Business context and reporting period
This is Advanced Emissions Solutions, Inc. (ADES)’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2023—not a filing by Arq, Inc. ADES sells activated-carbon and chemical consumables for power generation, industrial, water-treatment and remediation markets. It acquired Arq on February 1, 2023; Arq’s coal-waste-to-carbon business had no revenue through September 30.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $29.8 million | $28.4 million | $71.1 million | $79.6 million |
| Gross profit on consumables, before depreciation and amortization | $9.1 million | $6.9 million | $17.9 million | $16.6 million |
| Gross margin on same basis | 30.6% | 24.1% | 25.1% | 20.8% |
| Operating loss | $2.5 million | $2.6 million | $16.4 million | $8.7 million |
| Net loss | $2.2 million | $2.4 million | $15.5 million | $5.8 million |
| Adjusted EBITDA (non-GAAP) | $0.9 million | $(0.5) million | $(9.8) million | $2.5 million |
For the nine months, operating cash flow was $(21.1) million, investing cash flow $(17.3) million and financing cash flow $23.3 million. Cash and restricted cash declined $15.1 million to $61.3 million, including $52.5 million cash and $8.8 million restricted cash. Current assets were $91.5 million and current liabilities $22.0 million.
Total debt obligations had a $21.2 million carrying value, net of discounts and issuance costs, including $10.0 million principal on a related-party term loan, the assumed Arq loan and finance leases. Stockholders’ equity was $174.3 million. Common shares outstanding increased from 19.2 million at December 31, 2022 to 33.2 million at September 30, 2023, largely reflecting the acquisition and financing issuances.
Material changes versus prior comparable periods
- Q3 revenue rose 5%, as higher pricing and favorable product mix outweighed lower volumes. Nine-month revenue fell 11%; lower sales volumes reduced revenue by about $16.7 million, partly offset by approximately $8.3 million in higher pricing.
- Consumables gross margin improved in both comparisons, reflecting lower feedstock and additive costs. Lower volumes and higher fixed costs as a share of sales remained pressures.
- Nine-month net loss increased to $15.5 million. Higher payroll, acquisition-related costs, general and administrative expenses, depreciation and interest more than offset lower consumables costs and the $2.7 million gain on the Marshall Mine sale.
- ADES completed the $31.2 million Arq acquisition, funded in part by issuing common and preferred shares; the preferred shares converted into common shares in June. It also raised $15.4 million through a PIPE investment and entered a $10.0 million term loan.
- Marshall Mine was sold in March; ADES paid the buyer $2.2 million, and approximately $4.9 million of liabilities were discharged, generating a $2.7 million gain.
Outlook, risks and unusual items
- Management expected natural-gas prices to remain relatively consistent through 2023, weighing on coal-fired generation and product demand. It expected price increases and a shift toward higher-margin products to help offset lower volumes, while noting inflationary cost risks and weather-related seasonality.
- ADES expected $35–$40 million of 2023 capital expenditures, including $21–$24 million of growth spending to modify the Red River and Corbin plants to use Arq Powder. It had spent $17.0 million through September and expected to fund the program from cash on hand. Arq Powder production for granular activated carbon was expected to begin in the second half of 2024.
- Management stated that September 30 cash was expected to cover contractual obligations and expected operating losses for the next 12 months. The term loan requires quarterly interest and has a February 2027 maturity; the filing estimates a $12.2 million balloon payment of principal and PIK interest then.
- The term loan includes financial covenants, including a $70 million minimum consolidated revenue requirement for 2023, $5 million minimum unrestricted cash, and future EBITDA thresholds. Verify covenant compliance against full-year results. The Arq loan also has annual financial covenants.
- Liquidity risks include continuing operating cash use, capital requirements, debt service, reclamation costs and $8.8 million of restricted cash. Cash deposits at two banks exceeded FDIC insurance limits. Surety bonds and related indemnity obligations could create additional cash requirements if called.
- Other unusual items include $8.7 million of Arq acquisition-related costs, executive severance and a full valuation allowance that eliminated most potential income tax benefit. The company reported no significant legal proceedings at quarter-end; Tinuum-related guarantees remain contingent, with no liability recorded because management did not consider a loss probable.
Key facts for investors to verify
- Whether full-year revenue and other covenant tests are met, and whether the company maintains the required unrestricted cash balance.
- Actual cash burn, available unrestricted liquidity and funding for planned plant modifications and reclamation work.
- Whether Arq Powder reaches commercial production on schedule and delivers expected product economics; Arq reported no revenue and a $9.2 million net loss from acquisition through September 30.
- How lower coal dispatch, natural-gas and renewable-energy competition, weather, pricing and input costs affect volumes and margins.
- Debt service and maturity obligations, including the related-party term loan’s interest terms, collateral and prepayment provisions.
- Final issuance of the remaining 422,221 CEO subscription shares, subject to receipt of the remaining $0.8 million, and the resulting share dilution.