ADAES Inc. Reports Operating Results (10-Q)

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Aug 13, 2009
ADAES Inc. (ADES, Financial) filed Quarterly Report for the period ended 2009-06-30.

ADA-ES Inc. develops and implements proprietary environmental technology and specialty chemicals that mitigate the environmental impact from electric power and industrial companies while reducing operating costs. ADAES Inc. has a market cap of $26.4 million; its shares were traded at around $3.81 with and P/S ratio of 1.6.

Highlight of Business Operations:

In order to maintain our 50% ownership in our Clean Coal joint venture with NexGen, we are obligated to fund half of its operating costs and capital expenditures. We expect our portion of operating costs to average approximately $16,000 per month or approximately $193,000 total in 2009, which amount may increase due to cost-sharing of full-scale demonstrations which we believe will qualify as permanent refined coal installations if demonstrations currently being discussed are completed. In addition, Clean Coal is planning to put into operation several facilities to produce refined coal prior to the qualification deadline discussed below and is presently in negotiations with numerous parties to that end. Clean Coal has initiated staged purchase commitments to build several facilities to be available to put in operation prior to year-end, the estimated total capital expenditure in 2009 for which is approximately $2.6 million. If all such facilities are placed in service in time and the product qualifies for the Section 45 tax credit, they will have the potential of producing profits for Clean Coal in excess of $20.0 million per year for up to ten years. We have committed to hardware for two of the facilities and the other commitments will be made during August and September. The decision to proceed on such facilities depends on the outcome of planned demonstrations, the status of negotiations with third parties, receiving explicit guidance from the IRS and other milestones that we are closely monitoring. Our net operating loss for the quarter ended June 30, 2009 includes net costs of $146,000 related to our refined coal efforts and $311,000 from Clean Coal. The ability of Clean Coal to sell its planned refined coal product and qualify for the expected Section 45 tax credits depends on several conditions, including demonstrating qualified emission reductions, finalizing necessary contractual agreements, and completing construction, installation and startup of such facilities prior to January 1, 2010. The IRS guidance, which was originally to be announced by June 30, 2009 and is now expected before the end of August 2009, is key to securing and finalizing utility contracts. If Clean Coal succeeds in obtaining approval for the Section 45 tax credits and sells a facility to a third party, NexGen has the right to maintain its 50% interest by making additional payments to us that total $4.0 million commencing after Clean Coal receives such qualification. NexGen is not obligated to make those payments, but if it does not do so once Clean Coal has qualified for the Section 45 tax credits, it will forfeit a part of its interest in Clean Coal in direct proportion to the amount of the $4.0 million that it elects not to pay, if any.

Revenues totaled $4.8 million and $9.7 million for the three and six months ended June 30, 2009, respectively, versus $3.8 million and $7.9 million for the three and six months ended June 30, 2008, representing an increase of 26% and 24% for the quarter and year to date. We expect overall revenues will show little additional growth until revised mercury control regulations are implemented or legislation is enacted. Revenues in our MEC segment for 2009 increased for the second quarter and first six months by $607,000 and $1.1 million, respectively (16% and 14%), and FGC and other activities increased by $304,000 and $772,000, respectively as compared to the same periods in 2008.

General and administrative expenses increased by $2.0 million and $2.6 million or 138% or 88% to approximately $3.5 million and $5.6 million for the three and six months ended June 30, 2009, respectively, from the same periods in 2008. The dollar increases in both the three and six months ended June 30, 2009 resulted primarily from increased legal costs of $2.1 million and $2.6 million respectively, related to our litigation with Norit Americas, Inc. (Norit) and Calgon Carbon Corporation (Calgon) described in Part II, Item 1 of this Report. Under terms of the Joint Development Agreement executed with ECP on October 1, 2008, related to the formation of Carbon Solutions, we are required to indemnify ECP and Carbon Solutions for their costs incurred related to the Norit matter. Our legal expense for the three and six months ended June 30, 2009 includes estimates of such indemnity costs. We expect legal costs in the third quarter of 2009 to be similar to the previous quarter and decline substantially in the fourth quarter of 2009.

Our net operating loss for the three and six months ended June 30, 2009 includes net costs of $87,000 and $146,000 respectively, related to our refined coal efforts and $287,000 and $310,000 loss of the Clean Coal joint venture. If Clean Coal succeeds in obtaining approval for the Section 45 tax credits, NexGen has the right to maintain its 50% interest by making payments to us totaling $4.0 million commencing after Clean Coal receives such qualification. NexGen is not obligated to make those payments, but if it does not do so once Clean Coal has qualified for the Section 45 tax credits, it will forfeit a part of its interest in Clean Coal in direct proportion to the amount of the $4.0 million that it elects not to pay, if any. In addition, our net operating loss includes our equity in the losses incurred by Carbon Solutions totaling $665,000 and $1.3 million for the three and six months ended June 30, 2009, respectively. We expect to continue to recognize a loss from our equity in Carbon Solutions until the AC Facility is operational.

We had cash and cash equivalents of $1.3 million and positive working capital of $4.7 million as of June 30, 2009, compared to cash and cash equivalents of $3.0 million and working capital of $4.4 million at December 31, 2008 when the previously consolidated balances of Carbon Solutions are excluded. The increase in working capital (excluding the previously consolidated Carbon Solutions amounts) is a result primarily from fluctuations in operating assets and liabilities in the normal course of business. We believe that existing and expected future working capital necessary for our operations will be sufficient for the next twelve months. Existing litigation costs, including indemnity costs discussed above, may impact working capital. We reached a settlement in July 2009 with Hudson Specialty Insurance Company (Hudson), as described in Part II, Item 1 of this report, to reimburse us for a portion of the legal costs associated with the Norit matter. We received $1.25 million subsequent to the quarter ended June 30, 2009 as a part of the settlement which has been recorded as an offset to legal costs incurred during the quarter ended June 30, 2009. Legal costs related to the indemnification of Carbon Solutions and ECP are being paid by Carbon Solutions resulting in an obligation payable to Carbon Solutions of approximately $1.7 million at June 30, 2009, which is recognized in the accompanying consolidated financial statements as a long-term liability under accrued warranty and other. We do not anticipate the use of current assets to satisfy this obligation. As we pursue endeavors to expand our CO related projects, we may need to seek additional funding from industry partners. We also expect to expend some of our current working capital to fund operations, particularly litigation expenses. We believe that we have sufficient resources on hand to continue pursuit of the growing MEC market.

Cash flow used in operations totaled $1.0 million for the first six months of 2009 compared to cash provided of $37,000 for the same period in 2008. The change in cash flow from operations in 2009 primarily resulted from an increase in deferred revenue and other of $1.6 million and an increase of prepaid expenses and other of $1.3 million, which was offset by a decrease in our accrued payroll and related liabilities of $411,000. These changes in our operating assets and liabilities primarily correspond to the nature and timing of our procurement and billing cycle activities and the Hudson settlement noted above. In addition, other adjustments to cash flow from operations included a decrease from the deferred tax benefit of $1.3 million and equity in loss of Carbon Solutions of $1.3 million, which was offset by an increase from expenses paid with restricted stock of $620,000.

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