United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________ 

FORM 10-Q

 ______________________________________  

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

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.)

8051 E. Maplewood Ave, Suite 210, Greenwood Village, CO 80111

(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  ☒   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  ☒    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	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ☐    No  ☒

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, 2020, there were 18,558,907 outstanding shares of Advanced Emissions Solutions, Inc. common stock, par value $0.001 per share.

INDEX

		PAGE
PART I. - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019	1
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and June 30, 2019	2
	Condensed Consolidated Statements of Changes in Stockholders' Equity for the Three and Six Months Ended June 30, 2020 and June 30, 2019	3
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and June 30, 2019	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	45
PART II. - OTHER INFORMATION
Item 1.	Legal Proceedings	46
Item 1a.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	48
	Signatures	49

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, 2020			December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	16,733		$	12,080
Receivables, net	5,319			7,430
Receivables, related parties	3,480			4,246
Inventories, net	16,084			15,460
Prepaid expenses and other assets	18,959			7,832
Total current assets	60,575			47,048
Restricted cash, long-term	5,000			5,000
Property, plant and equipment, net of accumulated depreciation of $6,597 and $7,444, respectively	26,053			44,001
Intangible assets, net	2,293			4,169
Equity method investments	23,080			39,155
Deferred tax assets, net	2,448			14,095
Other long-term assets, net	13,881			20,331
Total Assets	$	133,330		$	173,799
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,174		$	8,046
Accrued payroll and related liabilities	3,158			3,024
Current portion of long-term debt	25,583			23,932
Other current liabilities	3,377			4,311
Total current liabilities	39,292			39,313
Long-term debt, net of current portion	10,120			20,434
Other long-term liabilities	4,816			5,760
Total Liabilities	54,228			65,507
Commitments and contingencies (Note 10)
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, 23,110,285 and 22,960,157 shares issued, and 18,492,139 and 18,362,624 shares outstanding at June 30, 2020 and December 31, 2019, respectively	23			23
Treasury stock, at cost: 4,618,146 and 4,597,533 shares as of June 30, 2020 and December 31, 2019, respectively	(47,692		)	(47,533		)
Additional paid-in capital	99,732			98,466
Retained earnings	27,039			57,336
Total stockholders’ equity	79,102			108,292
Total Liabilities and Stockholders’ Equity	$	133,330		$	173,799

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)	2020			2019			2020			2019
Revenues:
Consumables	$	8,170		$	11,386		$	17,387		$	26,495
License royalties, related party	3,313			4,191			6,359			8,411
Total revenues	11,483			15,577			23,746			34,906
Operating expenses:
Consumables cost of revenue, exclusive of depreciation and amortization	7,416			12,286			18,907			26,394
Other sales cost of revenue, exclusive of depreciation and amortization	—			6			—			6
Payroll and benefits	3,812			2,798			6,554			5,354
Legal and professional fees	1,022			1,995			3,065			4,199
General and administrative	2,462			1,995			4,793			3,909
Depreciation, amortization, depletion and accretion	1,733			757			4,030			2,859
Impairment of long-lived assets	26,103			—			26,103			—
Total operating expenses	42,548			19,837			63,452			42,721
Operating loss	(31,065		)	(4,260		)	(39,706		)	(7,815		)
Other income (expense):
Earnings from equity method investments	8,168			20,935			16,441			42,625
Interest expense	(962		)	(1,987		)	(2,172		)	(4,091		)
Other	148			60			191			130
Total other income	7,354			19,008			14,460			38,664
(Loss) income before income tax expense	(23,711		)	14,748			(25,246		)	30,849
Income tax expense	103			6,634			461			8,333
Net (loss) income	$	(23,814	)	$	8,114		$	(25,707	)	$	22,516
Earnings per common share (Note 1):
Basic	$	(1.32	)	$	0.45		$	(1.43	)	$	1.23
Diluted	$	(1.32	)	$	0.44		$	(1.43	)	$	1.22
Weighted-average number of common shares outstanding:
Basic	18,014			18,172			17,974			18,219
Diluted	18,014			18,377			17,974			18,412

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, 2020	22,960,157		$	23	(4,597,533	)	$	(47,533	)	$	98,466		$	57,336		$	108,292
Stock-based compensation	218,259		—		—		—			506			—			506
Repurchase of common shares to satisfy minimum tax withholdings	(64,198	)	—		—		—			(376		)	—			(376		)
Cash dividends declared on common stock	—		—		—		—			—			(4,590		)	(4,590		)
Repurchase of common shares	—		—		(20,613	)	(159		)	—			—			(159		)
Net loss	—		—		—		—			—			(1,893		)	(1,893		)
Balances, March 31, 2020	23,114,218		$	23	(4,618,146	)	$	(47,692	)	$	98,596		$	50,853		$	101,780
Stock-based compensation	(3,549	)	—		—		—			1,138			—			1,138
Repurchase of common shares to satisfy minimum tax withholdings	(384	)	—		—		—			(2		)	—			(2		)
Net loss	—		—		—		—			—			(23,814		)	(23,814		)
Balances, June 30, 2020	23,110,285		$	23	(4,618,146	)	$	(47,692	)	$	99,732		$	27,039		$	79,102

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			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	—		—		—		—			—			(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	—		—		—		—			—			(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.

4

Advanced Emissions Solutions, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
(in thousands)	2020			2019
Cash flows from operating activities
Net (loss) income	$	(25,707	)	$	22,516
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Deferred income tax expense	11,647			4,946
Depreciation, amortization, depletion and accretion	4,030			2,859
Impairment of long-lived assets	26,103			—
Operating lease expense	1,353			1,580
Amortization of debt discount and debt issuance costs	709			851
Stock-based compensation expense	1,644			858
Earnings from equity method investments	(16,441		)	(42,625		)
Other non-cash items, net	31			474
Changes in operating assets and liabilities:
Receivables and related party receivables	2,854			4,044
Prepaid expenses and other assets	(11,129		)	47
Inventories, net	(590		)	3,794
Other long-term assets, net	(224		)	(110		)
Accounts payable	(1,095		)	(758		)
Accrued payroll and related liabilities	134			(4,829		)
Other current liabilities	(515		)	862
Operating lease liabilities	(1,213		)	(1,563		)
Other long-term liabilities	(22		)	(462		)
Distributions from equity method investees, return on investment	32,516			38,088
Net cash provided by operating activities	24,085			30,572
Cash flows from investing activities
Acquisition of business	—			(661		)
Acquisition of property, plant, equipment, and intangible assets, net	(4,189		)	(3,797		)
Mine development costs	(507		)	(521		)
Net cash used in investing activities	(4,696		)	(4,979		)
Cash flows from financing activities
Principal payments on term loan	(12,000		)	(16,000		)
Principal payments on finance lease obligations	(676		)	(681		)
Dividends paid	(4,828		)	(9,179		)
Repurchase of common shares	(159		)	(2,831		)
Repurchase of common shares to satisfy tax withholdings	(378		)	(254		)
Borrowings from Paycheck Protection Program Loan	3,305			—
Net cash used in financing activities	(14,736		)	(28,945		)
Increase (decrease) in Cash and Cash Equivalents and Restricted Cash	4,653			(3,352		)
Cash and Cash Equivalents and Restricted Cash, beginning of period	17,080			23,772
Cash and Cash Equivalents and Restricted Cash, end of period	$	21,733		$	20,420
Supplemental disclosure of non-cash investing and financing activities:
Acquisition of property, plant and equipment through accounts payable	$	223		$	1,561
Dividends payable	$	77		$	113

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 Greenwood Village, 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. Through its wholly-owned subsidiary, ADA Carbon Solutions, LLC ("Carbon Solutions"), which the Company acquired on December 7, 2018 (the "Acquisition Date"), the Company manufactures and sells 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 PAC.

Through its equity ownership in Tinuum Group, LLC ("Tinuum Group") and Tinuum Services, LLC ("Tinuum Services"), both of which are unconsolidated entities, the Company generates substantial earnings. Tinuum Group provides reduction of mercury and nitrogen oxide ("NOx") emissions at select coal-fired power generators through the production and sale of refined coal ("RC") that qualifies for tax credits under the Internal Revenue Code ("IRC") Section 45 - Production Tax Credit ("Section 45 tax credits"). The Company also earns royalties for technologies that are licensed to Tinuum Group and used at certain RC facilities to enhance combustion and reduced emissions of NOx and mercury from coal burned to generate electrical power. Tinuum Services operates and maintains the RC facilities under operating and maintenance agreements with Tinuum Group and owners or lessees of the RC facilities.

The Company’s sales occur principally in the United States. See Note 15 for additional information regarding the Company's operating segments.

Basis of Presentation

The accompanying Condensed Consolidated Financial Statements of ADES are unaudited and have been prepared in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") and with Article 10 of Regulation S-X of the Securities and Exchange Commission. In compliance with those instructions, certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.

The unaudited Condensed Consolidated Financial Statements of ADES in this quarterly report ("Quarterly Report") are presented on a consolidated basis and include ADES and its 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 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 in consolidation for all periods presented in this Quarterly Report.

In the opinion of management, these Condensed Consolidated Financial Statements include all normal and recurring adjustments considered necessary for a fair presentation of the results of operations, financial position, stockholders' equity and cash flows for the interim periods presented. These Condensed Consolidated Financial Statements of ADES should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Form 10-K"). Significant accounting policies disclosed therein have not changed, except as described later in Note 1.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed using the two-class method, which is an earnings allocation formula that determines earnings (loss) per share for common stock and any participating securities according to dividend and participating rights in undistributed earnings (losses). 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

6

Advanced Emissions Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

participating, unvested RSA's ("common shares"), and the weighted-average number of participating, unvested RSA's outstanding during the period, respectively. The allocated, undistributed income for the period is then divided by the weighted-average number of common shares and participating, unvested RSA's outstanding during the period to arrive at basic earnings per common share and participating security for the period, respectively. 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 (loss) 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 (loss) earnings per share:

	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands, except per share amounts)	2020			2019		2020			2019
Net (loss) income	$	(23,814	)	$	8,114	$	(25,707	)	$	22,516
Less: Dividends and undistributed (loss) income allocated to participating securities	(17		)	11		(19		)	31
(Loss) income attributable to common stockholders	$	(23,797	)	$	8,103	$	(25,688	)	$	22,485
Basic weighted-average common shares outstanding	18,014			18,172		17,974			18,219
Add: dilutive effect of equity instruments	—			205		—			193
Diluted weighted-average shares outstanding	18,014			18,377		17,974			18,412
(Loss) earnings per share - basic	$	(1.32	)	$	0.45	$	(1.43	)	$	1.23
(Loss) earnings per share - diluted	$	(1.32	)	$	0.44	$	(1.43	)	$	1.22

For the three and six months ended June 30, 2020 and 2019, RSA's and Stock Options convertible to 0.7 million and 0.7 million, and 0.3 million and 0.3 million shares of common stock, respectively, were outstanding but were not included in the computation of diluted net (loss) income per share because the effect would have been anti-dilutive.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. There have been no changes in the Company’s critical accounting estimates from those that were disclosed in the 2019 Form 10-K except for assumptions regarding impairment of long-lived assets. Actual results could differ from these estimates.

Due to the coronavirus ("COVID-19") pandemic, there has been uncertainty and disruption in the global economy and financial markets. Additionally, due to COVID-19, overall power generation and coal-fired power demand may change, which could also have a material adverse effect on the Company. The Company is not aware of any specific event or circumstance due to COVID-19 that would require an update to its estimate or judgments or a revision of the carrying values of its assets or liabilities through the date of this Quarterly Report. These estimates may change as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions.

Risks and Uncertainties

The Company’s earnings are significantly affected by equity earnings it receives from Tinuum Group. As of June 30, 2020, Tinuum Group has 20 invested RC facilities of which 8 are leased to a single customer. A majority of these leases are periodically renewed. Further, the ability to generate Section 45 tax credits related to Tinuum's RC facilities expires in 2021. The loss of a single customer by Tinuum Group or the expiration of Section 45 tax credits would have a significant adverse impact on Tinuum Group's financial position, results of operations and cash flows, which in turn would have a material adverse impact on the Company’s financial position, results of operations and cash flows.

7

Advanced Emissions Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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 the Company's products.

Reclassifications

Certain balances have been reclassified from the prior year to conform to the current year presentation. Such reclassifications had no effect on the Company’s results of operations or financial position in any of the periods presented.

New Accounting Standards

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 "smaller reporting companies" (as defined by the Securities and Exchange Commission) for fiscal years beginning after December 15, 2022, including interim periods within those years, and must be adopted under a modified retrospective method approach. 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 and does not believe this standard will have a material impact on the Company's financial statements and disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes ("ASU 2019-12"). The amendments in ASU 2019-12 simplify various aspects related to accounting for income taxes by removing certain exceptions contained in Topic 740 and also clarifies and amends existing guidance in Topic 740 to improve consistent application. ASU 2019-12 is effective for public business entities beginning after December 15, 2020, including interim periods within those years, and early adoption is permitted. The Company is currently evaluating the provisions of this guidance and assessing its impact on the Company's financial statements and disclosures and does not believe this standard will have a material impact on the Company's financial statements and disclosures.

Note 2 - Impairment

As part of its periodic review of the carrying value of long-lived assets, the Company assessed its long-lived assets for potential impairment. In assessing impairment of its Power Generation and Industrials ("PGI") segment's and certain other long-lived asset groups, the Company considered factors such as the significant decline in both PGI’s trailing twelve months revenues and current and future years’ forecasted revenues, which are largely due to the significant drop in coal-fired power dispatch that began in 2019 and is anticipated to continue in the near term largely due to the current and forecasted historical low prices of alternative power generation sources such as natural gas and an increase in supply from other competing energy sources.

The Company completed an undiscounted cash flow analysis of its PGI segment's and certain other long-lived assets (the "Asset Group"), which are comprised of its manufacturing plant and related assets and its lignite mine assets, and estimated the undiscounted cash flows from the Asset Group at $54.7 million, which was less than the carrying value of the Asset Group of $58.3 million. Accordingly, the Company completed an assessment of the Asset Group’s fair value and estimated the fair value of the Asset Group at $32.2 million. This resulted in an impairment and write-down of the Asset Group of $26.1 million, which is reflected as "Impairment" in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020. The total impairment charge was allocated to the PGI segment and Other in the amounts of $23.2 million and $2.9 million, respectively.

8

Advanced Emissions Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following table summarizes the allocation of the impairment and write-down of $26.1 million to the Asset Group components during the three months ended June 30, 2020:

(in thousands)
Property, plant and equipment, net	$	18,986
Intangible assets, net	1,445
Other long-term assets, net	5,672
Total impairment	$	26,103

The Company engaged an independent third party to perform the valuation of the Asset Group in order to determine the estimated fair value of the Asset Group. This valuation was based on the use of several established valuation models including an expected future discounted cash flow model using Level 3 inputs under ASC 820 - Fair Value Measurement. The cash flows are those expected to be generated by market participants discounted at the risk-free rate of interest. Because of the continued future uncertainty surrounding the level of coal-fired dispatch, the impact of historically low natural gas prices and other estimates impacting the expected future cash flow, it is reasonably possible that the expected future cash flows may change in the near term and may result in the Company recording additional impairment of the Asset Group.

Note 3 - COVID-19

In response to the COVID-19 outbreak, in March 2020, the federal government passed the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The CARES Act provided, among other things, the creation of the Paycheck Protection Program ("PPP"), which is sponsored and administered by the U.S. Small Business Administration ("SBA").

On April 20, 2020, the Company entered into a loan (the "PPP Loan") under the PPP, evidenced by a promissory note, with BOK, NA dba Bank of Oklahoma ("BOK") providing for $3.3 million in proceeds, which was funded to the Company on April 21, 2020. The PPP Loan matures April 21, 2022 and provides for 18 monthly payments of principal and interest commencing on November 21, 2020. The interest rate on the PPP Loan is 1.00%. The PPP Loan is unsecured and contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or BOK, or breaching the terms of the PPP Loan. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, or filing suit and obtaining judgment against the Company. The PPP Loan principal may be forgiven subject to the terms of the PPP and approval by the SBA.

The Company recorded the PPP Loan as a debt obligation under the guidance of ASC 470 - Debt and will accrue interest over the 18-month term of the PPP Loan beginning November 21, 2020.

The CARES Act also provided the deferral of payroll tax payments for all payroll taxes incurred through December 31, 2020. The Company has elected to defer payments of payroll taxes for the periods allowed under the CARES Act and will repay 50% by December 31, 2021 and 50% by December 31, 2022. For the three months ended June 30, 2020, total payroll tax payments deferred under the CARES Act were $0.1 million.

Note 4 - Acquisition

As described in Note 1, on the Acquisition Date, the Company completed the acquisition of Carbon Solutions (the "Carbon Solutions Acquisition") for a total purchase price of $75.0 million (the "Purchase Price"). The fair value of the purchase consideration totaled $66.5 million, less cash acquired of $3.3 million, and the assumption of debt and contractual commitments of $11.8 million. The Company also paid $4.5 million in acquisition-related costs (or transaction costs). 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 7.

9

Advanced Emissions Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following table summarizes the final purchase price allocation. Subsequent to the Acquisition Date, 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

Adjustments to the preliminary purchase price allocation primarily related 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. During the three months ended June 30, 2019 based on new information of facts and circumstances that existed as of the Acquisition Date, the Company revised its estimates 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 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

10

Advanced Emissions Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 5 - Inventories, net

The following table summarizes the Company's inventories recorded at the lower of average cost or net realizable value as of June 30, 2020 and December 31, 2019:

	As of
(in thousands)	June 30, 2020		December 31, 2019
Product inventory	$	14,081	$	13,515
Raw material inventory	2,003		1,945
	$	16,084	$	15,460

Note 6 - Equity Method Investments

Tinuum Group, LLC

The Company's ownership interest in Tinuum Group was 42.5% as of June 30, 2020 and December 31, 2019. 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 RC that lower emissions and also 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)	2020			2019			2020			2019
Gross profit	$	6,868		$	38,180		$	11,878		$	79,380
Operating, selling, general and administrative expenses	11,919			5,763			24,695			12,345
(Loss) income from operations	(5,051		)	32,417			(12,817		)	67,035
Other income (expenses)	2,144			(28		)	5,787			23
Loss attributable to noncontrolling interest	18,823			12,891			38,094			28,667
Net income available to members	$	15,916		$	45,280		$	31,064		$	95,725
ADES equity earnings from Tinuum Group	$	6,764		$	19,244		$	13,202		$	39,011

For the three and six months ended June 30, 2020 and 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 six months ended June 30, 2019, 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.

For the three and six months ended June 30, 2020, the Company recognized equity earnings from Tinuum Group of $6.8 million and $13.2 million, respectively. 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.

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, 2020 and 2019 (in thousands):

Description	Date(s)	Investment balance			ADES equity earnings		Cash distributions		Memorandum Account: Cash distributions and equity earnings in (excess) of investment balance
Beginning balance	12/31/2019	$	32,280		$	—	$	—	$	—
ADES proportionate share of income from Tinuum Group	First Quarter	6,438			6,438		—		—
Cash distributions from Tinuum Group	First Quarter	(13,764		)	—		13,764		—
Total investment balance, equity earnings (loss) and cash distributions	3/31/2020	$	24,954		$	6,438	$	13,764	$	—
ADES proportionate share of income from Tinuum Group	Second Quarter	$	6,764		$	6,764	$	—	$	—
Cash distributions from Tinuum Group	Second Quarter	(13,600		)	—		13,600		—
Total investment balance, equity earnings and cash distributions	6/30/2020	$	18,118		$	6,764	$	13,600	$	—

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 and cash distributions	3/31/2019	$	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 and cash distributions	6/30/2019	$	42,455		$	19,244		$	17,000	$	—

(1) Tinuum Group adopted Accounting Standards Codification Topic ("ASC") 606 - Revenue from Contracts with Customers and ASC 842 - Leases as of January 1, 2019. As a result of Tinuum Group’s adoption of these standards, the Company recorded a cumulative adjustment of $27.4 million, net of the impact of income taxes, related to the Company's percentage of Tinuum Group's cumulative effect adjustment, which increased the Company's Retained earnings as of January 1, 2019.

Tinuum Services, LLC

The Company has a 50% voting and economic interest in Tinuum Services. 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, 2020 and December 31, 2019 was $4.9 million and $6.8 million, respectively.

12

Advanced Emissions Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The following table summarizes the results of operations of Tinuum Services:

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2020			2019			2020			2019
Gross loss	$	(20,418	)	$	(25,192	)	$	(42,677	)	$	(49,927	)
Operating, selling, general and administrative expenses	43,515			50,412			89,268			99,862
Loss from operations