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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. 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