U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
Amendment #1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
Commission File Number: 000-50216
ADA-ES, Inc.
------------
(Name of small business issuer in its charter)
Colorado 84-1457385
-------- ----------
(State of incorporation) (IRS Employer Identification No.)
8100 SouthPark Way, Unit B, Littleton, Colorado 80120-4525
----------------------------------------------------------
(Address of principal executive offices, including Zip Code)
(Issuer's telephone number, including area code): (303) 734-1727
Securities registered under Section 12(g) of the Exchange Act:
Title of class
Common Stock, no par value
--------------------------
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [__]
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year. $ 11,028,000
State the aggregate market value of the voting and non-voting common equity held
by nonaffiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked prices of such common equity, as of a
specified date within the past 60 days. As of March 24, 2006 was $129,654,000.
Number of shares outstanding of registrant's Common Stock, no par value as of
March 24, 2006 - 5,620,040.
DOCUMENTS INCORPORATED BY REFERENCE:
None
Transitional Small Business Disclosure Format: Yes __ No X
PART II
Item 7. Financial Statements.
Our Financial Statements can be found at pages F-1 through F-20 of this report.
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
Financial Statements:
ADA-ES, Inc. and Subsidiary
Consolidated Balance Sheet, December 31, 2005
Consolidated Statements of Income, For the Years Ended December 31, 2005
and 2004
Consolidated Statements of Changes in Stockholders' Equity, For the Years
Ended December 31, 2005 and 2004
Notes to Consolidated Financial Statements
Item 8A. 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 December 31, 2005, 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 fourth fiscal quarter of 2005, there have been no significant changes
in our controls over financial reporting or in other factors that have
materially affected, or are reasonably likely to materially affect, those
controls.
Item 13. Exhibits
(a) Exhibits and Index of Exhibits
No. Description
--- -----------
Index to Exhibits.
3.1 Amended and Restated Articles of Incorporation of ADA-ES (1)
3.2 Amended and Restated Bylaws of ADA-ES (2)
4.1 Form of Specimen Common Stock Certificate (3)
4.2 Registration Rights Agreement dated October 21, 2005 (4)
4.3 Registration Rights Agreement between ADA-ES, Inc. and Arch Coal, Inc.
dated March 19, 2003 (16)
No. Description
--- -----------
4.4 Standstill and Registration Rights Agreements dated August 3-6, 2004
(6)
10.1 Distribution Agreement dated as of March 17, 2003 between Earth
Sciences, Inc. and ADA-ES, Inc. (7)
10.2 2003 ADA-ES, Inc. Stock Option Plan** (16)
10.3 Market Development Agreement between NORIT Americas Inc. and Earth
Sciences, Inc. dated June 29, 2001 (5)
10.4 Assignment and Assumption Agreement between NORIT Americas Inc., Earth
Sciences, Inc. and ADA-Environmental Solutions LLC dated August 4,
2003 (8)
10.5 Joint Venture and Co-Marketing Agreement by and between Arch Coal
Sales Company and ADA- Environmental Solutions LLC as of January 1,
2002 (5)
10.6 Securities Subscription and Investment Agreement between ADA-ES, Inc.
and Arch Coal, Inc. dated July 7, 2003 (7)
10.7 U.S. Department of Energy Cooperative Agreement No. DE-FC26-00NT41004
"Field Test Program to Develop Comprehensive Design, Operating, and
Cost Data for Mercury Control Systems" (7)
10.8 U.S. Department of Energy Cooperative Agreement No. DE-FC26-00NT40755
"Advanced Flue Gas Conditioning as a Retrofit Upgrade to Enhance PM
collection from Coal-Fired Electric Utility Boilers" (7)
10.9 Joint Product Exploitation and Marketing Agreement dated October 2,
2002, by and between ALSTOM Power Inc. and ADA Environmental Solutions
LLC (5)
10.10 Tax Sharing Agreement between ADA-ES, Inc. and Earth Sciences, Inc.
dated March 17, 2003 (5)
10.11 U.S. Department of Energy Cooperative Agreement No. DE-FC26-02NT41591
"Long-Term Operation of a COHPAC System for Removing Mercury from
Coal-Fired Flue Gas" (7)
10.12 Amendment No. 1 to Distribution Agreement by and between ADA-ES, Inc.
and Earth Sciences, Inc. dated August 15, 2003 (8)
10.13 2003 Stock Compensation Plan #1** (9)
10.14 2003 Stock Compensation Plan #2** (10)
10.15 U.S. Department of Energy Cooperative Agreement No. DE-FC26-03NT41986
"Evaluation of Sorbent Injection for Mercury Control" (11)
10.16 Purchase Order #4500589101 signed 3/18/04 from We Energies (12)
10.17 Clean Coal Power Initiative Repayment Agreement between the U.S.
Department of Energy and ADA-ES, Inc. dated April 6, 2004 (12)
10.18 TOXECON Sorbent Sales Repayment Agreement by and between Norit America
Inc. and ADA-ES, Inc. dated February 18, 2004 (12)
10.19 Development and Field Validation Agreement between Thermo
Environmental Instruments Inc. and ADA-ES, Inc. dated April 16, 2004
(12)
10.20 Distribution Agreement between Thermo Environmental Instruments Inc.
and ADA-ES, Inc. dated April 16, 2004 (12)
10.21 ADA-ES, Inc. 2004 Executive Stock Option Plan** (13)
10.22 U.S. Department of Energy Cooperative Agreement No. DE-FC26-05NT42307
"Low-Cost Options for Moderate Levels of Mercury Control" (14)
10.23 Employment Agreement dated May 1, 1997 between C. Jean Bustard and ADA
Environmental Solutions, LLC (assigned to ADA-ES, Inc.) ** (14)
10.24 Employment Agreement dated May 1, 1997 between Michael D. Durham and
ADA Environmental Solutions, LLC (assigned to ADA-ES, Inc.) ** (14)
10.25 Employment Agreement dated January 2, 2000 between Mark H. McKinnies
and ADA Environmental Solutions, LLC (assigned to ADA-ES, Inc.) **
(14)
10.26 Employment Agreement dated January 1, 2000 between Richard J. Schlager
and ADA Environmental Solutions, LLC (assigned to ADA-ES, Inc.) **
(14)
10.27 2004 Stock Compensation Plan #2 and model stock option agreements**
(13)
10.28 2004 Directors Stock Compensation Plan #1** (15)
10.29 2005 Directors' Compensation Plan**(16)
21.1 Subsidiaries of ADA-ES, Inc. (5)
23.1* Consent of Hein & Associates LLP
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)
No. Description
--- -----------
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)
32.1* Certifications Pursuant to 17 CFR 240.13a-14(b) or 17CFR 240.15d-14(b)
and18 U.S.C. Section 1350
(*) - filed herewith.
(**) - Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to Exhibit 3.1 to the Form 10-QSB for the quarter
ended September 30, 2005 filed on November 10, 2005 (File No. 000-50216).
(2) Incorporated by reference to Exhibit 3.2 to the Form 8-K dated December 1,
2005 filed on December 5, 2005 (File No. 000-50216).
(3) Incorporated by reference to Exhibit 4.1 to the Form 8-K dated October 21,
2005 filed on October 26, 2005 (File No. 000-50216).
(4) Incorporated by reference to Exhibit 10.1 to the Form 8-K dated October 21,
2005 filed on October 26, 2005 (File No. 000-50216).
(5) Intentionally omitted.
(6) Incorporated by reference to Exhibit A to Exhibit 10.1 to the Form S-3 filed
on October 18, 2004 (File No. 333-119795).
(7) Incorporated by reference to the same numbered Exhibit to the Form 10-SB/A-3
filed on July 28, 2003 (File No. 000-50216).
(8) Incorporated by reference to the same numbered Exhibit to the Form 10-SB/A-4
filed on August 24, 2003 (File No. 000-50216).
(9) Incorporated by reference to Exhibit 99.2 to the Form S-8 filed on November
14, 2003 (File No. 333-110479).
(10) Incorporated by reference to Exhibit 99.1 to the Form S-8 filed on February
6, 2004 (File No. 333-112587).
(11) Incorporated by reference to the same numbered Exhibit to the Form 10-KSB
for the year ended December 31, 2003 filed on March 30, 2004 (File No.
000-50216).
(12) Incorporated by reference to the same numbered Exhibit to the Form 10-QSB
for the quarter ended March 31, 2004 filed on May 13, 2004 (File No. 000-50216).
(13) Incorporated by reference to Exhibit 99.3 to the Form S-8 filed on December
14, 2004 (File No. 333-121234).
(14) Incorporated by reference to the same numbered Exhibit to the Form 10-KSB
for the year ended December 31, 2004 filed on March 30, 2005 (File No.
000-50216).
(15) Incorporated by reference to Exhibit 99.1 to the Form S-8 filed on April
16, 2004 (File No. 333-114546).
(16) Incorporated by referenced to the same numbered Exhibit to the Form 10-KSB
for the year ended December 31,2005 filed on March 30, 2006.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ADA-ES, Inc.
------------
(Registrant)
By /s/ Mark H. McKinnies /s/ Michael D. Durham
------------------------ ---------------------
Mark H. McKinnies, Senior Vice Michael D. Durham
President and Chief Financial Officer President (Chief Executive
(Principal Financial and Accounting Officer) Officer)
Date: July 25, 2006 July 25, 2006
------------- -------------
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
/s/ John W. Eaves /s/ Rollie J. Peterson
----------------- -----------------------
John W. Eaves, Director Rollie J. Peterson
Director Director
July 25, 2006 July 25, 2006
------------- -------------
Date Date
/s/ Jeffrey C. Smith /s/ Michael D. Durham
-------------------- ---------------------
Jeffrey C. Smith, Director Michael D. Durham, Director
July 25, 2006 July 25, 2006
------------- -------------
Date Date
/s/ Mark H. McKinnies /s/ Ronald B. Johnson
--------------------- ---------------------
Mark H. McKinnies, Director Ronald B. Johnson, Director
July 25, 2006 July 25, 2006
------------- -------------
Date Date
ADA-ES, INC. AND SUBSIDIARY
Consolidated Financial Statements
For the Years Ended
December 31, 2005 and 2004
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Registered Public Accounting Firm.....................F-2
Consolidated Balance Sheet - December 31, 2005..............................F-3
Consolidated Statements of Income - For the Years Ended
December 31, 2005 and 2004.............................................F-4
Consolidated Statements of Changes in Stockholders' Equity - For
the Years Ended December 31, 2005 and 2004.............................F-5
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 2005 and 2004............................................F-6
Notes to Consolidated Financial Statements..................................F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
ADA-ES, Inc. and Subsidiary
Littleton, Colorado
We have audited the accompanying consolidated balance sheet of ADA-ES, Inc. and
Subsidiary as of December 31, 2005, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for the years ended
December 31, 2005 and 2004. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ADA-ES,
Inc. and Subsidiary as of December 31, 2005, and the results of their operations
and their cash flows for the years ended December 31, 2005 and 2004 in
conformity with U.S. generally accepted accounting principles.
HEIN & ASSOCIATES LLP
Denver, Colorado
February 13, 2006
F-2
ADA-ES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 14,026,000
Trade receivables, net of allowance for doubtful accounts of $4,000 3,014,000
Investments in securities 2,515,000
Prepaid expenses and other 283,000
------------
Total current assets 19,838,000
------------
PROPERTY AND EQUIPMENT, at cost 1,663,000
Less accumulated depreciation and amortization (1,013,000)
------------
Net property and equipment 650,000
------------
GOODWILL, net of $1,556,000 in amortization 2,024,000
INTANGIBLE ASSETS, net of $44,000 in amortization 156,000
INVESTMENTS IN SECURITIES 5,663,000
OTHER ASSETS 385,000
------------
TOTAL ASSETS $ 28,716,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,706,000
Accrued payroll and related liabilities 516,000
Accrued expenses 138,000
Deferred revenue and other 460,000
------------
Total current liabilities 2,820,000
------------
LONG-TERM LIABILITIES:
Deferred compensation and other 40,000
------------
Total liabilities 2,860,000
------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 6)
STOCKHOLDERS' EQUITY:
Preferred stock; 50,000,000 shares authorized, none outstanding --
Common stock; no par value, 50,000,000 shares authorized,
5,610,267 shares issued and outstanding 26,318,000
Accumulated other comprehensive income 33,000
Accumulated deficit (495,000)
------------
Total stockholders' equity 25,856,000
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,716,000
============
See accompanying notes to these consolidated financial statements.
F-3
ADA-ES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------
2005 2004
------------ ------------
REVENUE:
Mercury emission control $ 8,784,000 $ 5,940,000
Flue gas conditioning 1,917,000 2,122,000
Combustion aids and others 327,000 355,000
------------ ------------
Total net revenues 11,028,000 8,417,000
COST OF REVENUES
Mercury emission control 5,722,000 3,817,000
Flue gas conditioning 796,000 958,000
Combustion aids and others 223,000 245,000
------------ ------------
Total cost of services 6,741,000 5,020,000
------------ ------------
GROSS MARGIN 4,287,000 3,397,000
OTHER COSTS AND EXPENSES:
General and administrative 2,502,000 2,046,000
Research and development 977,000 815,000
Depreciation and amortization 157,000 153,000
------------ ------------
Total expenses 3,636,000 3,014,000
------------ ------------
OPERATING INCOME 651,000 383,000
OTHER INCOME (EXPENSE):
Interest and other expense (9,000) (34,000)
Interest and other income 357,000 49,000
------------ ------------
Total other income 348,000 15,000
------------ ------------
INCOME BEFORE INCOME TAX PROVISION 999,000 398,000
DEFERRED INCOME TAX PROVISION (336,000) (62,000)
------------ ------------
NET INCOME 663,000 336,000
UNREALIZED GAINS AND (LOSSES) ON CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES, net of tax (1,000) 34,000
------------ ------------
COMPREHENSIVE INCOME $ 662,000 $ 370,000
============ ============
NET INCOME PER COMMON SHARE - BASIC AND DILUTED $ .13 $ .08
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,966,000 4,126,000
============ ============
WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING 5,137,000 4,193,000
============ ============
See accompanying notes to these consolidated financial statements.
F-4
ADA-ES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
ACCUMULATED
COMMON STOCK OTHER
---------------------------- COMPREHENSIVE ACCUMULATED
SHARES AMOUNT INCOME DEFICIT TOTAL
------------ ------------ ----------- ----------- ------------
BALANCES, January 1, 2004
3,582,230 $ 4,467,000 $ -- $ (1,494,000) $ 2,973,000
Stock issued to employees and directors
for expenses 25,716 181,000 -- -- 181,000
Issuance of stock for cash, net 1,000,000 7,620,000 -- -- 7,620,000
Issuance of stock on exercise of options 173,265 435,000 -- -- 435,000
Issuance of stock on conversion of debt 14,500 36,000 -- -- 36,000
Tax benefit of stock transactions -- 395,000 -- -- 395,000
Unrealized gains on investments -- -- 34,000 -- 34,000
Net income -- -- -- 336,000 336,000
------------ ------------ ------------ ------------ ------------
BALANCES, December 31, 2004 4,795,711 13,134,000 34,000 (1,158,000) 12,010,000
------------ ------------ ------------ ------------ ------------
Stock and stock options issued to
consultant and directors for expenses 4,221 75,000 -- -- 75,000
Issuance of stock for cash, net 789,089 12,538,000 -- -- 12,538,000
Issuance of stock on exercise of options 40,976 303,000 -- -- 303,000
Tax benefit of stock transactions -- 268,000 -- -- 268,000
Return of shares from escrow (19,730) -- -- -- --
Unrealized loss on investments -- -- (1,000) -- (1,000)
Net income -- -- -- 663,000 663,000
------------ ------------ ------------ ------------ ------------
BALANCES, December 31, 2005 5,610,267 $ 26,318,000 $ 33,000 $ (495,000) $ 25,856,000
============ ============ ============ ============ ============
See accompanying notes to these consolidated financial statements.
F-5
ADA-ES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 663,000 $ 336,000
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization 157,000 153,000
Loss on asset dispositions and securities 104,000 24,000
Write off of inventory 28,000 --
Expenses paid with stock and stock options 75,000 181,000
Deferred tax expense 336,000 62,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables (1,816,000) (133,000)
Prepaid expenses and other (103,000) (94,000)
Increase (decrease) in:
Accounts payable 1,273,000 271,000
Accrued expenses 222,000 190,000
Deferred revenue and other 270,000 (159,000)
------------ ------------
Net cash provided by operating activities 1,209,000 831,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for equipment and patents (374,000) (212,000)
Investment in securities (10,753,000) (8,068,000)
Proceeds from asset dispositions -- 60,000
Proceeds from sale of securities 8,999,000 1,587,000
------------ ------------
Net cash used in investing activities (2,128,000) (6,633,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and notes payable (4,000) (922,000)
Exercise of stock options 303,000 435,000
Sale of stock 12,538,000 7,620,000
------------ ------------
Net cash provided by financing activities 12,837,000 7,133,000
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 11,918,000 1,331,000
CASH AND CASH EQUIVALENTS, beginning of year 2,108,000 777,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 14,026,000 $ 2,108,000
============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash payments for interest $ 2,000 $ 34,000
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer of inventory to property $ -- $ 39,000
============ ============
Tax effect of stock option exercises $ 268,000 $ 395,000
============ ============
Stock issued in conversion of debt $ -- $ 36,000
============ ============
See accompanying notes to these consolidated financial statements.
F-6
ADA-ES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
--------------------------------------------------------------------
Nature of Operations - The accompanying consolidated financial statements
include the accounts of ADA-ES, Inc. (ADA) and its wholly-owned subsidiary,
ADA Environment Solutions, LLC (ADA LLC). ADA's only asset is its
investment in its wholly-owned subsidiary, ADA LLC. All significant
intercompany transactions have been eliminated. Collectively, ADA and
ADA LLC are referred to as the Company.
The Company is principally engaged in providing environmental technologies
and specialty chemicals to the coal-burning utility industry. The Company
also generates substantial revenue from contracts co-funded by the
government and industry. The Company's sales occur principally throughout
the United States.
Cash Equivalents - The Company considers all highly liquid debt instruments
with original maturities of three months or less to be cash equivalents.
The Company maintains the majority of its cash in deposit accounts
collateralized by U.S. Treasury Securities. The amount on deposit at
December 31, 2005 was held in one commercial bank and was in excess of the
insurance limits of the Federal Deposit Insurance Corporation.
Receivables and Credit Policies - Trade receivables are uncollateralized
customer obligations due under normal trade terms requiring payment within
30 days from the invoice date. Management reviews trade receivables
periodically and reduces the carrying amount by a valuation allowance that
reflects management's best estimate of the amount that may not be
collectible.
Investments- Investments in securities include certificates of deposit and
debt securities. All investments in debt securities are classified as
available-for-sale securities, and are recorded at fair value in
investments in securities, with the change in fair value during the period
excluded from earnings and recorded net of tax as a component of other
comprehensive income.
Premiums and discounts on investments in debt securities are amortized over
the contractual lives of those securities. During the first half of 2005,
the Company transferred debt securities totaling approximately $5,532,000
to available-for-sale from the held-to-maturity category because of the
trading activity initiated by the debt security managers. The transfer
resulted in an increase to other comprehensive income of $20,000. All of
the Company's investments in debt and marketable equity securities are
classified as available-for-sale at December 31, 2005, as they are held for
an indefinite period. Unrealized holding losses on such securities, net of
tax, which were reported in other comprehensive income for 2005 were
$1,000.
Inventories - Inventories, which are included in prepaid expenses and
other, are stated at the lower of cost or market, determined by the
first-in, first-out method and consist of supplies.
F-7
ADA-ES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition - ADA follows the percentage of completion method of
accounting for all significant contracts excluding government contracts and
chemical sales. The percentage of completion method of reporting income
takes into account the estimated costs to complete and estimated gross
margin for contracts in progress. The Company recognizes revenue on
government contracts based on the time and expenses incurred to date. As of
December 31, 2005, costs incurred in excess of billings totaled $142,000
and are included in prepaid expenses and other in the accompanying Balance
Sheet. Billings in excess of recognized income totaled $135,000 as of
December 31, 2005 and are included in deferred revenue and other in the
accompanying Balance Sheet.
ADA chemical sales are recognized when products are shipped to customers. A
reserve is established for any returns, based on historical trends.
Chemical products are shipped FOB shipping point and title passes to the
customer when the chemicals are shipped. The Company's sales agreements do
not contain a right of inspection or acceptance provision and products are
generally received by customers within one day of shipment. The Company has
had no significant history of non-acceptance, nor of replacing goods
damaged or lost in transit. Consulting revenue is recognized as services
are performed and collection is assured.
Property and Equipment - Property and equipment is stated at cost.
Depreciation on assets is provided using the straight-line method based on
estimated useful lives ranging from 3 to 10 years. Maintenance and repairs
are charged to operations as incurred. When assets are retired, or
otherwise disposed of, the property accounts are relieved of costs and
accumulated depreciation and any resulting gain or loss is credited or
charged to income.
Intangible Assets - Intangible assets principally consist of patents.
Patents obtained by the Company directly are being amortized over a 17-year
life. Amortization of intangible assets for the years ended December 31,
2005 and 2004 was $11,000 and $10,000, respectively. Based on the balance
of intangible assets as of December 31, 2005, the Company anticipates
amortization expense over the next 5 years to be approximately $11,000 per
year.
Intangible assets consist of:
Accumulated
Cost Amortization Net
---------------- ---------------- -------------
Patents $ 200,000 $ 44,000 $ 156,000
================ ================ =============
F-8
ADA-ES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill - Goodwill consists of the excess of the aggregate purchase price
over the fair value of net assets of businesses acquired. Goodwill was
amortized over a 10-year period through December 31, 2001 and is
attributable to the Company's FGC reporting segment. As of January 1, 2002,
the Company adopted Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill is
no longer amortized, but subject to an impairment evaluation, which is
performed in the fourth quarter of each year. As a result of this
evaluation, which was performed on the FGC reporting segment, the Company
concluded that no impairment of its goodwill was required.
Operating Costs - Operating costs include all labor, fringe benefits,
subcontract labor, chemical costs, materials, equipment, supplies and
travel costs directly related to the Company's production of revenue.
General and Administrative - General and administrative costs include
personnel related fringe benefits, sales and administrative staff labor
costs, facility costs and other general costs of conducting business.
Net Income Per Share - Net income per share is presented in accordance with
the provisions of SFAS No. 128, Earnings Per Share. Basic EPS is calculated
by dividing the income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
calculated using the same numerator as basic EPS and further reflects the
potential dilution that could occur if outstanding stock options were
exercised. The effect of such dilutive stock options added 171,000 and
67,000 shares in 2005 and 2004, respectively, to the weighted average
number of common shares outstanding used in calculation of diluted EPS.
Impairment of Long-Lived Assets - The Company follows SFAS No. 144,
Impairment of Long-Lived Assets. In the event that facts and circumstances
indicate that the carrying value of assets or intangible assets may be
impaired, an evaluation of recoverability would be performed. Based on the
Company's evaluation as of December 31, 2005, no impairment of value
existed.
Fair Value of Financial Instruments - The carrying amounts of financial
instruments, including cash, cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximates fair value due to the
short maturity of these instruments. The fair values of investments are
estimated based on quoted market prices for those investments.
Income Taxes - The Company accounts for income taxes under the liability
method of SFAS No. 109, whereby current and deferred tax assets and
liabilities are determined based on tax rates and laws enacted as of the
balance sheet date. A valuation allowance is provided when deferred tax
assets are not expected to be realized.
Research and Development Costs - Research and development costs are charged
to operations in the period incurred.
Stock-Based Compensation - The Company records expense for stock options
granted to employees by using APB 25, which requires expense to be
recognized only to the extent the exercise price of the stock-based
compensation is below the market price on the date of grant. Transactions
in equity instruments with non-employees for goods or services are
F-9
ADA-ES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accounted for on the fair value method. Because the Company has elected not
to adopt the fair value accounting described in SFAS No. 123 for employees,
it is subject only to the disclosure requirements described in SFAS No.
123.
Had compensation cost been determined based on an estimate of the fair
value consistent with the method of SFAS No. 123 at the grant dates for
awards under those plans, the Company's net income and EPS would have been
reduced to the pro forma amounts indicated below.
Years Ended December 31,
--------------------------
2005 2004
------------ -----------
Net income (loss):
As reported $ 663,000 $ 336,000
Fair value of stock based
compensation, net of tax (147,000) (48,000)
----------- -----------
Pro forma $ 516,000 $ 288,000
=========== ===========
Net income (loss) per share - basic and diluted:
As reported $ .13 $ .08
Fair value of stock based compensation (.03) (.01)
----------- -----------
Pro forma - basic and diluted $ .10 $ .07
=========== ===========
The options granted in 2004 and 2005 had exercise prices equal to the
market price on the date of the grants. Prior to the third quarter of 2005,
the Company showed expense related to stock options in the period of grant.
The presentation above, including 2004 amounts, shows expense amortized
over the estimated service period, as required under SFAS 123. The average
fair value of each employee option granted in 2005 and 2004 was
approximately $2.18 and $1.38, respectively, and was estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
Years Ended December 31,
--------------------------
2005 2004
-------- -------
Expected volatility 41% 35%
Risk-free interest rate 2.6% 2.5%
Expected life of options (in years) 4.8 4.4
Expected dividends 0 0
Use of Estimates - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
requires the Company's management to make estimates and assumptions that
affect the amounts reported in these financial statements and accompanying
F-10
ADA-ES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
notes. Actual results could differ from those estimates. The Company makes
significant assumptions concerning: 1) the impairment of and the remaining
realizability of its intangibles; 2) estimates of certain overhead and
other rates on research contracts with the U.S. Government, which are
subject to future audits. At this time, the Company does not believe any
future government audit will result in material adjustment to previously
recorded revenues; 3) the allowance for doubtful accounts, which is based
on historical experience; 4) the valuation and classification of
investments in available-for-sale securities, which is based on estimated
fair market value; and 5) the 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.
Comprehensive Income - SFAS No. 130 establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners. In
2005 and 2004, comprehensive income includes unrealized gains (losses) on
investments, net of income tax expense, of ($1,000) and $34,000,
respectively.
Segment Information - The Company follows SFAS No. 131, Disclosure About
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards on the way that public companies report financial information
about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards
for disclosures regarding products and services, geographic areas, and
major customers. SFAS No. 131 defines operating segments as components of a
company about which discrete financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. The Company has three
reportable segments: mercury emission controls (MEC), flue gas conditioning
and consulting (FGC), and combustion aids and consulting (CA).
Recently Issued Accounting Pronouncements - In December 2004, the FASB
issued SFAS No. 123R, Share-Based Payment. This Statement is a revision of
SFAS No. 123, Accounting for Stock-Based Compensation. This Statement
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,
and its related implementation guidance. SFAS No. 123R establishes
standards for the accounting for transactions in which an entity exchanges
its equity instruments for goods or services, or incurs liabilities in
exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based
payment transactions and requires the Company to measure and recognize
costs of share-based payment transactions in the financial statements. The
Company must implement SFAS No. 123R as of the beginning of the first
quarter of 2006. The Company is evaluating the impact of SFAS No. 123R on
its financial statements and believes the impact will be similar to
proforma amounts disclosed above.
In November 2005, the FASB issued Staff Position ("FSP") FAS115-1/124-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments , which addresses the determination as to when an
investment is considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss. This FSP also
F-11
ADA-ES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. The guidance in this FSP amends FASB Statements No. 115,
Accounting for Certain Investments in Debt and Equity Securities , and No.
124, Accounting for Certain Investments Held by Not-for-Profit
Organizations , and APB Opinion No. 18, The Equity Method of Accounting for
Investments in Common Stock . This FSP is effective for reporting periods
beginning after December 15, 2005. Adoption of this FSP is not expected to
have a material impact on the Company's financial statements.
In April 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, requiring retrospective application as the required method for
reporting a change in accounting principle, unless impracticable or a
pronouncement includes specific transition provisions. This statement also
requires that a change in depreciation, amortization, or depletion method
for long-lived, non-financial assets be accounted for as a change in
accounting estimate effected by a change in accounting principle. This
statement carries forward the guidance in APB Opinion No. 20, Accounting
Changes, for the reporting of the correction of an error and a change in
accounting estimate. This statement is effective for accounting changes and
correction of errors made in fiscal years beginning after December 15, 2005
and is not expected to have a material impact on the Company's financial
statements.
2. PROPERTY AND EQUIPMENT:
-----------------------
Property and equipment as of December 31, 2005 is summarized as follows:
Estimated Useful
Lives
------------------
Machinery and equipment $ 1,375,000 3-10
Leasehold improvements 210,000 7
Furniture and fixtures 78,000 5
-------------
$ 1,663,000
=============
Depreciation and amortization of property and equipment for the years ended
December 31, 2005 and 2004 was $146,000 and $143,000, respectively.
F-12
ADA-ES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS:
------------
Investments in available-for-sale securities are reported at their fair
value in investments in securities and are summarized as follows at
December 31, 2005: Gross Gross Unrealized Fair Unrealized Gain Loss Value
Certificates of deposit $ -- $ -- $ 1,200,000
Common stock $ 142,000 $ (18,000) $ 1,444,000
Debt securities $ 4,000 $ (76,000) $ 5,534,000
----------- ----------- -----------
Total $ 146,000 $ (94,000) $ 8,178,000
=========== =========== ===========
Less short-term portion $(2,515,000)
-----------
Long-term portion $ 5,663,000
===========
Realized gains and losses are determined on the basis of specific
identification of the security sold. During 2005, information on securities
sold is as follows:
Carrying amount of securities sold $ 9,031,000
===========
Sale proceeds $ 8,999,000
===========
Gross realized losses $ (60,000)
===========
Gross realized gains $ 28,000
===========
Accumulated other comprehensive income for 2005 and 2004 includes an
unrealized holding gain, net of tax, on securities of $33,000 and $34,000,
respectively.
Debt securities will mature as follows:
Year(s) Amount
------- ------
2006 $ 271,000
2007-2010 1,706,000
2011-2015 2,934,000
Beyond 2015 623,000
------------
Total $ 5,534,000
============
F-13
ADA-ES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. GOVERNMENT AND INDUSTRY FUNDED CONTRACTS:
-----------------------------------------
ADA has performed activities under five contracts awarded by the Department
of Energy (the "DOE") that contributed a total of $2,348,000 and $2,387,000
to revenues in 2005 and 2004, respectively. These amounts are included in
Mercury emission control revenues. ADA typically invoices the DOE monthly
for labor and expenditures plus estimated overhead factors, less cost share
amounts. The total approved DOE budgets amount to $23.2 million, of which
the Company's and industry partners' cost-share portion is $7.4 million.
The remaining unearned amount of the contracts was $5.4 million as of
December 31, 2005, of which $3.3 million is expected to be recognized by
the Company in 2006 (including cash contributions by other industry
partners). These contracts are subject to audit and future appropriation of
funds by Congress. The Company's historical experience has not resulted in
significant adverse adjustments to the Company, however the government
audits for years ended 2005, 2004, 2003 and 2002 have not yet been
finalized.
5. STOCKHOLDERS' EQUITY:
---------------------
Shares and Stock Options Issued for Pension Expenses and Directors' and
Consultant Compensation - In 2004 the Company issued shares of its common
stock for the payments of approximately $146,000 of ADA pension related
expenses (see Note 6) and $35,000 of non-management directors'
compensation, based upon the per share value of unrestricted common stock
of ADA at the time of exchanges. In 2005, the Company issued shares of its
common stock for compensation of $58,000 to non-management directors based
on the market price of the common stock, and recorded $17,000 of expense
related to stock options issued to a consultant.
Sale of Stock, Convertible Debenture and Grant of Option to Arch - In 2003,
the Company sold 137,741 shares to Arch Coal for $1 million and sold a
convertible debenture for $300,000, both pursuant to an investment
agreement. Of the shares sold, 37,741 were originally placed in escrow of
which 19,730 shares were returned to the Company during 2005 since the
market price of the Company's shares exceeded a minimum of $9.08 for a
twenty-day continuous period during the one-year period from the date of
their issuance. The Debenture was repaid during 2004. As a part of the
share purchase Arch was also granted an option to purchase 50,000 shares
for $10.00 per share. The option expires in five years. Under the option,
Arch may purchase 16,667 shares after August 2004, another 16,667 shares
after August 2005, and the remaining shares after August 2006.
Sale of Stock in 2005 and 2004 - In August 2004 and October 2005, the
Company entered into several Subscription and Investment Agreements. Under
the August 2004 agreements, the Company privately sold 1 million shares of
its common stock to a limited number of institutional investors at a price
of $8.00 per share. The net proceeds to the Company from the sales totaled
$7,620,000. Under the October 2005 agreements, the Company privately sold
789,089 shares of its common stock to a limited number of institutional
investors at a price of $17.00 per share. Net proceeds to the Company
totaled $12,538,000.
F-14
ADA-ES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2005, 61,900 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. The option
exercise price of grants under this plan is 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. During 2004,
200,000 options were granted under this plan. In January 2005 and 2006 the
Board of Directors authorized the vesting of 27,080 options and 38,428
options, respectively, under this plan.
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 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
F-15
ADA-ES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The Company granted options to employees in 2004 and to employees and a
consultant in 2005 as additional compensation. The following is a table of
options activity during 2004 and 2005:
Weighted
Average
Employees Non-Employee Exercise
Options Options Price
------------------------------------
OPTIONS OUTSTANDING, January 1, 2004 187,310 80,000 3.94
Options granted 275,995 -- 9.32
Options expired (7,800) -- 2.80
Options exercised (157,765) (30,000) 2.51
-------- -------- ---------
OPTIONS OUTSTANDING, December 31, 2004 297,740 50,000 $ 9.01
======== ======== =========
Options granted 96,900 30,000 15.29
Options expired (2,181) -- 13.80
Options exercised (40,976) -- 7.39
-------- -------- ---------
OPTIONS OUTSTANDING, December 31, 2005 351,483 80,000 $ 10.99
======== ======== =========
The weighted average remaining contractual life for all options as of
December 31, 2005 was approximately 8.3 years. At December 31, 2005,
107,722 options with a weighted average exercise price of $9.90 were fully
vested and exercisable. Of the remaining 323,761 options, 103,877 options
with a weighted average exercise price of $12.68 vest in 2006, 42,617
options with a weighted average exercise price of $15.74 vest in 2007,
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, 27,000 options with an exercise price of $14.60 vest
at the discretion of the board of directors upon achievement of performance
objectives.
Following is information related to options outstanding at December 31,
2005:
Weighted
Average
Shares Weighted Average Contractual Number Weighted Average
Range Outstanding Exercise Price Life Exercisable Exercise Price
----- ----------- -------------- ---- ----------- --------------
(in years)
$2.80 13,425 $ 2.80 7.8 13,425 $2.80
$8.60 - $10.00 254,960 $ 8.87 8.5 59,218 $9.15
$13.80 - $18.61 163,098 $14.96 8.1 35,079 $13.87
------- ------ --- ------ ------
431,483 $10.99 8.3 107,722 $ 9.90
======= ====== === ======= ======
F-16
ADA-ES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS AND CONTINGENCIES:
------------------------------
Pension Expense and Retirement Plan - The Company assumed a defined
contribution and 401(k) plan covering all eligible employees as of January
1, 2003. The Company recognized contribution expense of $206,000 and
$161,000 for 2005 and 2004, respectively, based on a percentage of the
eligible employees' annual compensation.
Performance Guarantee Activated Carbon Injection Systems - Under contracts
to supply activated carbon injection systems, the Company may grant
performance guarantees to the owner of the power plants that guarantee the
performance of the associated equipment for a specified period and the
achievement of a certain level of mercury removal based upon the injection
of a specified quantity of activated carbon at a specified rate given other
plant operating conditions. In the event the equipment fails to perform as
specified, the Company is obligated to correct or replace the equipment. In
the event the level of mercury removal is not achieved, the Company has a
"make right" obligation within the contract limits.
Office Lease - The Company leases office space under a non-cancellable
operating lease. Total rental expense was $153,000 and $158,000 for the
years ending December 31, 2005 and 2004, respectively. The total minimum
rental commitments at December 31, 2005 was $494,000 for lease payments due
in 2006 through 2009 as follows:
Year Amount
---- ----------
2006 $ 119,000
2007 122,000
2008 125,000
2009 128,000
----------
$ 494,000
==========
7. MAJOR CUSTOMERS:
----------------
Sales to unaffiliated customers which represent 10% or more of the
Company's sales for the years ended December 31, 2005 and 2004 were as
follows (as a percentage of each entity's sales):
Customer 2005 2004
--------------------------------- ------------------- --------------
A (Governmental Contracts) 21% 28%
B 11% 10%
C 13% -
F-17
ADA-ES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2005, approximately 89% of the Company's trade receivables
were from five customers.
A significant portion of ADA's revenue is derived from contracts with the
DOE and chemical and equipment sales to coal-burning electric power plants.
8. INCOME TAXES:
-------------
The following lists the Company's deferred tax assets and liabilities as of
December 31, 2005, which are included in Other Assets and Accrued Expenses,
respectively, in the accompany Balance Sheet:
Current assets (liabilities):
Prepaid expenses $ (39,000)
Unrealized gains - securities held for sale (19,000)
Deferred revenues, compensation and other 30,000
------------
(28,000)
Non-current assets (liabilities)
Deferred compensation, warranty and other 9,000
Property and intangible asset differences (60,000)
Net loss carryforward 318,000
Tax credits 101,000
------------
368,000
Net tax assets $ 340,000
============
As of December 31, 2005, the Company had approximately $857,000 of tax loss
carryforwards. If not utilized to reduce taxable income in future periods,
$40,000 will expire in 2023 and the remainder in 2024. Approximately
$69,000 of tax loss carryforwards were used to reduce taxable income in
2005. The Company's valuation allowance as of December 31, 2005 and 2004
was $0, as the Company believes that it is more likely than not that its
deferred tax assets would be realized in the future.
At December 31, 2005 and 2004, the Company's current tax provision was
reduced by $268,000 and $395,000, respectively, attributable to the tax
effects of stock option exercises recorded in stockholders' equity.
F-18
ADA-ES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation of the actual income tax rate - expense
(benefit) to the expected combined Federal and State tax rate of
approximately 34%:
2005 2004
---- ----
Expected income tax rate - expense (benefit) 35% 34%
Permanent differences (4%) (4%)
Tax credits (1%) (17%)
State income taxes 3% 3%
Other 1% -
--- ---
Actual income tax rate 34% 16%
=== ===
9. RELATED PARTY TRANSACTIONS:
---------------------------
As discussed above in Note 5, the Company executed a Securities
Subscription and Investment Agreement with Arch Coal, Inc. in 2003.
Pursuant to the investment agreement, Arch purchased a $300,000 convertible
debenture from the Company, purchased 137,741 shares of the Company's
Common stock and was also granted an option to purchase 50,000 shares. The
debenture and accrued interest thereon was repaid in 2004. In addition, the
Company co-markets its ADA-249 product and performs certain testing and
research projects under agreements with Arch. Under such arrangements, the
Company has recorded revenue of $230,000 and $25,000 in 2005 and 2004,
respectively. A designee of Arch has been appointed a seat on the Company's
Board of Directors and management of the Company has agreed in the future
to nominate and to vote all proxies and other shares of stock in the
Company which they are entitled to vote in favor of that designee so long
as Arch holds no less than 100,000 shares of the Company's common stock.
10. BUSINESS SEGMENT INFORMATION:
-----------------------------
The following information relates to the Company's three reportable
segments: MEC, FGC, and CA. All assets are located in the U.S. and are not
evaluated by management on a segment basis. All significant customers are
U.S. companies.
Year Ended December 31, 2005:
MEC FGC CA Total
--- --- -- -----
Total revenue $8,784,000 $1,917,000 $327,000 $11,028,000
Segment profit (loss) $1,738,000 $957,000 $53,000 $2,748,000
F-19
ADA-ES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2004:
MEC FGC CA Total
--- --- -- -----
Total revenue $5,940,000 $2,122,000 $355,000 $8,417,000
Segment profit (loss) $996,000 $964,000 $34,000 $1,994,000
A reconciliation of the reported total segment profit to net income for the
periods shown above is as follows:
2005 2004
------------ ------------
Total segment profit $ 2,748,000 $1,994,000
Non-allocated general and administrative expenses (1,940,000) (1,458,000)
Depreciation and amortization (157,000) (153,000)
Interest, other income/expenses and tax (provision) benefit 12,000 (47,000)
------------ ----------
Net income $ 663,000 $ 336,000
============ ==========
F-20