10-Q 1 ades-20190630x10q.htm 10-Q Document


United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________ 
FORM 10-Q
 ______________________________________  
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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.
Large accelerated filer
 
o
  
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
o
  
Smaller reporting company
 
x
 
 
 
 
 
 
 
 
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
Securities registered pursuant to Section 12(b) of the Act:
Class
 
Trading Symbol
 
Name of each exchange on which registered
Common stock, par value $0.001 per share
 
ADES
 
NASDAQ Global Market

As of August 1, 2019, there were 18,578,019 outstanding shares of Advanced Emissions Solutions, Inc. common stock, par value $0.001 per share.





INDEX
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





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)
 
June 30, 2019
 
December 31, 2018
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash, cash equivalents and restricted cash
 
$
15,420

 
$
18,577

Receivables, net
 
5,606

 
9,554

Receivables, related parties
 
4,189

 
4,284

Inventories, net
 
17,798

 
21,791

Prepaid expenses and other assets
 
5,598

 
5,570

Total current assets
 
48,611

 
59,776

Restricted cash, long-term
 
5,000

 
5,195

Property, plant and equipment, net of accumulated depreciation of $4,179 and $1,499, respectively
 
44,825

 
42,697

Intangible assets, net
 
4,501

 
4,830

Equity method investments
 
48,403

 
6,634

Deferred tax assets, net
 
19,179

 
32,539

Other long-term assets, net
 
16,553

 
7,993

Total Assets
 
$
187,072

 
$
159,664

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
6,631

 
$
6,235

Accrued payroll and related liabilities
 
3,450

 
8,279

Current portion of long-term debt
 
24,025

 
24,067

Other current liabilities
 
5,552

 
2,138

Total current liabilities
 
39,658

 
40,719

Long-term debt
 
34,204

 
50,058

Other long-term liabilities
 
5,449

 
940

Total Liabilities
 
79,311

 
91,717

Commitments and contingencies (Note 8)
 

 

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, 22,867,405 and 22,640,677 shares issued, and 18,554,626 and 18,576,489 shares outstanding at June 30, 2019 and December 31, 2018, respectively
 
23

 
23

Treasury stock, at cost: 4,312,779 and 4,064,188 shares as of June 30, 2019 and December 31, 2018, respectively
 
(44,571
)
 
(41,740
)
Additional paid-in capital
 
97,354

 
96,750

Retained earnings
 
54,955

 
12,914

Total stockholders’ equity
 
107,761

 
67,947

Total Liabilities and Stockholders’ Equity
 
$
187,072

 
$
159,664


See Notes to the Condensed Consolidated Financial Statements.

1


Advanced Emissions Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited) 

 
 
Three Months Ended June 30,

Six Months Ended June 30,
(in thousands, except per share data)
 
2019

2018

2019

2018
Revenues:
 
 
 
 
 
 
 
 
Consumables
 
$
11,386

 
$
726


$
26,495


$
1,347

License royalties, related party
 
4,191

 
3,523

 
8,411

 
6,753

Other
 

 
24




72

Total revenues
 
15,577


4,273


34,906


8,172

Operating expenses:
 
 
 
 

 
 
 
Consumables cost of revenue, exclusive of depreciation and amortization
 
12,286

 
902


26,394

 
1,613

Other sales cost of revenue, exclusive of depreciation and amortization
 
6

 
(198
)

6

 
(346
)
Payroll and benefits
 
2,798


2,759


5,354


4,973

Legal and professional fees
 
1,569


1,213


3,545


2,761

General and administrative
 
2,421


1,094


4,563


2,264

Depreciation, amortization, depletion and accretion
 
757


72


2,859


188

Total operating expenses

19,837


5,842


42,721


11,453

Operating loss

(4,260
)

(1,569
)

(7,815
)

(3,281
)
Other income (expense):

 
 
 

 
 
 
Earnings from equity method investments

20,935


15,889


42,625


28,142

Interest expense

(1,987
)

(412
)

(4,091
)

(748
)
Other

60


34


130


60

Total other income

19,008


15,511


38,664


27,454

Income before income tax expense

14,748


13,942


30,849


24,173

Income tax expense (benefit)

6,634


(1,349
)

8,333


1,220

Net income

$
8,114


$
15,291


$
22,516


$
22,953

Earnings per common share (Note 1):

 
 
 

 
 
 
Basic

$
0.45


$
0.76


$
1.23


$
1.13

Diluted

$
0.44


$
0.75


$
1.22


$
1.12

Weighted-average number of common shares outstanding:

 
 
 

 
 
 
Basic

18,172


20,062


18,219


20,275

Diluted

18,377


20,195


18,412


20,386


See Notes to the Condensed Consolidated Financial Statements.



2


Advanced Emissions Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)


 
 
Common Stock
 
Treasury Stock
 
 
 
 
 
 
(Amounts in thousands, except share data)
 
Shares
 
Amount
 
Shares
 
Amount
 
Additional Paid-in Capital
 
Retained Earnings
 
Total Stockholders’
Equity
Balances, January 1, 2019
 
22,640,677

 
$
23

 
(4,064,188
)
 
$
(41,740
)
 
$
96,750

 
$
12,914

 
$
67,947

Cumulative effect of change in accounting principle (Note 1)
 

 

 

 

 

 
28,817

 
28,817

Stock-based compensation
 
218,465

 

 

 

 
317

 

 
317

Repurchase of common shares to satisfy minimum tax withholdings
 
(22,707
)
 

 

 

 
(245
)
 

 
(245
)
Cash dividends declared on common stock, $0.25 per share
 

 

 

 

 

 
(4,629
)
 
(4,629
)
Repurchase of common shares
 

 

 
(63,876
)
 
(693
)
 

 

 
(693
)
Net income
 

 

 

 

 

 
14,402

 
14,402

Balances, March 31, 2019
 
22,836,435

 
23

 
(4,128,064
)
 
(42,433
)
 
96,822

 
51,504

 
105,916

Stock-based compensation
 
31,715

 

 

 

 
541

 

 
541

Repurchase of common shares to satisfy minimum tax withholdings
 
(745
)
 

 

 

 
(9
)
 

 
(9
)
Cash dividends declared on common stock, $0.25 per share
 

 

 

 

 

 
(4,663
)
 
(4,663
)
Repurchase of common shares
 

 

 
(184,715
)
 
(2,138
)
 

 

 
(2,138
)
Net income
 

 

 

 

 

 
8,114

 
8,114

Balances, June 30, 2019
 
22,867,405

 
$
23

 
(4,312,779
)
 
$
(44,571
)
 
$
97,354

 
$
54,955

 
$
107,761


See Notes to the Condensed Consolidated Financial Statements.


3


Advanced Emissions Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)


 
 
Common Stock
 
Treasury Stock
 
 
 
 
 
 
(Amounts in thousands, except share data)
 
Shares
 
Amount
 
Shares
 
Amount
 
Additional Paid-in Capital
 
Retained Earnings (Deficit)
 
Total Stockholders’
Equity
Balances, January 1, 2018
 
22,465,821

 
$
22

 
(1,713,766
)
 
$
(16,397
)
 
$
105,308

 
$
(15,478
)
 
$
73,455

Cumulative effect from adoption of ASC 606
 

 

 

 

 

 
2,950

 
2,950

Stock-based compensation
 
193,583

 
1

 

 

 
335

 

 
336

Repurchase of common shares to satisfy minimum tax withholdings
 
(22,375
)
 

 

 

 
(267
)
 

 
(267
)
Cash dividends declared on common stock, $0.25 per share
 

 

 

 

 
(5,189
)
 

 
(5,189
)
Repurchase of common shares
 

 

 
(149,217
)
 
(1,642
)
 

 

 
(1,642
)
Net income
 

 

 

 

 

 
7,662

 
7,662

Balances, March 31, 2018
 
22,637,029

 
23

 
(1,862,983
)
 
(18,039
)
 
100,187

 
(4,866
)
 
77,305

Stock-based compensation
 
(1,135
)
 

 

 

 
675

 

 
675

Repurchase of common shares to satisfy minimum tax withholdings
 
(8,259
)
 

 

 

 
(92
)
 

 
(92
)
Cash dividends declared on common stock, $0.25 per share
 

 

 

 

 
(5,090
)
 

 
(5,090
)
Repurchase of common shares
 

 

 
(676,201
)
 
(7,469
)
 

 

 
(7,469
)
Net income
 

 

 

 

 

 
15,291

 
15,291

Balances, June 30, 2018
 
22,627,635

 
$
23

 
(2,539,184
)
 
$
(25,508
)
 
$
95,680

 
$
10,425

 
$
80,620


See Notes to the Condensed Consolidated Financial Statements.


4


Advanced Emissions Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)


 
 
Six Months Ended June 30,
(in thousands)
 
2019
 
2018
Cash flows from operating activities
 
 
 
 
Net income

$
22,516


$
22,953

Adjustments to reconcile net income to net cash provided by operating activities:

 
 
 
Increase (decrease) in valuation allowance on deferred tax assets

849


(498
)
Depreciation, amortization, depletion and accretion

2,859


188

Amortization of debt discount and debt issuance costs

851



Stock-based compensation expense

858


1,010

Earnings from equity method investments

(42,625
)

(28,142
)
Other non-cash items, net

474


192

Changes in operating assets and liabilities:

 



Receivables and related party receivables

4,044


(64
)
Prepaid expenses and other assets

47


(375
)
Costs incurred on uncompleted contracts



15,945

Inventories

3,794



Deferred tax assets, net

4,097


(246
)
Other long-term assets

1,470



Accounts payable

(758
)

323

Accrued payroll and related liabilities

(4,829
)
 
152

Other current liabilities

862


(1,505
)
Billings on uncompleted contracts



(15,945
)
Operating lease liabilities

(1,563
)


Other long-term liabilities

(462
)

(135
)
Distributions from equity method investees, return on investment

38,088


2,700

Net cash provided by (used in) operating activities

30,572


(3,447
)
Cash flows from investing activities

 
 
 
Distributions from equity method investees in excess of cumulative earnings
 

 
25,500

Acquisition of business

(661
)


Acquisition of property, plant, equipment, and intangible assets

(3,797
)

(131
)
Mine development costs

(521
)


Contributions to equity method investees



(750
)
Net cash (used in) provided by investing activities

(4,979
)

24,619

Cash flows from financing activities

 
 
 
Principal payments on term loan
 
(16,000
)
 

Principal payments on finance lease obligations
 
(681
)
 

Dividends paid
 
(9,179
)
 
(10,216
)
Repurchase of common shares

(2,831
)

(9,111
)
Repurchase of common shares to satisfy tax withholdings

(254
)

(359
)
Net cash used in financing activities

(28,945
)

(19,686
)
(Decrease) increase in Cash and Cash Equivalents and Restricted Cash

(3,352
)

1,486

Cash and Cash Equivalents and Restricted Cash, beginning of period

23,772


30,693

Cash and Cash Equivalents and Restricted Cash, end of period

$
20,420


$
32,179

Supplemental disclosure of non-cash investing and financing activities:

 
 
 
Acquisition of property, plant and equipment through accounts payable

$
1,561


$

Dividends declared, not paid
 
$
113

 
$
63

See Notes to the Condensed Consolidated Financial Statements.

5


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 and operations located in Louisiana. The Company is principally engaged in consumable mercury control options including powdered activated carbon (“PAC”) and chemical technologies. The Company's proprietary environmental technologies in the power generation and industrial ("PGI") market enable customers to reduce emissions of mercury and other pollutants, maximize utilization levels and improve operating efficiencies to meet the challenges of existing and pending emission control regulations. The Company generates substantial earnings and tax credits under Section 45 ("Section 45 tax credits") of the Internal Revenue Code ("IRC") from its equity investments in certain entities and earns royalties for technologies that are licensed to Tinuum Group, LLC, a Colorado limited liability company ("Tinuum Group"). Such technologies allow Tinuum Group to provide their customers with various solutions to enhance combustion and reduced emissions of nitrogen oxide ("NOx") and mercury from coal burned to generate electrical power. The Company’s sales occur principally throughout the United States. See Note 13 for additional information regarding the Company's operating segments.
On December 7, 2018 (the "Acquisition Date"), the Company acquired (the "Carbon Solutions Acquisition") 100% of the equity interests of ADA Carbon Solutions, LLC (“Carbon Solutions”). Carbon Solutions is a manufacturer and seller of activated carbon ("AC") used in mercury capture for the coal-fired power plant, industrial and water treatment markets. Carbon Solutions also owns an associated lignite mine that supplies the primary raw material for manufacturing powdered activated carbon. Carbon Solutions was formed in 2008 as a 50/50 joint venture by the Company and Energy Capital Partners LLC. The Company relinquished its ownership in 2011 as part of a legal settlement agreement as described in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017. The Company acquired Carbon Solutions primarily to expand the Company's product offerings within the mercury control industry and other complementary PAC markets.
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements of ADES are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") and with Article 10 of Regulation S-X of the Securities and Exchange Commission. In compliance with those instructions, certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
The unaudited Condensed Consolidated Financial Statements of ADES in this quarterly report ("Quarterly Report") are presented on a consolidated basis and include ADES and its wholly-owned subsidiaries (collectively, the "Company"). Also included within the unaudited Condensed Consolidated Financial Statements are the Company's unconsolidated equity investments; Tinuum Group, Tinuum Services, LLC ("Tinuum Services"), and GWN Manager, LLC ("GWN Manager"), which are accounted for under the equity method of accounting, and Highview Enterprises Limited (the "Highview Investment"), which is accounted for in accordance with U.S. GAAP applicable to equity investments that do not qualify for the equity method of accounting.
Results of operations and cash flows for the interim periods are not necessarily indicative of the results that may be expected for the entire year. All significant intercompany transactions and accounts were eliminated for all periods presented in this Quarterly Report.
In the opinion of management, these Condensed Consolidated Financial Statements include all normal and recurring adjustments considered necessary for a fair presentation of the results of operations, financial position, stockholders' equity and cash flows for the interim periods presented. These Condensed Consolidated Financial Statements of ADES should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the "2018 Form 10-K"). Significant accounting policies disclosed therein have not changed, except as described later in Note 1.
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

6


Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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. 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 Condensed 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 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.
The following table sets forth the calculations of basic and diluted earnings per share:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands, except per share amounts)
 
2019
 
2018
 
2019
 
2018
Net income
 
$
8,114

 
$
15,291

 
$
22,516

 
$
22,953

Less: Dividends and undistributed income allocated to participating securities
 
11

 
51

 
31

 
77

Income attributable to common stockholders
 
$
8,103

 
$
15,240

 
$
22,485

 
$
22,876

 
 
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
 
18,172

 
20,062

 
18,219

 
20,275

Add: dilutive effect of equity instruments
 
205

 
133

 
193

 
111

Diluted weighted-average shares outstanding
 
18,377

 
20,195

 
18,412

 
20,386

Earnings per share - basic
 
$
0.45

 
$
0.76

 
$
1.23

 
$
1.13

Earnings per share - diluted
 
$
0.44

 
$
0.75

 
$
1.22

 
$
1.12

For the three and six months ended June 30, 2019 and 2018, RSA's and Stock Options convertible to 0.3 million and 0.3 million shares, respectively, and 0.3 million and 0.4 million shares, respectively, 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 effect would have been anti-dilutive. For the six months ended June 30, 2018, Stock Options to purchase 0.1 million shares, which vest based on the Company achieving specified performance targets, were outstanding, but were not included in the computation of diluted net income per share for a portion of this period 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 make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. There have been no changes in the Company’s critical accounting estimates from those that were disclosed in the 2018 Form 10-K. Actual results could differ from these estimates.
Risks and Uncertainties
The Company’s earnings are significantly affected by equity earnings it receives from Tinuum Group. As of June 30, 2019, Tinuum Group has 21 invested RC facilities of which 11 are leased to a single customer. A majority of these leases are periodically renewed and the loss of this single customer or material modification to the lease terms of these facilities by this customer would have a significant adverse impact on Tinuum Group's financial position, results of operations and cash flows, which in turn would have material adverse impact on the Company’s financial position, results of operations and cash flows.
The Company's revenues, sales volumes, earnings and cash flows are significantly affected by prices of competing power generation sources such as natural gas and renewable energy. Low natural gas prices make it a competitive alternative to coal-fired power generation and therefore, coal consumption may be reduced, which reduces the demand for our products. In addition, coal consumption and demand for our products is also affected by the demand for electricity, which is higher in the warmer and colder months of the year. Abnormal temperatures during the summer and winter months may significantly reduce coal consumption and thus the demand for our products.

7


Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Reclassifications
Certain balances have been reclassified from the prior year to conform to the current year presentation. No reclassifications have any impact to income before income taxes or net income.
New Accounting Standards
Recently Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"), which created ASC Topic 842 - Leases ("ASC 842"), requiring 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. ASC 842 retains the distinction between finance leases (formerly defined as capital leases) and operating leases. On January 1, 2019, the Company adopted ASC 842 retrospectively beginning with the date of adoption. Under this adoption method, the application date is the beginning of the reporting period in which the Company first applies the provisions of ASC 842. Accordingly, the Company’s reporting for the comparative periods presented in the financial statements and related disclosures continues in accordance with legacy U.S. GAAP under ASC Topic 840 - Leases ("ASC 840"). The adoption of ASC 842 had no impact to the opening balance of retained earnings.
As of the adoption date, the Company recorded $7.0 million and $7.0 million of "right of use" ("ROU") assets and incremental lease liabilities, respectively. The cumulative effect of the change from the adoption of ASC 842 to the Consolidated Balance Sheet as of January 1, 2019 is shown in the table that follows:
 
 
Balance as of
 
Impact of
 
Balance as of
(in thousands)
 
December 31, 2018
 
Adoption
 
January 1, 2019
Balance Sheet
 
 
 
 
 
 
Other long-term assets
 
$
7,993

 
$
6,956

 
$
14,949

Other liabilities
 
$
50,058

 
$
3,085

 
$
53,143

Other long-term liabilities
 
$
940

 
$
3,871

 
$
4,811

See Note 6 for additional disclosures required under ASC 842 in the year of adoption.
As of January 1, 2019, Tinuum Group adopted ASU 2016-02 and ASU 2014-09 (Topic 606), Revenue from Contracts with Customers ("ASU 2014-09"). As a result of Tinuum Group’s adoption of these pronouncements, the Company recorded a cumulative effect increase of $28.8 million to Retained earnings as of January 1, 2019, based on the Company's ownership percentage of Tinuum Group's cumulative effect adjustment, and increased its investment balance in Tinuum Group in the amount of $37.2 million and established a deferred tax liability of $8.4 million. As a result of the increase in the investment balance in Tinuum Group, for the six months ended June 30, 2019, the Company began recognizing equity earnings in Tinuum Group based on its pro-rata share of Tinuum Group’s net income rather than based on cash distributions received as had been required in prior periods as a result of the cumulative cash distributions exceeding the cumulative pro-rata share of Tinuum Group's net income.
Not Yet Adopted
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 August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). The amendments in ASU 2018-13 improve the effectiveness of fair value measurement disclosures and modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement ("Topic 820"), based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting - Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. ASU

8


Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this update and delay adoption of the additional disclosures until their effective date. The Company is currently evaluating the provisions of ASU 2018-13 and assessing its impact on the Company's financial statement disclosures. The Company does not believe this standard will have a material impact on the Company's financial statement disclosures.

Note 2 - Acquisition
As described in Note 1, on the Acquisition Date, the Company completed the Carbon Solutions Acquisition for a total purchase price of $75.0 million (the "Purchase Price"). The results of Carbon Solutions have been included in the Company’s consolidated financial statements since the Acquisition Date. The fair value of the purchase consideration totaled $66.5 million and consisted of cash of $65.8 million and an additional purchase adjustment amount payable to Carbon Solutions' secured lender of $0.7 million, which was paid in March 2019. The Purchase Price was adjusted by assumed debt and contractual commitments of $11.8 million, less cash acquired of $3.3 million. The Company also paid $4.5 million in acquisition-related costs (or transaction costs) during the year ended December 31, 2018. The Company funded the cash consideration from cash on hand and the proceeds from the Term Loan and Security Agreement (the "Senior Term Loan") in the principal amount of $70.0 million, as more fully described in Note 5.

The following table summarizes the final purchase price allocation. Subsequent to December 31, 2018, the Company completed additional analysis and adjustments were made to the preliminary purchase price allocations as noted in the table below:
Fair value of assets acquired:
 
As Originally Reported
 
Adjustments
 
As Adjusted
Cash
 
$
3,284

 
$

 
$
3,284

Receivables
 
6,409

 

 
6,409

Inventories
 
22,100

 
(356
)
 
21,744

Prepaid expenses and other current assets
 
2,992

 
61

 
3,053

Spare parts
 
3,359

 

 
3,359

Property, plant and equipment
 
43,033

 
(377
)
 
42,656

Mine leases and development
 
2,500

 
200

 
2,700

Mine reclamation asset
 

 
2,402

 
2,402

Intangible assets
 
4,000

 
100

 
4,100

Other assets
 
168

 

 
168

Amount attributable to assets acquired
 
87,845

 
2,030

 
89,875

 
 
 
 
 
 
 
Fair value of liabilities assumed:
 
 
 
 
 
 
Accounts payable
 
4,771

 

 
4,771

Accrued liabilities
 
7,354

 
254

 
7,608

Equipment lease liabilities
 
8,211

 

 
8,211

Mine reclamation liability
 
626

 
1,776

 
2,402

Other liabilities
 
437

 

 
437

Amount attributable to liabilities assumed
 
21,399

 
2,030

 
23,429

 
 
 
 
 
 
 
Net assets acquired
 
$
66,446

 
$

 
$
66,446


9


Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Adjustments to the preliminary purchase price allocation primarily relate to changes in fair values assigned to property, plant and equipment, intangible assets, mine reclamation liability and the related mine reclamation asset as a result of the final valuation report from the Company's third-party valuation firm issued in May 2019. In addition, during the six months ended June 30, 2019 and based on new information of facts and circumstances that existed as of the Acquisition Date, the Company revised its estimate used as of the Acquisition Date related to the net realizable value of certain finished goods inventory items as well as values assigned to certain prepaid and accrued expense items.
The adjustments have been recorded as of June 30, 2019 and are included in the Consolidated Balance Sheet as of June 30, 2019 and the resultant impact to the Statement of Operations for the three and six months ended June 30, 2019.
The following table represents the intangible assets, as adjusted for purchase price adjustments noted above, identified as part of the Carbon Solutions Acquisition:
(in thousands)
 
Amount
 
Weighted Average Useful Life (years)
Customer relationships
 
$
2,200

 
5
Developed technology
 
1,600

 
5
Trade name
 
300

 
2
Total intangibles acquired
 
$
4,100

 
 
Unaudited Pro Forma Financial Information
The following represents the pro forma effects of the Carbon Solutions Acquisition as if it had occurred on January 1, 2017. The pro forma pre-tax income for the period presented has been calculated after applying the Company’s accounting policies in effect for 2017 and 2018. In addition, pro forma net income for the three and six months ended June 30, 2018 includes: (1) the impact on Carbon Solutions of the adoption of ASC 606 effective January 1, 2018, which resulted in a reclassification of $1.8 million and $3.8 million, respectively, from Revenues to Cost of Revenue for freight costs billed to customers, with no impact to income from operations; (2) the reduction in depletion, depreciation and amortization resulting from the purchase price adjustments to Property, plant and equipment and Mine development costs; (3) the adjustment to interest expense from the combination of the Senior Term Loan that was used to fund the Carbon Solutions Acquisition and the elimination of certain debt of Carbon Solutions as a result of pay-offs by the Company as of the Acquisition Date; and (4) the removal of $2.1 million and $3.2 million in transaction costs incurred for the three and six months ended June 30, 2018, respectively, together with the income tax effect on (1) through (4). The pro forma results do not include any anticipated synergies or other expected benefits of the Carbon Solutions Acquisition. The unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the Carbon Solutions Acquisition been consummated as of January 1, 2017.
As of June 30, 2019, the Company identified a difference in depreciation as originally calculated and included in the pro forma net income disclosure for the three months ended March 31, 2018. The following table presents the effect of the change in calculated depreciation to pro forma net income for the three months ended March 31, 2018:
 
 
For the three months ended March 31, 2018
(in thousands)
 
As reported
 
Adjustment
 
As adjusted
Net income
 
$
3,727

 
$
3,350

 
$
7,077

The following table presents the pro forma effects of the Carbon Solutions Acquisition for the three and six months ended June 30, 2018:
 
 
Three Months Ended
 
Six Months Ended
(in thousands)
 
June 30, 2018
 
June 30, 2018
Revenues
 
$
16,655

 
$
35,150

Net income
 
$
8,985

 
$
16,062



10


Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 3 - Inventories
The following table summarizes the Company's inventories recorded at the lower of average cost or net realizable value as of June 30, 2019 and December 31, 2018:
 
 
As of
(in thousands)
 
June 30, 2019
 
December 31, 2018
Product inventory (1)
 
$
16,466

 
$
19,403

Raw material inventory
 
1,332

 
2,388

 
 
$
17,798

 
$
21,791

(1) As of June 30, 2019 and December 31, 2018, this amount includes zero and $5.0 million, respectively, attributed to the increase in fair value of inventory acquired from the Carbon Solutions Acquisition.

Note 4 - Equity Method Investments
Tinuum Group, LLC
The Company's ownership interest in Tinuum Group was 42.5% as of June 30, 2019 and December 31, 2018. Tinuum Group supplies technology equipment and technical services at select coal-fired generators, but its primary purpose is to put into operation facilities that produce and sell refined coal ("RC") that lower emissions and therefore qualify for 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 June 30,
 
Six Months Ended June 30,
(in thousands)
 
2019
 
2018
 
2019
 
2018
Gross profit
 
$
38,180

 
$
28,683

 
$
79,380

 
$
55,096

Operating, selling, general and administrative expenses
 
5,763

 
5,491

 
12,345

 
11,498

Income from operations
 
32,417

 
23,192

 
67,035

 
43,598

Other (expenses) income
 
(28
)
 
(355
)
 
23

 
(2,224
)
Class B preferred return
 

 

 

 
(12
)
Loss attributable to noncontrolling interest
 
12,891

 
10,244

 
28,667

 
21,019

Net income available to members
 
$
45,280

 
$
33,081

 
$
95,725

 
$
62,381

ADES equity earnings from Tinuum Group
 
$
19,244

 
$
14,450


$
39,011


$
25,500

For the three and six months ended June 30, 2018 periods presented in the table below, the difference between the Company's proportionate share of Tinuum Group's net income available to members (at its equity interest of 42.5%) 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.
For the three and six months ended June 30, 2018 periods presented in the table below, the Company recognized equity earnings from Tinuum Group to the extent that cash distributions were received from Tinuum Group during the period. For the three months ended June 30, 2019, the Company recognized its pro-rata share of Tinuum Group's net income available to its members for the respective period. For the six months ended June 30, 2019, the Company recognized its pro-rata share of Tinuum Group's net income available to its members for the period, less the amount necessary to recover the cumulative earnings short-fall balance as of the end of the immediately preceding period, which was December 31, 2018. For the three and six months ended June 30, 2019, the Company recognized equity earnings from Tinuum Group of $19.2 million and $39.0 million, respectively. For the three and six months ended June 30, 2018, the Company recognized equity earnings from Tinuum Group of $14.5 million and $25.5 million, respectively. As of June 30, 2019 and December 31, 2018, the Company's carrying value in Tinuum Group was $42.5 million and zero, respectively.

11


Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The following tables present the Company's investment balance, equity earnings and cash distributions in excess of the investment balance, if any, for the three and six months ended June 30, 2019 and 2018 (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
 
12/31/2018
 
$

 
$

 
$

 
$
(1,672
)
Impact of adoption of accounting standards (1)
 
First Quarter
 
37,232

 

 

 

ADES proportionate share of income from Tinuum Group
 
First Quarter
 
21,439

 
21,439

 

 

Recovery of prior cash distributions in excess of investment balance (prior to cash distributions)
 
First Quarter
 
(1,672
)
 
(1,672
)
 

 
1,672

Cash distributions from Tinuum Group
 
First Quarter
 
(16,788
)
 

 
16,788

 

Total investment balance, equity earnings (loss) and cash distributions
 
03/31/19
 
$
40,211

 
$
19,767

 
$
16,788

 
$

ADES proportionate share of income from Tinuum Group
 
Second Quarter
 
$
19,244

 
$
19,244

 
$

 
$

Cash distributions from Tinuum Group
 
Second Quarter
 
(17,000
)
 

 
17,000

 

Total investment balance, equity earnings (loss) and cash distributions
 
6/30/2019
 
$
42,455

 
$
19,244

 
$
17,000

 
$

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
 
12/31/2017
 
$

 
$

 
$

 
$
(12,218
)
ADES proportionate share of income from Tinuum Group (2)
 
First Quarter
 
12,458

 
12,458

 

 

Recovery of prior cash distributions in excess of investment balance (prior to cash distributions)
 
First Quarter
 
(12,218
)
 
(12,218
)
 

 
12,218

Cash distributions from Tinuum Group
 
First Quarter
 
(11,050
)
 

 
11,050

 

Adjustment for current year cash distributions in excess of investment balance
 
First Quarter
 
10,810

 
10,810

 

 
(10,810
)
Total investment balance, equity earnings (loss) and cash distributions
 
3/31/2018
 
$

 
$
11,050

 
$
11,050

 
$
(10,810
)
ADES proportionate share of income from Tinuum Group (2)
 
Second Quarter
 
$
14,059

 
$
14,059

 
$

 
$

Recovery of prior cash distributions in excess of investment balance (prior to cash distributions)
 
Second Quarter
 
(10,810
)
 
(10,810
)
 

 
10,810

Cash distributions from Tinuum Group
 
Second Quarter
 
(14,450
)
 

 
14,450

 

Adjustment for current year cash distributions in excess of investment balance
 
Second Quarter
 
11,201

 
11,201

 

 
(11,201
)
Total investment balance, equity earnings (loss) and cash distributions
 
6/30/2018
 
$

 
$
14,450

 
$
14,450

 
$
(11,201
)
(1) As discussed in Note 1, Tinuum Group adopted ASC 606 and ASC 842 as of January 1, 2019. As a result of Tinuum Group’s adoption of these standards, the Company recorded a cumulative adjustment of $28.8 million, net of the impact of income taxes, related to the Company's percentage of Tinuum Group's cumulative effect adjustment that increased the Company's Retained earnings as of January 1, 2019.
(2) For the three and six months ended June 30, 2018, the amount of the Company's 42.5% proportionate share of net income available to members as shown in the table above may differ from mathematical calculations of the Company’s 42.5% equity interest in Tinuum Group multiplied by the amounts of net income available to members as shown in the table above of Tinuum Group results of operations due to adjustments related to the Class B preferred return.

12


Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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 June 30, 2019 and December 31, 2018 was $5.9 million and $6.6 million, respectively.
The following table summarizes the results of operations of Tinuum Services:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
 
2019
 
2018
 
2019
 
2018
Gross loss
 
$
(25,192
)
 
$
(21,701
)
 
$
(49,927
)
 
$
(42,707
)
Operating, selling, general and administrative expenses
 
50,412

 
43,133

 
99,862

 
83,837

Loss from operations
 
(75,604
)
 
(64,834
)
 
(149,789
)
 
(126,544
)
Other (expenses) income
 
(316
)
 
423

 
(558
)
 
365

Loss attributable to noncontrolling interest
 
79,307

 
67,287

 
157,577

 
131,463

Net income
 
$
3,387

 
$
2,876

 
$
7,230

 
$
5,284

ADES equity earnings from Tinuum Services
 
$
1,693

 
$
1,438

 
$
3,615


$
2,642

Included within the Consolidated Statements of Operations of Tinuum Services for the three and six months ended June 30, 2019 and 2018, 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 attributable to a noncontrolling interest and eliminated in the calculations of Tinuum Services' net income attributable to the Company's interest.
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 June 30,
 
Six Months Ended June 30,
(in thousands)
 
2019
 
2018
 
2019
 
2018
Earnings from Tinuum Group
 
$
19,244


$
14,450

 
$
39,011


$
25,500

Earnings from Tinuum Services
 
1,693


1,438

 
3,615


2,642

(Losses) earnings from other
 
(2
)

1

 
(1
)


Earnings from equity method investments
 
$
20,935

 
$
15,889

 
$
42,625


$
28,142

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 in 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.
 
 
Six Months Ended June 30,
(in thousands)
 
2019
 
2018
Distributions from equity method investees, return on investment
 
 
 
 
Tinuum Group
 
$
33,788

 
$

Tinuum Services
 
4,300

 
2,700

 
 
$
38,088

 
$
2,700

Distributions from equity method investees in excess of investment basis
 
 
 
 
Tinuum Group
 
$

 
$
25,500

 
 
$

 
$
25,500


13


Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)


Note 5 - Debt Obligations
 
 
As of
(in thousands)
 
June 30, 2019
 
December 31, 2018
Senior Term Loan due December 2021, related party
 
$
54,000

 
$
70,000

Less: net unamortized debt issuance costs
 
(1,620
)
 
(1,990
)
Less: net unamortized debt discount
 
(1,571
)
 
(2,052
)
Senior Term Loan due December 2021, net
 
50,809

 
65,958

Finance lease obligations (1)
 
7,420

 
8,167

 
 
58,229

 
74,125

Less: Current maturities
 
(24,025
)
 
(24,067
)
Total long-term debt
 
$
34,204

 
$
50,058

(1) As of December 31, 2018, amounts related to capital lease obligations.
Senior Term Loan
On December 7, 2018, the Company, and ADA-ES, Inc. ("ADA"), a wholly-owned subsidiary, and certain other subsidiaries of the Company as guarantors, The Bank of New York Mellon as administrative agent, and Apollo Credit Strategies Master Fund Ltd and Apollo A-N Credit Fund (Delaware) L.P. (collectively "Apollo”), affiliates of a beneficial owner of greater than five percent of the Company's common stock and a related party, entered into the Senior Term Loan in the amount of $70.0 million less original issue discount of $2.1 million. Proceeds from the Senior Term Loan were used to fund the Carbon Solutions Acquisition as disclosed in Note 2. The Company also paid debt issuance costs of $2.0 million related to the Senior Term Loan. The Senior Term Loan has a term of 36 months and bears interest at a rate equal to 3-month LIBOR (subject to a 1.5% floor) + 4.75% per annum, which is adjusted quarterly to the current 3-month LIBOR rate, and interest is payable quarterly in arrears. Quarterly principal payments of $6.0 million were required beginning in March 2019, and the Company may prepay the Senior Term Loan at any time without penalty. The Senior Term Loan is secured by substantially all of the assets of the Company, including the cash flows from Tinuum Group and Tinuum Services (collectively, the "Tinuum Entities"), but excluding the Company's equity interests in the Tinuum entities.
The Senior Term Loan includes, among others, the following covenants: (1) Beginning December 31, 2018 and as of the end of each fiscal quarter thereafter, the Company must maintain a minimum cash balance of $5.0 million and shall not permit "expected future net cash flows from the refined coal business" (as defined in the Senior Term Loan) to be less than 1.75 times the outstanding principal amount of the Senior Term Loan; (2) Beginning in January 2019, annual collective dividends and buybacks of Company shares in an aggregate amount, not to exceed $30.0 million, is permitted so long as (a) no default or event of default exists under the Senior Term Loan and (b) expected future net cash flows from the refined coal business as of the end of the most recent fiscal quarter exceed $100.0 million.
Line of Credit
On September 30, 2018, ADA, as borrower, the Company, as guarantor, and a bank (the "Lender") entered into an amendment (the "Twelfth Amendment") to the 2013 Loan and Security Agreement (the "Line of Credit"). The Twelfth Amendment decreased the borrowing availability of the Line of Credit to $5.0 million due to decreased collateral requirements, extended the maturity date of the Line of Credit to September 30, 2020 and permitted the Line of Credit to be used as collateral (in place of restricted cash) for letters of credit ("LC's") up to $5.0 million related to equipment projects and certain other agreements. Under the Twelfth Amendment, there was 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 previously defined in the "Eleventh Amendment" to the Line of Credit, of $24.0 million.
On December 7, 2018, ADA, as borrower, the Company, as guarantor, and the Lender entered into an amendment to the Line of
Credit, which provided, among other things, for ADA to be able to enter into the Senior Term Loan as a guarantor so long as
the principal amount of the Senior Term Loan does not exceed $70.0 million. Additionally, the financial covenants in the Line
of Credit were amended and restated to be consistent with the aforementioned Senior Term Loan covenants, including
maintaining a minimum cash balance of $5.0 million.
As of June 30, 2019, there were no outstanding borrowings under the Line of Credit.

14


Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)


Note 6 - Leases
The financial statement impact from the adoption of ASC 842 as of January 1, 2019 is due to recording ROU assets and related lease liabilities for operating lease commitments that were outstanding as of December 31, 2018. The Company has elected the transitional practical expedients allowed under ASC 842, which include among other things that the Company need not reassess: (1) whether any existing contracts are or contain leases, inclusive of land easements; (2) the lease classification or lease term for existing leases; and (3) initial direct costs for any existing leases.
ASC 842 defines a lease as a contract, or part of a contract, that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of an identified asset means that an entity has both the right to obtain substantially all of the economic benefits from the use of an identified asset and the right to direct the use of that identified asset. The determination of whether a contract contains a lease may require significant assumptions and judgments.
Historically, Carbon Solutions has used leasing to fund the majority of its capital needs for mining and manufacturing equipment. As of June 30, 2019, the Company has obligations under finance and operating leases in the amounts of $7.4 million and $5.5 million, respectively. ROU assets under finance leases are mining equipment used at the Company’s lignite mine, which provides the key raw materials for manufacturing the Company’s products. ROU assets under operating leases are primarily plant equipment used at the Company’s manufacturing facility, but also include other office equipment, vehicles and office facilities. As of June 30, 2019, the Company has ROU assets, net of accumulated amortization, under finance leases and operating leases of $7.0 million and $5.5 million, respectively.
Certain of the finance and operating leases have options permitting renewals for additional periods and buy-out options. Renewal and buy-out options for applicable leases have not been included in the measurement of the respective lease liabilities as the Company is not reasonably certain that it will exercise the respective option or the lessor does not have an exclusive right to exercise the option.
Variable lease payments represent payments made by a lessee for the right to use an underlying asset that vary because of changes in facts or circumstances occurring after the commence date of a lease other than the passage of time. Variable lease payments that are based on an index or rate, calculated by using the index or rate that exists on the lease commencement date, are included in the measurement of a lease liability. Certain of the Company’s operating leases for office facilities contain variable lease components that are not based on an index or rate, and the Company recognizes these payments as lease expense in the period in which the obligation for those payments is incurred.
The Company calculates lease liabilities based on the present value of lease payments discounted by the rate implicit in the lease or, if not readily determinable, the Company’s incremental borrowing rate.
The Company records lease liabilities and related ROU assets for all leases that have a term of greater than one year. For short-term leases (leases with terms of less than one year), the Company expenses lease payments on a straight-line basis over the lease term.
Finance leases
Leases classified as capital leases under ASC 840 and the related assets and liabilities were carried forward at their carrying values of $8.1 million and $8.2 million, respectively, as of December 31, 2018, and were classified as finance leases as of January 1, 2019. ROU assets under finance leases and finance lease liabilities are included in Property, plant and equipment and Current portion and Long-term portion of borrowings, respectively, in the Condensed Consolidated Balance Sheet as of June 30, 2019.
Finance lease liabilities are subsequently measured by increasing the carrying amount to reflect interest expense on the finance lease liability and reducing the carrying amount of the lease liability to reflect lease payments made during the period. Interest on finance lease liabilities is determined in each period during the lease term as the amount that produces a constant periodic discount rate on the remaining balance of the lease liability. ROU assets under finance leases are amortized over the remaining lease term on a straight-line basis. Interest expense related to finance lease liabilities and amortization of ROU assets under finance leases are included in Interest expense and Depreciation, amortization, depletion and accretion, respectively, in the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2019.
Operating leases
Operating lease liabilities as of January 1, 2019 were calculated at the present value, using a discount rate of the lease, of the remaining minimum rental payments (as defined under ASC 840). As the rate implicit in all of the operating leases was not readily determinable, the Company determined its discount rate as of January 1, 2019 based on an estimate of its incremental borrowing rate. This rate was based on the Company’s effective borrowing rate on the Senior Term Loan, considering the collateral requirements contained therein, in effect as of January 1, 2019. ROU assets under operating leases as of January 1,

15


Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

2019 were determined as the calculated value of the operating lease liabilities less accrued lease payments and accrued lease incentives. As of December 31, 2018, the total amount of accrued lease payments and accrued lease incentives was approximately $0.1 million. ROU assets under operating leases and operating lease liabilities are included in Other long-term assets and Other liabilities and Other long-term liabilities, respectively, in the Condensed Consolidated Balance Sheet as of June 30, 2019.
Operating lease liabilities are subsequently measured at the present value of the lease payments not yet paid discounted using the discount rate for the lease established at the inception date of the lease (or January 1, 2019 for operating leases in effect as of December 31, 2018). ROU assets under operating leases are subsequently measured at the amounts of the related operating lease liability, adjusted for, as applicable, prepaid or accrued lease payments, the remaining balance of any lease incentives received, unamortized initial direct costs and impairment. Lease expense from operating leases is recognized as a single lease cost over the remaining lease term on a straight-line basis. Variable lease payments not included in operating lease liabilities are recognized as expense in the period in which the obligation for those payments is incurred. Lease expense for operating leases for the three and six months ended June 30, 2019 was $1.0 million and $2.2 million, respectively, of which $1.0 million and $2.1 million, respectively is included in Consumables - cost of revenue, exclusive of depreciation and amortization, and zero and $0.1 million, respectively, is included in General and administrative in the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2019.
Lease financial information as of and for the three and six months ended June 30, 2019 is provided in the following table:
 
 
 
 
 
(in thousands)
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Finance lease cost:
 
 
 
 
Amortization of right-of-use assets
 
$
558

 
$
1,094

Interest on lease liabilities
 
57

 
188

Operating lease cost
 
927

 
1,856

Short-term lease cost
 
189

 
360

Variable lease cost (1)
 
93

 
175

Total lease cost
 
$
1,824

 
$
3,673

 
 
 
 
 
Other Information:
 
 
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
 
Operating cash flows from operating leases
 
 
 
$
1,901

Finance cash flows from finance leases
 
 
 
$
681

Right-of-use assets obtained in exchange for new operating lease liabilities
 
 
 
$
49

Weighted-average remaining lease term - finance leases
 
 
 
4.7 years

Weighted-average remaining lease term - operating leases
 
 
 
2.4 years

Weighted-average discount rate - finance leases
 
 
 
6.1
%
Weighted-average discount rate - operating leases
 
 
 
8.6
%
(1) Primarily includes common area maintenance, property taxes and insurance payable to lessors.

16


Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The following table summarizes the Company’s future lease payments under finance and operating leases as of June 30, 2019:
(in thousands)
 
Operating
Lease
Commitments
 
Finance
Lease
Commitments
 
Total Lease Commitments
2019 (remaining six months)
 
$
1,845

 
$
867

 
$
2,712

2020
 
2,328

 
1,707

 
4,035

2021
 
1,632

 
1,802

 
3,434

2022
 
310

 
951

 
1,261

2023
 
221

 
951

 
1,172

Thereafter
 

 
2,482

 
2,482

Total lease payments
 
6,336

 
8,760

 
15,096

Less: Imputed interest
 
(787
)
 
(1,340
)
 
(2,127
)
Present value of lease payments
 
$
5,549

 
$
7,420

 
$
12,969

Disclosures under ASC 840
Rent expense for the three and six months ended June 30, 2018 was $0.1 million and $0.1 million, respectively, and was included in General and administrative expense in the Condensed Consolidated Statement of Operations.
As of December 31, 2018, mining equipment financed under capital leases in the amount of $8.1 million, net of accumulated amortization of $0.1 million, was included in Property, plant and equipment in the Condensed Consolidated Balance Sheet.
The following table summarizes the Company’s future minimum non-cancellable lease payments due under capital and operating leases as of December 31, 2018:
(in thousands)
 
Operating
Lease
Commitments
 
Capital
Lease
Commitments
2019
 
$
3,619

 
$
1,749

2020
 
2,273

 
1,707

2021
 
1,632

 
1,802

2022
 
310

 
951

2023
 
221

 
951

Thereafter
 

 
2,482

Total minimum lease payments
 
$
8,055

 
9,642

Less: Imputed interest
 
 
 
(1,475
)
Present value of minimum lease payments
 
 
 
$
8,167

Note 7 - Revenues
Contract Assets and Liabilities
Contract assets are comprised of unbilled receivables and are included in Receivables, net in the Condensed Consolidated Balance Sheet. Unbilled receivables represent a conditional right to consideration in exchange for goods or services transferred to a customer.
Trade receivables represent an unconditional right to consideration in exchange for goods or services transferred to a customer. The Company invoices its customers in accordance with the terms of the contract. Credit terms are generally net 30 from the date of invoice. The timing between the satisfaction of performance obligations and when payment is due from the customer is generally not significant. The Company records allowances for doubtful trade receivables when it is probable that the balances will not be collected.
Contract liabilities are comprised of deferred revenue, which represents an obligation to transfer goods or services to a customer for which the Company has received consideration from the customer and, if deliverable within one year or less, is included in

17


Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Other current liabilities in the Condensed Consolidated Balance Sheet and, if deliverable outside of one year, is included in Other long-term liabilities in the Condensed Consolidated Balance Sheet.
Trade receivables, net
The following table shows the components of Trade receivables, net:
 
 
As of
(in thousands)
 
June 30, 2019
 
December 31, 2018
Trade receivables
 
$
6,173

 
$
10,121

Less: Allowance for doubtful accounts
 
(567
)
 
(567
)
Trade receivables, net
 
$
5,606

 
$
9,554

For the three and six months ended June 30, 2019, the Company recognized zero provision for bad debt expense, respectively, related to specific accounts whose ultimate collection was in doubt. During the three and six months ended June 30, 2018, the Company settled a previously recorded commitment for additional work related to a contract with a customer, which resulted in a reduction to Equipment sales cost of revenue, exclusive of depreciation and amortization of $0.3 million and bad debt expense of $0.2 million. Bad debt expense is included within the General and administrative line item in the Consolidated Statements of Operations.
Disaggregation of Revenue
During the three and six months ended June 30, 2019 and 2018, all performance obligations related to revenues recognized were satisfied at a point in time. The Company disaggregates its revenues by its major components as well as between its two operating segments, which are further discussed in Note 13 to the condensed consolidated financial statements. The following tables disaggregate revenues by major source for the three and six months ended June 30, 2019 and 2018 (in thousands):
 
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
 
 
Segment
 
 
 
 
 
Segment
 
 
 
 
 
 
PGI
 
RC
 
Other
 
Total
 
PGI
 
RC
 
Other
 
Total
Revenue component
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumables
 
$
11,049

 
$

 
$
337

 
$
11,386

 
$
25,602

 
$

 
$
893

 
$
26,495

License royalties, related party
 

 
4,191

 

 
4,191

 

 
8,411

 

 
8,411

Revenues from customers
 
11,049

 
4,191

 
337

 
15,577

 
25,602

 
8,411

 
893

 
34,906

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings from equity method investments
 

 
20,935

 

 
20,935

 

 
42,625

 

 
42,625

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues and earnings from equity method investments
 
$
11,049

 
$
25,126

 
$
337

 
$
36,512

 
$
25,602

 
$
51,036

 
$
893

 
$
77,531

 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
 
Segment
 
 
 
 
 
Segment
 
 
 
 
 
 
PGI
 
RC
 
Other
 
Total
 
PGI
 
RC
 
Other
 
Total
Revenue component
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumables
 
$
726

 
$

 
$

 
$
726

 
$
1,347

 
$

 
$

 
$
1,347

License royalties, related party
 

 
3,523

 

 
3,523

 

 
6,753

 

 
6,753

Other
 
24

 

 

 
24

 
72

 

 

 
72

Revenues from customers
 
750

 
3,523

 

 
4,273

 
1,419

 
6,753

 

 
8,172

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings from equity method investments
 

 
15,889

 

 
15,889

 

 
28,142

 

 
28,142

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues and earnings from equity method investments
 
$
750

 
$
19,412

 
$

 
$
20,162

 
$
1,419

 
$
34,895

 
$

 
$
36,314


18


Advanced Emissions Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)


Note 8 - 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. There were no significant legal proceedings as of June 30, 2019.
Restricted Cash
As of June 30, 2019 and December 31, 2018, the Company had long-term restricted cash of $5.0 million and $5.2 million, respectively, which primarily consisted of minimum cash balance requirements under the Senior Term Loan. As of June 30, 2019 and December 31, 2018, the Company had short-term restricted cash of zero and $0.1 million, respectively, related to other commitments.
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.
Note 9 - Stockholders' Equity
Stock Repurchase Programs
In November 2018, the Company's Board of Directors (the "Board") authorized the Company to purchase up to $20.0 million of its outstanding common stock. This stock repurchase program will remain in effect until December 31, 2019 unless otherwise modified by the Board. Previously, the Board had authorized the Company to purchase up to $20.0 million of its outstanding common stock under a separate repurchase program that was in effect until July 31, 2018.
For the three and six months ended June 30, 2019, under the respective stock repurchase program authorized by the Board,
the Company purchased 184,715 and 248,591 shares of its common stock for cash of $2.1 million and $2.8 million, respectively, inclusive of commissions and fees. For the three and six months ended June 30, 2018, under the respective stock repurchase program authorized by the Board, the Company purchased 676,201 and 825,418 shares of its common stock for cash of $7.5 million and $9.1 million, respectively, inclusive of commissions and fees.
Quarterly Cash Dividend
Dividends per share declared by the Board, and paid quarterly on all outstanding shares of common stock during the three and six months ended June 30, 2019 and 2018 were as follows:
 
 
2019
 
2018
 
 
Per share
 
Date paid
 
Per share
 
Date paid
Dividends declared during quarter ended:
 
 
 
 
 
 
 
 
March 31