Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. Advanced Emissions Solutions, Inc. (1515156) 10-Q published on May 11, 2020 at 4:56 pm
Reporting Period: Mar 30, 2020
Drivers of demand and key factors affecting our profitability differ by segment. In the RC segment, demand is driven primarily by IRC Section 45, which is expected to expire no later than December 31, 2021. Operating results in RC have been influenced by: (1) the ability to sell, lease or operate RC facilities; (2) lease renegotiation or termination; and (3) changes in tonnage of RC due to changing coal-fired dispatch and electricity power generation sources. In the PGI segment, demand is driven primarily by consumables-based solutions for coal-fired power generation and other industrials. Operating results in PGI have been influenced by: (1) changes in our sales volumes; (2) changes in price and product mix; and (3) changes in coal-fired dispatch and electricity power generation sources.
In March 2020, the World Health Organization ("WHO") declared the novel strain of coronavirus ("COVID-19") a global pandemic. We are designated by the Cybersecurity and Infrastructure Security Agency ("CISA") of the Department of Homeland Security as a critical infrastructure supplier to the energy sector. Our operations have been deemed essential and, therefore, our facilities remain open and our employees employed. We follow the COVID-19 guidelines from the Centers for Disease Control concerning the health and safety of our personnel, including remote working for those that have the ability to do so, sequestered employees at our plant and other heath safety measures. These measures have resulted in an increase in our personnel costs, operational inefficiencies and the incurrence of incremental costs to allow manufacturing operations to continue; while at the same time we have faced a general downturn in our sales and marketing efforts. The duration of these measures is unknown, may be extended and additional measures may be imposed.
For the three months ended March 31, 2020, equity earnings from our interest in Tinuum Group were positively impacted by the addition of two new RC facilities during the second half of 2019. However, equity earnings from Tinuum Group for the three months ended March 31, 2020 decreased from the comparable quarter in 2019 primarily from a new RC facility in the first quarter of 2019 that was recognized as a point-in-time sale and higher depreciation recognized of approximately $2.4 million for the three months ended March 31, 2020 on all Tinuum Group RC facilities as a result of a reduction in RC facilities estimated useful lives as determined by Tinuum Group during the second half of 2019. Further contributing to the decrease in equity earnings quarter over quarter was the restructuring of RC facility leases with Tinuum Group's largest customer, which decreased lease payments and equity earnings beginning in the three months ended September 30, 2019. We believe the increase in depreciation and decrease in lease payments will negatively impact equity earnings for the remainder of 2020 as well as 2021.
In March 2020, the WHO declared the outbreak of COVID-19 a global pandemic, which continues to spread throughout the United States ("U.S.") and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. We have been designated by CISA as a critical infrastructure supplier to the energy sector. This designation provides some latitude in continuing to conduct our business operations compared to companies in other industries and markets. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations, as well as that of our key customers, suppliers and other counterparties, for an indefinite period of time. To support the health and well-being of our employees, customers, partners and communities, a vast majority of our employees not directly involved in operating our plant, have been working remotely since March 2020. In addition, many of our customers are working remotely, which may delay the timing of some orders and deliveries expected in the second quarter of 2020 and beyond. The disruptions to our operations caused by COVID-19 may result in inefficiencies, delays and additional costs in our manufacturing, sales, marketing, and customer service efforts that we cannot fully mitigate through remote or other alternative work arrangements. Although such disruptions did not have a material adverse impact on our financial results for the first quarter of fiscal 2020, we currently expect that our operating costs of revenue for the second quarter of fiscal 2020 will be higher than initially anticipated at the beginning of 2020 as a result of reduced plant capacity due to fewer employees physically working at our plant, increased costs associated with those employees continuing to physically work at our plant and disruptions in our supply chain. In addition, for the balance of 2020, we may see reduced demand for our products due to reduced interaction with our customers and our inability to target new customers and markets. Similarly, we anticipate that Tinuum Group's ability to sell or lease additional RC facilities will be delayed due to the economic shutdown.
As previously disclosed, in April 2020, we entered into a loan (the "PPP Loan") in the amount of $3.3 million through a bank under the Paycheck Protection Program sponsored by the U.S. Small Business Administration ("SBA"). The PPP loan became available to us pursuant to the Coronavirus Aid, Relief, and Economic Security Act and is administered by the SBA. We entered into the PPP Loan to provide additional liquidity in light of our COVID-19-related higher employee costs. Proceeds from the PPP Loan will be used to cover a portion of our existing payroll and related expenses, including sequestration pay for certain employees, as well as certain other operating costs as permitted under the Paycheck Protection Program. We expect that current cash and cash equivalent balances, inclusive of the PPP Loan, and cash flows that are generated from operations will be sufficient to meet our working capital needs and other capital and liquidity requirements for at least the next 12 months. However, if our business is more adversely impacted by COVID-19 than expected, and our personnel costs remain higher than budgeted, our cash needs could increase.