United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

      

FORM 10-Q

      

(Mark One)

 

For the quarterly period ended September 30, 2013

or

 

For the transition period from                      to                      

Commission File Number: 000-54992

      

ADVANCED EMISSIONS SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

      

   

 

(303) 734-1727

(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. (Check one):

   

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. (Check one):    Yes  ¨    No   x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

   

 

   

      

      

   

   

   

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Part I. – FINANCIAL INFORMATION

   

Item 1. Consolidated Financial Statements

Advanced Emissions Solutions, Inc. and Subsidiaries

Consolidated Balance Sheets

As of September 30, 2013 and December 31, 2012

(Amounts in thousands, except share data)

   

 

   

See accompanying notes.

   

   

   

   

 

 

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Advanced Emissions Solutions, Inc. and Subsidiaries

Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2013 and 2012

(Amounts in thousands, except per share data)

(Unaudited)

   

 

   

   

See accompanying notes.

   

   

   

 

 

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Advanced Emissions Solutions, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Deficit

For the Nine Months Ended September 30, 2013 and 2012

(Amounts in thousands, except share data)

(Unaudited)

   

 

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

See accompanying notes.

   

   

   

 

 

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Advanced Emissions Solutions, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2013 and 2012

(Amounts in thousands)

(Unaudited)

   

 

   

   

   

   

   

   

See accompanying notes.

   

   

   

 

 

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Advanced Emissions Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

   

(1) Basis of Presentation

The shareholders of ADA-ES, Inc. (“ADA”) at its 2013 Annual Meeting of Shareholders approved a proposal to reorganize the Company. Effective July 1, 2013, Advanced Emissions Solutions, Inc. (“ADES”), a Delaware corporation, replaced ADA as the publicly-held corporation. The reorganization is more fully described in the proxy statement/prospectus relating to ADA’s Annual Meeting of Shareholders filed with the United States Securities and Exchange Commission (the “SEC”) on April 25, 2013. For further information, see Note 13.

ADES, its direct and indirect wholly-owned subsidiaries ADA, a Colorado corporation, BCSI, LLC, a Delaware limited liability company (“BCSI”), ADA Environmental Solutions, LLC, a Colorado limited liability company (“ADA LLC”) and ADA Intellectual Property, LLC, a Colorado limited liability company (“ADA IP”) (which had no operations during the first nine months of 2013) and ADA’s joint venture interest in Clean Coal Solutions, LLC (“Clean Coal”) are collectively referred to as the “Company”.  As this periodic report pertains to the period ended September 30, 2013, and the reorganization was effective July 1, 2013, the term “Company”, “we”, “us” and “our” means ADA and its subsidiaries and Clean Coal joint venture for the periods through and including June 30, 2013, and ADES and its subsidiaries and Clean Coal joint venture for the periods after June 30, 2013. ADES and its subsidiaries have continued to conduct the business previously conducted by the Company in substantially the same manner as conducted prior to the reorganization.

The Company is principally engaged in providing environmental technologies and specialty chemicals to the coal-burning electric power generation industry. The Company generates a substantial part of its revenue from the sale of refined coal (“RC”), the sale of Activated Carbon Injection (“ACI”) and Dry Sorbent Injection (“DSI”) systems, contracts co-funded by the government and industry and the development and lease or sale of equipment for the RC market. The Company’s sales occur principally throughout the United States.

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The consolidated financial statements include the financial statements of ADES, ADA, BCSI, ADA LLC, ADA IP and Clean Coal. All significant intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, the consolidated financial statements include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of operations, financial position and cash flows for the interim periods presented. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

These statements should be read in conjunction with the consolidated financial statements and related notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012. The accounting policies used in preparing these consolidated financial statements are the same as those described in our Form 10-K.

The Company prepares its consolidated financial statements in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain amounts have been reclassified from the prior periods to conform to the current period financial statement presentation. Such reclassification had no effect on the net income (loss) reported.

   

 

 

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(2) Property and Equipment

Property and equipment consisted of the following at the dates indicated:

   

 

   

 

   

(3) Investment in Unconsolidated Entity

Clean Coal Solutions Services, LLC

On January 20, 2010, ADA, together with NexGen Refined Coal, LLC (“NexGen”), an affiliate of NexGen Resources Corporation, formed Clean Coal Solutions Services, LLC (“CCSS”) for the purpose of operating RC facilities. ADA has a 50% ownership interest in CCSS (but does not have management control of it) and ADA’s investment in CCSS, which totaled $2.5 million as of September 30, 2013, includes its share of CCSS income since its formation and is accounted for under the equity method of accounting.

The following schedule shows ADA’s share of net income attributed to CCSS.

   

 

   

(4) Joint Venture Investment in Clean Coal

In November 2006, ADA sold a 50% interest in its joint venture Clean Coal to NexGen, which was formed in 2006 to market RC technology. In May 2011, ADA and NexGen entered into a transaction in which Clean Coal sold an effective 15% interest of the equity in Clean Coal to GSFS Investments I Corp. (“GSFS”), an affiliate of the Goldman Sachs Group, Inc. (“GS”), which is included in temporary equity subject to possible redemption in the consolidated balance sheets (see Note 8). GSFS has certain preferences over ADA and NexGen as to liquidation and profit distribution. GSFS has no further capital call requirements and does not have a voting interest but does have approval rights over certain corporate transactions.

In September 2011, ADA, NexGen and GSFS entered into a First Amendment to Second Amended and Restated Operating Agreement pursuant to which ADA and NexGen each transferred their 2.5% member interests in each of Clean Coal’s subsidiaries back to Clean Coal. As a result of these transactions, ADA’s interest in Clean Coal’s net profits and losses is 42.5%. This restructuring of ownership interests did not change the financial relationships of the parties and ADA still maintains a 50% governance interest in Clean Coal. In July 2012, ADA, NexGen and GSFS entered into a Second Amendment to the Operating Agreement (the “Operating Agreement”) which, among other things, expanded Clean Coal’s board of managers to allow for the appointment of an additional manager not directly representative of any of the members. Since its inception, ADA has been considered the primary economic beneficiary of this joint venture and has consolidated the accounts of Clean Coal.

Clean Coal’s function is to supply technology, equipment and technical services to cyclone-fired and other boiler users, and its primary purpose is to put into operation facilities that produce RC that qualifies for tax credits that are available under Section 45 of the Internal Revenue Code (“Section 45 tax credits”). Clean Coal qualified two facilities in 2009 for such purposes and in June 2010 leased those facilities to GS RC Investments, LLC (“GS RC”), a related entity of GS.

 

 

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In December 2010, the Tax Relief and Job Creation Act of 2010 extended the placed in service deadline for the Section 45 tax credits to January 1, 2012. In consideration of the extension, Clean Coal built and qualified an additional 26 RC facilities in 2011, which met the extended placed in service date. In November and December 2011, the two leased RC facilities qualified in 2009 were exchanged with newly constructed, redesigned RC facilities. The new leases carried over most of the substantive terms and conditions of the initial leases. In March 2013 the parties amended and restated the lease agreements to modify the structure and timing of the lease payments. The payments are due quarterly in advance and are subject to adjustments for inflation. Each lease has an initial non-cancellable term of two years and will automatically renew unless terminated at the option of the lessee thereof, for successive one-year terms through November 9, 2021 and December 10, 2021, as applicable. The parties also amended and restated the two Operating and Maintenance Agreements pursuant to which CCSS (subject to oversight by the lessee) operates and maintains the RC facilities to provide for the payment of a fixed fee under the agreements instead of payments based on the production of RC as had previously been in place.

Clean Coal leased two additional RC facilities in 2012, one to an entity related to GS and the other to a third party investor. All agreements included terms and conditions substantially similar to those applicable to the first two leased RC facilities. On February 28, 2013, Clean Coal sold an RC facility to a new third party investor. In July 2013, two additional RC facilities were leased and in October 2013 an additional RC facility was leased to entities related to GS with terms and conditions substantially similar to the terms then in place for the first two leased RC facilities, bringing the total number of RC facilities leased or sold to eight. In addition, Clean Coal currently operates three additional RC facilities for its own account, resulting in its owners’ ability to claim the Section 45 tax credits for the RC produced during those operations.

The Operating Agreement requires NexGen and ADA to each pay 50% of the costs of operating Clean Coal and specifies certain duties that both parties are obligated to perform. Pursuant to an Exclusive Right to Lease Agreement, Clean Coal granted to GSFS the exclusive right to lease additional RC facilities capable of producing up to approximately 12 million tons of RC (the “Target Tons”) per year on pre-established terms.  Clean Coal has entered into lease transactions with GSFS that in the aggregate meet or exceed the Target Tons and as a result the related obligations under the Exclusive Right to Lease Agreement have been satisfied.

Following is unaudited summarized information as to assets, liabilities and results of operations of Clean Coal:

   

 

   

 

Amounts due to CCSS

Clean Coal has recorded accounts payable to CCSS totaling $3.5 million and $3.5 million as of September 30, 2013 and December 31, 2012, respectively, which are included in accounts payable to related parties in the accompanying consolidated balance sheets.

   

 

 

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(5) Deferred Revenue and Deposits

Deferred revenue consists of:

 

 

Clean Coal Deferred Rent Revenue

Clean Coal has received $39.1 million in prepaid rents related to three RC facilities leased and sold thus far in 2013 that is being recognized as revenue over the terms specified in the related lease agreements.

The following table presents prepaid rents included in deferred revenue in the consolidated balance sheets.

   

 

The following table presents total rent revenues recognized and amortization with respect to the prepaid rents.

   

 

Clean Coal Deposits

At September 30, 2013, Clean Coal had no remaining deposits compared to $21.2 million in deposits at December 31, 2012 related to amounts received from GSFS for RC facilities which could be leased upon attainment of certain milestones. During the nine months ended September 30, 2013, deposits of $16.5 million were transferred to deferred revenue and $4.7 million was returned to GSFS as it was determined that GSFS would not pursue leases on two particular RC facilities.           

   

(6) Net Income (Loss) Per Share

Basic net income (loss) per share is computed based on the weighted average common shares outstanding in the period. Diluted net income (loss) per share is computed based on the weighted average common shares outstanding in the period and the effect of dilutive securities (stock options and awards) except where the inclusion is anti-dilutive.

All outstanding stock options (see Note 7) to purchase shares of common stock for the nine months ended September 30, 2013 and 2012 and for the three months ended September 30, 2012 were excluded from the calculation of diluted shares, as their effect is anti-dilutive.

   

(7) Stock-Based Compensation

The Company currently has several stock and option plans, including the 2005 Directors’ Compensation Plan (the “2005 Plan”), the Amended and Restated 2007 Equity Incentive Plan, as amended (the “2007 Plan”), the Amended and Restated 2010 Non-Management Compensation and Incentive Plan, as amended (the “2010 Plan”) and the Profit Sharing Retirement Plan, which is a plan qualified under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) as described below. These plans allow the Company to issue stock-based awards, including common stock, restricted stock, stock options and other rights and benefits under the plans to employees, directors and non-employees. As discussed in Notes 1 and 13, effective July 1, 2013, ADES replaced ADA as the publicly held corporation and assumed and adopted these plans and the outstanding awards granted pursuant to the plans.

During 2005, the Company adopted the 2005 Plan, which authorized the issuance of shares of common stock and the grant of options to purchase shares of common stock to non-management directors. Under the 2005 Plan, the award of stock is limited to not more than 1,000 shares per individual per year, and the grant of options is limited to 5,000 per individual in total. The aggregate number of

 

 

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shares of common stock reserved for issuance under the 2005 Plan totals 90,000 shares (50,000 in the form of stock awards and 40,000 in the form of options). In February 2013, a new board member was issued 5,000 options under the 2005 Plan. These stock options vest in three equal annual installments beginning one year after the grant date.

The 2007 Plan, which was adopted by the Company in 2007, permits grants to employees, directors and non-employees of shares of common stock, restricted stock, stock options and other rights and benefits under the plan. The 2007 Plan was amended and restated as of August 31, 2010 to make non-material changes to assure Internal Revenue Code Section 409A compliance and to increase the non-management director annual grant limit to 15,000 shares of common stock from 10,000 shares. On July 19, 2012, the stockholders of the Company approved an amendment to the 2007 Plan to increase the number of shares presently issuable to 1.3 million and increase the number of shares authorized for issuance to 1.8 million. In addition, the stockholders also approved an increase in the number of shares with respect to which awards may be granted in any fiscal year from 30,000 to 50,000 and the annual grant limit for the non-management director annual grant was increased to 30,000 shares.

In 2009, the Company revised its 401(k) Plan to allow the issuance of shares of its common stock to employees to satisfy its obligation to match employee contributions under the terms of the plan in lieu of matching contributions in cash. The Company reserved 300,000 shares of its common stock for this purpose. The value of common stock issued as matching contributions under the plan is determined based on the per share market value of the Company’s common stock generally on quarterly authorization dates.

The 2010 Plan, which was adopted by the Company in 2010, permits grants of awards, which may be shares, rights to purchase restricted stock, bonuses of restricted stock or other rights or benefits under the plan. The Company reserved 300,000 shares of its common stock for these purposes. The Plan was amended and restated as of July 19, 2012 to make non-material changes to assure Internal Revenue Code Section 409A compliance.

The fair value of stock options granted pursuant to one of the Company’s plans is determined on the date of grant using the Black-Scholes option pricing model and the related compensation expense is recognized on a straight-line basis over the vesting period. The fair value of restricted stock awards is determined based on the closing price of the Company’s common stock on the date of grant multiplied by the number of shares subject to the stock award. Compensation expense for restricted stock awards is recognized over the vesting period on a straight-line basis.

In May 2013, the Compensation Committee of the Board of Directors approved long-term incentive awards for executive officers under the 2007 Plan. The awards included the grant of 44,789 shares of restricted stock at a per share price of $31.29 that will vest in equal installments on January 1, 2014, January 1, 2015 and January 1, 2016 subject to the grantee’s continuous service with the Company and the grant of 89,578 performance share units (“PSUs”). Each PSU represents a contingent right to receive shares of the Company’s common stock if the Company meets certain performance measures over the period from January 1, 2013 through December 31, 2015. Vesting of the PSUs, if at all, will occur no later than January 1, 2016, subject to the grantee’s continuous service and the achievement of certain pre-established performance goals to be measured as of December 31, 2015, unless the PSUs vest sooner at the target amount as a result of certain transactions pursuant to Section 11 of the 2007 Plan.

The number of shares of common stock a participant receives will be increased (up to 200 percent of target levels) or reduced (down to zero) based on the level of achievement of performance goals. The number of PSUs that may be earned by a participant is determined at the end of the performance period based on the relative placement of the Company’s total stockholder return (“TSR”) for that period with 75% of the award based on the relative performance of the Company’s TSR performance compared to the respective TSRs of a specified group of 15 peer companies and the remaining 25% based on the Company’s TSR performance compared to the Russell 3000 Index. Compensation expense is recognized for PSU awards on a straight-line basis over the applicable service period based on the estimated fair value at the date of grant using a Monte Carlo simulation model. The valuation model for the PSU award used an average expected volatility of 81.43%, expected dividend yield of 0% and a risk-free interest rate of 0.36%. For the nine months ended September 30, 2013, the Company recorded approximately $364,000 in compensation expense related to the PSU awards. There was unrecognized compensation expense for the PSU awards of approximately $2 million as of September 30, 2013.

 

 

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Following is a table summarizing the activity under various stock issuance plans for the nine months ended September 30, 2013:

   

 

   

As noted above, 89,578 PSUs were granted that represent a contingent right to receive shares of the Company’s common stock and such shares, if issued, would decrease the available shares in the 2007 Plan.

Expense recognized under the different plans for stock and stock options (excluding PSU awards) for the nine months ended:

   

 

   

 

A summary of the status of the non-vested restricted stock shares for the nine months ended September 30, 2013 is presented below:

   

 

Following is a table of stock option activity for the nine months ended September 30, 2013:

   

 

   

 

 

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Following is a table of aggregate intrinsic value of stock options exercised and exercisable for the nine months ended September 30, 2013:

   

 

   

 

Stock options outstanding and exercisable at September 30, 2013 are summarized in the table below:

   

 

   

(8) Temporary Equity Subject to Possible Redemption

As described in Note 4, in May 2011, ADA and NexGen entered into a transaction in which Clean Coal sold an effective 15% interest of the equity in Clean Coal to GSFS. Approximately 15.8 units of non-voting Class B membership interests were issued to GSFS for $60 million in cash. ADA and NexGen each received $30 million as a result of the sale. The terms of the Operating Agreement permit GSFS to require redemption of the unreturned portion of its initial $60 million investment in Clean Coal plus a return of 15% in 2021 and under certain limited circumstances. As a result, $60 million is classified as temporary equity subject to possible redemption in the consolidated balance sheets.

   

(9) Stockholders’ Deficit

The non-controlling interest portion of stockholders’ deficit includes the non-controlling interests related to Clean Coal.

   

(10) Commitments and Contingencies

Lines of Credit

In September 2013, ADA, as borrower, and ADES, as guarantor, entered into a revolving line of credit agreement with a bank for an aggregate principal amount of $10 million that is secured by certain amounts due to ADA from certain Clean Coal RC leases and guaranteed by ADES.  The line of credit is available until September 20, 2014. Covenants in the line of credit include a borrowing base limitation determined based on a percentage of the net present value of ADA’s portion of payments due to Clean Coal from these certain RC leases. Amounts outstanding under the line of credit will bear interest payable monthly at a rate per annum equal to the higher of  5% or the “Prime Rate” (as defined in the agreement) plus 1%.  The line of credit also contains other affirmative and negative covenants, and provides for the issuance of letters of credit provided that the aggregate amount of the letters of credit plus all advances then outstanding do not exceed the calculated borrowing base. There was no outstanding balance under this agreement at September 30, 2013; however, ADA was not in compliance with a certain equity covenant as calculated using a specific formula. The bank agreed to defer declaring a default based upon that calculation and is in the process of amending the definition and formula for this covenant which should enable the Company to be in compliance with the amended covenant in future periods.

Clean Coal has a revolving line of credit with a bank for $15 million secured by the equity interests and proceeds related to such equity interests of each subsidiary owned by Clean Coal. In January 2013, the revolving line of credit agreement was amended to provide a $2 million revolver with any borrowings under the amended agreement due on December 31, 2013. The increased commitment is secured by the equity interests and proceeds related to such equity interests of each subsidiary owned by Clean Coal. There was no outstanding balance under this agreement at September 30, 2013.

   

 

 

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Retirement Plan

The 401(k) plan covers all eligible employees of ADA and the Company makes matching contributions to the plan in the form of cash and its common stock. Such contributions are as follows:

   

 

Performance Guarantees on Emission Control Systems

Under certain contracts to supply emission control systems, the Company may guarantee certain aspects of the performance of the associated equipment for a specified period to the owner of the power plant. The Company may also guarantee the achievement of a certain level of mercury and/or acid gas removal based upon the injection of a specified quantity of a qualified sorbent at a specified rate given other plant operating conditions. In the event the equipment fails to perform as specified, the Company may have an obligation to correct or replace the equipment. In the event the level of emission removal is not achieved, the Company may have a “make right” obligation within the contract limits. The Company assesses the risks inherent in each applicable contract and accrues an amount that is based on estimated costs that may be incurred over the performance period of the contract. Such costs are included in the Company’s accrued warranty and other liabilities in the consolidated balance sheets. Any warranty costs paid out in the future will be charged against the accrual. The adequacy of the warranty accrual balance is assessed at least quarterly based on the then current facts and circumstances and adjustments are made as needed.

The changes in the carrying amount of the Company’s performance guaranties are as follows: