Arq Inc

Previous wording

In February 2023, we acquired 100% of the equity of the subsidiaries of Arq Limited (hereafter the Arq Limited subsidiaries referred to as "Legacy Arq", and the acquisition itself referred to as the "Arq Acquisition") to secure access to a feedstock, a manufacturing facility and certain patented processes as a means to manufacture additional GAC products for sale into the APT and other markets. With the Arq Acquisition, we now control bituminous coal waste reserves and own a manufacturing facility, both located in Corbin, Kentucky (the "Corbin Facility"), and a process to recover and purify the bituminous coal fines for sale or further conversion to GAC products. Under this manufacturing process, we convert coal waste into a purified, microfine carbon powder known as Arq powder TM("Arq Powder"). We expect to begin using Arq Powder as a feedstock to manufacture high-quality GAC products for sale in the APT and other markets by the end of 2024.

Current wording

In February 2023, we acquired 100% of the equity of the subsidiaries of Arq Limited (hereafter the Arq Limited subsidiaries referred to as "Legacy Arq", and the acquisition itself referred to as the "Arq Acquisition") to secure access to a feedstock, a manufacturing facility and certain patented processes as a means to manufacture additional GAC products for sale into the APT market and other markets. With the Arq Acquisition, we now control bituminous coal waste reserves and own a manufacturing facility, both located in Corbin, Kentucky (the "Corbin Facility"), and a process to recover and purify the bituminous coal fines for sale or further conversion to GAC products. Under this manufacturing process, we convert coal waste into a purified, microfine carbon powder known as Arq powder TM("Arq Powder"). We expect to begin using Arq Powder as a feedstock to manufacture high-quality GAC products for sale in the APT and other markets by the end of 2024.

Previous wording

For the three months ended March 31, 2024, we experienced a decrease in demand for our products from certain coal-fired dispatch and electricity power generation customers. This was primarily due to lower than anticipated natural gas prices, resulting in several large utility customers opting to use natural gas versus coal as a primary source for power generation, and mild temperatures during the winter and spring seasons, resulting in lower demand for power generation compared to 2023. We expect that natural gas prices will remain relatively consistent through 2024 due to surplus natural gas reserves in storage, which, we expect, will negatively impact sales of our products even with higher than average summer temperatures.

Current wording

For the three and six months ended June 30, 2024, we experienced a decrease in demand for our products from certain coal-fired dispatch and electricity power generation customers. This was primarily due to lower natural gas prices, resulting in several large utility customers opting to use natural gas versus coal as a primary source for power generation, and mild temperatures during the winter and spring seasons, resulting in lower demand for power generation compared to 2023. We expect that natural gas prices will remain relatively consistent through 2024 due to surplus natural gas reserves in storage, which, we expect, will negatively impact sales of our products even with higher than average summer temperatures.

Previous wording

For the three months ended March 31, 2024, we recognized net loss of $3.4 million compared to net loss of $7.5 million for the three months ended March 31, 2023. The most significant factors impacting results for the comparable prior year period were expenses related to the Arq Acquisition during 2023 that did not occur in 2024, and higher revenues as a result of increased average selling price, partially offset by a decrease in demand for our AC and chemical products with power generation customers, primarily due to continued low prices of alternative energy sources for power generation.

Current wording

For the three and six months ended June 30, 2024, we recognized net loss of $2.0 million and $5.4 million compared to net loss of $5.9 million and $13.4 million for the three and six months ended June 30, 2023. The most significant factors impacting results for the comparable prior year period were expenses related to the Arq Acquisition during 2023 that did not occur in 2024, and higher revenue as a result of increased average selling price, partially offset by a decrease in demand for our AC and chemical products with power generation customers, primarily due to continued low prices of alternative energy sources for power generation.

Previous wording

We expect that revenue and gross margin will continue to be positively impacted by our product price increases and our efforts to move our product mix to higher margin products. We anticipate that the product price increases will help offset decreases in volumes due to prices of alternative energy sources impacting the demand for our AC and chemical products related to power generation. However, there is risk to our gross margin outlook driven by inflationary pressures that may increase our overall operating costs for our manufacturing operations.

Current wording

We expect that revenue and gross margin will continue to be positively impacted by our product price increases and our efforts to move our product mix to higher margin products. We anticipate that the product price increases will help offset decreases in volumes due to prices of alternative energy sources impacting the demand for our AC and chemical products related to power generation.

Previous wording

Legal and professional fees decreased for the three months ended March 31, 2024 compared to the corresponding quarter in 2023 primarily from a decrease in legal and consulting costs incurred related to the Arq Acquisition.

Current wording

Legal and professional fees decreased for the three months ended June 30, 2024 compared to the corresponding quarter in 2023 primarily from consulting and accounting costs incurred related to the Arq Acquisition during the period ended June 30, 2023.

Previous wording

General and administrative expenses increased for the three months ended March 31, 2024 compared to the corresponding quarter in 2023 by approximately $0.9 million quarter over quarter, primarily related to increases in rent and occupancy expense, franchise tax, travel, and Board compensation, as three new directors were added to the Board in connection with the Arq Acquisition.

Current wording

General and administrative expenses decreased for the three months ended June 30, 2024 compared to the corresponding quarter in 2023 by approximately $0.1 million, primarily related to decreases in banking costs, franchise tax, and travel, which were partially offset by increases in rent and occupancy expense.

Previous wording

Research and development expense increased for the three months ended March 31, 2024 compared to the corresponding quarter in 2023, primarily due to conducting product qualification testing in the first quarter of 2024 with potential lead-adopters as part of our ongoing GAC contracting process.

Current wording

Research and development expense increased for the three months ended June 30, 2024 compared to the corresponding quarter in 2023, primarily due to conducting product qualification testing with potential lead-adopters as part of our ongoing GAC contracting process.

Previous wording

The increase in Other for the three months ended March 31, 2024 is primarily driven by interest income of $0.4 million generated from the use of cash sweep accounts during the quarter.

Current wording

The decrease in Other for the three months ended June 30, 2024 is primarily driven by a decrease in interest income of $0.3 million due to lower balances in the Company's cash sweep accounts during the current quarter compared to the prior quarter.

Previous wording

For three months ended March 31, 2024, we had pretax loss of $3.4 million and recorded no income tax benefit for the pretax loss due to the recording of a full valuation allowance based on our forecast of pretax loss for the year ending December 31, 2024. For the three months ended March 31, 2023, we had pretax loss of $7.5 million and recorded no income tax benefit for the pretax loss due to the recording of a full valuation allowance based on our forecast of pretax loss for the year ended December 31, 2023.

Current wording

For the three months ended June 30, 2024 and 2023, we had pretax loss of $1.9 million and $5.9 million, respectively, and recorded no income tax benefit for the pretax loss due to the recording of a full valuation allowance based on our forecast of pretax loss for the years ending December 31, 2024 and 2023. For the three months ended June 30, 2024, we recorded out of period state income tax expense related to an assessment.

Previous wording

For the three months ended March 31, 2024, revenue increased from the comparable quarter in 2023 primarily driven by overall higher pricing and favorable product mix of approximately $1.3 million and $1.3 million, respectively. Offsetting these increases to revenue were approximately $1.7 million attributable to lower volumes sold. Product volumes were lower among power generation customers primarily due to low natural gas prices compared to the same quarter in 2023, which contributed to decreased utilization of coal-fired generation and decreased demand for our products. The average Henry Hub natural gas spot prices ($/MMBtu) for the three months ended March 31, 2024 and 2023 were $2.13 and $2.65, respectively.

Current wording

For the six months ended June 30, 2024, revenue increased from the comparable quarter in 2023 primarily driven by overall favorable product mix and higher pricing of approximately $2.8 million and $2.7 million, respectively. Offsetting these increases to revenue were approximately $1.0 million attributable to lower volumes sold. Product volumes were lower among power generation customers primarily due to low natural gas prices compared to the same period in 2023, which contributed to decreased utilization of coal-fired generation and decreased demand for our products. The average Henry Hub natural gas spot prices ($/MMBtu) for the six months ended June 30, 2024 and 2023 were $2.11 and $2.41, respectively.

Previous wording

Gross margin, exclusive of depreciation and amortization, increased for the three months ended March 31, 2024 compared to the corresponding quarter in 2023. Driving the increase in gross margin was a decrease in the price of our feedstock and additives, primarily as a result of decreased production volumes for the three months ended March 31, 2024 from the corresponding quarter in 2023 and lower raw material input costs. Offsetting the overall increase in gross margin for the three months ended March 31, 2024 from the corresponding quarter in 2023 were higher fixed costs as a percentage of total cost of revenue primarily due to lower production volumes for the three months ended March 31, 2024 from the corresponding quarter in 2023.

Current wording

Gross margin, exclusive of depreciation and amortization, increased for the six months ended June 30, 2024 compared to the corresponding period in 2023. Driving the increase in gross margin was a decrease in the price of our feedstock and additives, primarily as a result of decreased production volumes for the six months ended June 30, 2024 from the corresponding period in 2023 and lower raw material input costs. Offsetting the overall increase in gross margin for the six months ended June 30, 2024 from the corresponding period in 2023 were higher fixed costs as a percentage of total cost of revenue primarily due to lower production volumes for the six months ended June 30, 2024 from the corresponding period in 2023.

Previous wording

Payroll and benefits, which represent costs related to selling, general and administrative personnel, decreased for the three months ended March 31, 2024 compared to the corresponding quarter in 2023 primarily due to $1.3 million related to severance expense of former executives of Arq, Limited incurred during the three months ended March 31, 2023.

Current wording

Payroll and benefits decreased for the six months ended June 30, 2024 compared to the corresponding period in 2023 primarily due to $1.3 million related to severance expense of former executives of Arq, Limited incurred during the six months ended June 30, 2023, and decreased salaries and wages primarily from reduced executive salaries and lower headcount, as well as lower benefits and insurance costs in the current year.

Previous wording

Depreciation, amortization depletion and accretion expense decreased by approximately $0.4 million for the three months ended March 31, 2024 compared to the corresponding quarter in 2023, primarily due to increased absorption in inventory, partially offset by increased depreciation related to Legacy Arq assets purchased in Q1 2023.

Current wording

Depreciation, amortization depletion and accretion expense decreased by approximately $1.2 million for the six months ended June 30, 2024 compared to the corresponding period in 2023, primarily due to increased absorption in inventory of $1.2 million, decreased amortization of leasehold improvements, customer relationships and developed technology of $0.4 million, and decreased depletion of $0.2 million, partially offset by increased depreciation, primarily related to Legacy Arq assets purchased in February 2023.

Previous wording

As discussed above, for the three months ended March 31, 2023, we recognized a gain of $2.7 million on the sale of Marshall Mine, LLC.

Current wording

On March 27, 2023, the Company completed the sale of all of its membership interests in Marshall Mine, LLC to a third party. During the six months ended June 30, 2023, we recognized a gain of $2.7 million on the sale of Marshall Mine, LLC.

Previous wording

Earnings from equity method investments for the three months ended March 31, 2023 represented cash distributions from Tinuum Group and Tinuum Services. Tinuum Group and Tinuum Services began winding down their services in 2023.

Current wording

Earnings from equity method investments for the six months ended June 30, 2024 and 2023 represented cash distributions from Tinuum Group and Tinuum Services. Tinuum Group and Tinuum Services continue to wind down their services into 2024, and we have not received any cash distributions from either entity in 2024.

Previous wording

Interest expense increased for the three months ended March 31, 2024 compared to the corresponding quarter in 2023 primarily due to interest expense incurred for the three months ended March 31, 2024 of $0.6 million related to the CFG Term Loan, which was entered into on February 1, 2023 in connection with the Arq Acquisition, and $0.1 million related to the CTB Loan, which we assumed in the Arq Acquisition.

Current wording

Interest expense increased for the six months ended June 30, 2024 compared to the corresponding period in 2023 primarily due to interest expense incurred for the six months ended June 30, 2024 of $1.1 million related to the CFG Term Loan, which was entered into on February 1, 2023 in connection with the Arq Acquisition, and $0.3 million related to the CTB Loan, which we assumed in the Arq Acquisition.

Previous wording

(1) Included in Net loss for the three months ended March 31, 2023 are $4.4 million of transaction and integration costs incurred related to the Arq Acquisition. Additionally, for the three months ended March 31, 2023, Net loss included $0.9 million of Legacy Arq payroll and benefit costs.

Current wording

(1) Included in Net loss for the three and six months ended June 30, 2023 are $0.6 million and $4.9 million, respectively of transaction and integration costs incurred related to the Arq Acquisition. Additionally, for the three and six months ended June 30, 2023, Net loss included $0.8 million and $1.7 million of Legacy Arq payroll and benefit costs.

Previous wording

•cash on hand of $35.2 million, excluding $8.8 million of restricted cash; and

Current wording

•cash on hand of $28.5 million, excluding $8.7 million of restricted cash; and

Previous wording

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

Current wording

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

Previous wording

Cash and restricted cash decreased from $54.2 million as of December 31, 2023 to $44.0 million as of March 31, 2024. The following table summarizes our cash flows for the three months ended March 31, 2024 and 2023, respectively:

Current wording

Cash and restricted cash decreased from $54.2 million as of December 31, 2023 to $37.2 million as of June 30, 2024. The following table summarizes our cash flows for the six months ended June 30, 2024 and 2023, respectively:

Previous wording

Cash flows provided by (used in) operating activities for the three months ended March 31, 2024 increased by $18.2 million compared to the three months ended March 31, 2023. The net increase was primarily attributable to a decrease in cash used in accounts payable and accrued expenses of $10.5 million, primarily from payments of Legacy Arq assumed liabilities, comprised of accrued employee-related compensation and accrued transaction costs related to the Arq Acquisition in 2023; net loss of $3.4 million recognized for the three months ended March 31, 2024 compared to net loss of $7.5 million recognized for the three months ended March 31, 2023; the add-back of a non-cash gain of $2.7 million recognized from the sale of Marshall Mine, LLC for the three months ended March 31, 2023; and an increase in non-cash net working capital, excluding accounts payable and accrued expenses, of $0.5 million.

Current wording

Cash flows used in operating activities for the six months ended June 30, 2024 decreased by $18.7 million compared to the six months ended June 30, 2023. The net decrease was primarily attributable to a decrease in cash used in accounts payable and accrued expenses of $8.3 million, primarily from payments of Legacy Arq assumed liabilities, comprised of accrued employee-related compensation and accrued transaction costs related to the Arq Acquisition in 2023; net loss of $5.4 million recognized for the six months ended June 30, 2024 compared to net loss of $13.4 million recognized for the six months ended June 30, 2023; and the add-back of a non-cash gain of $2.7 million recognized from the sale of Marshall Mine, LLC for the six months ended June 30, 2023.

Previous wording

Cash flows used in investing activities increased for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 by $6.8 million primarily as a result of an increase in property, plant and equipment additions of $6.1 million from construction activities at our Red River Plant expansion; $2.2 million of cash acquired in the Arq Acquisition; and a decrease in distributions from equity earnings in excess of cumulative earnings of $0.6 million. Partially offsetting the net increase in cash flows used in investing activities was a cash payment of $2.2 million made in March 2023 required in the sale of Marshall Mine, LLC.

Current wording

Cash flows used in investing activities increased for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 by $18.4 million primarily as a result of an increase in property, plant and equipment additions of $18.4 million from construction activities at our Red River Plant expansion; $2.2 million of cash acquired in the Arq Acquisition during the prior year; and a decrease in distributions from equity earnings in excess of cumulative earnings of $1.1 million. Partially offsetting the net increase in cash flows used in investing activities was a cash payment of $2.2 million made during the six months ended June 30, 2023 required in the sale of Marshall Mine, LLC.

Previous wording

We have targeted the end of 2024 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 need 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, cash generation, ongoing cost reduction initiatives, potential customer prepayments for GAC contracts, and a planned refinancing and expansion of the CFG Loan. If we are not able to secure expanded or additional financing, the project timeline for our Red River Plant expansion will be delayed beyond the end of 2024.

Current wording

We have targeted the first quarter of 2025 for our first GAC deliveries. To meet this target, we need to incur substantial capital spend for additional equipment, labor, and project costs. The Company anticipates financing the timely completion of the project funded with cash on hand, cash generation, ongoing cost reduction initiatives, potential customer prepayments for GAC contracts, and a planned refinancing and expansion of the CFG Loan. If we are not able to secure expanded or additional financing, the project timeline for our Red River Plant expansion will be delayed beyond the end of 2024.

Previous wording

During 2024, we expect to spend between $55 and $60 million on the Red River Plant expansion, depending on the pace of the project, as well as between $5 and $10 million to complete our commissioning of the Corbin Facility. Capital expenditures planned for 2024 are dependent on many factors, including the ability to raise additional funding, which may impact the timing and amount of capital expenditures.

Current wording

During 2024, we expect to spend between $55 and $60 million on the Red River Plant expansion, depending on the pace of the project, as well as between $5 and $10 million to complete our commissioning of the Corbin Facility. Capital expenditures planned for 2024 are dependent on many factors, including our ability to raise additional funding, which may impact the timing and amount of capital expenditures.