Arq, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Advanced Emissions Solutions, Inc. Index to Financial Statements Advanced Emissions Solutions, Inc. Consolidated Financial Statements: Report of Independent Registered Public Accounting Firm (Moss Adam LLP, Denver, Colorado, PCAOB ID: 659 ) 47 Consolidated Balance Sheets as of December 31, 2022 and 2021 48 Consolidated Statements of Operations for the years ended December 31, 2022 and 2021 49 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2022 and 2021 50 Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021 51 Notes to Consolidated Financial Statements 53 46 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Advanced Emissions Solutions, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Advanced Emissions Solutions, Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022 and 2021, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2023 expressed an unqualified opinion on the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ Moss Adams LLP Denver, Colorado March 8, 2023 We have served as the Company’s auditor since 2017. 47 Advanced Emissions Solutions, Inc. and Subsidiaries Consolidated Balance Sheets As of December 31, (in thousands, except share data) 2022 2021 ASSETS Current assets: Cash $ 66,432 $ 78,753 Receivables, net 13,864 12,622 Receivables, related party — 2,481 Inventories, net 17,828 7,850 Prepaid expenses and other current assets 7,538 6,661 Total current assets 105,662 108,367 Restricted cash, long-term 10,000 10,027 Property, plant and equipment, net of accumulated depreciation of $ 11,897 and $ 7,684 , respectively 34,855 30,171 Other long-term assets, net 30,647 36,871 Total Assets $ 181,164 $ 185,436 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 16,108 $ 16,486 Current portion of long-term debt 1,131 1,011 Other current liabilities 6,645 5,124 Total current liabilities 23,884 22,621 Long-term debt, net of current portion 3,450 3,152 Other long-term liabilities 13,851 12,362 Total Liabilities 41,185 38,135 Commitments and contingencies (Note 7) Stockholders’ equity: Preferred stock: par value of $ .001 per share, 50,000,000 shares authorized, none outstanding — — Common stock: par value of $ .001 per share, 100,000,000 shares authorized, 23,788,319 and 23,460,212 shares issued and 19,170,173 and 18,842,066 shares outstanding at December 31, 2022 and 2021, respectively 24 23 Treasury stock, at cost: 4,618,146 and 4,618,146 shares as of December 31, 2022 and 2021, respectively ( 47,692 ) ( 47,692 ) Additional paid-in capital 103,698 102,106 Retained earnings 83,949 92,864 Total stockholders’ equity 139,979 147,301 Total Liabilities and Stockholders’ equity $ 181,164 $ 185,436 See Notes to the Consolidated Financial Statements. 48 Advanced Emissions Solutions, Inc. and Subsidiaries Consolidated Statements of Operations Years Ended December 31, (in thousands, except per share data) 2022 2021 Revenues: Consumables $ 102,987 $ 85,882 License royalties, related party — 14,368 Other — 44 Total revenues 102,987 100,294 Operating expenses: Consumables cost of revenues, exclusive of depreciation and amortization 80,465 65,576 Payroll and benefits 10,540 11,315 Legal and professional fees 9,455 6,260 General and administrative 8,145 7,060 Depreciation, amortization, depletion and accretion 6,416 7,933 Loss (gain) on change in estimate, asset retirement obligation 34 ( 2,702 ) Total operating expenses 115,055 95,442 Operating (loss) income ( 12,068 ) 4,852 Other income (expense): Earnings from equity method investments 3,541 68,726 Gain on extinguishment of debt — 3,345 Interest expense ( 336 ) ( 1,490 ) Other 155 640 Total other income 3,360 71,221 (Loss) income before income tax expense ( 8,708 ) 76,073 Income tax expense 209 15,672 Net (loss) income $ ( 8,917 ) $ 60,401 (Loss) earnings per common share (Note 1): Basic $ ( 0.48 ) $ 3.31 Diluted $ ( 0.48 ) $ 3.27 Weighted-average number of common shares outstanding: Basic 18,453 18,258 Diluted 18,453 18,461 See Notes to the Consolidated Financial Statements. 49 Advanced Emissions Solutions, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity Common Stock Treasury Stock (in thousands, except share data) Shares Amount Shares Amount Additional Paid-in Capital Retained Earnings/(Accumulated Deficit) Total Stockholders’ Equity Balances, January 1, 2021 23,141,284 $ 23 ( 4,618,146 ) $ ( 47,692 ) $ 100,425 $ 32,454 $ 85,210 Stock-based compensation 364,657 — — — 1,927 — 1,927 Repurchase of common shares to satisfy tax withholdings ( 45,729 ) — — — ( 246 ) — ( 246 ) Accrued dividends cancelled on common stock — — — — — 9 9 Net income — — — — — 60,401 60,401 Balances, December 31, 2021 23,460,212 $ 23 ( 4,618,146 ) $ ( 47,692 ) $ 102,106 $ 92,864 $ 147,301 Stock-based compensation 389,312 1 — — 1,980 — 1,981 Repurchase of common shares to satisfy tax withholdings ( 61,205 ) — — — ( 388 ) — ( 388 ) Accrued dividends cancelled on common stock — — — — — 2 2 Net loss — — — — — ( 8,917 ) ( 8,917 ) Balances, December 31, 2022 23,788,319 $ 24 ( 4,618,146 ) $ ( 47,692 ) $ 103,698 $ 83,949 $ 139,979 See Notes to the Consolidated Financial Statements. 50 Advanced Emissions Solutions, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, (in thousands) 2022 2021 Cash flows from operating activities Net (loss) income $ ( 8,917 ) $ 60,401 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation, amortization, depletion and accretion 6,416 7,933 Earnings from equity method investments ( 3,541 ) ( 68,726 ) Operating lease expense 2,709 2,038 Stock-based compensation expense 1,981 1,927 Loss (gain) on change in estimate, asset retirement obligation 34 ( 2,702 ) Deferred income tax expense — 10,604 Amortization of debt discount and debt issuance costs — 945 Gain on extinguishment of debt — ( 3,345 ) Other non-cash items, net 496 ( 209 ) Changes in operating assets and liabilities: Receivables, net ( 1,312 ) 540 Related party receivables 2,481 972 Prepaid expenses and other current assets ( 876 ) ( 2,064 ) Inventories, net ( 9,686 ) 1,394 Other long-term assets, net 245 ( 4,270 ) Accounts payable and accrued expenses ( 911 ) 5,197 Other current liabilities 1,008 ( 8,279 ) Operating lease liabilities 1,521 3,344 Other long-term liabilities ( 6 ) ( 2,645 ) Distributions from equity method investees, return on investment 2,297 22,944 Net cash (used in) provided by operating activities $ ( 6,061 ) $ 25,999 51 Years Ended December 31, (in thousands) 2022 2021 Cash flows from investing activities Distributions from equity method investees in excess of cumulative earnings $ 3,636 $ 51,082 Acquisition of property, equipment and intangible assets, net ( 8,914 ) ( 6,201 ) Mine development costs ( 583 ) ( 1,398 ) Proceeds from sale of property and equipment 1,253 895 Net cash (used in) provided by investing activities ( 4,608 ) 44,378 Cash flows from financing activities Principal payments on term loan — ( 16,000 ) Principal payments on finance lease obligations ( 1,246 ) ( 1,190 ) Repurchase of shares to satisfy tax withholdings ( 388 ) ( 246 ) Dividends paid ( 45 ) ( 93 ) Net cash used in financing activities ( 1,679 ) ( 17,529 ) (Decrease) increase in Cash and Restricted Cash ( 12,348 ) 52,848 Cash and Restricted Cash, beginning of year 88,780 35,932 Cash and Restricted Cash, end of year $ 76,432 $ 88,780 Supplemental disclosure of cash flow information: Cash paid for interest $ 334 $ 524 Cash paid for income taxes $ 3 $ 8,882 Supplemental disclosure of non-cash investing and financing activities: Acquisition of property and equipment under finance lease $ 1,641 $ — Change in accrued purchases for property and equipment $ 532 $ 183 Change in asset retirement obligation $ — $ 121 See Notes to the Consolidated Financial Statements. 52 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 1 - Summary of Operations and Significant Accounting Policies Nature of Operations Advanced Emissions Solutions, Inc. ("ADES" or the "Company") is a Delaware corporation with its principal office located in Greenwood Village, Colorado and manufacturing, mining and logistic operations located in Louisiana. The Company is principally engaged in the sale of consumable air and water treatment options including activated carbon ("AC") and chemical technologies. The Company's proprietary technologies in the advanced purification technologies ("APT") market enable customers to reduce air and water contaminants, including mercury and other pollutants, to maximize utilization levels and to improve operating efficiencies to meet the challenges of existing and pending air quality and water regulations. The Company manufactures and sells AC and other chemicals used to capture and remove contaminants for coal-fired power, industrial and water treatment markets. The Company also owns an associated lignite mine (the "Five Forks Mine") which supplies the primary raw material for manufacturing AC. Through December 31, 2021, the Company generated substantial earnings from its equity ownership in Tinuum Group, LLC ("Tinuum Group") and Tinuum Services, LLC ("Tinuum Services"), both of which are unconsolidated entities. Both Tinuum Group and Tinuum Services ceased material operations effective December 31, 2021 as a result of the expiration of a tax credit program under Internal Revenue Code Section 45 - Production Tax Credit (the "Section 45 Tax Credit Program"). Tinuum Group provided reduction of mercury and nitrogen oxide ("NOx") emissions at select coal-fired power generators through the production and sale of refined coal ("RC") that qualified for tax credits under the Section 45 Tax Credit Program ("Section 45 tax credits"). The Company also earned royalties for technologies which were licensed to Tinuum Group and used at certain RC facilities to enhance combustion and reduce emissions of NOx and mercury from coal burned to generate electrical power. Tinuum Services operated and maintained the RC facilities under operating and maintenance agreements with Tinuum Group and owners or lessees of the RC facilities. Presently, both Tinuum Group and Tinuum Services continue to wind-down their operations. Principles of Consolidation The Consolidated Financial Statements include accounts of wholly-owned subsidiaries and variable interest entities ("VIEs") in which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. All investments in partially owned entities for which the Company has greater than 20% ownership are accounted for using the equity method based on the legal form of the Company's ownership percentage and are included in the Other long-term assets, net line item in the Consolidated Balance Sheets. As of December 31, 2022, the Company holds equity interests of 42.5 % and 50.0 % in Tinuum Group and Tinuum Services, respectively. Cash and restricted cash Cash consists of cash on hand and bank deposits. Restricted cash is comprised of posted cash collateral required under a surety bond contract related to the Five Forks Mine and the Company's mine located at Marshall, Texas. Concentration of credit risk As of December 31, 2022, the Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents. The Company holds cash and cash equivalents at two financial institutions as of December 31, 2022. If those institutions were unable to perform their obligations, the Company would be at risk regarding the amount of its cash balance in excess of the federal deposit insurance corporation limits ($ 250 thousand). Fair value measurements The carrying amounts of our cash, restricted cash, accounts receivable, accounts payable and other current liabilities approximate fair value as recorded due to the short-term nature of these instruments. 53 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements Receivables, net Receivables, net are recorded at net realizable value, which includes an appropriate allowance for estimated uncollectible amounts to reflect any loss anticipated on the receivables. Increases and decreases in the allowance for doubtful accounts are established based upon changes in the credit quality of receivables and are included as a component of the General and administrative line item in the Consolidated Statements of Operations. The allowance for doubtful accounts is based on historical experience, general economic conditions and the credit quality of specific accounts and was no t material as of December 31, 2022 and 2021. Inventories, net Inventories, net are stated at the lower of average cost or net realizable value and consist principally of raw materials and finished goods related to the Company's AC and chemical products. The cost of inventory is determined using the average cost method. Inventories are periodically reviewed for both potential obsolescence and potential declines in anticipated selling prices. In this review, the Company makes assumptions about the future demand for and market value of the inventory and estimates the amount of any obsolete, unmarketable, slow moving or overvalued inventory. If applicable, the Company will write down the value of inventories by an amount equal to the difference between the cost of the inventory and its estimated net realizable value. Additional details regarding Inventory balances are included in Note 5. Intangible Assets Intangible assets consist of patents, licensed technology, customer relationships, developed technologies and trade names. The Company has developed technologies resulting in patents being granted by the U.S. Patent and Trademark Office or other regulatory offices. Legal costs associated with securing the patent are capitalized and amortized over the legal or useful life beginning on the patent filing date. The following table details the components of the Company's intangible assets: As of December 31, 2022 2021 (in thousands, except years) Weighted Average Remaining Amortization Period (in years) Cost Net of Accumulated Amortization Cost Net of Accumulated Amortization Customer relationships 0.9 $ 835 $ 226 $ 835 $ 470 Patents 11.3 1,490 456 1,454 426 Developed technology 0.9 607 165 607 341 Total $ 2,932 $ 847 $ 2,896 $ 1,237 Included in the Consolidated Statements of Operations is amortization expense related to intangible assets of $ 0.5 million and $ 0.9 million for the years ended December 31, 2022 and 2021, respectively. The estimated future amortization expense for existing intangible assets as of December 31, 2022 is expected to be $ 0.4 million for the year ended December 31, 2023 and less than $ 0.1 million for each of the four succeeding fiscal years. Investments The investments in entities in which the Company does not have a controlling interest (financial or operating), but where it has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method of accounting. Whether or not the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including, among others, representation on the investee company’s board of directors and the Company's ownership level. Under the equity method of accounting, an investee company’s financial statements are not consolidated in the Company’s Consolidated Balance Sheets and Consolidated Statements of Operations; however, the Company’s share of the earnings or losses of the investee is reported in the "Earnings from equity method investments" line item in the Consolidated 54 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements Statements of Operations, and the Company’s carrying value in an equity method investee is reported in the "Other long-term assets, net" line in the Consolidated Balance Sheets. The Company recognizes equity earnings (loss) from equity method investments based on it percentage ownership in the investee. The Company recognizes distributions received in excess of the carrying value of an equity method investment as equity method earnings in the period the distributions occur to the extent that the Company has not guaranteed any obligations of the investee or is not contractually required to provide additional funding to the investee. Subsequent earnings from investees where the Company has recognized earnings from distributions in excess of the carrying value of the equity method investment are recognized for the excess of cumulative earnings over previously recognized earnings from distributions. Additionally, when the Company's carrying value in an equity method investment is zero, and the Company has not guaranteed any obligations of the investee or is not required to provide additional funding to the investee, the Company will not recognize its share of any reported losses by the investee until future earnings are generated to offset previously unrecognized losses. Therefore, equity income (loss) reported in the Company's Consolidated Statements of Operations for certain equity method investees may differ from a mathematical calculation of net income or loss attributable to its equity interest based on the percentage ownership of the Company's equity interest and the net income or loss attributable to equity owners as shown in the investee's statements of operations. Distributions from equity method investees are reported in the Consolidated Statements of Cash Flows as "return on investment" in Operating cash flows until such time as the carrying value in an equity method investee is reduced to zero. Thereafter, such distributions are reported as "distributions in excess of cumulative earnings" in Investing cash flows. See Note 10 for additional information regarding the Company's equity method investments. Investments in partially-owned subsidiaries for which the Company has less-than-20% ownership are accounted for in accordance with accounting guidance applicable to equity investments that do not qualify for the equity method of accounting. The Company evaluates these types of investments for changes in fair value and, if there is change, recognizes the change in the Consolidated Statement of Operations. If no such events or changes in circumstances have occurred related to these types of investments, the fair value is estimated only if practicable to do so. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation and includes leasehold improvements. Depreciation on assets is computed using the straight-line method over the lesser of the estimated useful lives of the related assets or the lease term (ranging from 2 to 31 years). Maintenance and repairs that do not extend the useful life of the respective asset are charged to Operating expenses as incurred. When assets are retired, or otherwise disposed of, the property accounts are relieved of costs and accumulated depreciation and any resulting gain or loss is credited or charged to income. The Company performs an evaluation of the recoverability of the carrying value of property, plant and equipment to determine if facts and circumstances indicate that their carrying values may be impaired. Amortization of finance leased assets is included in depreciation expense and is calculated using the straight-line method over the term of the lease. Leases The Company records a right of use ("ROU") asset and related liability under a contract or part of a contract when it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of an identified asset occurs when an entity has both the right to obtain substantially all of the economic benefits from the use of an identified asset and the right to direct the use of that identified asset. The determination of whether a contract contains a lease may require significant assumptions and judgments. For all classes of underlying assets, the Company does not separate nonlease components from lease components and accounts for each separate lease component and the nonlease components associated with that lease component as a single lease component. The Company records lease liabilities and related ROU assets for all leases that have a term of greater than one year. For short-term leases (leases with terms of less than one year), the Company expenses lease payments on a straight-line basis over the lease term. 55 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements Variable lease payments represent payments made by a lessee for the right to use an underlying asset that vary because of changes in facts or circumstances occurring after the commencement date of a lease other than the passage of time. Variable lease payments that are based on an index or rate, calculated by using the index or rate that exists on the lease commencement date, are included in the measurement of a lease liability. Certain of the Company’s operating leases for office facilities contain variable lease components that are not based on an index or rate, and the Company recognizes these payments as variable lease expense in the period in which the obligation for those payments is incurred. The Company calculates lease liabilities based on the present value of lease payments discounted by the rate implicit in the lease or, if not readily determinable, the Company’s incremental borrowing rate. Finance lease liabilities are subsequently measured by increasing the carrying amount to reflect interest expense on the finance lease liability and reducing the carrying amount of the lease liability to reflect lease payments made during the period. Interest on finance lease liabilities is determined in each period during the lease term as the amount that produces a constant periodic discount rate on the remaining balance of the lease liability. ROU assets under finance leases are amortized over the remaining lease term on a straight-line basis. Interest expense related to finance lease liabilities and amortization of ROU assets under finance leases are included in the "Interest expense" and "Depreciation, amortization, depletion and accretion" line items, respectively, in the Consolidated Statements of Operations. Operating lease liabilities are subsequently measured at the present value of the lease payments not yet paid, discounted using the discount rate for the lease established at the inception date of the lease. ROU assets under operating leases are subsequently measured at the amounts of the related operating lease liability, adjusted for, as applicable, prepaid or accrued lease payments, the remaining balance of any lease incentives received, unamortized initial direct costs and impairment. Lease expense from operating leases is recognized as a single lease cost over the remaining lease term on a straight-line basis. Variable lease payments not included in operating lease liabilities are recognized as expense in the period in which the obligation for those payments is incurred. Lease expense from operating leases is included in the "General and administrative" and "Consumables Cost of revenues, excluding depreciation and amortization" line items in the Consolidated Statements of Operations. Other Assets Mine Development Costs Mine development costs are related to the Five Forks Mine and are stated at cost less accumulated depletion and include acquisition costs, the cost of other development work and mitigation costs. Costs are amortized over the estimated life of the related mine reserves, which as of December 31, 2022 is estimated to be 12 years. The Company performs an evaluation of the recoverability of the carrying value of mine development costs to determine if facts and circumstances indicate that their carrying value may be impaired and if any adjustment is warranted. Mine development costs are reported in the "Other long-term assets, net" line item in the Consolidated Balance Sheets. Spare Parts Spare parts include critical spares required to support plant operations. Parts and supply costs are determined using the lower of cost or estimated replacement cost. Parts are recorded as maintenance expenses or capitalized in the period in which they are consumed or put into use. Spare parts are reported in the "Other long-term assets, net" line item in the Consolidated Balance Sheets. Revenue Recognition The Company recognizes revenue from a contract with a customer when a performance obligation under the terms of a contract with a customer is satisfied, which is when the customer controls the promised goods or services that are transferred in satisfaction of the performance obligation. Revenue is measured as the amount of consideration that is expected to be received in exchange for transferring goods or providing services, and the transaction price is generally fixed and generally does not contain variable or noncash consideration. In addition, the Company’s contracts with customers generally do not contain customer refund or return provisions or other similar obligations. Transfer of control and satisfaction of performance obligations are further discussed in each of the revenue components listed below. The Company uses estimates and judgments in determining the nature and timing of satisfaction of performance obligations, the standalone selling price ("SSP") of performance obligations and the allocation of the transaction price to multiple performance obligations, if any. The Company’s revenue component is Consumables sales, but for 2021 also included License royalties. 56 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements Consumables The Company is principally engaged in the sale of consumable products that utilize AC and chemical-based technologies to a broad range of customers, including coal-fired utilities, water treatment plants, and other diverse markets. The Company's proprietary technologies and associated product offerings provide purification solutions to enable our customers to reduce certain contaminants and pollutants and thus maximize utilization levels and improve operating efficiencies to meet the challenges of existing and potential regulations. The sale of consumable products is comprised of a single performance obligation and is recognized at the point in time when control transfers and the Company's obligation has been fulfilled, which is when the product is shipped or delivered to a customer. Performance obligations for the sale of consumable products do not extend beyond one year. The Company performs shipping and handling activities through the use of third-party shippers and such activities occur prior to a customer obtaining control of goods. As such, the Company accounts for these activities as fulfillment activities and not as separate performance obligations. Shipping and handling costs incurred by the Company in delivering products to customers are billed to customers and are included in the transaction price and included in the "Revenues - Consumables" line item in the Consolidated Statements of Operations. Costs for shipping and handling activities incurred by the Company are included in the "Consumables Cost of revenues, excluding depreciation and amortization" line item in the Consolidated Statements of Operations. License royalties earned from Tinuum Group Through December 2021, the Company generated revenues from royalties ("M-45 Royalties") earned under a licensing arrangement ("M-45 License") of its M-45 TM and M-45-PC TM emissions control technologies ("M-45 Technology") between the Company and Tinuum Group, a related party. The Company recognized M-45 Royalties at a point in time based on the use of the M-45 Technology at certain RC facilities (the "M-45 Facilities") or through Tinuum Group’s use of licensed technology for rates in excess of amounts allowed for RC application. The amount of M-45 Royalties recognized was generally based on a percentage of pre-tax margins (as defined in the M-45 License) of the M-45 Facilities. License royalties payable to Tinuum Group In December 2022, the Company and Tinuum Group entered into an agreement (the "Tinuum Group Royalty Agreement") whereby the Company pays Tinuum Group a royalty (the "Tinuum Group Royalty") for certain of the Company's sales of its M-Prove TM products after the expiration of the Section 45 Tax Credit Program (beginning January 1, 2022) to certain of the M-45 Facilities. The Tinuum Group Royalty is calculated based on "Net Profit" (as defined in the Tinuum Royalty Agreement) on the Company's sales of M-Prove TM product to certain of the M-45 Facilities. The Tinuum Group Royalty Agreement is for an initial term of five years with automatic renewals of five years unless the Company and Tinuum Group agree to terminate it. For the year ended December 31, 2022, the Company recognized $ 0.8 million of Tinuum Group Royalties, which are included in the "Consumables cost of revenues, excluding depreciation and amortization" line item in the Consolidated Statement of Operations. Practical Expedients and Exemptions The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. Sales and other taxes that are collected concurrently with revenue-producing activities are excluded from revenue. The Company generally expenses sales commissions when incurred, as the amortization period of the asset that the Company would have recognized is one year or less. These costs are recorded in sales and marketing expenses in the "General and administrative" line item in the Consolidated Statements of Operations. Consumables Cost of Revenues Consumables cost of revenues includes all labor, fringe benefits, subcontract labor, additive and coal costs, materials, equipment, supplies, travel costs and any other costs and expenses directly related to the Company’s production of revenues. Payroll and Benefits Payroll and benefits costs include direct payroll, personnel related fringe benefits, sales and administrative staff labor costs and stock compensation expense. Payroll and benefits costs exclude direct labor included in Cost of revenues. 57 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements Legal and Professional Legal and professional costs include external legal, audit and consulting expenses. General and Administrative General and administrative costs include director fees and expenses, rent, insurance and occupancy-related expenses, bad debt expense, impairments and other general costs of conducting business. Research and development costs are charged to expense in the period incurred and are reported in the "General and administrative" line item in the Consolidated Statements of Operations. For the years ended December 31, 2022 and 2021, the Company recorded research and development costs of $ 0.4 million and $ 0.4 million, respectively. Asset Retirement Obligations Asset retirement obligations ("ARO") are comprised of mine reclamation activities required under operating agreements related to the Five Forks Mine and Marshall Mine (as defined below) and are recognized when incurred and recorded as liabilities at fair value. An ARO is accreted over time through periodic charges to earnings. Accounting for AROs requires the Company to make estimates of future costs unique to a specific mining operation that the Company expects to incur to complete the reclamation and remediation work required to comply with existing laws and regulations. AROs 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. Five Forks Mine For the Five Forks Mine ARO, a corresponding ARO asset is depreciated over its estimated life. Reclamation costs related to the Five Forks Mine 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. On an annual basis, unless otherwise deemed necessary, the Company reviews its estimates and assumptions of the Five Forks Mine ARO. The Company’s mining activities at the Five Forks Mine are subject to various domestic laws and regulations governing the protection of the environment. The Company conducts its mining activities to protect public health and the environment and believes its operations are in compliance with applicable laws and regulations in all material respects. The Company has made, and expects to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures. Estimated future reclamation costs are based principally on current legal and regulatory requirements. Marshall Mine (refer to Note 3) Reclamation costs related to the Marshall Mine are largely 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 the Company and the operator of the Marshall Mine. The timing of payments and actual reclamation costs may change and the Company accounts for these changes on a quarterly basis. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred income taxes are provided for temporary differences between the financial reporting basis and tax basis of the Company's assets and liabilities and are tax-effected using enacted tax rates in effect for the year in which the temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that includes the enactment date. The Company maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. 58 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements The Company records uncertain tax positions on the basis of a two-step process whereby (1) the Company determines whether it is more-likely-than-not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Stock-Based Compensation Stock-based compensation expense is measured at the grant date based on the estimated fair value of the stock-based award and is generally expensed on a straight-line basis over the requisite service period and/or performance period of the award. Forfeitures are recognized when incurred. Stock-based compensation expense related to manufacturing employees and administrative employees is included in the "Consumables Cost of revenues, exclusive of depreciation and amortization" and "Payroll and benefits" line items, respectively, in the Consolidated Statements of Operations. Stock-based compensation expense related to non-employee directors and consultants is included in the "General and administrative" line item in the Consolidated Statements of Operations. Dividends When a sufficient amount of available earnings exists at the time of a dividend declaration, dividends are charged to Retained earnings when declared. If a sufficient amount of available earnings is not available, dividends declared are charged as a reduction to Additional paid-in capital. Earnings (Loss) Per Share Basic earnings (loss) per share is computed using the weighted-average number of shares of common stock outstanding during the reporting period. Diluted earnings per share is computed in a manner consistent with that of basic earnings per share, while considering other potentially dilutive securities. The treasury stock method is used to determine the dilutive effect of potentially dilutive securities. Potentially dilutive securities consist of restricted stock awards ("RSAs") and contingent performance stock units ("PSUs") (collectively, "Potential dilutive shares"). Potential dilutive shares are excluded from diluted earnings (loss) per share when their effect is anti-dilutive. When there is a net loss for a period, all Potential dilutive shares are anti-dilutive and are excluded from the calculation of diluted loss per share for that period. Each PSU represents a contingent right to receive shares of the Company’s common stock, and the number of shares may range from zero to two times the number of PSUs granted on the award date depending upon the price performance of the Company's common stock as measured against a general index and a specific peer group index over requisite performance periods. The number of Potential dilutive shares related to a PSU is based on the number of shares of the Company's common stock, if any, that would be issuable at the end of the respective reporting period, assuming that the end of the reporting period is the end of the contingency period applicable to a PSU. See Note 12 for additional information related to PSUs. The following table sets forth the calculations of basic and diluted earnings (loss) per common share: Years Ended December 31, (in thousands, except per share amounts) 2022 2021 Net (loss) income $ ( 8,917 ) $ 60,401 Basic weighted-average number of common shares outstanding 18,453 18,258 Add: dilutive effect of equity instruments — 203 Diluted weighted-average shares outstanding 18,453 18,461 (Loss) earnings per share - basic $ ( 0.48 ) $ 3.31 (Loss) earnings per share - diluted $ ( 0.48 ) $ 3.27 For the years ended December 31, 2022 and 2021, 0.6 million and zero weighted-average equity instruments, respectively, were outstanding but were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive. 59 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements Use of Estimates The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires the Company’s management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates. Significant financial statement components in which the Company makes assumptions include: • business combinations, including asset acquisitions; • the carrying value of its long-lived assets; • AROs; and • income taxes, including the valuation allowance for deferred tax assets and assessment of uncertain tax positions. Risks and Uncertainties The Company is principally dependent on operations of its APT business and its cash on hand to provide liquidity over the near and long term. The Company's revenues, sales volumes, earnings and cash flows are significantly affected by prices of competing power generation sources such as natural gas and renewable energy. During periods of low natural gas prices, natural gas provides a competitive alternative to coal-fired power generation and therefore, coal consumption may be reduced, which in turn reduces the demand for the Company's products. However, during periods of higher prices for competing power generation sources, there is generally an increase in coal consumption and thus demand for the Company's products also increases. In addition, coal consumption and demand for the Company's products are affected by the demand for electricity, which is higher in the warmer and colder months of the year. As a result, the Company's operating results are subject to seasonal variations whereby its revenues and cost of revenues tend to be higher in its first and third fiscal quarters compared to its second and fourth fiscal quarters. Abnormal temperatures during the summer and winter months may significantly affect coal consumption and impurities within various municipalities' water sources, and thus impact the demand for the Company's products. Reclassifications Certain balances have been reclassified from prior years to conform to the current year presentation. Such reclassifications had no effect on the Company’s results of operations or financial position in any of the periods presented. Segments Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by a company's chief operating decision maker ("CODM"), or a decision-making group, in deciding how to allocate resources and in assessing financial performance. As of December 31, 2022, the Company's CODM was the Company's Chief Executive Officer, and the Company concluded that it had one reportable segment. Given the wind-down of Tinuum Group and Tinuum Services and the impact on the Company's financial statements, including the method in which the CODM allocates resources, the Company determined the historical Refined Coal segment no longer met the qualitative or quantitative criteria to be considered a reporting segment under GAAP. As a result, beginning January 1, 2022, the Company determined that it had one reportable segment and therefore has not provided segment reporting disclosures for both 2022 and 2021. New Accounting Guidance In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in ASU 2016-13 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for "smaller reporting companies" (as defined by the Securities and Exchange Commission) for fiscal years beginning after December 15, 2022, including interim periods within those years, and must be adopted under a modified retrospective method approach. Entities may adopt ASU 2016-13 earlier as of the fiscal years beginning after December 15, 2018, including 60 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements interim periods within those years. The Company will adopt ASU 2016-13 effective January 1, 2023 and this standard will not have a material impact on the Company's financial statements and disclosures. Note 2 - Customer Supply Agreement On September 30, 2020, the Company and Norit Activated Carbon - Americas (f/k/a Cabot Norit Americas, Inc.) ("Norit") entered into a supply agreement (the "Supply Agreement") pursuant to which the Company agreed to sell and deliver to Norit, and Norit agreed to purchase and accept from the Company certain lignite-based AC products ("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. Under the Supply Agreement, Norit also reimburses the Company for certain capital expenditures incurred by the Company that are necessary to manufacture the Furnace Products. Reimbursements are comprised of revenues earned from capital expenditures incurred that will benefit both the Company and Norit (referred to as "Shared Capital") and revenues earned from capital expenditures incurred that will benefit Norit exclusively (referred to as "Specific Capital"). In the event that Norit ceases to make purchases under the Supply Agreement, Norit is obligated to pay the balance of any outstanding payments for Specific Capital. Further, under the terms of the Supply Agreement, Norit was obligated to pay the Reclamation Reimbursement (defined in Note 3 below) to the Company for $ 10.2 million of the Reclamation Costs (defined in Note 3 below), inclusive of interest. On February 25, 2022, the Company received $ 10.6 million in cash from Norit (the "Norit Payment") as a result of a change in control provision in the Supply Agreement (the "Change in Control"), which occurred as a result of the sale of Norit by its parent, Cabot Corporation. Under the Change in Control, the Company received from Norit full payment of all amounts outstanding under the Reclamation Reimbursement, payment of all unbilled amounts related to Specific Capital for expenditures incurred through February 28, 2022 and payment of $ 0.8 million related to additional costs due to the third-party operator of Marshall Mine (the "Norit Reclamation Costs"). Under the Reclamation Contract (defined in Note 3 below), the Company was obligated to remit payment for the Norit Reclamation Costs to the third-party operator of Marshall Mine (defined in Note 3 below), and such payment was remitted in March 2022. The Change in Control did not impact any other provisions of the Supply Agreement. As of February 25, 2022, the carrying value of the Reclamation Reimbursement was $ 9.0 million, which included the principal balance, adjusted for accretion of interest and payments made to date. Under the Change in Control, the Company received $ 8.5 million in cash for full payment of the outstanding Reclamation Reimbursement. The Company concluded that the cash proceeds received represented an early payment of a receivable based on a change in contractual terms and accounted for the difference between the cash proceeds received and the carrying amount of the Reclamation Reimbursement of $ 0.5 million as a loss, which is included in the "Other income (expense)" line item in the Consolidated Statement of Operations for the year ended December 31, 2022. Also, under the Change in Control, the Company received $ 1.3 million in advance of revenue to be recognized in future periods related to Specific Capital and recorded this amount as deferred revenue, which is recognized ratably over the remaining contractual term as stipulated in the Supply Agreement. Note 3 - Marshall Mine Acquisition Concurrently with the execution of the Supply Agreement, on September 30, 2020, the Company entered into an agreement to purchase from Norit 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"). The Company concluded that the Marshall Mine did not have any remaining economic reserves and independently determined to immediately commence activities to shutter it. Accordingly, on September 30, 2020, the Company and a third party entered into a reclamation contract (the "Reclamation Contract") for full reclamation of the Marshall Mine, which was expected to be completed by 2030. Under the terms of the Supply Agreement, Norit was obligated to reimburse the Company for $ 10.2 million (the "Reclamation Reimbursement") for a portion of the total costs incurred under the Reclamation Contract (the "Reclamation Costs"), which was payable semi-annually over 13 years and inclusive of interest. As discussed in Note 2, on February 25, 2022 as part of the Change in Control, Norit fully paid the outstanding amount owed under the Reclamation Reimbursement and has no further liability related to the Marshall Mine. 61 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements The Company accounted for the Marshall Mine Acquisition as an asset acquisition, and it included the acquisition of certain assets and assumption of certain liabilities as well as the incurrence of an obligation for the Reclamation Costs (the "Marshall Mine ARO"). As of December 31, 2022 and 2021, the carrying value of the Marshall Mine ARO was $ 4.7 million and $ 6.3 million, respectively. As the Marshall Mine Acquisition represented a transaction with a customer of net assets acquired and liabilities assumed from Norit, the Company accounted for the excess of the fair value of liabilities assumed over assets acquired as upfront consideration transferred to a customer, Norit (the "Upfront Customer Consideration"), which was $ 7.6 million. The amount of the Upfront Customer Consideration was also recognized net of the Reclamation Reimbursement. The total Upfront Customer Consideration is being amortized as a reduction to revenues on a straight-line basis over the expected 15 -year contractual period of the Supply Agreement. Amortization of the Upfront Customer Consideration is approximately $ 0.5 million per year. As of June 30, 2021 and December 31, 2021, the Company significantly revised its estimate of future obligations owed for the reclamation of the Marshall Mine primarily based on scope reductions related to future reclamation requirements. As a result, the Company reduced the Marshall Mine ARO by $ 1.9 million as of June 30, 2021 and $ 0.8 million as of December 31, 2021 and for the year ended December 31, 2021 recognized a gain on change in estimate of $ 2.7 million. This is included as "Gain on change in estimate, asset retirement obligation" in the Consolidated Statement of Operations for the year ended December 31, 2021. Disposition On September 2, 2022, (the "Agreement Date"), the Company entered into a Membership Interest Purchase Agreement (the "MM Purchase Agreement") with a third party (the "MM Buyer") to sell all of its membership interests in Marshall Mine, LLC to the MM Buyer (the "MM Sale") in exchange for a cash payment to be made by the Company to the MM Buyer of approximately $ 2.4 million (the "MM Purchase Price") and the assumption by the MM Buyer of certain liabilities of Marshall Mine, LLC. The MM Buyer previously operated the Marshall Mine on behalf of Marshall Mine, LLC and is currently performing reclamation under the Reclamation Contract. The MM Purchase Price is subject to adjustments for certain events that may occur during the period from the Agreement Date and the Closing Date (as defined below) as follows: (1) increased or reduced as agreed upon by the Company and the MM Buyer (collectively, the "Parties"); (2) increased or decreased by income, proceeds, receipts and credits earned with respect to the assets and operations of Marshall Mine, LLC between signing and closing of the MM Sale, (3) increased by any amounts that are, or under US GAAP should be, accrued as liabilities of Marshall Mine LLC as of the closing of the MM Sale, as more fully described in the MM Purchase Agreement; and (4) decreased by agreed amounts which escalate depending on the timing of closing if it occurs after January 1, 2023. The obligations of the Parties to close the MM Sale (the "Closing Date") is subject to certain events, including (1) obtaining the approval of the Railroad Commission of Texas (the "Commission") for an operating permit in the name of the MM Buyer or an affiliate of the MM Buyer; and (2) the MM Buyer replacing the Company’s surety bond with a reclamation performance bond, letter of credit or other form of security to which the MM Buyer or an affiliate of the MM Buyer is the principal that is satisfactory to the Commission. The MM Purchase Agreement may be terminated: (1) by mutual consent of the MM Buyer and the Company at any time prior to the Closing Date; (2) by the MM Buyer or the Company, if the Closing has not occurred within one year after the Agreement Date, unless the failure of the consummation of the Closing shall be due to the failure of the party wishing to terminate to comply in all material aspects with the agreements and covenants contained therein; (3) if there is a material breach (by either the MM Buyer or the Company) of any representation, warranty, covenant or agreement contained in the MM Purchase Agreement that is not cured within a specified time frame; and (4) if the MM Sale is prohibited by governmental authority in a final, non-appealable order or applicable law. As of December 31, 2022, Marshall Mine, LLC had outstanding liabilities of approximately $ 4.9 million, which the Company expects to be fully discharged upon payment of the MM Purchase Price. Because the Closing Date is uncertain, primarily due to a date uncertain for the Parties to receive approval of the MM Buyer's operating permit and surety bond by the Commission, the Company is unable to determine the accounting period in which it will recognize the MM Sale. 62 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following tables summarize the assets and liabilities of Marshall Mine, LLC and their classification in the Company's Consolidated Balance Sheets: As of December 31, (in thousands) 2022 2021 Balance sheet component Cash $ — $ 914 Current assets Norit receivable, short-term — 2,056 Current assets Restricted cash 10,000 10,027 Non-current assets Norit receivable, long-term — 6,846 Non-current assets Property and equipment, net — 1,968 Non-current assets $ 10,000 $ 21,811 Accounts payable and accrued liabilities $ 201 $ 1,065 Current liabilities Asset retirement obligation, short-term 548 1,775 Current liabilities Asset retirement obligation, long-term 4,131 4,546 Non-current liabilities $ 4,880 $ 7,386 Note 4 - Revenues For the years ended December 31, 2022 and 2021, all material performance obligations related to revenues recognized were satisfied at a point in time. For the years ended December 31, 2022 and 2021, approximately 8 % and 12 %, respectively, of Consumables revenues were generated in Canada, and all other revenues were generated in the U.S. Trade receivables Trade receivables represent an unconditional right to consideration in exchange for goods or services transferred to a customer. The Company invoices its customers in accordance with the terms of the contract. Credit terms are generally net 30 - 45 days from the date of invoice . The timing between the satisfaction of performance obligations and when payment is due from the customer is generally not significant. The following table shows the components of the Company's Receivables, net: As of December 31, (in thousands) 2022 2021 Trade receivables, net $ 13,789 $ 10,476 Other receivables 75 — Norit Receivable - current — 2,146 Receivables, net $ 13,864 $ 12,622 Contract liabilities As discussed in Note 2, the Company received $ 1.3 million in advance of revenue to be recognized in future periods related to Specific Capital and recorded this amount as deferred revenue in February 2022, which is recognized ratably over the remaining contractual term as stipulated in the Supply Agreement. As of December 31, 2022, total deferred revenue related to Specific Capital was $ 1.0 million, of which the current portion is included in "Other current liabilities" and the long-term portion is included in "Other long-term liabilities" in the Consolidated Balance Sheet. 63 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 5 - Inventories, net The following table summarizes the Company's inventories recorded at the lower of average cost or net realizable value as of December 31, 2022 and 2021: As of December 31, (in thousands) 2022 2021 Product inventory $ 9,479 $ 4,901 Raw material inventory 8,349 2,949 $ 17,828 $ 7,850 Note 6 - Leases The Company's operating and finance lease right-of-use ("ROU") assets and liabilities as of December 31, 2022 and 2021 consisted of the following items (in thousands): Year ended December 31, 2022 2021 Operating Leases Operating lease right-of-use assets, net of accumulated amortization (1) $ 7,734 $ 6,000 Operating lease obligations, current $ 2,724 $ 2,157 Long-term operating lease obligations 5,133 4,178 Total operating lease obligation $ 7,857 $ 6,335 Finance Leases Finance lease right-of-use assets, net of accumulated amortization (2) $ 2,565 $ 1,743 Finance lease obligations, current $ 1,131 $ 1,011 Long-term finance lease obligations 3,450 3,152 Total finance lease obligations $ 4,581 $ 4,163 (1) Operating lease assets are reported net of accumulated amortization of $ 4.4 million and $ 1.9 million as of December 31, 2022 and 2021, respectively. (2) Finance lease assets are reported net of accumulated amortization of $ 2.0 million and $ 1.1 million as of December 31, 2022 and 2021, respectively. Finance leases ROU assets under finance leases are reported in the "Property, plant and equipment" line item, and finance lease liabilities are included in the "Current portion of long-term debt" and "Long-term debt, net of current portion" line items in the Consolidated Balance Sheets as of December 31, 2022 and 2021. Interest expense related to finance lease liabilities and amortization of ROU assets under finance leases are included in the "Interest expense" and "Depreciation, amortization, depletion and accretion" line items respectively, in the Consolidated Statement of Operations for the years ended December 31, 2022 and 2021. 64 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements Operating leases ROU assets under operating leases are included in the "Other long-term assets" line item, and operating lease liabilities are included in " Other liabilities" and " Other long-term liabilities" line items, respectively, in the Consolidated Balance Sheets as of December 31, 2022 and 2021. Lease expense for operating leases for the year ended December 31, 2022 was $ 4.4 million, of which $ 4.0 million is included in "Consumables cost of revenues, exclusive of depreciation and amortization" line item and $ 0.4 million is included in "General and administrative" line item in the Consolidated Statement of Operations for the year ended December 31, 2022. Lease expense for operating leases for the year ended December 31, 2021 was $ 4.0 million, of which $ 3.5 million is included in the "Consumables cost of revenues, exclusive of depreciation and amortization" line item and $ 0.5 million is included in the "General and administrative" line item in the Consolidated Statement of Operations for the year ended December 31, 2021. Lease financial information as of and for the years ended December 31, 2022 and 2021 is provided in the following table: Year ended December 31, (in thousands) 2022 2021 Finance lease cost: Amortization of right-of-use assets $ 818 $ 642 Interest on lease liabilities 307 288 Operating lease cost 3,436 2,430 Short-term lease cost 989 1,650 Variable lease cost (1) 19 40 Total lease cost $ 5,569 $ 5,050 Other Information: Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 307 $ 288 Operating cash flows from operating leases $ 2,923 $ 2,764 Financing cash flows from finance leases $ 1,246 $ 1,190 Right-of-use assets obtained in exchange for new finance lease liabilities $ 1,641 $ — Right-of-use assets obtained in exchange for new operating lease liabilities $ 4,444 $ 6,108 Weighted-average remaining lease term - finance leases 2.8 years 2.9 years Weighted-average remaining lease term - operating leases 4.1 years 4.3 years Weighted-average discount rate - finance leases 5.9 % 6.4 % Weighted-average discount rate - operating leases 6.9 % 6.7 % (1) Primarily includes common area maintenance, property taxes and insurance payable to lessors. 65 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following table summarizes the Company's future lease payments under finance and operating leases as of December 31, 2022: (in thousands) Operating Lease Commitments Finance Lease Commitments Total Lease Commitments 2023 $ 3,171 $ 1,371 $ 4,542 2024 1,798 1,199 2,997 2025 1,519 605 2,124 2026 1,519 372 1,891 2027 491 85 576 Thereafter 2,299 1,406 3,705 Total lease payments 10,797 5,038 15,835 Less: Imputed interest ( 2,940 ) ( 457 ) ( 3,397 ) Present value of lease payments $ 7,857 $ 4,581 $ 12,438 In November 2022, the Company executed a new lease for its corporate headquarters and primary laboratory commencing May 1, 2023 and expiring October 31, 2030. Total commitments under the lease include aggregate rental payments of $ 3.3 million plus a pro rata portion of operating expenses related to the office and laboratory leased space, which is not included in the table above. Note 7 - Commitments and Contingencies Retention Agreements On May 4, 2022, the Compensation Committee of the Board of Directors and the Board of Directors (the "Board") approved the amendment to retention agreements (the "Retention Agreements" and each a "Retention Agreement"), which had been executed in May 2021, between the Company and its executive officers and certain other key employees in order to maintain the Company's business operations while it pursues and executes on its strategic initiatives (the "Amended Retention Agreements"). Under the Amended Retention Agreements, employees will receive (i) 40 % of the original amount agreed to in the Retention Agreements ("Retention Pay") in August 2022; (ii) 60 % of the Retention Pay on the earliest of (1) the date the employee’s employment is terminated without Cause or for Good Reason (as those terms are defined in the Retention Agreement or the employee’s employment agreement, as applicable), (2) 90 days after a Transaction Date or a Change in Control (as those terms are defined in the Retention Agreement or the employee’s employment agreement, as applicable), or (3) January 18, 2023; and (iii) an additional lump sum payment, ranging from 10 % to 40 % of the Retention Pay, will also be paid at the earliest of (1) the date the employee’s employment is terminated without Cause or for Good Reason (as those terms are defined in the Retention Agreement or the employee’s employment agreement, as applicable), (2) 90 days after a Transaction Date or a Change in Control (as those terms are defined in the Retention Agreement or the employee’s employment agreement, as applicable), or (3) in January 2023. In order to receive the Amended Retention Agreements payments, employees must remain employed at the Company through the dates above. In August 2022, the Company paid out $ 1.0 million pursuant to the payment terms of the Amended Retention Agreements. As of December 31, 2022, the total cash payable pursuant to the Amended Retention Agreements was $ 1.4 million, and is included in the "Other current liabilities" line item in the Consolidated Balance Sheet. This amount was paid in January 2023. Surety Bonds and Restricted Cash As the owner of the Marshall Mine, the Company is required to post a surety bond with a regulatory commission. As of December 31, 2022, the Company had posted a $ 16.6 million surety bond (the "MM Surety Bond") which will remain in place until the Marshall Mine is fully reclaimed, and may be further reduced in amount from time to time as the Company progresses with its reclamation activities or eliminated if the MM Sale is consummated. As the owner of the Five Forks Mine, the Company is required to post a surety bond with a regulatory commission. As of December 31, 2022 , the Company had posted a $ 7.5 million surety bond related to performance requirements associated with the Five Forks Mine. 66 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements As of December 31, 2022, the Company posted cash collateral of $ 10.0 million for both the Marshall Mine and Five Forks Mine as required by the Company's surety bond provider, which is reported as long-term restricted cash on the Consolidated Balance Sheets. Tinuum Group The Company also has certain limited obligations contingent upon future events in connection with the activities of Tinuum Group. The Company, NexGen Refined Coal, LLC ("NexGen") and two entities affiliated with NexGen have provided another Tinuum Group owner with limited guarantees (the "Tinuum Group Party Guarantees") related to certain losses it may suffer as a result of inaccuracies or breach of representations and covenants. The Company also is a party to a contribution agreement with NexGen under which any party called upon to pay on a Tinuum Group Party Guaranty is entitled to receive contribution from the other party equal to 50 % of the amount paid. No liability or expense provision has been recorded by the Company related to this contingent obligation as the Company believes that it is not probable that a loss will occur with respect to Tinuum Group Party Guarantees. Legal Proceedings The Company is from time to time subject to various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of its business. Such matters are subject to many uncertainties and outcomes, the financial impacts of which are not predictable with assurance and that may not be known for extended periods of time. The Company records a liability in its consolidated financial statements for costs related to claims, settlements, and judgments where management has assessed that a loss is probable and an amount can be reasonably estimated. There were no significant legal proceedings as of December 31, 2022. Note 8 - Property, Plant and Equipment The cost basis and accumulated depreciation of property, plant and equipment at December 31, 2022 and 2021 are summarized in the table below: Life in Years As of December 31, (in thousands) 2022 2021 Land and land improvements 0 - 31 $ 1,225 $ 1,225 Plant and operating equipment 2 - 29 33,180 31,266 Furniture and fixtures 2 - 11 1,709 1,388 Machinery and equipment 3 - 10 2,116 697 Leasehold improvements 3 - 12 2,149 2,089 Construction in progress 6,373 1,190 46,752 37,855 Less accumulated depreciation ( 11,897 ) ( 7,684 ) Total property, plant and equipment, net $ 34,855 $ 30,171 Included in plant and operating equipment as of December 31, 2022 and 2021 is mining equipment financed under various lease facilities, and obligations due under these facilities are included in finance lease obligations in the Consolidated Balance Sheets. The total amount recorded for ROU assets as of December 31, 2022 and 2021 related to finance lease obligations was $ 2.6 million and $ 1.7 million, respectively, net of accumulated depreciation of $ 2.0 million and $ 1.1 million. Depreciation expense for the years ended December 31, 2022 and 2021 was $ 4.9 million and $ 5.5 million, respectively. 67 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 9 - Supplemental Financial Information Supplemental Balance Sheet Information The following table summarizes the components of "Prepaid expenses and other current assets" and "Other long-term assets, net" as presented in the Consolidated Balance Sheets: As of December 31, (in thousands) 2022 2021 Prepaid expenses and other current assets: Prepaid expenses $ 2,570 $ 2,571 Prepaid income taxes and income tax refunds 2,573 2,782 Other 2,395 1,308 $ 7,538 $ 6,661 Other long-term assets: Right of use assets, operating leases, net $ 7,734 $ 6,000 Spare parts, net 6,789 4,598 Upfront customer consideration (1) 6,475 6,982 Mine development costs, net 5,478 5,330 Mine reclamation asset, net 1,641 1,742 Intangible assets, net 847 1,237 Norit receivable — 6,846 Equity method investments — 2,391 Other long-term assets 1,683 1,745 $ 30,647 $ 36,871 (1) See further discussion of Upfront Customer Consideration in Note 3. Spare parts include critical spares required to support plant operations. Parts and supply costs are determined using the lower of cost or estimated replacement cost. Parts are recorded as maintenance expenses or capitalized in the period in which they are consumed or put into use. Mine development costs include acquisition costs, the cost of other development work and mitigation costs related to the Five Forks Mine and are depleted over the estimated life of the related mine reserves, which is estimated to be 12 years as of December 31, 2022. The Company performs an evaluation of the recoverability of the carrying value of mine development costs to determine if facts and circumstances indicate that their carrying value may be impaired and if any adjustment is warranted. Mine reclamation asset represents the ARO asset related to the Five Forks Mine and is depreciated over its estimated life. Highview Investment Other includes a long-term investment (the "Highview Investment") in Highview Enterprises Limited ("Highview"), a London, England based developmental stage company specializing in power storage. The Company accounts for the Highview Investment as an investment recorded at cost, less impairment, plus or minus observable changes in price for identical or similar investments of the same issuer. Fair value measurements, if any, represent Level 2 measurements. The Highview Investment is evaluated for indicators of impairment such as an event or change in circumstances that may have a significant adverse effect on the fair value of the investment. There were no changes to the carrying value of the Highview Investment for the years ended December 31, 2022 and 2021 as there were no indicators of impairment or observable price changes for equity issued by Highview. Since inception of Highview Investment, the Company has recognized $ 2.2 million of cumulative impairment losses. 68 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following table details the components of "Other current liabilities" and "Other long-term liabilities" as presented in the Consolidated Balance Sheets: As of December 31, (in thousands) 2022 2021 Other current liabilities: Current portion of operating lease obligations $ 2,724 $ 2,157 Income and other taxes payable 1,039 807 Current portion of mine reclamation liability 548 1,775 Other current liabilities (1) 2,334 385 $ 6,645 $ 5,124 Other long-term liabilities: Mine reclamation liabilities $ 7,985 $ 8,184 Operating lease obligations, long-term 5,133 4,178 Other 733 — $ 13,851 $ 12,362 (1) Include in Other current liabilities is $ 1.7 million related to the Repayment Agreement as defined in Note 10. The Mine reclamation liability related to the Five Forks Mine is included in "Other long-term liabilities". The Mine reclamation liability related to Marshall Mine, which was assumed in the Marshall Mine Acquisition, is included in "Other current liabilities" and "Other long-term liabilities." The Mine reclamation liabilities represent AROs. Changes in the AROs were as follows: As of December 31, (in thousands) 2022 2021 Asset retirement obligations, beginning of year $ 9,959 $ 21,447 Accretion 611 1,102 Liabilities settled ( 2,071 ) ( 10,010 ) Changes due to scope and timing of reclamation 34 ( 2,580 ) Asset retirement obligations, end of year 8,533 9,959 Less current portion 548 1,775 Asset retirement obligations, long-term $ 7,985 $ 8,184 Supplemental Consolidated Statements of Operations Information Gain on Change in estimate, asset retirement obligation As discussed in Note 3, for the year ended December 31, 2021, recorded a gain on change in estimate of $ 2.7 million based on its revisions in its estimate of future obligations owed for the reclamation of Marshall Mine. The following table details the components of "Interest expense" in the Consolidated Statements of Operations: Years Ended December 31, (in thousands) 2022 2021 Interest on Senior Term Loan $ — $ 206 Debt discount and debt issuance costs — 945 453A interest — 13 Other 336 326 Total Interest expense $ 336 $ 1,490 69 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following table details the components of "Other" in the Consolidated Statements of Operations: Years Ended December 31, (in thousands) 2022 2021 Interest income $ 239 $ 326 Other ( 84 ) 314 Total Other income $ 155 $ 640 Note 10 - Equity Method Investments Tinuum Group, LLC The following table summarizes the results of operations of Tinuum Group: Years Ended December 31, (in thousands) 2022 2021 Gross profit $ 964 $ 6,995 Operating, selling, general and administrative expenses 4,275 49,414 Loss from operations ( 3,311 ) ( 42,419 ) Other income 1,231 9,726 (Income) loss attributable to noncontrolling interest ( 874 ) 126,948 Net (loss) income available to members $ ( 2,954 ) $ 94,255 ADES equity earnings from Tinuum Group $ 3,455 $ 61,837 As of December 31, 2022 and 2021, the carrying value of the Company's investment in Tinuum Group was zero as the cumulative amount of distributions received from Tinuum Group exceeded the Company's cumulative pro-rata share of Tinuum Group's net income available to Class A members. As a result, for the years ended December 31, 2022 and 2021, the Company recognized earnings from Tinuum Group's net income available to members that was different from its pro-rata share of Tinuum Group's net income available to members. In December 2022, the Company, certain of the other owners of Tinuum Group (collectively, the "Tinuum Group Owners") and Tinuum Group executed the Distribution and Repayment Agreement (the "Repayment Agreement"). Under the terms of the Repayment Agreement, the Tinuum Group Owners received cash distributions (the "Distributions") equal to their percentage ownership and also agreed to be contractually liable for certain contingent liabilities of Tinuum Group (the "Tinuum Group Obligation") in amounts equal to their percentage ownership. In December 2022, the Company received its percentage share of the Distributions in the amount of $ 2.0 million and became contractually liable for $ 1.7 million of the Tinuum Group Obligation. The Company recorded the Company's contractual obligation of $ 1.7 million as a liability in the "Other current liabilities" line item in the Consolidated Balance Sheet as of December 31, 2022, with the difference between the cash distribution of $ 0.3 million recorded to equity method earnings for the year ended December 31, 2022. In the event that the Tinuum Group Obligation is discharged in its entirety or settled for an amount that is less than the total Tinuum Group Obligation, the Company will recognize future equity earnings for the difference in its contractual obligation amount and its pro rata share of the actual payment made by Tinuum Group, if any, for the Tinuum Group Obligation. 70 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following table presents the Company's investment balance, equity earnings, cash distributions and cash distributions in excess of the investment balance for the years ended December 31, 2022 and 2021 ( in thousands ): Description Date(s) Investment balance ADES equity earnings (loss) Cash distributions Memorandum Account: Cash distributions and equity loss in (excess) of investment balance Beginning balance 12/31/2020 $ 3,387 $ — $ — $ — ADES proportionate share of net income from Tinuum Group 2021 activity 40,058 40,058 — — Cash distributions from Tinuum Group 2021 activity ( 65,224 ) — 65,224 — Adjustment for current year cash distributions in excess of investment balance 2021 activity 21,779 21,779 — ( 21,779 ) Total investment balance, equity earnings (loss) and cash distributions 12/31/2021 $ — $ 61,837 $ 65,224 $ ( 21,779 ) ADES proportionate share of net loss from Tinuum Group 2022 activity ( 1,255 ) ( 1,255 ) — ( 1,255 ) Cash distributions from Tinuum Group 2022 activity ( 3,455 ) — 3,455 ( 3,455 ) Adjustment for current year cash distributions in excess of investment balance 2022 activity 4,710 4,710 — — Total investment balance, equity earnings and cash distributions 12/31/2022 $ — $ 3,455 $ 3,455 $ ( 26,489 ) Tinuum Services, LLC The following tables summarizes the results of operations of Tinuum Services: Years Ended December 31, (in thousands) 2022 2021 Gross profit (loss) $ 1,065 $ ( 68,465 ) Operating, selling, general and administrative expenses 2,800 166,075 Loss from operations ( 1,735 ) ( 234,540 ) Other income (expenses), net 1,159 3,830 Loss attributable to noncontrolling interest 323 246,094 Net (loss) income $ ( 253 ) $ 15,384 ADES equity earnings from Tinuum Services $ 85 $ 6,952 Included in the Consolidated Statement of Operations of Tinuum Services for the years ended December 31, 2022 and 2021 were losses related to VIE entities that are consolidated within Tinuum Services. These losses do not impact the Company's equity earnings from Tinuum Services as 100 % of those losses are attributable to a noncontrolling interest and eliminated in the calculations of Tinuum Services' net income attributable to the Company's interest. 71 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following table presents the Company's investment balance, equity earnings, cash distributions and cash distributions in excess of the investment balance for the year ended December 31, 2022 ( in thousands ): Description Date(s) Investment balance ADES equity earnings Cash distributions Memorandum Account: Cash distributions and equity earnings in (excess) of investment balance Beginning balance 12/31/2021 $ 2,391 $ — $ — $ — ADES proportionate share of net loss from Tinuum Services 2022 activity ( 127 ) ( 127 ) — — Cash distributions from Tinuum Services 2022 activity ( 2,476 ) — 2,476 — Adjustment for current year cash distributions in excess of investment balance 2022 activity 212 212 — ( 212 ) Total investment balance, equity earnings and cash distributions 12/31/2022 $ — $ 85 $ 2,476 $ ( 212 ) The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. As of December 31, 2021, the Company concluded the carrying amount of its investment in Tinuum Services was not fully recoverable and as a result, wrote down its investment in the amount of $ 0.7 million, which is included in the "Earnings from equity method investments" line item in the Consolidated Statement of Operations for the year ended December 31, 2021. Other The following table details the carrying value of the Company's respective equity method investments included in the "Other long-term assets, net" line item on the Consolidated Balance Sheets and indicates the Company's maximum exposure to loss: As of December 31, (in thousands) 2022 2021 Equity method investment in Tinuum Services — 2,391 Total equity method investments $ — $ 2,391 The following table details the components of the Company's respective earnings or loss from equity method investments included in the "Earnings from equity method investments" line item in the Consolidated Statements of Operations: Year ended December 31, (in thousands) 2022 2021 Earnings from Tinuum Group $ 3,455 $ 61,837 Earnings from Tinuum Services 85 6,952 Earnings (loss) from other 1 ( 63 ) Earnings from equity method investments $ 3,541 $ 68,726 The following table details the components of the cash distributions from the Company's respective equity method investments included as a component of cash flows from operating activities in the Consolidated Statements of Cash Flows. Distributions from equity method investees are reported in the Consolidated Statements of Cash Flows as "return on investment" in Operating cash flows until such time as the carrying value in an equity method investee company is reduced to zero . Thereafter, such distributions are reported as "distributions in excess of cumulative earnings" as a component of cash flows from investing activities. 72 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements Year ended December 31, (in thousands) 2022 2021 Distributions from equity method investees, return on investment Tinuum Services $ 2,297 $ 8,802 Tinuum Group — 14,142 $ 2,297 $ 22,944 Distributions from equity method investees in excess of cumulative earnings Tinuum Group $ 3,455 $ 51,082 Tinuum Services 179 — Other 2 — $ 3,636 $ 51,082 Note 11 - Stockholders' Equity The Company has two classes of capital stock authorized, common stock and preferred stock, which are described as follows: Preferred Stock The Company's Board of Directors (the "Board") is authorized to provide out of the unissued shares of Preferred Stock and to fix the number of shares constituting a series of Preferred Stock and, with respect to each series, to fix the number of shares and designation of such series, the voting powers, if any, the preferences and relative, participating, option or other special rights, if any, and any qualifications, limitations or restrictions thereof, of the shares of such series. As of December 31, 2022 and 2021, there were no shares of Preferred Stock designated or outstanding. See further discussion of subsequent preferred stock designation and issuance in Note 17. Common Stock Holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Additionally, holders of common stock are entitled to receive dividends when and if declared by the Board, subject to any statutory or contractual restrictions on payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding shares of preferred stock. Upon dissolution, liquidation or the sale of all or substantially all of the Company's assets, after payment in full of any amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of shares of common stock will be entitled to receive the Company's remaining assets for distribution on a pro rata basis. Stock Repurchase Programs In November 2018, the Board authorized the Company to purchase up to $ 20.0 million of its 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. 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. As of December 31, 2022, the Company had $ 7.0 million remaining under the Stock Repurchase Program. Tax Asset Protection Plan U.S. federal income tax rules, and Section 382 of the Internal Revenue Code in particular, could substantially limit the use of Section 45 tax credits and other tax assets if the Company experiences an "ownership change" (as defined in the Internal Revenue Code). In general, an ownership change occurs if there is a cumulative change in the ownership of the Company by "5 percent stockholders" that exceeds 50 percentage points over a rolling three-year period. An entity that experiences an ownership change generally will be subject to an annual limitation on its pre-ownership change tax loss and credit carryforwards equal to the equity value of the entity immediately before the ownership change, multiplied by the long-term, tax-exempt rate posted monthly by the Internal Revenue Service ("IRS") (subject to certain adjustments). The annual limitation would be increased each year to the extent that there is an unused limitation in a prior year. 73 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements On May 5, 2017, the Board approved the declaration of a dividend of rights to purchase Series B Junior Participating Preferred Stock for each outstanding share of common stock as part of a tax asset protection plan (the "TAPP"), which is designed to protect the Company’s ability to utilize its net operating losses and tax credits. The TAPP is intended to act as a deterrent to any person acquiring beneficial ownership of 4.99 % or more of the Company’s outstanding common stock. During the years 2018-2022, we executed amendments to the TAPP (the "TAPP Amendments"), which amended the definition of "Final Expiration Date under the TAPP to extend the duration of the TAPP and makes associated changes in connection therewith. The most recent TAPP Amendment was approved at our 2022 annual meeting of stockholders and extended the Final Expiration Date to the close of business on December 31, 2023. Note 12 - Stock-Based Compensation On May 16, 2022, the Company's stockholders approved the 2022 Omnibus Incentive Plan (the "2022 Plan"), which permits grants of awards to employees, directors and consultants. Awards may be in the form of options (both nonqualified stock options and incentive stock options), stock appreciation rights, restricted stock, restricted stock units, performance share units, and other stock-based awards and cash-based awards as described under the 2022 Plan. As of December 31, 2022, the Company has 1,403,043 shares of its common stock authorized for issuance under the 2022 Plan. On June 20, 2017, the Company's stockholders approved the 2017 Omnibus Incentive Plan (the "2017 Plan"), which permits grants of awards to employees, directors and non-employees. Awards may be in the form of shares, rights to purchase restricted stock, bonuses of restricted stock, or other rights or benefits as described under the 2017 Plan. As of December 31, 2022, the Company has zero shares of its common stock authorized for issuance under the 2017 Plan. Expense RSAs - Restricted Stock Awards ("RSA's") are typically granted with vesting terms of three years . The fair value of RSAs is determined based on the closing price of the Company’s common stock on the authorization date of the grant multiplied by the number of shares subject to the stock award. Compensation expense for RSAs is generally recognized over the vesting term on a straight-line basis. PSUs - Performance share units ("PSU's") generally vest over three years and are based on the grantee’s continuous service with the Company, performance measures or a combination of both. Each PSU represents a contingent right to receive shares of the Company’s common stock if the Company meets certain performance measures over the requisite period. Compensation expense is recognized for PSU awards on a straight-line basis over the vesting period based on the estimated fair value at the date of grant using a Monte Carlo simulation model. Risk-free interest rate - The risk-free interest rate for PSUs granted during the period was determined by using a zero-coupon, U.S. Treasury rate for the periods that coincided with the expected terms listed above. Dividends - As the PSUs granted receive dividend equivalent units, no discount was applied for any dividends declared. Expected volatility - To calculate expected volatility, the historical volatility of the Company's common stock was used. Performance period - The Company’s performance period is based on the vesting term of the Company’s PSU awards. The Company recorded the following compensation expense related to the Stock Plans: Years Ended December 31, (in thousands) 2022 2021 RSA expense $ 1,679 $ 1,816 PSU expense 302 111 Total stock-based compensation expense $ 1,981 $ 1,927 Stock-based compensation expense related to manufacturing employees and administrative employees is included in the "Consumables cost of revenues, excluding depreciation and amortization" and "Payroll and benefits" line items in the Consolidated Statements of Operations. Stock-based compensation expense related to non-employee directors and consultants is included in the "General and administrative" line item in the Consolidated Statements of Operations. 74 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements The amount of unrecognized compensation cost as of December 31, 2022, and the expected weighted-average period over which the cost will be recognized is as follows: As of December 31, 2022 (in thousands) Unrecognized Compensation Cost Expected Weighted-Average Period of Recognition (in years) RSA expense $ 2,489 1.75 PSU expense 561 1.32 Total unrecognized stock-based compensation expense $ 3,050 1.43 Activity Restricted Stock A summary of activity of RSAs for the year ended December 31, 2022 is presented in the following table: Restricted Stock Weighted-Average Grant Date Fair Value (in thousands, except for share and per share amounts) Awards RSA's For the year ended December 31, 2022 Non-vested at January 1, 2022 531,623 $ 5.94 Granted 462,135 $ 5.69 Vested ( 267,973 ) $ 6.35 Forfeited ( 72,823 ) $ 5.96 Non-vested at December 31, 2022 652,962 $ 5.58 The weighted-average grant date fair value of RSAs granted or modified for the years ended December 31, 2022 and 2021 was $ 5.69 and $ 5.54 , respectively. The total grant-date fair value of RSAs vested for the years ended December 31, 2022 and 2021 was $ 1.7 million and $ 1.5 million, respectively. The aggregate intrinsic value of non-vested RSAs outstanding as of December 31, 2022 was $ 1.6 million. PSUs PSUs outstanding remain unvested until the third anniversary of their issuance date, at which time the actual number of vested shares will be determined based on the actual price performances of the Company’s common stock relative to a broad stock index and a peer group performance index. A summary of PSU activity for the year ended December 31, 2022 is presented in the table below: Units Weighted-Average Grant Date Fair Value Aggregate Intrinsic Value (in thousands) Weighted-Average Remaining Contractual Term (in years) For the year ended December 31, 2022 PSU's outstanding, January 1, 2022 88,026 $ 6.65 Granted 60,565 9.59 Vested / Settled — — Forfeited / Canceled — — PSU's outstanding, December 31, 2022 148,591 $ 7.85 $ 361 1.32 75 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 13 - Income Taxes The provision for income taxes consists of the following: Years Ended December 31, (in thousands, except for rate) 2022 2021 Current portion of income tax expense: Federal $ ( 10 ) $ 2,741 State and other 219 2,326 209 5,067 Deferred portion of income tax expense (benefit): Federal — 9,527 State and other — 1,078 — 10,605 Total income tax expense $ 209 $ 15,672 Effective tax rate ( 2 ) % 21 % Income tax expense (benefit) differed from the amount that would be computed by applying the U.S. statutory federal income tax rate of 21% to income before income taxes for the years ended December 31, 2022 and 2021 as follows: Years Ended December 31, (in thousands) 2022 2021 Federal statutory rate $ ( 1,829 ) $ 15,975 State income taxes, net of federal benefit 115 2,283 Permanent differences 1,284 ( 680 ) Tax credits — ( 443 ) Valuation allowances 825 ( 1,290 ) Changes in tax rates ( 87 ) ( 33 ) Stock-based compensation 10 86 Return to provision and other true-ups ( 109 ) ( 40 ) Other — ( 186 ) Income tax expense $ 209 $ 15,672 76 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and their reported amounts in the accompanying Consolidated Balance Sheets. These temporary differences result in taxable or deductible amounts in future years. Details of the Company’s deferred tax assets and liabilities are summarized as follows: As of December 31, (in thousands) 2022 2021 Deferred tax assets Tax credits $ 86,125 $ 86,097 Net operating loss carryforwards 2,892 2,388 Intangible assets 2,638 5,126 Employee related liabilities 1,968 1,971 Operating lease obligations 1,828 1,585 ARO, net of reimbursements 1,448 — Research and development capitalization 739 — Other investments 518 556 Equity method investments 325 1,584 Inventory 315 — Interest limitations 77 — Other 429 138 Total deferred tax assets 99,302 99,445 Less valuation allowance ( 88,293 ) ( 87,468 ) Deferred tax assets 11,009 11,977 Less: Deferred tax liabilities Property and equipment and other ( 7,702 ) ( 8,203 ) Right of use operating lease assets ( 1,800 ) ( 1,497 ) Upfront customer consideration ( 1,507 ) ( 1,747 ) Inventory — ( 197 ) ARO, net of reimbursements — ( 333 ) Total deferred tax liabilities ( 11,009 ) ( 11,977 ) Net deferred tax assets $ — $ — Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against a deferred tax asset based on an assessment of the amount of the deferred tax asset that is "more likely than not" to be realized. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company assesses a valuation allowance recorded against deferred tax assets at each reporting date. The determination of whether a valuation allowance is appropriate requires the evaluation of positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available to realize a deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating taxes, the Company assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance. As of December 31, 2022, the Company concluded it is more likely than not the Company will not generate sufficient taxable income within the applicable net operating loss and tax credit carry-forward periods to realize any of its net deferred tax assets. For the year ended December 31, 2022, the Company increased a valuation allowance from December 31, 2021 by $ 0.8 million and as of December 31, 2022, has a valuation allowance equal to 100 % of its net deferred tax assets. In reaching this conclusion, the Company primarily considered forecasts of future taxable losses. 77 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following table presents the approximate amount of federal and state net operating loss carryforwards and federal tax credit carryforwards available to reduce future taxable income, along with the respective range of years that the net operating loss and tax credit carryforwards would expire if not utilized: As of December 31, (in thousands) 2022 Beginning expiration year Ending expiration year Federal net operating loss carryforwards $ 467 Indefinite Indefinite State and other operating loss carryforwards $ 2,425 2026 2037 Federal tax credit carryforwards $ 86,125 2032 2041 The following table sets forth a reconciliation of the beginning and ending unrecognized tax positions on a gross basis for the years ended December 31, 2022 and 2021: Years Ended December 31, (in thousands) 2022 2021 Balance as of January 1 $ 54 $ 946 Lapse of applicable statute of limitations — ( 892 ) Balance as of December 31 $ 54 $ 54 For the years ended December 31, 2022 and 2021, the Company did not record any adjustments or recognize interest expense for uncertain tax positions. Interest and penalties related to uncertain tax positions are accrued and included in the "Interest expense" line item in the Consolidated Statements of Operations. Additional information related to the components of "Interest expense" is included in Note 9. The Company files income tax returns in the U.S. and various states. The Company is no longer subject to U.S. federal examinations by tax authorities for years before 2019. The Company is generally no longer subject to state examinations by tax authorities for years before 2015. Note 14 - Major Customers Revenues from external customers who represent 10% or more of the Company’s revenues for the years ended December 31, 2022 and 2021 were as follows: Years ended December 31, Customer Revenue Type 2022 2021 A Consumables 18 % 14 % B Consumables 11 % 8 % C Consumables 8 % 10 % D License royalties, related party — % 14 % Note 15 - Related Party Transactions Accounts Receivable The following table shows the Company's receivable balance associated with related parties as of December 31, 2022 and 2021: As of December 31, (in thousands) 2022 2021 Receivable from related party - Tinuum Group (1) $ — $ 2,481 (1) Represents amount due for M-45 Royalties. 78 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements Revenues The following table shows the income recognized with related parties during the years ended December 31, 2022 and 2021: Years Ended December 31, (in thousands) 2022 2021 License royalties, related party - Tinuum Group $ — $ 14,368 The above Tinuum Group royalties are included in the "License royalties, related party" line item in the Consolidated Statements of Operations. Consumables Cost of Revenues For the year ended December 31, 2022, the Company recognized $ 0.8 million of Tinuum Group Royalty expense, which is included in the "Consumables cost of revenues, exclusive of depreciation and amortization" line item in the Consolidated Statement of Operations. Tinuum Group Obligation As of December 31, 2022, the Company had an outstanding liability of $ 1.7 million related to its contractual amount due under the Tinuum Group Obligation, which is included in the "Other current liabilities" line item in the Consolidated Balance Sheet. Refer to Note 10 for further discussion. Note 16 - Defined Contribution Savings Plans The Company sponsors a qualified defined contribution savings plan (the "401(k) Plan") that allows participation by eligible employees who may defer a portion of their gross pay. The Company makes contributions to the 401(k) Plan based on percentages of an employee's eligible compensation as specified in the 401(k) Plan, and such employer contributions are in the form of cash. The following table presents the amount of the Company's contributions made to the 401(k) Plans: Years Ended December 31, (in thousands) 2022 2021 401(k) Plans employer contributions $ 552 $ 479 Note 17 - Subsequent Events Unless disclosed elsewhere in the notes to the Consolidated Financial Statements, the following is the significant matter that occurred subsequent to December 31, 2022. Acquisition On February 1, 2023 (the "Acquisition Date"), the Company entered into a securities purchase agreement (the "Purchase Agreement") with Arq Limited ("Arq Ltd."), a company incorporated under the laws of Jersey, pursuant to which the Company acquired all of the direct and indirect equity interests of Arq Limited’s subsidiaries (the "Arq Acquisition," and hereafter referred to as "Arq") in exchange for consideration (the "Purchase Consideration") totaling $ 31.2 million and consisting of (i) 3,814,864 shares of the Company's common stock, par value $ 0.001 per share (the "Common Stock"), valued at $ 12.4 million based on the closing price of the Common Stock on the Acquisition Date and (ii) 5,294,462 shares of the Company's Series A Convertible Preferred Stock, par value $ 0.001 per share (the "Series A Preferred Stock" or the "Preferred Shares"), valued at $ 18.8 million. The Company also incurred $ 8.7 million in acquisition-related costs, which have been expensed as incurred. Of the total Preferred Shares, 833,914 are being held in escrow (the "Escrow Shares") based on a contingent redemption feature, (the "Contingent Redemption Feature," as defined below). The fair value of the Preferred Shares issued was determined to be $3.46 per Preferred Share on the Acquisition Date (the ("Preferred Share Price") plus the value of the Contingent Feature related to the Escrow Shares. In connection with the issuance of the Series A Preferred Stock pursuant to the Purchase Agreement, the Company filed the Certificate of Designations of Preferred Stock for the Series A Preferred Stock (the "Certificate of Designations") with the Secretary of State of the State of Delaware. Under the Certificate of Designations, 8.9 million preferred shares were designated as Series A Preferred Stock. 79 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements Arq's principal office is located in London, United Kingdom, with additional offices located in Lexington and Corbin, Kentucky near its main production facility. Arq is an environmental technology company that has developed a process for transforming coal waste into a purified, microfine carbon powder ("Arq Powder") that can be used as an alternative to oil or in-ground mined coal to produce a range of carbon products. With the completion of the Arq Acquisition, the Company intends to first sell Arq Powder as a feedstock to produce high-quality AC for use in water and air purification markets. Series A Preferred Stock Each share of Series A Preferred Stock will be automatically converted into a share of Common Stock upon approval by the stockholders of the Company. Each share of Series A Preferred Stock is deemed to have an original issue price of $ 4.00 per share (the "Original Issue Amount"). The number of shares of Common Stock issued upon conversion of each share of Series A Preferred Stock shall be equal to the product of (i) the sum of (A) the Original Issue Amount plus (B) an amount equal to the cumulative amount of the accrued and unpaid dividends on such share at such time divided by (ii) the Original Issue Amount, subject to adjustment. Holders of the Series A Preferred Stock are entitled to receive cumulative dividends which will accrue quarterly on the last day of each applicable quarter (whether or not declared or funds for their payment are lawfully available) and will be payable quarterly, in arrears, on the earlier to occur of (a) the date any dividend is paid to holders of Common Stock with respect to such quarter and (b) 30 days after the end of each quarter (the "Series A Quarterly Dividend") at the rate per share of Series A Preferred Stock equal to the greater of (i) if the Company declares a cash dividend on the Common Stock with respect to such quarter, the amount of the cash dividend that would be received by a holder of Common Stock in which such share of Series A Preferred Stock would be convertible on the record date for such cash dividend and (ii) an annual rate (the "Rate") of 8.0 % of the Original Issue Amount per annum compounded quarterly with respect to such quarter. The Rate will increase by 2.0 % on the first day of the first quarter ending on or after the 635th day following the closing date of the first issuance of Series A Preferred Stock and on each subsequent anniversary of such date. The Series A Quarterly Dividend is payable in cash or in additional shares of Series A Preferred Stock (the "Series A PIK Shares"), at the option of us. The number of Series A PIK Shares to be issued shall be determined by dividing (i) the Series A Quarterly Dividend payable with respect to all shares of Series A Preferred Stock held by a holder thereof by (ii) the aggregate Original Issue Amount of all shares of Series A Preferred Stock held by a holder thereof, and each fractional Series A PIK Share will be rounded to the nearest whole Series A PIK Share (with 0.5 of a share being rounded down to 0.0). In the event of the Company’s liquidation, dissolution or winding up, after payment or provision for payment of its debt and other liabilities, a holder of Series A Preferred Stock will receive a liquidating distribution equal to the amount of the cumulative accrued but unpaid dividends on each share of Series A Preferred Stock held by such holder. After the payment to the holders of Series A Preferred Stock of such liquidation preference, the holders of outstanding shares of Series A Preferred Stock will participate pari passu with the holders of Common Stock on an as-converted basis in any remaining distributions out of the Company’s assets available for distribution to stockholders. Holders of shares of Series A Preferred Stock will generally have no voting rights. However, the Company is restricted from taking certain actions without the written consent or affirmative vote of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, including, but not limited to, amending the Company’s Certificate of Incorporation or Bylaws in a manner that adversely affects the rights of the Series A Preferred Stock or consummating a merger of the Company with or into another party or a sale of substantially of our assets. If the approval by the stockholders of the Company of conversion of the Series A Preferred Stock has not been obtained, each outstanding share of Series A Preferred Stock will be redeemed by the Company on February 1, 2028 for cash, at a redemption price equal to the sum of (i) the product of (x) 140 % and (y) the Original Issue Amount, plus (ii) an amount equal to the cumulative amount of accrued and unpaid dividends on such share of Series A Preferred Stock. Acquisition Accounting The Company accounted for the Arq Acquisition as an acquisition of a business as of the Acquisition Date. The fair value of the Purchase Consideration has been preliminarily allocated to the acquired assets and assumed liabilities based on their respective fair values as of the Acquisition Date. The Company also incurred $ 8.7 million in acquisition-related costs (or transaction costs), which were expensed as incurred. 80 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements Under the terms of the Purchase Agreement, the Escrow Shares are being withheld pending a determination by the IRS that no tax withholding is required on the Purchase Consideration issued to Arq Ltd. (the "Arq Ltd. Tax Liability"). The Company has estimated the fair value of the potential Arq Ltd. Tax Liability at $ 3.3 million. In the event that the IRS determines that no withholding is required by Arq Ltd.in connection with the Purchase Considered received by Arq Ltd., all of the Escrow Shares will be released and delivered to Arq Ltd. In the event that the IRS determines that any amount of withholding is required by Arq Ltd., the Company has agreed to redeem a sufficient number of Escrow Shares to fund the required payment to the IRS, and that number of Escrow Shares will be returned to the Company (the "Contingent Redemption Feature"). The number of Escrow Shares to be returned to the Company is equal to the required withholding amount divided by the Original Issue Amount, not to exceed a maximum of 833,914 Escrow Shares, and is equal to $ 3.3 million based on the Original Issue Amount (the "Maximum Contingent Redemption Amount"). The fair value of the Escrow Shares is the Maximum Contingent Redemption Amount and the fair value of the non-escrowed Preferred Shares ("Non Escrow Shares") is the Preferred Share Price. The Series A Preferred Stock contains a mandatory redemption feature in the event the Series A Preferred Stock is not converted prior to February 1, 2028. The Company has determined that both the Escrow Shares and the Non Escrow Shares do not meet the definition of mandatorily redeemable financial instruments as there is a substantive conversion feature, and are therefore not classified as liabilities. As both the Escrow Shares and Non Escrow Shares represent financial instruments that are redeemable for cash, SEC guidance mandates that preferred securities which are redeemable upon the occurrence of an event that is not solely within the control of the issuer be classified outside of permanent equity as "temporary equity." Accordingly, the Company has classified all of the Preferred Shares as temporary equity as of the Acquisition Date. The following table provides the preliminary estimated fair values of the assets acquired and liabilities assumed as of the Acquisition Date: (in thousands) Preliminary Purchase Price Allocation Cash $ 1,411 Inventories, net 340 Prepaid expenses and other current assets 1,889 Property, plant and equipment, net 39,199 Other long-term assets, net 19,460 Total Assets $ 62,299 Accounts payable and accrued expenses $ 9,323 Other current liabilities — Long-term debt, net of current portion 20,502 Other long-term liabilities 1,269 Total Liabilities $ 31,094 Total Preliminary Purchase Price $ 31,205 The intangible assets acquired are composed of Developed Technology and the estimated useful life is 10 years. 81 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements Unaudited Pro Forma Financial Information The following represents the pro forma effects of the Arq Acquisition as if it had occurred on January 1, 2021. The pro forma net (loss) income for each of the two years presented has been calculated after applying the Company’s accounting policies in effect for those years. In addition, pro forma net (loss) income includes: (1) for the year ended December 31, 2021, an increase in Payroll and benefits for compensation expense of $ 1.9 million payable to certain Arq employees triggered by change in control provisions in employment agreements as well as in employee severance agreements that is not recognized in the historical financial statements, assuming such amounts will be paid in cash; (2) for the year ended December 31, 2022, a decrease in depreciation and amortization resulting from fair value adjustments to Property, plant, equipment of $ 0.9 million, and for the year ended 2021, an increase in depreciation and amortization resulting from fair value adjustments to Property, plant, equipment of $ 1.1 million; (3) for each of the years ended December 31, 2022 and 2021, an increase in amortization resulting from fair value adjustments to Intangibles of $ 0.8 million (4) for the year ended December 31, 2022 and 2021, increases to interest expense for: (a) the issuance of the Term Loan (as defined below) including stated interest and the amortization of the Term Loan's discount and issuance costs and (b) amortization of debt discount related to a fair value adjustment to an assumed term loan of Arq of $ 2.3 million and $ 2.2 million, respectively; (5) the removal of $ 6.3 million of transaction costs incurred for the year ended December 31, 2022 but included as additional transaction costs for the year ended December 31, 2021; and (6) for the year ended December 31, 2021, the addition of $ 5.9 million of transaction costs incurred for the period from January 1, 2023 through the Arq Acquisition Date, together with the income tax effects on (1) through (6). Since Arq had no revenues for the years ended December 31, 2022 or 2021, pro forma revenues are the same as the Company's reported revenues for those years. Years ended December 31, (in thousands) 2022 2021 Revenues 102,987 100,294 Net (loss) income ( 66,297 ) 5,344 Subscription Agreements As a requirement of the Purchase Agreement, and on February 1, 2023, the Company entered into subscription agreements with certain persons (the "Subscribers") pursuant to which the Subscribers subscribed for and purchased 3,842,315 shares of Common Stock for an aggregate price of $ 15.4 million and at a price per share of $ 4.00 ("PIPE Investment"). As a requirement of the Arq Acquisition, the Company appointed three new directors to the Board (the "New Directors"), each of whom was a director of Arq Ltd and is considered a related party as of the Acquisition Date. Each of the New Directors individually or through their affiliated entities were Subscribers in the PIPE Investment. Loan Agreement On August 19, 2022, the Company and CF Global Credit, LP ("CF Global") executed a commitment letter pursuant to which CF Global offered to provide a $ 10 million term loan (the "Term Loan") to the Company, of which $ 8.5 million was the net proceeds. The proceeds of the Term Loan are intended to be utilized for the general corporate purposes of the Company and its subsidiaries. As a requirement of the Purchase Agreement, and on February 1, 2023 (the "Closing Date"), the Company, as borrower, certain of its subsidiaries, as guarantors, and CF Global, as administrative agent and lender, entered into the Term Loan upon execution of a Term Loan and Security Agreement (the "Loan Agreement"). Capitalized terms used herein but not otherwise defined have the meaning set forth in the Loan Agreement. CF Global is an affiliate of one of the Company's directors who was appointed on February 1, 2023 in conjunction with the Arq Acquisition. This director is considered a related party effective February 1, 2023. The Term Loan has a term of 48 months and bears interest at a rate equal to either (a) Adjusted Term SOFR (subject to a 1.00 % floor and a cap of 2.00 %) plus a margin of 9.00 % paid in cash and 5.00 % paid in kind or (b) Base Rate plus a margin of 8.00 % paid in cash and 5.00 % paid in kind, which interest on the Term Loan in each case shall be payable (or capitalized, in the case of in kind interest) quarterly in arrears. 82 Advanced Emissions Solutions, Inc. and Subsidiaries Notes to Consolidated Financial Statements The Company is permitted to prepay the Term Loan at any time subject to the following prepayment premium: (i) prior to the twelve (12) month anniversary of the Closing Date, the Make-Whole Amount (as defined below), (ii) thereafter but prior to the thirty-six (36) month anniversary of the Closing Date, 2.00 % of the outstanding principal amount of the Term Loan being repaid or prepaid or (iii) thereafter until the maturity date, 1.00 % of the outstanding principal amount of the Term Loan being repaid or prepaid. The "Make-Whole Amount", with respect to any repayment or prepayment, is (i) an amount equal to all required interest payable (except for currently accrued and unpaid interest) on the aggregate principal amount of the Term Loan subject to such prepayment or repayment from the date of such prepayment or repayment through but excluding the date that is the first anniversary of the Closing Date calculated using an interest rate equal to (x) Adjusted Term SOFR for an interest period of one month in effect on the third U.S. Government Securities Business Day prior to such prepayment or repayment plus (y) 14.00 % per annum and assuming all interest was paid in cash, plus (ii) a prepayment premium of 2.00 % on the aggregate principal amount of the Term Loan subject to such prepayment or repayment. The Term Loan is secured by substantially all of the assets of the Company and its subsidiaries (including those acquired in Arq Acquisition), subject to customary exceptions. The Loan Agreement includes, among others, the following covenants: (1) beginning March 31, 2023 and as of the end of each fiscal quarter thereafter, the Company must maintain a minimum cash balance of $ 5.0 million; (2) (x) as of December 31, 2023, for the fiscal year then ended, the Company must have a minimum annual revenue, on a consolidated basis, of $ 70.0 million, (y) as of December 31, 2024, for the fiscal year then ended, the Company must have a minimum annual revenue, on a consolidated basis, of $ 85.0 million and (z) for any fiscal year thereafter, the Company must have a minimum annual revenue, on a consolidated basis, of $ 100.0 million; (3) (x) as of December 31, 2024, for the fiscal year then ended, the Company must have a minimum EBITDA of $ 3.0 million and (y) for any fiscal year thereafter, the Company must have a minimum EBITDA of $ 16.0 million; and (4) beginning after the fiscal quarter ending September 30, 2023, during an LTV Trigger Period, the Company must not exceed a loan to value (based on the consolidated total assets of the Company and its subsidiaries) ratio of 0.40 :1.00. In addition, in connection with the Loan Agreement and as consideration for the Term Loan, the Company agreed to issue to CF Global a warrant (the "Warrant") to purchase 325,457 shares of Common Stock. The Warrant has an exercise price of $ 0.01 per share, subject to adjustment as set forth in the Warrant, is exercisable immediately and will expire on February 1, 2030. The terms of the Warrant do not allow for cash exercise, and the Warrant may only be exercised pursuant to the terms thereof. One of the New Directors is a principal of CF Global and both this director and CF Global are considered related parties as of the Acquisition Date. Termination of Transaction Agreement In connection with entry into the Purchase Agreement described above, that certain Transaction Agreement, dated August 19, 2022, by and among Elbert Holdings, Inc., Arq Ltd. and the Company (the "Transaction Agreement") was terminated on February 1, 2023 pursuant to a termination agreement entered into by each of the parties to the Transaction Agreement. The Transaction Agreement would have provided, subject to its terms and conditions, for a business combination of Arq Ltd. and the Company. By virtue of the termination of the Transaction Agreement, the Transaction Agreement became void and of no further force or effect, with no liability of the part of any party to the Transaction Agreement. 83 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.