Document
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-Q
______________________________________
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| |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017
or |
| |
¨ | TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-37822
______________________________________
Advanced Emissions Solutions, Inc.
(Exact name of registrant as specified in its charter)
______________________________________ |
| | |
Delaware | | 27-5472457 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
|
| | |
640 Plaza Drive, Suite 270, Highlands Ranch, CO | | 80129 |
(Address of principal executive offices) | | (Zip Code) |
(720) 598-3500
(Registrant’s telephone number, including area code)Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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| | | | | | |
Large accelerated filer | | o | | Accelerated filer | | x |
| | | |
Non-accelerated filer | | o | | Smaller reporting company | | ¨ |
| | | |
| | | | Emerging growth company | | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
|
| | |
Class | | Outstanding at November 1, 2017 |
Common stock, par value $0.001 per share | | 21,089,470 |
INDEX
Part I. – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Advanced Emissions Solutions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited) |
| | | | | | | | |
| | As of |
(in thousands, except share data) | | September 30, 2017 | | December 31, 2016 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 26,823 |
| | $ | 13,208 |
|
Restricted cash | | — |
| | 13,736 |
|
Receivables, net | | 1,631 |
| | 8,648 |
|
Receivables, related parties, net | | 2,803 |
| | 1,934 |
|
Costs in excess of billings on uncompleted contracts | | — |
| | 25 |
|
Prepaid expenses and other assets | | 1,759 |
| | 1,357 |
|
Total current assets | | 33,016 |
| | 38,908 |
|
Property and equipment, net of accumulated depreciation of $1,419 and $2,920, respectively | | 443 |
| | 735 |
|
Equity method investments | | 3,070 |
| | 3,959 |
|
Deferred tax assets | | 50,310 |
| | 61,396 |
|
Other long-term assets | | 2,292 |
| | 2,298 |
|
Total Assets | | $ | 89,131 |
| | $ | 107,296 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 1,317 |
| | $ | 1,920 |
|
Accrued payroll and related liabilities | | 1,296 |
| | 2,121 |
|
Billings in excess of costs on uncompleted contracts | | 1,863 |
| | 4,947 |
|
Legal settlements and accruals | | 4,482 |
| | 10,706 |
|
Other current liabilities | | 3,318 |
| | 4,017 |
|
Total current liabilities | | 12,276 |
| | 23,711 |
|
Legal settlements and accruals, long-term | | — |
| | 5,382 |
|
Other long-term liabilities | | 2,247 |
| | 2,038 |
|
Total Liabilities | | 14,523 |
| | 31,131 |
|
Commitments and contingencies (Note 5) | |
| |
|
Stockholders’ equity: | | | | |
Preferred stock: par value of $.001 per share, 50,000,000 shares authorized, none outstanding | | — |
| | — |
|
Common stock: par value of $.001 per share, 100,000,000 shares authorized, 22,464,566 and 22,322,022 shares issued, and 21,093,675 and 22,024,675 shares outstanding at September 30, 2017 and December 31, 2016, respectively | | 22 |
| | 22 |
|
Treasury stock, at cost: 1,370,891 and -0- shares as of September 30, 2017 and December 31, 2016, respectively | | (13,024 | ) | | — |
|
Additional paid-in capital | | 110,073 |
| | 119,494 |
|
Accumulated deficit | | (22,463 | ) | | (43,351 | ) |
Total stockholders’ equity | | 74,608 |
| | 76,165 |
|
Total Liabilities and Stockholders’ Equity | | $ | 89,131 |
| | $ | 107,296 |
|
See Notes to the Condensed Consolidated Financial Statements.
Advanced Emissions Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| Nine Months Ended September 30, |
(in thousands, except per share data) | | 2017 |
| 2016 |
| 2017 |
| 2016 |
Revenues: | | | | | | | | |
Equipment sales | | $ | 1,577 |
|
| $ | 14,869 |
|
| $ | 31,304 |
|
| $ | 44,788 |
|
Chemicals | | 717 |
|
| 670 |
|
| 3,844 |
|
| 1,717 |
|
Consulting services and other | | — |
|
| 171 |
|
| — |
|
| 492 |
|
Total revenues | | 2,294 |
|
| 15,710 |
|
| 35,148 |
|
| 46,997 |
|
Operating expenses: | | | | |
| | | |
Equipment sales cost of revenue, exclusive of depreciation and amortization | | 1,467 |
|
| 12,704 |
|
| 28,260 |
|
| 35,175 |
|
Chemicals cost of revenue, exclusive of depreciation and amortization | | 574 |
|
| 469 |
|
| 2,977 |
|
| 865 |
|
Consulting services and other cost of revenue, exclusive of depreciation and amortization | | — |
|
| 86 |
|
| — |
|
| 299 |
|
Payroll and benefits | | 1,679 |
|
| 2,809 |
|
| 5,894 |
|
| 10,567 |
|
Rent and occupancy | | 255 |
|
| 508 |
|
| 555 |
|
| 1,534 |
|
Legal and professional fees | | 1,062 |
|
| 1,615 |
|
| 3,316 |
|
| 6,581 |
|
General and administrative | | 862 |
|
| 818 |
|
| 2,934 |
|
| 2,920 |
|
Research and development, net | | 252 |
|
| (524 | ) |
| 30 |
|
| (667 | ) |
Depreciation and amortization | | 87 |
|
| 138 |
|
| 687 |
|
| 593 |
|
Total operating expenses |
| 6,238 |
|
| 18,623 |
|
| 44,653 |
|
| 57,867 |
|
Operating loss |
| (3,944 | ) |
| (2,913 | ) |
| (9,505 | ) |
| (10,870 | ) |
Other income (expense): |
| | | |
| | | |
Earnings from equity method investments |
| 12,120 |
|
| 10,735 |
|
| 36,089 |
|
| 30,066 |
|
Royalties, related party |
| 2,804 |
|
| 2,064 |
|
| 6,425 |
|
| 3,922 |
|
Interest expense |
| (678 | ) |
| (969 | ) |
| (1,999 | ) |
| (4,496 | ) |
Revision in estimated royalty indemnity liability | | — |
| | — |
| | 3,400 |
| | — |
|
Other |
| (924 | ) |
| 1,278 |
|
| (908 | ) |
| 3,960 |
|
Total other income |
| 13,322 |
|
| 13,108 |
|
| 43,007 |
|
| 33,452 |
|
Income before income tax expense |
| 9,378 |
|
| 10,195 |
|
| 33,502 |
|
| 22,582 |
|
Income tax expense |
| 3,586 |
|
| 583 |
|
| 12,614 |
|
| 734 |
|
Net income |
| $ | 5,792 |
|
| $ | 9,612 |
|
| $ | 20,888 |
|
| $ | 21,848 |
|
Earnings per common share (Note 1): |
| | | |
| | | |
Basic |
| $ | 0.28 |
|
| $ | 0.44 |
|
| $ | 0.96 |
|
| $ | 0.99 |
|
Diluted |
| $ | 0.28 |
|
| $ | 0.43 |
|
| $ | 0.96 |
|
| $ | 0.97 |
|
Weighted-average number of common shares outstanding: |
| | | |
| | | |
Basic |
| 20,808 |
|
| 21,740 |
|
| 21,569 |
|
| 21,926 |
|
Diluted |
| 20,854 |
|
| 22,098 |
|
| 21,598 |
|
| 22,209 |
|
Cash dividends declared per common share outstanding: | | $ | 0.25 |
| | $ | — |
| | $ | 0.50 |
| | $ | — |
|
See Notes to the Condensed Consolidated Financial Statements.
Advanced Emissions Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
| | | | | | | | |
| | Nine Months Ended September 30, |
(in thousands) | | 2017 | | 2016 |
Cash flows from operating activities | | | | |
Net income |
| $ | 20,888 |
|
| $ | 21,848 |
|
Adjustments to reconcile net income to net cash used in operating activities: |
| | | |
Depreciation and amortization |
| 687 |
|
| 593 |
|
Debt prepayment penalty and amortization of debt issuance costs |
| 109 |
|
| 1,379 |
|
Impairment of property, equipment, inventory, and cost method investment |
| 464 |
|
| 517 |
|
Stock-based compensation expense |
| 1,648 |
|
| 2,238 |
|
Earnings from equity method investments |
| (36,089 | ) |
| (30,066 | ) |
Gain on sale of equity method investment |
| — |
|
| (2,078 | ) |
Gain on settlement of note payable and licensed technology |
| — |
|
| (1,910 | ) |
Other non-cash items, net |
| 436 |
| | 61 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Receivables |
| 7,027 |
|
| (3,677 | ) |
Related party receivables |
| (869 | ) |
| 541 |
|
Prepaid expenses and other assets |
| (513 | ) |
| 831 |
|
Costs incurred on uncompleted contracts |
| 27,081 |
|
| 28,575 |
|
Deferred tax asset, net |
| 11,086 |
|
| — |
|
Other long-term assets |
| (766 | ) |
| 961 |
|
Accounts payable |
| (603 | ) |
| (3,837 | ) |
Accrued payroll and related liabilities |
| (825 | ) |
| (2,245 | ) |
Other current liabilities |
| (917 | ) |
| (2,094 | ) |
Billings on uncompleted contracts |
| (30,140 | ) |
| (32,469 | ) |
Other long-term liabilities |
| 147 |
|
| (2,967 | ) |
Legal settlements and accruals |
| (11,606 | ) |
| 1,454 |
|
Distributions from equity method investees, return on investment |
| 3,675 |
|
| 6,850 |
|
Net cash used in operating activities |
| (9,080 | ) |
| (15,495 | ) |
|
| | | | | | | | |
| | Nine Months Ended September 30, |
(in thousands) | | 2017 | | 2016 |
Cash flows from investing activities |
| | | |
Distributions from equity method investees in excess of cumulative earnings | | 33,363 |
| | 24,650 |
|
Maturity of investment securities, restricted |
| — |
|
| 336 |
|
Acquisition of property and equipment, net |
| (343 | ) |
| (147 | ) |
Purchases of and contributions to equity method investees |
| (61 | ) |
| (223 | ) |
Proceeds from sale of equity method investment |
| — |
|
| 1,773 |
|
Net cash provided by investing activities |
| 32,959 |
|
| 26,389 |
|
Cash flows from financing activities |
| | | |
Borrowings on Line of Credit |
| 808 |
|
| — |
|
Repayments on Line of Credit |
| (808 | ) |
| — |
|
Repayments on short-term borrowings and notes payable, related party |
| — |
|
| (14,496 | ) |
Short-term borrowing loan costs and debt prepayment penalty |
| — |
|
| (807 | ) |
Repurchase of common shares to satisfy tax withholdings |
| (518 | ) |
| (192 | ) |
Dividends paid |
| (10,458 | ) |
| — |
|
Repurchase of common shares |
| (13,024 | ) |
| — |
|
Net cash used in financing activities |
| (24,000 | ) |
| (15,495 | ) |
Decrease in Cash and Cash Equivalents and Restricted Cash |
| (121 | ) |
| (4,601 | ) |
Cash and Cash Equivalents and Restricted Cash, beginning of period |
| 26,944 |
|
| 20,973 |
|
Cash and Cash Equivalents and Restricted Cash, end of period |
| $ | 26,823 |
|
| $ | 16,372 |
|
Supplemental disclosure of cash flow information: |
| | | |
Cash paid for interest |
| $ | 2,391 |
|
| $ | 2,899 |
|
Cash paid for income taxes |
| $ | 1,160 |
|
| $ | 46 |
|
Supplemental disclosure of non-cash investing and financing activities: |
| | | |
Stock award reclassification (liability to equity) |
| $ | — |
|
| $ | 899 |
|
Settlement of RCM6 note payable |
| $ | — |
|
| $ | 13,234 |
|
Non-cash reduction of equity method investment |
| $ | — |
|
| $ | 11,156 |
|
Dividends payable | | $ | 93 |
| | $ | — |
|
See Notes to the Condensed Consolidated Financial Statements.
Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 Highlands Ranch, Colorado. The Company is principally engaged in providing environmental and emissions control equipment, technologies and specialty chemicals to the coal-burning electric power generation industry. The Company generates substantial earnings and tax credits under Section 45 of the Internal Revenue Code ("IRC") from its equity investments in certain entities and royalty payment streams related to technologies that are licensed to Tinuum Group, LLC, a Colorado limited liability company ("Tinuum Group"). Such technologies allow Tinuum Group to provide various solutions to reduce mercury and nitrogen oxide ("NOx") emissions at select coal-fired power generators through the burning of Refined Coal ("RC"). The Company’s sales occur principally throughout the United States. See Note 10 for additional information regarding the Company's operating segments.
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 direct and indirect, wholly-owned subsidiaries. Also included within the unaudited Condensed Consolidated Financial Statements are the Company's investments, Tinuum Group, Tinuum Services, LLC ("Tinuum Services"), and GWN Manager, LLC ("GWN Manager"), which are accounted for using the equity method of accounting. As discussed in Note 2, the Company sold its equity investment in RCM6, LLC ("RCM6") in March 2016, which was also accounted for using the equity method prior to the sale.
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 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 and cash flows for the interim periods presented. These Condensed Consolidated Financial Statements of ADES should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the "2016 Form 10-K"). Significant accounting policies disclosed therein have not changed.
Earnings Per Share
Basic earnings per share is computed using the two-class method, which is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividend and participating rights in undistributed earnings. The Company's restricted stock awards ("RSA's") granted prior to December 31, 2016 contain non-forfeitable rights to dividends or dividend equivalents and are deemed to be participating securities. RSA's granted subsequent to December 31, 2016 do not contain non-forfeitable rights to dividends and are not deemed to be participating securities.
Under the two-class method, net income for the period is allocated between common stockholders and the holders of the participating securities based on the weighted-average number of common shares outstanding during the period, excluding participating, unvested RSA's ("common shares"), and the weighted-average number of participating unvested RSA's outstanding during the period, respectively. The allocated, undistributed income for the period is then divided by the weighted-average number of common shares and participating, unvested RSA's outstanding during the period to arrive at basic earnings per common share and participating security for the period, respectively. Because the participating, unvested RSA's possess substantially the same rights to undistributed earnings as common shares outstanding, there is no difference between the calculated basic earnings per share for common shares and participating securities. Accordingly, and pursuant to U.S. GAAP, the Company has elected not to separately present basic or diluted earnings per share attributable to participating securities in the Consolidated Statements of Operations.
Diluted earnings per share is computed in a manner consistent with that of basic earnings per share, while considering other potentially dilutive securities. Potentially dilutive securities consist of both unvested, participating and non-participating RSA's, as well as outstanding options to purchase common stock ("Stock Options") and contingent performance stock units ("PSU's") (collectively, "Potential Dilutive Shares"). The dilutive effect, if any, for non-participating RSA's, Stock Options and PSU's is computed using the treasury stock method. For participating RSA's, the dilutive effect, if any, is determined using the greater of dilution as calculated under the treasury stock method or the two-class method. Potential Dilutive Shares are excluded from diluted earnings per share when their effect is anti-dilutive. When there is a net loss for a period, all Potential Dilutive Shares are anti-dilutive and are excluded from the calculation of diluted loss per share for that period.
Each PSU represents a contingent right to receive shares of the Company’s common stock, and the number of shares may range from zero to two times the number of PSU's granted on the award date depending upon the price performance of the Company's common stock as measured against a general index and a specific peer group index over requisite performance periods. The number of Potential Dilutive Shares related to PSU's is based on the number of shares of the Company's common stock, if any, that would be issuable at the end of the respective reporting period, assuming that the end of the reporting period is the end of the contingency period applicable to such PSU's. See Note 7 for additional information related to PSU's.
The following table sets forth the calculations of basic and diluted earnings per share: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except per share amounts) | | 2017 | | 2016 | | 2017 | | 2016 |
Net income | | $ | 5,792 |
| | $ | 9,612 |
| | $ | 20,888 |
| | $ | 21,848 |
|
Less: Dividends and undistributed income allocated to participating securities | | 32 |
| | 133 |
| | 141 |
| | 229 |
|
Income attributable to common stockholders | | $ | 5,760 |
| | $ | 9,479 |
| | $ | 20,747 |
| | $ | 21,619 |
|
| | | | | | | | |
Basic weighted-average common shares outstanding | | 20,808 |
| | 21,740 |
| | 21,569 |
| | 21,926 |
|
Add: dilutive effect of equity instruments | | 46 |
| | 358 |
| | 29 |
| | 283 |
|
Diluted weighted-average shares outstanding | | 20,854 |
| | 22,098 |
| | 21,598 |
| | 22,209 |
|
Earnings per share - basic | | $ | 0.28 |
| | $ | 0.44 |
| | $ | 0.96 |
| | $ | 0.99 |
|
Earnings per share - diluted | | $ | 0.28 |
| | $ | 0.43 |
| | $ | 0.96 |
| | $ | 0.97 |
|
For the three and nine months ended September 30, 2017 and 2016, options to purchase 0.2 million shares of common stock for each of the periods presented were outstanding, but were not included in the computation of diluted net income per share because the exercise price exceeded the average price of the underlying shares and the effect would have been anti-dilutive. For the three and nine months ended September 30, 2017 and 2016, options to purchase of 0.4 million, 0.2 million, 0.4 million and 0.2 million shares of common stock, respectively, which vest based on the Company achieving specified performance targets, were outstanding, but not included in the computation of diluted net income per share because they were determined not to be contingently issuable.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to makes 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 2016 Form 10-K. Actual results could differ from these estimates.
Reclassifications
Certain balances have been reclassified from the prior year to conform to the current year presentation.
New Accounting Guidance
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific guidance. The core principle of ASU 2014-09 is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 and its related amendments are effective for reporting periods (including interim periods) beginning after December 31, 2017. Early application is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption ("modified retrospective method"). The Company will adopt the standard under the modified retrospective method effective January 1, 2018, which will be reflected in its financial statements as of and for the three months ended March 31, 2018.
As of the date of this filing, the Company has materially completed its assessment of ASU 2014-09 for the impact to the financial statements as of the adoption date, completed a detailed review of individual customer contracts, continued its review of controls and procedures that may need to be revised or added from the adoption of the standard, and updated its timeline for completion of the various phases of the implementation plan for the standard, including documentation of the standard's financial statement impact at adoption, financial statement presentation and disclosure changes and reviews over potential changes to existing revenue recognition policies, controls and procedures. As a result, the Company may revise its initial quantitative and qualitative assessments of the financial impacts on its current revenue streams and related costs.
Based on the Company's current assessment of ASU 2014-09, it has determined that the timing of revenue recognition for equipment sales will be accelerated and all deferred revenue and deferred project costs on all uncompleted equipment sales projects as of December 31, 2017 will be derecognized through a cumulative effect adjustment, which will reduce the Accumulated deficit as of the adoption date in the amount of approximately $2.2 million. In addition, as of the adoption date, the Company anticipates derecognizing deferred revenue and deferred project costs for a technology licensing arrangement through a cumulative effect adjustment, which will reduce the Accumulated deficit in the amount of approximately $1.7 million. The Company currently estimates that there will be no material financial statement impact as of the adoption date from either chemical sales or consulting services.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments (Subtopic 825-10) - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). This standard provides guidance on how entities measure certain equity investments and present changes in the fair value. This standard requires that entities measure certain equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income. ASU 2016-01 is effective for fiscal years beginning after December 31, 2017. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures. The Company does not believe this standard will have a material impact on the Company's financial statements and disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"), which requires lessees to recognize a right of use asset and related lease liability for those leases classified as operating leases at the commencement date and have lease terms of more than 12 months. This topic retains the distinction between finance leases and operating leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, and must be applied under a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in ASU 2016-13 replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those years, and must be adopted under a modified retrospective method approach. Entities may adopt ASU 2016-13 earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those years. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures. The Company does not believe this standard will have a material impact on the Company's financial statements and disclosures.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting ("ASU 2017-09"). ASU 2017-09 provides guidance about which changes to the terms or conditions of a stock-based payment award require an entity to apply modification in Topic 718. Under the standard, an entity does not apply modification accounting if the fair value, vesting conditions, and classification of the stock-based awards are the same immediately before and after the modification. The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this standard. ASU 2017-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for public business entities for which financial statements have not yet been issued. The Company elected to adopt ASU 2017-09 effective with the beginning of its second fiscal quarter of 2017, April 1, 2017, and there was no material impact on the Company's financial statements or disclosures.
Note 2 - Equity Method Investments
Tinuum Group, LLC
The Company's ownership interest in Tinuum Group was 42.5% as of September 30, 2017 and December 31, 2016. Tinuum Group supplies technology equipment and technical services to cyclone-fired and other boiler users, but Tinuum Group's primary purpose is to put into operation facilities that produce and sell RC that lower emissions and therefore qualify for tax credits available under Section 45 of the IRC ("Section 45 tax credits"). Tinuum Group has been determined to be a variable interest entity ("VIE"); however, the Company does not have the power to direct the activities that most significantly impact Tinuum Group's economic performance and has therefore accounted for the investment under the equity method of accounting. The Company determined that the voting partners of Tinuum Group have identical voting rights, equity control interests and board control interests, and therefore, concluded that the power to direct the activities that most significantly impact Tinuum Group's economic performance was shared.
The following table summarizes the results of operations of Tinuum Group: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Gross profit | | $ | 23,812 |
| | $ | 22,645 |
| | $ | 70,895 |
| | $ | 70,325 |
|
Operating, selling, general and administrative expenses | | 5,174 |
| | 4,996 |
| | 14,975 |
| | 15,464 |
|
Income from operations | | 18,638 |
| | 17,649 |
| | 55,920 |
| | 54,861 |
|
Other expenses | | (3,331 | ) | | (3,583 | ) | | (4,278 | ) | | (7,618 | ) |
Class B preferred return | | (384 | ) | | (905 | ) | | (1,526 | ) | | (3,101 | ) |
Loss attributable to noncontrolling interest | | 11,953 |
| | 8,881 |
| | 29,240 |
| | 14,788 |
|
Net income available to Class A members | | $ | 26,876 |
| | $ | 22,042 |
| | $ | 79,356 |
| | $ | 58,930 |
|
ADES equity earnings from Tinuum Group | | $ | 11,050 |
| | $ | 9,775 |
|
| $ | 33,363 |
|
| $ | 28,050 |
|
As of September 30, 2017 and December 31, 2016, the amount of Tinuum Group's temporary Class B preferred equity was $7.4 million and $18.3 million, respectively.
The difference between the Company's proportionate share of Tinuum Group's Net income available to Class A members (at its equity interest of 42.5%) as presented in the table below and the Company's earnings from its Tinuum Group equity method investment as reported in the Condensed Consolidated Statements of Operations relates to the Company receiving distributions in excess of the carrying value of the equity investment, and therefore recognizing such excess distributions as equity method earnings in the period the distributions occur, as discussed below.
As shown in the tables below, the Company’s carrying value in Tinuum Group was reduced to zero for the three and nine months ended September 30, 2017, as cumulative cash distributions received from Tinuum Group exceeded the Company's pro-rata share of cumulative earnings in Tinuum Group. The carrying value of the Company's investment in Tinuum Group shall remain zero as long as the cumulative amount of distributions received from Tinuum Group continues to exceed the Company's cumulative pro-rata share of Tinuum Group's Net income available to Class A members. For periods during which the ending balance of the Company's investment in Tinuum Group is zero, the Company only recognizes equity earnings from Tinuum Group to the extent that cash distributions are received from Tinuum Group during the period. For periods during which the ending balance of the Company's investment is greater than zero (e.g., when the cumulative earnings in Tinuum Group exceeds cumulative cash distributions received), the Company recognizes its pro-rata share of Tinuum Group's Net income available to Class A members for the period, less any amount necessary to recover the cumulative earnings short-fall balance as of the end of the immediately preceding period. During the three and nine months ended September 30, 2017, the Company's cumulative amount of distributions received from Tinuum Group exceeded the Company's cumulative pro-rata share of Tinuum Group's Net income available to Class A members. As such, the Company recognized equity earnings from Tinuum Group for the three and nine months ended September 30, 2017 of $11.1 million and $33.4 million, respectively. During the three and nine months ended September 30, 2016, the Company recognized equity earnings from Tinuum Group in the amount of $9.8 million and $28.1 million, respectively. As of September 30, 2017 and 2016, the Company's carrying value in Tinuum Group was zero and zero, respectively.
Thus, the amount of equity earnings or loss reported on the Company's Condensed Consolidated Statement of Operations may differ from a mathematical calculation of net income or loss attributable to the equity interest based upon the factor of the equity interest and the Net income or loss attributable to Class A members as shown on Tinuum Group’s statement of operations. Additionally, for periods during which the carrying value of the Company's investment in Tinuum Group is greater than zero, distributions from Tinuum Group are reported on the Condensed Consolidated Statements of Cash Flows as "Distributions from equity method investees, return on investment" within Operating cash flows. For periods during which the carrying value of the Company's investment in Tinuum Group is zero, such cash distributions are reported on the Condensed Consolidated Statements of Cash Flows as "Distributions from equity method investees in excess of investment basis" within Investing cash flows.
The following tables presents the Company's investment balance, equity earnings and cash distributions in excess of the investment balance for the three and nine months ended September 30, 2017 and 2016 (in thousands): |
| | | | | | | | | | | | | | | | | | |
Description | | Date(s) | | Investment balance | | ADES equity earnings (loss) | | Cash distributions | | Memorandum Account: Cash distributions and equity earnings in (excess) of investment balance |
Beginning balance | | 12/31/2016 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (9,894 | ) |
ADES proportionate share of income from Tinuum Group (1) | | First Quarter | | 10,457 |
| | 10,457 |
| | — |
| | — |
|
Recovery of prior cash distributions in excess of investment balance (prior to cash distributions) | | First Quarter | | (9,894 | ) | | (9,894 | ) | | — |
| | 9,894 |
|
Cash distributions from Tinuum Group | | First Quarter | | (13,175 | ) | |
| | 13,175 |
| | — |
|
Adjustment for current year cash distributions in excess of investment balance | | First Quarter | | 12,612 |
| | 12,612 |
| | — |
| | (12,612 | ) |
Total investment balance, equity earnings (loss) and cash distributions | | 3/31/2017 | | $ | — |
| | $ | 13,175 |
| | $ | 13,175 |
| | $ | (12,612 | ) |
ADES proportionate share of income from Tinuum Group (1) | | Second Quarter | | $ | 11,761 |
| | $ | 11,761 |
| | $ | — |
| | $ | — |
|
Recovery of prior cash distributions in excess of investment balance (prior to cash distributions) | | Second Quarter | | (11,761 | ) | | (11,761 | ) | | — |
| | 11,761 |
|
Cash distributions from Tinuum Group | | Second Quarter | | (9,138 | ) | | — |
| | 9,138 |
| | — |
|
Adjustment for current year cash distributions in excess of investment balance | | Second Quarter | | 9,138 |
| | 9,138 |
| | — |
| | (9,138 | ) |
Total investment balance, equity earnings (loss) and cash distributions | | 6/30/2017 | | $ | — |
| | $ | 9,138 |
| | $ | 9,138 |
| | $ | (9,989 | ) |
ADES proportionate share of income from Tinuum Group (1) | | Third Quarter | | $ | 11,393 |
| | $ | 11,393 |
| | $ | — |
| | $ | — |
|
Recovery of prior cash distributions in excess of investment balance (prior to cash distributions) | | Third Quarter | | (9,989 | ) | | (9,989 | ) | | — |
| | 9,989 |
|
Cash distributions from Tinuum Group | | Third Quarter | | (11,050 | ) | | — |
| | 11,050 |
| | — |
|
Adjustment for current year cash distributions in excess of investment balance | | Third Quarter | | 9,646 |
| | 9,646 |
| | — |
| | (9,646 | ) |
Total investment balance, equity earnings (loss) and cash distributions | | 9/30/2017 | | $ | — |
| | $ | 11,050 |
| | $ | 11,050 |
| | $ | (9,646 | ) |
|
| | | | | | | | | | | | | | | | | | |
Description | | Date(s) | | Investment balance | | ADES equity earnings (loss) | | Cash distributions | | Memorandum Account: Cash distributions and equity earnings in (excess) of investment balance |
Beginning balance | | 12/31/2015 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (3,263 | ) |
ADES proportionate share of income from Tinuum Group (1) | | First Quarter | | 8,706 |
| | 8,706 |
| | — |
| | — |
|
Recovery of prior cash distributions in excess of investment balance (prior to cash distributions) | | First Quarter | | (3,263 | ) | | (3,263 | ) | | — |
| | 3,263 |
|
Cash distributions from Tinuum Group | | First Quarter | | (3,400 | ) | | — |
| | 3,400 |
| | — |
|
Total investment balance, equity earnings (loss) and cash distributions | | 3/31/2016 | | $ | 2,043 |
| | $ | 5,443 |
| | $ | 3,400 |
| | $ | — |
|
ADES proportionate share of income from Tinuum Group (1) | | Second Quarter | | $ | 6,758 |
| | $ | 6,758 |
| | $ | — |
| | $ | — |
|
Recovery of prior cash distributions in excess of investment balance (prior to cash distributions) | | Second Quarter | | — |
| | — |
| | — |
| | — |
|
Cash distributions from Tinuum Group | | Second Quarter | | (14,875 | ) | | — |
| | 14,875 |
| | — |
|
Adjustment for current year cash distributions in excess of investment balance | | Second Quarter | | 6,074 |
| | 6,074 |
| | — |
| | (6,074 | ) |
Total investment balance, equity earnings (loss) and cash distributions | | 6/30/2016 | | $ | — |
| | $ | 12,832 |
| | $ | 14,875 |
| | $ | (6,074 | ) |
ADES proportionate share of income from Tinuum Group (1) | | Third Quarter | | $ | 9,300 |
| | $ | 9,300 |
| | $ | — |
| | $ | — |
|
Recovery of prior cash distributions in excess of investment balance (prior to cash distributions) | | Third Quarter | | (6,074 | ) | | (6,074 | ) | | — |
| | 6,074 |
|
Cash distributions from Tinuum Group | | Third Quarter | | (9,775 | ) | | — |
| | 9,775 |
| | — |
|
Adjustment for current year cash distributions in excess of investment balance | | Third Quarter | | 6,549 |
| | 6,549 |
| | — |
| | (6,549 | ) |
Total investment balance, equity earnings (loss) and cash distributions | | 9/30/2016 | | $ | — |
| | $ | 9,775 |
| | $ | 9,775 |
| | $ | (6,549 | ) |
(1) For the three and nine months ended September 30, 2017 and 2016, the amounts of the Company's 42.5% proportionate share of Net Income available to Class A members as shown in the table above differ from mathematical calculations of the Company’s 42.5% equity interest in Tinuum Group multiplied by the amounts of Net Income available to Class A members as shown in the table above of Tinuum Group results of operations due to adjustments related to the Redeemable Class B preferred return and, for the three months ended March 31, 2016, the elimination of Tinuum Group's earnings attributable to RCM6, of which the Company sold its 24.95% equity interest on March 3, 2016.
Tinuum Services, LLC
The Company has a 50% voting and economic interest in Tinuum Services, which is equivalent to the voting and economic interest of NexGen Refined Coal, LLC ("NexGen"). The Company has determined that Tinuum Services is not a VIE and has evaluated its consolidation analysis under the Voting Interest Model. Because the Company does not own greater than 50% of the outstanding voting shares, either directly or indirectly, it has accounted for its investment in Tinuum Services under the equity method of accounting. The Company’s investment in Tinuum Services as of September 30, 2017 and December 31, 2016 was $3.0 million and $4.0 million, respectively.
The following table summarizes the results of operations of Tinuum Services: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Gross loss | | $ | (17,344 | ) | | $ | (15,848 | ) | | $ | (47,472 | ) | | $ | (42,946 | ) |
Operating, selling, general and administrative expenses | | 34,872 |
| | 34,278 |
| | 106,825 |
| | 101,687 |
|
Loss from operations | | (52,216 | ) | | (50,126 | ) | | (154,297 | ) | | (144,633 | ) |
Other income (expenses) | | 34 |
| | 27 |
| | 103 |
| | (13 | ) |
Loss attributable to noncontrolling interest | | 54,305 |
| | 52,019 |
| | 159,627 |
| | 149,792 |
|
Net income | | $ | 2,123 |
| | $ | 1,920 |
| | $ | 5,433 |
| | $ | 5,146 |
|
ADES equity earnings from Tinuum Services | | $ | 1,061 |
| | $ | 960 |
|
| $ | 2,717 |
|
| $ | 2,573 |
|
Included within the Consolidated Statements of Operations of Tinuum Services for the three and nine months ended September 30, 2017 and 2016, respectively, were losses related to VIE's of Tinuum Services. These losses do not impact the Company's equity earnings from Tinuum Services as 100% of those losses are removed from the net losses of Tinuum Services as they are losses attributable to a noncontrolling interest.
Other
On March 3, 2016, the Company sold its 24.95% membership interest in RCM6 for a cash payment of $1.8 million and the assumption, by the buyer, of an outstanding note payable made by the Company in connection with its purchase of RCM6 membership interests from Tinuum Group. In doing so, the Company recognized a gain on the sale of $2.1 million for the nine months ended September 30, 2016, which is included within the Other line item in the Condensed Consolidated Statements of Operations. As a result of the sale of its ownership interest, the Company ceased to be a member of RCM6 and, as such, is no longer subject to any quarterly capital calls and variable payments to RCM6. In addition, the Company has no future obligations related to the previously recorded note payable. However, the Company still receives its pro-rata share of income and cash distributions through its ownership in Tinuum Group based on the RCM6 lease payments made to Tinuum Group.
Prior to the sale of its ownership interest, the Company recognized equity losses related to its investment in RCM6 of $0.6 million for the three months ended March 31, 2016.
On July 27, 2017, the Company purchased a 50% membership interest in GWN Manager from Tinuum Group for an upfront payment of $0.1 million. GWN Manager owns a 0.2% membership interest in a subsidiary of Tinuum Group, which owns a single RC facility that produces RC that qualifies for Section 45 tax credits. Tinuum Group sold 49.9% of the subsidiary that owns the RC facility to an unrelated third party and retained ownership of the remaining 49.9%. GWN Manager is subject to monthly capital calls based on estimated working capital needs.
The Company has determined that GWN Manager is not a VIE and has evaluated the consolidation analysis under the Voting Interest Model. Because the Company does not own greater than 50% of the outstanding voting shares, either directly or indirectly, it has accounted for its investment in GWN Manager under the equity method of accounting.
As September 30, 2017, the Company's ownership in GWN Manager was 50%. The Company's investment in GWN Manager as of September 30, 2017, was $0.1 million.
The following table details the components of the Company's respective equity method investments included within 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) | | 2017 | | 2016 | | 2017 | | 2016 |
Earnings from Tinuum Group | | $ | 11,050 |
|
| $ | 9,775 |
|
| $ | 33,363 |
|
| $ | 28,050 |
|
Earnings from Tinuum Services | | 1,061 |
|
| 960 |
|
| 2,717 |
|
| 2,573 |
|
Earnings (losses) from other | | 9 |
|
| — |
|
| 9 |
|
| (557 | ) |
Earnings from equity method investments | | $ | 12,120 |
| | $ | 10,735 |
|
| $ | 36,089 |
|
| $ | 30,066 |
|
The following table details the components of the cash distributions from the Company's respective equity method investments included in the Condensed Consolidated Statements of Cash Flows. Distributions from equity method investees are reported on the Condensed Consolidated Statements of Cash Flows as "Distributions from equity method investees, return on investment" within Operating cash flows until such time as the carrying value in an equity method investee company is reduced to zero; thereafter, such distributions are reported as "Distributions from equity method investees in excess of cumulative earnings" within Investing cash flows. |
| | | | | | | | |
| | Nine Months Ended September 30, |
(in thousands) | | 2017 | | 2016 |
Distributions from equity method investees, return on investment | | | | |
Tinuum Group | | $ | — |
| | $ | 3,400 |
|
Tinuum Services | | 3,675 |
| | 3,450 |
|
| | $ | 3,675 |
| | $ | 6,850 |
|
Distributions from equity method investees in excess of investment basis | | | | |
Tinuum Group | | $ | 33,363 |
| | $ | 24,650 |
|
| | $ | 33,363 |
| | $ | 24,650 |
|
Note 3 - Borrowings
Line of Credit
On November 30, 2016, ADA-ES, Inc., a wholly-owned subsidiary of the Company ("ADA"), as borrower, the Company, as guarantor, and a bank (the "Lender") entered into an amendment (the "Tenth Amendment") to the 2013 Loan and Security Agreement (the "Line of Credit" or "LOC"). The Tenth Amendment increased the Line of Credit to $15 million, extended the maturity date of the Line of Credit to September 30, 2017 and permitted the Line of Credit to be used as collateral (in place of restricted cash) for letters of credit ("LC's") related to equipment projects, the Royalty Award, as defined in Note 5, and certain other agreements. Additionally, this amendment secured the Line of Credit with amounts due to the Company from an additional existing Refined Coal facility lease, which amounts also factor into the borrowing base limitation, and amended certain financial covenants. Pursuant to the Tenth Amendment, the Company was required to maintain a deposit account with the Lender, initially with a minimum balance of $6.0 million, which was reduced to $3.0 million based on the Company meeting certain conditions and maintaining minimum trailing twelve month EBITDA (earnings before interest, taxes, depreciation and amortization as defined in the Tenth Amendment) of $24.0 million. The minimum deposit balance was classified as Restricted Cash on the Condensed Consolidated Balance Sheets as of December 31, 2016.
On September 30, 2017, ADA, as borrower, the Company, as guarantor, and the Lender entered into an amendment (the "Eleventh Amendment") to the LOC. The Eleventh Amendment decreased the LOC to $10 million due to decreased collateral requirements for the Company's outstanding LC's, extended the maturity date of the LOC to September 30, 2018, and permitted the LOC to be used as collateral (in place of restricted cash) for LC's up to $8 million related to equipment projects, the Royalty Award and certain other agreements. Additionally, under the Eleventh Amendment there is no minimum balance requirement based on the Company meeting certain conditions and maintaining minimum trailing twelve-month EBITDA (earnings before interest, taxes, depreciation and amortization as defined in the Eleventh Amendment) of $24.0 million.
As of September 30, 2017, there were no outstanding borrowings under the Line of Credit, however, LC's in the aggregate amount of $4.5 million were secured under the Line of Credit, resulting in borrowing availability of $5.5 million and LC availability of $3.5 million.
Letters of Credit
The Company has LC's related to equipment projects, the Royalty Award and certain other agreements. During March 2017, a customer drew on an LC related to an equipment system in the amount of $0.8 million, which was funded by borrowing availability under the LOC. The Company subsequently repaid this amount to the Lender as of March 31, 2017. The Company is contesting the draw on this LC and is pursuing actions to recover this amount from the customer. This amount is included in Other long-term assets on the Condensed Consolidated Balance Sheets.
The following tables summarize the LC's outstanding and collateral, by asset type, reported on the Condensed Consolidated Balance Sheets:
|
| | | | | | | | | | | | |
| | As of September 30, 2017 |
(in thousands) | | LC Outstanding | | Utilization of LOC Availability | | Restricted Cash |
Royalty Award | | $ | 4,500 |
| | $ | 4,500 |
| | $ | — |
|
Total LC outstanding | | $ | 4,500 |
| | $ | 4,500 |
| | $ | — |
|
|
| | | | | | | | | | | | |
| | As of December 31, 2016 |
(in thousands) | | LC Outstanding | | Utilization of LOC Availability | | Restricted Cash |
Contract performance - equipment systems | | $ | 1,855 |
| | $ | 1,776 |
| | $ | 86 |
|
Royalty Award | | 7,150 |
| | — |
| | 7,150 |
|
Total LC outstanding | | $ | 9,005 |
| | $ | 1,776 |
| | $ | 7,236 |
|
Credit Agreement
On June 30, 2016, the Company, the required lenders and the administrative lender under a $15.0 million short-term loan (the "Credit Agreement") agreed to terminate the Credit Agreement prior to the maturity date of July 8, 2016, effective upon the Company’s prepayment on June 30, 2016 of $9.9 million, which was comprised of the total principal balance of the loan and advances made to or for the benefit of the Company, together with all accrued but unpaid interest, and the total amount of all fees, costs, expenses and other amounts owed by the Company thereunder, including a prepayment premium.
Tinuum Group - RCM6 Note Payable
The Company acquired a 24.95% membership interest in RCM6 from Tinuum Group in February 2014 through an up-front payment and a note payable (the "RCM6 Note Payable"). Due to the payment terms of the note purchase agreement, the RCM6 Note Payable periodically added interest to the outstanding principal balance. The stated rate associated with the RCM6 Note Payable was 1.65% and the effective rate of the RCM6 Note Payable at inception was 20%. As discussed in Note 2, on March 3, 2016, the Company sold its 24.95% membership interest in RCM6 and, as a result, the Company has no future obligations related to the previously recorded RCM6 Note Payable.
DSI Business Owner
In February 2016, the Company entered into an agreement to settle an outstanding note payable of approximately $1.1 million for $0.3 million with the former owner of a business ("DSI Business Owner") acquired by the Company in 2012, which was paid during the first quarter of 2016. The Company recognized a gain related to the settlement of $0.9 million, which is included in the Other line item in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2016.
Note 4 - Fair Value Measurements
Fair value of financial instruments
The carrying amounts of financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, deposits and accrued expenses, approximate fair value due to the short maturity of these instruments. Accordingly, these instruments are not presented in the table below. The following table provides the estimated fair values of the remaining financial instruments:
|
| | | | | | | | | | | | | | | | |
| | As of September 30, 2017 | | As of December 31, 2016 |
(in thousands) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Financial Instruments: | | | | | | | | |
Cost method investment (1) | | $ | 552 |
| | $ | 552 |
| | $ | 1,016 |
| | $ | 1,016 |
|
Highview technology license payable | | $ | 210 |
| | $ | 210 |
| | $ | 207 |
| | $ | 207 |
|
(1) Fair value is based on the investee's equity raise at £1.00 per share that commenced during the three months ended September 30, 2017 and the equity raise at £2.00 per share as of December 31, 2016. Refer to Note 9 for further discussion of this investment. The fair value measurement represents a Level 3 measurement as it is based on significant inputs not observable in the market.
Concentration of credit risk
The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and restricted cash, which were held at one and two financial institutions as of September 30, 2017 and December 31, 2016, respectively. If those institutions were to be unable to perform their 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.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of September 30, 2017 and December 31, 2016, the Company had no financial instruments carried and measured at fair value on a recurring basis.
Note 5 - Commitments and Contingencies
Legal Proceedings
The Company is from time to time subject to, and is presently involved in, various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of its business. Such matters are subject to many uncertainties and to outcomes, the financial impacts of which are not predictable with assurance and that may not be known for extended periods of time. The Company records a liability in its consolidated financial statements for costs related to claims, settlements, and judgments where management has assessed that a loss is probable and an amount can be reasonably estimated. The Company’s significant legal proceedings are discussed below.
Securities class action lawsuit: United Food and Commercial Workers Union v. Advanced Emissions Solutions, Inc., No. 14-cv-01243-CMA-KMT (U.S. District Court, D. Colo.)
As of December 31, 2016, the Company had a recorded liability and insurance receivable of $4.0 million in connection with this lawsuit as the losses in connection with this matter were probable and reasonably estimable under U.S. GAAP. The liability was originally recorded as of June 30, 2016 in the Legal settlements and accruals line item of the Consolidated Balance Sheet. On February 10, 2017, the Company received an order and final judgment that the lawsuit was settled, and the entire case had been dismissed with prejudice. The Company's insurance carriers funded the full settlement in November 2016. As of March 31, 2017, the Company no longer had any amounts impacting its consolidated financial statements as the order and judgment related to the lawsuit was received during the first quarter of 2017.
Stockholder derivative lawsuits: In Re Advanced Emissions Solutions, Inc. Shareholder Derivative Litigation, No. 2014CV-30709 (District Court, Douglas County, Colorado) (consolidated actions).
As of December 31, 2016, the Company had a recorded liability and insurance receivable of $0.6 million in connection with this lawsuit as the losses in connection with this matter were probable and reasonably estimable under U.S. GAAP. The liability was originally recorded as of June 30, 2016 in the Legal settlements and accruals line item of the Consolidated Balance Sheet. A settlement for this lawsuit was approved and the case was closed on January 4, 2017, and the Company's insurance carriers funded the full settlement in January 2017. As of March 31, 2017, the Company no longer had any amounts impacting its consolidated financial statements as the order and judgment related to the lawsuit was received during the first quarter of 2017.
SEC Inquiry
On March 29, 2017, the Company and the Securities and Exchange Commission reached a settlement to resolve a previously disclosed investigation into certain accounting issues, as described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014. Without admitting or denying the SEC’s allegations, the Company agreed to the terms of the settlement and agreed to pay a civil monetary penalty of $0.5 million. The Company had fully reserved for this penalty as of June 30, 2016. The penalty was paid in the first quarter of 2017.
Settlement and royalty indemnity
In August 2008, Norit International N.V. f/k/a Norit N.V. ("Norit") filed a lawsuit against the Company asserting claims for misappropriation of trade secrets and other claims related to the Company's ADA Carbon Solutions, LLC joint venture ("Carbon Solutions") that built an activated carbon manufacturing plant (the “Red River Plant”). In August 2011, the Company and Norit entered into a settlement agreement whereby the Company paid amounts related to the non-solicitation breach of contract claim, and ADA was also required to pay additional damages related to certain future revenues generated from the Red River Plant through the second quarter of 2018 (the "Royalty Award"). Payments of amounts due under the Royalty Award for each quarter are payable three months after such quarter ends. In October 2011, an arbitration panel endorsed and confirmed the terms of the settlement agreement.
Additionally, during November 2011, the Company entered into an Indemnity Settlement Agreement whereby the Company agreed to settle certain indemnity obligations asserted against the Company related to the Norit litigation and relinquished all of its equity interest in Carbon Solutions to Carbon Solutions and amended the Intellectual Property License Agreement dated October 1, 2008 between the Company and Carbon Solutions. Under a provision of the Royalty Award, in the event that the Company declares or otherwise issues a dividend to any or all of its stockholders prior to January 1, 2018, other than repurchases of common stock under employee stock plans, the Company must increase its LC amounts as collateral for payments due to Norit, equal to 50% of the aggregate fair market value of such dividends (the "Dividends Provision"). Additionally, the first time that the Company achieves earnings in excess of $20.0 million for a fiscal year ended prior to January 1, 2018, the Company would be required increase its LC amounts as collateral by $5.0 million for payments due to Norit (the "Earnings Provision"). Any increase due to the Dividends Provision or the Earnings Provision should not cause the outstanding LC's to exceed the remaining estimated Royalty Award. Based on the Company's achievement of $97.7 million of net income for the fiscal year ended December 31, 2016, in March 2017 and pursuant to the Earnings Provision, the Company provided an additional LC of $5.0 million that is secured under the Line of Credit as of September 30, 2017. Although the Company executed a stock repurchase and declared dividends during the nine months ended September 30, 2017, the Company was not required to increase its outstanding LC amounts as the existing LC’s are of a sufficient amount to support future estimated payments due related to the Royalty Award.
During the nine months ended September 30, 2017, the Company revised its estimate for future Royalty Award payments based in part on an updated forecast provided to the Company from Carbon Solutions. This forecast included a material reduction in estimated future revenues generated at the Red River Plant. Based primarily on the updated forecast, the Company recorded a $3.4 million reduction to the Royalty Award accrual.
As of September 30, 2017 and December 31, 2016, the Company carried the components of the Royalty Award in Legal settlements and accruals in the Condensed Consolidated Balance Sheets of $4.5 million and $5.7 million, respectively, and in Legal settlements and accruals, long-term of zero and $5.4 million, respectively. Future amounts to be paid related to the Royalty Award may differ from current estimates due to future adjusted sales of activated carbon from the Red River Plant.
The following table summarizes the Company's legal settlements and accruals as described above, which are presented in the Condensed Consolidated Balance Sheets: |
| | | | | | | | |
| | As of |
(in thousands) | | September 30, 2017 | | December 31, 2016 |
Settlement and Royalty Indemnification | | $ | 4,482 |
| | $ | 5,656 |
|
Legal settlements | | — |
| | 5,050 |
|
Legal settlements and accruals | | 4,482 |
| | 10,706 |
|
Settlement and Royalty Indemnification, long-term | | — |
| | 5,382 |
|
Legal settlements and accruals, long-term | | — |
| | 5,382 |
|
Total legal settlements and accruals | | $ | 4,482 |
| | $ | 16,088 |
|
Advanced Emission Solutions, Inc. Profit Sharing Retirement Plan
The Advanced Emissions Solutions, Inc. Profit Sharing Retirement Plan (the “Plan”) is subject to the jurisdiction of the Internal Revenue Service ("IRS") and the Department of Labor ("DOL"). The DOL opened an investigation into the Plan, and the Company is responding to all requests for documents and information from the DOL. The DOL has not issued any formal findings as of the date of this report. Although the Company believes there has been no breach of fiduciary duty with respect to the Plan, the Company believes that it is probable that the DOL will require some payment to the Plan in order to close the investigation. The Company determined that this amount is reasonably estimable and, as such, the Company has accrued $0.5 million as of September 30, 2017. The liability was recorded in the Other current liabilities line item on the Condensed Consolidated Balance Sheets. The expense recognized related to this accrual was included in the Other line item in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017. The estimate is based on information currently available and involves elements of judgment and significant uncertainties. As additional information becomes available and the resolution of the uncertainties becomes more apparent, it is possible that actual payment may exceed the accrued amount.
Other Commitments and Contingencies
Tinuum Group
The Company also has certain limited obligations contingent upon future events in connection with the activities of Tinuum Group. The Company, NexGen and two entities affiliated with NexGen have provided 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. 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. No liability or expense provision has been recorded by the Company related to this contingent obligation as the Company believes that it is not probable that a loss will occur with respect to Tinuum Group Party Guaranties.
Performance Guarantee on Equipment Systems
In the normal course of business related to ACI and DSI systems, the Company may guarantee certain performance thresholds during a discrete performance testing period that do not extend beyond six months from the initial test date, the commencement of which is determined by the customer. Performance thresholds include such matters as the achievement of a certain level of mercury removal and other emissions based upon the injection of a specified quantity of a qualified activated carbon or other chemical at a specified rate given other plant operating conditions, and availability of equipment and electric power usage. In the event the equipment fails to perform as specified during the testing period, the Company may have an obligation to correct or replace the equipment. In the event the performance thresholds are not achieved, the Company may have a “make right” obligation within the contract limits. During the three and nine months ended September 30, 2017, the Company was not presented with any performance guarantees nor did it incur any additional claims. Additional performance guarantee claims, if incurred, are included within the Equipment sales cost of revenue line in the Condensed Consolidated Statements of Operations.
Note 6 - Stockholders' Equity
Stock Repurchase
On May 5, 2017, the Company’s Board of Directors ("Board") authorized the commencement of a modified Dutch Auction tender offer ("Tender Offer") to purchase for cash up to 925,000 shares of the Company's common stock at a price per share of not less than $9.40 nor greater than $10.80, for a maximum aggregate purchase price of $10.0 million, with an option to purchase an additional 2% of the outstanding shares of common stock if the Tender Offer was oversubscribed. The Tender Offer expired on June 6, 2017 and a total of 2,858,425 shares were validly tendered and not properly withdrawn at or below the final purchase price of $9.40 per share.
Because the tender offer was oversubscribed, the Company purchased a prorated portion of the shares properly tendered by each tendering stockholder (other than "odd lot" holders whose shares were purchased on a priority basis) at the final per share purchase price. Accordingly, the Company acquired 1,370,891 shares of its common stock ("Tendered Shares") at a price of $9.40 per share, for a total cost of approximately $12.9 million, excluding fees and other expenses related to the tender offer. The Tendered Shares represented approximately 6.2% of the Company's outstanding shares prior to the tender offer. The Tendered Shares include the 925,000 shares the Company initially offered to purchase and 445,891 additional shares that the Company elected to purchase pursuant to its right to purchase up to an additional 2% of its outstanding shares of common stock. The Company recorded the Tendered Shares at cost, which included fees and expenses related to the Tender Offer, and reported the Tendered Shares as Treasury Stock on the Condensed Consolidated Balance Sheet as of September 30, 2017.
The Company’s Board and executive officers did not participate in the Tender Offer, except for one director of the Board, who is a manager of a financial institution and holds dispositive powers over the shares of the Company's common stock held by the financial institution that tendered 70,178 of its shares of the Company's common stock in order to continue to own less than 4.99% of the outstanding shares of the Company's common stock upon the expiration of the Tender Offer.
Quarterly Cash Dividend
The Company declared cash dividends (the "Dividends") of $0.25 per common share on each of June 14, 2017 and August 7, 2017, payable to stockholders of record as of the close of business on June 28, 2017 and August 21, 2017, respectively, which were paid on July 17, 2017 and September 7, 2017, respectively. The total amount of quarterly cash dividends paid by the Company during the three and nine months ended September 30, 2017 was $10.5 million. A portion of the Dividends remains accrued subsequent to the payment dates and represents dividends accumulated on nonvested shares of common stock held by employees of the Company that contain forfeitable dividend rights that are not payable until the underlying shares of common stock vest. These amounts are included in both Other current liabilities and Other long-term liabilities on the Condensed Consolidated Balance Sheet as of September 30, 2017,
Tax Asset Protection Plan
On May 5, 2017, the Board approved a Tax Asset Protection Plan designed to protect the Company’s ability to utilize its net operating losses and tax credits, which totaled approximately $113 million as of December 31, 2016.
United States federal income tax rules, and Section 382 of the Internal Revenue Code in particular, could substantially limit the use of net operating losses and other tax assets if ADES experiences an “ownership change” (as defined in the Internal Revenue Code). In general, an ownership change occurs if there is a cumulative change in the ownership of ADES by "5 percent stockholders" that exceeds 50 percentage points over a rolling three-year period.
The Tax Asset Protection Plan is intended to act as a deterrent to any person acquiring beneficial ownership of 4.99% or more of the Company’s outstanding common stock and will expire on the earlier of (a) May 4, 2018, or (b) the date of the 2018 Annual Meeting of Stockholders. The Tax Asset Protection Plan may also be terminated earlier in accordance with the terms thereof.
Note 7 - Stock-Based Compensation
The Company grants equity based awards to employees and non-employee directors. Equity based awards include RSA's, Stock Options, PSU's and Stock Appreciation Rights ("SAR's"). Stock-based compensation expense related to employees is included within the Payroll and benefits line item in the Condensed Consolidated Statements of Operations. Stock-based compensation expense related to non-employee directors 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, 2017 and 2016 was as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Restricted stock award expense | | $ | 298 |
| | $ | 633 |
| | $ | 1,103 |
| | $ | 1,615 |
|
Stock option expense | | 143 |
| | (21 | ) | | 443 |
| | 118 |
|
PSU expense | | 34 |
| | 83 |
| | 102 |
| | 399 |
|
SAR expense | | — |
| | — |
| | — |
| | 106 |
|
Total stock-based compensation expense | | $ | 475 |
| | $ | 695 |
| | $ | 1,648 |
| | $ | 2,238 |
|
The amount of unrecognized compensation cost as of September 30, 2017, and the expected weighted-average period over which the cost will be recognized is as follows: |
| | | | | | | |
| | As of September 30, 2017 |
(in thousands) | | Unrecognized Compensation Cost | | Expected Weighted- Average Period of Recognition (in years) |
Restricted stock award expense | | $ | 1,985 |
| | 2.16 |
|
Stock option expense | | 288 |
| | 0.22 |
|
PSU expense | | 35 |
| | 0.26 |
|
Total unrecognized stock-based compensation expense | | $ | 2,308 |
| | 1.89 |
|
Restricted Stock Awards
Restricted stock is typically granted with vesting terms of three years. The fair value of restricted stock awards 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 restricted stock awards is recognized over the entire vesting period on a straight-line basis. A summary of restricted stock award activity under the Company's various stock compensation plans for the nine months ended September 30, 2017 is presented below: |
| | | | | | | |
| | Shares | | Weighted-Average Grant Date Fair Value |
Non-vested at January 1, 2017 | | 297,347 |
| | $ | 8.03 |
|
Granted | | 185,616 |
| | $ | 9.52 |
|
Vested | | (190,524 | ) | | $ | 7.99 |
|
Forfeited | | (1,687 | ) | | $ | 9.17 |
|
Non-vested at September 30, 2017 | | 290,752 |
| | $ | 9.00 |
|
Stock Options
Stock options generally vest over three years and have a contractual limit of five years from the date of grant to exercise. The fair value of stock options granted is determined on the date of grant using the Black-Scholes option pricing model and the related expense is recognized on a straight-line basis over the entire vesting period.
A summary of option activity for the nine months ended September 30, 2017 is presented below:
|
| | | | | | | | | | | | | |
| | Number of Options Outstanding and Exercisable | | Weighted-Average Exercise Price | | Aggregate Intrinsic Value | | Weighted-Average Remaining Contractual Term (in years) |
Options outstanding, January 1, 2017 | | 632,446 |
| | $ | 11.61 |
| | | | |
Options granted | | — |
| | — |
| | | | |
Options exercised | | — |
| | — |
| | | | |
Options expired / forfeited | | — |
| | — |
| | | | |
Options outstanding, September 30, 2017 | | 632,446 |
| | $ | 11.61 |
| | $ | 648 |
| | 2.45 |
Options exercisable as of September 30, 2017 | | 254,448 |
| | $ | 13.48 |
| | $ | 124 |
| | 2.58 |
Performance Share Units
Compensation expense is recognized for PSU awards 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. There were no PSU's granted during the nine months ended September 30, 2017.
A summary of PSU activity for the nine months ended September 30, 2017 is presented below:
|
| | | | | | | |
| | Units | | Weighted-Average Grant Date Fair Value |
Non-vested at January 1, 2017 | | 49,516 |
| | $ | 25.20 |
|
Granted | | — |
| | — |
|
Vested / Settled (1) | | (30,110 | ) | | $ | (28.59 | ) |
Forfeited / Canceled | | — |
| | — |
|
Non-vested at September 30, 2017 | | 19,406 |
| | $ | 19.95 |
|
(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. The following table shows the PSU's that were settled by issuing shares of the Company's common stock relative to a broad stock index and a peer group performance index.
|
| | | | | | | | | | | | | | | | | | | | |
| | Year of Grant | | Net Number of Issued Shares upon Vesting | | Shares Withheld to Settle Tax Withholding Obligations | | TSR Multiple Range | | Russell 3000 Multiple |
| | | | | Low | | High | | Low | | High |
Nine Months Ended September 30, 2017 | | | | | | | | | | | | | | |
| | 2014 | | 6,476 |
| | 3,573 |
| | 0.75 |
| | 1.00 |
| | — |
| | — |
|
| | 2015 | | 3,869 |
| | 2,310 |
| | 0.60 |
| | 0.60 |
| | — |
| | — |
|
Nine Months Ended September 30, 2016 | | | | | | | | | | | | | | |
| | 2013 | | 38,706 |
| | 1,572 |
| | 0.63 |
| | 1.00 |
| | — |
| | — |
|
| | 2014 | | 11,487 |
| | — |
| | 0.63 |
| | 0.63 |
| | — |
| | — |
|
| | 2015 | | 13,529 |
| | — |
| | 0.50 |
| | 0.50 |
| | — |
| | — |
|
Note 8 - Income Taxes
For the three and nine months ended September 30, 2017, the Company recorded income tax expense of $3.6 million and $12.6 million, respectively, compared to income tax expense of $0.6 million and $0.7 million for the three and nine months ended September 30, 2016, respectively. The income tax expense recorded for the three and nine months ended September 30, 2017 was comprised of estimated federal income tax expense of $3.2 million and $11.9 million, respectively, and estimated state income tax expense of $0.4 million and $0.7 million, respectively. The income tax expense recorded for the three and nine months ended September 30, 2016 was comprised of estimated state income tax expense.
For the three and nine months ended September 30, 2017 and 2016, the Company's income tax expense and effective tax rates based on forecasted pretax income were:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except for rate) | | 2017 | | 2016 | | 2017 | | 2016 |
Income tax expense | | $ | 3,586 |
| | $ | 583 |
| | $ | 12,614 |
| | $ | 734 |
|
Effective tax rate | | 38 | % | | 6 | % | | 38 | % | | 3 | % |
The effective tax rate for the three and nine months ended September 30, 2017 was different from the federal statutory rate primarily due to state income tax expense, net of federal benefit.
The effective tax rate for the three and nine months ended September 30, 2016 was different from the statutory rate primarily due to the utilization of a portion of the federal operating losses and the Company's full valuation allowances against federal and state net operating losses and federal tax credits, offset by estimated state income tax expense.
The Company assesses the valuation allowance recorded against deferred tax assets at each reporting date. The determination of whether a valuation allowance for deferred tax assets is appropriate requires the evaluation of positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available to realize the deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating 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 9 - Supplemental Financial Information
Supplemental Balance Sheet Information
The following table summarizes the components of Prepaid expenses and other assets and Other long-term assets as presented in the Condensed Consolidated Balance Sheets:
|
| | | | | | | | |
| | As of |
(in thousands) | September 30, 2017 | | December 31, 2016 |
Prepaid expenses and other assets: | | | | |
Prepaid expenses | | $ | 1,635 |
| | $ | 1,169 |
|
Other | | 124 |
| | 188 |
|
| | $ | 1,759 |
| | $ | 1,357 |
|
Other long-term assets: | | | | |
Deposits | | $ | 223 |
| | $ | 263 |
|
Intangibles | | 788 |
| | 696 |
|
Cost method investment | | 552 |
| | 1,016 |
|
Other | | 729 |
| | 323 |
|
| | $ | 2,292 |
| | $ | 2,298 |
|
Included within Other long-term assets is the Company's cost method investment. In November 2014, the Company acquired 411,765 shares of common stock, representing approximately an 8% ownership interest, in Highview Enterprises Limited ("Highview"), a London, England based developmental stage company specializing in power storage, for $2.8 million in cash (the "Highview Investment"). The Company evaluated the Highview Investment and determined that it should account for the investment under the cost method. The Highview Investment is evaluated for impairment upon an indicator of impairment such as an event or change in circumstances that may have a significant adverse effect on the fair value of the investment. As of December 31, 2016, the Company recorded an impairment charge of $1.8 million based on an estimated fair value of £2.00 per share, compared to the carrying value prior to the impairment charge of £4.25 per share. The estimated fair value as of December 31, 2016 was based on an equity raise that was completed during the first quarter of 2017 at a price of £2.00 per share.
As of September 30, 2017, the Company recorded an impairment charge of $0.5 million, which is included in the Other line item in the Condensed Consolidated Statement of Operations, based on an estimated fair value of £1.00 per share, compared to the carrying value prior to the impairment charge of £2.00 per share. The estimated fair value as of September 30, 2017 was based on an equity raise that commenced during the third quarter of 2017 at a price of £1.00 per share.
The following table details the components of Other current liabilities and Other long-term liabilities as presented in the Condensed Consolidated Balance Sheets:
|
| | | | | | | | |
| | As of |
(in thousands) | | September 30, 2017 | | December 31, 2016 |
Other current liabilities: | | | | |
Taxes payable | | $ | 1,064 |
| | $ | 244 |
|
Estimated Company contribution to the Plan (1) | | 500 |
| | — |
|
Accrued losses on revenue contracts | | 124 |
| | 183 |
|
Accrued interest | | 63 |
| | 618 |
|
Dividends payable | | 31 |
| | — |
|
Warranty liabilities | | 374 |
| | 287 |
|
Deferred rent | | — |
| | 369 |
|
Asset retirement obligation | | — |
| | 1,312 |
|
Other | | 1,162 |
| | 1,004 |
|
| | $ | 3,318 |
| | $ | 4,017 |
|
Other long-term liabilities: | | | | |
Deferred rent | | 185 |
| | 38 |
|
Deferred revenue, related party | | 2,000 |
| | 2,000 |
|
Dividends payable | | 62 |
| | — |
|
| | $ | 2,247 |
| | $ | 2,038 |
|
(1) See Note 5 for further discussion on the Plan.The tables below detail additional components of Other current liabilities as presented above:
The changes in the carrying amount of the Company’s warranty obligations from December 31, 2016 through September 30, 2017 are as follows:
|
| | | | |
| | As of |
(in thousands) | | September 30, 2017 |
Balance, beginning of period | | $ | 287 |
|
Warranties accrued, net | | 580 |
|
Consumption of warranty obligations accrued | | (524 | ) |
Change in estimate related to previous warranties accrued | | 31 |
|
Balance, end of period | | $ | 374 |
|
Included within Other current liabilities as of December 31, 2016 is the Company's asset retirement obligation. Changes in the Company's asset retirement obligations are as follows: |
| | | | |
| | As of |
(in thousands) | | September 30, 2017 |
Asset retirement obligation, beginning of period | | $ | 1,312 |
|
Accretion | | 37 |
|
Liabilities settled | | (527 | ) |
Changes due to amount and timing of reclamation | | (822 | ) |
Asset retirement obligations, end of period | | $ | — |
|
The Company's estimate for its asset retirement obligation was reduced during the nine months ended September 30, 2017 as the scope of the asset retirement obligation was reduced. The change in estimate was recorded within the Research and development, net line item of the Condensed Consolidated Statements of Operations as the asset retirement obligation related to a research project of which expenses were originally recorded within the same line item.
Supplemental Condensed Consolidated Statements of Operations Information
The following table details the components of Interest expense in the Condensed Consolidated Statements of Operations:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
453A interest | | $ | 614 |
| | $ | 889 |
| | $ | 1,646 |
|
| $ | 2,034 |
|
Interest on RCM6 note payable, related party | | — |
| | — |
| | — |
|
| 263 |
|
Credit agreement interest | | 64 |
| | — |
| | 137 |
| | 2,112 |
|
Other | | — |
| | 80 |
| | 216 |
| | 87 |
|
| | $ | 678 |
| | $ | 969 |
| | $ | 1,999 |
| | $ | 4,496 |
|
The following table details the components of the Other line item of the Condensed Consolidated Statements of Operations: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Impairment of cost method investment | | $ | (464 | ) | | $ | — |
| | $ | (464 | ) | | $ | — |
|
Gain on sale of equity method investment | | — |
| | — |
| | — |
| | 2,078 |
|
Gain on settlement of note payable and licensed technology | | — |
| | — |
| | — |
| | 869 |
|
Gain on termination of sales-type lease | | — |
| | 900 |
| | — |
| | 900 |
|
Other (expense) income | | (460 | ) | | 378 |
| | (444 | ) | | 113 |
|
| | $ | (924 | ) | | $ | 1,278 |
| | $ | (908 | ) | | $ | 3,960 |
|
Note 10 - Business Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by a company's chief operating decision maker ("CODM"), or a decision making group, in deciding how to allocate resources and in assessing financial performance. As of September 30, 2017, the Company's CODM was the Company's CEO. The Company's operating and reportable segments are organized by products and services provided.
As of September 30, 2017, the Company has two reportable segments: (1) Refined Coal ("RC"); and (2) Emissions Control ("EC").
The business segment measurements provided to and evaluated by the CODM are computed in accordance with the principles listed below:
| |
• | The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the 2016 Form 10-K, except as described below. |
| |
• | RC segment revenue includes the Company's equity method earnings and losses from the Company's equity method investments. RC segment revenue also includes the Company's royalty earnings from Tinuum Group. |
| |
• | Segment operating income (loss) includes the Company's equity method earnings and losses from the Company's equity method investments, royalty earnings from Tinuum Group, gains related to sales of equity method investments and allocation of certain "Corporate general and administrative expenses," which include Payroll and benefits, Rent and occupancy, Legal and professional fees, and General and administrative. |
| |
• | All items not included in operating income are excluded from the RC and EC segments. |
As of September 30, 2017 and December 31, 2016, substantially all of the Company's material assets are located in the U.S. and all significant customers are either U.S. companies or the U.S. Government. The following table presents the Company's operating segment results for the three and nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Revenues: | | | | | | | | |
Refined Coal: | | | | | | | | |
Earnings in equity method investments | | $ | 12,120 |
| | $ | 10,735 |
| | $ | 36,089 |
| | $ | 30,066 |
|
Royalties | | 2,804 |
| | 2,064 |
| | 6,425 |
| | 3,922 |
|
| | 14,924 |
| | 12,799 |
| | 42,514 |
| | 33,988 |
|
Emissions Control: | | | | | | | | |
Equipment sales | | 1,577 |
|
| 14,869 |
|
| 31,304 |
|
| 44,788 |
|
Chemicals | | 717 |
|
| 670 |
|
| 3,844 |
|
| 1,717 |
|
Consulting services | | — |
|
| 171 |
|
| — |
|
| 492 |
|
| | 2,294 |
| | 15,710 |
| | 35,148 |
| | 46,997 |
|
Total segment reporting revenues | | 17,218 |
| | 28,509 |
| | 77,662 |
| | 80,985 |
|
Adjustments to reconcile to reported revenues: | | | | | | | | |
Refined Coal: | | | | | | | | |
Earnings in equity method investments | | (12,120 | ) | | (10,735 | ) | | (36,089 | ) | | (30,066 | ) |
Royalties | | (2,804 | ) | | (2,064 | ) | | (6,425 | ) | | (3,922 | ) |
| | (14,924 | ) | | (12,799 | ) | | (42,514 | ) | | (33,988 | ) |
Total reported revenues | | $ | 2,294 |
| | $ | 15,710 |
| | $ | 35,148 |
| | $ | 46,997 |
|
| | | | | | | | |
Segment operating income (loss): | | | | | | | | |
Refined Coal (1) | | $ | 13,991 |
| | $ | 11,913 |
|
| $ | 40,149 |
|
| $ | 33,974 |
|
Emissions Control | | (895 | ) | | 2,956 |
| | 1,265 |
| | 9,656 |
|
Total segment operating income | | $ | 13,096 |
| | $ | 14,869 |
| | $ | 41,414 |
| | $ | 43,630 |
|
(1) Included within the RC segment operating income for the three months ended September 30, 2017 and 2016 is 453A interest expense of $0.6 million and $0.9 million, respectively. Included within the RC segment operating income for the nine months ended September 30, 2017 and 2016 are 453A interest expense of $1.6 million and $2.0 million, respectively, and interest expense related to the RCM6 note payable of zero and $0.3 million, respectively. Additionally, included within the RC segment operating income for the nine months ended September 30, 2016 is a $2.1 million gain on the sale of RCM6.
A reconciliation of reportable segment operating income to the Company's consolidated net income is as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | | |
Segment operating income | | $ | 13,096 |
| | $ | 14,869 |
| | $ | 41,414 |
| | $ | 43,630 |
|
Adjustments to reconcile to net income attributable to ADES | | | | | | | | |
Corporate payroll and benefits | | (1,222 | ) | | (2,034 | ) | | (4,375 | ) | | (7,946 | ) |
Corporate rent and occupancy | | (91 | ) | | (306 | ) | | (208 | ) | | (807 | ) |
Corporate legal and professional fees | | (964 | ) | | (1,606 | ) | | (3,091 | ) | | (6,515 | ) |
Corporate general and administrative | | (857 | ) | | (818 | ) | | (2,513 | ) | | (2,965 | |