Advanced Emissions Solutions(ADES) - 2023 Q2 - Quarterly Report

PART I. - FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements (unaudited) This section presents ADES's unaudited condensed consolidated financial statements and related detailed notes Condensed Consolidated Balance Sheets Condensed consolidated balance sheets detail assets, liabilities, and equity as of June 30, 2023 and December 31, 2022 | (in thousands, except share data) | As of June 30, 2023 | As of December 31, 2022 | |:----------------------------------|:--------------------|:------------------------| | ASSETS | | | | Total current assets | $99,669 | $105,662 | | Property, plant and equipment, net| $81,008 | $34,855 | | Total Assets | $233,714 | $181,164 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total current liabilities | $23,934 | $23,884 | | Long-term debt obligations, net | $19,830 | $3,450 | | Total Liabilities | $58,899 | $41,185 | | Total Stockholders' Equity | $174,815 | $139,979 | Condensed Consolidated Statements of Operations Condensed consolidated statements of operations present revenues, operating loss, and net loss for the three and six months ended June 30, 2023 and 2022 | (in thousands, except per share data) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:--------------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Revenues: Consumables | $20,445 | $24,739 | $41,250 | $51,141 | | Total revenues | $20,445 | $24,739 | $41,250 | $51,141 | | Operating loss | $(6,087) | $(2,736) | $(13,914) | $(6,071) | | Net loss | $(5,856) | $(326) | $(13,364) | $(3,359) | | Loss per common share (Basic) | $(0.21) | $(0.02) | $(0.53) | $(0.18) | Condensed Consolidated Statements of Changes in Stockholders' Equity Condensed consolidated statements of changes in stockholders' equity detail equity movements for the three and six months ended June 30, 2023 and 2022 | (Amounts in thousands, except share data) | Balances, January 1, 2023 | Balances, June 30, 2023 | |:------------------------------------------|:--------------------------|:------------------------| | Common Shares | 23,788,319 | 37,194,159 | | Common Stock Amount | $24 | $37 | | Additional Paid-in Capital | $103,698 | $152,042 | | Retained Earnings | $83,949 | $70,428 | | Total Stockholders' Equity | $139,979 | $174,815 | - Total Stockholders' Equity increased from $139,979 thousand at January 1, 2023, to $174,815 thousand at June 30, 2023, primarily due to common stock issuance for the Arq Acquisition and PIPE Investment, and stock-based compensation, partially offset by net loss and preferred stock dividends[10] Condensed Consolidated Statements of Cash Flows Condensed consolidated statements of cash flows present operating, investing, and financing activities for the six months ended June 30, 2023 and 2022 | (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:----------------------------------------------|:-------------------------------|:-------------------------------| | Net cash (used in) provided by operating activities | $(21,159) | $1,758 | | Net cash (used in) provided by investing activities | $(10,482) | $1,305 | | Net cash provided by (used) in financing activities | $22,792 | $(1,024) | | (Decrease) increase in Cash and Restricted Cash | $(8,849) | $2,039 | | Cash and Restricted Cash, end of period | $67,583 | $90,819 | Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1 - Basis of Presentation This note outlines the company's business, significant transactions, and factors affecting revenues and cash flows - Advanced Emissions Solutions, Inc. (ADES) is an environmental technology company specializing in consumable air and water treatment solutions, including activated carbon (AC) and chemical technologies, and owns the Five Forks Mine for raw material supply[17] - On February 1, 2023, ADES acquired Arq Ltd.'s subsidiaries for $31.2 million, consisting of common stock and Series A Convertible Preferred Stock, with Arq expected to begin granular activated carbon (GAC) production in H2 2024[18] - The Company entered into a $10.0 million Term Loan with CF Global (a related party) on February 1, 2023, receiving $8.5 million net cash proceeds and issuing a warrant to purchase 325,457 shares of common stock[19] - On February 1, 2023, ADES completed a PIPE Investment, selling 3,842,315 shares of common stock for $15.4 million to certain subscribers, including existing Arq Ltd. shareholders[20] - The Company's revenues and cash flows are significantly affected by prices of competing power generation sources (natural gas, renewables) and seasonal variations in electricity demand, with higher revenues and costs typically in Q1 and Q3[28] Note 2 - Arq Acquisition This note details the Arq Acquisition, including purchase consideration, asset allocation, and financial impact - The Arq Acquisition was accounted for as a business acquisition on February 1, 2023, with a total purchase consideration of $31.2 million, including 3,814,864 shares of Common Stock ($12.4 million) and 5,294,462 Preferred Shares ($18.8 million), with $8.7 million in acquisition-related costs expensed[31] | (in thousands) | Purchase Price Allocation | |:----------------------------------|:--------------------------| | Fair value of assets acquired: | | | Cash | $1,411 | | Property, plant and equipment, net| $39,159 | | Other long-term assets, net | $11,717 | | Amount attributable to assets acquired | $55,330 | | Fair Value of liabilities assumed: | | | Accounts payable and accrued expenses | $9,806 | | Long-term debt, net of current portion | $9,199 | | Amount attributable to liabilities assumed | $24,125 | | Net assets acquired | $31,205 | - A developed technology intangible asset of $7.7 million with a 20-year useful life was identified as part of the Arq Acquisition[35] - All Series A Preferred Stock, including escrowed shares, were converted into Common Stock on June 13, 2023, following stockholder approval, with escrowed shares held pending IRS tax withholding determination[35][36] | (in thousands) | Six Months Ended June 30, 2023 | |:---------------|:-------------------------------| | Revenues | $— | | Net loss | $(6,756) | Note 3 - Marshall Mine This note describes the sale of Marshall Mine, LLC, and its financial impact - On March 27, 2023, the Company completed the sale of Marshall Mine, LLC, for a cash payment of $2.2 million, discharging approximately $4.9 million in liabilities and recognizing a $2.7 million gain in the Statement of Operations for the six months ended June 30, 2023[41] Note 4 - Revenues This note provides details on the composition of receivables and geographical revenue distribution | (in thousands) | As of June 30, 2023 | As of December 31, 2022 | |:--------------------|:--------------------|:------------------------| | Trade receivables, net | $10,235 | $13,789 | | Other receivables | $72 | $75 | | Receivables, net | $10,307 | $13,864 | - For the three and six months ended June 30, 2023, approximately 5% and 9% of Consumables revenues, respectively, were generated in Canada, with all other revenues from the U.S[43] Note 5 - Inventories, net This note details the composition of the Company's inventories, net, as of the reporting dates | (in thousands) | As of June 30, 2023 | As of December 31, 2022 | |:--------------------|:--------------------|:------------------------| | Product inventory, net | $12,205 | $9,479 | | Raw material inventory | $10,833 | $8,349 | | Total inventories, net | $23,038 | $17,828 | Note 6 - Debt Obligations This note provides information on the Company's debt obligations, including terms, interest rates, and covenants | (in thousands) | As of June 30, 2023 | As of December 31, 2022 | |:------------------------------------------|:--------------------|:------------------------| | Term Loan due February 2027, related party | $10,000 | $— | | Arq Loan due January 2036 | $9,787 | $— | | Finance lease obligations | $4,004 | $4,581 | | Total long-term debt obligations | $19,830 | $3,450 | - The Term Loan, entered into on February 1, 2023, is for $10.0 million, bears interest at Adjusted Term SOFR + 9.00% cash / 5.00% PIK or Base Rate + 8.00% cash / 5.00% PIK, and is secured by substantially all Company assets (excluding Arq Loan collateral), including covenants for minimum unrestricted cash, annual revenue, and Consolidated EBITDA[48] - The Company assumed the Arq Loan of $10.0 million (recorded at fair value of $9.7 million) as part of the Arq Acquisition, maturing in January 2036, bearing interest at 6.0% until January 2026, then prime rate + 2.75%, and requiring fixed monthly payments of $0.1 million[50] - An amendment to the Arq Loan Agreement on June 2, 2023, waived certain financial delivery requirements and covenants for 2021-2023, and required an additional $0.7 million deposit into an Interest Reserve Account[50] Note 7 - Leases This note provides details on the Company's operating and finance lease assets and obligations | (in thousands) | As of June 30, 2023 | As of December 31, 2022 | |:------------------------------------------|:--------------------|:------------------------| | Operating lease right-of-use assets, net | $11,292 | $7,734 | | Total operating lease obligation | $11,381 | $7,857 | | Finance lease right-of-use assets, net | $2,120 | $2,565 | | Total finance lease obligations | $4,004 | $4,581 | - Operating lease expense for the three and six months ended June 30, 2023, was $1.3 million and $2.7 million, respectively, primarily included in 'Consumables - cost of revenue'[55] | (in thousands) | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | |:---------------------------|:---------------------------------|:-------------------------------| | Amortization of right-of-use assets | $223 | $446 | | Interest on lease liabilities | $63 | $131 | | Operating lease cost | $1,035 | $2,017 | | Total lease cost | $1,619 | $3,309 | - The weighted-average remaining lease term for finance leases is 2.3 years (discount rate 5.9%), and for operating leases is 7.7 years (discount rate 11.0%) as of June 30, 2023[60] Note 8 - Commitments and Contingencies This note outlines the Company's commitments, including retention liabilities, surety bonds, guaranties, and legal proceedings - The $1.4 million Retention Liability from retention agreements with executive officers and key employees was paid in full in January 2023[63] - As of June 30, 2023, the Company had outstanding surety bonds totaling $7.5 million for the Five Forks Mine, $3.0 million for land adjacent to the Corbin Facility, and $0.7 million for Mine 4, with $8.6 million in restricted cash posted as collateral[64] - The Company has limited guaranties related to Tinuum Group's contingent liabilities but has not recorded a liability as a loss is not considered probable[65] - There were no significant legal proceedings as of June 30, 2023[66] Note 9 - Supplemental Financial Information This note provides additional details on other long-term assets and liabilities | (in thousands) | As of June 30, 2023 | As of December 31, 2022 | |:-------------------------------|:--------------------|:------------------------| | Other long-term assets, net: | | | | Right of use assets, operating leases, net | $11,292 | $7,734 | | Intangible assets, net | $8,222 | $847 | | Mine development costs, net | $6,629 | $5,478 | | Total other long-term assets, net | $44,224 | $30,647 | | (in thousands) | As of June 30, 2023 | As of December 31, 2022 | |:------------------------------------------|:--------------------|:------------------------| | Other current liabilities: | | | | Current portion of operating lease obligations | $2,375 | $2,724 | | Total other current liabilities | $6,375 | $6,645 | | Other long-term liabilities: | | | | Operating lease obligations, long-term | $9,006 | $5,133 | | Mine reclamation liabilities | $5,323 | $7,985 | | Total other long-term liabilities | $15,135 | $13,851 | - Mine reclamation liabilities decreased from $8,533 thousand at the beginning of the period to $5,492 thousand at June 30, 2023, primarily due to the removal of the Marshall Mine ARO ($4,844 thousand) following its sale, partially offset by assumed AROs from the Arq Acquisition ($1,500 thousand)[75][76] Note 10 - Equity Method Investments This note provides information on the Company's equity method investments and their financial contributions - The Company's ownership in Tinuum Group is 42.5%, with earnings decreasing significantly from $2.1 million (3 months ended June 30, 2022) to $0.2 million (3 months ended June 30, 2023), and from $3.1 million (6 months ended June 30, 2022) to $0.9 million (6 months ended June 30, 2023), as Tinuum Group winds down services[79] - The Company has a 50% interest in Tinuum Services, recognizing $0.3 million in income for both the three and six months ended June 30, 2023[80] | (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:----------------------------------------------------------|:-------------------------------|:-------------------------------| | Distributions from equity method investees, return on investment | $— | $2,297 | | Distributions from equity method investees in excess of investment basis | $1,100 | $3,316 | Note 11 - Stockholders' Equity This note details changes in stockholders' equity, including stock issuances, repurchases, and the Tax Asset Protection Plan - On February 1, 2023, the Company issued 3,814,864 shares of Common Stock for the Arq Acquisition and 3,842,315 shares for the PIPE Investment, with 5,294,462 Preferred Shares issued for Arq later converted to Common Stock on June 13, 2023[85] - As consideration for the Term Loan, 325,857 Warrant Shares were issued, recorded at an estimated fair value of $0.8 million to Additional paid-in capital[86] - The Company has $7.0 million remaining under its stock repurchase program as of June 30, 2023[87] - The Tax Asset Protection Plan (TAPP) was amended on April 11, 2023, extending its final expiration date to December 31, 2024, to protect the Company's ability to utilize net operating losses and tax credits[89] Note 12 - Stock-Based Compensation This note provides information on stock-based compensation expense, unrecognized costs, and restricted stock activity | (in thousands) | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | |:-------------------------------|:---------------------------------|:-------------------------------| | RSA expense | $416 | $904 | | PSU expense | $129 | $204 | | Total stock-based compensation expense | $545 | $1,108 | | (in thousands, expect years) | Unrecognized Compensation Cost | Expected Weighted-Average Period of Recognition (in years) | |:-----------------------------|:-------------------------------|:-----------------------------------------------------------| | RSA expense | $2,418 | 2.24 | | PSU expense | $930 | 2.24 | | Total unrecognized stock-based compensation expense | $3,348 | 2.24 | | Restricted Stock | Non-vested at January 1, 2023 | Granted | Vested | Forfeited | |:------------------------------|:------------------------------|:----------|:----------|:----------| | Number of Shares | 652,962 | 498,541 | (276,767) | (31,729) | | Weighted-Average Grant Date Fair Value | $5.58 | $1.97 | $5.62 | $4.63 | | PSUs | Units | Weighted-Average Grant Date Fair Value | |:------------------------------|:----------|:---------------------------------------| | PSUs outstanding, January 1, 2023 | 148,591 | $7.85 | | Granted | 231,242 | $2.48 | | Vested / Settled | (41,855) | $6.17 | | PSUs outstanding, June 30, 2023 | 337,978 | $4.38 | Note 13 - Income Taxes This note provides information on income tax benefits and the effective tax rate for the reporting periods | (in thousands, except for rate) | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | |:--------------------------------|:---------------------------------|:-------------------------------| | Income tax benefit | $— | $(33) | | Effective tax rate | —% | —% | - The Company recorded no income tax benefit for the three and six months ended June 30, 2023, due to a full valuation allowance against deferred tax assets, based on a forecast of pretax loss for the year[100] Note 14 - Subsequent Events This note discloses significant events occurring after the balance sheet date, including executive appointments and related transactions - Effective July 17, 2023, Mr. Robert Rasmus was appointed President and CEO, succeeding Mr. Greg Marken, and also joined the Board of Directors[102] - Mr. Rasmus agreed to purchase 950,000 shares of common stock for $1.8 million (approximately $1.90 per share)[102] - In connection with his separation, Mr. Marken will receive severance payments and benefits, including accelerated vesting of 49,715 restricted stock shares and continued eligibility for pro rata vesting of PSUs, with the Company expecting to record an $0.8 million liability[102] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operations, and liquidity, highlighting key drivers and non-GAAP measures Overview This section provides a general overview of Advanced Emissions Solutions, Inc.'s business and operations - Advanced Emissions Solutions, Inc. (ADES) is an environmental technology company specializing in activated carbon (AC) and chemical-based solutions for air and water treatment, serving coal-fired utilities, industrials, and municipal water customers, and owns a lignite mine for raw material supply[105] Acquisition This section summarizes the Arq Acquisition, including the purchase price and stock conversion details - On February 1, 2023, ADES completed the Arq Acquisition for $31.2 million, issuing common stock and Series A Convertible Preferred Stock, with all Series A Preferred Stock converted to 5,362,926 shares of Common Stock on June 13, 2023, following stockholder approval[106] Loan Agreement This section describes the Term Loan agreement, including its amount, costs, collateral, and associated warrant - On February 1, 2023, ADES entered into a $10.0 million Term Loan with CFG, incurring $1.3 million in issuance costs, secured by most of ADES's assets, and including a warrant for CFG to purchase 325,457 shares of Common Stock[107] Equity Financing This section details the PIPE Investment, including the amount raised and shares sold - A PIPE Investment was completed on February 1, 2023, raising $15.4 million through the sale of 3,842,315 shares of Common Stock at $4.00 per share to subscribers, including existing Arq Ltd. shareholders[108] Drivers of Demand and Key Factors Affecting Profitability This section identifies the primary factors influencing product demand and the Company's overall profitability - Demand for ADES's consumable products is driven by sales to coal-fired power generation, industrials, municipal water, and other markets, with profitability influenced by manufacturing volumes, average selling price/product mix, coal-fired dispatch, and water contaminant removal demand[109] - For the three and six months ended June 30, 2023, product demand decreased due to lower natural gas prices (average $2.16/MMBtu in Q2 2023 vs. $7.47/MMBtu in Q2 2022) and mild temperatures, expected to negatively impact sales through 2023[110][115] Marshall Mine This section provides an update on the sale of Marshall Mine, LLC, and its financial outcome - The sale of Marshall Mine, LLC, closed on March 27, 2023, involved a $2.2 million cash payment to the buyer, discharging $4.9 million in liabilities and resulting in a $2.7 million gain for the six months ended June 30, 2023[111] Results of Operations This section analyzes the Company's financial performance for the reported periods, detailing revenue, expenses, and profitability - Net loss for the three months ended June 30, 2023, was $5.9 million, compared to $0.3 million in the prior year, and for the six months, net loss was $13.4 million, up from $3.4 million, primarily due to increased expenses from the Arq Acquisition and decreased demand for AC and chemical products[112] Comparison of the Three Months Ended June 30, 2023 and 2022 This section compares the Company's financial performance for the three months ended June 30, 2023, against the same period in 2022 Total Revenue and Cost of Revenue This section analyzes changes in total revenue and consumables cost of revenue for the three-month period | (in thousands, except percentages) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | |:-----------------------------------|:---------------------------------|:---------------------------------|:-----------|:-----------| | Revenues: Consumables | $20,445 | $24,739 | $(4,294) | (17)% | | Total revenues | $20,445 | $24,739 | $(4,294) | (17)% | | Consumables cost of revenue | $15,336 | $19,910 | $(4,574) | (23)% | - Consumables revenues decreased by $4.3 million (17%) for the three months ended June 30, 2023, primarily due to a $6.4 million decrease in volumes sold (driven by low natural gas prices) and a $0.1 million unfavorable product mix, partially offset by a $2.2 million increase from higher product pricing[115] - Consumables gross margin, exclusive of depreciation and amortization, increased due to decreased feedstock and additive prices, despite higher fixed costs as a percentage of total costs due to lower production volumes[115] Other Operating Expenses This section details changes in various operating expenses, including payroll, legal, general, and depreciation | (in thousands, except percentages) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | |:-----------------------------------|:---------------------------------|:---------------------------------|:-----------|:-----------| | Payroll and benefits | $3,555 | $2,519 | $1,036 | 41% | | Legal and professional fees | $1,868 | $1,555 | $313 | 20% | | General and administrative | $3,345 | $1,869 | $1,476 | 79% | | Depreciation, amortization, depletion and accretion | $2,428 | $1,588 | $840 | 53% | - Payroll and benefits increased by $1.0 million (41%) due to the addition of Arq employees[118] - Legal and professional fees rose by $0.3 million (20%) due to Arq Acquisition and intellectual property costs[119] - General and administrative expenses increased by $1.5 million (79%) due to Arq-related expenses ($0.9 million, including $0.4 million for rent) and higher travel, insurance, and Board compensation ($0.6 million)[120] - Depreciation and amortization increased by $0.8 million (53%) from Arq Acquisition assets[121] Other Income (Expense), net This section analyzes changes in other income and expenses, including equity method earnings and interest | (in thousands, except percentages) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Change ($) | Change (%) | |:-----------------------------------|:---------------------------------|:---------------------------------|:-----------|:-----------| | Earnings from equity method investments | $462 | $2,389 | $(1,927) | (81)% | | Interest expense | $(834) | $(90) | $(744) | 827% | | Other | $603 | $111 | $492 | 443% | | Total other income | $231 | $2,410 | $(2,179) | (90)% | - Earnings from equity method investments decreased by $1.9 million (81%) as Tinuum Group and Tinuum Services wind down[125] - Interest expense increased by $0.7 million (827%) due to the Term Loan ($0.5 million) and assumed Arq Loan ($0.2 million)[126] - Other income increased by $0.5 million, primarily from $0.5 million in interest income from cash on hand[127] - No income tax expense or benefit was recorded for both periods due to a full valuation allowance based on pretax loss forecasts[128] Comparison of the Six Months Ended June 30, 2023 and 2022 This section compares the Company's financial performance for the six months ended June 30, 2023, against the same period in 2022 Consumables and consumables cost of revenue This section analyzes changes in consumables revenue and cost of revenue for the six-month period | (in thousands, except percentages) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | |:-----------------------------------|:-------------------------------|:-------------------------------|:-----------|:-----------| | Revenues: Consumables | $41,250 | $51,141 | $(9,891) | (19)% | | Total revenues | $41,250 | $51,141 | $(9,891) | (19)% | | Consumables cost of revenue | $32,511 | $41,417 | $(8,906) | (22)% | - Consumables revenues decreased by $9.9 million (19%) for the six months ended June 30, 2023, primarily due to a $12.9 million decrease in volumes sold (driven by low natural gas prices) and a $1.0 million unfavorable product mix, partially offset by a $4.0 million increase from higher product pricing[130] - Consumables gross margin decreased due to lower volumes, but was partially offset by lower feedstock prices and increased product prices[130] Other Operating Expenses This section details changes in various operating expenses, including payroll, legal, general, depreciation, and gain on asset sale | (in thousands, except percentages) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | |:-----------------------------------|:-------------------------------|:-------------------------------|:-----------|:-----------| | Payroll and benefits | $8,254 | $5,145 | $3,109 | 60% | | Legal and professional fees | $6,406 | $3,727 | $2,679 | 72% | | General and administrative | $6,123 | $3,795 | $2,328 | 61% | | Depreciation, amortization, depletion and accretion | $4,565 | $3,094 | $1,471 | 48% | | Gain on sale of Marshall Mine, LLC | $(2,695) | $— | $(2,695) | * | - Payroll and benefits increased by $3.1 million (60%), driven by $3.2 million from Arq employees (including $1.1 million severance) and $0.7 million from non-Arq employees, partially offset by a $0.7 million decrease in retention bonuses[132] - Legal and professional fees increased by $2.7 million (72%), mainly due to $2.4 million in non-recurring transaction costs for the Arq Acquisition[133] - General and administrative expenses rose by $2.3 million (61%), with $1.5 million from Arq (including $0.7 million rent) and $0.8 million from increased insurance, travel, and Board compensation[134] - Depreciation and amortization increased by $1.5 million (48%) due to assets acquired in the Arq Acquisition[135] - A $2.7 million gain was recognized on the sale of Marshall Mine, LLC, for the six months ended June 30, 2023[136] Other Income (Expense), net This section analyzes changes in other income and expenses, including equity method earnings and interest, for the six-month period | (in thousands, except percentages) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | Change (%) | |:-----------------------------------|:-------------------------------|:-------------------------------|:-----------|:-----------| | Earnings from equity method investments | $1,100 | $3,222 | $(2,122) | (66)% | | Interest expense | $(1,368) | $(176) | $(1,192) | 677% | | Other | $785 | $(334) | $1,119 | (335)% | | Total other income | $517 | $2,712 | $(2,195) | (81)% | - Earnings from equity method investments decreased by $2.1 million (66%) as Tinuum Group and Tinuum Services wind down[139] - Interest expense increased by $1.2 million (677%) due to the Term Loan ($0.9 million) and assumed Arq Loan ($0.3 million)[140] - Other income increased by $1.1 million, primarily from $0.8 million in interest income from cash on hand, contrasting with a $0.5 million loss in the prior year from an early settlement[141] - For the six months ended June 30, 2023, a $33 thousand income tax benefit was recorded related to out-of-period state income tax refunds, but no additional benefit due to a full valuation allowance[142] Non-GAAP Financial Measures This section presents non-GAAP financial measures, EBITDA and Adjusted EBITDA, used to supplement GAAP information - The Company uses non-GAAP measures, EBITDA and Adjusted EBITDA, to supplement GAAP financial information, believing they aid in period-to-period comparisons and provide useful insights by excluding non-cash or non-representative items[144] | (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |:----------------------------------------------|:---------------------------------|:---------------------------------|:-------------------------------|:-------------------------------| | Net loss | $(5,856) | $(326) | $(13,364) | $(3,359) | | Depreciation, amortization, depletion and accretion | $2,428 | $1,588 | $4,565 | $3,094 | | EBITDA (loss) | $(2,993) | $1,443 | $(7,980) | $107 | | Adjusted EBITDA (loss) | $(2,993) | $2,188 | $(10,675) | $3,067 | - Adjusted EBITDA for the six months ended June 30, 2023, was a loss of $10,675 thousand, a significant decrease from a gain of $3,067 thousand in the prior year, reflecting increased transaction and integration costs related to the Arq Acquisition and Arq payroll and benefit costs[145][146] Liquidity and Capital Resources This section discusses the Company's sources and uses of liquidity, cash flow activities, and future capital expenditure plans - As of June 30, 2023, principal liquidity sources included $58.8 million cash on hand (excluding $8.8 million restricted cash) and operations, with principal uses including business operating expenses, capital/spare parts expenditures, lease/debt obligations, and Five Forks Mine reclamation payments[147] | (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | Change ($) | |:----------------------------------------------|:-------------------------------|:-------------------------------|:-----------| | Cash and restricted cash (used in) provided by: | | | | | Operating activities | $(21,159) | $1,758 | $(22,917) | | Investing activities | $(10,482) | $1,305 | $(11,787) | | Financing activities | $22,792 | $(1,024) | $23,816 | | Net change in cash and restricted cash | $(8,849) | $2,039 | $(10,888) | - Cash flows used in operating activities increased by $22.9 million, primarily due to a higher net loss, the non-cash gain on Marshall Mine sale, a $7.6 million decrease in accounts payable and accrued expenses (Arq liabilities, retention bonuses), and a $2.3 million decrease in distributions from equity method investees[149] - Cash flows used in investing activities increased by $11.8 million, mainly due to a $7.5 million increase in property, plant, and equipment additions, a $0.9 million increase in mine development costs, a $2.2 million decrease in equity distributions, a $2.2 million cash payment for Marshall Mine sale, and a $1.2 million decrease in proceeds from asset sales, partially offset by $2.2 million cash acquired in Arq Acquisition[150] - Cash flows provided by financing activities increased by $23.8 million, driven by $8.5 million net borrowings from the Term Loan and $15.2 million net proceeds from the PIPE Investment[151] - The Company expects to incur $40.0 million to $45.0 million in capital expenditures for 2023, including $13.0-$15.0 million for Red River Plant improvements and $27.0-$30.0 million for growth capital to incorporate Arq Powder as feedstock, funded from cash on hand[153] - As of June 30, 2023, outstanding surety bonds totaled $7.5 million for Five Forks Mine and $3.0 million for Corbin Facility land reclamation, with $7.7 million in restricted cash pledged as collateral[154] Critical Accounting Policies and Estimates This section confirms that the Company's critical accounting policies and estimates remain consistent with prior reports - The Company's critical accounting policies and estimates remain unchanged from those reported in the 2022 Form 10-K[155] Recently Issued Accounting Standards This section directs readers to Note 1 for information on recently issued accounting standards - Information regarding recently issued accounting standards is provided in Note 1 of the Condensed Consolidated Financial Statements[155] Forward-Looking Statements Found in this Report This section identifies forward-looking statements and outlines factors that could cause actual results to differ materially - This section identifies forward-looking statements related to anticipated effects of pricing and costs, supply/demand, competition, Arq Acquisition integration and commercialization, R&D, plant expansions, technology effectiveness, Tinuum Group guarantees, contract timing/value, financial measures, capital expenditures, patent awards, regulations, macroeconomic conditions, and alternative energy sources[156][157] - Actual results may differ materially due to various factors, including regulatory changes, economic conditions, competition, technical difficulties, inability to commercialize technologies, loss of key personnel, material availability, intellectual property claims, litigation, and risks related to the Arq Acquisition[157] Item 3. Quantitative and Qualitative Disclosures About Market Risk This item is not required for smaller reporting companies Item 4. Controls and Procedures This section evaluates disclosure controls and procedures and reports on internal control changes Evaluation of Disclosure Controls and Procedures This section reports on the effectiveness of the Company's disclosure controls and procedures - The principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2023[159] Changes in Internal Control Over Financial Reporting This section reports on any material changes in internal control over financial reporting during the fiscal quarter - There were no material changes in internal control over financial reporting during the fiscal quarter ended June 30, 2023, and the acquired Arq business was excluded from the assessment as of June 30, 2023[160] PART II. - OTHER INFORMATION This section contains other required information, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section refers to Note 8 for legal proceedings, noting no significant outstanding cases as of June 30, 2023 - Information on legal proceedings is found in Note 8 'Commitments and Contingencies' to the consolidated financial statements[162] Item 1A. Risk Factors This section updates risk factors, highlighting potential adverse effects from bank failures on the Company's financial condition - No material updates to risk factors from the 2022 Form 10-K, except for a new risk concerning bank failures or other events affecting financial institutions[163] - The Company primarily uses one U.S. bank, with most cash deposits exceeding FDIC insurance limits, and failure of this bank or adverse financial market conditions could disrupt access to cash, impact liquidity, or limit transaction processing, potentially having a material adverse effect[163] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report - None to report[164] Item 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities - None to report[164] Item 4. Mine Safety Disclosures This section refers to Exhibit 95.1 for the required statement on mine safety violations and regulatory matters - The statement concerning mine safety violations or other regulatory matters is included in Exhibit 95.1[165] Item 5. Other Information This section states that there is no other information to report - None to report[165] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report, including amendments, agreements, certifications, and XBRL data files - Key exhibits include the Sixth Amendment to Tax Asset Protection Plan (Exhibit 10.1), Loan Modification Agreement (Exhibit 10.2), Certifications of Principal Executive and Financial Officers (Exhibits 31.1, 31.2, 32.1), Mine Safety Disclosure (Exhibit 95.1), and XBRL interactive data files (Exhibits 101.SCH, CAL, LAB, PRE, DEF, 104)[168][169][170][171][172][173] SIGNATURES This section contains the required signatures for the Quarterly Report, confirming its submission by the CEO and Chief Accounting Officer - The report was signed on August 9, 2023, by Robert Rasmus, Chief Executive Officer (Principal Executive Officer), and Morgan Fields, Chief Accounting Officer (Principal Financial Officer)[176]