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 September 30, 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 or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8100 SouthPark Way, 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 the 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 [X] Non-accelerated filer [ ]
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 November 3, 2006
-------------------------- -------------------------------
Common Stock, no par value 5,628,360
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ADA-ES, Inc. and Subsidiary
Consolidated Balance Sheets
September 30, 2006
(Unaudited)
(amounts in thousands, except share amounts)
September 30, December 31,
2006 2005
-------- --------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 15,670 $ 14,026
Trade receivables, net of allowance for doubtful accounts of $4 3,100 3,014
Investments in securities 1,730 2,515
Prepaid expenses and other 421 283
-------- --------
Total current assets 20,921 19,838
-------- --------
PROPERTY AND EQUIPMENT, at cost 1,866 1,663
Less accumulated depreciation and amortization (1,028) (1,013)
-------- --------
Net property and equipment 838 650
-------- --------
GOODWILL, net of $1,556 in amortization 2,024 2,024
INTANGIBLE ASSETS, net of $54 and $44, respectively, in amortization 190 156
INVESTMENTS IN SECURITIES 5,937 5,663
OTHER ASSETS 623 385
-------- --------
TOTAL ASSETS $ 30,533 $ 28,716
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,547 $ 1,706
Accrued payroll and related liabilities 485 516
Accrued expenses 52 138
Deferred revenue 749 460
-------- --------
Total current liabilities 3,833 2,820
-------- --------
LONG-TERM LIABILITIES:
Deferred warranty and other 116 40
-------- --------
Total liabilities 3,949 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,
5,628,360 and 5,610,267 shares issued and outstanding, respectively 26,805 26,318
Accumulated other comprehensive income 120 33
Accumulated deficit (341) (495)
-------- --------
Total stockholders' equity 26,584 25,856
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,533 $ 28,716
======== ========
See accompanying notes.
2
ADA-ES, Inc. and Subsidiary
Consolidated Statements of Operations (Unaudited)
Three and Nine Months Ended September 30, 2006 and 2005
(amounts in thousands, except per share)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2006 2005 2006 2005
-------- -------- -------- --------
REVENUE:
Mercury emission control $ 4,120 $ 2,454 $ 9,875 $ 6,013
Flue gas conditioning and other 328 661 1,528 1,748
-------- -------- -------- --------
Total net revenues 4,448 3,115 11,403 7,761
COST OF REVENUES
Mercury emission control 2,835 1,546 6,588 3,892
Flue gas conditioning and other 323 323 1,003 792
-------- -------- -------- --------
Total cost of revenues 3,158 1,869 7,591 4,684
-------- -------- -------- --------
GROSS MARGIN 1,290 1,246 3,812 3,077
OTHER COSTS AND EXPENSES:
General and administrative 974 687 2,736 1,873
Research and development 308 224 922 670
Depreciation and amortization 71 41 193 123
-------- -------- -------- --------
Total other costs and expenses 1,353 952 3,851 2,666
-------- -------- -------- --------
OPERATING (LOSS) INCOME (63) 294 (39) 411
OTHER INCOME (EXPENSE):
Other expense and interest (412) (1) (412) (3)
Interest and other income 270 71 658 204
-------- -------- -------- --------
Total other income (expense) (142) 70 246 201
-------- -------- -------- --------
INCOME (LOSS) BEFORE TAX (205) 364 207 612
PROVISION FOR TAX BENEFIT (EXPENSE) 77 (116) (53) (162)
-------- -------- -------- --------
NET INCOME (LOSS) (128) 248 154 450
UNREALIZED GAINS AND (LOSSES) ON CERTAIN INVESTMENTS
IN DEBT AND EQUITY SECURITIES, net of tax 101 (35) 87 (26)
-------- -------- -------- --------
COMPREHENSIVE (LOSS) INCOME $ (27) $ 213 $ 241 $ 424
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED $ (.02) $ .05 $ .03 $ .09
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,627 4,819 5,622 4,822
======== ======== ======== ========
WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING 5,627 4,977 5,795 4,998
======== ======== ======== ========
See accompanying notes.
3
ADA-ES, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 2006 and 2005
(amounts in thousands)
(Unaudited)
ACCUMULATED
OTHER
COMMON STOCK 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 41 303 -- -- 3034
Tax benefit of stock transactions -- 256 -- -- 256
Stock and options issued for services 4 69 -- -- 69
Return of shares from escrow (20) -- -- -- --
Unrealized gains on investments -- -- (26) -- (26)
Net income -- -- -- 450 450
-------- -------- -------- -------- --------
BALANCES, September 30, 2005 4,821 $ 13,762 $ 8 $ (708) $ 13,062
======== ======== ======== ======== ========
BALANCES, January 1, 2006 5,610 $ 26,318 $ 33 $ (495) $ 25,856
Stock and stock options issued to
consultant and directors for services 7 157 -- -- 157
Issuance of stock on exercise of options 11 93 -- -- 93
Sale of stock - registration costs (12) (12)
Stock-based compensation -- 249 -- -- 249
Unrealized losses on investments -- -- 87 -- 87
Net income -- -- -- 154 154
-------- -------- -------- -------- --------
BALANCES, September 30, 2006 5,627 $ 26,805 $ 120 $ (341) $ 26,584
======== ======== ======== ======== ========
See accompanying notes.
4
ADA-ES, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2006 and 2005
(amounts in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2006 2005
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 154 $ 450
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 193 123
Loss on asset dispositions and securities 34 63
Deferred tax expense 78 162
Expenses paid with stock and stock options 406 69
Changes in operating assets and liabilities:
Receivables (86) (1,033)
Prepaid expenses and other (376) (66)
Accounts payable 841 504
Accrued expenses (242) 142
Deferred revenue and other 365 301
-------- --------
Net cash provided by operating activities 1,367 715
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for equipment and patents (419) (54)
Investment in securities (5,485) (7,722)
Proceeds from sale of securities 6,104 7,216
-------- --------
Net cash provided by (used in) investing activities 200 (560)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and notes payable (4) (3)
Registration of stock sold (12) --
Exercise of stock options 93 303
-------- --------
Net cash provided by financing activities 77 300
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 1,644 455
CASH AND CASH EQUIVALENTS, beginning of period 14,026 2,108
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 15,670 $ 2,563
======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash payments for interest $ 1 $ 3
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Tax effect of stock option exercises $ -- $ 26
======== ========
See accompanying notes.
5
ADA-ES, Inc. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
September 30, 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 adopting SFAS 123R; therefore, results prior to January 1, 2006 have not
been restated. For the three and nine months ended September 30, 2006, $95,000
and $249,000, respectively, were charged to expense for equity compensation,
which amounted to $71,000 and $185,000, respectively, after tax and ($0.01) and
($0.03), respectively, 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 123R during 2005, then the Company's
net income per share for the three and nine months ended September 30, 2005
would have been adjusted to the pro forma amounts indicated below:
Three Months Nine Months
Ended Ended
September 30, September 30,
2005 2005
----------- -----------
Net income as reported $ 248,000 $ 450,000
Deduct: Stock-based compensation cost under SFAS 123R (63,000) (96,000)
----------- -----------
Pro forma net income $ 185,000 $ 354,000
=========== ===========
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 4,819,000 4,822,000
=========== ===========
Diluted 4,977,000 4,998,000
=========== ===========
Reported net income per common share -
Basic and Diluted $ 0.05 $ 0.09
=========== ===========
Pro forma net income per common share -
Basic and Diluted $ 0.04 $ 0.07
=========== ===========
(4) Stock Options
-----------------
During 2003 the Company adopted the 2003 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
6
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 nine months 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. Thus far in 2006 1,000 of such option had
been exercised. The remaining 37,428 options were exercisable at September 30,
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 half of 2006, 15,000
of such options were forfeited after the resignation of three directors. As of
September 30, 2006, one-third of the remaining outstanding options, or a total
of 6,668 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 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, and in August the Board authorized the grant of 15,000
options to the non-management directors of the Company.
Following is a table of options activity for the nine months ended September 30,
2006:
Weighted
Director & Average
Employee Non-Employee Exercise
Options Options Price
------------------------------------
OPTIONS OUTSTANDING, January 1, 2006 351,483 80,000 $10.99
Options granted 34,900 - $18.05
Options expired (16,466) - $13.80
Options exercised (11,093) - $ 8.39
--------- -------- ------
OPTIONS OUTSTANDING, September 30, 2006 358,757 80,000 $11.51
========= ======== ======
The weighted average remaining contractual life for all options as of September
30, 2006 was approximately 7.8 years. At September 30, 2006, 188,755 options
with a weighted average exercise price of $10.95 were fully vested and
exercisable. Of the remaining 250,002 options, 17,302 options with a weighted
average exercise price of $14.57 vest in the remaining months of 2006, 70,750
options with a weighted average exercise price of $15.25 vest in 2007, 21,425
7
options with a weighted average exercise price of $13.24 vest in 2008, 16,600
options with a weighted average exercise price of $11.17 vest in 2009, and the
remaining 123,992 options with a weighted average exercise price of $9.54 vest
at the discretion of the board of directors based on specific performance
objectives of executive officers and a consultant, with minimum annual vesting
of 11,500 and maximum annual vesting of 23,000.
The average fair value of each employee and director option granted in 2006 was
approximately $4.72 and was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions.
Expected volatility 55%
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 September
30, 2006:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Weighted Weighted Average
Average Average Contractual
Range Number of Exercise Number of Exercise Life
----- Options Price Options Price ----
------- ----- ------- ----- (in years)
$2.80 11,665 $ 2.80 11,665 $2.80 7.1
$8.60 - $10.00 247,150 $ 8.88 112,658 $9.22 7.7
$13.80 - $15.20 136,709 $14.52 47,757 $14.18 7.5
$18.61 - $20.20 43,300 $19.34 16,675 $19.08 9.1
------- ------ ------- ------ ---
438,824 $11.51 188,755 $10.95 7.8
======= ====== ======= ====== ===
The aggregate intrinsic value of options exercised in the nine months ended
September 30, 2006 and 2005, based on a market price of $13.00 and $19.70,
respectively, was $51,000 and $504,000, respectively. The aggregate intrinsic
value of options exercisable at September 30, 2006 was $387,000 based on a
market price of $13.00.
As of September 30, 2006, total compensation costs related to non-vested
options, which had not yet been recognized was $496,000. The weighted average
period over which such expense is expected to be recognized is 2.0 years.
(5) Business Segment Information
--------------------------------
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 September 30, 2006 (amounts in thousands)
MEC FGC Total
--- --- -----
Total revenue $4,120 $328 $4,548
Segment profit (loss) $889 $(93) $796
Three Months Ended September, 2005 (amounts in thousands)
MEC FGC Total
--- --- -----
Total revenue $2,454 $661 $3,115
Segment profit $556 $318 $874
Nine Months Ended September 30, 2006 (amounts in thousands)
MEC FGC Total
--- --- -----
Total revenue $9,875 $1,628 $11,503
Segment profit $2,094 $387 $2,481
Nine Months Ended September 30, 2005 (amounts in thousands)
MEC FGC Total
--- --- -----
Total revenue $6,013 $1,748 $7,761
Segment profit $1,163 $709 $1,872
8
A reconciliation of reported total segment profit to Net Income for the periods
shown above is as follows (amounts in thousands). Non-allocated general and
administrative expenses include costs that benefit the business as a whole and
are not directly related to one of our segments. Such costs include but are not
limited to accounting and human resources staff, information systems costs,
facility costs, audit fees and corporate governance expenses.
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------ ------------------
2006 2005 2006 2005
------- ------- ------- -------
Total segment profit $ 796 $ 874 $ 2,381 $ 1,972
Non-allocated general & admin
expenses (788) (539) (2,227) (1,438)
Depreciation and amortization (71) (41) (193) (123)
Interest, other (expenses),
income and taxes (65) (46) 193 39
------- ------- ------- -------
Net Income (Loss) $ (128) $ 248 $ 154 $ 450
======= ======= ======= =======
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 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; payments expected from NexGen; expected
growth in MEC revenues, operating cash flow and research and development
expenses; sources of MEC revenue growth; 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; clarification of "market value" requirements by
Congress or the Internal Revenue Service impacting our joint venture with
NexGen; 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 and
availability of additional intellectual property necessary for our business;
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.
9
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.
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 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. We have recently seen a significant increase in new
plant projects. DOE's latest report issued in 2006 includes 153 new projects
totaling 93GW of capacity. 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. State
regulations and increasing numbers of consent decrees are becoming the largest
market driver for this part of our business. Although we expect this market to
show steady growth over the next several years, more significant revenue growth
is anticipated when federal regulations impact a significant portion of existing
boilers.
The market for our FGC chemicals and services is relatively flat and is expected
to continue to decline in the near-term but we are testing certain synergies
with our mercury control technology that may provide opportunities for future
growth. 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 eleven ACI systems to be
delivered in 2006 and 2007, bringing the total number of ACI systems installed
or currently in process to ten. In addition, one system was installed in
partnership with a third party for whom we provided design services through a
DOE contract. Revenue from ACI system contracts totaled $4.2 million for the
nine months ended September 30, 2006 and $4.4 million is remaining to be
recognized. We have historically bid on single unit contracts for ACI systems,
but are now seeing a number of multi-unit contracts out for proposal.
Thus far in 2006, we have also signed two development and testing contracts with
DOE with 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 also awarded a
$100,000 research grant from DOE in 2006 to develop an improved activated carbon
manufacturing process, which activities are expected to be conducted over the
next six months. 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 $16.2 million as of September 30, 2006. We recognized
$4.6 million related to DOE and industry co-funded contracts in the first nine
months of 2006. We expect to recognize revenue from these contracts of
approximately $6.8 million in total for 2006, including the revenue recognized
in the first nine months. 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 expect DOE programs to
represent a decreasing percentage of revenues over the next few years as we
focus more on market growth for ACI systems and commercial testing and
demonstrations in 2007, which tend to offer higher margins and faster
implementation schedules.
On November 3, 2006, we closed the sale of a 50% interest in a joint venture
with NexGen Refined Coal, LLC, an affiliate of NexGen Resources Corporation, to
market our refined coal technology as further described in Part II. Item 5.
Other Information below. We received a $100,000 non-refundable down payment from
NexGen upon signing a Joint Venture Proposal on June 26, 2006, which has been
included as deferred revenue at September 30, 2006. At closing, NexGen paid us
$900,000 for its 50% interest. This payment is non-refundable. NexGen and ADA-ES
are each obligated to pay 50% of the costs of operating the JV, which we
estimate will amount to around $50,000 per month for the next several months.
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, particularly with respect to
the vertical integration of our business to establish an invested role in the
production and supply of activated carbon. The major revenue sources from the
growing MEC market are expected to include engineering services, equipment sales
and activated carbon 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. During the quarter ended September 30, 2006 we determined that
deferred charges amounting to approximately $412,000 related to our M&A
activities incurred earlier in the year were no longer of future value and were
therefore expensed. Such charges are included in Other expense and interest for
the quarter ended September 30, 2006 in the accompanying financial statements.
10
Thus far in 2006 we have incurred $344,000 for project development costs, which
costs have been deferred and are classified on the balance sheet as Other
Assets. Such development 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 a long-term assets and then subject to future impairment
evaluations.
Liquidity and Capital Resources
-------------------------------
We had a positive working capital of $17.1 million at September 30, 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 $5.9 million and $5.7 million
at September 30, 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 for the next
twelve months. 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. In addition, we may need to raise additional
capital to fund strategic acquisitions.
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 three
flue gas conditioning (FGC) units currently in-place. Each of these units
provided an average monthly cash flow of approximately $30,000 in 2005. One of
these customers is performing a process upgrade expected to be completed in 2006
that may reduce or eliminate the requirement for FGC. Since the beginning of
2006, we performed a successful demonstration project at one plant that has
resulted in continued chemical sales, although at a lower level and with a lower
gross margin than existing customers. 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), changes in regulations, 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.
We have planned capital expenditures to sustain and improve ongoing operations
for 2006 estimated at $460,000, 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. Of this estimated total we have spent $419,000 through the nine
months ended September 30, 2006.
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 nine months ended September 30, 2006 and
2005, we recognized $81,000 and $69,000, respectively, of matching expense; this
expense is expected to amount to approximately $123,000 total 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 nine months of 2006 and 2005, the
Company accrued approximately $102,000 and $150,000, respectively, for such
payments based on results for the respective periods.
We recorded net deferred tax assets of $241,000 and $340,000 as of September 30,
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 $1,367,000 for the first nine months of 2006
compared to $715,000 for the same period of 2005. Cash flow from operations in
2006 increased from 2005 primarily as a result of increases in expenses paid
with stock and stock options, and depreciation and amortization, offset by
variations in operating asset and liability accounts due to fluctuations in the
normal course of business. The 2006 operating cash flow was reduced by
additional prepaid expenses and other assets totaling ($376,000) as a result of
increases in prepaid insurance, deferred project development costs and interest
receivable and a decrease in accrued expenses in the net amount of ($242,000).
The 2006 operating cash flow was also increased as a result of a decrease in
accounts payable totaling $841,000 and an increase in other liabilities totaling
$265,000.
11
Net cash provided by investing activities was $200,000 for the first nine months
of 2006 compared to cash used in investing activities of ($560,000) in the first
nine months 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 and field equipment.
Cash provided by financing activities was $77,000 and $300,000 in the first nine
months of 2006 and 2005, respectively. The decrease was due to the exercise of
fewer stock options in 2006 and registration costs incurred in 2006 but related
to stock sold in 2005. We may require additional debt or equity financing to
support future growth, including potential acquisitions.
Results of Operations
---------------------
Revenues totaled $4,448,000 and $11,403,000 for the quarter and nine months
ended September 30, 2006, respectively, versus $3,115,000 and $7,761,000 for the
same periods in 2005, representing increases of 43% for the quarter and 47% for
the first nine months of 2006. Revenues in the MEC segment for 2006 increased
from the second quarter by $1,666,000 (68%), and FGC and other activities
decreased by ($333,000) (51%). For the nine-month period, revenues in the MEC
segment for 2006 increased by $3,862,000 (64%), and FGC and other activities
decreased by $220,000 (13%). 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 have been and are expected to be available to meet
anticipated needs.
Revenues in the first nine months of 2006 from the MEC segment were comprised of
government and industry-supported contracts (47%), sales and installation of
activated carbon injection (ACI) systems (42%) and consulting services (11%),
compared to 60%, 14% and 26%, respectively, in the first nine months of 2005.
While revenues from both the government and industry-supported contracts and the
ACI systems sales increased from the first nine months of 2005 to the first nine
months of 2006, the most significant growth occurred in the sales and
installations of ACI systems, which increased $3.4 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. Activities in two of our
DOE contracts are behind the original planned schedule due to the unavailability
of one of the host sites and test results that did not meet project goals.
Discussions with DOE have resulted in reallocating a portion of the remaining
contract amounts to our other activities. 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 and other revenues decreased due to fewer shipments of chemical and revenues
related to continuing customers. We expect FGC and other revenues in 2006 to be
somewhat lower than 2005, as we believe that planned customer purchases for 2006
will be less than such purchases made in 2005.
Cost of revenues increased by $1,289,000 and $2,907,000, respectively, in the
third quarter and first nine months of 2006 as compared to the same periods in
2005 as a result of increased revenues for the same periods. Gross margins were
29% and 34% for the quarter and nine months ended September 30, 2006,
respectively, as compared to 40% and 40%, respectively, for the same periods in
2005. The decrease is a result of decreased margins in both the MEC and FGC and
other segments as discussed below.
Cost of revenues for the MEC segment increased by $1,289,000 and $2,696,000,
respectively, in the third quarter and first nine months of 2006, as compared to
the same periods in 2005 as a result of the increased revenue generating
activities noted above. Gross margins for this segment were 31% and 33% for the
quarter and nine months ended September 30, 2006, respectively, as compared to
37% and 35%, respectively, for the same periods in 2005. The decrease in gross
margins from the prior periods resulted from lower margins on ACI system sales
where we have found that in order to maintain market share, we have had to
decrease prices. The changes in MEC segment profits for periods under review are
a result of the same factor.
12
Cost of revenues for the FGC and other segment remained flat and increased by
$211,000, respectively, in the third quarter and first nine months of 2006, as
compared to the same periods in 2005 also as a result of increased costs for
development projects included in this segment. Gross margins for this segment
were 2% and 34% for the quarter and nine months ended September 30, 2006,
respectively, as compared to 51% and 55%, respectively, for the same periods in
2005. The decrease in gross margins from 2005 to 2006 is a result of increased
FGC sales of a product we license from ARKAY Technologies, which carry a lower
margin than historical FGC sales, lower margins typically recognized on the
demonstration projects we carried out in 2006, and the increased costs in
development projects noted above. 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 13% of total revenues thus far in
2006, compared to 23% in 2005. The changes in the FGC segment profits for the
periods under review are a result of the same factors.
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. Overall
gross margins for 2006 are therefore expected to decline further 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.
General and administrative expenses increased by $287,000 or 42%, from $687,000
to $974,000, and by $863,000 or 46% to $2,736,000 in the third quarter and the
first nine months of 2006, respectively. The dollar increase in 2006 resulted
primarily from compensation expenses related to the implementation of SFAS 123R
($95,000 for the quarter and $249,000 for the nine months ended September 30,
2006); legal and increased director fees and expenses incurred to maintain
compliance with public company regulations (approximately $50,000 for the
quarter and $150,000 for the nine months); and facilities, benefits and other
overhead expenses resulting from increases in number of employees (approximately
$80,000 for the quarter and $150,000 for the nine months).
Research and development expenses increased by $84,000 or 38% in the third
quarter of 2006, and $252,000 or 38% in the first nine months of 2006 as
compared to the same periods 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 continue to
grow at a rate of about 10% annually for the next several years, with an
expected increase of about 40% in total for 2006 compared to 2005.
Included in other expenses for the third quarter we recognized $411,000 of
deferred costs related to our M&A activities as noted above. The Company had net
interest and other income of $270,000 for the third quarter and $658,000 in the
first nine months of 2006, as compared to $71,000 and $204,000 for the same
periods in 2005. Interest and other income increased in 2006 due to an increase
in invested balances and increasing interest rates.
Unrealized gains, net of tax, on investments in debt and equity securities
amounted to $101,000 and $87,000, respectively, for the third quarter and first
nine months of 2006 as compared to losses of ($35,000) and ($26,000) for the
same periods in 2005. The gains recorded in 2006 are the result of increases in
the market value of our equity investments. The losses incurred in 2005 were
primarily the result of increasing interest rates, which correspondingly tend to
decrease the market value of our investments in longer-term fixed-rate debt
securities.
The deferred income tax provision for the first nine months of 2006 represents
an effective tax rate of approximately 26%, which approximates the rate for the
same period in 2005. 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 have
13
performed an evaluation of the goodwill and intangible asset values which
supports the recorded value, 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.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, to
define fair value, establish a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expand disclosures about fair value
measurements. Having a single definition of fair value, together with a
framework for measuring fair value, is designed to result in increased
consistency and comparability in fair value measurements. This FASB is effective
for reporting period beginning after November 15, 2007. We are continuing to
evaluate the impact and do not expect that adoption of this FASB will have a
material impact on our financial statements.
In July 2006, The FASB Issued FIN No. 48, Accounting for Uncertainty in Income
Taxes, which provides guidance for (1) recognizing and measuring tax positions
taken or expected to be taken that affect amounts reported in the financial
statements, and (2) for the income tax effects of tax positions that do not meet
the threshold condition for recognition. This FIN will apply to fiscal years
beginning after December 15, 2006. We are continuing to evaluate the impact and
do not expect that adoption of this FIN will have a material impact on our
financial statements.
Item 4. CONTROLS AND PROCEDURES
-------------------------------
Disclosure Controls and Procedures
----------------------------------
We maintain disclosure controls and procedures designed to ensure that the
information required to be disclosed by us in the reports we file with the
Securities and Exchange Commission (SEC), is recorded, processed, summarized and
disclosed within the time periods specified in the rules of the SEC. Based on
their evaluation of our disclosure controls and procedures which took place as
of September 30, 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 (i) we are able to record, process, summarize and
disclose the information we are required to disclose in the reports we file with
the SEC within the required time periods and (ii) information required to be
disclosed by us in such reports is accumulated and communicated to our
management, including our principal executive and financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosures.
Internal Control Over Financial Reporting
-----------------------------------------
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, we evaluated our disclosure controls
and procedures and our internal controls over financial reporting and concluded
that (i) our disclosure controls and procedures were effective as of September
30, 2006, and (ii) there have been no 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 2. Unregistered Sales of Equity Securities.
In January 2006, the Board of Directors authorized the issuance of 1,000 shares
of common stock to each of the seven non-management directors of the Company (a
total of 7,000 shares of common stock) representing a portion of their
compensation for the period from October 2005 through September 2006. The shares
were issued on February 2, 2006. The fair value of the shares issued totaled
$154,000. The Company relied on the registration exemption contained in Section
4(2) of the Securities Act of 1933 for offerings not involving a public
14
offering. The shares were issued to directors, each of whom were fully
knowledgeable about the Company and its financial condition, and who were
therefore capable of evaluating the merits and risks of owning the shares.
On January 27, 2006, the Company authorized the issuance of 19,900 common stock
options to three employees of the Company solely in consideration for services
rendered to the Company. The options are exercisable at $20.20 per share, the
market price of the underlying shares on the date of grant. The Company relied
on the registration exemption contained in Section 4(2) of the Securities Act of
1933 for offerings not involving a public offering. The options were issued to
employees, each of whom were fully knowledgeable about the Company and its
financial condition, and who the Company believes to be capable of evaluating
the merits and risks of owning the options. The options are not transferable and
can be exercised only by the employee or, under certain circumstances, their
heirs or devisees. The options cannot be exercised until the underlying shares
are registered with the SEC.
On August 3, 2006, the Company authorized the issuance of 15,000 common stock
options to three non-management directors of the Company solely in consideration
for services rendered to the Company. The options are exercisable at $15.20 per
share, the market price of the underlying shares on the date of grant. The
Company relied on the registration exemption contained in Section 4(2) of the
Securities Act of 1933 for offerings not involving a public offering. The
options were issued to directors, each of whom were fully knowledgeable about
the Company and its financial condition, and who the Company believes to be
capable of evaluating the merits and risks of owning the options. The options
are not transferable and can be exercised only by the director while he or she
remains a director of the Company. The options cannot be exercised until the
underlying shares are registered with the SEC.
Item 5. Other Information.
On November 3, 2006, we closed the sale of a 50% interest in a joint venture
(the "JV") with NexGen Refined Coal, LLC ("NexGen"), an affiliate of NexGen
Resources Corporation, to market our refined coal technology ("Refined Coal
Technology"), which reduces emissions of nitrogen oxides and mercury from
certain, treated coals ("Refined Coal"). The JV's primary opportunity is based
on tax credits available under Section 45 of the Internal Revenue Code ("Section
45 Tax Credits"), as it was amended by the American Jobs Creation Act of 2004
(the "2004 Act") for qualifying Refined Coal. Under the 2004 Act, a tax credit
with a current value of approximately $5.60 per ton of Refined Coal can be
earned for a period of ten years ending in or before 2019. Our Refined Coal
Technology incorporates ADA-ES' patented chemical, which we developed for
slagging boilers, and our expertise with sorbent-based mercury control
technology. NexGen's affiliates have extensive experience and expertise with
Section 29 tax credits (which apply to the development of coal-bed methane gas),
and we anticipate that NexGen's experience and expertise in this area will serve
as a template for monetization of Section 45 Tax Credits in the Refined Coal
area. We believe that our Refined Coal Technology is applicable to a target
market of approximately 60 million tons of Refined Coal per year.
The JV will be carried out through a Colorado limited liability company called
ADA-NexCoal, LLC ("ADA-NexCoal") which we formed on October 31, 2006. Under a
Purchase and Sale Agreement, we sold a 50% interest in ADA-NexCoal to NexGen,
which paid us $900,000 for its 50% interest. This $900,000 payment was in
addition to a $100,000 non-refundable down payment NexGen paid us upon signing a
Joint Venture Proposal on June 26, 2006, which has been included as deferred
revenue at September 30, 2006. The detailed report of a demonstration of the
related Refined Coal technology, which was a prerequisite to the final
documentation, was also completed in that quarter. The $900,000 payment received
on November 3, 2006 is non-refundable.
The JV will initially operate a business supplying chemicals, additives,
equipment and technical services to cyclone fired boiler users (a "Chemicals
Business"), but the JV's primary purpose is to seek and obtain approval from the
United States Internal Revenue Service to qualify ADA Refined Coal for the
Section 45 Tax Credits (a "Section 45 Business"). If the JV succeeds in
obtaining that approval and becomes a Section 45 Business, NexGen has the right
to maintain its 50% interest by paying us an additional $4 million, in 8
quarterly payments of $500,000 each, beginning in the 4th quarter of 2007.
NexGen can determine not to make those payments, but it if does so, it will
forfeit a part of its interest in ADA-NexCoal in direct proportion to the amount
of the $4 million that it elects not to pay. Once it fails to make any one
payment, it cannot come back and reclaim its interest by making later payments.
Simultaneously with the execution of the Purchase and Sale Agreement, the
parties entered into an Amended and Restated Operating Agreement governing the
operation of ADA-NexCoal, which calls for NexGen and ADA-ES to each pay 50% of
the costs of operating the JV, and specifies certain duties that ADA-ES and
NexGen are obligated to perform as members of ADA-NexCoal to further the
business purposes of the JV. We estimate those costs will amount to around
$50,000 per month for the next several months. We also entered into a License
Agreement with ADA-NexCoal pursuant to which we licensed certain patents and
15
know-how (the "Licensed Property") to ADA-NexCoal on a fully paid-up,
royalty-free, non-transferable and exclusive basis, to allow it to exploit our
Refined Coal Technology for the cyclone-fired boiler market. Pursuant to the
License Agreement, we are required to provide technical assistance without
charge to the JV relating to the development, marketing and deployment of the
Licensed Property and, with certain limitations, to prosecute, maintain and
defend the patents that are a part of the Licensed Property, take appropriate
steps to protect the know-how and trade secrets comprising a part of the
Licensed Property, and indemnify and hold ADA-NexCoal harmless in the event the
Licensed Property infringes the intellectual property of any third party.
Finally, we entered into a Chemicals, Equipment and Technical Services Supply
Agreement with ADA-NexCoal pursuant to which we will supply the JV with certain
chemicals, additives, equipment and technical services to facilitate the
purposes of the JV. ADA-NexCoal will pay us standard charges for the chemicals,
additives, equipment and technical services it will supply to the JV, on a
"most-favored" nation basis.
Item 6. Exhibits
Exhibits filed as part of this Quarterly Report on Form 10-Q are as follows:
10.1 License Agreement dated as of November 3, 2006 by and between ADA-ES,
Inc. and ADA-NexCoal, LLC.
10.2 Chemicals, Equipment, and Technical Engineering Services Supply
Agreement dated as of November 3, 2006 by and between ADA-ES, Inc. and
ADA-NexCoal, LLC.
10.3 Purchase and Sale Agreement dated as of November 3, 2006 by and among
ADA-ES, Inc., NexGen Refined Coal, LLC and ADA-NexCoal, LLC.
10.4 Amended and Restated Operating Agreement of ADA-NexCoal, LLC dated as of
November 3, 2006 by and among ADA-ES, Inc., NexGen Refined Coal, LLC and
ADA-NexCoal, LLC.
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: November 7, 2006 /s/ Michael D. Durham
---------------------
Michael D. Durham
President and Chief Executive Officer
Date: November 7, 2006 /s/ Mark H. McKinnies
---------------------
Mark H. McKinnies
Chief Financial Officer
16
EXHIBIT INDEX
10.1 License Agreement dated as of November 3, 2006 by and between ADA-ES,
Inc. and ADA-NexCoal, LLC.
10.2 Chemicals, Equipment, and Technical Engineering Services Supply
Agreement dated as of November 3, 2006 by and between ADA-ES, Inc. and
ADA-NexCoal, LLC.
10.3 Purchase and Sale Agreement dated as of November 3, 2006 by and among
ADA-ES, Inc., NexGen Refined Coal, LLC and ADA-NexCoal, LLC.
10.4 Amended and Restated Operating Agreement of ADA-NexCoal, LLC dated as of
November 3, 2006 by and among ADA-ES, Inc., NexGen Refined Coal, LLC and
ADA-NexCoal, LLC.
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.