) | | | $ | (38,965) | |
Note 3 - Marshall Mine
On March 27, 2023, (the "MM Closing Date"), the Company completed the sale of all of its membership interests in Marshall Mine, LLC to a third party (the "Buyer") in exchange for cash payment of $2.2 million (the "MM Purchase Price") made by the Company to the Buyer and the assumption by the Buyer of certain liabilities of Marshall Mine, LLC. 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 six months ended June 30, 2023.
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) | | June 30, 2023 | | December 31, 2022 |
| | | | |
| | | | |
| Trade receivables, net | | $ | 10,235 | | | $ | 13,789 | |
| Other receivables | | 72 | | | 75 | |
| | | | |
| Receivables, net | | $ | 10,307 | | | $ | 13,864 | |
For the three and six months ended June 30, 2023 and 2022, all material performance obligations related to revenues recognized were satisfied at a point in time. For the three and six months ended June 30, 2023, approximately 5% and 9% , respectively, of Consumables revenues were generated in Canada, and all other revenues were generated in the U.S. For the three and six months ended June 30, 2022, approximately 8% and 9% 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 June 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
| | As of |
| (in thousands) | | June 30, 2023 | | December 31, 2022 |
| Product inventory, net | | $ | 12,205 | | | $ | 9,479 | |
| Raw material inventory | | 10,833 | | | 8,349 | |
| | | | |
Total inventories, net | | $ | 23,038 | | | $ | 17,828 | |
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6 - Debt Obligations
| | | | | | | | | | | | | | |
| | As of |
| (in thousands) | | June 30, 2023 | | December 31, 2022 |
| Term Loan due February 2027, related party | | $ | 10,000 | | | $ | — | |
| Arq Loan due January 2036 | | 9,787 | | | — | |
| Finance lease obligations | | 4,004 | | | 4,581 | |
| | 23,791 | | | 4,581 | |
| Unamortized debt discounts | | (943) | | | — | |
| Unamortized debt issuance costs | | (1,424) | | | — | |
| | | | |
| | 21,424 | | | 4,581 | |
| Less: Current maturities | | (1,594) | | | (1,131) | |
| Total long-term debt obligations | | $ | 19,830 | | | $ | 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.
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.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 Subsidiaries") with a financial institution (the "Bank") 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 originally entered into 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 amount of $2.0 million. The Notes mature on January 27, 2036 and bear interest at 6.0% per annum through January 2026 and at the prime rate plus 2.75% thereafter. Beginning January 27, 2023 and for the balance of the term of the Arq Loan, the Arq Subsidiaries 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.
On June 2, 2023 (the "Amendment Date"), certain of the Subsidiaries, which include Corbin Project LLC, Arq Projects Holding Company LLC, Arq St. Rose LLC, Arq Corbin LLC and Arq Corbin Land LLC (collectively, the "Borrowers") and the Bank entered into a loan modification agreement (the "Arq Loan Modification Agreement") to the Arq Loan, as amended by that certain letter agreement by and among the Bank and Borrowers dated January 21, 2022, and as otherwise amended, modified and/or extended by the parties from time to time (collectively, the "Arq Loan Agreement"). As consideration for the Bank entering into the Arq Loan Modification Agreement, the Borrowers agreed to pay a fee of $50,000 plus additional fees incurred by the Bank and were required to deposit an additional $0.7 million into a deposit account (the "Interest Reserve Account" as defined in the Arq Loan Agreement), where the Interest Reserve Account is held as collateral by the Bank. The Borrowers may withdraw funds from the Interest Reserve Account beginning one year from the Amendment Date, subject to restrictions as stated in the Arq Loan Modification Agreement.
The Arq Loan Modification Agreement clarified and modified certain terms under the Arq Loan Agreement. The principal clarifications and modifications are as follows:
•The Borrowers are not entitled to any further disbursements of proceeds under those promissory notes described in the Arq Loan Modification Agreement;
•The Bank agreed to waive certain financial delivery requirements for fiscal years 2021 and 2022;
•The Bank agreed to waive certain required financial covenants required as of December 31, 2022 and certain required financial convents as of December 31, 2023;
•The Borrowers are required to establish their operating bank accounts with the Bank no later than September 30, 2023; and
•The Bank is authorized to amend and/or amend and restate its then-current security instruments to include additional collateral represented by the Borrowers' acquisition of any equipment or other fixed and/or operating assets in which the Bank does not then hold a lien or security interest.
The Arq Loan is secured by substantially all assets of the Borrowers and includes among others, the following covenants with respect to the Borrowers, which are tested annually (Capitalized terms are defined in the Arq Loan Agreement): (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 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 June 30, 2023 and December 31, 2022 consisted of the following items (in thousands):
| | | | | | | | | | | | | | |
| | As of |
| Leases | | June 30, 2023 | | December 31, 2022 |
| Operating Leases | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Operating lease right-of-use assets, net of accumulated amortization (1) | | $ | 11,292 | | | $ | 7,734 | |
| | | | |
| Operating lease obligations, current | | $ | 2,375 | | | $ | 2,724 | |
| Long-term operating lease obligations | | 9,006 | | | 5,133 | |
| Total operating lease obligation | | $ | 11,381 | | | $ | 7,857 | |
| | | | |
| Finance Leases | | | | |
| | | | |
| | | | |
| | | | |
Finance lease right-of-use assets, net of accumulated amortization (2) | | $ | 2,120 | | | $ | 2,565 | |
| | | | |
| Finance lease obligations, current | | $ | 1,119 | | | $ | 1,131 | |
| Long-term finance lease obligations | | 2,885 | | | 3,450 | |
| Total finance lease obligations | | $ | 4,004 | | | $ | 4,581 | |
(1) Operating lease ROU assets are reported net of accumulated amortization of $4.5 million and $4.4 million as of June 30, 2023 and December 31, 2022, respectively.
(2) Finance lease ROU assets are reported net of accumulated amortization of $2.4 million and $2.0 million as of June 30, 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 June 30, 2023 and December 31, 2022.
Lease expense for operating leases for the three and six months ended June 30, 2023 was $1.3 million and $2.7 million, respectively, of which $1.1 million and $2.2 million, respectively, is included in the "Consumables - cost of revenue, exclusive of depreciation and amortization" line item, and $0.2 million and $0.5 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 six months ended June 30, 2022 was $1.0 million and $2.0 million, respectively, of which $0.9 million and $1.8 million, respectively, is included in the "Consumables - cost of revenue, exclusive of depreciation and amortization" line item, and $0.1 million and $0.2 million, respectively, is included in the "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 June 30, 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 and six months ended June 30, 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 and six months ended June 30, 2023 and 2022 is provided in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| Finance lease cost: | | | | | | | | |
| Amortization of right-of-use assets | | $ | 223 | | | $ | 230 | | | $ | 446 | | | $ | 371 | |
| Interest on lease liabilities | | 63 | | | 86 | | | 131 | | | 164 | |
| Operating lease cost | | 1,035 | | | 778 | | | 2,017 | | | 1,584 | |
| Short-term lease cost | | 242 | | | 216 | | | 651 | | | 459 | |
Variable lease cost (1) | | 56 | | | 3 | | | 64 | | | 7 | |
| | | | | | | | |
| Total lease cost | | $ | 1,619 | | | $ | 1,313 | | | $ | 3,309 | | | $ | 2,585 | |
| | | | | | | | |
| Other Information: | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
| Operating cash flows for finance leases | | | | | | $ | 131 | | | $ | 164 | |
| Operating cash flows for operating leases | | | | | | $ | 1,483 | | | $ | 1,419 | |
| Financing cash flows for finance leases | | | | | | $ | 577 | | | $ | 594 | |
| 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 | | | | | | $ | 1,881 | | | $ | 3,418 | |
| Weighted-average remaining lease term - finance leases | | | | | | 2.3 years | | 3.2 years |
| Weighted-average remaining lease term - operating leases | | | | | | 7.7 years | | 4.3 years |
| Weighted-average discount rate - finance leases | | | | | | 5.9 | % | | 5.9 | % |
| Weighted-average discount rate - operating leases | | | | | | 11.0 | % | | 5.9 | % |
(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 Five Forks Mine, the Company is required to post a surety bond with a regulatory commission. As of June 30, 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.
The Company leases land adjacent to the Corbin Facility and is required to post surety bonds with a regulatory commission for reclamation. As of June 30, 2023, the amount of these surety bonds was $3.0 million.
The Company holds permits for an abandoned mine in West Virginia ("Mine 4") and is required to post a surety bond with a regulatory commission for reclamation. As of June 30, 2023, the amount of this surety bond was $0.7 million.
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 of June 30, 2023 and December 31, 2022, the Company posted cash collateral of $8.6 million and $10.0 million, respectively, as required by the Company's surety bond providers, which is reported as long-term restricted cash in the Condensed Consolidated Balance Sheets. As of June 30, 2023, the Company holds a deposit of $0.4 million with a third party for collateral as required under a bonding arrangement for Mine 4. This deposit is included in "Other long-term assets, net" in the Condensed Consolidated Balance Sheet as of June 30, 2023.
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 June 30, 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) | June 30,
2023 | | December 31,
2022 |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Other long-term assets, net: | | | | |
| Right of use assets, operating leases, net | | $ | 11,292 | | | $ | 7,734 | |
| Intangible assets, net | | 8,222 | | | 847 | |
| Spare parts, net | | 7,647 | | | 6,789 | |
| Upfront Customer Consideration | | 6,221 | | | 6,475 | |
| Mine development costs, net | | 6,629 | | | 5,478 | |
| Mine reclamation asset, net | | 1,591 | | | 1,641 | |
| Other | | 2,622 | | | 1,683 | |
| | | | |
| | | | |
| Total other long-term assets, net | | $ | 44,224 | | | $ | 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 June 30, 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 June 30, 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 and six months ended June 30, 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) | | June 30,
2023 | | December 31,
2022 |
| Other current liabilities: | | | | |
| Current portion of operating lease obligations | | $ | 2,375 | | | $ | 2,724 | |
| Income and other taxes payable | | 1,069 | | | 1,039 | |
| Current portion of mine reclamation liability | | 169 | | | 548 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Other(1) | | 2,762 | | | 2,334 | |
| Total other current liabilities | | $ | 6,375 | | | $ | 6,645 | |
| Other long-term liabilities: | | | | |
| Operating lease obligations, long-term | | $ | 9,006 | | | $ | 5,133 | |
| Mine reclamation liabilities | | 5,323 | | | 7,985 | |
| | | | |
| | | | |
| | | | |
| Other | | 806 | | | 733 | |
| Total other long-term liabilities | | $ | 15,135 | | | $ | 13,851 | |
(1) Included in Other current liabilities is $1.7 million related to the Repayment Agreement as defined in Note 10.
As of June 30, 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 Mine 4 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. As of June 30, 2023, the Corbin ARO is included in Other long-term liabilities. As of June 30, 2023, the current portion of the Mine 4 ARO is 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 six months ended June 30, 2023 and year ended December 31, 2022 were as follows: | | | | | | | | | | | | | | |
| | As of |
| (in thousands) | | June 30, 2023 | | December 31, 2022 |
| Asset retirement obligations, beginning of period | | $ | 8,533 | | | $ | 9,959 | |
Asset retirement obligations assumed(1) | | 1,500 | | | — | |
| Accretion | | 303 | | | 611 | |
Liabilities settled(2) | | (4,844) | | | (2,071) | |
| Changes due to scope and timing of reclamation | | — | | | 34 | |
| Asset retirement obligations, end of period | | 5,492 | | | 8,533 | |
| Less current portion | | 169 | | | 548 | |
| Asset retirement obligations, long-term | | $ | 5,323 | | | $ | 7,985 | |
(1) Represents the Corbin ARO and Mine 4 ARO in the amounts of $0.5 million and $1.0 million, respectively.
(2) Represents 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)
Note 10 - Equity Method Investments
Tinuum Group, LLC
As of June 30, 2023 and December 31, 2022, the Company's ownership interest in Tinuum Group was 42.5%. For the three and six months ended June 30, 2023 the Company recognized earnings from Tinuum Group of $0.2 million and $0.9 million, respectively, which was comprised solely of cash distributions received during these periods. For the three and six months ended June 30, 2022, the Company recognized earnings from Tinuum Group of $2.1 million and $3.1 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 June 30, 2023 and December 31, 2022, the Company's 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") on 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 and six months ended June 30, 2023, the Company recognized $0.3 million and $0.5 million, respectively, 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 June 30, 2023 and December 31, 2022, the Company had a 50% voting and economic interest in Tinuum Services. For the three and six months ended June 30, 2023, the Company recognized income from Tinuum Services of $0.3 million and $0.3 million, respectively. For the three and six months ended June 30, 2022, the Company recognized income from Tinuum Services of $0.3 million and $0.1 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. | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| (in thousands) | | 2023 | | 2022 |
| Distributions from equity method investees, return on investment | | | | |
| Tinuum Services | | $ | — | | | $ | 2,297 | |
| Tinuum Group | | — | | | — | |
| | | | |
| | | | |
| | | | |
| | $ | — | | | $ | 2,297 | |
| Distributions from equity method investees in excess of investment basis | | | | |
| Tinuum Group | | $ | 850 | | | $ | 3,137 | |
| Tinuum Services | | 250 | | | 179 | |
| | | | |
| | | | |
| | $ | 1,100 | | | $ | 3,316 | |
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.
On March 31, 2023, and pursuant to the Certificate of Designations, the Company declared a dividend of 68,464 shares of Series A Preferred Stock with respect to accrued dividends on the Series A Preferred Stock for the first quarter of 2023 (the "PIK Dividend"). The 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.
As discussed in Note 2, on the Conversion Date, pursuant to stockholder approval, all shares of Series A Preferred Stock were converted into shares of Common Stock.
Term Loan
As consideration for the Term Loan, the Company issued 325,857 Warrant Shares, which were deemed to be equity securities. The Warrant Shares were recorded at their estimated fair value of $0.8 million to Additional paid in capital with a corresponding amount recorded as a debt discount on the Term Loan.
Stock Repurchase Program
As of June 30, 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. At the Company's 2023 Annual Meeting of Stockholders, the Company's stockholders approved the Sixth Amendment, thus the Final Expiration Date will be the close of business on December 31, 2024.
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 six months ended June 30, 2023 and 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| RSA expense | | $ | 416 | | | $ | 393 | | | $ | 904 | | | $ | 820 | |
| | | | | | | | |
| PSU expense | | 129 | | | 91 | | | 204 | | | 128 | |
| | | | | | | | |
| Total stock-based compensation expense | | $ | 545 | | | $ | 484 | | | $ | 1,108 | | | $ | 948 | |
The amount of unrecognized compensation cost as of June 30, 2023, and the expected weighted-average period over which the cost will be recognized is as follows:
| | | | | | | | | | | | | | |
| | As of June 30, 2023 |
| (in thousands, expect years) | | Unrecognized Compensation Cost | | Expected Weighted-
Average Period of
Recognition (in years) |
| RSA expense | | $ | 2,418 | | | 2.24 |
| | | | |
| PSU expense | | 930 | | | 2.24 |
| | | | |
| Total unrecognized stock-based compensation expense | | $ | 3,348 | | | 2.24 |
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 six months ended June 30, 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 | | (276,767) | | | | | $ | 5.62 | | | |
| Forfeited | | (31,729) | | | | | $ | 4.63 | | | |
| Non-vested at June 30, 2023 | | 843,007 | | | | | $ | 3.46 | | | |
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 six months ended June 30, 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, June 30, 2023 | | 337,978 | | | $ | 4.38 | | | $ | 629 | | | 2.24 |
(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 and six months ended June 30, 2023, no shares of common stock were issued upon vesting of PSUs.
Note 13 - Income Taxes
For the three and six months ended June 30, 2023 and 2022, the Company's income tax expense and effective tax rates were:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands, except for rate) | | 2023 | | 2022 | | 2023 | | 2022 |
| Income tax benefit | | $ | — | | | $ | — | | | $ | (33) | | | $ | — | |
| Effective tax rate | | — | % | | — | % | | — | % | | — | % |
The Company incurred pretax loss for the six months ended June 30, 2023 and expects to incur pretax loss for the year ending December 31, 2023. As a result, the effective rate for the three and six months ended June 30, 2023 was zero as the resultant tax benefit was offset by a valuation allowance recorded as of June 30, 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.
Note 14 - Subsequent Events
Unless disclosed elsewhere in the notes to the Condensed Consolidated Financial Statements, the following are the significant matters that occurred subsequent to June 30, 2023.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On July 14, 2023, the Board appointed Mr. Robert Rasmus to the positions of President and Chief Executive Officer effective July 17, 2023 succeeding Mr. Greg Marken, who will remain an employee of the Company through August 28, 2023. Also on this date, the Board increased the size of the Board from seven to eight directors and appointed Mr. Rasmus to fill the vacancy as a member of the Board effective immediately.
On July 17, 2023, the Company entered into a Subscription Agreement (the "Subscription Agreement") with Mr. Rasmus and entities controlled by Mr. Rasmus, in connection with his appointment as the Company’s President and Chief Executive Officer. Pursuant to the Subscription Agreement, Mr. Rasmus subscribed for and agreed to purchase 950,000 shares of the Company’s common stock, par value $0.001 per share, from the Company for an aggregate purchase price of $1.8 million (at a price per share of approximately $1.90). The purchase of these shares of Common Stock is expected to close on or prior to the 30th day following the date of the Subscription Agreement.
Under a separation agreement executed between the Company and Mr. Marken, Mr. Marken will receive the following payments and benefits in connection with his separation, which was determined to be a termination without cause: (i) the severance payments and benefits set forth in the terms of his employment agreement upon a termination without "cause," (ii) accelerated vesting of 49,715 shares of restricted stock, (iii) continued eligibility for possible vesting of a pro rata target number of 25,941 performance share units ("PSUs") granted in 2021, subject to achievement of applicable performance measures, (iv) continued eligibility for possible vesting of a pro rata target number of 15,988 PSUs granted in 2022, subject to achievement of applicable performance measures, and (v) continued eligibility for possible vesting of a pro rata target number of 19,834 PSUs granted in 2023, subject to achievement of applicable performance measures. Receipt of such payments and benefits is subject to Mr. Marken’s execution and non-revocation of a separation agreement, which includes a customary release of claims. The Company expects to record a liability and corresponding charge in the amount of $0.8 million related to (i) above.
In addition, the Company and Mr. Marken intend to enter into an advisor services agreement effective August 28, 2023 through September 27, 2023, pursuant to which Mr. Marken will provide up to 20 hours of consulting services to the Company and certain of its joint venture partners, as requested by any officer of the Company. The advisor services agreement provides for a retainer of $12,000.