U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 000-50216
ADA-ES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1457385
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8100 SouthPark Way, Unit B, Littleton, Colorado 80120
(Address of principal executive offices) (Zip Code)
(303)734-1727
(Registrant's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of he Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]; No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. (Check one): Yes [ ]; No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes______; No______
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 28, 2006
-------------------------- -----------------------------
Common Stock, no par value 5,621,200
-----------------------------------------------------
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ADA-ES, Inc. and Subsidiary
Consolidated Balance Sheets (Unaudited)
March 31, 2006
(amounts in thousands, except share amounts)
March 31, December 31,
2006 2005
-------- --------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 14,865 $ 14,026
Trade receivables, net of allowance for doubtful accounts of $4 2,797 3,014
Investments in securities 2,001 2,515
Prepaid expenses and other 273 283
-------- --------
Total current assets 19,936 19,838
-------- --------
PROPERTY AND EQUIPMENT, at cost 1,896 1,663
Less accumulated depreciation and amortization (1,068) (1,013)
-------- --------
Net property and equipment 828 650
-------- --------
GOODWILL, net of $1,556 in amortization 2,024 2,024
INTANGIBLE ASSETS, net of $47 and $44, respectively, in amortization 159 156
INVESTMENTS IN SECURITIES 5,494 5,663
OTHER ASSETS 723 385
-------- --------
TOTAL ASSETS $ 29,164 $ 28,716
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,697 $ 1,706
Accrued payroll and related liabilities 427 516
Accrued expenses 214 138
Deferred revenue 395 460
-------- --------
Total current liabilities 2,733 2,820
-------- --------
LONG-TERM LIABILITIES:
Deferred warranty and other 61 40
-------- --------
Total liabilities 2,794 2,860
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock; 50,000,000 shares authorized, none outstanding -- --
Common stock; no par value, 50,000,000 shares authorized,
5,620,040 and 5,610,267 shares issued and outstanding, respectively 26,577 26,318
Accumulated other comprehensive income 50 33
Accumulated deficit (257) (495)
-------- --------
Total stockholders' equity 26,370 25,856
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 29,164 $ 28,716
======== ========
See accompanying notes.
ADA-ES, Inc. and Subsidiary
Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, 2006 and 2005
(amounts in thousands, except per share)
For the Three Months Ended
March 31,
2006 2005
------- -------
REVENUE:
Mercury emission control $ 3,120 $ 1,607
Flue gas conditioning and other 529 565
------- -------
Total net revenues 3,649 2,172
COST OF REVENUES
Mercury emission control 2,019 1,012
Flue gas conditioning and other 252 253
------- -------
Total cost of revenues 2,271 1,265
------- -------
GROSS MARGIN 1,378 907
OTHER COSTS AND EXPENSES:
General and administrative 852 552
Research and development 304 258
Depreciation and amortization 58 42
------- -------
Total expenses 1,214 852
------- -------
OPERATING INCOME 164 55
OTHER INCOME (EXPENSE):
Interest and other expense -- (1)
Interest and other income 194 70
------- -------
Total other income 194 69
------- -------
INCOME BEFORE INCOME TAX PROVISION 358 124
DEFERRED INCOME TAX PROVISION (120) (29)
------- -------
NET INCOME 238 95
UNREALIZED GAINS AND (LOSSES) ON CERTAIN INVESTMENTS
IN DEBT AND EQUITY SECURITIES, net of tax 17 (18)
------- -------
COMPREHENSIVE INCOME $ 255 $ 77
======= =======
NET INCOME PER COMMON SHARE - BASIC AND DILUTED $ .04 $ .02
======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,616 4,811
======= =======
WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING 5,834 5,029
======= =======
See accompanying notes.
ADA-ES, Inc. and Subsidiary
Condensed Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended March 31, 2006 and 2005
(amounts in thousands)
(Unaudited)
ACCUMULATED
COMMON STOCK OTHER
--------------------- COMPREHENSIVE ACCUMULATED
SHARES AMOUNT INCOME DEFICIT TOTAL
-------- -------- -------- -------- --------
BALANCES, January 1, 2005 4,796 $ 13,134 $ 34 $ (1,158) $ 12,010
Issuance of stock on exercise of options 35 272 -- -- 272
Tax benefit of stock transactions 244 244
Unrealized losses on investments -- -- (18) -- (18)
Net income -- -- -- 95 95
-------- -------- -------- -------- --------
BALANCES, March 31, 2005 4,831 $ 13,650 $ 16 $ (1,063) $ 12,603
======== ======== ======== ======== ========
BALANCES, January 1, 2006 5,610 $ 26,318 $ 33 $ (495) $ 25,856
Stock and stock options issued to
consultant and directors for services 7 147 -- -- 147
Issuance of stock on exercise of options 3 32 -- -- 32
Stock-based compensation -- 80 -- -- 80
Unrealized gain on investments -- -- 17 -- 17
Net income -- -- -- 238 238
-------- -------- -------- -------- --------
BALANCES, March 31, 2006 5,620 $ 26,577 $ 50 $ (257) $ 26,370
======== ======== ======== ======== ========
See accompanying notes.
ADA-ES, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2006 and 2005
(amounts in thousands)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------
2006 2005
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 238 $ 95
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 58 42
Loss on asset dispositions and securities 22 42
Deferred tax expense 120 29
Expenses paid with stock and stock options 227 --
Changes in operating assets and liabilities:
Receivables 217 (378)
Prepaid expenses and other (319) (6)
Accounts payable (9) (122)
Accrued expenses (151) (53)
Deferred revenue and other (45) 30
-------- --------
Net cash provided by (used in) operating activities 358 (321)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for equipment and patents (239) (28)
Investment in securities (1,812) (2,668)
Proceeds from sale of securities 2,502 2,628
-------- --------
Net cash provided by (used in) investing activities 451 (68)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and notes payable (2) (1)
Exercise of stock options 32 272
-------- --------
Net cash provided by financing activities 30 271
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 839 (118)
CASH AND CASH EQUIVALENTS, beginning of period 14,026 2,108
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 14,865 $ 1,990
======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash payments for interest $ 1 $ 1
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Tax effect of stock option exercises $ -- $ 244
======== ========
See accompanying notes.
ADA-ES, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2006
(1) General
The accompanying consolidated financial statements were prepared in accordance
with U.S. generally accepted accounting principles and reflect all adjustments
which are, in the opinion of management, necessary for fair representation of
the financial results of ADA-ES, Inc. and subsidiary (the Company) for the
interim periods shown. Such statements should be considered in conjunction with
Registrant's Form 10-KSB, filed for the year ended December 31, 2005.
(2) Investments
Investments in available-for-sale securities consisting of certificates of
deposit, equities and corporate, government and municipal bonds maturing in the
next year are reported as current assets at their fair values in investments in
securities. Investments in available-for-sale securities not included in current
assets are reported at their fair values in non-current investments in
securities. Cumulative unrealized gains and losses on such securities are shown,
net of their tax effect, as a component of shareholders' equity and such gains
or losses related to the current period are shown in the determination of
comprehensive income as reported on the statement of operations.
(3) Stock Based Compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123R (SFAS 123R), Share-Based Payment, which requires the Company
to record equity compensation to employees at fair value. Prior to January 1,
2006, the Company elected to use APB 25, which required expense to be recognized
only to the extent the exercise price of the stock-based compensation was below
the market price on the date of grant. The modified prospective approach was
used in adapting SFAS 123R, therefore results prior to January 1, 2006 have not
been restated. For the three months ended March 31, 2006, $80,000 was charged to
expense for equity compensation, which amounted to $53,000 after tax and ($0.01)
of basic and diluted earnings per share.
If compensation cost for the Company's stock-based compensation plans had been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123R during 2005, then the
Company's net income per share for the three months ended March 31, 2005 would
have been adjusted to the pro forma amounts indicated below:
Net income as reported $ 95,000
Deduct: Stock-based compensation cost under SFAS 123(R) (35,000)
-----------
Pro forma net income $ 60,000
===========
Pro forma basic and diluted net income per share:
Pro forma shares used in the calculation of pro forma net
income per common share -
Basic 4,811,000
===========
Diluted 5,029,000
===========
Reported net income per common share -
Basic and Diluted $ 0.02
===========
Pro forma net income per common share -
Basic and Diluted $ 0.01
===========
(4) Stock Options
During 2003 the Company adopted the 2002 ADA-ES, Inc. Stock Option Plan and
reserved 400,000 shares of common stock for issuance under the plan. In general,
all options granted under the plan expire ten years from the date of grant
unless otherwise specified by the Company's board of directors. The exercise
price of an option will be determined by the compensation committee of the board
of directors at the time the option is granted and will not be less than 100% of
the fair market value of a share of our common stock on the date the option is
granted. The compensation committee may provide in the option agreement that an
option may be exercised in whole immediately or is exercisable in increments
through a vesting schedule. During the first quarter of 2006, 19,900 options
were granted under this plan.
During 2004, the Company adopted the 2004 Executive Stock Option Plan. This plan
authorized the grant of up to 200,000 options to purchase shares of the
Company's Common Stock to executive officers of the Company, all of which were
granted in 2004. The option exercise price of $8.60 per share was the market
price on the date of the grant. The options are exercisable over a 10-year
period based on a vesting schedule that may be accelerated based on performance
of the individual recipients as determined by the Board of Directors. In January
2006, the Board of Directors authorized the vesting of 38,428 options under this
plan with a fair value of $77,000. Such options were exercisable at March 31,
2006.
During 2004, the Company adopted a plan (the "2004 Plan") for the issuance of
shares and the grant of options to purchase shares of the Company's Common Stock
to the Company's non-management directors. The 2004 Plan provided for the award
of stock of 603 shares per individual non-management director or 4,221 shares in
total, and the grant of options of 5,000 per individual non-management director
or 35,000 in total, all of which were formally granted and issued in 2005 after
approval of the 2004 Plan by the stockholders. The option exercise price of
$13.80 per share for the stock options granted on November 4, 2004 was the
market price on the date of the grant. The options are exercisable over a period
of five years and will vest over a three-year period, one-third each year for
continued service on the Board. If such service is terminated, the non-vested
portion of the option will be forfeited. During the first quarter of 2006,
10,000 of such options were forfeited after the resignation of two directors. As
of March 31, 2006, one-third of the remaining outstanding options, or a total of
8,335 options had vested and were exercisable.
During 2005 the Company adopted the 2005 Directors' Compensation Plan (the "2005
Plan"), which authorized the issuance of shares of Common Stock and the grant of
options to purchase shares of the Company's Common Stock to non-management
directors. The 2005 Plan provides a portion of the annual compensation to
non-management directors of the Company in the form of awards of shares of
Common Stock and vesting of options to purchase Common Stock of the Company for
services performed for the Company. Under the 2005 Plan, the award of stock is
limited to not more than 1,000 shares per individual per year, and the grant of
options is limited to 5,000 per individual in total. The aggregate number of
shares of Common Stock reserved for issuance under the 2005 Plan totals 90,000
shares (50,000 in the form of stock awards and 40,000 in the form of options).
The exercise price will be the market price on the date of grant, the shares of
Stock underlying the option will vest for exercise at a rate of no more than
1,667 shares per annual period per individual, and any unvested shares of Stock
that are outstanding at the date the individual is no longer is a Director will
be forfeited. The 2005 Plan, if not terminated earlier by the Board, will
terminate ten years after the date of its adoption. In January 2006 the Board of
Directors authorized the issuance of 1,000 shares of Common Stock each, or a
total of 7,000 shares, to the non-management directors of the Company. No
options have been granted under the 2005 Plan.
Following is a table of options activity for the quarter ended March 31, 2006:
Weighted
Average
Employee Non-Employee Exercise
Options Options Price
-------- -------- --------
OPTIONS OUTSTANDING, January 1, 2006 351,483 80,000 $ 10.99
Options granted 19,900 -- $ 20.20
Options expired -- (10,000) 13.80
Options exercised (2,773) -- 11.46
-------- -------- --------
OPTIONS OUTSTANDING, March 31, 2006 368,610 70,000 $ 11.34
======== ======== ========
The weighted average remaining contractual life for all options as of March 31,
2006 was approximately 8.3 years. At March 31, 2006, 119,869 options with a
weighted average exercise price of $10.19 were fully vested and exercisable. Of
the remaining 318,741 options, 95,241 options with a weighted average exercise
price of $13.47 vest in 2006, 49,233 options with a weighted average exercise
price of $16.78 vest in 2007, and 150,267 options with an exercise price of
$8.60 vest at the discretion of the board of directors based on specific
achievements of individual employees, with minimum annual vesting of 10,000 and
maximum vesting of 20,000. Additionally, 24,000 options with an exercise price
of $14.60 vest at the discretion of the board of directors upon achievement of
performance objectives.
The average fair value of each employee option granted in 2006 was approximately
$5.44 and was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions. No options
were granted in the first quarter of 2005.
Expected volatility 38%
Risk-free interest rate 4.0%
Expected life of options (in years) 4.0
Expected dividends 0
Following is information related to options outstanding/exercisable at March 31,
2006:
Shares Outstanding Shares Exercisable
------------------ ------------------
Weighted
Weighted Weighted Average
Average Average Contractual
Range Number of Exercise Number of Exercise Life
----- Shares Price Shares Price ------
------ ----- ------ ----- (in years)
$2.80 13,425 $ 2.80 13,425 $2.80 7.8
$8.60 - $10.00 253,710 $ 8.88 67,372 $9.08 8.3
$13.80 - $18.61 151,575 $15.05 39,072 $14.64 8.3
$20.20 19,900 $20.20 0 n/a 10.0
------- ------ ------- ------ ----
438,610 $11.34 119,869 $10.19 8.3
======= ====== ======= ====== ====
The aggregate intrinsic value of options exercised at March 31, 2006, based on a
market price on that date of $24.14 was $35,000. No options were exercised in
the first quarter of 2005. The aggregate intrinsic value of options exercisable
at March 31, 2006 and 2005 was $1,672,000 and $1,139,000 (based on a market
price of $23.95), respectively.
(5) Business Segment Information
As of March 31, 2006, total compensation cost related to nonvested options which
had not yet been recognized was $608,000. The weighted average period over which
such expense is expected to be recognized is 2.1 years.
The Company has two reportable segments: mercury emission control (MEC) and flue
gas conditioning and other (FGC). All assets are located in the US and are not
evaluated by management on a segment basis. All significant customers are US
companies.
Three Months Ended March 31, 2006 (amounts in thousands)
MEC FGC Total
--- --- -----
Total revenue $3,120 $529 $3,649
Segment profit $728 $165 $893
Three Months Ended March 31, 2005 (amounts in thousands)
MEC FGC Total
--- --- -----
Total revenue $1,607 $565 $2,172
Segment profit $259 $273 $532
A reconciliation of reported total segment profit to Net Income for the periods
shown above is as follows (amounts in thousands):
2006 2005
----- -----
Total segment profit $ 893 $ 532
Non-allocated general & admin expenses (671) (435)
Depreciation and amortization (58) (42)
Interest, other income and taxes 74 40
----- -----
Net income $ 238 $ 95
===== =====
--------------------------------------------
Item 2. Management's Discussion and Analysis or Plan of Operation.
This Quarterly Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 that involve risks and uncertainties. The following
discussion and analysis of our financial condition and results of operations
should be read in conjunction with the audited consolidated financial statements
and related notes thereto included in our Annual Report on Form 10-KSB for the
year ended December 31, 2005. Words or phrases such as "will," "hope," "expect,"
"anticipate," "intend," "plan" or similar expressions are generally intended to
identify forward-looking statements. Forward-looking statements in this report
include statements regarding our expectations for market growth, growth in MEC
revenues and continued positive cash flow; the impact of governmental
regulations and the outcome of pending litigation contesting them; timing of
performance of services under existing contracts and associated revenue
recognition; expected increase in merger and acquisition activities; expected
growth in MEC revenues, operating cash flow and research and development
expenses; anticipated declines in the market for FGC chemicals and services and
revenues from such market, and gross margins; expenses under our defined
contribution and 401(k) plan; our ability to satisfy performance guaranties;
sufficiency of working capital; future capital expenditures; realization of net
deferred tax assets; outcome of any governmental audits of our contracts;
availability of skilled labor; and no material effect on our internal controls.
Forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from the results discussed herein.
The principal risks and uncertainties that may affect our actual performance and
results of operations include the following: general economic conditions;
adverse weather; changes in federal income tax laws and federal funding for
environmental technology/specialty chemicals programs; changes in federal and
state governmental regulations; changes in governmental and public policy; the
outcome of pending litigation regarding EPA regulations; permitting
requirements; changes in market demand and cost/benefit analysis of our products
and services; results of demonstrations of our technologies; construction of new
coal-fueled power plants and significant retrofitting of existing plants;
availability and pricing of coal compared to other energy sources; changes in
relationships with key business partners; intellectual property protection of
our technologies; dependence on key employees; availability of skilled
personnel; changes in economic conditions specific to one or more of our markets
and businesses; competition; availability of raw materials; and unexpected
operations difficulties. Other risks and uncertainties may also affect the
outcome of our actual performance and results of operations. You are cautioned
not to place undue reliance on the forward-looking statements made in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Overview
We provide environmental technologies and specialty chemicals to the
coal-burning electric utility industry. Revenues are generated through (1) time
and materials and fixed-price contracts for the emerging mercury emission
control (MEC) market, several of which are co-funded by government (Department
of Energy - DOE) and industry and (2) the sale of specialty chemicals and
services for flue gas conditioning (FGC) and other applications. As we discussed
in prior reports, the market for our combustion aids (CA) products has been
declining, causing revenues from this product to be immaterial to our business.
As a result of the immateriality of CA revenues and because CA revenues are
similar in nature to sales in our FGC segment, we have combined the CA segment
with the FGC segment in this report and intend to combine them going forward.
Mercury has been identified as a toxic substance and, pursuant to a court order,
the EPA issued regulations for its control in March 2005. The long-term growth
of the MEC market for the electric utility industry will most likely depend on
how industry chooses to respond to federal and/or other state regulations, which
are in various stages of enactment and challenge in the courts. As many as 1,100
existing coal-fired boilers may be affected by such regulations, if and when
they are fully implemented. Permitting of new coal-fired plants generally
requires them to meet more stringent requirements that likely include MEC. For
the near-term, our revenues from this market will be dependent on (i) DOE- and
industry-funded contracts mentioned above, (ii) mercury testing services and
(iii) equipment sales and commissions on sorbents sold to new plants and
existing plants affected by the implementation of enacted regulations. Although
we expect this market to show steady growth over the next several years, more
significant revenue growth is anticipated when federal (and possible state)
regulations impact a significant portion of existing boilers.
The market for our FGC chemicals and services is relatively flat and is expected
to decline in the near-term. Margins on these products are typically higher than
what we recognize for our present MEC sales and represent an important
contribution to the overall profitability of the Company.
Thus far in 2006, we have signed contracts for six ACI systems to be delivered
in 2006 and 2007, bringing our total number of ACI systems installed or
currently in process to 8. In addition, one system was installed in partnership
with a third party for which we provided design services through a DOE contract.
We are entitled to royalties on future sorbent sales to the utility industry in
North America purchased from a vendor we have a relationship with. Remaining
revenue from the ACI system contracts totaled $6.0 million as of January 1,
2006, of which approximately $1.2 million was recognized in the first quarter of
2006 and approximately $4.8 million is remaining to be recognized. Thus far in
2006, we have also signed two development and testing contracts with DOE with
future expected revenues totaling approximately $7.5 million, including industry
cost share amounts, the services for which are expected to be performed over the
period from contract signing through the fall of 2008. We were recently notified
that we have also been awarded a $100,000 research grant from DOE.
As part of our strategy to address the growing MEC market, we are not only
pursuing internal, organic growth, but we have also been and expect to be
engaged in merger and acquisition (M&A) activities. The major revenue sources
from the growing MEC market are expected to include engineering services,
equipment sales and sorbent supply. Our M&A activities have been and will likely
be focused on candidates engaged in those businesses. The costs we incur in our
M&A activities may be significant. Such costs are generally deferred and either
(a) expensed when it has been determined they are no longer of future value, or
(b) capitalized as part of an acquisition and then subject to future impairment
evaluations. Included in other long-term assets as of March 31, 2006 are
deferred charges amounting to approximately $312,000 related to our M&A
activities incurred during the first quarter of 2006, which may be expensed in
future periods based on the above criteria.
Liquidity and Capital Resources
We had a positive working capital of $17.2 million at March 31, 2006, compared
to working capital of $17.0 million at December 31, 2005. The increase resulted
from an increase in cash, offset by a decrease in short-term investments due to
liquidation of certificate of deposits and fluctuations in operating assets and
liabilities in the normal course of business. In addition to working capital, we
had long-term investments in securities, accounted for as "available-for-sale"
investments, of approximately $5.5 million and $5.7 million at March 31, 2006
and December 31, 2005, respectively. We intend to retain a portion of these
investments to demonstrate strength in our financial position to support
performance guarantees we have been and may continue to provide on sales of ACI
systems. We may also use a portion of such investments and cash on hand to fund
growth of the Company, which may include expansion of product offerings and
strategic acquisitions. We believe that existing and expected future working
capital, which we expect to come from positive cash flow, will be sufficient to
meet the anticipated operating needs of the Company in 2006. However, we cannot
be certain that positive cash flow that we have achieved historically will
continue, and it is possible that we could be required to expend some of our
current working capital to fund operations, although we consider this unlikely.
Our principal source of liquidity is our existing working capital and positive
operating cash flow. The continuation of positive cash flow is somewhat
dependent upon the continuation of chemical sales and operations of the flue gas
conditioning (FGC) units currently in-place in Illinois, Louisiana and Iowa.
These units provided an average monthly cash flow of approximately $30,000 each
in 2005. Since the beginning of 2006, we performed a successful demonstration
project at one plant that we expect to result in future chemical sales, although
at a lower level and with a lower gross margin than existing customers. While we
have been awarded a contract to perform a demonstration project at another plant
beginning in the first half of 2006, we are not certain that this demonstration
will be successful or will result in future sales of FGC equipment and
chemicals. Unsatisfactory results for any of our FGC customers, which could be
caused by a single factor (or some combination of factors) such as changes in
coal, mechanical difficulties (whether in the FGC unit or otherwise), and/or
overall cost/benefit analysis, at any of those units, are likely to result in a
decrease or termination of the sale of chemicals for such units and a reduction
in the cash flow we have historically received, thereby reducing that portion of
our liquidity that has been provided by positive cash flow.
During the first quarter of 2006, we signed two new DOE contracts, bringing the
number of DOE and industry co-funded contracts we are performing services under
to six. In addition, we have been notified by DOE of its intention to negotiate
the final terms of an additional grant totaling $100,000. Assuming no changes in
government funding, we expect to recognize over the next several years the
remaining revenue on the in-progress and new awards totaling $18.2 million as of
March 31, 2006. We recognized $1.3 million related to DOE and industry co-funded
contracts in the first quarter of 2006. We expect to recognize revenue from
these contracts of approximately $6.2 million in total for 2006, including the
first quarter. If further funding were not approved, the Company would decrease
or cease activities on those contracts and would expect to maintain a positive
cash flow but at a reduced level.
We have planned capital expenditures to sustain and improve ongoing operations
for 2006 estimated at $395,000, which include planned expenditures for build out
of space and office equipment to accommodate new employees, replacement of
obsolete computers and office equipment and field equipment. We expect to fund
these requirements out of existing working capital and cash flow from
operations.
Under our defined contribution and 401(k) pension plan, we match up to 5% of
salary amounts deferred by employees in the Plan and contribute certain amounts
based on the profits of the Company, which amounts are determined annually by
our Board of Directors. During the three months ended March 31, 2006 and 2005,
we recognized $25,000 and $21,000, respectively, of matching expense; this
expense is expected to amount to approximately $123,000 in 2006. In the past,
the Company has also made discretionary contributions to the Plan and employees.
Based on results for 2005, the amount paid to the plan totaled $108,000 and was
paid in the form of cash to the accounts of all eligible employees in February
2006. During the first quarters of 2006 and 2005, the Company accrued
approximately $32,000 and $9,000, respectively, for such payments based on
results for the respective quarters.
We recorded net deferred tax assets of $297,000 and $340,000 as of March 31,
2006 and December 31, 2005, respectively. Based on existing R&D contracts
supported by the DOE, the current industry and regulatory environment and other
expectations of continuing work, the Company has determined that it is more
probable than not that deferred tax assets will be realized in the future.
Cash flow from operations totaled $358,000 for the first three months of 2006
compared to cash used in operations of ($321,000) for the same period of 2005.
Cash flow from operations in 2006 increased from 2005 primarily as a result of
increases in net income, expenses paid with stock and stock options, and
deferred income taxes, offset by variations in operating asset and liability
accounts due to fluctuations in the normal course of business.
Net cash provided by investing activities was $451,000 for the first quarter of
2006 compared to cash used in investing activities of ($68,000) in the first
quarter of 2005. In 2006, certificates of deposit were liquidated and held as
cash, whereby proceeds from sales of securities exceeded purchases of
securities. Such excess was offset somewhat by trading activity on investments
to maintain a targeted portfolio balance and maximize earnings, as well as
re-investment of gains that occurred during the period. The net increase in cash
from investment activity was offset by a use of cash for purchases of property
and equipment for the build-out of additional space in our current headquarters
location to accommodate new employees.
Cash provided by financing activities was $30,000 and $271,000 in the first
quarter of 2006 and 2005, respectively. The decrease was due to the exercise of
fewer stock options in 2006. We may require additional debt or equity financing
to support future growth, including potential acquisitions.
Results of Operations
Revenues totaled $3,649,000 for the quarter ended March 31, 2006 versus
$2,172,000 for the quarter ended March 31, 2005, representing an increase of
68%. Revenues in the MEC segment for 2006 increased by $1,513,000 (94%), which
was offset by a decrease of $36,000 (6%) in FGC and other activities. Based on
contracts in hand and other anticipated projects, we anticipate that total
revenues for 2006 will grow by approximately 35% from the 2005 level. We have
been hiring personnel in response to the growth we have realized in the past and
expect to achieve in 2006, and adequate resources of skilled labor appear to be
available to meet anticipated needs.
Revenues in the first quarter of 2006 from the MEC segment were comprised of
government and industry-supported contracts (42%), sales and installation of
activated carbon injection (ACI) systems (38%) and consulting services (20%),
compared to 63%, 2% and 35%, respectively, in the first quarter of 2005. While
revenues from each of these activities increased from the first quarter of 2005
to the first quarter of 2006, the most significant growth occurred in the sales
and installations of ACI systems, which increased $1.2 million. We expect growth
in 2006 in the MEC segment to result primarily from sales of ACI systems in
response to mercury emission control legislation and from existing and recently
awarded government and industry-supported contracts. Our contracts with the
government are subject to audit by the federal government, which could result in
adjustment(s) to previously recognized revenue. We believe, however, that we
have complied with all requirements of the contracts and future adjustments, if
any, will not be material. In addition, the federal government must appropriate
funds on an annual basis to support these DOE contracts, and funding is always
subject to unknown and uncontrollable contingencies.
FGC revenues decreased due to decreased shipments to two FGC customers,
partially offset by increased shipments to one FGC customer. We expect FGC
revenues in 2006 to decrease further, as we believe that planned purchases for
2006 are less than revenues recognized in 2005. In addition, future FGC sales
may include sales of a product we license from ARKAY Technologies, which carry a
lower margin than historical FGC sales.
Cost of revenues increased by $1,006,000 in the first quarter of 2006, as
compared to the same period in 2005 as a result of the increased revenue
generating activities. Gross margins decreased from 42% in the first quarter of
2005 to 38% in the first quarter of 2006. The decrease in gross margin resulted
from a change in product mix. FGC revenues primarily include chemical sales,
which carry a higher margin than the fixed price and time and materials MEC
revenues. FGC and other revenues comprised 14% of total revenues in 2006,
compared to 26% in 2005. We expect the amount of fixed price and time and
materials work in the MEC segment for the near term to represent an increasing
source of revenue. Gross margins for 2006 are therefore expected to decline from
the levels achieved in 2005, as a result of an increasing proportion of fixed
price and time and materials work, our assumption of an increasing share of
costs in the field demonstration projects in which we have elected to
participate and pricing pressure caused by increased competition.
Research and development expenses increased by $46,000 or 18% in the first
quarter of 2006 as compared to the same quarter in 2005. We incur R&D expenses
not only on direct activities we conduct but also by sharing a portion of the
costs in the government and industry programs in which we participate. Future
consolidated research and development expenses, except for those anticipated to
be funded by the DOE contracts and others that may be awarded, are expected to
grow by about 35% in total for 2006 compared to 2005.
General and administrative expenses increased by $300,000 or 54%, from $552,000
in the first quarter of 2005 to $852,000 in the first quarter of 2006. For the
same periods, as a percent of net revenues, G&A expenses decreased from 25% to
24%. The dollar increase in 2006 resulted primarily from compensation expenses
related to the implementation of SFAS 123R, legal and increased director fees
and expenses incurred to maintain compliance with public company regulations;
and facilities, benefits and other overhead expenses resulting from increases in
number of employees.
The Company had net interest and other income of $194,000 in the first quarter
of 2006, as compared to $69,000 in the first quarter of 2005. Interest and other
income increased in 2006 due to an increase in invested balances and increasing
interest rates.
The deferred income tax provision for the first quarter of 2006 represents an
effective tax rate of approximately 34% as compared to a rate of approximately
23% for the same period in 2005. The 2005 rate was lower due to the favorable
tax impact of employee stock options exercised during the quarter. During the
preparation of its effective tax rate, the Company uses an annualized estimate
of pre-tax earnings or loss. Throughout the year, this annualized estimate may
change based on actual results and annual earnings or loss estimate revisions.
Because the Company's permanent tax benefits expected for 2006 are relatively
constant, changes in the annualized estimate may have a significant impact on
the effective tax rate in future periods.
Critical Accounting Policies and Estimates
Significant estimates are used in preparation of our financial statements and
include (1) our allowance for doubtful accounts, which is based on historical
experience; (2) our valuation and classification of investments as
"available-for-sale" securities, which is based on estimated fair market value;
(3) our percentage of completion method of accounting for significant long-term
contracts, which is based on estimates of gross margins and of the costs to
complete such contracts; and (4) warranty reserves related to sales of ACI
systems to cover performance guarantees that we provided on certain contracts.
In addition, amounts invoiced for government contracts are subject to change
based on the results of future audits by the federal government. We have not
experienced significant adjustments in the past from such audits, and we do not
expect significant adjustments will be required in the future. We also use our
judgment to support the current fair value of goodwill and other intangible
assets of $2.2 million on the consolidated balance sheet. Although we had an
independent valuation prepared, which supports the recorded value, and
management believes the fair value of other recorded intangibles is not
impaired, market demand for our products and services could change in the
future, which would require a write-down in recorded values. As with all
estimates, the amounts described above are subject to change as additional
information becomes available, although we are not aware of anything that would
cause us to believe that any material changes will be required in the near term.
Recently Issued Accounting Policies
Effective January 1, 2006, we adopted SFAS 123R using the modified prospective
approach. See Note 3 to the consolidated financial statements for further
details.
Item 3. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that
it is able to collect the information it is required to disclose in the reports
it files with the Securities and Exchange Commission (SEC), and to process,
summarize and disclose this information within the time periods specified in the
rules of the SEC. Based on their evaluation of the Company's disclosure controls
and procedures which took place as of March 31, 2006, the end of the period
covered by this report, the Chief Executive and Financial Officers believe that
these controls and procedures are effective to ensure that the Company is able
to collect, process and disclose the information it is required to disclose in
the reports it files with the SEC within the required time periods.
The Company also maintains a system of internal controls designed to provide
reasonable assurance that: transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
necessary (1) to permit preparation of financial statements in conformity with
generally accepted accounting principles, and (2) to maintain accountability for
assets; access to assets is permitted only in accordance with management's
general or specific authorization; and the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
During the Company's last fiscal quarter, there have been no significant changes
in such controls or in other factors that have materially affected, or are
reasonably likely to materially affect, those controls.
PART II. OTHER INFORMATION
Item 6. Exhibits
31.1* Certification of Chief Executive Officer of ADA-ES, Inc. Pursuant to 17
CFR 240.13a-14(a)or 17 CFR 240.15d-14(a)
31.2* Certification of Chief Financial Officer of ADA-ES, Inc. Pursuant to 17
CFR 240.13a-14(a)or 17 CFR 240.15d-14(a)
32* Certification Pursuant to 18 U.S.C. Section 1350
* These certifications are "furnished" and shall not be deemed filed for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ADA-ES, Inc.
------------
Registrant
Date: May 09, 2006 /s/ Michael D. Durham
----------------------
Michael D. Durham
President and Chief Executive Officer
Date: May 09, 2006 /s/ Mark H. McKinnies
---------------------
Mark H. McKinnies
Chief Financial Officer
EXHIBIT INDEX
31.1* Certification of Chief Executive Officer of ADA-ES, Inc. Pursuant to 17
CFR 240.13a-14(a)or 17 CFR 240.15d-14(a)
31.2* Certification of Chief Financial Officer of ADA-ES, Inc. Pursuant to 17
CFR 240.13a-14(a)or 17 CFR 240.15d-14(a)
32* Certification Pursuant to 18 U.S.C. Section 1350
*These certifications are "furnished" and shall not be deemed filed for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended.