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Item 7. Management’s Discussion and Analysis

2021-03-10 compared with 2020-03-16 · 351 added, 253 removed, 218 unchanged (73% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

We operate two segments:

Our RC segment is comprised of our equity ownership in Tinuum Group and Tinuum Services, both of which are unconsolidated entities in which we generate substantial earnings.

Tinuum Group provides reduction of mercury and NOx emissions at select coal-fired power generators through the production and sale of RC that qualifies for Section 45 tax credits under IRC Section 45.

We benefit from Tinuum Group's production and sale of RC, which generates tax credits, as well as its revenue from selling or leasing RC facilities to tax equity investors.

We also earn royalties for technologies that we license to Tinuum Group and are used at certain RC facilities to enhance combustion and reduced emissions of NOx and mercury from coal burned to generate electrical power.

Tinuum Services operates and maintains the RC facilities under operating and maintenance agreements with Tinuum Group and owners or lessees of the RC facilities.

Both Tinuum Group and Tinuum Services expect to significantly wind down their operations by the end of 2021 due to the expected expiration of the Section 45 tax credit period as of December 31, 2021.

As such, our earnings and distributions from our RC segment will substantially cease as of December 31, 2021.

Our APT segment is materially operated through a wholly-owned subsidiary, Carbon Solutions, which we acquired on December 7, 2018 (the "Carbon Solutions Acquisition").

We sell consumable products that utilize AC and chemical based technologies to a broad range of customers, including coal-fired utilities, industrials, water treatment plants, and other diverse markets through the customer supply agreement defined below.

Our primary products are comprised of AC, which is produced from lignite coal.

Our AC products include PAC and GAC.

Our proprietary technologies and associated product offerings provide purification solutions to enable our customers to reduce certain contaminants and pollutants to meet the challenges of existing and potential regulations.

Additionally, through Carbon Solutions, we also own an associated lignite mine that supplies the primary raw material for manufacturing our products.

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.

Additionally, discussion related to our reportable segments is included in Item 1 and Note 19 of the Consolidated Financial Statements, which are included in Item 8 of this Report.

We believe there are opportunities to continue to pursue diverse markets for our purification products outside of coal-fire power generation, including industrial applications and water.

The Supply Agreement with Cabot, as discussed below, will help our expansion of our AC products to those diverse end-markets and drive the Company’s post-Refined Coal future.

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:

In the RC segment, demand is driven primarily from investors who purchase or lease RC facilities that qualify under the Section 45 tax credit period, which is expected to expire no later than December 31, 2021.

Operating results in RC are affected by:

(1) the ability to sell, lease or operate RC facilities;

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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:

Earnings and distributions from our RC segment will substantially cease as of December 31, 2021 as a result the significant wind down of both Tinuum Group and Tinuum Services due to the expected expiration of the Section 45 tax credit period as of December 31, 2021.

In the APT segment, demand is driven primarily by consumables-based solutions for coal-fired power generation and other industrials, municipal water customers, and since September 30, 2020, demand from Cabot's customers through the Supply Agreement discussed below.

Operating results in APT has been influenced by:

(1) changes in our sales volumes;

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and (3) changes in coal-fired dispatch and electricity power generation sources.

Customer Supply Agreement

On September 30, 2020, we and Cabot entered into the Supply Agreement pursuant to which we agree to sell and deliver to Cabot, and Cabot agrees to purchase and accept from us, Furnace Products.

The term of the Supply Agreement is for 15 years with 10-year renewal terms that are automatic unless either party provides three years prior notice of intention not to renew before the end of any term.

In addition to the sale by us and purchase by Cabot of Furnace Products, we and Cabot have agreed to additional terms whereby Cabot will reimburse us for certain capital expenditures incurred by us that are necessary to manufacture the Furnace Products.

Reimbursements will be in the form of revenues earned from capital expenditures incurred that will benefit both us and Cabot (referred to as "Shared Capital") and capital expenditures incurred that will benefit Cabot exclusively (referred to as "Specific Capital").

We believe the Supply Agreement will provide material incremental volume and capture lower operating cost efficiencies of our manufacturing plant.

As these incremental volumes come on-line and after our existing inventory balances are sold, we anticipate an increase in gross margins.

Further, we expect the Supply Agreement will expand our activated carbon products to diverse end markets that are outside of coal-fired power generation.

Acquisition of Marshall Mine

Concurrently with the execution of the Supply Agreement, on September 30, 2020, we entered into the Mine Purchase Agreement from Cabot 100% of the membership interests in Marshall Mine, LLC (the "Marshall Mine Acquisition") for a nominal purchase price.

Marshall Mine, LLC owns a lignite mine located outside of Marshall, Texas (the "Marshall Mine").

We independently determined to immediately commence activities to shutter the Marshall Mine and will incur the associated reclamation costs.

In conjunction with the execution of the Supply Agreement and the Mine Purchase Agreement, on September 30, 2020, we entered into the Reclamation Contract with a third party that provides a capped cost, subject to certain contingencies, in the amount of approximately $19.7 million plus an obligation to pay certain direct costs of approximately $3.6 million (collectively, the "Reclamation Costs") over the estimated reclamation period of 10 years.

We are accounting for this obligation as an asset retirement obligation under U.S.

Under the terms of the Supply Agreement, Cabot is obligated to reimburse us for $10.2 million of Reclamation Costs (the "Reclamation Reimbursements"), which are payable semi-annually over 13 years and inclusive of interest.

As the owner of the Marshall Mine, we were required to post a surety bond to ensure performance of our reclamation activities in the amount of $30.0 million under the Surety Agreement.

For the obligations due under the Reclamation Contract, we were required to post collateral of $5.0 million dollars as of September 30, 2020 and to post an additional $5.0 million dollars as of March 31, 2021.

Settlement with Former Customer

On December 29, 2020, we and a former customer (the "Parties") reached a settlement (the "Settlement") on various litigation matters (the "Litigation Matters") that resulted in the former customer (the "Former Customer") agreeing to pay to us cash of $2.5 million (the "Settlement Amount"), which was received on January 27, 2021.

This payment was in exchange for full dissolution of all claims and counterclaims that the two Parties have asserted or could have asserted against each other in the Litigation Matters, or which have arisen or may arise against each other but are presently unknown, arising out of or related to the Litigation Matters and related to any other of the Parties’ business dealings, conduct and/or transactions through the date of the Settlement, including all claims for damages, fees, costs, sanctions, or any other amounts due or to become due in connection with the foregoing.

We applied the Settlement Amount cash proceeds to both an outstanding trade account receivable and note receivable due from the Former Customer and recognized the excess cash received as a gain from the Settlement of $1.1 million, which is included as a reduction of operating expenses for the year ended December 31, 2020, See further discussion under "Results of Operations" under this Item 7.

Impact of COVID-19

In March 2020, the WHO declared COVID-19 a global pandemic.

We are designated by CISA of the Department of Homeland Security as a critical infrastructure supplier to the energy sector.

Our operations have been deemed essential and, therefore, our facilities remain open and our employees employed.

We follow the COVID-19 guidelines from the Centers for Disease Control concerning the health and safety of our personnel, including remote working for those that have the ability to do so, sequestered employees at our plant and other heath safety measures.

Additionally, we have taken proactive and precautionary steps to ensure the safety of our employees, customers and suppliers, including frequent cleaning and disinfection of workspaces, property, plant and equipment, instituting social distancing measures and mandating remote working environments, where possible, for all employees.

These measures have resulted in an increase in our personnel costs, operational inefficiencies and the incurrence of incremental costs to allow manufacturing operations to continue;

while at the same time we have faced a general downturn in our sales and marketing efforts.

The duration of these measures is unknown, may be extended and additional measures may be imposed.

We cannot predict the long-term effects on our business, including our financial position or results of operations, if governmental restrictions or other such directives continue for a prolonged period of time and cause a material negative change in power generation demand, materially disrupt our supply chain, substantially increase our operating costs or limit our ability to serve existing customers and seek new customers.

In response to the COVID-19 outbreak, in March 2020, the federal government passed the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act").

The CARES Act provided, among other things, the deferral of payroll tax payments for all payroll taxes incurred through December 31, 2020 and created the Paycheck Protection Program ("PPP"), which is sponsored and administered by the SBA.

In June 2020, the Paycheck Protection Program Flexibility Act of 2020 (the "PPPFA") was signed into law and established the payment dates in the event that amounts borrowed under the PPP are not forgiven.

See further discussion below of the loan made to us under the PPP under the section "PPP Loan" under this Item.

The Company elected to defer payments of payroll taxes for the periods allowed under the CARES Act and will repay 50% by December 31, 2021 and 50% by December 31, 2022.

As of December 31, 2020, total payroll tax payments deferred under the CARES Act were $0.4 million.

For the year ended December 31, 2020, we incurred costs of $0.4 million related to sequestration of certain of our employees at our Red River plant.

These costs included hazard pay, lodging and meal expenses for 30 days.

Our customers may also be impacted by COVID-19 pandemic as the utilization of energy has changed.

We cannot predict the long-term impact on our customers and the subsequent impact on our business.

Components of Revenue, Expenses and Equity Method Investees

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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

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.

Revenues and cost of revenue

We sell AC and proprietary chemical blend technologies for purification of air and water contaminants and other industries.

Currently, our products mostly serve coal-fired utilities and other industrial boilers that allow the respective utilities to comply with the regulatory air emissions standards as well as water treatment plants to remove contaminants from the water.

Additionally, we sell AC to Cabot and its customers through the Supply Agreement.

Revenue is generally recorded upon delivery of our product.

License royalties, related party

We recognize license royalties under a licensing arrangement (the "M-45 License") of our M-45 TM and M-45-PC TM 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.

We recognize license royalties under the M-45 License, under our M-45 Technology, to Tinuum Group.

License royalties are based on a percentage of the per-ton, pre-tax margin, inclusive of depreciation expense and other allocable expenses, as defined in the M-45 License.

Because Section 45 tax credits from the production and sale of RC will likely not be available after 2021 and both Tinuum Group and Tinuum Services expect to significantly wind down their operations by the end of 2021, we do not expect to receive license royalties after 2021.

Other Operating Expenses

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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 .

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.

Depletion and accretion expense consists of depletion expense related to the depletion of mine development costs and the accretion of mine reclamation liabilities.

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.

Earnings from equity method investments represent our share of earnings (losses) related to our equity method investments.

We own a 42.5% equity interest and a 50% voting interest in Tinuum Group.

Our equity method earnings in Tinuum Group 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 are 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.

These benefits, if utilized, increase our consolidated net income as a result of a reduction in income tax expense.

We own both a 50% equity and voting interest in Tinuum Services, which operates and maintains RC facilities under operating and maintenance agreements.

The lessee/owner of an RC facility 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.

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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.

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A summary of the components of revenues and cost of revenue for the years ended December 31, 2020 and 2019 is as follows:

Years Ended December 31,

Years Ended December 31, Change

( Amounts in thousands except percentages )

2020 2019 ($) (%)

Consumables $ 48,122 $ 53,187 $ (5,065) (10) %

License royalties, related party 13,440 16,899 (3,459) (20) %

Other 15 — 15 *

Total revenues $ 61,577 $ 70,086 $ (8,509) (12) %

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Other cost of revenue, exclusive of depreciation and amortization (563) — (563) *

* Calculation not meaningful

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.

For the years ended December 31, 2020 and 2019, consumables revenue decreased year over year primarily due to less favorable price and product mix of approximately $7.6 million combined.

Offsetting these decreases was higher volume resulting in revenue of approximately $2.6 million.

However, for the quarterly period ended December 31, 2020, both volumes and revenue increased both sequentially and compared to the quarterly period ended December 31, 2019, primarily due to the Supply Agreement, which was executed on September 30, 2020.

Consumables revenue is affected by electricity demand, driven by seasonal weather and related power generation needs, as well as competitor prices related to alternative power generation sources such as natural gas.

According to data provided by the EIA, for the year ended December 31, 2020, power generation from coal-fired power dispatch was down approximately 19.0% compared to the corresponding period in 2019.

Additionally, there was a decrease in total power generation from all sources of approximately 4.0% in 2020 compared to the corresponding period in 2019.

Consumables cost of revenue was positively impacted for the year ended December 31, 2020 due to higher volumes driving lower per unit fixed costs.

However, we incurred additional expense from safety actions taken by the Company to provide for continued operation of our manufacturing facilities in response to COVID-19 of approximately $0.4 million.

For the year ended December 31, 2019, consumables cost of revenue was negatively impacted as a result of $5.0 million of costs recognized as a result of the step-up in inventory fair value recorded from the Carbon Solutions Acquisition.

For 2021, based on current market estimates and the expected benefits from the Supply Agreement, we believe that consumables revenue and volumes will be higher for 2021 compared to 2020.

In addition to the Supply Agreement, the most significant drivers related to this expected volume increase are expected higher natural gas prices and the expansion of energy generation sources related to natural gas and renewables.

For 2021, we expect to incur additional plant costs that were not incurred in 2020 for the planned plant turnaround occurring in 2021.

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.

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.

License royalties decreased in 2020 compared to 2019 primarily due to a reduction in the royalty rate per ton.

This decrease was primarily attributable to higher depreciation recognized of approximately $1.7 million on all royalty bearing RC facilities as a result of a reduction in their estimated useful lives as determined by Tinuum Group in the second half of 2019.

Further reducing the rate per ton was a decrease in net lease payments of approximately $1.3 million as a result of Tinuum Group restructuring RC facility contracted leases with its largest customer in the second half of 2019.

As a result of higher depreciation and lower lease payments, we expect that the lower royalty rate per ton will continue in 2021.

Offsetting the year over year decrease in license royalties from a decrease in the royalty rate per ton, there was an increase year over year in tons of RC produced from RC produced using the M-45 Technology under the M-45 License, which increased from 47.3 million tons in 2019 to 49.4 million tons in 2020.

Other cost of revenue

For the year ended December 31, 2020, we recognized a credit of $0.6 million to Other cost of revenue for the reversal of an allowance, originally recorded as of December 31, 2016, on a trade account receivable due from the Former Customer.

We recorded the reversal of this reserve based on our quarterly collectability review of financial assets that was performed as of December 31, 2020.

See further discussion below of the reversal of an allowance on a note receivable due from the Former Customer in this section under the caption "General and administrative."

Additional information related to revenue concentrations and contributions by class and reportable segment is included in the "Business Segments" section of this Item and in Note 13 and Note 19 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, 2020 and 2019 is as follows:

Years Ended December 31,

Years Ended December 31, Change

(in thousands, except percentages)

2020 2019 ($) (%)

Operating expenses:

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Depreciation, amortization, depletion and accretion 8,537 7,371 1,166 16 %

Impairment of long-lived assets 26,103 — 26,103 *

Gain on settlement (1,129) — (1,129) *

$ 57,945 $ 35,536 $ 22,409 63 %

* Calculation not meaningful

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.

Payroll and benefits expenses increased year over year primarily due to severance related costs of $1.4 million incurred in 2020 associated with the resignation of an executive officer, offset by a decrease in salaries related to our current headcount, which remained relatively consistent year over year.

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.

Legal and professional fees decreased year over year primarily due to decreased outsourced shared service costs, which included legal, general consulting and audit and accounting fees of approximately $2.8 million, and a reduction in outsourced IT costs specific to the completion of the integration of Carbon Solutions of $1.5 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.

General and administrative expenses increased year over year primarily due to an increase in product development expenses of approximately $0.8 million related to the Supply Agreement, an increase in rent and occupancy of approximately $0.6 million relating to property taxes and office rent, and an increase in costs incurred due to the sequestration of certain of our employees at our Red River plant of approximately $0.4 million.

Offsetting these increases was the reversal of an allowance on a note receivable from the Former Customer (See "Other cost of revenue" discussion of above under this section) of $0.4 million, which we reversed as part of our financial asset collectability review performed as of December 31, 2020.

See further discussion below in this section under the caption "Gain on settlement." Further reductions year over year included travel, as a preventative measure related to the COVID-19 pandemic, and recruiting fees.

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 .

Depreciation and amortization expense increased year over year primarily due to increased sales volumes in 2020 and lower absorption due to the drawdown of inventory, resulting in an increase of depreciation expense of $1.1 million.

Further, the addition of leasehold improvements at our corporate headquarters in 2020 and the addition of accretion expense related to Marshall Mine contributed approximately $0.7 million of depreciation and amortization expense in 2020.

Offsetting these increases was a decrease year over year in depreciation and amortization expense of approximately $0.6 million related to impaired property, plant and equipment assets as of June 30, 2020, which resulted in lower net book values of the impaired assets of June 30, 2020 and lower depreciation and amortization recorded in the second half of 2020.

Impairment of long-lived assets

As of June 30, 2020, we recorded an impairment charge of $26.1 million, which is included in the Statement of Operations for the year ended December 31, 2020 and was solely attributable to our APT segment.

This impairment charge was necessitated by an analysis of the carrying values of our APT segment's long-lived assets and certain other long-lived assets (the "Asset

Group"), which are comprised of our manufacturing plant and related assets and our lignite mine assets, to their respective fair values.

Gain on settlement

As noted above under this Item 7, for the year ended December 31, 2020, we recognized a gain of $1.1 million on the Settlement with the Former Customer.

Other Income (Expense), net

A summary of the components of our other income (expense), net for the years ended December 31, 2020 and 2019 is as follows:

Years Ended December 31,

Years Ended December 31, Change

(Amounts in thousands, except percentages)

2020 2019 ($) (%)

Other income (expense):

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Interest expense (3,920) (7,174) 3,254 (45) %

Other 132 427 (295) (69) %

Total other income $ 27,190 $ 62,429 $ (35,239) (56) %

Earnings in equity method investments

Earnings from equity method investments

The following table presents the equity method earnings by investee for the years ended December 31, 2020 and 2019:

Years Ended December 31,

Years Ended December 31, Change

(in thousands) 2020 2019 ($) (%)

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Earnings from Tinuum Services 6,582 8,896 (2,314) (26) %

Loss from other

Earnings (loss) from other — (6) 6 (100) %

Earnings from equity method investments $ 30,978 $ 69,176 $ (38,198) (55) %

* 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, 2020, we recognized $24.4 million in equity earnings from Tinuum Group, which was equal to our proportionate share of Tinuum Group's net income for the year.

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.

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.

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.

See further discussion of year over year changes in Earnings from Equity Investments in "Business Segments" under this Item.

Additional information related to equity method investments is included in Note 7 to the Consolidated Financial Statements included in Item 8 of this Report.

Tinuum Group's audited consolidated financial statements as of December 31, 2020 and 2019 and for the years then ended are included in Item 15 - "Exhibits and Financial Statement Schedules" ("Item 15") 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.

Historically, we have earned Section 45 tax credits that may be available for future benefit related to the production of RC from the operation of RC facilities 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." Future earned Section 45 tax credits for 2021 are expected to be consistent with 2020.

As of December 31, 2020, we had approximately $93.9 million in Section 45 tax carryforwards.

In the hypothetical event of an ownership change, as defined by IRC Section 382, utilization of general business credits ("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, 2020, as defined by IRC Section 382.

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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:

Interest expense decreased year over year by $3.3 million primarily due to a reduction in the coupon interest of $2.4 million related to senior term loan (the "Senior Term Loan"), as the principal balance was reduced from payments made of $24.0 million in 2020 and the weighted-average interest rate for 2019 compared to 2020 decreased from 7.1% to 5.8%.

Interest expense related to debt discount and debt issuance costs related to the Senior Term Loan also decreased by $0.3 million as a result of the decrease in the Senior Term Loan principal.

The remaining decrease in interest expense year over year related to lower interest expense ("Section 453A interest") in 2020 compared to 2019 related to IRS section 453A ("Section 453A"), which decreased by $0.7 million in 2020 year over year as a result of a decrease in the tax liability for the year ended December 31, 2020 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 used to calculate 453A interest:

As of December 31,

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Tax liability deferred on installment sales (1)

$ 10,653 $ 20,783

Interest rate 3.00 % 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 $59.8 million as of December 31, 2020).

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%.

We expect the tax liability deferred on installment sales to be minimal as of December 31, 2021.

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 .

For the year ended December 31, 2020, our reported income tax expense of $6.5 million differed from federal income tax benefit of $2.9 million, computed by applying the U.S.

statutory federal income tax rate (the "Federal Rate") and state income tax benefit of $0.4 million, primarily due to the increase in the valuation allowance on our deferred income tax assets of $9.1 million.

For the year ended December 31, 2019, our reported income tax expense of $12.0 million differed from income tax expense of $10.0 million, computed using the Federal Rate, primarily due to an increase in income tax expense from state income tax expense, net of federal benefit of $1.6 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.

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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 .

As of December 31, 2020, 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 $10.6 million of our net deferred tax assets.

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.

and (2) forecasts of future taxable income.

As of December 31, 2020 and 2019, we had a valuation allowance of $88.8 million and $79.6 million, respectively, on 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.

Our estimate of future taxable income is based on internal projections that consider historical performance, assumptions on future performance and external data.

If events are identified that affect our ability to utilize our deferred tax assets, or if additional deferred tax assets are generated, we update our analysis to determine if an increase to the valuation allowance is required.

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.

Conversely, better than expected results and continued positive results and trends could result in an decrease to the 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 18 of the Consolidated Financial Statements included in Item 8 of this Report.

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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.

These non-GAAP measures include Consolidated EBITDA, Consolidated Adjusted EBITDA, RC Segment EBITDA, RC Segment Adjusted EBITDA, APT Segment EBITDA and APT Segment Adjusted EBITDA.

We have included non-GAAP measures because management believes that they help to facilitate period to period comparisons of our operating results.

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.

Management uses these non-GAAP measures in evaluating the performance of our business.

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.

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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

depreciation, amortization, depletion, accretion, interest expense, net and income tax expense.

We define Consolidated Adjusted EBITDA as Consolidated EBITDA reduced by the non-cash impacts of equity earnings from equity method investments and gain on settlement, and increased by cash distributions from equity method investments, impairment of long-lived assets and amortization of upfront customer consideration that was recorded as a component of the Marshall Mine Acquisition ("Upfront Customer Consideration").

Because Consolidated Adjusted EBITDA omits certain non-cash items, we believe that the measure is less susceptible to variances that affect our operating performance.

We define APT Segment EBITDA Loss as APT Segment operating 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, accretion and interest expense, net.

We define APT Segment Adjusted EBITDA loss as APT Segment EBITDA loss reduced by gain on settlement and increased by impairment of long-lived assets and amortization of Upfront Customer Consideration.

We define RC Segment EBITDA as RC Segment operating 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, accretion and interest expense.

We define RC Segment Adjusted EBITDA as RC Segment EBITDA reduced by the non-cash impact of equity earnings from equity method investments and increased by cash distributions from equity method investments.

When used in conjunction with GAAP financial measures, we believe these non-GAAP measures are supplemental measures of operating performance that explain our operating performance for our period to period comparisons and against our competitors' performance.

Generally, we believe these non-GAAP measures are less susceptible to variances that affect our operating performance results.

With the exception of impairment on long-lived assets and gain on settlement, the adjustments to Consolidated Adjusted EBITDA and APT Segment Adjusted EBITDA in future periods are generally expected to be similar.

These non-GAAP measures have limitations as analytical tools, and should not be considered in isolation or as a substitute for analyzing our results as reported under GAAP.

Consolidated EBITDA and Consolidated Adjusted EBITDA

Year ended December 31,

Net income (1)

Net (loss) income (1)

$ (20,302) $ 35,537

Depreciation, amortization, depletion and accretion 8,537 7,371

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Income tax expense 6,511 11,999

Consolidated EBITDA

Consolidated EBITDA (loss) (1,461) 61,820

Cash distributions from equity method investees 62,441 73,888

Equity earnings (30,978) (69,176)

Impairment 26,103 —

Gain on settlement (1,129) —

Amortization of Upfront Customer Consideration 158 —

Consolidated Adjusted EBITDA $ 55,134 $ 66,532

(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").

As of December 31, 2020, we have two reportable segments, RC and APT.

The business segment measurements provided to and evaluated by our chief operating decision maker are computed in accordance with the principles listed below:

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• 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 .

• 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, Legal and professional fees, General and administrative, and Depreciation, amortization, depletion and accretion.

• RC segment operating income includes interest expense directly attributable to the RC segment.

The principal products and services of our segments are:

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 NO X 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.

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.

The principal products and services of our segments are described in Item 1 of this document.

The following table presents our operating segment results for the years ended December 31, 2020 and 2019:

Years Ended December 31,

Years Ended December 31, Change

(in thousands) 2020 2019 ($)

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License royalties, related party 13,440 16,899 (3,459)

Power Generation and Industrials:

44,418 86,075 (41,657)

Advanced Purification Technologies:

Consumables 48,122 53,187 (5,065)

Other 15 — 15

48,137 53,187 (5,050)

Total segment reporting revenues 92,555 139,262 (46,707)

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Earnings in equity method investments (30,978) (69,176) 38,198

Corporate and other

Total reported revenues $ 61,577 $ 70,086 $ (8,509)

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Refined Coal (1)

Power Generation and Industrials (2)

$ 42,689 $ 83,471 $ (40,782)

Advanced Purification Technologies (2)

(39,958) (13,600) (26,358)

Total segment operating income $ 2,731 $ 69,871 $ (67,140)

(1) Included in the RC segment operating income for the years ended December 31, 2020 and 2019 is 453A interest expense of $0.3 million and $1.0 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.

(2) I ncluded in the APT segment operating loss for the years ended December 31, 2020 and 2019 was $7.9 million and $7.2 million, respectively, of depreciation, amortization, depletion and accretion expenses on mine- and plant-related long-lived assets and liabilities.

Included in the APT segment operating loss for the year ended December 31, 2020 was an impairment charge of $26.1 million offset by gain on settlement of $1.1 million.

Included in the APT segment operating loss for the year ended December 31, 2019 was approximately $5.0 million of cost of revenue expense related to a step up in basis of the fair value of inventory and of depreciation, amortization.

A reconciliation of segment operating income to consolidated net income is included in Note 19 of the Consolidated Financial Statements included in Item 8 of this Report.

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Earnings from Tinuum Services 6,582 8,896

Loss from other

Earnings (loss) from other — (6)

Earnings from equity method investments $ 30,978 $ 69,176

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

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.

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.

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.

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.

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.

For 2020, equity earnings from Tinuum Group were positively impacted by the addition of two new RC facilities during the second half of 2019, three new RC facilities added during the year ended December 31, 2020 and the sale by Tinuum Group of its 49.9% remaining interest in an RC facility in the quarterly period ended September 30, 2020.

However, equity earnings from Tinuum Group for 2020 decreased from 2019 primarily from the point-in-time revenue recognition in 2019 of two new RC facilities and due to higher depreciation recognized of approximately $4.9 million in 2020 on all Tinuum Group RC facilities as

a result of a reduction in RC facilities estimated useful lives as determined by Tinuum Group during the second half of 2019.

Further contributing to the decrease in equity earnings for 2020 compared to 2019 was the restructuring of RC facility leases with Tinuum Group's largest customer in 2019, which decreased lease payments and equity earnings beginning in the second half of 2019, and the termination of two RC facility leases in the fourth quarter of 2019 for RC facilities located at two coal-fired utilities that were announced for closure in 2019.

Also, in the fourth quarter of 2020, Tinuum Group recorded an impairment charge of $3.0 million on certain of its assets located at RC facilities and a retention accrual related to the wind down of its operations by the end of 2021.

As a result of higher depreciation, lower lease payments and the termination of RC facilities' leases throughout 2021 due to the expiration of the Section 45 tax period applicable to those RC facilities' leases, we expect our earnings in Tinuum Group to decrease in 2021.

However, in 2021, and consistent with 2020, we expect that cash distributions will substantially exceed earnings.

RC earnings related to M-45 license royalties decreased from 2020 to 2019 as a result of reduction in the royalty rate per ton year over year offset by an increase in tonnage produced by RC facilities subject to the M-45 License.

Equity earnings from Tinuum Services decreased by $2.3 million in 2020 compared to 2019 primarily as a result of recording an impairment charge of $2.9 million for year ended December 31, 2020 as well as a reduction in tonnage for the RC facilities that Tinuum Services operated in 2020 compared to 2019.

As of December 31, 2020 and 2019, Tinuum Services provided operating and maintenance services to 22 and 19 RC facilities, respectively.

Tinuum Services derives earnings from both fixed-fee arrangements as well as fees that are tied to actual RC production, as determined by the specific RC facility operating and maintenance agreement.

Both Tinuum Group and Tinuum Services expect to significantly wind down their operations by the end of 2021 due to the planned expiration of the Section 45 tax credit period as of December 31, 2021, and the loss of equity earnings, distributions and M-45 Royalties beginning in 2022 will have a material adverse effect on our financial condition and consolidated operating results compared to historical periods.

Earnings in the RC segment for 2021 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.

As a result of higher depreciation and lower lease payments for 2021, as well as the expiration of the Section 45 tax program as of December 31, 2021, we expect our earnings in Tinuum Group to decrease in 2021.

However, in 2021, and consistent with 2020, cash distributions will substantially exceed earnings.

RC Segment EBITDA and Adjusted EBITDA

Year ended December 31,

(in thousands) 2020 2019

RC Segment operating income $ 42,689 $ 83,471

Depreciation, amortization, depletion and accretion 116 83

Interest expense 331 1,039

RC Segment EBITDA 43,136 84,593

Cash distributions from equity method investees 62,441 73,888

Equity earnings (30,978) (69,176)

RC Segment Adjusted EBITDA $ 74,599 $ 89,305

Advanced Purification Technologies

APT segment operating loss increased during the year ended December 31, 2020 compared to 2019 primarily due to the impairment charge of $26.1 million, a reduction in consumable revenue and associated margins and costs incurred related to COVID-19.

During the year ended December 31, 2020, Consumables revenue and margins also continued to be negatively impacted by low coal-fired power dispatch driven by power generation from sources other than coal and a decline in overall U.S.

power generation during 2020 of approximately 4.0%.

During the year ended December 31, 2020, we incurred costs of $0.4 million related to sequestration of certain of our employees at our Red River plant.

These costs included hazardous pay, lodging expense and other related costs for 60 days.

Based on current market estimates, we believe that the APT segment will continue 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.

PGI Segment EBITDA

However, in 2021 and beyond, we expect the Supply Agreement to play significant roles in diversifying our product mix into markets outside of power generation.

APT Segment EBITDA Loss and Adjusted EBITDA Loss

Year ended December 31,

(in thousands) 2020 2019

Segment operating loss (1)

APT Segment operating loss (1)

$ (39,958) $ (13,600)

Depreciation, amortization, depletion and accretion 7,870 7,206

Interest expense, net 402 368

Segment EBITDA loss

(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.

APT Segment EBITDA loss (31,686) (6,026)

Impairment 26,103 —

Gain on settlement (1,129) —

Amortization of Upfront Customer Consideration 158 —

APT Segment Adjusted EBITDA loss $ (6,554) $ (6,026)

(1) Segment operating loss for the year ended December 31, 2019 was inclusive of an adjustment of $5.0 million, which increased cost of revenue due to a step-up in basis of inventory acquired related to the Carbon Solutions Acquisition.

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;

Factors Affecting Our Liquidity

During 2020, our liquidity position was positively affected primarily from cash distributions from Tinuum Group and Tinuum Services, royalty payments from Tinuum Group, PPP Loan distributions and borrowing availability under our bank ("Lender") line of credit (the "Line of Credit").

As of December 31, 2020, our principal future sources of liquidity include:

• cash and cash equivalents;

• distributions from Tinuum Group and Tinuum Services;

• royalty payments from Tinuum Group;

operations of the PGI segment;

• operations of the APT segment;

• 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;

For the year ended December 31, 2020, our principal uses of liquidity included:

• our business operating expenses, including capital expenditures, reclamation costs, federal and state tax payments and cash severance payments,

• payment of debt principal and interest;

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.

• payment of dividends;

• repurchases of shares of common stock.

Tinuum Group and Tinuum Services Distributions

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(in thousands) 2020 2019

Tinuum Group $ 53,289 $ 65,238

Tinuum Services 9,152 8,650

Distributions from equity method investees $ 62,441 $ 73,888

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:

Cash distributions from Tinuum Group for 2020 decreased by $11.9 million compared to 2019 primarily due to reductions in lease payments received by Tinuum Group from its largest customer as a result of renegotiations of certain leases, which occurred in the second half of 2019 between Tinuum Group and this customer, and the shuttering of two coal-fired utilities in the fourth quarter of 2019 where two invested RC facilities were operating.

Future cash flows from Tinuum are expected to range from $70 to $90 million, and key drivers in achieving these future cash flows are based on the following:

• 23 invested facilities as of December 31, 2020 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.

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• 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 .

Both Tinuum Group and Tinuum Services expect to significantly wind down their operations by the end of 2021 due to the expected expiration of the Section 45 tax credit period as of December 31, 2021.

As such, our distributions from our RC segment will substantially cease as of December 31, 2021.

On April 20, 2020, we entered into the PPP Loan under the PPP, evidenced by a promissory note, with BOK providing for $3.3 million in proceeds, which was funded on April 21, 2020.

The PPP Loan matures April 21, 2022.

The PPP Loan principal may be forgiven subject to the terms of the PPP and approval by the SBA.

The interest rate on the PPP Loan is 1.00%.

The PPP Loan is unsecured and contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or BOK, or breaching the terms of the PPP Loan.

The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from us, or filing suit and obtaining judgment against us.

Under the PPPFA, as defined above, monthly payments of principal and interest commence on the later of 10 months following the "covered period" (as defined in the PPPFA) or the date that BOK notifies us that the SBA has notified BOK that all or a portion of the PPP Loan has not been forgiven.

In January 2021, we submitted an application to the SBA for forgiveness of the PPP Loan and we are awaiting the SBA's response on our application for forgiveness.

Accordingly, we have determined that any amounts due under the PPP Loan would commence in August 2021.

Our business has been classified as an essential business, and therefore we continue to operate on a modified basis to comply with governmental restrictions and public health authority guidelines.

In April 2020, we sequestered approximately 60 employees to continue to run our manufacturing plant and build-up inventory in order to supply our customers.

This resulted in additional costs as the sequestered employees received hazard pay.

We used proceeds from the PPP Loan to fund our payroll costs.

Restricted Cash

As of December 31, 2020, we had short-term restricted cash of $5.0 million as required under a minimum cash balance requirement of a Senior Term Loan covenant, and long-term restricted cash of $5.0 million as required under the Surety Agreement related to the Reclamation Contract.

Under the Surety Agreement, we are required to increase the restricted cash balance by $5.0 million as of March 31, 2021.

Senior Term Loan

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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 matures on December 7, 2021 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.

As of December 31, 2020, we have $16.0 million in outstanding principal which, per the contractual requirements, we expect to fully repay in 2021.

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."

(1) As of the end of each fiscal quarter, 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) 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.

As of December 31, 2020, our expected future net cash flows from the refined coal business are less than $100.0 million and we have no plans in 2021 to either declare cash dividends on our stock or repurchase shares of our common stock.

See also "Item 1A Risk Factors" of this Report - "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 .

In November 2018, our Board authorized us to purchase up to $20.0 million of our outstanding common stock under a stock repurchase program (the "Stock Repurchase Program"), which was to remain in effect until December 31, 2019 unless otherwise modified by the Board.

As of November 2019, $2.9 million remained outstanding related to Stock Repurchase Program.

In November 2019, the Board authorized an incremental $7.1 million to the Stock Repurchase Program and provided that it will remain in effect until all amounts are utilized or it is otherwise modified by the Board.

During the year ended December 31, 2020, we paid quarterly cash dividends to stockholders of $4.6 million, which was paid on March 10, 2020.

Line of Credit

As of December 31, 2020, 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 .

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 .

In September 2013, ADA, as borrower, ADES, as guarantor, and the Lender entered into the Line of Credit for an aggregate principal amount of $10.0 million that was secured by certain amounts due to the Company from certain Tinuum Group RC leases.

The Line of Credit has been amended 14 times from the period from December 2, 2013 through December 31, 2020, which included a reduction in the principal amount to $5.0 million in September 2018.

On September 29, 2020, ADA, ADES and the Lender entered into an amendment to the Line of Credit (the "Fourteenth Amendment"), which extended the maturity date of the Line of Credit to March 31, 2021.

In addition, the Fourteenth Amendment retained covenants from the prior amendments to the Line of Credit, which included ADA's ability to enter into the Senior Term Loan as a guarantor so long as the principal amount of the Senior Term Loan did not exceed $70.0 million and the revision of covenants that were consistent with the Senior Term Loan covenants, including maintaining a minimum cash balance of $5.0 million.

Cash, cash equivalents and restricted cash increased from $17.1 million as of December 31, 2019 to $35.9 million as of December 31, 2020, an increase of $18.9 million.

The following table summarizes our cash flows for the years ended December 31, 2020 and 2019, respectively:

Years Ended December 31,

(in thousands)

(in thousands) 2020 2019 Change

Cash provided by (used in):

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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 provided by operating activities for the year ended December 31, 2020 decreased by $7.8 million compared to the year ended December 31, 2019 and were negatively impacted primarily by the following:

(1) a decrease in Distributions from equity method investees, return on investment of $11.4 million;

(2) a decrease of $5.2 million in deferred income tax expense;

and (3) a reduction due to the Gain on settlement of $1.1 million recognized in 2020 .

Offsetting these decreases to operating cash flows was primarily a decrease in earnings from equity method investments of $38.2 million and Impairment of long-lived assets of $26.1 million recorded in 2020.

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 used in investing activities for the year ended December 31, 2020 decreased by $5.4 million compared to the year ended December 31, 2019 primarily due to a decrease in expenditures for mine development costs of $3.5 million.

Also contributing to the decrease in cash flows used in investing activities were decreases in cash flows used in investing activities for acquisition of property, plant, equipment and intangibles of $1.2 million and the final cash payment for the Carbon Solutions Acquisition of $0.7 million, which was made in 2019.

Cash flows from financing activities

Cash flows used in financing activities for the year ended December 31, 2020 were $27.7 million compared to cash flows provided by financing activities of $55.7 million for the year ended December 31, 2019.

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 .

This net decrease in cash flows used in financing activities was primarily due a decrease in dividends paid and shares repurchased of $13.3 million and $5.6 million, respectively, in an effort to preserve cash due to uncertainties arising from the COVID-19 pandemic in 2020.

Also contributing to the decrease were lower principal payments on the Senior Term Loan of $6.0 million and $3.3 million of cash proceeds in 2020 from the PPP Loan .

Liquidity Outlook

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, includes 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 APT consumables, including expanding our overall AC business into additional adjacent markets.

Our liquidity was negatively impacted from COVID-19 due to increased operating losses in our APT segment from higher operating costs as a result of measures taken to support our ability to deliver as a critical infrastructure business, primarily from sequestration efforts and "hazard pay," which is a premium on wages, for a substantial number of our employees, and overall plant operating inefficiencies.

However, in April 2020, we took steps to enhance our short-term liquidity through the PPP Loan as discussed above under this Item.

In 2021, our primary source of liquidity is expected to be distributions from Tinuum Group and Tinuum Services.

These distributions in 2021 will provide sufficient cash on hand to fund operations in 2021 and 2022.

For 2021, we expect to spend $9.5 million in capital expenditures compared to $7.1 million incurred in 2020.

This increase is primarily the result of product specific capital related to the Supply Agreement and routine scheduled maintenance outages planned for 2021.

Due to the expiration of the Section 45 tax period as of December 31, 2021 and the resultant wind down of Tinuum Group's and Tinuum Services' operations by the end of 2021, distributions from Tinuum Group will no longer be a source of liquidity after 2021.

As we look to 2022 and beyond, our primary source of liquidity is expected to be through our ongoing operations from our APT segment.

We believe the Supply Agreement will provide material incremental volume and capture lower operating cost efficiencies of our Red River plant, providing additional sources of operating cash flows in the future.

Full and partial reimbursements on capital expenditures from Cabot will help limit our uses of investing cash flows.

Further, we intend to fund the remaining portion of the Reclamation Costs from cash on hand as well as cash generated from the Supply Agreement.

In 2022 and beyond, our capital expenditures are expected to average approximately $5.0 million.

Contractual Obligations

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Payment Due by Period

(in thousands)

Less than 1 year

After 5 years

(in thousands) Total Less than 1 year 1-3 years 4-5 years After 5 years

Senior Term Note (1)

$ 16,000 $ 16,000 $ — $ — $ —

Finance lease obligations 6,344 1,859 1,988 2,497 —

Operating lease obligations 3,119 1,994 1,125 — —

Purchase obligations (2)

(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.

Reclamation liability, Marshall Mine (2)

20,281 10,257 8,122 1,109 793

$ 45,744 $ 30,110 $ 11,235 $ 3,606 $ 793

(1) Includes outstanding principal amounts due through the maturity date of the Senior Term Loan.

(2) Includes payments due under a capped fee contract with a third-party mining operator for reclamation of the Marshal Mine (the "Marshall Mine ARO").

Payments on this contract are due through approximately 2031.

Reclamation costs related to the Marshall Mine ARO are based on a stated fee by month structure, based on the initial estimate of the total costs of reclamation, which provides for certain contingencies that could increase or decrease the reclamation fee over time.

The timing of payments may vary, and the Company accounts for these timing differences in valuing the reclamation on a quarterly basis.

As well, the Company accounts for changes in actual reclamation costs on a quarterly basis.

The table above excludes obligations related to 453A interest payments, which are variable due to annual changes in the statutory rate established by the IRS and changes in Tinuum Group's deferred tax liabilities associated with taxes that have been deferred under the installment method for sales or leases of certain of Tinuum Group's RC facilities.

We do not expect that our obligations for 453A interest will be material for 2021.

During 2021, Tinuum Group will be likely closing RC facilities commensurate with the expiration of the Section 45 tax credit period, which expires 10 years after a respective facility was in service and eligible to generate Section 45 tax credits.

As a result, Tinuum Group's composite deferred tax liability will decline through 2021 and our 453A interest payments will also decline in proportion to the decrease in Tinuum Group's deferred tax liability.

The table above also excludes our asset retirement obligation ("ARO") related to reclamation of the Five Forks Mine (the "Five Forks ARO").

As of December 31, 2020, our consolidated balance sheet reflects a liability of $3.3 million for the Five Forks ARO.

The Five Forks Mine ARO was recorded at fair value.

The timing and amount of payments to satisfy the Five Forks ARO are uncertain and are based on numerous factors including, but not limited to, the Five Forks Mine closure date.

We had no outstanding letters of credit as of December 31, 2020.

Off-Balance Sheet Arrangements

During 2019 and 2018 , we did not engage in any off-balance sheet financing.

As of December 31, 2020, we had outstanding surety bonds of $36.7 million related to performance requirements under reclamation contracts associated with both the Five Forks Mine and the Marshall Mine.

As of December 31, 2020, we had restricted cash of $5.0 million securing the Surety Agreement and will be required to post an additional $5.0 million of restricted cash on March 31, 2021.

We expect that the obligations secured by these surety bonds will be performed in the ordinary course of business and in accordance with the applicable contractual terms.

To the extent that the obligations are performed, the related surety bonds should be released, and we should not have any continuing obligations.

However, in the event any surety bond is called, our indemnity obligations could require us to reimburse the issuer of the surety bond.

Critical Accounting Policies and Estimates

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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

Business Combinations, including asset acquisitions

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.

This also includes accounting for asset acquisitions.

The purchase price allocation process requires us to make significant estimates and assumptions with respect to assets acquired and liabilities assumed.

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:

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• valuation methods and discount rates used in estimating the values of the assets acquired and liabilities assumed.

In regard to the Marshall Mine Acquisition, which was accounted for as an asset acquisition, we recorded the fair value of assumed assets, which included property, plant and equipment and spare parts and assumed liabilities, which included accrued liabilities.

In addition, we recorded assets including, Upfront Customer Consideration and the Cabot Receivable, and liability of Marshall Mine ARO.

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.

An impairment loss is measured and recorded for long-lived assets and intangibles based on the excess of their carrying amounts over their estimated fair values.

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.

Asset Retirement Obligations

Accounting for AROs requires management to make estimates of future costs unique to a specific mining operation that 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.

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.

Five Forks Mine ARO - Reclamation costs related to the Five Forks Mine ARO 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.

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.

Reclamation obligations are based on the timing of estimated spending for an existing environmental disturbance.

We review, on at least an annual basis, the Five Forks Mine ARO.

Marshall Mine ARO - Reclamation costs related to the Marshall Mine are based on a capped fee structure, based on the initial estimate of the total costs of reclamation, which provides for certain contingencies that could increase or decrease the reclamation fee based on the reclamation agreement executed between us and the Marshall Mine operator.

The timing of payments may vary, and the Company accounts for these timing differences in valuing the reclamation on a quarterly basis.

As well, the Company accounts for changes in actual reclamation costs on a quarterly basis.

We account for income taxes as required by U.S.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis