Advanced Emissions Solutions(ADES) - 2021 Q4 - Annual Report

PART I ITEM 1. Business ADES transitions to solely focus on Advanced Purification Technologies (APT) after its Refined Coal (RC) segment ceased operations due to tax credit expiration, pursuing growth in diverse purification markets - Advanced Emissions Solutions, Inc. (ADES), incorporated in 2011, succeeded ADA-ES, Inc. in 2013 and acquired ADA Carbon Solutions, LLC in 2018 to expand into the activated carbon (AC) market[13] - The company sells consumable AC and chemical-based products for purification solutions to coal-fired utilities, industrials, and water treatment plants[13] - Equity interests of 42.5% and 50.0% were held in Tinuum Group, LLC and Tinuum Services, LLC, respectively, which substantially ceased operations as of December 31, 2021, due to the expiration of the Section 45 refined coal tax credit program[13] - The Refined Coal (RC) segment, including Tinuum Group and Tinuum Services, substantially ceased operations as of December 31, 2021, due to the expiration of the Section 45 tax credit program, which will have a material adverse effect on financial results starting in 2022[13][24][26] - The Advanced Purification Technologies (APT) segment focuses on purifying contaminated liquid and gas streams from industrial sources, coal-fired power plants, and wastewater treatment plants, with emerging opportunities in soil and groundwater treatment[17] - A 15-year supply agreement with Cabot Norit Americas, Inc. for lignite-based AC products is expected to provide material incremental sales volume, lower fixed operating costs, and expand distribution to diverse end-markets[20] - The company owns and operates the Red River plant in Louisiana for AC manufacturing and the Five Forks Mine for lignite coal supply, with 83 U.S. and 12 international patents[23][22][42] General Company Overview - Advanced Emissions Solutions, Inc. (ADES), incorporated in 2011, succeeded ADA-ES, Inc. in 2013 and acquired ADA Carbon Solutions, LLC in 2018 to expand into the activated carbon (AC) market[13] - The company sells consumable AC and chemical-based products for purification solutions to coal-fired utilities, industrials, and water treatment plants[13] - Equity interests of 42.5% and 50.0% were held in Tinuum Group, LLC and Tinuum Services, LLC, respectively, which substantially ceased operations as of December 31, 2021, due to the expiration of the Section 45 refined coal tax credit program[13] Markets and Demand Drivers - Activated Carbon (AC) is a specialized sorbent material used in various industrial and consumer applications to remove impurities from gas, water, and waste streams[14] - Key markets for AC include pollution removal from coal-fired generation, water treatment, industrial acid gas/odor removal, automotive emission control, and soil/groundwater remediation[14] - Demand for AC products is driven by increasing environmental regulations, particularly in developed and rapidly developing countries, with significant opportunities in soil, sediment, and groundwater treatment[14][16] Business Segments - The Advanced Purification Technologies (APT) segment uses AC and chemical products to purify contaminated liquid and gas streams from industrial sources, including coal-fired power plants (mercury control) and wastewater treatment plants[17] - In late 2021, the APT segment developed a new Colloidal Carbon Product (CCP) platform, FluxSorb IS™, for in-situ treatment of contaminated soil and groundwater[17] - The Refined Coal (RC) segment, through Tinuum Group, provided mercury and NOx emission reduction using Section 45 tax credits, but substantially ceased operations as of December 31, 2021, due to the program's expiration[24] - The cessation of the RC segment's operations means the company will no longer earn M-45 Royalties or substantial earnings and distributions from Tinuum Group and Tinuum Services, materially affecting financial results from 2022[24][26] Sales and Customer Relationships - Consumables sales are primarily made by company employees under requirements-based contracts (1-5 years for AC, purchase order for chemical products)[18] - Top three customers comprised approximately 37% of consolidated consumables revenues for 2021, indicating significant customer concentration risk[18] - M-45 Royalties from Tinuum Group, which comprised 14% of total consolidated revenues and 296% of operating income in 2021, ceased as of December 31, 2021, due to the RC segment wind-down[26] Cabot Supply Agreement and Related Agreements - A 15-year Supply Agreement with Cabot Norit Americas, Inc. for lignite-based activated carbon products (Furnace Products) commenced on September 30, 2020, with automatic 10-year renewal terms[20] - The Supply Agreement is expected to provide material incremental sales volume, lower fixed operating costs per unit, and expand AC product distribution to new markets[20] - Concurrently, the company acquired Marshall Mine, LLC from Cabot for a nominal price, immediately commencing shuttering activities and incurring approximately $23.3 million in Reclamation Costs, with Cabot obligated to reimburse $10.2 million[20] - An EMEA Supply Agreement was also signed with Cabot Corporation on February 1, 2021, for lignite activated carbon products for mercury removal in the EMEA market[20] Competitive Landscape - Primary competitors for consumable sorbent products include Cabot (CBT), Calgon Carbon (Kuraray Co., Ltd.), Donau Carbon Company, Midwest Energy Emissions Corp. (MEEC), and Nalco Holding Company (Ecolab Inc. (ECL))[21] Raw Materials and Supply Chain - Lignite coal, the principal raw material for AC manufacturing, is supplied 100% through the company's Five Forks Mine[22] - Manufacturing of AC and chemical products relies on various additives, which are subject to price fluctuations and supply constraints from a limited number of suppliers[22] - Raw materials for RC products were primarily non-bromine based halogens, but this segment has ceased operations[30] Operational Facilities - The company owns and operates the Red River plant in Louisiana for manufacturing, leases another manufacturing and distribution facility in Louisiana, and has sales, product development, and administrative operations in Colorado[23] - Tinuum RC facilities were located at coal-fired power plants in the U.S. but have ceased operations[30] Proprietary Products and Technologies - Proprietary technologies include M-45 and M-45-PC for pre-combustion coal treatment to control NOx and mercury emissions, and CyClean technology to enhance combustion and reduce emissions[25] - Patents related to the RC segment are not expected to have significant commercial application beyond December 31, 2021, due to the wind-down of Tinuum Group and Tinuum Services[25] Research and Development Activities Research and Development Expenses | Year Ended December 31 | Expenses (in millions) | | :--------------------- | :--------------------- | | 2021 | $0.4 | | 2020 | $1.0 | Legislation and Environmental Regulations - The U.S. EPA's MATS Rule, effective April 2012, requires 80-90% mercury capture from coal-fired EGUs and remains in effect despite past reconsideration attempts[33] - State-level mercury rules, U.S. Federal Industrial Boiler MACT, and Effluent Limitation Guidelines (ELGs) for wastewater also impact demand for the company's products[34][35][36] - International regulations, such as Canada-Wide Standard and the EU's Minimata Convention on Mercury, are expected to expand the market for mercury control products[39] Mining Environmental and Reclamation Matters - The U.S. coal mining industry is regulated by federal, state, and local authorities, including SMCRA, for employee health and safety, environmental protection, and reclamation[40] - Mine operators are required to post surety bonds to ensure payment of long-term obligations like mine closure and reclamation costs[40] Surety Bonds for Mine Reclamation (as of December 31, 2021) | Mine | Amount (in millions) | | :------------- | :------------------- | | Five Forks Mine | $7.5 | | Marshall Mine | $16.6 | Patents - As of December 31, 2021, the company held 83 U.S. patents, 12 international patents, and 15 pending U.S. provisional patents or applications[42] - Existing patents generally have terms of 20 years from the filing date, with the earliest expirations beginning in 2022[42] Seasonality of Activities - Sales of consumable products are seasonal, dependent on power generation unit operations (weather-dependent heating/cooling needs) and scheduled maintenance outages[43] - Demand for AC products for water purification is highest in summer months due to increased degradation of organic contaminants causing taste and odor issues[43] Safety, Health and Environment - Operations are subject to numerous federal, state, and local Safety, Health, and Environmental (SH&E) Regulations, requiring compliance with various environmental permits[44] Employees - As of December 31, 2021, the company employed 139 full-time personnel, with 27 in Colorado and 112 in Louisiana[45] Available Information - Periodic and current reports are filed with the SEC and available free of charge on the company's website (www.advancedemissionssolutions.com) and the SEC's website (www.sec.gov)[46](index=46&type=chunk) Forward-Looking Statements Found in this Report - The report contains forward-looking statements regarding expected growth in APT markets, pricing, supply/demand, competition, strategic alternatives, R&D, technology effectiveness, financial measures, capital expenditures, patents, and regulatory impacts[48] - These statements are based on assumptions including coal's continued significance, the company's role as a key supplier, capital/personnel availability, Cabot's purchases, business relationships, and new consumable development[49] - Actual results could differ materially due to risks such as regulatory changes, competition, alternative energy sources, technical difficulties, loss of personnel, supply chain issues, IP claims, and litigation[51] ITEM 1A. Risk Factors The company faces significant risks from sole dependence on the APT segment, strategic review uncertainties, single plant reliance, regulatory volatility, and potential tax credit limitations - The company is now solely dependent on the APT segment for earnings, requiring substantial growth to offset the loss of the RC segment's $82.6 million operating income in 2021[54] - Uncertainty exists regarding the strategic review process, with no assurance of identifying or completing a transaction that will maximize shareholder value[54] - Reliance on a single manufacturing plant (Red River) creates risk of supply disruption due to damage or insufficient capacity[54][56] - Demand for products is highly dependent on environmental laws and regulations, with changes or delays in enforcement posing a material adverse effect[58] - The market for pollutant reduction products is highly competitive, with larger and more established competitors potentially impeding growth and financial results[61] - The company's ability to utilize $86.1 million in Section 45 tax credit carryforwards may be substantially limited by an 'ownership change' as defined by IRC Sections 382 and 383[74] ITEM 1B. Unresolved Staff Comments No unresolved staff comments are reported - No unresolved staff comments were reported[82] ITEM 2. Properties Properties include leased Colorado offices, owned/leased Louisiana manufacturing and distribution facilities, and mining operations in Louisiana and Texas - The company leases approximately 24,000 square feet of office space in Greenwood Village, Colorado, for its corporate headquarters and primary R&D laboratory[82] - Manufacturing operations include an owned plant in Coushatta, Louisiana, and a leased manufacturing and distribution facility in Natchitoches Parish, Louisiana[82] - The APT segment utilizes all office, facilities, and mining properties[82][83] - The company owns or controls approximately 4,425 acres of coal land for surface mining, including 1,975 acres at the Five Forks Mine in Louisiana and 2,450 acres at the Marshall Mine in Texas, where mining ceased in 2020[84] ITEM 3. Legal Proceedings The company is involved in ordinary course legal proceedings, with details in Note 14 of the Consolidated Financial Statements - The company is involved in various litigation matters arising in the ordinary course of business[85] - Information regarding legal proceedings can be found in Note 14 'Commitments and Contingencies' of the Consolidated Financial Statements[85] ITEM 4. Mine Safety Disclosures Mine safety disclosures, as mandated by the Dodd-Frank Act, are provided in Exhibit 95 of this report - Mine safety disclosures are provided in Exhibit 95 of the report, as required by Section 1503(a) of the Dodd-Frank Act[86] PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ADES common stock trades on Nasdaq with limited volume; dividends are suspended due to RC segment cessation, and a $7.0 million stock repurchase program remains - The company's common stock trades on the Nasdaq Global Market under 'ADES', with relatively limited trading volume[89] - The quarterly cash dividend program, which last paid in March 2020, is unlikely to resume in the foreseeable future due to the cessation of the cash-generating RC segment[90][78] - As of February 25, 2022, there were approximately 900 holders of record and an estimated 7,800 beneficial stockholders[91] - The company has a Stock Repurchase Program with $7.0 million remaining as of December 31, 2021, but no repurchases were made during the three months ended December 31, 2021[91] ITEM 6. Reserved This item is reserved and contains no information - No unresolved staff comments were reported[82] ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations MD&A details the transition to a sole APT focus, 2021 revenue growth, strategic review, liquidity management, and a restatement due to a material weakness in internal controls - The RC segment, which generated substantial earnings and cash distributions, substantially ceased operations as of December 31, 2021, due to the expiration of the Section 45 tax credit period[94] - The APT segment, focused on AC and chemical-based purification solutions, is now the primary driver, with opportunities in industrial applications and water treatment[94] Total Revenues and Cost of Revenues (in thousands) | Metric | 2021 | 2020 | Change ($) | Change (%) | | :------------------------------------------------------------------- | :-------- | :-------- | :--------- | :--------- | | Consumables Revenues | $85,882 | $53,908 | $31,974 | 59% | | License royalties, related party | $14,368 | $13,440 | $928 | 7% | | Other Revenues | $44 | $15 | $29 | 193% | | Total Revenues | $100,294| $67,363| $32,931| 49% | | Consumables cost of revenues, exclusive of depreciation and amortization | $65,576 | $50,962 | $14,614 | 29% | - Consumables revenue increased 59% year-over-year in 2021, primarily due to higher product volumes ($25.0 million), increased coal-fired generation utilization, and expanded sales under the Cabot Supply Agreement[115] - The company recorded a $3.3 million gain on extinguishment of debt in 2021 due to the forgiveness of its PPP Loan[130] - A material weakness in internal control over financial reporting was identified regarding the selection and application of accounting principles, leading to a restatement of previously reported revenues for shipping and handling costs[371][238] Overview of Operations - The company operated two segments through December 31, 2021: Refined Coal (RC) and Advanced Purification Technologies (APT)[94] - The RC segment, comprising equity ownership in Tinuum Group and Tinuum Services, generated substantial earnings from Section 45 tax credits and technology royalties, but ceased operations as of December 31, 2021[94] - The APT segment, acquired in 2018, sells consumable AC and chemical-based products for purification solutions to coal-fired utilities, industrials, and water treatment plants, utilizing an associated lignite mine[94] Review of Strategic Alternatives - In May 2021, the company initiated a strategic review process with Ducera Partners, LLC to assess alternatives for maximizing stockholder value[95] - There is no assurance that the review will result in any transaction or provide anticipated benefits, and the process is ongoing without a set timetable[95] Drivers of Demand and Key Factors Affecting Profitability - Historically, RC segment earnings and cash distributions from Tinuum Group and M-45 Royalties were substantial, but these ceased with the Section 45 tax credit expiration[96] - APT segment demand is driven by consumables for coal-fired power generation, municipal water treatment, industrial customers, and sales through the Cabot Supply Agreement[96] - APT operating results are influenced by sales volumes, price/product mix, non-integrated supply chain inputs, and coal-fired dispatch/electricity generation sources[96] - In 2021, APT experienced significant demand increases, leading to purchases of AC product from third-party suppliers at higher costs to supplement Red River production[97] Customer Supply Agreement - The 15-year Supply Agreement with Cabot Norit Americas, Inc., initiated in September 2020, provides material incremental volume and operating cost efficiencies at the Red River manufacturing plant[98] - This agreement has improved fixed cost absorption, increased gross margins, and expanded AC product distribution to diverse end markets[98] Acquisition of Marshall Mine - The company acquired Marshall Mine, LLC from Cabot in September 2020 for a nominal price, immediately commencing shuttering and incurring approximately $23.3 million in Reclamation Costs over 10 years[99] - Cabot is obligated to reimburse the company for approximately $10.2 million of these Reclamation Costs, payable semi-annually over 13 years[99] - A surety bond of $16.6 million was posted as of December 31, 2021, to ensure reclamation activities[100] - A gain on change in estimate of $2.7 million was recorded in 2021 due to scope reductions in estimated future reclamation requirements for the Marshall Mine[100] Settlement with Former Customer - On December 29, 2020, the company reached a settlement with a former customer, receiving $2.5 million in cash on January 27, 2021[101] - This settlement resulted in a gain of $1.1 million, recognized as a reduction of operating expenses for the year ended December 31, 2020[102] Impact of COVID-19 - The company followed COVID-19 guidelines, implementing remote work, employee sequestration, and health safety measures[103] - Payroll tax payments of $0.4 million were deferred under the CARES Act, with $0.2 million repaid by December 31, 2021, and the balance due by December 31, 2022[103] - Costs of $0.4 million were incurred in 2020 for employee sequestration at the Red River plant, but no similar costs in 2021[103] Components of Revenue, Expenses and Equity Method Investees - Revenues include Consumables (AC and chemical products) and License royalties (M-45 Technology from Tinuum Group, expected to cease after 2021)[105][106] - Operating expenses include Payroll and benefits, Legal and professional fees, General and administrative (including R&D), and Depreciation, amortization, depletion and accretion[107][108][109] - Other Income (Expense), net primarily includes Earnings from equity method investments (Tinuum Group and Tinuum Services) and other miscellaneous items[110][111] Results of Operations - The company restated 'Revenues - Consumables' and 'Cost of revenues, excluding depreciation and amortization' for 2020 by $5.8 million to correctly classify shipping and handling costs as revenue[112] Total Revenues and Cost of Revenues (in thousands) | Metric | 2021 | 2020 | Change ($) | Change (%) | | :------------------------------------------------------------------- | :-------- | :-------- | :--------- | :--------- | | Consumables Revenues | $85,882 | $53,908 | $31,974 | 59% | | License royalties, related party | $14,368 | $13,440 | $928 | 7% | | Other Revenues | $44 | $15 | $29 | 193% | | Total Revenues | $100,294| $67,363| $32,931| 49% | | Consumables cost of revenues, exclusive of depreciation and amortization | $65,576 | $50,962 | $14,614 | 29% | - Consumables revenue increased 59% in 2021, driven by higher product volumes ($25.0 million), increased coal-fired generation due to higher natural gas prices, and sales under the Cabot Supply Agreement[115] - Gross margin increased in 2021 due to higher product volumes and price increases, but was negatively impacted by higher-cost third-party AC purchases to meet demand[115] Other Operating Expenses (in thousands) | Operating Expenses | 2021 | 2020 | Change ($) | Change (%) | | :---------------------------------------------------- | :-------- | :-------- | :--------- | :--------- | | Payroll and benefits | $11,315 | $10,621 | $694 | 7% | | Legal and professional fees | $6,260 | $5,585 | $675 | 12% | | General and administrative | $7,060 | $8,228 | $(1,168) | (14)% | | Depreciation, amortization, depletion and accretion | $7,933 | $8,537 | $(604) | (7)% | | Gain on change in estimate, asset retirement obligation | $(2,702) | $0 | $(2,702) | * | | Impairment of long-lived assets | $0 | $26,103 | $(26,103) | (100)% | | Gain on settlement | $0 | $(1,129) | $1,129 | (100)% | | Total Operating Expenses | $29,866| $57,945| $(28,079)| (48)% | Other Income (Expense), net (in thousands) | Other Income (Expense) | 2021 | 2020 | Change ($) | Change (%) | | :------------------------------------------ | :-------- | :-------- | :--------- | :--------- | | Earnings from equity method investments | $68,726 | $30,978 | $37,748 | 122% | | Gain on extinguishment of debt | $3,345 | $0 | $3,345 | * | | Interest expense | $(1,490) | $(3,920) | $2,430 | (62)% | | Other | $640 | $132 | $508 | 385% | | Total Other Income | $71,221| $27,190| $44,031| 162% | - Equity earnings from Tinuum Group increased by $37.4 million (153%) in 2021, primarily due to higher coal-fired power generation demand and higher production volume[128] - The company had $86.1 million in Section 45 tax carryforwards as of December 31, 2021, but their utilization could be limited by an 'ownership change' under IRC Section 382[131] - Income tax expense for 2021 was $15.7 million (21% effective rate), while 2020 had $6.5 million (47% inverse effective rate) due to an increase in valuation allowance on deferred tax assets[133] Non-GAAP Financial Measures - The company provides non-GAAP measures like Consolidated EBITDA, Consolidated Adjusted EBITDA, and segment-specific EBITDAs to facilitate period-to-period comparisons and evaluate core operating results[137] - Consolidated Adjusted EBITDA increased from $55.1 million in 2020 to $84.9 million in 2021[140] Consolidated EBITDA and Adjusted EBITDA Reconciliation (in thousands) | Metric | 2021 | 2020 | | :---------------------------------------------------- | :-------- | :-------- | | Net income (loss) | $60,401 | $(20,302) | | Depreciation, amortization, depletion and accretion | $7,933 | $8,537 | | Amortization of Upfront Customer Consideration | $508 | $158 | | Interest expense, net | $1,164 | $3,793 | | Income tax expense | $15,672 | $6,511 | | Consolidated EBITDA (loss) | $85,678| $(1,303)| | Cash distributions from equity method investees | $74,026 | $62,441 | | Equity earnings | $(68,726) | $(30,978) | | Gain on extinguishment of debt | $(3,345) | $0 | | Gain on change in estimate, asset retirement obligation | $(2,702) | $0 | | Impairment | $0 | $26,103 | | Gain on settlement | $0 | $(1,129) | | Consolidated Adjusted EBITDA | $84,931| $55,134| Business Segments Segment Operating Income (Loss) (in thousands) | Segment | 2021 | 2020 | | :--------------------------------------- | :-------- | :--------- | | Refined Coal (RC) | $82,634 | $42,689 | | Advanced Purification Technologies (APT) | $5,649 | $(39,958) | | Total Segment Operating Income | $88,283| $2,731 | - RC segment equity earnings from Tinuum Group increased in 2021 due to higher coal-fired power generation demand and production volume, and a higher average RC facility count[144] - APT segment operating income increased significantly in 2021 compared to 2020, primarily due to the $26.1 million impairment charge recorded in 2020 and increased consumable revenues/gross margin from higher volumes and new customers[147] - The RC segment's equity earnings, distributions, and M-45 Royalties will substantially cease beginning in 2022, materially affecting consolidated operating results[145] - APT segment outlook for 2022 expects consistent demand from current customers and continued pursuit of diverse markets outside coal-fired power generation[148] Liquidity and Capital Resources - As of December 31, 2021, principal liquidity sources included $88.8 million in cash, cash equivalents, and restricted cash, and APT segment operations[152] - Liquidity in 2021 was positively affected by cash distributions from Tinuum Group and Tinuum Services, royalty payments, and line of credit availability, but RC distributions will no longer be a material source after 2021[153] Cash Distributions from Equity Method Investments (in thousands) | Investee | 2021 | 2020 | | :---------------- | :-------- | :-------- | | Tinuum Group | $65,224 | $53,289 | | Tinuum Services | $8,802 | $9,152 | | Total | $74,026| $62,441| - The company received $3.3 million in PPP Loan forgiveness on July 27, 2021, recorded as a gain on extinguishment of debt[157] - The Senior Term Loan of $70.0 million was fully repaid on June 1, 2021, prior to its maturity date, without prepayment fees[159] - The Line of Credit, with an aggregate principal amount of $10.0 million (reduced to $5.0 million in 2018), expired on December 31, 2021[162] Cash Flows Summary (in thousands) | Cash Flow Activity | 2021 | 2020 | Change ($) | | :---------------------------------------------------- | :-------- | :-------- | :--------- | | Operating activities | $25,999 | $54,048 | $(28,049) | | Investing activities | $44,378 | $(7,466) | $51,844 | | Financing activities | $(17,529) | $(27,730) | $10,201 | | Net change in Cash and Cash Equivalents and Restricted Cash | $52,848| $18,852| $33,996| - Expected capital expenditures for 2022 are $13.0 million, up from $7.6 million in 2021, primarily for plant improvements and product-specific capital related to the Supply Agreement[169] Contractual Obligations (as of December 31, 2021, in thousands) | Obligation | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | | :------------------------------ | :------- | :--------------- | :-------- | :-------- | :------------ | | Finance lease obligations | $4,486 | $1,008 | $2,909 | $569 | $0 | | Operating lease obligations | $7,249 | $2,502 | $2,744 | $1,132 | $871 | | Reclamation liability, Marshall Mine | $7,631 | $2,104 | $2,885 | $1,231 | $1,411 | | Total | $19,366| $5,614 | $8,538| $2,932| $2,282 | Critical Accounting Policies and Estimates - Critical accounting policies involve significant estimates and assumptions for business combinations (asset acquisitions), carrying value of long-lived assets and intangibles, asset retirement obligations (AROs), and income taxes[172] - Valuation of long-lived assets and intangibles for impairment uses an income approach (discounted future cash flows) or market approach[174] - AROs for Five Forks and Marshall Mines require estimates of future costs, timing of activities, and scope, which are periodically adjusted[175] - Income tax accounting involves judgment in determining deferred tax assets and liabilities, and assessing the need for valuation allowances based on future taxable income forecasts[176] Recently Issued Accounting Standards - The company intends to adopt ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), effective January 1, 2023, but does not believe it will have a material impact on financial statements[237] ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk This item is not required for smaller reporting companies, so no information is provided - Information under this Item is not required to be provided by smaller reporting companies[180] ITEM 8. Financial Statements and Supplementary Data This section presents audited consolidated financial statements, including balance sheets, statements of operations, equity changes, cash flows, and detailed notes - The section includes the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations, Changes in Stockholders' Equity, and Cash Flows for 2021 and 2020[182] - The financial statements are presented in conformity with accounting principles generally accepted in the United States of America (GAAP)[185] - Notes to Consolidated Financial Statements provide detailed information on significant accounting policies, restatement, customer supply agreements, Marshall Mine acquisition, equity method investments, debt obligations, leases, revenues, commitments, stockholders' equity, stock-based compensation, income taxes, and business segments[206][238][242][243][254][271][275][277][281][290][300][306][312][322][331][341] Report of Independent Registered Public Accounting Firm - Moss Adams LLP issued an unqualified opinion on the consolidated financial statements for 2021 and 2020, stating they present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with GAAP[185] - A critical audit matter identified was the realizability of deferred tax assets, due to significant management judgments and estimates regarding sufficient taxable income generation prior to expiration[189][190][192] Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Metric | December 31, 2021 | December 31, 2020 | | :--------------------------- | :---------------- | :---------------- | | Total Assets | $185,436 | $146,671 | | Total Liabilities | $38,135 | $61,461 | | Total Stockholders' Equity | $147,301 | $85,210 | | Cash, cash equivalents and restricted cash | $78,753 | $30,932 | | Current Liabilities | $22,621 | $42,543 | - Total assets increased by $38.7 million, and total stockholders' equity increased by $62.1 million from 2020 to 2021[195] Consolidated Statements of Operations Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | 2021 | 2020 | | :------------------------------------------------------------------- | :-------- | :-------- | | Total revenues | $100,294 | $67,363 | | Total operating expenses | $95,442 | $108,344 | | Operating income (loss) | $4,852 | $(40,981) | | Total other income | $71,221 | $27,190 | | Income (loss) before income tax expense | $76,073 | $(13,791) | | Income tax expense | $15,672 | $6,511 | | Net income (loss) | $60,401 | $(20,302) | | Basic Earnings (loss) per common share | $3.31 | $(1.12) | | Diluted Earnings (loss) per common share | $3.27 | $(1.12) | - The company reported a net income of $60.4 million in 2021, a significant improvement from a net loss of $20.3 million in 2020[197] - Total revenues increased by 49% in 2021, while total operating expenses decreased by 12% due to the absence of a $26.1 million impairment charge in 2021[197] Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Changes in Stockholders' Equity Highlights (in thousands) | Metric | December 31, 2021 | December 31, 2020 | | :----------------------------------- | :---------------- | :---------------- | | Total Stockholders' Equity | $147,301 | $85,210 | | Additional Paid-in Capital | $102,106 | $100,425 | | Retained Earnings | $92,864 | $32,454 | | Stock-based compensation | $1,927 | $2,496 | | Net income (loss) | $60,401 | $(20,302) | - Total stockholders' equity increased by $62.1 million in 2021, primarily driven by net income of $60.4 million[199] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | 2021 | 2020 | | :---------------------------------------------------- | :-------- | :-------- | | Net cash provided by operating activities | $25,999 | $54,048 | | Net cash provided by (used in) investing activities | $44,378 | $(7,466) | | Net cash used in financing activities | $(17,529) | $(27,730) | | Net change in Cash, Cash Equivalents and Restricted Cash | $52,848| $18,852| - Cash, cash equivalents, and restricted cash increased by $52.8 million in 2021, reaching $88.8 million at year-end[163][203] - Cash provided by investing activities significantly increased in 2021 due to $51.1 million in distributions from equity earnings in excess of cumulative earnings[165][203] - Cash used in financing activities decreased in 2021 due to lower principal payments on the Senior Term Loan and reduced dividends/share repurchases, partially offset by the absence of PPP Loan proceeds[166][203] Notes to Consolidated Financial Statements Note 1 - Summary of Operations and Significant Accounting Policies - The company's primary business is selling consumable air and water treatment options, including activated carbon (AC) and chemical technologies, through its APT segment[206] - The RC segment, which generated earnings from Section 45 tax credits through Tinuum Group and Tinuum Services, ceased operations as of December 31, 2021, due to the program's expiration[206] - The company consolidates wholly-owned subsidiaries and Variable Interest Entities (VIEs) where it is the primary beneficiary, and uses the equity method for partially owned entities with significant influence[207] - Key accounting estimates include business combinations, carrying value of long-lived assets, asset retirement obligations (AROs), and income taxes[234] - Revenue from consumable products is recognized at the point of transfer of control (shipment or delivery), while license royalties are recognized based on the use of M-45 Technology[219][221] Note 2 - Restatement - The company restated its 2020 financial statements to reclassify shipping and handling costs billed to customers from a reduction of consumables cost of revenues to a component of consumables revenue[238] - This restatement increased both 'Revenues - Consumables' and 'Consumables cost of revenues, exclusive of depreciation and amortization' by $5.8 million for 2020, with no impact on net income or loss per share[238][241] Note 3 - Customer Supply Agreement - The company entered a 15-year Supply Agreement with Cabot Norit Americas, Inc. on September 30, 2020, to sell lignite-based AC products (Furnace Products)[242] - Cabot reimburses the company for certain capital expenditures incurred to manufacture Furnace Products, categorized as 'Shared Capital' (benefiting both parties) and 'Specific Capital' (benefiting Cabot exclusively)[242] Note 4 - Acquisition of Marshall Mine - The company acquired Marshall Mine, LLC from Cabot on September 30, 2020, for a nominal price, immediately commencing reclamation activities[243] - A Reclamation Contract with a third party established capped costs of approximately $23.3 million for reclamation over 10 years, with Cabot obligated to reimburse $10.2 million[243] - A $16.6 million surety bond was posted for reclamation, and $10.0 million in cash collateral was posted for Reclamation Contract obligations as of December 31, 2021[243][244] - The acquisition was accounted for as an asset acquisition, with the excess of assumed liabilities over acquired assets recognized as Upfront Customer Consideration, amortized as a reduction to revenue over the 15-year Supply Agreement term[244] Note 5 - Marshall Mine Asset Retirement Obligation and related Cabot Receivable - The Marshall Mine Asset Retirement Obligation (ARO) was initially recorded at $21.3 million, based on estimated future cash flows of $23.7 million discounted at 7.0%[249] - A gain on change in estimate of $2.7 million was recorded in 2021 due to revisions in estimated future reclamation obligations[249] - The Cabot Receivable for Reclamation Reimbursement was recorded at its estimated fair value of $9.7 million, reflecting a 1.5% discount rate, with no allowance for doubtful accounts deemed necessary[250] Note 6 - Impairment - As of June 30, 2020, the company recorded an impairment charge of $26.1 million, solely attributable to its APT segment's long-lived assets (manufacturing plant and lignite mine assets)[252] - The impairment was triggered by a significant decline in APT segment revenues and forecasted revenues, driven by low alternative power generation prices[252] - The fair value of the Asset Group was estimated at $32.2 million, resulting in the $26.1 million write-down[252] Note 7 - COVID-19 - The company received formal notification on July 27, 2021, that the SBA approved forgiveness of its $3.3 million PPP Loan (including accrued interest)[254] - A gain on extinguishment of the PPP Loan in the amount of $3.3 million was recorded in the Consolidated Statement of Operations for 2021[254] - The company deferred $0.4 million in payroll tax payments under the CARES Act, with $0.2 million repaid in 2021 and the balance due by December 31, 2022[254] Note 8 - Equity Method Investments - The company held 42.5% ownership in Tinuum Group and 50% in Tinuum Services as of December 31, 2021, accounted for under the equity method[255][262] - Tinuum Group's primary purpose was to operate facilities producing refined coal (RC) qualifying for Section 45 tax credits, which expired December 31, 2021[255] Equity Earnings from Tinuum Group and Tinuum Services (in thousands) | Investee | 2021 | 2020 | | :---------------- | :-------- | :-------- | | Tinuum Group | $61,837 | $24,396 | | Tinuum Services | $6,952 | $6,582 | | Loss from other | $(63) | $0 | | Total Earnings| $68,726| $30,978| - The company recognized $61.8 million in equity earnings from Tinuum Group in 2021, exceeding its pro-rata share due to cash distributions exceeding the investment's carrying value[258] - The carrying amount of the investment in Tinuum Services was written down by $0.7 million in 2021 due to expected minimal future cash distributions as operations shutter[266] Note 9 - Inventories, net Inventories, net (in thousands) | Inventory Type | December 31, 2021 | December 31, 2020 | | :--------------------- | :---------------- | :---------------- | | Product inventory | $4,901 | $8,361 | | Raw material inventory | $2,949 | $1,521 | | Total Inventories, net | $7,850 | $9,882 | - Inventories are stated at the lower of average cost or net realizable value and consist principally of raw materials and finished goods for AC and chemical products[210] Note 10 - Property, Plant and Equipment Property, Plant and Equipment, net (in thousands) | Asset Category | December 31, 2021 | December 31, 2020 | | :--------------------------------- | :---------------- | :---------------- | | Land and land improvements | $1,225 | $891 | | Plant and operating equipment | $31,266 | $25,703 | | Furniture and fixtures | $1,388 | $1,259 | | Machinery and equipment | $697 | $688 | | Leasehold improvements | $2,089 | $2,089 | | Construction in progress | $1,190 | $2,143 | | Less accumulated depreciation | $(7,684) | $(3,340) | | Total property, plant and equipment, net | $30,171 | $29,433 | - Depreciation expense for 2021 was $5.5 million, down from $6.8 million in 2020[276] - ROU assets related to finance lease obligations were $1.7 million (net of $1.1 million accumulated depreciation) as of December 31, 2021[276] Note 11 - Debt Obligations Debt Obligations (in thousands) | Debt Type | December 31, 2021 | December 31, 2020 | | :-------------------------------------- | :---------------- | :---------------- | | Finance lease obligations | $4,163 | $5,526 | | Senior Term Loan principal, related party | $0 | $16,000 | | PPP Loan | $0 | $3,305 | | Total borrowings | $4,163 | $23,886 | | Less: Current maturities | $(1,011) | $(18,441) | | Total long-term borrowings | $3,152 | $5,445 | - The Senior Term Loan of $16.0 million outstanding in 2020 was fully repaid on June 1, 2021[278] - The Line of Credit, with a principal amount of $5.0 million, expired on December 31, 2021, with no outstanding borrowings[280] Note 12 - Leases Lease Liabilities and ROU Assets (in thousands) | Lease Type / Metric | December 31, 2021 | December 31, 2020 | | :------------------------------------------------ | :---------------- | :---------------- | | Operating lease right-of-use assets, net | $6,000 | $1,930 | | Total operating lease obligation | $6,335 | $2,992 | | Finance lease right-of-use assets, net | $1,743 | $2,385 | | Total finance lease obligations | $4,163 | $5,526 | - Total lease cost for 2021 was $5.05 million, down from $6.44 million in 2020[286] - Weighted-average remaining lease terms are 2.9 years for finance leases and 4.3 years for operating leases as of December 31, 2021[286] Note 13 - Revenues Trade Receivables, net (in thousands) | Metric | December 31, 2021 | December 31, 2020 | | :---------------------- | :---------------- | :---------------- | | Trade receivables | $10,476 | $12,241 | | Less: Allowance for doubtful accounts | $0 | $(37) | | Trade receivables, net| $10,476 | $12,204 | Cabot Receivable (in thousands) | Metric | December 31, 2021 | December 31, 2020 | | :---------------------- | :---------------- | :---------------- | | Receivables, net | $2,146 | $921 | | Other long-term assets, net | $6,846 | $8,852 | | Total Cabot Receivable| $8,992 | $9,773 | - Upfront Customer Consideration of $7.6 million, related to the Marshall Mine acquisition, is amortized as a reduction to revenue over the 15-year Supply Agreement term[294] Disaggregation of Revenue and Equity Earnings by Segment (2021, in thousands) | Revenue Component / Segment | APT | RC | Total | | :-------------------------- | :-------- | :-------- | :-------- | | Consumables | $85,882 | $0 | $85,882 | | License royalties, related party | $0 | $14,368 | $14,368 | | Other | $44 | $0 | $44 | | Revenues from customers | $85,926 | $14,368 | $100,294 | | Earnings from equity method investments | $0 | $68,726 | $68,726 | | Total | $85,926| $83,094| $169,020| Note 14 - Commitments and Contingencies - The company is involved in various legal actions, recording liabilities when a loss is probable and estimable[300] - Long-term restricted cash of $10.0 million was held as of December 31, 2021, related to the Marshall Mine Reclamation Contract surety agreement[303] - Outstanding surety bonds totaled $24.1 million as of December 31, 2021, for reclamation contracts at Five Forks Mine and Marshall Mine[304] - The company has limited guarantee obligations related to Tinuum Group, but no liability has been recorded as a loss is not deemed probable[305] Note 15 - Stockholders' Equity - The company has authorized common stock and preferred stock, with no preferred stock outstanding as of December 31, 2021[307] - Holders of common stock are entitled to one vote per share and receive dividends when declared by the Board[308] - The Stock Repurchase Program had $7.0 million remaining as of December 31, 2021, with no repurchases made in 2021[309] - The Tax Asset Protection Plan (TAPP), extended to December 31, 2022, deters beneficial ownership of 4.99% or more of common stock to protect the company's ability to utilize net operating losses and tax credits[311] Note 16 - Stock-Based Compensation - The 2017 Omnibus Incentive Plan authorizes grants of awards to employees, directors, and non-employees, with 644,540 shares authorized for issuance as of December 31, 2021[312] Stock-Based Compensation Expense (in thousands) | Expense Type | 2021 | 2020 | | :--------------------------- | :-------- | :-------- | | RSA expense | $1,816 | $2,304 | | PSU expense | $111 | $192 | | Total stock-based compensation expense | $1,927| $2,496| - Unrecognized compensation cost as of December 31, 2021, totaled $2.24 million, with a weighted-average recognition period of 1.62 years[315] - Restricted Stock Awards (RSAs) granted in 2021 had a weighted-average fair value of $5.54, and Performance Share Units (PSUs) outstanding at year-end 2021 totaled 88,026 units[317][321] Note 17 - Supplemental Financial Information Other Long-Term Assets (in thousands) | Asset Category | December 31, 2021 | December 31, 2020 | | :----------------------------------- | :---------------- | :---------------- | | Upfront customer consideration | $6,982 | $7,490 | | Cabot receivable | $6,846 | $8,852 | | Right of use assets, operating leases, net | $6,000 | $1,930 | | Spare parts, net | $4,598 | $3,727 | | Mine development costs, net | $5,330 | $4,338 | | Mine reclamation asset, net | $1,742 | $1,712 | | Highview investment | $552 | $552 | | Other long-term assets | $1,193 | $1,388 | | Total Other long-term assets | $33,243 | $29,989 | Other Current and Long-Term Liabilities (in thousands) | Liability Category | December 31, 2021 | December 31, 2020 | | :----------------------------------- | :---------------- | :---------------- | | Current portion of operating lease obligations | $2,157 | $1,883 | | Current portion of mine reclamation liability | $1,775 | $9,370 | | Operating lease obligations, long-term | $4,178 | $1,109 | | Mine reclamation liabilities | $8,184 | $12,077 | - The company recognized a $1.1 million gain on settlement with a former customer in 2020 and a $2.7 million gain on change in estimate for the Marshall Mine ARO in 2021[327][328] Interest Expense Components (in thousands) | Component | 2021 | 2020 | | :------------------------------ | :-------- | :-------- | | Interest on Senior Term Loan | $206 | $1,708 | | Debt discount and debt issuance costs | $945 | $1,418 | | 453A interest | $13 | $331 | | Other | $326 | $463 | | Total Interest expense | $1,490| $3,920| Note 18 - Income Taxes Income Tax Expense (in thousands) | Component | 2021 | 2020 | | :-------------------------------------- | :-------- | :-------- | | Current portion of income tax expense | $5,067 | $3,020 | | Deferred portion of income tax expense (benefit) | $10,605 | $3,491 | | Total income tax expense | $15,672| $6,511| | Effective tax rate | 21% | (47)% | - The effective tax rate for 2021 was 21%, aligning with the U.S. federal statutory rate, while 2020 had an inverse rate of (47%) due to an increase in the valuation allowance[333] Deferred Tax Assets and Liabilities (in thousands) | Metric | December 31, 2021 | December 31, 2020 | | :----------------------------------- | :---------------- | :---------------- | | Total deferred tax assets | $99,445 | $108,813 | | Less valuation allowance | $(87,468) | $(88,758) | | Deferred tax assets | $11,977 | $20,055 | | Total deferred tax liabilities | $(11,977) | $(9,451) | | Net deferred tax assets | $0 | $10,604 | - As of December 31, 2021, the company concluded it is more likely than not that it will not generate sufficient taxable income to realize any of its net deferred tax assets, resulting in a 100% valuation allowance[337] - The company has $86.1 million in federal tax credit carryforwards expiring between 2032 and 2040[338] Note 19 - Business Segment Information - The company has two reportable segments: Refined Coal (RC) and Advanced Purification Technologies (APT)[341] Segment Reporting Revenues (in thousands) | Segment | 2021 | 2020 | | :--------------------------------------- | :-------- | :-------- | | Refined Coal | $83,094 | $44,418 | | Advanced Purification Technologies | $85,926 | $53,923 | | Total segment reporting revenues | $169,020| $98,341| Segment Operating Income (Loss) (in thousands) | Segment | 2021 | 2020 | | :--------------------------------------- | :-------- | :--------- | | Refined Coal | $82,634 | $42,689 | | Advanced Purification Technologies | $5,649 | $(39,958) | | Total segment operating income | $88,283| $2,731 | - The APT segment's operating income in 2020 included a $26.1 million impairment charge and a $1.1 million gain on settlement[343] Segment Assets (in thousands) | Segment | December 31, 2021 | December 31, 2020 | | :--------------------------------------- | :---------------- | :---------------- | | Refined Coal | $4,884 | $11,516 | | Advanced Purification Technologies | $83,516 | $80,877 | | Corporate | $97,036 | $54,278 | | Consolidated | $185,436 | $146,671 | Note 20 - Fair Value Measurements - The carrying amounts of most financial instruments (cash, receivables, payables) approximate their fair values due to short matu