Business context and reporting period
The supplied filing is Advanced Emissions Solutions, Inc. (ADES), not Arq, Inc. It is an unaudited Form 10-Q for the quarter and six months ended June 30, 2015, filed April 19, 2016. ADES supplies emissions-control equipment, technologies, chemicals, and services to coal-fired power and other industrial customers, and also earns royalties and equity-method income from refined-coal ventures.
Financial performance and position
Amounts below are in millions of dollars except per-share data. Results are compared with the corresponding 2014 period.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $14.9 | $3.2 | $36.7 | $4.2 |
| Operating loss | $(17.8) | $(8.4) | $(24.7) | $(16.0) |
| Net income (loss) | $(12.4) | $1.0 | $(18.6) | $0.4 |
| Loss per share, diluted | $(0.57) | $0.04 income | $(0.85) | $0.02 income |
- Revenue growth reflected substantially higher equipment sales, primarily from completed activated-carbon-injection (ACI) systems. Equipment sales were $14.2 million in Q2 and $35.4 million for the six months.
- Operating results were pressured by expenses well above revenue, including payroll and benefits, legal and professional fees, and research and development. Q2 direct costs of revenue were $14.0 million; the filing does not present a single consolidated gross-margin line.
- Equity-method earnings fell to $4.9 million in Q2 from $9.8 million, and to $5.2 million for the six months from $16.4 million. CCS cash distributions received were $4.6 million in Q2 and $4.7 million for the six months, versus $9.7 million and $16.3 million, respectively, a year earlier. Related-party royalties increased.
- Operating cash flow was $(13.8) million for the six months, compared with $(18.9) million in 2014. Cash and cash equivalents declined from $25.2 million at year-end 2014 to $10.4 million at June 30, 2015; net cash decreased $14.8 million.
- At June 30, 2015, current assets were $33.4 million and current liabilities $48.0 million, implying negative working capital of about $14.7 million. Total liabilities were $91.1 million against assets of $76.5 million; stockholders’ deficit was $14.6 million.
- Related-party notes payable totaled $15.3 million at quarter-end. The bank line of credit had no outstanding balance but was unavailable because of covenant violations. Restricted cash and investments totaled about $13.5 million, largely supporting letters of credit.
Material changes, outlook, and risks
- Management attributed worsening liquidity to operating losses, weak DSI manufacturing performance, costs of the financial-statement restatement and related SEC inquiry, and reduced CCS distributions. It warned that cash pressure would continue and that repayment capacity depended on operating execution, royalties, and investee distributions.
- ADES recorded $6.0 million of restructuring charges for the first half, including accelerated equity-award expense. Q2 included $1.8 million of loss provisions for DSI contracts; first-half DSI provisions were $2.0 million. Management warned that project cost overruns could make future revenue and cost relationships differ from past results.
- After the quarter, the company obtained a $15.0 million term loan in October 2015, receiving $13.9 million net. By March 2016, amendments had raised the stated interest rate from 10.5% to 15%, set maturity at July 8, 2016, and increased the minimum cash balance requirement to $3.5 million. The loan is secured by substantially all company assets and guaranteed by domestic subsidiaries. These subsequent events underscore financing and refinancing risk.
- Other subsequent events included the August 2015 decision to wind down ADA Analytics, followed by a $1.9 million impairment in Q3 2015, and the March 2016 sale of the RCM6 interest for $1.8 million with no further obligations on its related note.
- Legal and regulatory exposures include a securities class action, stayed derivative litigation, and an SEC investigation concerning prior financial statements and controls. No loss accrual was recorded for these matters because management said losses were not probable or reasonably estimable. The company also had a $22.6 million settlement and royalty-indemnity obligation at June 30, 2015.
- Management reported disclosure controls and procedures were ineffective at June 30, 2015 because of previously identified material weaknesses. Remediation was ongoing, but management had not concluded that the measures had operated long enough to establish effectiveness.
- No numerical revenue or earnings guidance is provided. Management cited possible market growth from emissions-compliance requirements, while noting dependence on coal-sector demand, regulation, successful contracts, performance guarantees, Section 45 tax-credit eligibility, and CCS securing additional tax-equity investors.
Most important facts for investors to verify
- Confirm the issuer identity: this source is an ADES filing, not an Arq, Inc. filing.
- Review subsequent liquidity and debt developments, including the amended term-loan terms, collateral, cash requirements, and ability to refinance or repay.
- Assess DSI contract losses, operating performance, restructuring actions, and the company’s ability to convert equipment revenue into cash and profits.
- Track CCS/CCSS distributions, royalty receipts, retained-facility performance, and the availability and realizability of Section 45 tax benefits.
- Monitor the SEC inquiry, litigation, restatement work, and progress in remediating material weaknesses in internal controls.