Arq, Inc. (ARQ) FY 2024 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are an environmental technology company and are principally engaged in the sale of consumable air, water, and soil treatment solutions primarily based on AC. Our proprietary AC products enable customers to reduce air, soil, and water contaminants, including mercury, PFAS and other pollutants to meet the challenges of existing and pending air quality, soil, and water regulations. We manufacture and sell AC and other chemicals used to capture and remove impurities, contaminants and pollutants for the coal-fired power generation, industrial, water treatment, and water and soil remediation markets, which we collectively refer to as the APT market.

Our primary products are comprised of AC, which is produced from a variety of carbonaceous raw materials. Our AC products include both PAC and GAC, among others. Additionally, we own the Five Forks Mine, a lignite coal mine that currently supplies the primary raw material for the manufacturing of our products.

In February 2023, we acquired 100% of the equity interests, assets and liabilities of the subsidiaries of Arq Limited, an environmental technology company incorporated under the laws of Jersey (hereafter the Arq Limited subsidiaries referred to as "Legacy Arq", and the acquisition itself referred to as the "Arq Acquisition") to secure access to additional U.S. based bituminous coal feedstock, a manufacturing facility located in Corbin, Kentucky (the "Corbin Facility") and certain patented processes as a means to manufacture new advanced GAC products for sale into the APT and other markets. Under this manufacturing process, we convert high-quality recovered bituminous coal fines into a purified, microfine carbon powder known as Arq powderTM ("Arq Powder") for high value applications, such as for a raw material to produce GAC products. We expect to begin using Arq Powder as a feedstock to produce high-quality GAC products by the end of the first quarter of 2025 for sale into the APT and other markets. We anticipate that our GAC products made using these highly purified recovered bituminous coal fines will have a materially lower carbon footprint than other coal-based competitor alternatives.

We believe Arq Powder has additional potential to enable us to access new markets and applications. We intend to secure customer interest in Arq Powder as an additive into other markets, such as components for asphalt. These products utilizing Arq Powder are expected to have a lower carbon footprint compared to similar products utilizing conventional materials and have demonstrated other beneficial performance attributes during lab-scale customer testing. These applications are currently in various stages of proof of concept testing or preliminary customer testing.

In February 2024, as part of a larger rebranding, the Company changed its name to Arq, Inc., and on February 1, 2024, our common stock commenced trading on the Nasdaq Global Market under the ticker symbol, "ARQ."

Drivers of Demand and Key Factors Affecting Profitability

Drivers of demand and current key factors affecting our profitability are sales of our AC products to the APT market. Our operating results are influenced by: (1) changes in our manufacturing production and sales volumes; (2) changes in price and product mix; (3) changes in coal-fired dispatch and electricity power generation sources; (4) changes in demand for contaminant removal within water treatment facilities; (5) changes in environmental regulations; and (6) state or municipal approval and customer acceptance for our new GAC products.

Components of Revenue, Expenses and Equity Method Investees

The following narrative briefly describes the components of revenue and expenses as presented in the Consolidated Statements of Operations. Descriptions of the revenue recognition policies are included in Note 1 to the Consolidated Financial Statements included in Item 8 of this Report.

Revenue and cost of revenue

Revenue

Our revenue is comprised of the sale of AC products and other chemical-based technology products into the APT market, as well as the sale of other AC products to our largest customer, who services other diverse markets.

Cost of revenue

Cost of revenue is comprised of all labor, fringe benefits, subcontract labor, additive and coal costs, materials, equipment, supplies, travel costs and any other costs and expenses directly related to the cost of production of consumables.

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License Royalties Payable to Tinuum Group

In December 2022, the Company and Tinuum Group entered into an agreement (the "Tinuum Group Royalty Agreement") whereby we pay Tinuum Group a royalty (the "Tinuum Group Royalty") for certain of our sales of M-ProveTM products after the expiration of the tax credit program under IRC Section 45 ("Section 45 Tax Credit Program") (beginning January 1, 2022) to certain refined coal production facilities owned and operated by Tinuum Group (the "Refined Coal Facilities"). The Tinuum Group Royalty is calculated based on "Net Profit" (as defined in the Tinuum Royalty Agreement) on our sales of M-ProveTM product to certain of the Refined Coal Facilities. The Tinuum Group Royalty Agreement is for an initial term of five years with automatic renewals of five years unless we and Tinuum Group agree to terminate it. The Tinuum Group Royalty is included in Consumables cost of revenue.

Other Operating Expenses

Selling, general and administrative

Selling, general and administrative costs include payroll and benefits costs, legal and professional fees, and general and administrative expenses.

Payroll and benefits costs include payroll costs, payroll-related fringe benefits and stock-based compensation expense of sales and administrative personnel, but exclude such costs related to direct labor that are included in Cost of revenue. Payroll costs, payroll-related fringe benefits, and stock-based compensation expense of research and development personnel are reported in the Research and development line item in the Consolidated Statements of Operations.

Legal and professional costs include external legal, audit and consulting expenses.

General and administrative costs include director fees and expenses, bad debt expense, rent and occupancy expense and other general costs of conducting business.

Research and development

Research and development costs include payroll expenses related to research and development personnel and other expenses incurred related to research and development activities. Research and development costs provided by third parties, net of reimbursements from cost-sharing arrangements, are charged to expense in the period incurred.

Depreciation, amortization, depletion and accretion

Depreciation and amortization expense consists of depreciation expense related to property, plant and equipment and the amortization of long-lived intangible assets. Depletion and accretion expense consists of depletion expense related to the depletion of mine development costs and the accretion of mine reclamation liabilities.

Other (Expense) Income, net

Earnings from equity method investments

Earnings from equity method investments represent our share of earnings related to equity method investments, and in 2023 and 2024, primarily from Tinuum Group. Through December 31, 2021, we had substantial earnings from Tinuum Group and Tinuum Services, LLC ("Tinuum Services"). With the expiration of the tax credit program under IRC Section 45 afforded to producers of refined coal as of December 31, 2021, both Tinuum Group and Tinuum Services commenced winding down their operations related to the Section 45 tax credit program. We have recognized earnings in both 2023 and 2024 related to residual cash distributions received from Tinuum Group. Tinuum Services ceased operations and completed its wind down in 2024.

Other (expense) income

The remaining components of other (expense) income include interest income, interest expense and other miscellaneous items.

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Results of Operations

Presentation of Financial Results

For comparison purposes, the following tables set forth our results of operations for the years presented in the Consolidated Financial Statements included in Item 8 of this Report. The year-to-year comparison of financial results is not necessarily indicative of financial results that may be achieved in future years. This discussion and analysis compares 2024 results to 2023 results. For discussion and analysis that compares 2023 results to 2022 results, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II of our Annual Report on Form 10-K for the year ended December 31, 2023.

Year ended December 31, 2024 Compared to Year ended December 31, 2023

Total Revenue and Cost of Revenue

A summary of the components of revenue and cost of revenue for the years ended December 31, 2024 and 2023 is as follows:

Revenue and cost of revenue

For the years ended December 31, 2024 and 2023, revenue increased year over year primarily driven by the impact of favorable product mix of approximately $6.9 million and improved pricing for our products of approximately $4.9 million. These increases were partially offset by lower volumes sold, which negatively impacted revenue by $2.2 million. Product volumes decreased among power generation customers in 2024, primarily due to lower natural gas prices compared to 2023, which contributed to decreased utilization of coal-fired generation and decreased demand for our products. Also offsetting the overall increase was a decrease in revenue recognized from the settlement of certain contracts with customers containing minimum quantity purchases ("MQ Contracts").

Consumables gross margin, exclusive of depreciation and amortization, increased for the year ended December 31, 2024 compared to 2023. The increase in gross margin was primarily driven by an increase in revenue resulting from increased pricing of our products, while the cost to manufacture our products increased between periods, partially due to increased variable production costs on lower production volumes during 2024. Our consumables gross margin was negatively impacted by a decrease in volumes sold and lower revenue recognized from MQ Contracts in 2024 compared to 2023.

We currently expect consumables revenue to increase in the coming years as a result of increased regulatory requirements finalized by the EPA in April 2024, especially with respect to PFAS substances. However, there is substantial uncertainty regarding the future of these regulations in light of the change in the U.S. presidential administration. See "Legislation and Environmental Regulations" included in Item 1 and our risk factor discussion in Item 1A of this Report for further information.

Consumables revenue continues to be affected by electricity demand, driven by seasonal weather and related power generation needs, as well as competitor prices related to alternative power generation sources such as natural gas and renewables.

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Operating Expenses

A summary of the components of our operating expenses, exclusive of cost of revenue items (presented above), for the years ended December 31, 2024 and 2023 is as follows:

* Percent change in excess of 100% not considered meaningful.

Selling, general and administrative

A summary of the components of selling, general and administrative expenses for the years ended December 31, 2024 and 2023, exclusive of cost of revenue items (presented above), is as follows:

Payroll and benefits

Payroll and benefits expenses decreased year over year primarily due to expenses recorded during the year ended December 31, 2023 relating to severance expense of former executives, which comprised $1.7 million of the total payroll and benefit expense, and $1.1 million related to severance expense of former executives of Legacy Arq. Additionally, salaries and wages and other benefit-related expenses decreased by $1.0 million year over year primarily as a result of lower CEO compensation beginning in July 2023.

Legal and professional fees

Legal and professional fees decreased year over year primarily from decreased consulting, legal, and accounting costs incurred related to the acquisition of Legacy Arq during 2023.

General and administrative

General and administrative expenses increased year over year by approximately $2.2 million, primarily due to increases in franchise & use tax expenses, rent and occupancy expenses, outside construction-related labor and license and fee expenses, partially offset by decreases in property and liability insurance.

Research and development

Research and development expenses increased year over year primarily due to increased research and development payroll costs and conducting product qualification testing with potential lead-adopters as part of our GAC contracting process.

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Depreciation, amortization, depletion and accretion

Depreciation. amortization, depletion and accretion expense decreased by approximately $1.9 million year over year primarily due to higher absorption of depreciation into cost of goods sold during 2024 compared to 2023, which resulted in lower expense of $2.0 million for the year ended December 31, 2024, and decreased amortization of leasehold improvements, customer relationships and developed technology of $0.6 million. These decreases were partially offset by an increase in depreciation expense for property, plant and equipment acquired and placed in service during 2024.

Loss (gain) on sale of assets

For the year ended December 31, 2023, we recognized a one-time gain of $2.7 million on the sale of Marshall Mine, LLC. Loss on sale of assets was not significant for the year ended December 31, 2024.

Other (Expense) Income, net

A summary of the components of our other (expense) income, net for the years ended December 31, 2024 and 2023 is as follows:

* Percent change in excess of 100% not considered meaningful.

Earnings from equity method investments

The following table presents the equity method earnings for the years ended December 31, 2024 and 2023:

Earnings from equity method investments for the year ended December 31, 2024 represented cash distributions from Tinuum Group. Earnings from equity method investments for the year ended December 31, 2023 represented cash distributions received from both Tinuum Group and Tinuum Services. Tinuum Group continues to wind down their services into 2025. The Tinuum Group Royalty Agreement expires at the end of 2027, with an option to extend. We do not expect further distributions from Tinuum Services as Tinuum Services has completed its wind-down.

Interest expense

Interest expense increased for the year ended December 31, 2024 compared to the corresponding period in 2023 primarily due to paid in kind interest on the $10 million term loan with CF Global (the "CFG Loan"), which accrues to the principal portion and is payable upon the termination of the CFG Loan. The CFG Loan was paid in full in December 2024, and the loan agreement was terminated.

Loss on extinguishment of debt

Loss on extinguishment of debt increased year over year due to the write-off of deferred financing costs associated and unamortized debt discount with the termination of the CFG Loan.

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Other

The decrease in Other year over year is primarily driven by a decrease in interest income of $0.7 million as a result of lower cash on hand in 2024, and was driven by increased capital expenditures during 2024.

Income tax (benefit) expense

For the year ended December 31, 2024, we reported income tax benefit of $0.2 million and an effective tax rate of 3%. The difference between our reported income tax benefit and the expected federal benefit of $1.1 million, as a result of pretax loss recognized for the year ended December 31, 2024, was primarily due to an increase in the valuation allowance on our deferred tax assets offset by the benefit of permanent differences related to stock-based compensation.

For the year ended December 31, 2023, we reported income tax expense of $0.2 million and an effective rate of (1)%. The difference between our reported income tax expense and the expected federal benefit of 2.5 million, as a result of pretax loss recognized for the year ended December 31, 2024, was primarily due to the expense of permanent differences related to acquisition-related costs and an increase in the valuation allowance on our deferred tax assets.

Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against their deferred tax asset based on an assessment of the amount of the deferred tax asset that is "more likely than not" to be realized. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized.

We assess a valuation allowance recorded against deferred tax assets at each reporting date. The determination of whether a valuation allowance for deferred tax assets is appropriate requires the evaluation of positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available to realize the deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating taxes, we assess the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial, and regulatory guidance.

As of December 31, 2024, we concluded it is more likely than not we will not generate sufficient taxable income within the allowable carryforward periods to realize any of our net deferred tax assets, and fully reserved for such assets as of December 31, 2024. In reaching this conclusion, we primarily considered our pretax losses incurred over a cumulative three-year look-back period. As of December 31, 2024 and 2023, we had a valuation allowance of $101.6 million and $98.8 million, respectively, on our deferred tax assets.

The ability to recognize the remaining deferred tax assets that continue to be subject to a valuation allowance is evaluated on a quarterly basis to determine if there are any significant events that would affect the ability to utilize those deferred tax assets. Our estimate of future taxable income or losses is based on internal projections that consider historical performance, assumptions on future performance and external data. If events are identified that affect our ability to utilize our deferred tax assets, or if additional deferred tax assets are generated, we update our analysis to determine if an increase to a valuation allowance is required. Such an increase could have a material adverse effect on our financial condition and results of operations. Conversely, better than expected results and continued positive results and trends could result in a decrease to a valuation allowance, and any such decreases could have a material positive effect on our financial condition and results of operations.

See additional discussion in Note 12 of the Consolidated Financial Statements included in Item 8 of this Report.

Tax Assets

As of December 31, 2024, we had approximately $86.1 million in tax credit carryforwards. In the hypothetical event of an "ownership change," as defined by IRC Sections 382, utilization of general business credits ("Tax Credits") generated prior to the change would be subject to an annual limitation imposed by IRC Section 383 for Tax Credits. In connection with the equity offerings completed at various dates during 2024, we issued additional shares of our common stock. We performed an IRC Section 382 analysis as of those dates and determined that we had not experienced an ownership change as of those dates.

Prior to the Acquisition Date, Legacy Arq completed numerous equity offerings that resulted in ownership changes. We have not completed a formal IRC Section 382 analysis of Legacy Arq equity changes from its inception through the Acquisition Date, however, we believe that one or more "ownership changes" occurred during this time period as defined under Sections 382 and 383 and that a portion or all the Legacy Arq Tax Assets may be subject to an annual limitation.

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Non-GAAP Financial Measures

To supplement our financial information presented in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), we provide certain supplemental financial measures, including EBITDA and Adjusted EBITDA, which are measurements that are not calculated in accordance with GAAP. EBITDA is defined as earnings before interest, taxes, depreciation and amortization, and Adjusted EBITDA is defined as EBITDA reduced by the non-cash impact of equity earnings from equity method investment, loss on extinguishment of debt, loss (gain) on sale of assets, increased by cash distributions from equity method investments, loss on change in estimate, asset retirement obligations and charges incurred in as a result of our financing activities. EBITDA and Adjusted EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a measure of performance. See below for a reconciliation from Net income, the nearest GAAP financial measure, to EBITDA and Adjusted EBITDA.

We believe that the EBITDA and Adjusted EBITDA measures are less susceptible to variances that affect our operating performance. We include these non-GAAP measures because management uses them in the evaluation of our operating performance, and believe such measures facilitate comparison of operating results between periods. We believe the non-GAAP measures provide useful information to both management and users of the financial statements by excluding certain expenses, gains, and losses which can vary widely across different industries or among companies within the same industry and may not be indicative of core operating results and business outlook.

EBITDA and Adjusted EBITDA

The following table reconciles net loss, our most directly comparable as-reported financial measure calculated in accordance with GAAP to EBITDA, Adjusted EBITDA and (Adjusted EBITDA Loss).

(1) Included in Net loss for the year ended December 31, 2023 was $4.9 million of transaction and integration costs incurred related to the Arq Acquisition, $4.9 million of Legacy Arq payroll and benefit costs and $1.7 million of severance expense related to three executive employees.

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Liquidity and Capital Resources

Current Capital Resources and Factors Affecting Our Liquidity

For the year ended December 31, 2024, our principal sources of liquidity consisted of:

•cash on hand, excluding restricted cash of $8.7 million primarily pledged as collateral under a surety bond agreement;

•cash flows from operations of $10.5 million;

•proceeds received from issuance and sale of our common stock, which totaled $42.4 million in the current year; and

•availability of $16.2 million under our recent $30.0 million secured revolving credit facility (the "Revolving Credit Facility").

For the year ended December 31, 2024, our principal uses of liquidity included:

•capital expenditures, including those related to the Red River Plant expansion and commissioning of the Corbin Facility;

•our business operating expenses;

•payments on our lease obligations; and

•payments on our debt obligations, including the extinguishment of the CFG Loan principal and accrued interest in the amount of $11.1 million.

Tinuum Group and Tinuum Services Distributions

The following table summarizes the cash distributions from our equity method investments for the years ended December 31, 2024 and 2023:

Cash distributions from Tinuum Group and Tinuum Services for 2024 decreased by $1.5 million compared to 2023, as both Tinuum Group and Tinuum Services ceased material operations as of December 31, 2021, and began wind-down of their business at that time. Tinuum Group continues to wind down their services into 2025; the Tinuum Group Royalty Agreement currently remains active through 2027 with options to extend. We do not expect further distributions from Tinuum Services as Tinuum Services has completed its wind-down.

Cash Flows

Cash and restricted cash decreased from $54.2 million as of December 31, 2023, to $22.2 million as of December 31, 2024, a decrease of $31.9 million. The following table summarizes our cash flows for the years ended December 31, 2024 and 2023, respectively:

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Cash flows from operating activities

Cash flows provided by operating activities for the year ended December 31, 2024 was $10.5 million compared to cash flows used in operating activities of $16.7 million for the year ended December 31, 2023. The increase in cash provided by operating activities was primarily due to the following: (1) a decrease in net loss of $7.1 million year over year; (2) a net increase in working capital of $17.8 million primarily as a result of significant payments made in 2023 on accounts payable and accrued expenses assumed in the Arq Acquisition, (3) a one-time $2.7 million gain on the sale of the Marshall Mine, LLC in 2023, and (4) a decrease in Earnings from equity method investments of $1.5 million. Partially offsetting the net increase in cash flows used in operating activities year over year was a decrease in Depreciation, amortization, depletion and accretion of $1.9 million.

Cash flows from investing activities

Cash flows used in investing activities for the year ended December 31, 2024 was $85.1 million compared to cash flows used in investing activities of $28.5 million for the year ended December 31, 2023. The increase in cash used was primarily due to an increase in acquisition of property, equipment and intangibles, net, of $57.7 million primarily related to capital expenditures for our Red River Plant expansion, $2.2 million cash acquired as part of the Legacy Arq Acquisition in 2023, and a decrease in distributions from equity earnings in excess of cumulative earnings of $1.5 million. Partially offsetting the net increase in cash flows used in investing activities year over year was a payment of $2.2 million related to the disposal of Marshall Mine, LLC in 2023 and a decrease in mine development costs of $2.5 million.

Cash flows from financing activities

Cash flows provided by financing activities for the year ended December 31, 2024 increased by $19.8 million compared to the year ended December 31, 2023 primarily due to proceeds from the issuance and sale of our common stock in a public offering of $26.7 million and a net increase in borrowings year over year of $5.3 million associated with a borrowing on the Revolving Credit Facility in 2024 that exceeded proceeds from the CFG Loan in 2023. These increases were offset by decreases due to the prepayment of the principal of the CFG Loan of $10.0 million in 2024 and a net decrease in proceeds from common stock issued and sold in private placements of $0.5 million year over year. Additional decreases in cash flows year over year provided by financing activities were due to costs associated with extinguishment of the CFG Loan and associated financing costs for the Revolving Credit Facility, both in 2024.

Material Cash Requirements

Our ability to continue to generate sufficient cash flow required to meet ongoing operational needs and obligations depends upon several factors. These include executing on our contracts and initiatives and increasing our share of the market for APT consumables, including expanding our overall AC business into additional adjacent markets and increasing our gross margin from improving our customer and product mix.

Based on current operating levels, we expect that our cash on hand and borrowing availability on the Revolving Credit Facility as of December 31, 2024 will provide sufficient liquidity to fund operations for the next 12 months.

Capital expenditures

We are targeting the first quarter of 2025 for the completion of our Red River Plant expansion which is necessary to commence production of our new GAC products. To meet this target, we have incurred and may continue to incur substantial capital spend in excess of our originally forecasted amount for additional equipment, labor, and project costs. The Company anticipates financing the timely completion of the project funded with cash on hand, borrowing availability on the Revolving Credit Facility, and ongoing cost reduction initiatives.

During 2025, we expect our capital expenditures to primarily relate to the completion of the Red River Project. Capital expenditures planned for 2025 are dependent on many factors, including the approval of certain environmental permits, and the pace and progression of the project, which may impact the timing and amount of capital expenditures.

Surety Bonds

As of December 31, 2024, we had outstanding surety bonds with regulatory commissions totaling $11.1 million primarily related to the Five Forks Mine and the Corbin Facility. As of December 31, 2024, and as required by our surety bond provider, we held restricted cash of $8.5 million pledged as collateral related to performance requirements required under a reclamation contract for the Five Forks Mine and the Corbin Facility. We expect that the obligations secured by these surety bonds will be performed in the ordinary course of business and in accordance with the applicable contractual terms. To the extent that the

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obligations are performed, the related surety bonds may be released and collateral requirements may be reduced. However, in the event any surety bond is called, our indemnity obligations could require us to reimburse the surety bond provider.

Long Term Requirements

For a discussion of our long-term cash requirements, see Item 8, Note 5 of this Report.

Contractual Obligations

Contractual obligations as of December 31, 2024 are as follows:

The table above excludes our asset retirement obligation ("ARO") related to reclamation of the Five Forks Mine, as the timing and amount of payments to satisfy the ARO are uncertain and are based on numerous factors including, but not limited to, the expected closure date of the Five Forks Mine. As of December 31, 2024, our Consolidated Balance Sheet reflects a liability for ARO related to reclamation of the Five Forks Mine of $4.5 million. The table above also excludes amounts outstanding under our Revolving Credit Facility, as the timing and amount of repayments are uncertain and are based on the nature and timing of our operating cash flows. Our outstanding borrowings under the Revolving Credit Facility were $13.8 million as of December 31, 2024. Additionally, the table above excludes construction costs related to the Red River Plant expansion referred to under the "Capital Expenditures" caption above, as the timing and amount of payments to satisfy these obligations are conditional and based on numerous factors including, but not limited to, the pace of construction activities and the timing of mechanical completion of the Red River Plant expansion.

Critical Accounting Policies and Estimates

Our significant accounting policies are discussed in Note 1 to the Consolidated Financial Statements included in Item 8 of this Report. In presenting our financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. Our estimates are based on historical experience and other assumptions believed to be reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

We believe that the accounting estimates discussed below are critical to understanding our historical and future performance, as these estimates relate to the more significant areas involving management’s judgments and estimates.

Business Combinations, including asset acquisitions

We apply the acquisition method to acquisitions of both businesses and assets and allocate the purchase price to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The purchase price allocation process requires us to make significant estimates and assumptions with respect to assets acquired and liabilities assumed. We believe the assumptions and estimates we make are reasonable, they are based in part on historical experience, market conditions and information obtained from management of the acquired company or group of assets and are inherently uncertain.

Examples of critical estimates in valuing certain of long-lived assets, including intangible assets, we have acquired or may acquire in the future include but are not limited to:

•future expected cash flows from revenue;

•the acquired company’s developed technology as well as assumptions about the period of time the acquired developed technology will continue to be used in the combined company's product portfolio;

•the expected use and useful lives of the acquired assets; and

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•valuation methods and discount rates used in estimating the values of the assets acquired and liabilities assumed.

Carrying value of long-lived assets and intangibles

We review and evaluate our long-lived assets and intangibles for impairment at least annually, or more frequently when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. An impairment loss is measured and recorded for long-lived assets and intangibles based on the excess of their carrying amounts over their estimated fair values. Fair value is typically determined through the use of an income approach utilizing estimates of discounted pretax future cash flows or a market approach utilizing recent transaction activity for comparable assets.

Asset Retirement Obligations

Accounting for AROs requires us to make estimates of future costs unique to a specific mining operation that we will incur to complete the reclamation and remediation work required to comply with existing laws and regulations. Any such changes in future costs, the timing of reclamation activities, scope or the exclusion of certain costs not considered reclamation and remediation costs could materially impact the amounts charged to earnings for reclamation and remediation. Additionally, future changes to environmental laws and regulations could increase the scope of reclamation and remediation work required.

Reclamation costs related to AROs are allocated to expense over the life of the related mine assets and are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. Remediation costs are accrued based on management’s best estimate of the costs expected to be incurred. Such cost estimates may include ongoing care, maintenance and monitoring costs. Reclamation obligations are based on the timing of estimated spending for an existing environmental disturbance. We review, on at least an annual basis, the future expected costs and the timing of such costs for AROs.

Income Taxes

We account for income taxes under the asset and liability method, which requires judgment in determining income tax expense and the related balance sheet amounts. This includes estimating and analyzing historical and projected future operating results, the reversal of taxable temporary differences, tax planning strategies, and the ultimate outcome of uncertain income tax positions. Actual income taxes paid may vary from estimates depending on changes in income tax laws, actual results of operations, state apportionment and, if applicable, final audits of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. Changes in the estimates and assumptions used for calculating income tax expense and potential differences in actual results from estimates could have a material impact on our results of operations and financial condition.

We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations.

We establish a valuation allowance against our deferred tax assets when, based upon the weight of all available evidence, we believe it is more likely than not that some portion or all of the deferred tax assets will not be realized. In making this determination, we consider the relative impact of all of the available positive and negative evidence regarding future sources of taxable income and tax planning strategies. However, there could be a material impact to our effective tax rate if there is a significant change in our estimates of future taxable income. If and when our estimates change, or there is a change in the value of deferred tax assets or liabilities warranting the need to reassess the realizability of deferred tax assets, we adjust a valuation allowance through the provision for income taxes in the period in which this determination is made. Refer to Note 12 of our Consolidated Financial Statements included in Item 8 of this Report for additional information regarding our deferred tax assets and liabilities.

Recently Issued Accounting Standards

Refer to Note 1 of the Consolidated Financial Statements included in Item 8 of this Report for information regarding recently issued accounting standards.

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