Business context and reporting period
Registrant: Advanced Emissions Solutions, Inc. (ADES; Nasdaq: ADES), not Arq, Inc. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023. ADES sells activated carbon and chemical-based air and water treatment products. It acquired Arq on February 1, 2023; Arq had no revenue after acquisition through June 30 and is developing a process to turn coal waste into purified carbon powder. ADES expects to use Arq Powder in granular activated carbon products in the second half of 2024.
Financial results and position
Amounts below are in millions of dollars except per-share data and margins. Comparisons are with the corresponding 2022 period.
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $20.4 | $24.7 | $41.3 | $51.1 |
| Consumables gross profit, before depreciation and amortization | $5.1 | $4.8 | $8.7 | $9.7 |
| Gross margin on that basis | 25.0% | 19.5% | 21.2% | 19.0% |
| Operating loss | $(6.1) | $(2.7) | $(13.9) | $(6.1) |
| Net loss | $(5.9) | $(0.3) | $(13.4) | $(3.4) |
| Diluted loss per share | $(0.21) | $(0.02) | $(0.53) | $(0.18) |
| Adjusted EBITDA (non-GAAP) | $(3.0) | $2.2 | $(10.7) | $3.1 |
First-half operating cash flow was $(21.2) million, versus $1.8 million provided in 2022; investing cash flow was $(10.5) million, versus $1.3 million provided. Financing provided $22.8 million, principally from $15.2 million of PIPE proceeds and $8.5 million of net Term Loan proceeds. Cash and restricted cash declined $8.8 million to $67.6 million, including $58.8 million of unrestricted cash and $8.8 million of restricted cash.
At June 30, current assets were $99.7 million and current liabilities $23.9 million. Debt obligations had a $23.8 million gross balance, including $10.0 million under the related-party Term Loan, $9.8 million under the assumed Arq Loan, and $4.0 million of finance leases; the reported carrying amount after discounts and issuance costs was $21.4 million. Total liabilities were $58.9 million.
Material changes versus the prior comparable period
- Revenue fell 17% in Q2 and 19% in the first half. Management attributed the decline primarily to lower sales volumes as low natural gas prices favored gas-fired generation over coal, and to mild weather; higher product pricing partly offset volume and mix declines.
- Q2 consumables gross profit and margin, before depreciation and amortization, improved year over year, reflecting lower feedstock and additive costs. First-half gross profit declined as reduced volumes outweighed lower feedstock costs and higher product prices.
- Net losses widened substantially, reflecting weaker revenue and lower equity-method earnings, higher interest expense following the Arq financing, and acquisition-related and integration costs. First-half results included $2.7 million gain on the Marshall Mine sale; the sale also involved a $2.2 million cash payment to the buyer and discharge of approximately $4.9 million of liabilities.
- The Arq acquisition increased assets, debt, operating expenses, and outstanding shares. The Series A preferred shares converted into 5.36 million common shares in June. ADES also issued common shares in the acquisition and PIPE transaction.
Outlook, risks and unusual items
- Management expected a slight increase in second-half 2023 consumables revenue versus the first half, supported by customer/product mix and pricing, but expected volumes to remain below 2022 levels. It expected low natural gas prices through 2023 to weigh on product demand.
- ADES forecast 2023 capital expenditures of $40–$45 million: $13–$15 million for Red River Plant maintenance and current projects, and $27–$30 million for growth modifications at Red River and Corbin to use Arq Powder. Management expected to fund this spending from cash on hand and stated cash at June 30 would cover contractual obligations and operating losses for the next 12 months.
- The related-party Term Loan is secured by substantially all company assets and carries cash and payment-in-kind interest. Covenants include minimum unrestricted cash of $5.0 million and minimum consolidated revenue of $70 million for 2023; later revenue and EBITDA thresholds also apply. The Arq Loan is secured by substantially all assets of its borrowers. Its lender waived specified financial reporting and covenant requirements, including certain 2023 requirements, under a June modification.
- Key exposures include coal demand and competing energy prices, weather and seasonality, execution and commercialization of Arq technology, planned capital spending, inflation and operating costs, and mine reclamation obligations. Most cash was held at one financial institution and exceeded FDIC insurance limits; the filing identifies possible access and recovery risks.
- ADES reported no significant legal proceedings at June 30 and no material risk-factor updates other than the bank-concentration risk. Its disclosure controls were deemed effective; Arq was excluded from the internal-control assessment while the company evaluates acquisition impacts.
- Subsequent to quarter-end, Robert Rasmus became CEO effective July 17 and agreed to buy 950,000 shares for $1.8 million, subject to closing. The company expected to record a $0.8 million charge related to the former CEO’s separation.
Important facts for investors to verify
- Whether revenue, margins, and cash generation recover as projected, given low gas prices and the $70 million 2023 minimum-revenue loan covenant.
- Whether the $40–$45 million capital program can be completed within budget and funded while preserving liquidity and covenant compliance.
- Arq’s progress toward commercial production and the expected 2024 use of Arq Powder, including the required plant modifications and customer demand.
- Term Loan interest, payment-in-kind accruals, maturities, collateral, and covenant headroom; also the effect of the Arq Loan’s amended terms and restricted collateral.
- The eventual disposition of the 833,914 acquisition-related escrow shares tied to potential IRS withholding, and the resulting share count and dilution.
- Exposure from concentrated uninsured bank deposits, surety bonds, restricted cash, and mine reclamation obligations.