Business context and reporting period
Advanced Emissions Solutions, Inc. (ADES; Nasdaq: ADES) filed this unaudited Form 10-Q for the quarter ended March 31, 2023. Although the request identifies Arq, Inc., the registrant is ADES; it acquired Arq Limited on February 1, 2023. Arq had no revenue after acquisition through quarter-end and recorded a $3.65 million net loss for that period.
ADES sells activated carbon and other consumable air- and water-treatment products. The acquisition added Arq’s Corbin, Kentucky facility and technology to convert coal waste into purified carbon powder; management expects to use Arq Powder in granular activated carbon products in the second half of 2024.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $20.8 million | $26.4 million |
| Gross profit on consumables, before depreciation and amortization | $3.6 million; 17.4% margin | $4.9 million; 18.5% margin |
| Operating loss | $7.8 million | $3.3 million |
| Net loss | $7.5 million | $3.0 million |
| Loss per diluted share | $0.32 | $0.17 |
| Operating cash flow | $(17.7) million | $2.1 million |
| Capital expenditures and intangible asset additions | $3.5 million | $1.4 million |
| Cash and restricted cash at quarter-end | $79.1 million | $89.8 million |
Cash on the balance sheet was $68.0 million; long-term restricted cash was $11.1 million, including $10.0 million pledged as surety collateral at quarter-end. Total debt obligations had a $21.7 million carrying value after discounts and issuance costs; stated principal and finance lease obligations totaled $24.2 million. Current and long-term debt carrying amounts were $1.6 million and $20.1 million, respectively. The company reported $104.7 million of current assets and $20.0 million of current liabilities.
Q1 adjusted EBITDA was a loss of $7.7 million, versus positive adjusted EBITDA of $0.9 million in Q1 2022. This is a company-defined non-GAAP measure.
Material changes versus prior period
- Revenue fell 21%, primarily because lower natural-gas prices and warm winter weather reduced coal-fired power generation and product volumes. Lower volumes reduced revenue by approximately $5.9 million; unfavorable product mix reduced it by about $1.0 million, partly offset by approximately $1.6 million of higher pricing.
- Consumables cost of revenue declined 20%, less than the revenue decline. Management cited lower volumes, higher raw material, transportation and operating costs, and lower net electricity generation as pressures on gross margin.
- Payroll and benefits rose 79% to $4.7 million, legal and professional fees rose 109% to $4.5 million, and general and administrative expense rose 44% to $2.8 million. Acquisition-related expenses, Arq employees and severance contributed to increases; legal and professional fees included $2.4 million of Arq transaction costs.
- The quarter included a $2.7 million gain on the Marshall Mine sale. ADES paid the buyer $2.2 million, discharged approximately $4.9 million of mine liabilities, and released a $16.6 million surety bond.
- Operating cash outflow included a $14.0 million decline in accounts payable and accrued expenses, primarily from payment of Arq-assumed liabilities, transaction costs and retention bonuses. Financing provided $23.3 million, including $15.2 million of net PIPE proceeds and $8.5 million of net Term Loan proceeds.
Outlook, risks and contingencies
- Management expected natural-gas prices to remain low through 2023, significantly pressuring power-generation product sales; it also identified weather and seasonal electricity demand as important variables. It forecast slight revenue growth in the second half of 2023 versus the first half, but slightly lower volumes than in 2022.
- Management forecast 2023 capital expenditures of $40–$45 million: $13–$15 million for Red River Plant improvements and maintenance, and $27–$30 million for growth modifications at the Red River and Corbin plants to use Arq Powder. It expected to fund this spending from cash on hand.
- Management said cash on hand at March 31 was expected to cover contractual obligations and operating losses for the next 12 months. The related-party $10 million Term Loan matures in February 2027, bears substantial cash and payment-in-kind interest, and is secured by substantially all company assets subject to exceptions. It also carries revenue, EBITDA, cash and other covenants; minimum revenue requirements begin at $70 million for 2023.
- Series A preferred shares carry cumulative dividends at a minimum annual rate of 8%, compounded quarterly, payable in cash or additional preferred shares at the company’s option. If conversion approval is not obtained, the shares are redeemable on February 1, 2028 at 140% of the original issue amount plus accrued unpaid dividends.
- Key risks include Arq integration and commercialization, execution of the planned plant investment, inflation and operational costs, alternative energy prices, and potential demand weakness. The filing also highlights that most cash is held at one bank and exceeds FDIC insurance limits. Surety-bond calls could require reimbursement; $10.0 million of restricted cash at quarter-end was later reduced to $7.7 million.
- Management reported no significant legal proceedings and no material change in previously disclosed risk factors other than the added bank-concentration risk. Disclosure controls were deemed effective; Arq was excluded from the quarter-end internal-control assessment while integration impacts are evaluated.
Important facts for investors to verify
- Confirm the reporting entity and security: this is ADES’s 10-Q, not a standalone Arq, Inc. filing.
- Track coal-fired generation, natural-gas prices, weather, product volumes and realized pricing against management’s 2023 expectations.
- Assess whether planned $40–$45 million capital spending and Arq’s expected 2024 product launch remain on schedule and within funding capacity.
- Review operating cash burn, debt service, Term Loan covenants and the preferred stock’s accumulating dividend and redemption terms.
- Monitor the Arq integration, plant modifications, mine and surety obligations, and the concentration of cash at one financial institution.