Company Quick10K Filing
Advanced Emissions Solutions
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 19 $227
10-K 2020-03-16 Annual: 2019-12-31
10-Q 2019-11-12 Quarter: 2019-09-30
10-Q 2019-08-05 Quarter: 2019-06-30
10-Q 2019-05-06 Quarter: 2019-03-31
10-K 2019-03-18 Annual: 2018-12-31
10-Q 2018-11-06 Quarter: 2018-09-30
10-Q 2018-08-06 Quarter: 2018-06-30
10-Q 2018-05-09 Quarter: 2018-03-31
10-K 2018-03-12 Annual: 2017-12-31
10-Q 2017-11-06 Quarter: 2017-09-30
10-Q 2017-08-07 Quarter: 2017-06-30
10-Q 2017-05-08 Quarter: 2017-03-31
10-K 2017-03-13 Annual: 2016-12-31
10-Q 2016-11-08 Quarter: 2016-09-30
10-Q 2016-08-09 Quarter: 2016-06-30
10-Q 2016-05-10 Quarter: 2016-03-31
10-K 2016-04-19 Annual: 2015-12-31
10-K 2016-04-19 Annual: 2015-09-30
10-Q 2016-04-19 Quarter: 2015-06-30
10-Q 2016-04-19 Quarter: 2015-03-31
10-K 2016-02-29 Annual: 2014-12-31
10-Q 2013-11-12 Quarter: 2013-09-30
10-Q 2013-08-09 Quarter: 2013-06-30
8-K 2020-03-16 Earnings, Exhibits
8-K 2019-11-25 Other Events
8-K 2019-11-12 Earnings, Exhibits
8-K 2019-08-05 Earnings, Exhibits
8-K 2019-06-20 Shareholder Vote, Exhibits
8-K 2019-05-06 Earnings, Exhibits
8-K 2019-04-29 Officers, Exhibits
8-K 2019-04-05 Enter Agreement, Shareholder Rights
8-K 2019-03-18 Earnings, Exhibits
8-K 2019-02-27 Officers, Exhibits
8-K 2018-12-07 Enter Agreement, M&A, Off-BS Arrangement, Exhibits
8-K 2018-11-15 Enter Agreement, Other Events, Exhibits
8-K 2018-11-06 Earnings, Other Events, Exhibits
8-K 2018-09-30 Enter Agreement
8-K 2018-08-16 Code of Ethics
8-K 2018-08-06 Earnings, Exhibits
8-K 2018-07-11 Enter Agreement
8-K 2018-06-22 Regulation FD, Exhibits
8-K 2018-06-19 Shareholder Vote, Exhibits
8-K 2018-05-09 Officers
8-K 2018-05-09 Earnings, Exhibits
8-K 2018-04-30 Exit Costs, Officers, Exhibits
8-K 2018-04-06 Enter Agreement, Shareholder Rights, Officers
8-K 2018-03-22 Other Events, Exhibits
8-K 2018-03-12 Earnings, Exhibits
8-K 2018-03-01 Officers, Exhibits
8-K 2017-12-29
ADES 2019-12-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Note 1 - Summary of Operations and Significant Accounting Policies
Note 2 - Acquisition
Note 3 - Inventories, Net
Note 4 - Property, Plant and Equipment
Note 5 - Equity Method Investments
Note 6 - Debt Obligations
Note 7 - Leases
Note 8 - Revenues
Note 9 - Commitments and Contingencies
Note 10 - Stockholders' Equity
Note 11 - Stock-Based Compensation
Note 12 - Supplemental Financial Information
Note 13 - Fair Value Measurements
Note 14 - Income Taxes
Note 15 - Business Segment Information
Note 16 - Major Customers
Note 17 - Related Party Transactions
Note 18 - Defined Contribution Savings Plans
Note 19 - Restructuring
Note 20 - Quarterly Financial Results (Unaudited)
Note 21 - Subsequent Events
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers, and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
Note 1 - Significant Accounting Policies
Note 2 - Fixed Assets
Note 3 - Inventory
Note 4 - Revenues
Note 5 - Variable Interest Entities
Note 6 - Notes Payable
Note 7 - Members' Equity
Note 8 - Income Taxes
Note 9 - Related Party Transactions
Note 10 - Commitments
Note 11 - Concentrations
Note 12 - Subsequent Events
Item 16. Form 10-K Summary
EX-21.1 exhibit211-subsidiariesofa.htm
EX-23.1 exhibit231-consent_q42019.htm
EX-23.2 exhibit232-tgconsent_q42019.htm
EX-31.1 exhibit311-certificationce.htm
EX-31.2 exhibit312-certificationcf.htm
EX-32.1 exhibit321-906certificatio.htm
EX-95 exhibit95-minesafetyq42019.htm

Advanced Emissions Solutions Earnings 2019-12-31

ADES 10K Annual Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
GPRE 414 2,141 1,146 3,349 107 -32 129 557 3% 4.3 -1%
RYAM 333 2,651 1,984 2,041 205 14 227 1,481 10% 6.5 1%
LOOP 289 15 8 0 0 -18 -16 283 -17.7 -121%
ADES 227 187 79 51 7 35 61 265 13% 4.3 19%
FTK 187 264 42 192 42 60 71 89 22% 1.3 23%
NL 181 591 262 122 38 11 17 49 31% 2.8 2%
LXU 103 1,141 819 390 30 -44 68 502 8% 7.4 -4%
TANH 51 134 24 0 0 0 0 41 0%
GURE 47 330 42 6 3 -64 -49 -114 52% 2.3 -19%
FSI 45 32 12 23 8 4 6 43 36% 7.5 13%

10-K 1 ades-20191231x10k.htm 10-K Document
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-K
______________________________________
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-37822
 
 
Advanced Emissions Solutions, Inc.
(Name of registrant as specified in its charter)
 
 
Delaware
 
27-5472457
(State of incorporation)
 
(IRS Employer
Identification No.)
640 Plaza Drive, Suite 270, Highlands Ranch, CO, 80129
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code): (720) 598-3500
Securities registered under 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

Securities registered under Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes    x  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    ¨  Yes    x  No
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.    x  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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
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 definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨
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 Act.)    ¨  Yes    x  No
The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $182.9 million based on the last reported bid price of the Common Stock on the NASDAQ Global Market on June 30, 2019.  The number of shares outstanding of the registrant’s Common Stock, par value $0.001 per share, as of March 6, 2020 was 18,341,113.
 
 
 
Documents Incorporated By Reference
Portions of Part III of this Form 10-K are incorporated by reference from the Registrant's definitive proxy statement to be filed with the Securities and Exchange Commission no later than 120 days after the end of the Registrant's fiscal year.


1


ADVANCED EMISSIONS SOLUTIONS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019

TABLE OF CONTENTS
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






PART I
Item 1. Business
General
ADA-ES, Inc. (“ADA”), a Colorado corporation, was incorporated in 1997. Pursuant to an Agreement and Plan of Merger, effective July 1, 2013, Advanced Emissions Solutions, Inc. (“ADES”), a Delaware company incorporated in 2011, succeeded ADA as the publicly-held corporation and ADA became a wholly-owned subsidiary of ADES. This Annual Report on Form 10-K is referred to as the "Form 10-K" or the "Report." As used in this Report, the terms the "Company," "we," "us" and "our" means ADES and its consolidated subsidiaries.
We provide environmental solutions to customers in coal-fired power generation, municipal water and other industries primarily through air and water purification control technologies of our subsidiaries and joint ventures. Our proprietary technologies and associated product offerings provide multi-pollutant control and purification solutions to enable coal-fired power generators, municipal water and industrials to meet compliance requirements for applicable regulations.
As of December 31, 2019 and 2018, we held equity interests of 42.5% and 50.0% in Tinuum Group, LLC ("Tinuum Group") and Tinuum Services, LLC ("Tinuum Services"), respectively, and each of their operations significantly impacted our financial position and results of operations for the years ended December 31, 2019 and 2018. We account for Tinuum Group and Tinuum Services under the equity method of accounting.
We operate two segments: Refined Coal (“RC”) and Power Generation and Industrials (“PGI”). The segments are discussed in more detail later under this Item 1. Our products are primarily used for the removal of mercury and other air pollutants at coal-fired power plants and other industrial companies. Our products are also used for the purification of water and our operating results from water products are included in All Other and Corporate for segment reporting purposes.
Carbon Solutions Acquisition
On December 7, 2018 (the "Acquisition Date"), the Company purchased 100% of the membership interests of ADA Carbon Solutions, LLC ("Carbon Solutions") for a total purchase price of $75.0 million (the "Carbon Solutions Acquisition") plus transaction fees of $4.5 million. The fair value of the purchase consideration was $66.5 million and consisted of cash consideration of $65.8 million and an additional purchase adjustment amount payable to Carbon Solutions' secured lender of $0.7 million. The Company acquired Carbon Solutions to enter into the broader activated carbon market and to expand the Company's product offerings in the mercury control industry and other complementary activated carbon markets. Carbon Solutions owns and operates an activated carbon manufacturing and processing facility and owns an associated lignite mine (“Five Forks Mine”), which supplies the primary raw material for the activated carbon plant.
The Company primarily funded the cash consideration in the Carbon Solutions Acquisition from a $70.0 million senior term loan facility, less original issue discount of $2.1 million (the "Senior Term Loan"), which is further discussed below in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations ("Item 7").
Markets
Activated carbon ("AC") is a specialized sorbent material that is used widely in a host of industrial and consumer applications to remove impurities, contaminants or pollutants from gas, water and other product or waste streams. ACs are produced by activating carbonaceous raw materials, including wood, coal, nut shells, resins and petroleum pitch. Properties such as surface area, pore volume and particle size can be specifically engineered to selectively target various contaminants to meet end-use application requirements. AC can come in several different forms including powdered activated carbon ("PAC"), granular activated carbon ("GAC"), pellets, honeycombs, blocks or cloths, which can be important for the end-use application.
Key markets include removal of heavy metal pollutants from coal-fired electrical generation processes, treatment of drinking and waste waters, industrial acid gas and odor removal, automotive gasoline emission control, soil and ground water remediation and food and beverage process and product purifications.
The AC market has been and is expected to continue to be driven by increasing environmental regulations, principally water and air purification, especially in the mature and more industrialized areas of the world. Additionally, we believe environmental issues will continue to be the predominant force in the AC markets of rapidly developing countries.

3


Power Generation and Industrials
Currently, in the PGI segment, approximately 90% of our revenue is generated from coal-fired power. According to the most recent data from the U.S. Energy Information Administration ("EIA"), coal-fired power generation was down year-over-year by approximately 15% even though overall power generation was flat. Consistent with 2018, 2019 U.S. coal-fired power generation has been significantly affected by prices of competing power generation sources such as natural gas and the acceleration of new renewable energy available to the electricity grid. Low natural gas prices make gas generation a competitive alternative to coal-fired power generation and therefore, coal consumption has been reduced, which in turn has reduced the demand for our products in both the RC and PGI segments. Both lower prices of competing power generation sources and lower electricity demand in the U.S. may continue to negatively impact our revenues, sales volumes, earnings and cash flows in the near term as well as in future years. However, we believe that coal-fired power generation will remain a significant component of the U.S. power generation mix for many years, given coal's abundance, affordability, reliability and availability as a domestic fuel source.
The primary drivers for many of our products and services are environmental laws and regulations impacting the electric power generation industry and other coal users. These regulations include the Mercury and Air Toxics Standards ("MATS"), a U.S. federal regulation requiring all existing and any new coal-fired electricity generating units to control mercury emissions, acid gases, and particulate matter, as well as various state regulations and permitting requirements for coal-fired electricity generating units. In addition to the federal MATS rule, many states have implemented their own mercury rules that are similar to, or in many cases more stringent than, MATS, and many coal-fired electricity generating units around the country have agreed to consent decrees, which require pollution controls that, in some cases, are more restrictive than the existing regulations. We continue to believe the MATS regulation as well as certain state regulations creates a market for our RC and PGI products. An additional regulation impacting our products and services is the Industrial Boiler Maximum Achievable Control Technology ("MACT") rule that established air toxin standards for industrial boilers, including mercury, particulate matter, and acid gas emission limits.
While the long-term future for coal as a fuel source for electricity generation is uncertain, and as coal assets continue to age, we expect a continued purchasing trend towards variable cost products and integrated solutions with low capital expenditure requirements and a move away from large capital equipment and other fixed cost solutions that are less likely to have costs recovered.
We believe it is likely that many U.S. coal mines, coal-fired electricity generating units, coal-centric large equipment providers and other coal-related businesses will have difficulty adapting to industry changes expected in the coming years. However, we see opportunities for companies that can offer their customers creative and cost-effective solutions that help U.S. coal-related businesses meet regulatory compliance, improve efficiency, lower costs and maintain reliability.
Water
AC has been used in the treatment of drinking water, wastewater, contaminated soil and groundwater to absorb compounds causing unpleasant taste and odor and other contaminants. Both industrial and municipal wastewater treatment plants have deployed the use of AC in their treatment processes.
Groundwater contamination has become a matter of increasing concern to federal and state governments as well as to the public, especially in the last 10 years. The U.S. AC market may see significant growth from water purification markets, especially if future regulations are passed controlling certain chemicals in drinking water. At present, individual states are primarily responsible for the protection of groundwater. Worldwide, water treatment accounts for 41% of the total consumption of AC and continues to be the largest global market segment for AC.
We see opportunities in the water market for our products that will provide cost-effective solutions to help industrial and municipal wastewater treatment plants meet water purification standards.

4


Segments
Refined Coal
Tinuum Group, an unconsolidated entity, provides reduction of mercury and nitrogen oxide ("NOX") emissions at select coal-fired power generators through the production and sale of RC that qualifies for tax credits under the Internal Revenue Code ("IRC") Section 45 - Production Tax Credit ("Section 45 tax credits"). We benefit from Tinuum Group's production and sale of RC, which historically has generated substantial tax credits to us, as well as our equity earnings earned from Tinuum Group's sales or leases of RC facilities to tax equity investors. See the separately filed financial statements of Tinuum Group included in Item 15 - "Exhibits, Financial Statement Schedules" ("Item 15") of this Report.
Products
Our patented CyCleanTM technology, a pre-combustion coal treatment process provides electric power generators the ability to enhance combustion and reduce emissions of nitrogen oxides ("NOX") and mercury from coals burned in cyclone boilers.
Our patented M-45TM and M-45-PCTM technologies (collectively, the "M-45 Technology") are proprietary pre-combustion coal treatment technologies used to control emissions from circulating fluidized bed boilers and pulverized coal boilers, respectively.
Sales and Customers
Our RC segment derives its revenues from license royalties earned from Tinuum Group on the M-45 Technology ("M-45 Royalties") and other revenues related to reduced emissions of both NOX and mercury from coal are treated with our proprietary chemicals and burned at coal-fired electricity generating units. For the year ended December 31, 2019, M-45 Royalties comprised 24% of our total consolidated revenues. We also derive substantial earnings from our equity method investments in the RC segment, which include Tinuum Group, Tinuum Services and GWN Manager, LLC. RC segment earnings are primarily provided by equity earnings from Tinuum Group and Tinuum Services. The loss of equity earnings and M-45 Royalties will have a material adverse effect on our financial condition and consolidated operating results. Additional information related to major customers is disclosed in Note 16 of the Consolidated Financial Statements included in Item 8 of this Report.
Coal-fired electricity generating units use RC as one of a portfolio of tools to help comply with MATS and other environmental regulations. These RC facilities produce and sell RC that qualifies for Section 45 tax credits, including meeting the "placed in service" requirements (referred to as "placed in service"). The IRS has issued guidance regarding emissions reductions in the production of electricity by coal-fired electric generating units, including measurement and certification criteria necessary to qualify for the Section 45 tax credits. The ability to produce and sell RC, which generates Section 45 tax credits, expires 10 years after each RC facility was placed in service, but not later than December 31, 2021. Two of Tinuum Group's RC facilities were placed in service in 2009 and related Section 45 tax credits for these facilities expired in December 2019. As of December 31, 2019, Tinuum Group had built and placed into service a total of 26 RC facilities designed to produce RC for sale to coal-fired electricity generating units that were still eligible to produce RC qualifying for Section 45 tax credits. The ability to generate Section 45 tax credits related to the remaining 26 RC facilities expires in 2021.
Once an RC facility is in operation, Tinuum Group may lease or sell it to a tax equity investor, which we refer to as an "invested" RC facility. The tax equity investor subsequently operates the RC facility to produce and sell RC to a utility. It is financially advantageous for Tinuum Group to lease or sell an RC facility as the tax equity investor assumes the operating expenses for the RC facility and remits to Tinuum Group either payments to purchase or lease payments to lease the RC facility. We benefit from equity income and cash distributions through our investment in Tinuum Group. Tax equity investors may benefit from their investment in RC facilities through the realization of tax assets and credits from the production and sale of RC.
RC facilities that are producing and selling RC and have not been leased or sold, are referred to as "retained" RC facilities, whereby the RC is produced and sold by Tinuum Group and, as an owner in Tinuum Group, we benefit from the related Section 45 tax benefits. As of December 31, 2019 and 2018, respectively, the Section 45 tax credits were $7.173 and $7.031 per ton of RC produced and sold to a utility. The value of the Section 45 tax credits is adjusted annually based on inflation adjustment factors published in the Federal Register. As of December 31, 2019, we have earned, but have not been able to fully utilize, substantial tax credits and benefits from certain retained RC facilities that previously produced and sold RC for the benefit of Tinuum Group. See Note 14 to our Consolidated Financial Statements included in Item 8 - "Financial Statements and Supplementary Data" ("Item 8") of this Report for additional information regarding our net operating losses, tax credits and other deferred tax assets.

5


As of December 31, 2019, Tinuum Group had 20 invested RC facilities producing RC at utility sites. The remaining 6 RC facilities, although placed in service, were either installed but not operating, awaiting site selection or in various other stages of contract negotiation or permanent installation. As of December 31, 2019, Tinuum Group had eight facilities that are leased to affiliates of The Goldman Sachs Group (the "GS Affiliates"), and one of these GS Affiliates is also an owner of Tinuum Group. A majority of Tinuum Group's leases are periodically renewed and the loss of these customers or material modification to the lease terms of these facilities by these customers 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 our financial position, results of operations and cash flows.
During the third quarter of 2019, Tinuum Group restructured contracted RC facility leases with the GS Affiliates, which resulted in a decrease of lease payments for 2019 through 2021. Further, two coal-fired utilities in which Tinuum Group had invested RC facilities announced closures in the fourth quarter of 2019, and the associated leases of those RC facilities terminated during this period. As a result of reduced lease payments with the GS Affiliates, the termination of the RC facility leases at the closed coal-fired utilities and higher depreciation on all Tinuum Group RC facilities as a result of a reduction in their estimated useful lives as determined by Tinuum Group during the three months ended September 30, 2019, we expect our pro-rata share of Tinuum Group’s earnings and distributions to be lower in future periods.
Tinuum Services operates and maintains RC facilities under operating and maintenance agreements with Tinuum Group and owners or lessees of RC facilities. Tinuum Group or the owners or lessees of the RC facilities pay Tinuum Services, subject to certain limitations, the costs of operating and maintaining the RC facilities plus various fees. Tinuum Services also arranges for the purchase and delivery of certain chemical additives under chemical agency agreements, which include the chemicals required for our CyCleanTM, and M-45 Technologies that are necessary for the production of RC. The term of each chemical agency agreement runs concurrently with the respective RC facility's operating and maintenance agreement.
We also earn royalty revenues from the licensing of our M-45 Technology ("M-45 License") to Tinuum Group. License royalties are recognized based upon a percentage of the per-ton, pre-tax margin as defined in the M-45 License.
The following table provides summary information related to the Company's investment in Tinuum Group and the related RC facilities as of December 31, 2019 and tons of RC produced and sold for the year ended December 31, 2019:
 
 
 
 
 
 
Operating
 
 
# of RC Facilities
 
Not Operating
 
Invested
 
Retained
RC Facilities
 
26

 
6

 
20

(1)

RC tons produced and sold (000's)
 
 
 
 
 
66,481

 
1,505

The following tables provide summary information related to the Company's investment in Tinuum Group and the related RC facilities as of December 31, 2018 and tons of RC produced and sold for the year ended December 31, 2018:
 
 
 
 
 
 
Operating
 
 
# of RC Facilities
 
Not Operating
 
Invested
 
Retained
Facilities
 
28

 
9

 
19

(1)

RC tons produced and sold (000's)
 
 
 
 
 
59,737

 
2,302

(1) One RC facility is approximately 50% invested with an independent third party. The remaining approximate 50% is retained by Tinuum Group, the Company and another member of Tinuum Group.
Competition
We believe Chem-Mod, LLC and licensees of Chem-Mod's technology are Tinuum Group's principal competitors. Competition in the RC market is based primarily on price, the number of tons of coal burned at the coal-fired electric generating units where the RC facilities are operating and the tax compliance facts associated with each RC facility. Additionally, competition for tax equity investors extends into other investment opportunities, including opportunities related to potential tax incentive transactions.

6


Raw Materials
The principal raw materials used in our RC products are comprised of non-bromine based halogens.
Operations
Tinuum RC facilities are located at coal-fired power plants in the U.S. As of December 31, 2019, Tinuum Group and Tinuum Services had operations in 15 states.
Power Generation and Industrials
Products
Our products provide mercury control and other air contaminants control to coal-fired power generators and other industrial companies. Most of the North American coal-fired power generators have installed equipment to control air pollutants, like mercury, prior to or since the inception of the MATS rule. However, many power generators need consumable products on a recurring basis to chemically and physically capture mercury and other contaminants. There are three primary consumable products that work in conjunction with the installed equipment, to control mercury: PAC, coal halogen additives and scrubber additives. In many cases these three consumable products can be used together or in many circumstances substituted for each other. However, PAC has widely been adopted as the best available technology to capture mercury due to product efficiency and effectiveness and currently accounts for over 50% of the mercury control consumables North American market. Additionally, we offer coal additives through both our RC and PGI segments. Regardless of the offering, we work with customers to develop and implement a compliance control strategy that utilizes the consumables solutions that fit with their unique operating and pollutions control configuration.
Power generators must stay in compliance with the various regulatory emissions requirements. As such, we believe power generators’ top priority is to identify and work with a vendor that can consistently and reliably provide a consumables solution. However, as the market has matured since 2016 and coal-fired power continues to be under economic pressure from natural gas and renewable energy sources, cost of compliance has become increasingly important. Our current products and services provide cost competitive solutions across the entire spectrum of coal-fired power generators' needs.
Sales and Customers
Sales of consumables are made by the Company’s employees and through distributors and sales representatives to coal-fired utilities and industrials. Some of our sales of AC are made under annual requirements-based contracts or longer-term agreements. Revenues from our top three customers comprised approximately 37% of our total consolidated revenues during the year ended December 31, 2019, and the loss of these customers would have a material adverse effect on the PGI operating results.
Competition
Our primary competitors for consumable products include Cabot Norit America, Inc., a division of Cabot Corporation (CBT), Calgon Carbon, a subsidiary of Tokyo Stock Exchange listed Kuraray Co., Ltd., Nalco Holding Company, a subsidiary of Ecolab Inc. (ECL) and Midwest Energy Emissions Corp (MEEC).
Raw Materials
The principal raw material we use in the manufacturing of AC is lignite coal, which is, in general, readily available and we believe we have an adequate supply through our ownership of the Five Forks Mine, which is operated by Demery Resources Company, LLC, a subsidiary of the North American Coal Company ("Demery").
We purchase additives that are included in certain products for resale to our customers through contracts with suppliers. The manufacturing of our consumables is dependent upon certain discrete additives that are subject to price fluctuations and supply constraints. In addition, the number of suppliers who provide the necessary additives needed to manufacture our products are limited. Supply agreements are generally renewed on an annual basis.
Operations
We own and operate an AC plant that is located in Louisiana. We also have sales, product development and administrative operations located in Colorado.

7


Revenue by Type
The following table shows the amount of total revenue by type:
 
 
Years Ended December 31,
(in thousands)
 
2019
 
2018
Revenues:
 
 
 
 
Consumables
 
$
53,187

 
$
8,733

License royalties, related party
 
16,899

 
15,140

Other
 

 
72

Total revenues
 
$
70,086

 
$
23,945

Legislation and Environmental Regulations
Our products and services, as well as Tinuum Group’s production and sale of RC, are for the reduction of pollutants and other contaminants in the coal-burning electrical generation and water treatment processes. To the extent that legislation and regulation limit the amount of pollutants and other contaminants permitted, the need for our products increases. Below is a summary of the primary legislation and regulation that affects the market for our products.
U.S. Federal Mercury and Air Toxic Standards (“MATS”) Affecting Electric Utility Steam Generating Units
On December 16, 2011, the U.S. Environmental Protection Agency ("EPA") issued the final "MATS Rule" that went into effect in April 2012. The EPA structured the MATS Rule as a MACT-based hazardous pollutant regulation applicable to coal and oil-fired Electric Utility Steam Generating Units (“EGU”), which generate electricity through steam turbines and have a capacity of 25 megawatts or greater, and provide for, among other provisions, control of mercury and particulate matter and control of acid gases such as hydrochloric acid ("HCl"), sulfuric acid ("H2SO4") and other Hazardous Air Pollutants ("HAPs"). Approximately 1,260 units were coal-fired EGUs when the rule was enacted. According to our estimates, the MATS Rule sets a limit that we believe requires the capture of up to 80-90% of the mercury in the coal burned in electric power generation boilers as measured at the exhaust stack outlet for most plants. The MACT standards are also known as National Emission Standards for Hazardous Air Pollutants ("NESHAP"). Plants generally had four years to comply with the MATS Rule, and we estimate that, based on data reported to the EPA and conversations with plant operators, most plants were required to comply by April 2016 and implementation of the MATS Rule is now largely complete. We estimate that 42% of the coal-fired EGUs that were operating in December 2011 when the MATS rule was finalized have been permanently shut down, leaving approximately 527 EGUs in operation at the end of 2019.
In April 2017, a review by the U.S. Court of Appeals for the D.C. Circuit of a 2016 “supplemental finding” associated with the cost benefit analysis of the MATS Rule conducted by the EPA was stayed at the request of the current Administration. The court case continues to be stayed indefinitely. In February 2019, the EPA published a reconsideration of its 2016 "supplemental finding" associated with the cost benefit analysis of the MATS Rule. This reconsideration proposes that it is not “appropriate or necessary” to regulate HAPs emissions from coal- and oil-filed EGUs. However, the EPA expressly states that the reconsideration is not removing coal- and oil-fired EGUs from the list of sources that must comply with the MATS rule, but does, in the reconsideration, solicit public comments on whether the EPA has the authority to remove coal- and oil-fired EGUs from the list of sources that must comply with the MATS Rule or whether it can rescind the MATS Rule.  The timing and content of the final reconsideration rule are unknown.
State Mercury and Air Toxics Regulations Affecting EGUs
In addition, certain states have their own mercury rules that are similar to or more stringent than the MATS Rule, and coal-fired electricity generating units in the U.S are subject to consent decrees that require the control of acid gases and particulate matter, in addition to mercury emissions.

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U.S. Federal Industrial Boiler MACT
In January 2013, the U.S. EPA issued the final set of adjustments to the MACT-based air toxics standards for industrial boilers, including mercury, particulate matter, and acid gas emission limits. Existing boilers typically had until January 31, 2017 to comply with the rule. On December 1, 2014, the EPA announced the reconsideration of the industrial boiler MACT ("IBMACT") and proposed amendments to the version published January 31, 2013, representing technical corrections and clarifications. The proposed amendments do not affect the applicability of the final rule.
The EPA estimated that approximately 600 coal-fired boilers will be affected by IBMACT, in industries such as pulp and paper. Our estimates, based on conversations with plant operators, suggest that most of the affected plants have or will either shut down or switch fuels to natural gas to comply with the regulation.
Effluent Limitation Guidelines
On September 30, 2015, the EPA set the first federal limits known as effluent limitation guidelines (“ELGs”) on the levels of toxic metals in wastewater that can be discharged from power plants. The final rule requires, among other things, zero discharge for fly ash and bottom ash transport water, and limits on mercury, arsenic, selenium, and nitrate from flue gas desulfurization ("FGD") wastewater. In September 2017, EPA finalized a rule that delayed the original compliance deadlines for certain wastewater streams from November 2018 to November 2020, with the possibility that plants would not need to comply until December 2023 with state approval. In April 2019, the U.S. Court of Appeals for the Fifth Circuit struck down the EPA’s ELGs that apply to leachate wastewater and “legacy wastewater,” and directed the EPA to revise the limits on the levels of toxic metals in those wastewater streams. In November 2019, the EPA proposed to revise the ELGs for bottom ash and FGD wastewater. In none of the proposed effluent guidelines that the EPA is considering are halogens directly regulated. Though under several (though not all) of the proposed treatment options that the EPA is considering, selenium in FGD wastewater would be regulated, and. some halogens may impact the effectiveness of biological wastewater treatment systems that are often used for the removal of selenium.
Additional U.S. Legislation and Regulations
On August 3, 2015, the EPA finalized rules to reduce greenhouse gases ("GHGs") in the form of the Clean Power Plan ("CPP"), which established guidelines for states to follow in developing plans to reduce GHG emissions from fossil fuel-fired power plants. Under the CPP, states were required to prepare "State Plans" to meet state targets based on emission reductions from affected sources.  The CPP was challenged by multiple states in the U.S. Court of Appeals for the District of Columbia Circuit ("DC Circuit"). The CPP was stayed by the U.S. Supreme Court. The DC Circuit held the CPP litigation in abeyance until April 28, 2017, and dismissed the case once the EPA replaced the CPP.
In July 2019, the EPA repealed the CPP and replaced it with the Affordable Clean Energy (“ACE”) rule, which established guidelines for states to follow in developing plans to reduce GHG emissions from fossil fuel-fired power plants. ACE also requires states to prepare State Plans and prescribes that they must be based on heat rate improvements at affected plants. Numerous states, power companies, and non-governmental organizations challenged the ACE rule in the D.C. Circuit.
International Regulations
There are various international regulations related to mercury control. In Canada, the Canada-Wide Standard ("CWS") was initially implemented in 2010, with increasingly stringent limits through 2020 and with varying mercury emissions caps for each province. China and Germany both have limits for mercury emissions that are less stringent than U.S. limits and are typically met using co-benefits from other installed air pollution control equipment designed to control other pollutants. In May 2017, the EU ratified the Minimata Convention on Mercury, triggering mercury control regulations with implementation starting in 2021. Specific emissions limits are currently being developed guided by the best available technologies reference ("BREF") document for limiting stack emissions and liquid effluents from industrial processes. The BREF conclusions for large coal-fired electricity generating units were adopted by the European Commission in July 2017.
Based upon the existing and potential regulations, we believe the international market for mercury control products may expand in the coming years, and we are positioning our patent portfolio and existing commercial products accordingly to be prepared if an international market for our products develops.

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Mining Environmental and Reclamation Matters

Federal, state and local authorities regulate the U.S. coal mining industry with respect to matters such as employee health and safety and the environment, including the protection of air quality, water quality, wetlands, special status species of plants and animals, land uses, cultural and historic properties and other environmental resources identified during the permitting process. Reclamation is required during production and after mining has been completed. Materials used and generated by mining operations must also be managed according to applicable regulations and law.

The Surface Mining Control and Reclamation Act of 1977 ("SMCRA"), establishes mining, environmental protection, reclamation and closure standards for all aspects of surface mining. Mining operators must obtain SMCRA permits and permit renewals from the Office of Surface Mining (the "OSM"), or from the applicable state agency if the state agency has obtained regulatory primacy. A state agency may achieve primacy if the state regulatory agency develops a mining regulatory program that is no less stringent than the federal mining regulatory program under SMCRA. Our Five Forks Mine operates in Louisiana which has achieved primacy and issues permits in lieu of the OSM.

Mine operators are often required by federal and/or state laws, including SMCRA, to assure, usually through the use of surety bonds, payment of certain long‑term obligations including mine closure or reclamation costs, federal and state workers’ compensation costs, coal leases and other miscellaneous obligations. Although surety bonds are usually noncancelable during their term, many of these bonds are renewable on an annual basis and collateral requirements may change. As of December 31, 2019, we posted a surety bond of approximately $5.9 million for reclamation of the Five Forks Mine.
Patents
As of December 31, 2019, we held 57 U.S. patents and seven international patents that were issued or allowed, 27 additional U.S. provisional patents or applications that were pending, and seven international patent applications that were either pending or filed relating to different aspects of our technology. Our existing patents generally have terms of 20 years from the date of filing, with our next patents expiring beginning in 2021. We consider many of our patents and pending patents to be critical to the ongoing conduct of our business.
Seasonality of Activities
The sale of our consumable products and RC facility operation levels depend on the operations of the coal-fired electricity generating units to which the applicable consumables are provided and the location of the RC facilities, respectively. Power generation is weather dependent, with electricity and steam production varying in response to heating and cooling needs. Additionally, coal-fired electricity generating units routinely schedule maintenance outages in the spring and/or fall depending upon the operation of the boilers. During the period in which an outage may occur, which may range from one week to over a month, no consumables are used and no RC is produced or sold, and our revenues and Tinuum's revenues may be correspondingly reduced.
The sale of our AC products for water purification depends on demand from municipal water treatment facilities where these products are utilized. Depending on weather conditions and other environmental factors the summer months historically have the highest demand for PAC, as one of the major uses for PAC is for the treatment of taste and odor problems caused by increased degradation of organic contaminants and natural materials in water during the summer.
Safety, Health and Environment
Our operations are subject to numerous federal, state, and local laws, regulations, rules and ordinances relating to safety, health, and environmental matters (“SH&E Regulations”). These SH&E Regulations include requirements to maintain and comply with various environmental permits related to the operation of many of our facilities, including mine health and safety laws required for continued operation of the Five Forks Mine.
Employees
As of December 31, 2019, we employed 133 personnel, all of which were full-time employees; 36 employees were employed at our offices in Colorado and 97 employees were employed at our facilities in Louisiana.

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Available Information
Our periodic and current reports are filed with the Securities and Exchange Commission ("SEC') pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and are available free of charge within 24 hours after they are filed with, or furnished to, the SEC at the Company’s website at www.advancedemissionssolutions.com. The filings are also available through the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or by calling 1-800-SEC-0330. Alternatively, these reports can be accessed at the SEC’s website at www.sec.gov. The information contained on our website shall not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended (the "Securities Act") or the Exchange Act.
Copies of Corporate Governance Documents
The following Company corporate governance documents are available free of charge at our website at www.advancedemissionssolutions.com and such information is available in print to any stockholder who requests it by contacting the Secretary of the Company at 640 Plaza Drive, Suite 270, Highlands Ranch CO, 80129.
Certificate of Incorporation
Bylaws
Code of Ethics and Business Conduct
Insider Trading Policy
Whistleblower Protection Policy
Board of Directors Responsibilities
Audit Committee Charter
Compensation Committee Charter
Nominating and Governance Committee Charter

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Forward-Looking Statements Found in this Report
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that involve risks and uncertainties. In particular such forward-looking statements are found in this Part I and under the heading in Part II, Item 7 below. Words or phrases such as "anticipates," "believes," "expects," "intends," "plans," "estimates," "predicts," the negative expressions of such words, or similar expressions are used in this Report to identify forward-looking statements, and such forward-looking statements include, but are not limited to, statements or expectations regarding:
(a)
the scope and impact of mercury and other regulations or pollution control requirements, including the impact of the final MATS;
(b)
the production and sale of RC by RC facilities that will qualify for Section 45 tax credits;
(c)
expected growth or contraction in and potential size of our target markets;
(d)
expected supply and demand for our products and services;
(e)
increasing competition in the PGI market;
(f)
future level of research and development activities;
(g)
the effectiveness of our technologies and the benefits they provide;
(h)
Tinuum Group’s ability to profitably sell and/or lease additional RC facilities and/or RC facilities that may be returned to Tinuum Group, or to recognize the tax benefits from production and sale of RC on retained RC facilities and the effect of these factors on Tinuum Group's future earnings and distributions;
(i)
probability of any loss occurring with respect to certain guarantees made by Tinuum Group ("Party Guarantees");
(j)
the timing of awards of, and work and related testing under, our contracts and agreements and their value;
(k)
the timing and amounts of or changes in future revenues, royalties earned, backlog, funding for our business and projects, gross margins, expenses, earnings, tax rates, valuation allowance on our deferred tax assets, cash flows, license royalties, working capital, liquidity and other financial and accounting measures;
(l)
the outcome of current legal proceedings;
(m)
awards of patents designed to protect our proprietary technologies both in the U.S. and other countries; and
(n)
whether any legal challenges or EPA actions will have a material impact on the implementation of the MATS or other regulations and on our ongoing business.
Our expectations are based on certain assumptions, including without limitation, that:
(a)
coal will continue to be a significant source of fuel for electrical generation in the U.S.;
(b)
the IRS will allow the production and sale of RC to qualify for Section 45 tax credits through December 31, 2021;
(c)
we will continue as a key supplier of consumables to the coal-fired power generation industry as it seeks to implement reduction of mercury emissions;
(d)
current environmental laws and regulations requiring reduction of mercury from coal-fired boiler flue gases will not be materially weakened or repealed by courts or legislation in the future;
(e)
we will be able to obtain adequate capital and personnel resources to meet our operating needs and to fund anticipated growth and our indemnity obligations;
(f)
we will be able to establish and retain key business relationships with current and other companies;
(g)
orders we anticipate receiving will be received;
(h)
we will be able to formulate new consumables that will be useful to, and accepted by, the PGI markets;
(i)
we will be able to effectively compete against others;
(j)
we will be able to meet any technical requirements of projects we undertake;
(k)
Tinuum Group will be able to sell or lease additional RC facilities, including RC facilities that may be returned to Tinuum Group, to third party investors; and
(l)
we will be able to utilize the Section 45 tax credits earned from the production and sale of RC from retained facilities.

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The forward-looking statements included in this Report involve risks and uncertainties. Actual events or results could differ materially from those discussed in the forward-looking statements as a result of various factors including, but not limited to, timing of new and pending regulations and any legal challenges to or extensions of compliance dates of them; the U.S. government’s failure to promulgate regulations or appropriate funds that benefit our business; changes in laws and regulations, accounting rules, prices, economic conditions and market demand; impact of competition; availability, cost of and demand for alternative energy sources and other technologies; technical, start up and operational difficulties; failure of the RC facilities to produce RC; termination of or amendments to the contracts for sale or lease of RC facilities or such facilities to qualify for Section 45 tax credits; decreases in the production of RC; our inability to commercialize our technologies on favorable terms; our inability to ramp up our operations to effectively address recent and expected growth in our business; loss of key personnel; potential claims from any terminated employees, customers or vendors; availability of materials and equipment for our businesses; intellectual property infringement claims from third parties; pending litigation; as well as other factors relating to our business, as described in our filings with the SEC, with particular emphasis on the risk factor disclosures contained in those filings and in Item 1A - "Risk Factors" of this Report. You are cautioned not to place undue reliance on the forward-looking statements made in this Report and to consult filings we have made and will make with the SEC for additional discussion concerning risks and uncertainties that may apply to our business and the ownership of our securities. The forward-looking statements contained in this Report are presented as of the date hereof, and we disclaim any duty to update such statements unless required by law to do so.

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Item 1A. Risk Factors
The following risks relate to us as of the date this Report is filed with the SEC. This list of risks is not intended to be exhaustive, but reflects what we believe are the material risks inherent in our business and the ownership of our securities as of the specified dates. A statement to the effect that the occurrence of a specified event may have a negative impact on our business, results of operations, profitability, financial condition, or the like, is intended to reflect the fact that such an event, if it occurs, would be likely to have a negative impact on your investment in ADES, but should not imply the likelihood of the occurrence of such specified event. The order in which the following risk factors are presented is not intended as an indication of the relative seriousness of any given risk.
Risks relating to our business
Demand for our products and services depends significantly on environmental laws and regulations. Uncertainty as to the future of such laws and regulations, as well as changes to such laws and regulations, or granting of extensions of compliance deadlines has had, and will likely continue to have a material effect on our business.
A significant market driver for our existing products and services, and those planned in the future, are present and expected environmental laws and regulations, particularly those addressing the reduction of mercury and other emissions from coal-fired electricity generating units. If such laws and regulations are delayed, or are not enacted or are repealed or amended to be less strict, or include prolonged phase-in periods, or are not enforced, our business would be adversely affected by declining demand for such products and services. For example:
The implementation of environmental regulations regarding certain pollution control and permitting requirements has been delayed from time to time due to various lawsuits. The uncertainty created by litigation and reconsiderations of rule-making by the EPA has negatively impacted our business, results of operations and financial condition and will likely continue to do so.
To the extent federal, state, and local legislation mandating that electric power generating companies serving a state or region purchase a minimum amount of power from renewable energy sources such as wind, hydroelectric, solar and geothermal, and such amount lessens demand for electricity from coal-fired plants, the demand for our products and services would likely decrease.
Federal, state, and international laws or regulations addressing emissions from coal-fired electricity generating units, climate change or other actions to limit emissions, including public opposition to new coal-fired electricity generating units, has caused and could continue to cause electricity generators to transition from coal to other fuel and power sources, such as natural gas, nuclear, wind, hydroelectric and solar. The potential financial impact on us of future laws or regulations or public pressure will depend upon the degree to which electricity generators diminish their reliance on coal as a fuel source. That, in turn, will depend on a number of factors, including the specific requirements imposed by any such laws or regulations, the periods over which those laws or regulations are or will be phased in, the amount of public opposition, and the state and cost of commercial development of related technologies and processes. In addition, Public Utility Commissions ("PUCs") may not allow utilities to charge consumers for, and pass on the cost of, emissions control technologies without federal or state mandate. We cannot reasonably predict the impact that any such future laws or regulations or public opposition may have on our results of operations, financial condition or cash flows.
Action by the EPA related to MATS that decreases demand for our mercury removal products could have a material adverse effect on our PGI segment.
Performance in our PGI segment depends on demand for mercury removal related product, which is largely dependent on the amount of coal-based power generation used in the U.S. and the continued regulation of utilities under MATS. In August 2018, the EPA announced that it intends to reconsider the MATS rule and in September 2018 submitted its proposal to the White House Office of Management and Budget. In February 2019, the EPA published a reconsideration of its 2016 "supplemental finding" associated with the cost benefit analysis of the MATS Rule. This reconsideration proposes that it is not 'appropriate or necessary' to regulate HAPs emissions from coal- and oil-filed EGUs. However, the EPA expressly states that the reconsideration is not removing coal- and oil-fired EGUs from the list of sources that must comply with the MATS rule, but does, in the reconsideration, solicit comments on whether the EPA has the authority to remove coal- and oil-fired EGUs from the list of sources that must comply with the MATS Rule or whether it can rescind the MATS Rule. Any final action taken by

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the EPA related to MATS that decreases demand for our products for mercury removal will have a negative effect on the financial results of our PGI segment. The timing and content of the final reconsideration rule are unknown.
The failure of tariffs placed on U.S. imports of Chinese activated carbon to adequately address the impact of low-priced imports from China could have a material adverse effect on the competitiveness and financial performance of our PGI segment.
Our PGI segment faces competition in the U.S. from low-priced imports of activated carbon products. If the amounts of these low-priced imports increase, especially if they are sold at less than fair value, our sales of competing products could decline, which could have an adverse effect on the earnings of our PGI segment. In addition, sales of these low-priced imports may negatively impact our pricing. To limit these activities, regulators in the U.S. have enacted an anti-dumping duty order on steam activated carbon products from China. In 2018, the order was extended for an additional five years. The amount of anti-dumping duties collected on imports of steam activated carbon from China is reviewed annually by the U.S. Department of Commerce. To the extent the anti-dumping margins do not adequately address the degree to which imports are unfairly traded, the anti-dumping order may be less effective in reducing the volume of these low-priced activated carbon imports in the U.S., which could negatively affect demand and/or pricing for our AC products.
The market for consumables and other products that provide pollutant reduction is highly competitive and some of our competitors are significantly larger and more established than we are, which could adversely impede our growth opportunities and financial results.
We operate in a highly competitive marketplace. Our ability to compete successfully depends in part upon our ability to maintain a production cost advantage, competitive technological capabilities and to continue to identify, develop and commercialize new and innovative products for existing and future customers. We may face increased competition from existing or newly developed products offered by industry competitors or other companies whose products offer a similar functionality as our products and could be substituted for our products, which may negatively affect demand for our products. In addition, market competition could negatively impact our ability to maintain or raise prices or maintain or grow our market position.
We compete against certain significantly larger and/or more established companies in the market for consumables and other products that provide mercury emissions reduction and water treatment.
Reduction of coal consumption by North American electricity power generators could result in less demand for our products and services. If utilities significantly reduce the number of coal-fired electricity generating units or the amount of coal burned, without a corresponding increase in the services required at the remaining units, this could reduce our revenues and materially and adversely affect our business, financial condition and results of operations.
The amount of coal consumed for North American electricity power generation is affected by, among other things, (1) the location, availability, quality and price of alternative energy sources for power generation, such as natural gas, fuel oil, nuclear, hydroelectric, wind, biomass and solar power; and (2) technological developments, including those related to competing alternative energy sources.
Natural gas-fueled generation and renewable energy generation has been displacing and may continue to displace coal-fueled generation, particularly from older, less efficient coal-powered generators. We expect that a significant amount of the new power generation necessary to meet increasing demand for electricity generation will be fueled by these sources. The price of natural gas has remained at historically low levels and use of natural gas is perceived as having a lower environmental impact than burning coal. Natural gas-fired plants are cheaper to construct, and permits to construct these plants are easier to obtain, and ongoing costs of natural gas-fired plants associated with meeting environmental compliance are lower. Possible advances in technologies and incentives, such as tax credits, that enhance the economics of renewable energy sources could make those sources more competitive than coal. Any reduction in the amount of coal consumed by domestic electricity power generators, whether as a result of new power plants utilizing alternative energy sources or as a result of technological advances, could reduce the demand for our current products and services, thereby reducing our revenues and materially and adversely affecting our business and results of operations.

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Additionally, long-term changes in environmental regulation that threaten or preclude the use of coal or other fossil fuels as a primary fuel source for electricity production may result in the reduction or closure of a significant number of coal-fired electric generating units, and may adversely affect our business, financial condition and results of operations.
The loss of, or significant reduction in, purchases by our largest customers could adversely affect our business, financial condition or results of operations.
During the year ended December 31, 2019, we derived approximately 65% of our total consumable revenues from our ten largest customers. Many of these customers purchase our products to comply with emissions regulations, and if coal-fired generation decreases, it may have a negative impact on the amount of consumable products purchased. If any of our ten largest customers, were to significantly reduce the quantities of consumables they purchase from us, it may adversely affect our business, financial condition and results of operations.
Volatility in price and availability of raw materials can significantly impact our results of operations.
The manufacturing and processing of our consumable products requires significant amounts of raw materials. The price and availability of those raw materials can be impacted by factors beyond our control. Our consumable products, exclusive of lignite coal, use a variety of additives. Significant movements or volatility in the costs of additives could have an adverse effect on our working capital or results of operations. Additionally, we obtain certain raw materials from selected key suppliers. While we have inventory of such raw materials, if any of these suppliers are unable to meet their obligations with us on a timely basis or at an acceptable price, we may be forced to incur higher costs to obtain the necessary raw materials.
We may attempt to offset the increase in raw material costs with price increases allowed in our contractual relationships or through cost reduction efforts. If we are unable to fully offset the increased cost of raw materials through price increases, it could significantly impact our business, financial condition and results of operations.
We face operational risks inherent in mining operations and our mining operations have the potential to cause safety issues, including those that could result in significant personal injury.
We own the Five Forks Mine, a lignite coal mine located in Louisiana that is operated for us by a third party. Mining operations by their nature involve a high level of uncertainty and are often affected by risks and hazards outside of our control. At the Five Forks Mine, the risks are primarily operational risks associated with the maintenance and operation of the heavy equipment required to dig and haul the lignite and risks relating to lower than expected lignite quality or recovery rates. The failure to adequately manage these risks could result in significant personal injury, loss of life, damage to mineral properties, production facilities or mining equipment, damage to the environment, delays in or reduced production, and potential legal liabilities.
Our operations and products are subject to extensive safety, health and environmental requirements that could increase our costs and/or impair our ability to manufacture and sell certain products.
Our ongoing operations are subject to extensive federal, state and local laws, regulations, rules and ordinances relating to safety, health and environmental matters, many of which provide for substantial monetary fines and criminal sanctions for violations. These include requirements to obtain and comply with various environmental-related permits for constructing any new facilities and operating all of our existing facilities. In addition, our AC manufacturing facility may become subject to greenhouse gas emission trading schemes under which we may be required to purchase emission credits if our emission levels exceed our allocations. Greenhouse gas regulatory programs that have been adopted, such as cap-and-trade programs, have not had a significant impact on our business to date. Costs of complying with regulations could increase, as concerns related to greenhouse gases and climate change continue to emerge. The enactment of new environmental laws and regulations and/or the more aggressive interpretation of existing requirements could require us to incur significant costs for compliance or capital improvements or limit our current or planned operations, any of which could have a material adverse effect on our earnings or cash flow. We attempt to offset the effects of these compliance costs through price increases, productivity improvements and cost reduction efforts, and our success in offsetting any such increased regulatory costs is largely influenced by competitive and economic conditions and could vary significantly depending on the segment served. Such increases may not be accepted by our customers, may not be sufficient to compensate for increased regulatory costs or may decrease demand for our products and our volume of sales.

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We may not be successful in achieving our growth expectations related to new products in our existing or new markets.
We may not be successful in achieving our growth expectations from developing new products for our existing or new markets. Further, we cannot ensure costs incurred to develop new products will result in an increase in revenues. Additionally, our ability to bring new products to the market will depend on various factors, including, but not limited to, solving potential technical or manufacturing difficulties, competition and market acceptance, which may hinder the timeliness and cost to bring such products to production. These factors or delays could affect our future operating results.
We may make future acquisitions or form partnerships and joint ventures that may involve numerous risks that could impact our financial condition, results of operations and cash flows.
Our strategy may include expanding our scope of products and services organically or through selective acquisitions, investments or creating partnerships and joint ventures. We have acquired, and may selectively acquire, other businesses, product or service lines, assets or technologies that are complementary to our business. We may be unable to find or consummate future acquisitions at acceptable prices and terms, or we may be unable to integrate existing or future acquisitions effectively and efficiently and may need to divest those acquisitions. We continually evaluate potential acquisition opportunities in the ordinary course of business. Acquisitions involve numerous risks, including among others:
our evaluation of the synergies and/or long-term benefits of an acquired business;
integration difficulties, including challenges and costs associated with implementing systems, processes and controls to comply with the requirements of a publicly-traded company;
diverting management’s attention;
litigation arising from acquisition activity;
potential increased debt leverage;
potential issuance of dilutive equity securities;
entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;
unanticipated costs and exposure to undisclosed or unforeseen liabilities or operating challenges;
potential goodwill or other intangible asset impairments;
potential loss of key employees and customers of the acquired businesses, product or service lines, assets or technologies;
our ability to properly establish and maintain effective internal controls over an acquired company; and
increasing demands on our operational and IT systems.
The success of acquisitions of businesses, new technologies and products, or arrangements with third parties is not always predictable and we may not be successful in realizing our objectives as anticipated. The Senior Term Loan and our line of credit facility contain certain covenants that limit, or that may have the effect of limiting, among other things, the payment of dividends, acquisitions, capital expenditures, the sale of assets and the incurrence of additional indebtedness.
Natural disasters could affect our operations and financial results.
We operate facilities, including the Five Forks Mine, that are exposed to natural hazards, such as floods, windstorms and hurricanes. Extreme weather events present physical risks that may become more frequent as a result of factors related to climate change. Such events could disrupt our supply of raw materials or otherwise affect production, transportation and delivery of our products or affect demand for our products.

Additionally, we could experience a prolonged disruption, interruption or other loss of operations at our manufacturing facility and headquarters as well as reduced travel and interactions with customers for any number of reasons, including the occurrence of a contagious disease or illness, such as the novel coronavirus (“COVID-19”). Due to the evolving and highly uncertain nature of this event, it is currently not possible to estimate the direct or indirect impacts this outbreak may have on our business. However, if the COVID-19 were to develop into a global pandemic that disrupts the manufacturing of our product, commerce

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and related activity, it could materially and adversely affect our results of operations and financial condition due to these and other potential consequences of a pandemic.
Information technology vulnerabilities and cyberattacks on our networks could have a material adverse impact on our business.
We rely upon information technology ("IT") to manage and conduct business, both internally and externally, with our customers, suppliers and other third parties. Internet transactions involve the transmission and storage of data including, in certain instances, customer and supplier business information. Therefore, maintaining the security of computers and other electronic devices, computer networks and data storage resources is a critical issue for us and our customers and suppliers because security breaches could result in reduced or lost ability to carry on our business and loss of and/or unauthorized access to confidential information. We have limited personnel and other resources to address information technology reliability and security of our computer networks and to respond to known security incidents to minimize potential adverse impact. Experienced hackers, cybercriminals and perpetrators of threats may be able to penetrate our network security and misappropriate or compromise our confidential information or that of third parties, create system disruptions or cause shutdowns. These perpetrators of cyberattacks also may be able to develop and deploy viruses, worms, malware and other malicious software programs that attack our information and networks or otherwise exploit any security vulnerabilities of our information and networks. Techniques used to obtain unauthorized access to or sabotage systems change frequently and often are not recognized until long after being launched against a target, and we may be unable to anticipate these techniques or to implement adequate preventative measures. A breach of our IT systems and security measures as a result of third party action, malware, employee error, malfeasance or otherwise could materially adversely impact our business and results of operations and expose us to customer, supplier and other third party liabilities.
Risks relating to Refined Coal
The ability of Tinuum Group to continue to generate revenues from the sale or lease of RC facilities to tax equity investors is not assured, and the inability to sell, lease or operate RC facilities to produce and sell RC and generate Section 45 production tax credits could adversely affect our future growth and profitability.
Tinuum Group has successfully sold and leased RC facilities to third party investors and is continuing its efforts to sell or lease new RC facilities in the near term. The inability of Tinuum Group to successfully lease or sell additional RC facilities to third party tax equity investors who qualify to receive the benefit of the Section 45 tax credits that are expected to be generated from those RC facilities, as well as the termination or cancellation of existing RC facility leases in the near term, would likely have an adverse effect on our future growth and profitability.
Furthermore, if, in the near term, electricity power generators decide to limit coal-fired generation for economic reasons such as cheaper alternative power sources or are forced to limit coal-fired generation under environmental regulations or other legal statutes, this could also lessen the production and use of RC. This in turn would likely negatively impact Tinuum Group's ability to attract additional investors in RC facilities over the currently anticipated term of the Section 45 tax credit program, which in turn would negatively impact its business, financial condition and results of operations.
The ability to generate Section 45 tax credits from existing operating RC facilities ends in 2021, which could eliminate the desire for investors to lease further RC facilities beyond this date. This would effectively eliminate Tinuum Group’s and Tinuum Services' operations and significantly impact our financial condition and results of operations beyond 2021.
Substantially all of our earnings and cash flows in 2019 and 2018 are comprised of equity method earnings from Tinuum Group and license royalties generated from certain of Tinuum Group’s invested RC facilities. For the year ended December 31, 2019, our RC segment generated segment operating income of $83.5 million. As of December 31, 2019, Tinuum Group has 20 invested facilities and zero retained facilities. Absent a modification to the Section 45 tax credit program, the 20 invested facilities will no longer generate Section 45 tax credits beyond 2021. As a result, we believe that substantially all of the invested RC facilities will be returned to Tinuum Group upon the expiration of the Section 45 tax credit program.  If Tinuum Group continues to operate these RC facilities, if any, its earnings will be significantly reduced and accordingly, our pro rata share will also be substantially reduced. 

18


Additionally, our RC segment is the larger of our two segments, and the remainder of our business must grow substantially, either organically or acquisitively, in order to replace earnings from Tinuum Group that will substantially end during the 2021. There can be no assurance that we will be able to increase our PGI segment earnings during this period to cover our current operating expenses or to provide a return to shareholders that is comparable to the return currently provided by our RC segment.  If we are not able to cover operating expenses, we could be forced to raise additional capital, significantly reduce our operating expenses or take other alternative actions.
The 2017 Tax Act introduced changes in income tax rates and other specific provisions that may make Section 45 production tax credits less attractive, which, in turn, could adversely affect our results of operations or financial condition.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "2017 Tax Act") became law. The 2017 Tax Act, among other things, lowered the federal income tax rate on corporations from 35% to 21%, effective for the year beginning January 1, 2018 and created certain new tax provisions, including the Base Erosion and Anti-Abuse tax ("BEAT"). In December 2019, the U.S. Treasury Department and the Internal Revenue Service issued final and proposed regulations on BEAT under Internal Revenue Code Section 59A (the "final BEAT regulations") and the "2019 proposed regulations," respectively). The final BEAT regulations are generally consistent with the proposed BEAT regulations released on December 13, 2018 but adopted several changes. Most notably, the final BEAT regulations generally exclude from the base erosion payment definition amounts transferred to a foreign-related party in certain specified nonrecognition transactions. The 2019 proposed regulations would also allow taxpayers to elect to forego a deduction so that it is not taken into account as a base erosion tax benefit so long as the deduction is waived for all US income tax purposes. In general, the final BEAT regulations apply to tax years ending on or after December 17, 2018, and the 2019 proposed regulations generally would apply to tax years beginning on or after the date that regulations finalizing those rules are published. However, taxpayers may rely on the 2019 proposed regulations in their entirety for tax years beginning after December 31, 2017 and before the regulations are finalized. The changes to previously higher tax rates and provisions such as BEAT could negatively impact tax capacity of current or potential tax equity investors and result in Section 45 production tax credits being less attractive.
Presently, the GS Affiliates account for a substantial portion of earnings for Tinuum Group and any further lease renegotiation or termination by the GS Affiliates or any failure to continue to produce and sell RC at the GS Affiliates' RC facilities would have a material adverse effect on our business.
As of December 31, 2019, eight of Tinuum Group’s 26 RC facilities are leased to the GS Affiliates. Significant components of our total cash flows come from Tinuum Group's distributions relating to payments received under these leases. These leases have an initial fixed period and then automatically renew, unless terminated at the option of the lessee, for successive one-year terms through 2021. In September 2019, Tinuum Group restructured all of the existing leases with the GS Affiliates, which resulted in a decrease in net lease payments for the balance of 2019 and will result in lower net lease payments for 2020 and 2021. If the GS Affiliates further renegotiate or terminate their leases, or if the utilities where the RC facilities are installed materially reduce their use of RC, these events would have a material adverse effect on our business, results of operations or financial condition.
Our RC businesses are joint ventures and managed under operating agreements where we do not have sole control of the decision-making process, and we cannot mandate decisions or ensure outcomes.
We oversee our joint ventures under the terms of their respective operating agreements by participating in the following activities: (1) representation on the respective governing boards of directors, (2) regular oversight of financial and operational performance and controls and establishing audit and reporting requirements, (3) hiring of management personnel, (4) technical support of RC facilities, and (5) other regular and routine involvement with our joint venture partners. Notwithstanding this regular participation and oversight, our joint venture partners also participate in the management of these businesses and they may have business or economic interests that divert their attention from the joint venture, or they may prefer to operate the business, make decisions or invest resources in a manner that is contrary to our preferences. Since material business decisions must be made jointly with our joint venture partners, we cannot mandate decisions or ensure outcomes.

19


The financial effects of Tinuum Group providing indemnification under performance guarantees of its RC facilities are largely unknown and could adversely affect our financial condition.
Tinuum Group indemnifies certain utilities and lessees of RC facilities for particular risks associated with the operations of those facilities. We have provided limited, joint and several guarantees of Tinuum Group’s obligations under those leases. Any substantial payments made under such guarantees could have a material adverse effect on our financial condition, results of operations and cash flows.
Risks related to intellectual property
Failure to protect our intellectual property or infringement of our intellectual property by a third party could have an adverse impact on our financial condition.
We rely on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. Such means of protecting our proprietary rights may not be adequate because they provide only limited protection or such protection may be prohibitively expensive to enforce. We also enter into confidentiality and non-disclosure agreements with our employees, consultants and many of our customers and vendors, and generally control access to and distribution of our proprietary information. Notwithstanding these measures, a third party could copy or otherwise obtain and use our proprietary information without authorization. We cannot provide assurance that the steps we have taken will prevent misappropriation of our technology and intellectual property, which could negatively impact our business and financial condition. In addition, such actions by third parties could divert the attention of our management from the operation of our business.
We may be subject to intellectual property infringement claims from third parties that are costly to defend and that may limit our ability to use the disputed technologies.
If our technologies are alleged to infringe the intellectual property rights of others, we may be prevented from marketing and selling existing products or services and from pursuing research, development or commercialization of new or complimentary products or services. Further, we may be required to obtain licenses to third party intellectual property or be forced to develop or obtain alternative technologies. Our failure to obtain a license to a technology that we may require, or the need to develop or obtain alternative technologies, could significantly and negatively affect our business.
Indemnification of third party licensees of our technologies against intellectual property infringement claims concerning our licensed technology and our products could be financially significant to us.
We have agreed to indemnify licensees of our technologies (including Tinuum Group) and purchasers of our products, and we may enter into additional agreements with others under which we agree to indemnify and hold them harmless from losses they may incur as a result of the infringement of third party rights caused by the use of our technologies and products. Infringement claims, which are expensive and time-consuming to defend, could have a material adverse effect on our business, operating results and financial condition, even if we are successful in defending ourselves (and the indemnified parties) against them.
Our future success depends in part on our ongoing identification and development of intellectual property and our ability to invest in and deploy new products, services and technologies into the marketplace efficiently and cost effectively.
The process of identifying customer needs and developing and enhancing products, services and solutions for our business segments is complex, costly and uncertain. Any failure by us to identify and anticipate changing needs, emerging trends and new regulations could significantly harm our future market share and results of operations.

20


Risk related to tax matters
An “ownership change” could limit our ability to utilize tax loss and credit carryforwards to offset future taxable income.
We have certain general business credit tax credits ("Tax Credits"). As of December 31, 2019, we had $98.5 million of Tax Credits, equaling 92% of our total gross deferred tax assets. Our ability to use these Tax Credits to offset future taxable income may be significantly limited if we experience an "ownership change" as discussed below. Under the Internal Revenue Code ("IRC') and regulations promulgated by the U.S. Treasury Department, we may carry forward or otherwise utilize the Tax Credits in certain circumstances to offset any current and future taxable income and thus reduce our federal income tax liability, subject to certain requirements and restrictions. To the extent that the Tax Credits do not otherwise become limited, we believe that we will have available a significant amount of Tax Credits in future years, and therefore the Tax Credits could be a substantial asset to us. However, if we experience an "ownership change," as defined in Section 382 and 383 of the IRC, our ability to use the Tax Credits may be substantially limited, and the timing of the usage of the Tax Credits could be substantially delayed, which could therefore significantly impair the value of that asset.
In general, an "ownership change" under Section 382 and 383 occurs if the percentage of stock owned by an entity’s 5% stockholders (as defined for tax purposes) increases by more than 50 percentage points over a rolling three-year period. An entity that experiences an ownership change generally will be subject to an annual limitation on its pre-ownership change tax loss and credit carryforwards equal to the equity value of the entity immediately before the ownership change, multiplied by the long-term, tax-exempt rate posted monthly by the IRS (subject to certain adjustments). The annual limitation would be increased each year to the extent that there is an unused limitation in a prior year. The limitation on our ability to utilize the Tax Credits arising from an ownership change under Section 382 and 383 of the IRC would depend on the value of our equity at the time of any ownership change.  If we were to experience an "ownership change," it is possible that a significant portion of our tax credit carryforwards could expire before we would be able to use them to offset future taxable income.
On May 5, 2017, our Board of Directors (the "Board") approved the Tax Asset Protection Plan (the "Protection Plan") and declared a dividend of one preferred share purchase right (each, a "Right") for each outstanding share of our common stock. The Protection Plan was adopted in an effort to protect stockholder value by attempting to diminish the risk that our ability to use the Tax Credits to reduce potential future federal income tax obligations may become substantially limited.
On April 5, 2019, the Board approved amending the Protection Plan as previously amended to extend the duration of the Protection Plan and makes associated changes in connection therewith. At the Company's 2019 annual meeting of stockholders, the Company's stockholders approved that amendment; thus the final expiration date will be the close of business on December 31, 2020.
The Protection Plan, as amended, is intended to act as a deterrent to any person acquiring beneficial ownership of 4.99% or more of our outstanding common stock without the approval of the Board. Stockholders who beneficially owned 4.99% or more of our outstanding common stock upon execution of the Protection Plan will not trigger the Protection Plan so long as they do not acquire beneficial ownership of additional shares of our common stock. The Board may, in its sole discretion, also exempt any person from triggering the Protection Plan.
Risks relating to our common stock
Our stock price is subject to volatility.
The market price of our common stock has experienced substantial price volatility in the past and may continue to do so. The market price of our common stock may continue to be affected by numerous factors, including:
actual or anticipated fluctuations in our operating results and financial condition;
changes in laws or regulations and court rulings and trends in our industry;
Tinuum Group’s ability to lease or sell RC facilities;
announcements of sales awards;
changes in supply and demand of components and materials;
adoption of new tax regulations or accounting standards affecting our industry;

21


changes in financial estimates by securities analysts;
perceptions of the value of corporate transactions;
trends in social responsibility and investment guidelines;
our ability to continue to be able to pay cash dividends;
the number of shares of common stock repurchased under stock repurchase programs; and
the degree of trading liquidity in our common stock and general market conditions.
From January 1, 2018 to December 31, 2019, the closing price of our common stock ranged from $7.69 to $14.84 per share. In June 2017, we commenced a quarterly cash dividend program and have paid out cash dividends in each succeeding quarter through December 31, 2019. In 2018 and 2019, we implemented stock repurchase programs, and repurchased a total of 2,883,767 shares of our common stock during these two years for cash of $31.1 million.
Stock price volatility over a given period may cause the average price at which we repurchase shares of our common stock to exceed the stock’s price at a given point in time. We believe our stock price should reflect expectations of future growth and profitability. Future dividends are subject to declaration by the Board, and under our current stock repurchase program, we are not obligated to acquire any specific number of shares. If we fail to meet expectations related to future growth, profitability, dividends, stock repurchases or other market expectations, our stock price may decline significantly, which could have a material adverse impact on our ability to obtain additional capital, investor confidence and employee retention, and could reduce the liquidity of our common stock.
There can be no assurance that we will continue to declare cash dividends at all or in any particular amounts.
The Board first approved a $0.25 per share of common stock quarterly dividend in June 2017. During 2018 and 2019, we declared quarterly dividends in the aggregate amount of $38.8 million. We intend to continue to pay quarterly dividends subject to capital availability, compliance with debt covenants and periodic determinations by the Board that cash dividends are in the best interest of our stockholders and are in compliance with all laws and agreements applicable to the declaration and payment of cash dividends by us.
The payment of future dividends may also be affected by, among other factors, compliance with debt covenants; our views on potential future capital requirements for investments in acquisitions; legal risks; stock repurchase programs; changes in federal and state income tax laws or corporate laws; changes to our business model; and our increased interest and principal payments required by the Senior Term Loan and any additional indebtedness that we may incur in the future.
Under covenants in the Senior Term Loan, annual collective dividends and repurchases of our common stock in the aggregate may not exceed $30 million, and shall be 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 million. Based on our current forecasts, we anticipate that future net cash flows from the refined coal business will be below the $100 million minimum requirement as of the third fiscal quarter of 2020, which would preclude us from paying dividends or repurchasing our common stock at that time, absent a modification to the Senior Term Loan.
Our dividend payments may change from time to time, and we cannot provide assurance that we will continue to declare dividends at all or in any particular amounts. A reduction in our dividend payments could have a negative effect on our stock price.
Our certificate of incorporation and bylaws contain provisions that may delay or prevent an otherwise beneficial takeover attempt of us.
Certain provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These include provisions that:
Limit the business at special meetings to the purpose stated in the notice of the meeting;

22


Authorize the issuance of "blank check" preferred stock, which is preferred stock with voting or other rights or preferences that could impede a takeover attempt and that the Board can create and issue without prior stockholder approval;
Establish advance notice requirements for submitting nominations for election to the Board and for proposing matters that can be acted upon by stockholders at a meeting; and
Require the affirmative vote of the "disinterested" holders of a majority of our common stock to approve certain business combinations involving an "interested stockholder" or its affiliates, unless either minimum price criteria or procedural requirements are met, or the transaction is approved by a majority of our "continuing directors" (known as "fair price provisions").
These provisions, alone or in combination with each other, may discourage transactions involving actual or potential changes of control, including transactions that otherwise could involve payment of a premium over prevailing market prices to holders of our common stock, or could limit the ability of our stockholders to approve transactions that they may deem to be in their best interest.
An increased focus on environmental, social and governance factors by institutional investors may negatively impact our access to capital and the liquidity of our stock price.
Some institutional investors, including our largest shareholder, have recently adopted Environmental, Social and Governance ("ESG") investing guidelines that may prevent them from increasing or taking new stakes with companies with exposure to fossil fuels. Additional institutional investors may adopt similar ESG investment guidelines. This could limit the demand for owning our common stock and/or our access to capital. If such capital is desired, we cannot assure you that we will be able to obtain any additional equity or debt financing on terms that are acceptable to us. Given these emerging trends, liquidity in our common stock and our stock price may be negatively impacted.
We may require additional funding for our growth plans, and such funding may require us to issue additional shares of our common stock, resulting in a dilution of your investment.
We estimate our funding requirements in order to implement our growth plans. If the funding required to implement growth plans should exceed these estimates significantly, or if we come across opportunities to grow through expansion plans which cannot be predicted at this time, and our funds generated from our operations prove insufficient for such purposes, we may need to raise additional funds to meet these funding requirements.
These additional funds may be raised by issuing equity or debt securities or by borrowing from banks or other resources. We cannot assure you that we will be able to obtain any additional financing on terms that are acceptable to us, or at all. If we fail to obtain additional financing on terms that are acceptable to us, we will not be able to implement such plans fully. Such financing, even if obtained, may be accompanied by conditions that limit our ability to pay dividends or require us to seek lenders’ consent for payment of dividends, or restrict our freedom to operate our business by requiring lender’s consent for certain corporate actions. Further, if we raise additional funds through the issuance of new shares of our common stock, any shareholders who are unable or unwilling to participate in such an additional round of fund raising may suffer dilution of their investment.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Offices and Facilities
We lease office space in Highlands Ranch, Colorado for our corporate headquarters. Also, in Colorado, we lease additional office, warehouse and laboratory space. Total combined leased space for these facilities is approximately 32,000 square feet. We also lease or own manufacturing, storage and distribution facilities in Louisiana. Our manufacturing plant sits on

23


approximately 59 acres and the remaining facilities are comprised of a total of approximately 310,000 square feet. All of the facilities located in Louisiana are included in our PGI segment and Corporate and other.
In August 2019, we entered into a new lease for our corporate headquarters and primary laboratory (approximately 21,000 square feet located in Greenwood Village, Colorado). We expect to occupy this new facility beginning in March 2020, at which point we will no longer occupy the previously leased space in Colorado of approximately 32,000 square feet.
Mining
As of December 31, 2019, we owned or controlled, primarily through long-term leases, approximately 2,279 acres of coal land for surface mining located in the Gulf Coast Lignite Region, in Natchitoches Parish, Louisiana ("Five Forks"). The majority of the Five Forks land is leased for mineral rights and right-of-use purposes that expire at varying dates over the next 30 years and contain options to renew. The remaining land is owned by us.
Under our current mining plans, substantially all leased reserves will be mined out within the period of existing leases or within the time period of assured lease renewals. Royalties are paid to lessors either as a fixed price per ton or as a percentage of the gross sales price of the mined coal. The majority of the significant leases are on a percentage royalty basis. In some cases, a payment is required either at the time of execution of the lease or in annual installments. In most cases, the prepaid royalty amount is applied to reduce future production royalties.
On October 31, 2018, the SEC issued new rules for disclosures under this Item for mining registrants. These rules amend Item 102 of Regulation S-K under the Securities Act and the Exchange Act and rescind Industry Guide 7 to direct mining registrants, and create a new subpart of Regulation S-K, which contains all of the requirements for property disclosures by mining registrants from and after January 1, 2021 (the "Mining Disclosures"). The Mining Disclosures became effective on February 25, 2019 and allow mining registrants a transition period through January 1, 2021 to comply. We elected to adopt the Mining Disclosures effective February 25, 2019 and were subject to the requirements effective with the filing of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Based on the materiality and the vertically-integrated company guidelines contained in the Mining Disclosures, we have concluded that no additional disclosures related to our mining operations are required under this Item.
Item 3. Legal Proceedings
From time to time, we are involved in various litigation matters arising in the ordinary course of our business. Information with respect to this item may be found in Note 9 "Commitments and Contingencies" to the consolidated financial statements included in Item 8 of this Report.

Item 4. Mine Safety Disclosures
The statement concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Report.



24


PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Our Common Stock
As of December 31, 2019, our common stock was quoted on the NASDAQ Global Market under the symbol "ADES." The trading volume for our common stock is relatively limited. There is no assurance that an active trading market will provide adequate liquidity for our existing stockholders or for persons who may acquire our common stock in the future.
Dividends
In June 2017, we commenced a quarterly cash dividend program of $0.25 per common share.
We may continue to declare and pay a cash dividend on shares of our common stock on a quarterly basis. Whether we do, however, and the timing and amounts of dividends will be subject to approval and declaration by the Board and will depend on a variety of factors including, but not limited to, our financial results, cash requirements, financial condition, compliance with loan covenants and other contractual restrictions and other factors considered relevant by the Board and will be subject to limitations imposed under Delaware law.
Holders
The number of holders of record of our common stock as of March 6, 2020 was approximately 800. The approximate number of beneficial stockholders is estimated at 7,800.
Purchases of Equity Securities by the Company and Affiliated Purchasers
In November 2018, the Board authorized a program for us to repurchase up to $20.0 million of shares of our common stock through open market transactions at prevailing market prices. As of September 30, 2019, the Company had $2.9 million remaining under this program. In November 2019, the Board authorized an incremental $7.1 million to this stock repurchase program and provided that the program will remain in effect until all amounts are utilized or the program is otherwise modified by the Board. The following table summarizes the common stock repurchase activity for the three months ended December 31, 2019:
Period
 
(a) Total number of shares (or units) purchased
 
(b) Average price paid per share (or unit)
 
(c) Total number of shares (or units) purchased as part of publicly announced programs
 
(d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs (in thousands)
October 1 to 31, 2019
 

 
$

 

 
$

November 1 to 30, 2019
 
144,615

 
10.36

 
144,615

 

December 1 to 31, 2019
 
131,987

 
10.37

 
131,987

 
7,134

Total
 
276,602

 
 
 
276,602

 
$
7,134


Item 6. Selected Financial Data
The information under this Item is not required to be provided by smaller reporting companies.

25



Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
This Form 10-K for the year ended December 31, 2019 is filed by Advanced Emissions Solutions, Inc. together with its consolidated subsidiaries (collectively, "ADES," the "Company," "we," "us," or "our" unless the context indicates otherwise).
We are a leader in emissions reductions technologies through consumables that utilize powdered activated carbon (“PAC”) and chemical based technologies, primarily serving the coal-fired power generation and industrial boiler industries. Our proprietary environmental technologies and specialty chemicals enable our customers to reduce emissions of mercury and other pollutants, maximize utilization levels and improve operating efficiencies to meet the challenges of existing and potential emissions control regulations. See further discussion of our business included in Item 1 - "Business" ("Item 1") of this Report. Discussion regarding segment information is included in the discussion of our consolidated results under this Item 7. Additionally, discussion related to our reportable segments is included in Item 1 and Note 15 of the Consolidated Financial Statements included in Item 8 of this Report.
On December 7, 2018 (the “Acquisition Date”), we acquired all of the outstanding equity interests (the "Carbon Solutions Acquisition”) of ADA Carbon Solutions, LLC (“CS” or “Carbon Solutions”). Carbon Solutions is an activated carbon company and the North American leader in mercury capture using PAC for the coal-fired power plant, industrial and water treatment markets. Carbon Solutions owns and operates an activated carbon ("AC") manufacturing and processing facility. It also owns an associated lignite mine ("Five Forks Mine") that supplies the raw material for the powdered activated carbon plant. Our operating results for 2018 include the operating results of Carbon Solutions for the period from the Acquisition Date to December 31, 2018.
On December 7, 2018, ADES 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 related parties, entered into the Term Loan and Security Agreement (the "Senior Term Loan") in the principal 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.
Drivers of Demand and Key Factors Affecting Profitability
Drivers of demand and key factors affecting our profitability differ by segment. In the Refined Coal ("RC') segment, demand is driven primarily by the Internal Revenue Code ("IRC") Section 45 - Production Tax Credit ("Section 45 tax credits"), which is expected to expire no later than December 31, 2021. Operating results in RC have been influenced by: (1) the ability to sell, lease or operate RC facilities; (2) lease renegotiation or termination; and (3) changes in tonnage of RC due to changing coal-fired dispatch and electricity power generation sources.
In the Power Generation and Industrials ("PGI") segment, demand is driven primarily by consumables-based solutions for coal-fired power generation and other industrials. Operating results in PGI has been influenced by: (1) changes in our sales volumes; (2) changes in price and product mix; and (3) changes in coal-fired dispatch and electricity power generation sources.
Components of Revenue, Expenses and Equity Method Investees
The following briefly describes the components of revenues and expenses as presented in the Consolidated Statements of Operations. Descriptions of the revenue recognition policies are included in Note 1 to the Consolidated Financial Statements included in Item 8 of this Report.
Revenues and costs of revenue
Consumables
We sell PAC and proprietary chemical blends to coal-fired utilities and other industrial boilers that allow the respective utilities to comply with the regulatory emissions standards. Additionally, we also sell PAC to water treatment plants to remove contaminants from the water. Revenue is generally recorded upon delivery of our product.

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License royalties, related party
We recognize license royalties under a licensing arrangement (the "M-45 License") of our M-45TM and M-45-PCTM emission control technologies (the "M-45 Technology") to Tinuum Group, LLC ("Tinuum Group"). License royalties are based on a percentage of the per-ton, pre-tax margin, inclusive of impacts related to depreciation expense and other allocable expenses, as defined in the M-45 License.
Other Operating Expenses
Payroll and benefits
Payroll and benefits costs include personnel related fringe benefits, sales and administrative staff labor costs and stock compensation expenses. Payroll and benefits costs exclude direct labor included in Cost of revenue.
Legal and professional fees
Legal and professional costs include external legal, audit and consulting expenses.
General and administrative
General and administrative costs include director fees and expenses, bad debt expense, research and development expense and other general costs of conducting business. Research and development costs, net of reimbursements from cost-sharing arrangements, are charged to expense in the period incurred and are reported in the General and administrative line item in the Consolidated Statements of Operations.
Depreciation, amortization, depletion and accretion
Depreciation and amortization expense consists of depreciation expense related to property, plant and equipment and the amortization of long-lived intangible assets. Depletion and accretion expense consists of depletion expense related to the depletion of mine development costs and the accretion of a mine reclamation liability.
Other Income (Expense), net
Earnings from equity method investments
Earnings from equity method investments relates to our share of earnings (losses) related to our equity method investments.
Our equity method earnings in Tinuum Group, a related party in which we own a 42.5% equity interest and a 50% voting interest, are positively impacted when Tinuum Group obtains an investor in a RC facility and receives cash payments under either a lease arrangement or sales arrangement of the RC facility. If Tinuum Group operates a retained RC facility, the Company's equity method earnings will be negatively impacted as operating retained RC facilities generate operating losses. However, we benefit on an after-tax basis if we are able to utilize tax credits associated with the production and sale of RC from operation of retained RC facilities by Tinuum Group. These benefits, if utilized, will increase our consolidated net income as a result of a reduction in income tax expense.
Tinuum Services, LLC ("Tinuum Services"), a related party in which we own both a 50% equity and voting interest, operates and maintains RC facilities under operating and maintenance agreements. Tinuum Group or the lessee/owner of the RC facilities pays Tinuum Services, subject to certain limitations, the costs of operating and maintaining the RC facilities plus certain fees. Tinuum Services also arranges for the purchase and delivery of certain chemical additives under chemical agency agreements necessary for the production of RC. Tinuum Services consolidates certain RC facilities leased or owned by tax equity investors that are deemed to be variable interest entities ("VIE's). All net income (loss) associated with these VIE's is allocated to the noncontrolling equity holders of Tinuum Services and therefore does not impact our equity earnings (loss) from Tinuum Services.
Other income (expense)
The remaining components of other income (expense) include interest income, interest expense and other miscellaneous items.

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Results of Operations
For comparison purposes, the following tables set forth our results of operations for the years presented in the Consolidated Financial Statements included in Item 8 of this Report. The operating results for the year ended December 31, 2018 include the operations of Carbon Solutions from the Acquisition Date through December 31, 2018. The year-to-year comparison of financial results is not necessarily indicative of financial results that may be achieved in future years.
Year ended December 31, 2019 Compared to Year ended December 31, 2018
Total Revenue and Cost of Revenue
A summary of the components of revenues and cost of revenue for the years ended December 31, 2019 and 2018 is as follows:
 
 
Years Ended December 31,
 
Change
(Amounts in thousands except percentages)
 
2019
 
2018
 
($)
 
(%)
Revenues:
 
 
 
 
 
 
 
 
Consumables
 
$
53,187

 
$
8,733

 
$
44,454

 
509
 %
License royalties, related party
 
16,899

 
15,140

 
1,759

 
12
 %
Other
 

 
72

 
(72
)
 
(100
)%
Total revenues
 
$
70,086

 
$
23,945

 
$
46,141

 
193
 %
 
 
 
 
 
 
 
 
 
Consumables cost of revenue, exclusive of depreciation and amortization
 
$
49,443

 
$
6,606

 
$
42,837

 
648
 %
Other cost of revenue, exclusive of depreciation and amortization
 
$

 
$
(353
)
 
$
353

 
(100
)%
Consumables revenue and consumables cost of revenue
For the years ended December 31, 2019 and 2018, consumables revenue increased year over year primarily due to the addition of Carbon Solutions' operations. These operations increased the total pounds of our consumables sold year over year.
Consumables cost of revenue was also increased year-over-year primarily due to the Carbon Solutions' operations. Additional increase to cost of revenue was due to a $5.0 million adjustment related to the step-up in basis of inventory acquired related to the Carbon Solutions Acquisition.
During the year ended December 31, 2019, Consumables revenue and margins were negatively impacted by low coal-fired power dispatch driven by power generation from sources other than coal as well as mild weather conditions. According to the most recent U.S. Energy Information Administration ("EIA") data, coal-fired power generation was down year over year by approximately 15%, even though overall power generation was flat.
Based on current market estimates, we believe that consumables sales volumes and revenues will be negatively impacted in 2020 due to continued generation of power from sources other than coal. The most significant drivers related to this expected impact are natural gas prices and the expansion of energy generation sources related to natural gas and renewables.
License royalties, related party
License royalties increased in 2019 compared to 2018 primarily due to obtaining additional third party investors for two RC facilities during 2018 and four new RC facilities during 2019, all of which use our M-45 License. The addition of new invested RC facilities in 2018 and 2019 resulted in an increase in both cash payments to Tinuum Group and the related tons subject to the M-45 License. For the years ended December 31, 2019 and 2018, there were 47.3 million and 37.3 million tons, respectively, of RC produced using the M-45 Technology. Offsetting the net increase in license royalties for 2019 from additional facilities and related tonnage was a lower royalty per ton rate. This lower rate was attributable to higher depreciation recognized of approximately $1.0 million on all royalty bearing RC facilities during the second half of 2019 as a result of a reduction in their estimated useful lives as determined by Tinuum Group. Further offsetting the net increase in license royalties was a decrease in net lease payments of approximately $0.1 million as a result of Tinuum Group restructuring RC facility contracted leases with its largest customer. As a result of higher depreciation and lower lease payments, we expect that the lower royalty rate per ton will continue in 2020 and 2021.

28


Additional information related to revenue concentrations and contributions by class and reportable segment is included in the segment discussion below and in Note 8 and Note 16 to the Consolidated Financial Statements included in Item 8 of this Report.

Other Operating Expenses
A summary of the components of our operating expenses, exclusive of cost of revenue items (presented above), for the years ended December 31, 2019 and 2018 is as follows:
 
 
Years Ended December 31,
 
Change
(in thousands, except percentages)
 
2019
 
2018
 
($)
 
(%)
Operating expenses:
 
 
 
 
 
 
 
 
Payroll and benefits
 
$
10,094

 
$
10,639

 
$
(545
)
 
(5
)%
Legal and professional fees
 
9,948

 
8,552

 
1,396

 
16
 %
General and administrative
 
8,123

 
4,178

 
3,945

 
94
 %
Depreciation, amortization, depletion and accretion
 
7,371

 
723

 
6,648

 
920
 %
 
 
$
35,536

 
$
24,092

 
$
11,444

 
48
 %
Payroll and benefits
Payroll and benefits expenses decreased in 2019 compared to 2018 primarily due to restructuring expenses in connection with the departure of certain executive officers and management's alignment of the business with strategic objectives during 2018, as well as the elimination of certain duplicative positions in connection with the Carbon Solutions Acquisition. There was a decrease in restructuring charges of $3.0 million year over year. Offsetting this decrease was an increase in payroll-related expenses due to a full year of increased headcount as a result of the Carbon Solutions Acquisition.
Legal and professional fees
Legal and professional fees expenses increased in 2019 compared to 2018 as a result of costs incurred related to professional fees, primarily outsourced IT cost specific to the integration of Carbon Solutions of $2.9 million, consulting fees of $1.8 million, legal fees related to ongoing business matters of $1.0 million and shared service costs, including audit fees, of $0.5 million. These costs were partially offset by a decrease in costs related to transaction fees incurred related to the Carbon Solutions Acquisition during the year ended December 31, 2018 of approximately $4.5 million.

General and administrative
General and administrative expenses increased in 2019 compared to 2018 primarily due to an increase in general operating expenses, including an increase year over year of approximately $1.3 million related to rent and occupancy expense from additional leased office and warehouse space resulting from the Carbon Solutions Acquisition. Remaining increases of approximately $1.9 million period over period related to other general and administrative expenses, including travel, insurance and recruiting expenses.

Depreciation, amortization, depletion and accretion
Depreciation and amortization expense increased in 2019 compared to 2018 due to the addition of long-lived assets and intangible assets acquired as part of the Carbon Solutions Acquisition, which contributed approximately $6.7 million of depreciation and amortization for 2019.

29


Other Income (Expense), net
A summary of the components of our other income (expense), net for the years ended December 31, 2019 and 2018 is as follows:
 
 
Years Ended December 31,
 
Change
(Amounts in thousands, except percentages)
 
2019
 
2018
 
($)
 
(%)
Other income (expense):
 
 
 
 
 
 
 
 
Earnings from equity method investments
 
$
69,176

 
$
54,208

 
$
14,968

 
28
%
Interest expense
 
(7,174
)
 
(2,151
)
 
(5,023
)
 
234
%
Other
 
427

 
220

 
207

 
94
%
Total other income
 
$
62,429

 
$
52,277

 
$
10,152

 
19
%
Earnings in equity method investments
The following table presents the equity method earnings by investee for the years ended December 31, 2019 and 2018:
 
 
Years Ended December 31,
 
Change
(in thousands)
 
2019
 
2018
 
($)
 
(%)
Earnings from Tinuum Group
 
$
60,286

 
$
47,175

 
$
13,111

 
28
%
Earnings from Tinuum Services
 
8,896

 
7,033

 
1,863

 
26
%
Loss from other
 
(6
)
 

 
(6
)
 
*

Earnings from equity method investments
 
$
69,176

 
$
54,208

 
$
14,968

 
28
%
* Calculation not meaningful
Earnings from equity method investments, and changes related thereto, are impacted by our significant equity method investees: Tinuum Group and Tinuum Services.
For the year ended December 31, 2019, we recognized $60.3 million in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of $62.0 million for the year. The difference represents the cumulative earnings short-fall balance as of December 31, 2018. For the year ended December 31, 2018, we recognized $47.2 million in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of $57.7 million for the year. This difference was the result of cumulative distributions received from Tinuum Group being in excess of the carrying value of the investment, and therefore we recognized such excess distributions as equity method earnings in the year the distributions occurred.
For the year ended December 31, 2019, equity earnings from Tinuum Group were positively impacted by the addition during the year of four new invested RC facilities. Further, revenues from two of these facilities were recognized immediately in 2019 as a result of Tinuum Group's adoption of ASC Topic 606 - Revenue from Contracts with Customers ("ASC 606"). However, equity earnings from Tinuum Group were negatively impacted by approximately $4.9 million from higher depreciation on all Tinuum Group RC facilities as a result of a reduction in their estimated useful lives as determined by Tinuum Group during the three months ended September 30, 2019. In addition and during the three months ended September 30, 2019, Tinuum Group restructured RC facility leases with its largest customer, which decreased lease payments and equity earnings beginning in the three months ended September 30, 2019 and will also negatively impact equity earnings in the future. For the year ended December 31, 2018, cash distributions and related equity earnings from Tinuum Group were negatively impacted as a result of $17.6 million of capital expenditures incurred by Tinuum Group related to the engineering and installation of RC facilities. See the discussion below regarding the accounting of earnings from Tinuum Group.
We expect our earnings in Tinuum to decrease in future periods due to higher depreciation and revised lease payments as discussed above. Future earnings will also be negatively impacted due to the expiration of Section 45 tax credits in 2021. However, although earnings recognized under accounting principles generally accepted in the U.S. ("GAAP") are expected to decrease in future years compared to 2019, cash distributions are expected to significantly exceed GAAP earnings, consistent with our current expectations of future RC cash distributions.

30


On January 1, 2019, Tinuum Group adopted ASC 606 and ASU 2016-02 (Topic 842), Leases (“ASU 2016-02”). As a result of Tinuum Group’s adoption, on January 1, 2019, we recorded a cumulative adjustment increase to Retained earnings of $27.4 million related to our portion of Tinuum Group's cumulative effect adjustment. As a result, we recognized equity earnings based on our pro-rata share of Tinuum Group's net income as, on a go-forward basis, our cumulative pro-rata share of Tinuum Group's net income was equal to or exceeded cumulative cash distributions received from Tinuum Group.
Tinuum Group's audited consolidated financial statements as of December 31, 2019 and 2018 and for the years then ended are included in Item 15 - "Exhibits and Financial Statement Schedules" ("Item 15") of this Report.
Equity earnings from our interest in Tinuum Services increased by $1.9 million in 2019 compared to 2018. As of December 31, 2019 and 2018, Tinuum Services provided operating and maintenance services to 19 and 18 RC facilities, respectively. Tinuum Services derives earnings from both fixed-fee arrangements as well as fees that are tied to actual RC production, depending upon the specific RC facility operating and maintenance agreement.
Additional information related to equity method investments is included in Note 5 to the Consolidated Financial Statements included in Item 8 of this Report.
Tax Credits and Obligations
Historically, we have earned tax credits that may be available for future benefit related to the production of RC from the operation of RC facilities under Section 45 tax credits (or "GBC's) in which we have held both direct ownership and indirect ownership through Tinuum's direct ownership. We refer to these RC facilities as "retained facilities." We currently hold a direct and indirect ownership through Tinuum Group in the GWN REF RC facility ("GWN REF") and during 2018 we earned substantially all of our Section 45 tax credits from GWN REF. However, under an agreement effective January 1, 2019 between Tinuum Group and its largest customer, who also has an ownership interest in Tinuum Group, substantially all of the tax credits earned from GWN REF were allocated prospectively to this customer. As a result, our earned Section 45 tax credits for the year ended December 31, 2019 were $0.3 million compared to $7.0 million for the year ended December 31, 2018. Future earned Section 45 tax credits for the years 2020-2021 are expected to be consistent with 2019. As of December 31, 2019, we had approximately $98.5 million in GBC carryforwards.
In the hypothetical event of an ownership change, as defined by IRC Section 382, utilization of GBC's generated prior to the change would be subject to an annual limitation imposed by IRC Section 383 for GBC's. The results of a recent analysis indicated that we had not experienced an ownership change as of December 31, 2019, as defined by IRC Section 382. Such analysis for the period from January 1, 2020 through the date of this Report has not been completed. Therefore, it is possible that we experienced an ownership change between January 1, 2020 and the date of this filing, thus subjecting our GBC carryforwards to limitation.
Interest expense
Interest expense increased $5.0 million in 2019 compared to 2018 primarily due to interest expense of $5.3 million related to the Senior Term Loan entered into on December 7, 2018 to fund the Carbon Solutions Acquisition. This increase was comprised of stated interest on the Senior Term Loan principal of $3.7 million and interest expense related to debt discount and debt issuance costs associated with the Senior Term Loan of $1.6 million. Offsetting this increase was a decrease in IRS section 453A ("Section 453A") interest expense of $0.5 million in 2019 compared to 2018. This reduction was driven by a decrease in the tax liability associated with RC facilities in which Tinuum Group recognized as installment sales for tax purposes.
The following table shows the balance of the tax liability that has been deferred and the applicable interest rate to calculate 453A interest:
 
 
As of December 31,
(in thousands)
 
2019
 
2018
Tax liability deferred on installment sales (1)
 
$
20,783

 
$
35,703

Interest rate
 
5.00
%
 
5.00
%
(1) Represents the approximate tax effected liability utilizing the federal tax rate in effect for the applicable years ended related to the deferred gain on installment sales (approximately $112 million as of December 31, 2019).
Based on the interest rate in effect as of the date of this filing, the 453A interest rate for the year ended December 31, 2020 is expected to be 5%.

31


Income tax expense
For the year ended December 31, 2019, our reported income tax expense of $12.0 million differed from income tax expense computed by applying the U.S. statutory federal income tax rate (the "Federal Rate") of $10.0 million primarily due to state income tax expense, net of federal benefit of $1.6 million.
For the year ended December 31, 2018, our reported income tax expense of $10.4 million differed from income tax expense computed using the Federal Rate of $9.6 million primarily due to an increase in income tax expense from state income tax expense, net of federal benefit of $3.6 million and an increase in the valuation allowance from on our deferred tax assets of $4.5 million, offset by a decrease in income tax expense from tax credits realized of $7.0 million.
Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against their deferred tax asset based on an assessment of the amount of the deferred tax asset that is “more likely than not” to be realized. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. 
We assess the valuation allowance recorded against deferred tax assets at each reporting date. The determination of whether a valuation allowance for deferred tax assets is appropriate requires the evaluation of positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available to realize the deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating taxes, we assess the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial, and regulatory guidance.
As of December 31, 2019, we concluded it is more likely than not we will generate sufficient taxable income within the applicable net operating loss and tax credit carryforward periods to realize $14.1 million of our net deferred tax assets, which resulted in a decrease in the valuation allowance from December 31, 2018 of $0.3 million. In reaching this conclusion, we primarily considered: (1) the future reversal of existing temporary differences; and (2) forecasts of continued future taxable income. As of December 31, 2019 and 2018, we had a valuation allowance of $79.6 million and $79.9 million, respectively, against our deferred tax assets.
The ability to recognize the remaining deferred tax assets that continue to be subject to a valuation allowance is evaluated on a quarterly basis to determine if there are any significant events that would affect the ability to utilize those deferred tax assets.
Our estimate of future taxable income is based on internal projections that consider historical performance, multiple internal scenarios and assumptions, as well as external data that we believe is reasonable. If events are identified that affect our ability to utilize our deferred tax assets, or if additional deferred tax assets are generated, the analysis will be updated to determine if any adjustments to the valuation allowance are required. If actual results differ negatively from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the remaining valuation allowance may need to be increased. Such an increase could have a material adverse effect on our financial condition and results of operations. Conversely, better than expected results and continued positive results and trends could result in further releases to the deferred tax valuation allowance, and any such decreases could have a material positive effect on our financial condition and results of operations.
See additional discussion in Note 14 of the Consolidated Financial Statements included in Item 8 of this Report.

32


Non-GAAP Financial Measures
To supplement our financial information presented in accordance with GAAP, we are providing non-GAAP measures of certain financial performance. These non-GAAP measures include Consolidated EBITDA and Segment EBITDA. We have included non-GAAP measures because management believes that they help to facilitate comparison of operating results between periods. We believe the non-GAAP measures provide useful information to both management and users of the financial statements by excluding certain expenses, gains and losses that may not be indicative of core operating results and business outlook. These non-GAAP measures are not in accordance with, or an alternative to, measures prepared in accordance with GAAP and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. These measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures.
We define Consolidated EBITDA as net income, adjusted for the impact of the following items that are either non-cash or that we do not consider representative of our ongoing operating performance: depreciation, amortization, depletion and accretion, interest expense, net and income tax expense. Because Consolidated EBITDA omits certain non-cash items, we believe that the measure is less susceptible to variances that affect our operating performance.
Segment EBITDA is calculated as Segment operating income (loss) adjusted for the impact of the following items that are either non-cash or that we do not consider representative of our ongoing operating performance: depreciation, amortization, depletion and accretion and interest expense, net. When used in conjunction with GAAP financial measures, Segment EBITDA is a supplemental measure of operating performance that management believes is a useful measure for our PGI segment performance relative to the performance of our competitors as well as performance period over period. Additionally, we believe the measure is less susceptible to variances that affect our operating performance results.
We present Consolidated EBITDA and Segment EBITDA because we believe they are useful as supplemental measures in evaluating our operating performance and provide greater transparency into the results of operations. Management uses Consolidated EBITDA and Segment EBITDA as factors in evaluating the performance of our business.
The adjustments to Consolidated EBITDA and Segment EBITDA in future periods are generally expected to be similar. Consolidated EBITDA and Segment EBITDA have limitations as analytical tools, and these measures should not be considered in isolation or as a substitute for analyzing our results as reported under GAAP.

Consolidated EBITDA
 
 
Year ended December 31,
 
 
2019
 
2018
Net income (1)
 
$
35,537

 
$
35,454

Depreciation, amortization, depletion and accretion
 
7,371

 
723

Interest expense, net
 
6,913

 
1,912

Income tax expense
 
11,999

 
10,423

Consolidated EBITDA
 
$
61,820

 
$
48,512

(1) Net income for the year ended December 31, 2019 was inclusive of a $5.0 million adjustment, which increased cost of revenue due to a step-up in basis of inventory acquired related to the Carbon Solutions Acquisition.
Business Segments
As of December 31, 2019, we have two reportable segments: (1) Refined Coal ("RC"); and (2) Power Generation and Industrials ("PGI").
The business segment measurements provided to and evaluated by our chief operating decision maker are computed in accordance with the principles listed below:
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies except as described below.

33


Segment revenues include equity method earnings and losses from our equity method investments.
Segment operating income (loss) includes segment revenues, gains related to sales of equity method investments and allocation of certain "Corporate general and administrative expenses," which include Payroll and benefits, Rent and occupancy, Legal and professional fees, and General and administrative.
RC segment operating income includes interest expense directly attributable to the RC segment.
The principal products and services of our segments are:
1.
RC - Our RC segment derives its earnings from equity method investments as well as royalty payment streams and other revenues related to enhanced combustion of and reduced emissions of both NOX and mercury from the burning of RC. Our equity method investments related to the RC segment include Tinuum Group, Tinuum Services and one insignificant investee. Segment revenues include equity method earnings (losses) from our equity method investments and royalty earnings from Tinuum Group. These earnings are included in the Earnings from equity method investments and License royalties, related party line items in the Consolidated Statements of Operations included in Item 8 of this Report. Key drivers to RC segment performance are the produced and sold RC from both operating and retained RC facilities, royalty-bearing tonnage, and the number of operating (leased or sold) and retained RC facilities. These key drivers impact our earnings and cash distributions from equity method investments.
2.
PGI - Our PGI segment includes revenues and related expenses from the sale of consumable products that utilize PAC and chemical technologies. These options provide coal-powered utilities and industrial boilers with mercury control solutions working in conjunction with pollution control equipment systems, generally without the requirement for significant ongoing capital outlays. These amounts are included in the respective revenue and cost of revenue line items in the Consolidated Statements of Operations included in Item 8 of this Report.

34


The following table presents our operating segment results for the years ended December 31, 2019 and 2018:
 
 
Years Ended December 31,
 
Change
(in thousands)
 
2019
 
2018
 
($)
Revenues:
 
 
 
 
 
 
Refined Coal:
 
 
 
 
 
 
Earnings in equity method investments
 
$
69,176

 
$
54,208

 
$
14,968

License royalties, related party
 
16,899

 
15,140

 
1,759

 
 
86,075

 
69,348

 
16,727

Power Generation and Industrials:
 
 
 
 
 
 
Consumables
 
50,458

 
8,628

 
41,830

Other
 

 
72

 
(72
)
 
 
50,458

 
8,700

 
41,758

Total segment reporting revenues
 
136,533

 
78,048

 
58,485

 
 
 
 
 
 
 
Adjustments to reconcile to reported revenues:
 
 
 
 
 
 
Earnings in equity method investments
 
(69,176
)
 
(54,208
)
 
(14,968
)
Corporate and other
 
2,729

 
105

 
2,624

Total reported revenues
 
$
70,086

 
$
23,945

 
$
46,141

 
 
 
 
 
 
 
Segment operating income (loss)
 
 
 
 
 
 
Refined Coal (1)
 
$
83,471

 
$
64,854

 
$
18,617

Power Generation and Industrials (2)
 
(11,606
)
 
(2,621
)
 
(8,985
)
Total segment operating income
 
$
71,865

 
$
62,233

 
$
9,632

(1) Included in the RC segment operating income for the years ended December 31, 2019 and 2018 is 453A interest expense of $1.0 million and $1.6 million, respectively. Also included in the RC segment operating income for the year ended December 31, 2018 was $0.4 million of severance expense.
(2) Included in the PGI segment operating income for the year ended December 31, 2019 and 2018 was approximately $4.7 million and $1.0 million, respectively, of cost of revenue expense related to a step up in basis of the fair value of inventory. Also included in the PGI segment operating income for the year ended December 31, 2019 and 2018 was $6.7 million and $0.5 million, respectively, of depreciation, amortization and depletion expense on mine- and plant-related long-lived assets.
A reconciliation of segment operating income to consolidated net income is included in Note 15 of the Consolidated Financial Statements included in Item 8 of this Report.
Refined Coal
The following table details the segment revenues of our respective equity method investments for the years ended December 31, 2019 and 2018:
 
 
Year ended December 31,
(in thousands)
 
2019
 
2018
Earnings from Tinuum Group
 
$
60,286

 
$
47,175

Earnings from Tinuum Services
 
8,896

 
7,033

Loss from other
 
(6
)
 

Earnings from equity method investments
 
$
69,176

 
$
54,208

RC earnings increased primarily due to increased equity earnings from Tinuum Group during the year ended December 31, 2019 compared to the year ended December 31, 2018, as presented above. For the year ended December 31, 2019, we

35


recognized $60.3 million in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of $62.0 million for the year. The difference represents the cumulative earnings short-fall balance as of December 31, 2018. For the year ended December 31, 2018, we recognized $47.2 million in equity earnings from Tinuum Group compared to our proportionate share of Tinuum Group's net income of $57.7 million for the year. This difference was the result of cumulative distributions received from Tinuum Group being in excess of the carrying value of the investment, and therefore we recognized such excess distributions as equity method earnings in the year the distributions occurred.
For the year ended December 31, 2019, equity earnings from our interest in Tinuum Group were positively impacted by the addition of four new RC facilities during the year ended December 31, 2019. Further, revenues from two of these facilities were recognized immediately in 2019 as a result of Tinuum Group’s adoption of ASC 606 and ASC 842 as of January 1, 2019. However, our earnings were negatively impacted from higher depreciation recognized for the year ended December 31, 2019 on all Tinuum Group RC facilities as a result of a reduction in their estimated useful lives as determined by Tinuum Group during the three months ended September 30, 2019, as described above. As a result of a reduction in coal consumption, as noted above, during the three months ended September 30, 2019, Tinuum Group restructured RC facility contracted leases with its largest customer, which decreased lease payments beginning for the remainder of 2019 and will also negatively impact our pro-rata share of Tinuum Group's earnings in the future.
Earnings from Tinuum Services for 2019 increased compared to 2018 primarily due to an increase in the number of operating RC facilities from 18 to 19 in which Tinuum Services provides operating and maintenance services.
RC earnings were positively impacted during the year ended December 31, 2019 by an increase in royalties related to Tinuum Group's use of our M-45 License. The addition of new invested RC facilities in 2018 and 2019 resulted in an increase in both cash payments to Tinuum Group and the related tons subject to the M-45 License. For the years ended December 31, 2019 and 2018, there were 47.3 million and 37.3 million tons, respectively, of RC produced using the M-45 Technology. Offsetting the net increase in license royalties for the year ended December 31, 2019 from additional facilities and related tonnage was a lower royalty per ton rate. This lower rate is attributable to higher depreciation recognized of approximately $1.0 million on all royalty bearing RC facilities during the second half of 2019 as a result of a reduction in their estimated useful lives as determined by Tinuum Group. Further offsetting the net increase in license royalties was a decrease in lease payments of approximately $0.1 million as a result of Tinuum Group restructuring RC facility contracted leases with its largest customer.
Outlook
Future earnings and growth in the RC segment will continue to be impacted by coal-fired dispatch and invested facilities with leases subject to periodic renewals being terminated, repriced, or otherwise subject to renegotiated terms. Further, we expect our earnings in Tinuum to decrease in future periods due to higher depreciation and revised lease payments as discussed above. Future earnings will also be negatively impacted due to the expiration of Section 45 tax credits in 2021 earned from RC production. However, although GAAP earnings are expected to decrease in future years compared to 2019, cash distributions are expected to significantly exceed GAAP earnings, consistent with our current expectations of future RC distributions.
Power Generation and Industrials
PGI segment operating loss increased during the year ended December 31, 2019 compared to 2018 primarily due to the increase in the operating loss of Carbon Solutions. This increase included $4.7 million of cost of revenue expense recognized in 2019 related to a step-up in basis of acquired finished goods inventory and $6.7 million of depreciation, amortization and depletion expense related to Carbon Solutions Acquisition. During the year ended December 31, 2019, Consumables revenue and margins were negatively impacted by low coal-fired power dispatch driven by power generation from sources other than coal as well as mild weather. According to the most recent EIA data, coal-fired power generation was down year over year by approximately 15% even though overall power generation was flat.
Outlook
Based on current market estimates, we believe that the PGI segment will continued to be negatively impacted, as power generation from coal-fired power plants declines and the market focuses on other sources, including natural gas and renewable energy. Future demand will also be impacted by prices of competing energy sources, such as natural gas. Low prices of alternative energy sources and decreasing power generation from coal-fired utilities reduce demand for our products.


36


PGI Segment EBITDA
 
 
Year ended December 31,
(in thousands)
 
2019
 
2018
Segment operating loss (1)
 
$
(11,606
)
 
$
(2,621
)
Depreciation, amortization, depletion and accretion
 
6,682

 
520

Interest expense, net
 
351

 
45

Segment EBITDA loss
 
$
(4,573
)
 
$
(2,056
)
(1) Segment operating loss for the year ended December 31, 2019 and 2018 was inclusive of adjustments of $4.7 million and $1.0 million, respectively, which increased cost of revenue due to a step-up in basis of inventory acquired related to the Carbon Solutions Acquisition.


37


Liquidity and Capital Resources
Overview of Factors Affecting Our Liquidity
During 2019, our liquidity position was positively affected primarily due to distributions from Tinuum Group and Tinuum Services, royalty payments from Tinuum Group and borrowing availability under our bank ("Lender") line of credit (the "Line of Credit").
Our principal sources of liquidity currently include:
cash and cash equivalents on hand;
distributions from Tinuum Group and Tinuum Services;
royalty payments from Tinuum Group;
operations of the PGI segment; and
the Line of Credit.
Our principal uses of liquidity during the year ended December 31, 2019 included:
repurchases of shares of common stock;
payment of dividends;
payment of debt principal and interest; and
our business operating expenses, including capital expenditures, federal and state tax payments and cash severance payments.
Our ability to continue to generate sufficient cash flow required to meet ongoing operational needs and obligations, and make potential future dividend payments and share repurchases depends upon several factors, including executing on our contracts and initiatives, receiving royalty payments from Tinuum Group and distributions from Tinuum Group and Tinuum Services, and increasing our share of the market for PGI consumables, including expanding our overall AC business into additional adjacent markets. Increasing distributions from Tinuum Group will likely be dependent on both preserving existing contractual relationships and securing additional tax equity investors for those Tinuum Group facilities that are currently not operating.
Due to the Carbon Solutions Acquisition, we spent significantly more in capital expenditures in 2019, which included expenditures for a plant turnaround of our AC manufacturing facility that occurs on average about every 18 - 24 months. We believe that capital expenditures for 2020 may be slightly lower compared to 2019. Carbon Solutions has historically incurred costs for capital expenditures related to the PAC manufacturing facility under normal operations and planned outages and for mine development at the Five Forks Mine. 
Tinuum Group and Tinuum Services Distributions
The following table summarizes the cash distributions from our equity method investments, which most significantly affected our consolidated cash flow results, for the years ended December 31, 2019 and 2018:
 
 
Year ended December 31,
(in thousands)
 
2019
 
2018

 
 
 
 
Tinuum Group
 
$
65,238

 
$
47,175

Tinuum Services
 
8,650

 
5,500

Distributions from equity method investees
 
$
73,888

 
$
52,675

Future cash flows from Tinuum through 2021 are expected to range from $150 to $175 million, and key drivers in achieving these future cash flows are based on the following:
20 invested facilities as of December 31, 2019 and inclusive of all net Tinuum cash flows (distributions and license royalties), offset by estimated federal and state income tax payments and 453A interest payments.
Expected future cash flows from Tinuum Group are based on the following key assumptions:
Tinuum Group continues to not operate retained facilities;
Tinuum Group does not have material unexpected capital expenditures or unusual operating expenses;

38


Tax equity lease renewals on invested facilities are not terminated or repriced; and
Coal-fired power generation remains consistent with existing contractual expectations.
During the fourth quarter of 2019, two coal-fired utilities where Tinuum Group had invested RC facilities operating closed. The shuttering of these two facilities has negatively impacted our expectations related to future cash flows if Tinuum is unable to move these two RC facilities to new utilities. As previously noted under this Item, Tinuum Group and its largest customer agreed to certain reductions in overall net lease payments for the period from October 2019 to December 2021, and these reductions will negatively impact future cash flows. All of these factors, combined with the addition of new invested facilities during 2019, are included in the expected cash flows as of December 31, 2019.
Senior Term Loan
On December 7, 2018, we executed the Senior Term Loan with Apollo in the principal amount of $70.0 million, less original issue discount of $2.1 million. We 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 we may prepay the Senior Term Loan at any time without penalty. The Senior Term Loan is secured by substantially all of our assets, including the cash flows from Tinuum Group and Tinuum Services, but excluding our equity interests in those 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, we 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 shares of our common stock in an aggregate amount, not to exceed $30.0 million, are 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. See "Risk Factors-Risks relating to our common stock - There can be no assurance that we will continue to declare cash dividends at all or in any particular amounts."
Stock Repurchases and Dividends
In November 2018, our Board of Directors (the "Board") authorized us to purchase up to $20.0 million of our outstanding common stock. As of November 2019, $2.9 million remained outstanding under this program. In November 2019, the Board authorized an incremental $7.1 million to this stock repurchase program and provided that the program will remain in effect until all amounts are utilized or the program is otherwise modified by the Board. For the year ended December 31, 2019, under these two stock repurchase programs, we purchased 533,345 shares of our common stock for cash of $5.8 million, inclusive of commissions and fees.
Previously, in December 2017, the Board had authorized us to purchase up to $20.0 million of our outstanding common stock under a separate repurchase program that was in effect until July 31, 2018. For the year ended December 31, 2018, under this program and the program implemented in November 2018, we purchased 2,350,422 shares of our common stock for cash of $25.3 million, inclusive of commissions and fees.
During the year ended December 31, 2019, we paid quarterly cash dividends to stockholders of $18.3 million, which were paid on March 7, 2019, June 7, 2019, September 6, 2019 and December 13, 2019.
Line of Credit
As of December 31, 2019, there were no outstanding borrowings under the Line of Credit.
On September 30, 2018, ADA, as borrower, ADES, as guarantor, and the Lender entered into an amendment (the "Twelfth Amendment") to the Line of Credit. The Twelfth Amendment decreased 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 cash balance requirement based on us 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.

39


On December 7, 2018, ADA, as borrower, ADES 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 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.
Sources and Uses of Cash
Cash, cash equivalents and restricted cash decreased from $23.8 million as of December 31, 2018 to $17.1 million as of December 31, 2019, a decrease of $6.7 million. The following table summarizes our cash flows for the years ended December 31, 2019 and 2018, respectively:
 
 
Years Ended December 31,
 
 
(in thousands)
 
2019
 
2018
 
Change
Cash provided by (used in):
 
 
 
 
 
 
Operating activities
 
$
62,262

 
$
(9,889
)
 
$
72,151

Investing activities
 
(13,238
)
 
(16,543
)
 
3,305

Financing activities
 
(55,716
)
 
19,511

 
(75,227
)
Net change in Cash and Cash Equivalents and Restricted Cash
 
$
(6,692
)
 
$
(6,921
)
 
$
229

Cash flows from operating activities
Cash flows provided by operating activities for the year ended December 31, 2019 increased by $72.2 million compared to the year ended December 31, 2018 and were positively impacted primarily by the following: (1) an increase in Distributions from equity method investees, return on investment of $68.4 million; (2) an increase in depreciation, amortization, depletion and accretion of $6.6 million; (3) an increase of $3.4 million in deferred income tax expense; and (4) a net decrease in working capital of $6.9 million, primarily due to a decrease in accrued payroll and related liabilities. Offsetting these increases to operating cash flows was primarily an increase in earnings from equity method investments of $15.0 million.
Cash flows from investing activities
Cash flows used in investing activities for the year ended December 31, 2019 decreased by $3.3 million compared to the year ended December 31, 2018 primarily from the net cash consideration paid in 2018 of $62.5 million for the Carbon Solutions Acquisition. Offsetting this net decrease in cash flows used in investing activities were increases in cash flows used in investing activities for acquisition of property, plant, equipment and intangibles of $7.4 million and mine development costs of $4.7 million. In addition, cash flows from investing activities were negatively impacted by a decrease in cash distributions from equity method investees, return in excess of cumulative earnings of $47.2 million, as all distributions received from Tinuum Group in 2019 represent a return on investment and are classified under operating activities.
Cash flows from financing activities
Cash flows used in financing activities for the year ended December 31, 2019 were $55.7 million compared to cash flows provided by financing activities of $19.5 million for the year ended December 31, 2018. This net increase in cash flows used in financing activities was primarily due to the net borrowings, net of debt issuance costs paid, of $65.9 million on the Senior Term Loan incurred in 2018 and principal payments made in 2019 on the Senior Term Loan and finance lease obligations of $30.0 million and $1.4 million, respectively. Offsetting this net increase in cash flows used in financing activities were decreases in repurchases of common shares of $19.6 million and dividends paid of $1.9 million.


40


Contractual Obligations
Our contractual obligations as of December 31, 2019 are as follows:
 
 
Payment Due by Period
(in thousands)
 
Total
 
Less than 1 year
 
1-3 years
 
4-5 years
 
After 5 years
Senior Term Note (1)
 
$
40,000

 
$
24,000

 
$
16,000

 
$

 
$

Finance lease obligations
 
7,908

 
1,707

 
2,753

 
2,880

 
568

Operating lease obligations
 
5,759

 
2,710

 
2,690

 
359

 

Purchase obligations (2)
 
1,927

 
1,927

 

 

 

 
 
$
55,594

 
$
30,344

 
$
21,443

 
$
3,239

 
$
568

(1) Includes outstanding principal amounts due through the maturity date.
(2) Represents non-cancellable obligations related to construction of and furnishings for our new corporate office and laboratory facilities that we expect to occupy during the first quarter of 2020.
The table above excludes obligations related to 453A interest payments due to uncertainty of amounts payable in future periods relating to matters impacting future obligations such as our portion of Tinuum Group's deferred tax liability balance under the installment method at each future balance sheet date and changes in interest rates. If no additional RC facilities become invested in the future, Tinuum Group's deferred tax liability balance would decrease and interest payments, assuming no changes in the applicable tax and interest rates, would also decrease throughout the periods in the table above.
The table above also excludes our asset retirement obligation related to reclamation of the Five Forks Mine. As of December 31, 2019, our consolidated balance sheet reflects a liability of $2.7 million for mine reclamation. Asset retirement obligations are recorded at fair value when incurred and accretion expense is recognized through the expected date of settlement. Determining the fair value of our asset retirement obligation involves a number of estimates, as discussed in the section entitled “Critical Accounting Policies” below, including the timing of payments to satisfy the obligation. The timing of payments to satisfy asset retirement obligations is based on numerous factors, including the Five Forks Mine closure date.
We had no outstanding letters of credit as of December 31, 2019.
Off-Balance Sheet Arrangements
During 2019 and 2018, we did not engage in any off-balance sheet financing.
Critical Accounting Policies and Estimates
Our significant accounting policies are discussed in Note 1 to the Consolidated Financial Statements included in Item 8 of this Report. In presenting our financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. Our estimates are based on historical experience and other assumptions believed to be reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the accounting estimates discussed below are critical to understanding our historical and future performance, as these estimates relate to the more significant areas involving management’s judgments and estimates.
Business Combinations
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the Acquisition Date. The purchase price allocation process requires us to make significant estimates and assumptions with respect to property, plant and equipment, intangible assets and certain obligations. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions and information obtained from management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
future expected cash flows from revenues;

41


historical and expected customer attrition rates and anticipated growth in revenues from acquired customers;
the acquired company’s developed technology as well as assumptions about the period of time the acquired developed technology will continue to be used in the combined company's product portfolio;
the expected use and useful lives of the acquired assets; and
valuation methods and discount rates used in estimating the values of the assets acquired and liabilities assumed.
Carrying value of long-lived assets and intangibles;
We review and evaluate our long-lived assets and intangibles for impairment at least annually, or more frequently when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment loss is measured and recorded based on the estimated fair value of the long-lived assets or intangibles being tested for impairment and their carrying amounts. Fair value is typically determined through the use of an income approach utilizing estimates of discounted pre-tax future cash flows or a market approach utilizing recent transaction activity for comparable properties.
Asset Retirement Obligation
Reclamation costs are related to the Five Forks Mine and are allocated to expense over the life of the related mine assets, and are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. Reclamation obligations are based on when the spending for an existing environmental disturbance will occur. We review, on at least an annual basis, the reclamation obligation for the Five Forks Mine.
Remediation costs for the Five Forks Mine are accrued based on management’s best estimate at the end of each period of the costs expected to be incurred. Such cost estimates may include ongoing care, maintenance and monitoring costs.
Accounting for reclamation and remediation obligations requires management to make estimates unique to the mining operation of the future costs we will incur to complete the reclamation and remediation work required to comply with existing laws and regulations. Any such changes in future costs, the timing of reclamation activities, scope, or the exclusion of certain costs not considered reclamation and remediation costs, could materially impact the amounts charged to earnings for reclamation and remediation. Additionally, future changes to environmental laws and regulations could increase the extent of reclamation and remediation work required.
Income Taxes
We account for income taxes as required by GAAP, under which management judgment is required in determining income tax expense and the related balance sheet amounts. This judgment includes estimating and analyzing historical and projected future operating results, the reversal of taxable temporary differences, tax planning strategies, and the ultimate outcome of uncertain income tax positions. Actual income taxes paid may vary from estimates, depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. Changes in the estimates and assumptions used for calculating income tax expense and potential differences in actual results from estimates could have a material impact on our results of operations and financial condition.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations.
We establish a valuation allowance against our deferred tax assets when, based upon the weight of all available evidence, we believe it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2019 and 2018, we have established valuation allowances for our deferred tax assets that, in our judgment, will not be realized. In making this determination, we have considered the relative impact of all of the available positive and negative evidence regarding future sources of taxable income and tax planning strategies. However, there could be a material impact to our effective tax rate if there is a significant change in our estimates of future taxable income and tax planning strategies. If and when our estimates change, or there is a change in the gross balance of deferred tax assets or liabilities causing the need to reassess the realizability of deferred tax assets, we adjust the valuation allowance through the provision for income taxes in the period in which this determination is made. Refer to Note 14 of our Consolidated Financial Statements included in Item 8 of this Report for additional information regarding our net deferred tax assets and related deferred income tax expense (benefit).

42


Recently Issued Accounting Standards
Refer to Note 1 of the Consolidated Financial Statements included in Item 8 of this Report for information regarding recently issued accounting standards.

43


Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information under this Item is not required to be provided by smaller reporting companies.


44


Item 8. Financial Statements and Supplementary Data
Advanced Emissions Solutions, Inc.
Index to Financial Statements


45



Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of
Advanced Emissions Solutions, Inc. and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Advanced Emissions Solutions, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2019 and 2018, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 16, 2020 expressed an unqualified opinion on the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, in 2019 the Company changed its method of accounting for leases due to the adoption of Accounting Standards Codification (ASC) 842.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Moss Adams LLP

Denver, Colorado
March 16, 2020

We have served as the Company’s auditor since 2017.

46


Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
 
 
As of December 31,
(in thousands, except share data)
 
2019
 
2018
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash, cash equivalents and restricted cash
 
$
12,080

 
$
18,577

Receivables, net
 
7,430

 
9,554

Receivables, related party
 
4,246

 
4,284

Inventories, net
 
15,460

 
21,791

Prepaid expenses and other assets
 
7,832

 
5,570

Total current assets
 
47,048

 
59,776

Restricted cash, long-term
 
5,000

 
5,195

Property, plant and equipment, net of accumulated depreciation of $7,444 and $1,499, respectively
 
44,001

 
42,697

Intangible assets, net
 
4,169

 
4,830

Equity method investments
 
39,155

 
6,634

Deferred tax assets, net
 
14,095

 
32,539

Other long-term assets, net
 
20,331

 
7,993

Total Assets
 
$
173,799

 
$
159,664

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
8,046

 
$
6,235

Accrued payroll and related liabilities
 
3,024

 
8,279

Current portion of long-term debt
 
23,932

 
24,067

Other current liabilities
 
4,311

 
2,138

Total current liabilities
 
39,313

 
40,719

Long-term debt, net of current portion
 
20,434

 
50,058

Other long-term liabilities
 
5,760

 
940

Total Liabilities
 
65,507

 
91,717

Commitments and contingencies (Notes 6 and 9)
 

 

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, 22,960,157 and 22,640,677 shares issued and 18,362,624 and 18,576,489 shares outstanding at December 31, 2019 and 2018, respectively
 
23

 
23

Treasury stock, at cost: 4,597,533 and 4,064,188 shares as of December 31, 2019 and 2018, respectively
 
(47,533
)
 
(41,740
)
Additional paid-in capital
 
98,466

 
96,750

Retained earnings
 
57,336

 
12,914

Total stockholders’ equity
 
108,292

 
67,947

Total Liabilities and Stockholders’ equity
 
$
173,799

 
$
159,664

See Notes to the Consolidated Financial Statements.

47


Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Statements of Operations
 
 
Years Ended December 31,
(in thousands, except per share data)
 
2019
 
2018
Revenues:
 
 
 
 
Consumables
 
$
53,187

 
$
8,733

License royalties, related party
 
16,899

 
15,140

Other
 

 
72

Total revenues
 
70,086

 
23,945

Operating expenses:
 
 
 
 
Consumables cost of revenue, exclusive of depreciation and amortization
 
49,443

 
6,606

Other cost of revenue, exclusive of depreciation and amortization
 

 
(353
)
Payroll and benefits
 
10,094

 
10,639

Legal and professional fees
 
9,948

 
8,552

General and administrative
 
8,123

 
4,178

Depreciation, amortization, depletion and accretion
 
7,371

 
723

Total operating expenses
 
84,979

 
30,345

Operating loss
 
(14,893
)
 
(6,400
)
Other income (expense):
 
 
 
 
Earnings from equity method investments
 
69,176

 
54,208

Interest expense
 
(7,174
)
 
(2,151
)
Other
 
427

 
220

Total other income
 
62,429

 
52,277

Income before income tax expense
 
47,536

 
45,877

Income tax expense
 
11,999

 
10,423

Net income
 
$
35,537

 
$
35,454

Earnings per common share (Note 1):
 
 
 
 
Basic
 
$
1.96

 
$
1.78

Diluted
 
$
1.93

 
$
1.76

Weighted-average number of common shares outstanding:
 
 
 
 
Basic
 
18,154

 
19,901

Diluted
 
18,372

 
20,033

See Notes to the Consolidated Financial Statements.



48


Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity

 
 
Common Stock
 
Treasury Stock
 
 
 
 
 
 
(in thousands, except share data)
 
Shares
 
Amount
 
Shares
 
Amount
 
Additional Paid-in Capital
 
Retained Earnings/(Accumulated 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 of change in accounting principle (Note 8)
 

 

 

 

 

 
2,950

 
2,950

Stock-based compensation
 
217,174

 
1

 

 

 
2,489

 

 
2,490

Issuance of stock upon exercise of options, net
 
18,667

 

 

 

 

 

 

Repurchase of common shares to satisfy tax withholdings
 
(60,985
)
 

 

 

 
(769
)
 

 
(769
)
Cash dividends declared on common stock
 

 

 

 

 
(10,278
)
 
(10,012
)
 
(20,290
)
Repurchase of common shares
 

 

 
(2,350,422
)
 
(25,343
)
 

 

 
(25,343
)
Net income
 

 

 

 

 

 
35,454

 
35,454

Balances, December 31, 2018
 
22,640,677

 
$
23

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

 
$
12,914

 
$
67,947

Cumulative effect of change in accounting principle (Note 5)
 

 

 

 

 

 
27,442

 
27,442

Stock-based compensation
 
298,573

 

 

 

 
2,011

 

 
2,011

Issuance of stock upon exercise of options, net
 
50,268

 

 

 

 
156

 

 
156

Repurchase of common shares to satisfy tax withholdings
 
(29,361
)
 

 

 

 
(451
)
 

 
(451
)
Cash dividends declared on common stock
 

 

 

 

 

 
(18,557
)
 
(18,557
)
Repurchase of common shares
 

 

 
(533,345
)
 
(5,793
)
 

 

 
(5,793
)
Net income
 

 

 

 

 

 
35,537

 
35,537

Balances, December 31, 2019
 
22,960,157

 
$
23

 
(4,597,533
)
 
$
(47,533
)
 
$
98,466

 
$
57,336

 
$
108,292

See Notes to the Consolidated Financial Statements.


49


Advanced Emissions Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

 
 
Years Ended December 31,
(in thousands)
 
2019
 
2018
Cash flows from operating activities
 
 
 
 
Net income
 
$
35,537

 
$
35,454

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
Deferred income tax expense
 
8,655

 
5,233

Depreciation, amortization, depletion and accretion
 
7,371

 
723

Amortization of debt discount and debt issuance costs
 
1,678

 
94

Operating lease expense
 
3,192

 

Stock-based compensation expense, net
 
2,011

 
2,490

Earnings from equity method investments
 
(69,176
)
 
(54,208
)
Other non-cash items, net
 
638

 
289

Changes in operating assets and liabilities, net of effects of acquired businesses:
 
 
 
 
Receivables, net
 
2,124

 
(1,847
)
Related party receivables
 
37

 
(1,037
)
Prepaid expenses and other assets
 
(2,200
)
 
(757
)
Costs incurred on uncompleted contracts
 

 
15,945

Inventories, net
 
5,505

 
237

Other long-term assets, net
 
(262
)
 
(753
)
Accounts payable
 
2,218

 
(197
)
Accrued payroll and related liabilities
 
(5,255
)
 
(59
)
Other current liabilities
 
(261
)
 
(869
)
Billings on uncompleted contracts
 

 
(15,945
)
Operating lease liabilities
 
(3,180
)
 

Other long-term liabilities
 
(258
)
 
(182
)
Distributions from equity method investees, return on investment
 
73,888

 
5,500

Net cash provided by (used in) operating activities
 
62,262

 
(9,889
)

50


 
 
Years Ended December 31,
(in thousands)
 
2019
 
2018
Cash flows from investing activities
 
 
 
 
Distributions from equity method investees in excess of cumulative earnings
 
$

 
$
47,175

Acquisition of business, net of cash acquired
 
(661
)
 
(62,501
)
Acquisition of property, plant, equipment, and intangible assets, net
 
(7,851
)
 
(467
)
Mine development costs
 
(4,726
)
 

Contributions to equity method investee
 

 
(750
)
Net cash used in investing activities
 
(13,238
)
 
(16,543
)
Cash flows from financing activities
 
 
 
 
Principal payments on term loan
 
(30,000
)
 

Principal payments on finance lease obligations
 
(1,354
)
 

Borrowings, net of debt discount - related party
 

 
67,900

Debt issuance costs paid
 

 
(2,036
)
Dividends paid
 
(18,274
)
 
(20,165
)
Repurchase of common shares
 
(5,793
)
 
(25,343
)
Repurchase of shares to satisfy tax withholdings
 
(451
)
 
(769
)
Other
 
156

 
(76
)
Net cash (used in) provided by financing activities
 
(55,716
)
 
19,511

Decrease in Cash, Cash Equivalents and Restricted Cash
 
(6,692
)
 
(6,921
)
Cash, Cash Equivalents and Restricted Cash, beginning of year
 
23,772

 
30,693

Cash, Cash Equivalents and Restricted Cash, end of year
 
$
17,080

 
$
23,772

Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid for interest
 
$
5,650

 
$
1,400

Cash paid for income taxes, net of refunds received
 
$
4,308

 
$
7,460

Supplemental disclosure of non-cash investing and financing activities: