Filing identity and reporting period
The supplied filing is for Advanced Emissions Solutions, Inc. (ADES), not Arq, Inc. It is a Form 10-Q for the quarter and nine months ended September 30, 2015—not 2015 Q1—and was signed April 19, 2016. The filing itself should be checked against the requested company and period.
ADES supplied emissions-control equipment, technology, chemicals and services to coal-fired power generation and held interests in refined-coal ventures. Financial amounts below are in U.S. dollars; millions are used unless noted.
Financial performance and position
| Metric | Three months ended Sept. 30, 2015 | Nine months ended Sept. 30, 2015 | Comparable 2014 period |
|---|---|---|---|
| Revenue | $12.9m | $49.5m | $9.1m quarter; $13.2m nine months |
| Operating loss | $(10.0)m | $(34.7)m | $(10.3)m quarter; $(26.3)m nine months |
| Net loss | $(8.7)m | $(27.2)m | $(3.7)m quarter; $(3.3)m nine months |
| Loss per share, basic and diluted | $(0.40) | $(1.24) | $(0.17) quarter; $(0.15) nine months |
| Operating cash flow | Not provided for the quarter | $(13.6)m | $(30.8)m nine months |
Revenue grew 42% in the quarter and 274% year to date, primarily from more completed equipment projects. Equipment sales were $47.4m for the nine months, versus $9.5m in 2014. Direct costs of revenue were $10.6m in the quarter and $40.3m year to date; the resulting gross margins were approximately 17.7% and 18.6%, respectively, versus 28.2% and 34.1% in 2014. These gross-margin calculations use reported revenue less the three stated cost-of-revenue lines.
Cash and cash equivalents fell to $8.6m at September 30 from $25.2m at December 31, 2014. Current assets were $26.5m against current liabilities of $47.7m, implying negative working capital of $21.2m. Total liabilities were $88.0m and stockholders’ deficit was $22.6m. Related-party notes payable totaled $15.7m; the filing also describes a separate $15m term loan obtained after quarter-end.
Material changes versus prior period
- Nine-month revenue increased sharply on equipment sales, but nine-month net loss widened to $27.2m from $3.3m. Higher operating costs, DSI contract losses, restructuring, research and development, and lower CCS distributions contributed.
- ADES recognized $3.2m of DSI contract loss provisions for the nine months. In the quarter, DSI revenue was $3.3m against $3.8m of costs, including $1.2m of loss provisions.
- Equity-method earnings declined to $5.1m for the nine months from $22.0m. CCS distributions recognized as earnings were $4.7m, versus $22.5m in 2014; CCS made no distribution to ADES in Q3 2015. Related-party royalties rose to $7.8m for the nine months from $4.3m.
- Operating cash outflow improved to $13.6m from $30.8m, but cash still declined by $16.6m. The prior-year investing inflow included substantially larger distributions from equity investees.
Outlook, risks and unusual items
- Management said working-capital pressure was expected to continue until restatement activities were completed, including resolution of the SEC inquiry and private litigation. It gave no specific financial guidance.
- Liquidity depended on contract execution, CCS royalties and distributions from CCS and CCSS, and improving emissions-control operations. Management warned that insufficient cash flow could prevent meeting operating needs or repaying debt; refinancing or alternative financing might be required. The lender’s collateral included substantially all company and guarantor assets.
- After quarter-end, ADES obtained a $15m term loan, receiving $13.9m net proceeds. Amendments in 2016 extended maturity to July 8, 2016, raised stated interest to 15% from 10.5%, increased the minimum cash requirement to $3.5m, and incurred about $0.6m in fees.
- The bank line of credit had no borrowing availability because of covenant violations. Cash and investments backing letters of credit were restricted; outstanding letters of credit totaled $12.0m at September 30.
- Restructuring charges were $8.8m for the nine months, including accelerated equity-award expense. ADES acquired ClearView assets for $2.4m and later wound down ADA Analytics, recording $1.9m of impairment expense. Management also described plans to wind down DSI manufacturing operations.
- The securities class action, derivative litigation and SEC inquiry remained unresolved; the company said potential losses were not probable or reasonably estimable. Disclosure controls were deemed ineffective because of previously reported material weaknesses, although management said the statements fairly presented the periods reported.
- Two equipment performance-guarantee issues arose in Q3; the company said resolution was not expected to materially affect performance or liquidity. It recognized no revenue on the affected contracts.
Important facts for investors to verify
- Confirm the filing belongs to the intended issuer and period: the supplied document identifies ADES and Q3/nine-month 2015, not Arq or Q1.
- Review subsequent liquidity and debt developments, including loan amendments, cash-minimum requirements, maturity, collateral and repayment/refinancing capacity.
- Track cash generation and working capital, CCS/CCSS distributions, and whether CCS can secure additional tax-equity investors for facilities.
- Assess DSI contract economics, loss provisions, operational restructuring and the performance-guarantee claims.
- Follow the SEC inquiry, restatement, litigation and remediation of material weaknesses in financial reporting controls.