Arq, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Arq, Inc. Index to Financial Statements Arq, Inc. Consolidated Financial Statements: Report of Independent Registered Public Accounting Firm (Moss Adam LLP, Denver, Colorado, PCAOB ID: 659 ) 40 Consolidated Balance Sheets as of December 31, 2023 and 2022 42 Consolidated Statements of Operations for the years ended December 31, 2023 and 2022 43 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2023 and 2022 44 Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 45 Notes to Consolidated Financial Statements 47 39 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Arq, Inc. and Subsidiaries Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Arq, Inc. and Subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2023 and 2022, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America . Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Business Combination – Valuation of Acquired Property, Plant, and Equipment and Developed Technology Intangible Asset As described in Notes 1 and 2 to the consolidated financial statements, in February 2023, the Company acquired 100% of the equity of the subsidiaries of Arq Ltd. (the “Arq Acquisition”) in exchange for total consideration of $31.2 million. The Company accounted for the Arq Acquisition as an acquisition of a business and recorded the assets acquired and liabilities assumed at their respective fair values, including $39.2 million of property, plant, and equipment, and a $7.7 million developed technology intangible asset. Management estimated the fair value of the acquired property, plant and equipment using a combination of valuation methodologies, including the cost and market approaches and the fair value of the developed technology intangible asset using an income approach. The significant assumptions used by management in determining the fair value of the acquired property, plant and equipment primarily included estimated replacement costs and sales prices of the acquired assets as well as the estimated useful lives of the acquired assets. The significant assumptions used by management in determining the fair value of the developed technology intangible asset included the Company’s best estimate of projected financial information, including revenues, growth rates, production ramp-up and capacity, and cost of revenue as well as discount and royalty rates. 40 The principal considerations for our determination that performing procedures relating to the valuation of the acquired property, plant and equipment and developed technology intangible asset relating to the Arq Acquisition is a critical audit matter are (i) the significant judgment by management when determining the significant assumptions used in projecting future financial performance of the acquired business; (ii) especially challenging and subjective auditor judgment involved when performing procedures and evaluating management’s significant assumptions related to revenue and its growth rate, production ramp-up and capacity, and cost of revenue, and the discount and royalty rates utilized; and (iii) involving the use of professionals with specialized skill and knowledge. The primary procedures we performed to address this critical audit matter included: – Obtaining and reading the Securities Purchase Agreement to develop an understanding of the Arq Acquisition. – Evaluating management’s process for determining the fair value of the acquired property, plant and equipment and developed technology intangible asset, including the appropriateness of the valuation methods used. – Testing the completeness and accuracy of the underlying data used in the valuation models. – Evaluating the reasonableness of the significant assumptions used by management related to projected financial information, which primarily related to production ramp-up and capacity, revenue growth, cost of revenues and the discount and royalty rates. Specifically, when evaluating the assumptions related to production ramp-up and capacity and revenue growth rates, we compared the assumptions to industry and market trends, along with updated management forecasts, to evaluate the reasonableness of management’s estimates as of the date of the transaction. – Utilizing professionals with specialized skill and knowledge to assist in evaluating the appropriateness of the valuation models used and the reasonableness of certain significant assumptions including estimated replacement costs and sales prices as well as discount and royalty rates. /s/ Moss Adams LLP Denver, Colorado March 12, 2024 We have served as the Company’s auditor since 2017. 41 Arq, Inc. and Subsidiaries Consolidated Balance Sheets As of December 31, (in thousands, except share data) 2023 2022 ASSETS Current assets: Cash $ 45,361 $ 66,432 Receivables, net 16,192 13,864 Inventories, net 19,693 17,828 Prepaid expenses and other current assets 5,215 7,538 Total current assets 86,461 105,662 Restricted cash, long-term 8,792 10,000 Property, plant and equipment, net of accumulated depreciation of $ 19,293 and $ 11,897 , respectively 94,649 34,855 Other long-term assets, net 45,600 30,647 Total Assets $ 235,502 $ 181,164 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 14,603 $ 16,108 Current portion of long-term debt 2,653 1,131 Other current liabilities 5,792 6,645 Total current liabilities 23,048 23,884 Long-term debt, net of current portion 18,274 3,450 Other long-term liabilities 15,780 13,851 Total Liabilities 57,102 41,185 Commitments and contingencies (Note 8) Stockholders’ equity: Preferred stock: par value of $ .001 per share, 50,000,000 shares authorized, none outstanding — — Common stock: par value of $ .001 per share, 100,000,000 shares authorized, 37,791,084 and 23,788,319 shares issued and 33,172,938 and 19,170,173 shares outstanding at December 31, 2023 and 2022, respectively 38 24 Treasury stock, at cost: 4,618,146 and 4,618,146 shares as of December 31, 2023 and 2022, respectively ( 47,692 ) ( 47,692 ) Additional paid-in capital 154,511 103,698 Retained earnings 71,543 83,949 Total stockholders’ equity 178,400 139,979 Total Liabilities and Stockholders’ equity $ 235,502 $ 181,164 See Notes to the Consolidated Financial Statements. 42 Arq, Inc. and Subsidiaries Consolidated Statements of Operations Years Ended December 31, (in thousands, except per share data) 2023 2022 Revenue: Consumables $ 99,183 $ 102,987 Total revenue 99,183 102,987 Operating expenses: Consumables cost of revenue, exclusive of depreciation and amortization 67,323 80,465 Payroll and benefits 15,154 10,540 Legal and professional fees 9,588 9,455 General and administrative 12,641 8,145 Depreciation, amortization, depletion and accretion 10,543 6,416 Gain on sale of Marshall Mine, LLC ( 2,695 ) — Other ( 36 ) 34 Total operating expenses 112,518 115,055 Operating loss ( 13,335 ) ( 12,068 ) Other income, net: Earnings from equity method investments 1,623 3,541 Interest expense ( 3,014 ) ( 336 ) Other 2,630 155 Total other income, net 1,239 3,360 Loss before income tax expense ( 12,096 ) ( 8,708 ) Income tax expense 153 209 Net loss $ ( 12,249 ) $ ( 8,917 ) Loss per common share (Note 1): Basic $ ( 0.42 ) $ ( 0.48 ) Diluted $ ( 0.42 ) $ ( 0.48 ) Weighted-average number of common shares outstanding: Basic 29,104 18,453 Diluted 29,104 18,453 See Notes to the Consolidated Financial Statements. 43 Arq, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity Common Stock Treasury Stock (in thousands, except share data) Shares Amount Shares Amount Additional Paid-in Capital Retained Earnings/(Accumulated Deficit) Total Stockholders’ Equity Balances, January 1, 2022 23,460,212 $ 23 ( 4,618,146 ) $ ( 47,692 ) $ 102,106 $ 92,864 $ 147,301 Stock-based compensation 389,312 1 — — 1,980 — 1,981 Repurchase of common shares to satisfy tax withholdings ( 61,205 ) — — — ( 388 ) — ( 388 ) Accrued dividends cancelled on common stock — — — — — 2 2 Net loss — — — — — ( 8,917 ) ( 8,917 ) Balances, December 31, 2022 23,788,319 $ 24 ( 4,618,146 ) $ ( 47,692 ) $ 103,698 $ 83,949 $ 139,979 Issuance of common stock upon conversion of preferred stock 5,362,926 5 — — 18,921 — 18,926 Issuance of common stock related to PIPE Investment, net of offering costs 3,842,315 4 — — 15,216 — 15,220 Issuance of common stock pursuant to Arq Acquisition, net of offering costs 3,814,864 4 — — 12,433 — 12,437 Stock-based compensation 572,056 — — — 2,648 — 2,648 Issuance of common stock to related party 527,779 1 — — 999 — 1,000 Repurchase of common shares to satisfy tax withholdings ( 117,175 ) — — — ( 230 ) — ( 230 ) Issuance of warrant — — — — 826 — 826 Preferred stock dividends declared on redeemable preferred stock — — — — — ( 157 ) ( 157 ) Net loss — — — — — ( 12,249 ) ( 12,249 ) Balances, December 31, 2023 37,791,084 $ 38 ( 4,618,146 ) $ ( 47,692 ) $ 154,511 $ 71,543 $ 178,400 See Notes to the Consolidated Financial Statements. 44 Arq, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, (in thousands) 2023 2022 Cash flows from operating activities Net loss $ ( 12,249 ) $ ( 8,917 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation, amortization, depletion and accretion 10,543 6,416 Operating lease expense 2,757 2,709 Gain on sale of Marshall Mine, LLC ( 2,695 ) — Stock-based compensation expense 2,648 1,981 Earnings from equity method investments ( 1,623 ) ( 3,541 ) Amortization of debt discount and debt issuance costs 546 — Other non-cash items, net ( 111 ) 530 Changes in operating assets and liabilities: Receivables and related party receivables ( 2,264 ) 1,169 Prepaid expenses and other current assets 4,777 ( 876 ) Inventories, net ( 2,571 ) ( 9,686 ) Other long-term assets, net ( 4,762 ) 245 Accounts payable and accrued expenses ( 12,061 ) ( 911 ) Other current liabilities ( 184 ) 1,008 Operating lease liabilities ( 168 ) 1,521 Other long-term liabilities 764 ( 6 ) Distributions from equity method investees, return on investment — 2,297 Net cash used in operating activities ( 16,653 ) ( 6,061 ) Cash flows from investing activities Acquisition of property, equipment and intangible assets, net ( 27,516 ) ( 8,914 ) Mine development costs ( 2,690 ) ( 583 ) Cash and restricted cash acquired in acquisition of business 2,225 — Payment for disposal of Marshall Mine, LLC ( 2,177 ) — Distributions from equity method investees in excess of cumulative earnings 1,623 3,636 Proceeds from sale of property and equipment — 1,253 Net cash used in investing activities ( 28,535 ) ( 4,608 ) 45 Years Ended December 31, (in thousands) 2023 2022 Cash flows from financing activities Net proceeds from common stock issuance $ 15,220 $ — Net proceeds from CFG Loan, related party, net of discount and issuance costs 8,522 — Principal payments on finance lease obligations ( 1,130 ) ( 1,246 ) Net proceeds from common stock issuance, related party 1,000 — Principal payments on Arq Loan ( 473 ) — Repurchase of shares to satisfy tax withholdings ( 230 ) ( 388 ) Dividends paid — ( 45 ) Net cash provided by (used in) financing activities 22,909 ( 1,679 ) Decrease in Cash and Restricted Cash ( 22,279 ) ( 12,348 ) Cash and Restricted Cash, beginning of year 76,432 88,780 Cash and Restricted Cash, end of year $ 54,153 $ 76,432 Supplemental disclosure of cash flow information: Cash paid for interest $ 1,727 $ 334 Cash (received) paid for income taxes $ ( 1,697 ) $ 3 Supplemental disclosure of non-cash investing and financing activities: Equity issued as consideration for acquisition of business $ 31,206 $ — Change in accrued purchases for property and equipment $ 914 $ 532 Paid-in-kind dividend on Series A Preferred Stock $ 157 $ — Acquisition of property and equipment under finance lease $ — $ 1,641 See Notes to the Consolidated Financial Statements. 46 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 1 - Summary of Operations and Significant Accounting Policies Nature of Operations Arq Inc. ("Arq" or the "Company", formerly known as Advanced Emissions Solutions, Inc. ("ADES")) is a Delaware corporation with its principal office located in Greenwood Village, Colorado, manufacturing, mining and logistic operations located in Louisiana and mining and manufacturing operations in Kentucky. The Company is an environmental technology company and is principally engaged in the sale of consumable air, water, and soil treatment solutions including activated carbon ("AC") and chemical technologies. The Company's proprietary AC products enable customers to reduce air, water, and soil contaminants, including mercury, per and polyfluoroalkyl substances ("PFAS") and other pollutants, to help our customers meet the challenges of existing and pending air quality and water regulations. The Company manufactures and sells AC and other chemicals used to capture and remove contaminants for coal-fired power generation, industrial, municipal water and air, water, and soil treatment and remediation markets (collectively, the advanced purification technologies or "APT" market). In February 2023, the Company acquired 100 % of the equity of the subsidiaries of Arq Limited (the "Arq Acquisition," and hereafter the Arq Limited subsidiaries referred to as "Legacy Arq") to secure access to a feedstock, a manufacturing facility and certain patented processes as a means to manufacture additional granular activated carbon ("GAC") products for sale into the APT and other markets. With the Arq Acquisition, the Company now controls bituminous coal waste reserves and owns 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, the Company expects to be able to convert bituminous coal waste into a purified, microfine carbon powder known as Arq powder TM ("Arq Powder"). See further discussion of the Arq Acquisition in Note 2. Principles of Consolidation The Consolidated Financial Statements include accounts of wholly-owned subsidiaries and variable interest entities ("VIEs") in which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. All investments in partially owned entities for which the Company has the ability to exercise significant influence and holds a 20% or greater ownership interest based on the legal form of the Company's ownership percentage are accounted for using the equity method and are included in the Other long-term assets, net line item in the Consolidated Balance Sheets. As of December 31, 2023, the Company holds equity interests of 42.5 % and 50.0 % in Tinuum Group, LLC ("Tinuum Group") and Tinuum Services, LLC ("Tinuum Services"), respectively. Cash and restricted cash Cash consists of cash on hand and bank deposits. Restricted cash is primarily comprised of posted cash collateral required under a surety bond contract related to a lignite mine in Louisiana (the "Five Forks Mine") and the Corbin Facility. Concentration of credit risk As of December 31, 2023, the Company holds cash that exceed the Federal Deposit Insurance Corporation ("FDIC") limits (currently $ 250 thousand) at two financial institutions. If a financial institution was unable to perform its obligations, the Company would be at risk regarding the amount of cash held in excess of the FDIC limits. Fair value measurements The carrying amounts of our cash, restricted cash, accounts receivable, accounts payable and other current liabilities approximate fair value as recorded due to the short-term nature of these instruments. 47 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements Receivables, net Receivables, net are recorded at net realizable value, which includes an appropriate allowance for estimated uncollectible amounts to reflect any loss anticipated on the receivables. Increases and decreases in the allowance for doubtful accounts are established based upon changes in the credit quality of receivables and are included as a component of the General and administrative line item in the Consolidated Statements of Operations. The allowance for doubtful accounts is based on historical experience, general economic conditions and the credit quality of specific accounts and was no t material as of December 31, 2023 and 2022. Inventories, net The cost of inventory is determined using the average cost method. Inventories, net are stated at the lower of average cost or net realizable value and consist principally of raw materials and finished goods related to the Company's AC products. Inventories are periodically reviewed for both potential obsolescence and potential declines in anticipated selling prices. The Company makes assumptions about the future demand for and market value of the inventory and estimates the amount of any obsolete, unmarketable, slow moving or overvalued inventory. The composition of Inventories is included in Note 3. Intangible Assets Intangible assets consist of customer relationships, patents, and developed technology. The Company has developed technologies resulting in patents being granted by the U.S. Patent and Trademark Office or other regulatory offices. Legal costs associated with securing the patent are capitalized and amortized over the legal or useful life beginning on the patent filing date. The following table details the components of the Company's intangible assets: As of December 31, 2023 2022 (in thousands, except years) Weighted Average Remaining Amortization Period (in years) Cost Net of Accumulated Amortization Cost Net of Accumulated Amortization Customer relationships 0.0 $ 835 $ — $ 835 $ 226 Patents 11.1 1,600 520 1,490 456 Developed technology 19.1 8,307 7,379 607 165 Total $ 10,742 $ 7,899 $ 2,932 $ 847 Included in the Consolidated Statements of Operations is amortization expense related to intangible assets of $ 0.8 million and $ 0.5 million for the years ended December 31, 2023 and 2022, respectively. The estimated future amortization expense for existing intangible assets as of December 31, 2023 is expected to be approximately $ 0.4 million for the year ended December 31, 2024 and each of the four succeeding fiscal years. Investments The investments in entities in which the Company does not have a controlling interest (financial or operating), but where it has the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method of accounting. Whether or not the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including, among others, representation on the investee company’s board of directors and the Company's ownership percentage. Under the equity method of accounting, an investee company’s financial statements are not consolidated in the Company’s Consolidated Balance Sheets and Consolidated Statements of Operations; however, the Company’s share of the earnings or losses of the investee is reported in the "Earnings from equity method investments" line item in the Consolidated Statements of Operations, and the Company’s carrying value in an equity method investee is reported in the "Other long-term assets, net" line in the Consolidated Balance Sheets. The Company recognizes equity earnings from equity method investments based on its percentage ownership in the investee. The Company recognizes distributions received in excess of the carrying value of an equity method investment as equity 48 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements method earnings in the period the distributions occur to the extent that the Company has not guaranteed any obligations of the investee or is not contractually required to provide additional funding to the investee. Subsequent earnings from investees where the Company has recognized earnings from distributions in excess of the carrying value of the equity method investment are recognized for the excess of cumulative earnings over previously recognized earnings from distributions. Additionally, when the Company's carrying value in an equity method investment is zero, and the Company has not guaranteed any obligations of the investee or is not required to provide additional funding to the investee, the Company will not recognize its share of any reported losses by the investee until future earnings are generated to offset previously unrecognized losses. Therefore, equity income (loss) reported in the Company's Consolidated Statements of Operations for certain equity method investees may differ from a mathematical calculation of net income or loss attributable to its equity interest based on the percentage ownership of the Company's equity interest and the net income or loss attributable to equity owners as shown in the investee's statements of operations. Distributions from equity method investees are reported in the Consolidated Statements of Cash Flows as "return on investment" in Operating cash flows until such time as the carrying value in an equity method investee is reduced to zero. Thereafter, such distributions are reported as "distributions in excess of cumulative earnings" in Investing cash flows. Investments in partially-owned subsidiaries for which the Company has less than 20% ownership are accounted for in accordance with accounting guidance applicable to equity investments that do not qualify for the equity method of accounting. The Company evaluates these types of investments for changes in fair value and, if there is change, recognizes the change in the Consolidated Statement of Operations. If no such events or changes in circumstances have occurred related to these types of investments, the fair value is estimated only if practicable to do so. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation and include leasehold improvements. Depreciation on assets is computed using the straight-line method over the lesser of the estimated useful lives of the related assets or the lease term (ranging from 1 to 31 years). Maintenance and repairs that do not extend the useful life of the respective asset are charged to operating expenses as incurred. When assets are retired, or otherwise disposed of, the property accounts are relieved of costs and accumulated depreciation and any resulting gain or loss is credited or charged to income. The Company periodically evaluates the recoverability of the carrying value of property, plant and equipment for impairment. Amortization of right of use assets under finance lease is included in depreciation expense and is calculated using the straight-line method over the term of the lease. Leases The Company records a right of use ("ROU") asset and related liability under a contract or part of a contract when it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of an identified asset occurs when an entity has both the right to obtain substantially all of the economic benefits from the use of an identified asset and the right to direct the use of that identified asset. The determination of whether a contract contains a lease may require significant assumptions and judgments. For all classes of underlying assets, the Company does not separate nonlease components from lease components and accounts for each separate lease component and the nonlease components associated with that lease component as a single lease component. The Company records lease liabilities and related ROU assets for all leases that have a term of greater than one year. For short-term leases (leases with terms of less than one year), the Company expenses lease payments on a straight-line basis over the lease term. Variable lease payments represent payments made by a lessee for the right to use an underlying asset that vary because of changes in facts or circumstances occurring after the commencement date of a lease other than the passage of time. Variable lease payments that are based on an index or rate, calculated by using the index or rate that exists on the lease commencement date, are included in the measurement of a lease liability. Certain of the Company’s operating leases for office facilities contain variable lease components that are not based on an index or rate, and the Company recognizes these payments as variable lease expense in the period in which the obligation for those payments is incurred. The Company calculates lease liabilities based on the present value of lease payments discounted by the rate implicit in the lease or, if not readily determinable, the Company’s incremental borrowing rate. Finance lease liabilities are subsequently measured by increasing the carrying amount to reflect interest expense on the finance lease liability and reducing the carrying amount of the lease liability to reflect lease payments made during the period. Interest 49 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements on finance lease liabilities is determined in each period during the lease term as the amount that produces a constant periodic discount rate on the remaining balance of the lease liability. ROU assets under finance leases are amortized over the remaining lease term on a straight-line basis. Interest expense related to finance lease liabilities and amortization of ROU assets under finance leases are included in the "Interest expense" and "Depreciation, amortization, depletion and accretion" line items, respectively, in the Consolidated Statements of Operations. Operating lease liabilities are subsequently measured at the present value of the lease payments not yet paid, discounted using the discount rate for the lease established at the inception date of the lease. ROU assets under operating leases are subsequently measured at the amounts of the related operating lease liability, adjusted for, as applicable, prepaid or accrued lease payments, the remaining balance of any lease incentives received, unamortized initial direct costs and impairment. Lease expense from operating leases is recognized as a single lease cost over the remaining lease term on a straight-line basis. Variable lease payments not included in operating lease liabilities are recognized as expense in the period in which the obligation for those payments is incurred. Lease expense from operating leases is included in the "General and administrative" and "Consumables Cost of revenue, excluding depreciation and amortization" line items in the Consolidated Statements of Operations. Other Assets Mine Development Costs Mine development costs are related to the Five Forks Mine and are stated at cost less accumulated depletion and include acquisition costs, the cost of other development work and mitigation costs. Costs are amortized over the estimated life of the related mine reserves, which as of December 31, 2023 is estimated to be 14 years. The Company performs an evaluation of the recoverability of the carrying value of mine development costs to determine if facts and circumstances indicate that their carrying value may be impaired and if any adjustment is warranted. Mine development costs are reported in the "Other long-term assets, net" line item in the Consolidated Balance Sheets. Spare Parts Spare parts include critical spares required to support plant operations. Parts and supply costs are determined using the lower of cost or estimated replacement cost. Parts are recorded as maintenance expenses or capitalized in the period in which they are consumed or put into use. Spare parts are reported in the "Other long-term assets, net" line item in the Consolidated Balance Sheets. Revenue Recognition The Company recognizes revenue from a contract with a customer when a performance obligation under the terms of a contract with a customer is satisfied, which is when the customer controls the promised goods or services that are transferred in satisfaction of the performance obligation. Revenue is measured as the amount of consideration that is expected to be received in exchange for transferring goods or providing services, and the transaction price is generally fixed and generally does not contain variable or noncash consideration. In addition, the Company’s contracts with customers generally do not contain customer refund or return provisions or other similar obligations. Transfer of control and satisfaction of performance obligations are further discussed below. The Company uses estimates and judgments in determining the nature and timing of satisfaction of performance obligations, the standalone selling price ("SSP") of performance obligations and the allocation of the transaction price to multiple performance obligations, if any. The Company’s revenue component is Consumables. Consumables The Company is principally engaged in the sale of consumable products that utilize AC and chemical-based technologies to a broad range of customers, including coal-fired utilities, industrial and water treatment plants, and other diverse markets. The sale of consumable products is comprised of a single performance obligation and is recognized at the point in time when control transfers and the Company's obligation has been fulfilled, which is when the product is shipped or delivered to a customer. Performance obligations for the sale of consumable products do not extend beyond one year. 50 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements Certain contracts with customers require the customers to purchase minimum quantities over the contractual period ("MQ Contracts"). Under these MQ Contracts, the Company reserves the right to bill a customer for any shortfall in the actual quantity purchases and minimum quantity purchases as of the end of the contractual period. The Company recognizes revenue on MQ Contracts based on the satisfaction of all three of the following criteria: (1) the likelihood of a customer not meeting its MQ contract obligations is probable, (2) the amount of the shortfall can be quantified and (3) the Company elects to exercise it right to enforce the billing of the shortfall at some point during the contractual period through a billing subsequent to the contractual period. The determination of when all three criteria are satisfied requires significant judgment. The Company performs shipping and handling activities through the use of third-party shippers and such activities occur prior to a customer obtaining control of goods. As such, the Company accounts for these activities as fulfillment activities and not as separate performance obligations. Shipping and handling costs incurred by the Company in delivering products to customers are billed to customers and are included in the transaction price and included in the "Revenue - Consumables" line item in the Consolidated Statements of Operations. Costs for shipping and handling activities incurred by the Company are included in the "Consumables cost of revenue, excluding depreciation and amortization" line item in the Consolidated Statements of Operations. Practical Expedients and Exemptions The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. Sales and other taxes that are collected concurrently with revenue-producing activities are excluded from revenue. The Company generally expenses sales commissions when incurred, as the amortization period of the asset that the Company would have recognized is one year or less. These costs are recorded in sales and marketing expenses in the "General and administrative" line item in the Consolidated Statements of Operations. Consumables Cost of Revenue Consumables cost of revenue includes all labor, fringe benefits, subcontract labor, additive and coal costs, materials, equipment, supplies, travel costs and any other costs and expenses directly related to the Company’s production of revenue. License Royalties Payable to Tinuum Group In December 2022, the Company and Tinuum Group entered into an agreement (the "Tinuum Group Royalty Agreement") whereby the Company agreed to pay Tinuum Group a royalty (the "Tinuum Group Royalty") on sales of M-Prove TM to certain power plants where Tinuum Group had operated refined coal facilities (the "M-45 Facilities") prior to the expiration of the Section 45 Tax Credit Program on December 31, 2021. Amounts due under the Tinuum Group Royalty Agreement commenced on January 1, 2022. The Tinuum Group Royalty is calculated based on "Net Profit" (as defined in the Tinuum Royalty Agreement) on the Company's sales of M-Prove TM product to the M-45 Facilities. The Tinuum Group Royalty Agreement is for an initial term of five years with automatic renewals of five years unless the Company and Tinuum Group agree to terminate it. The Tinuum Group Royalty is included in Cost of revenue in the Consolidated Statements of Operations. Payroll and Benefits Payroll and benefits costs include payroll costs, payroll related fringe benefits and stock based compensation expense of research and development, sales and administrative personnel, but exclude such costs related to direct labor that are included in Cost of revenue. Payroll and benefits costs include direct payroll, personnel related fringe benefits, sales and administrative staff labor costs and stock compensation expense. Payroll and benefits costs exclude direct labor included in Cost of revenue. Legal and Professional Legal and professional costs include external legal, audit and consulting expenses. General and Administrative General and administrative costs include director fees and expenses, rent, insurance and occupancy-related expenses, bad debt expense, impairments, research and development and other general costs of conducting business. 51 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements Research and Development Research and development costs are charged to expense in the period incurred and are reported within the "Payroll and Benefits" and "General and administrative" line items in the Consolidated Statements of Operations. For the years ended December 31, 2023 and 2022, the Company recorded total research and development costs of $ 3.3 million and $ 2.1 million, respectively. Asset Retirement Obligations Asset retirement obligations ("ARO") are comprised of mine reclamation activities required under agreements related primarily to the Five Forks Mine and a coal waste site adjacent to the Corbin Facility (the "Corbin ARO") and are recognized when incurred and recorded as liabilities at fair value. An ARO is accreted over time through periodic charges to earnings. An ARO asset is depreciated over its estimated remaining life. Accounting for AROs requires the Company to estimate future costs unique to a specific mining operation that the Company expects to incur to complete the reclamation and remediation work required to comply with existing laws and regulations. AROs are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation costs. On an annual basis, unless otherwise deemed necessary, the Company reviews its estimates and assumptions of its AROs. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred income taxes are provided for temporary differences between the financial reporting basis and tax basis of the Company's assets and liabilities and are tax-effected using enacted tax rates in effect for the year in which the temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that includes the enactment date. The Company maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. The Company records uncertain tax positions on the basis of a two-step process whereby (1) the Company determines whether it is more-likely-than-not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Stock-Based Compensation Stock-based compensation expense is measured at the grant date based on the estimated fair value of the stock-based award and is generally expensed on a straight-line basis over the requisite service period and/or performance period of the award. Forfeitures are recognized when incurred. Stock-based compensation expense related to manufacturing employees and administrative employees is included in the "Consumables Cost of revenue, exclusive of depreciation and amortization" and "Payroll and benefits" line items, respectively, in the Consolidated Statements of Operations. Stock-based compensation expense related to non-employee directors and consultants is included in the "General and administrative" line item in the Consolidated Statements of Operations. Dividends When a sufficient amount of available earnings exists at the time of a dividend declaration, dividends are charged to Retained earnings when declared. If a sufficient amount of available earnings is not available, dividends declared are charged as a reduction to Additional paid-in capital. Earnings (Loss) Per Share Basic earnings (loss) per share is computed using the weighted-average number of shares of common stock outstanding during the reporting period. Diluted earnings per share is computed in a manner consistent with that of basic earnings per share, while considering other potentially dilutive securities. The treasury stock method is used to determine the dilutive effect of potentially dilutive securities. 52 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements Potentially dilutive securities consist of restricted stock awards ("RSAs") and contingent performance stock units ("PSUs") (collectively, "Potential dilutive shares"). Potential dilutive shares are excluded from diluted earnings (loss) per share when their effect is anti-dilutive. When there is a net loss for a period, all Potential dilutive shares are anti-dilutive and are excluded from the calculation of diluted loss per share for that period. Each PSU represents a contingent right to receive shares of the Company’s common stock, and the number of shares may range from zero to two times the number of PSUs granted on the award date depending upon the price performance of the Company's common stock as measured against a general index and a specific peer group index over requisite performance periods. The number of Potential dilutive shares related to a PSU is based on the number of shares of the Company's common stock, if any, that would be issuable at the end of the respective reporting period, assuming that the end of the reporting period is the end of the contingency period applicable to a PSU. See Note 12 for additional information related to PSUs. The following table sets forth the calculations of basic and diluted earnings (loss) per common share: Years Ended December 31, (in thousands, except per share amounts) 2023 2022 Net loss $ ( 12,249 ) $ ( 8,917 ) Basic weighted-average number of common shares outstanding 29,104 18,453 Add: dilutive effect of equity instruments — — Diluted weighted-average shares outstanding 29,104 18,453 Loss per share - basic $ ( 0.42 ) $ ( 0.48 ) Loss per share - diluted $ ( 0.42 ) $ ( 0.48 ) For the years ended December 31, 2023 and 2022, 1.7 million and 0.6 million weighted-average equity instruments, respectively, were outstanding but were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive. Use of Estimates The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires the Company’s management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates. Significant financial statement components in which the Company makes assumptions include: • business combinations, including asset acquisitions; • the carrying value of its long-lived assets; • AROs; and • income taxes, including the valuation allowance for deferred tax assets and assessment of uncertain tax positions. Risks and Uncertainties The Company is principally dependent on operations of its APT business and its cash on hand to provide liquidity over the near and long term. The Company's revenue, sales volumes, earnings and cash flows are significantly affected by prices of competing power generation sources such as natural gas and renewable energy. During periods of low natural gas prices, natural gas provides a competitive alternative to coal-fired power generation and therefore, coal consumption may be reduced, which in turn reduces the demand for the Company's products. However, during periods of higher prices for competing power generation sources, there is generally an increase in coal consumption and thus demand for the Company's products also increases. In addition, coal consumption and demand for the Company's products are affected by the demand for electricity, which is higher in the warmer and colder months of the year. As a result, the Company's operating results are subject to seasonal variations whereby its revenue and cost of revenue tend to be higher in its first and third fiscal quarters compared to its second and fourth fiscal quarters. Abnormal temperatures during the summer and winter months may significantly affect coal 53 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements consumption and impurities within various municipalities' water sources, and thus impact the demand for the Company's products. Reclassifications Certain balances have been reclassified from prior years to conform to the current year presentation. Such reclassifications had no effect on the Company’s results of operations or financial position in any of the periods presented. Segments Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by a company's chief operating decision maker ("CODM"), or a decision-making group, in deciding how to allocate resources and in assessing financial performance. As of December 31, 2023, the Company's CODM was the Company's Chief Executive Officer, and the Company concluded that it had one reportable segment. New Accounting Standards Recently Adopted Effective January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The adoption of ASU 2016-13 did not have a material impact on the Company's financial statements and disclosures. Recently Issued In December 2023, the FASB issued Accounting Standards Update 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . ("ASU 2023-09"). ASU 2023-09 requires entities to disclose: (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) the disaggregation of income taxes paid by jurisdiction. This update also makes several other changes to the income tax disclosure requirements. For public entities, the amendments in ASU 2023-09 are effective for fiscal years beginning after December 15, 2024, with early adoption permitted, and is required to be applied prospectively, but retrospective application is permitted. The Company is currently evaluating the impact of ASU 2023-09 on its income tax disclosures. Note 2 - Arq Acquisition On February 1, 2023 (the "Acquisition Date"), the Company entered into a securities purchase agreement (the "Purchase Agreement") with Arq Ltd. for the Arq Acquisition in exchange for consideration (the "Purchase Consideration") totaling $ 31.2 million and consisting of (i) 3,814,864 shares of the Company's common stock, par value $ 0.001 per share (the "Common Stock"), valued at $ 12.4 million based on the closing price of the Common Stock on the Acquisition Date and (ii) 5,294,462 shares of the Company's Series A Convertible Preferred Stock, par value $ 0.001 per share (the "Series A Preferred Stock" or the "Preferred Shares"), valued at $ 18.8 million. The Company also incurred $ 8.7 million in acquisition-related costs, which have been expensed as incurred. Legacy Arq's principal location is in Corbin, Kentucky where it operates the Corbin Facility, which processes bituminous coal waste into Arq Powder and can be used as an alternative to oil or in-ground mined coal to produce a range of carbon products. With the completion of the Arq Acquisition, the Company intends to sell Arq Powder as a feedstock to produce high-quality AC for use in water and air purification markets. The Company expects to begin using Arq Powder to produce granular activated carbon products by the end of 2024. The Company accounted for the Arq Acquisition as an acquisition of a business. The total Purchase Consideration was $ 31.2 million and was allocated to the acquired assets and assumed liabilities of Legacy Arq based on their estimated fair values as of the Acquisition Date. The Purchase Consideration was comprised of the fair values as of the Acquisition Date of 3,814,864 shares of Common Stock, valued at $ 12.4 million, and 5,294,462 Preferred Shares, valued at $ 18.8 million. The Company also incurred $ 8.7 million in acquisition-related costs, which were expensed as incurred and included in the "General and administrative" and "Legal and professional fees" line items in the Statements of Operations. 54 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following table provides the final purchase price allocation to the assets acquired and liabilities assumed as of the date of the Arq Acquisition: (in thousands) Purchase Price Allocation Fair value of assets acquired: Cash $ 1,411 Prepaid expenses and other current assets 2,229 Restricted cash, long-term 814 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 Current portion of long-term debt 494 Other current liabilities 103 Long-term debt, net of current portion 9,199 Other long-term liabilities 4,523 Amount attributable to liabilities assumed 24,125 Net assets acquired $ 31,205 The following represents the intangible asset identified as part of the Arq Acquisition and which is included in "Other long-term-assets, net" in the table above: (in thousands) Amount Weighted Average Useful Life (years) Developed technology $ 7,700 20 Series A Preferred Stock In connection with the issuance of the Series A Preferred Stock pursuant to the Purchase Agreement, the Company filed the Certificate of Designations of Preferred Stock for the Series A Preferred Stock (the "Certificate of Designations") with the Secretary of State of the State of Delaware. Under the Certificate of Designations, 8.9 million preferred shares were designated as Series A Preferred Stock. On June 13, 2023 (the "Conversion Date"), the Company's stockholders approved the conversion of all of the outstanding shares of Series A Preferred Stock, including the "Escrow Shares," as defined below, and the corresponding issuance of shares of Common Stock. Upon such approval, each outstanding share of Series A Preferred Stock was automatically converted into the number of shares of Common Stock described below. Each share of Series A Preferred Stock was deemed to have an original issue price of $ 4.00 per share (the "Original Issue Amount"). The number of shares of Common Stock issued upon conversion of each share of Series A Preferred Stock was equal to the product of (i) the sum of (A) the Original Issue Amount plus (B) an amount equal to the cumulative amount of the accrued and unpaid dividends on such share at such time divided by (ii) the Original Issue Amount, subject to adjustment. Holders of the Series A Preferred Stock were entitled to receive cumulative dividends, which accrued quarterly on the last day of each applicable quarter (whether or not declared or funds for their payment are lawfully available) and were payable quarterly, in arrears, on the earlier to occur of (a) the date any dividend is paid to holders of Common Stock with respect to such quarter and (b) 30 days after the end of each quarter (the "Series A Quarterly Dividend") at the rate per share of Series A Preferred Stock equal to the greater of (i) if the Company declared a cash dividend on the Common Stock with respect to such quarter, the amount of the cash dividend that would be received by a holder of Common Stock in which such share of Series A Preferred Stock would be convertible on the record date for such cash dividend and (ii) an annual rate (the "Rate") of 8.0 % of 55 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements the Original Issue Amount compounded quarterly with respect to such quarter. On March 31, 2023, the Company declared a dividend of 68,464 Series A PIK Shares with respect to the accrued dividends on the Preferred Shares for the first quarter of 2023 (the "PIK Dividend"). The PIK Dividend was recorded at the estimated fair value of $ 0.2 million as of March 31, 2023 and was paid on April 21, 2023. Of the total Preferred Shares issued in the Arq Acquisition, 833,914 were held in escrow (the "Escrow Shares") based on a contingent redemption feature, (the "Contingent Redemption Feature," as defined below). The fair value of the Preferred Shares issued was determined to be $ 3.46 per Preferred Share on the Acquisition Date (the ("Preferred Share Price") plus the value of the Contingent Feature related to the Escrow Shares. The Escrow Shares were converted into shares of Common Stock on the Conversion Date and continue to be held in escrow (the "Escrow Common Shares"). The Escrow Common Shares are being withheld pending a determination by the IRS that no tax withholding is required on the Purchase Consideration issued to Arq Ltd. (the "Arq Ltd. Tax Liability"). The Company estimated the fair value of the potential Arq Ltd. Tax Liability at $ 3.3 million. In the event that the IRS determines that no withholding is required by Arq Ltd. in connection with the Purchase Consideration received by Arq Ltd., all of the Escrow Common Shares will be released and delivered to Arq Ltd. In the event that the IRS determines that any amount of withholding is required by Arq Ltd., the Company has agreed to redeem a sufficient number of Escrow Common Shares to fund the required payment to the IRS, and that number of Escrow Common Shares will be returned to the Company. The number of Escrow Common Shares to be returned to the Company is equal to the required withholding amount divided by the Original Issue Amount, not to exceed a maximum of 833,914 Escrow Common Shares, and is equal to $ 3.3 million based on the Original Issue Amount (the "Maximum Contingent Redemption Amount"). The fair value of the Preferred Escrow Shares was determined on the Acquisition Date and was comprised of the Maximum Contingent Redemption Amount and the fair value of the non-escrowed Preferred Shares ("Non-Preferred Escrow Shares"). The Series A Preferred Stock contained a mandatory redemption feature in the event the Preferred Shares, including future issuances of Series A Preferred Stock issued under dividend requirements, were not converted into shares of Common Stock prior to February 1, 2028. The Company concluded that both the Escrow Shares and the Non Escrow Shares did not meet the definition of mandatorily redeemable financial instruments as there was a substantive conversion feature, and were therefore not classified as liabilities. As both the Escrow Shares and Non Escrow Shares represented financial instruments that were redeemable for cash, SEC guidance mandates that preferred securities which are redeemable upon the occurrence of an event that is not solely within the control of the issuer be classified outside of permanent equity as "temporary equity." Accordingly, the Company classified and reported the Series A Preferred Stock as temporary equity and in the Consolidated Balance Sheet as of as of the Acquisition Date. On the Conversion Date, all shares of Series A Preferred Stock were converted into 5,362,926 shares of Common Stock, and the Company reclassified all of the Series A Preferred Stock to Common Stock as of June 30, 2023. PIPE Investment On February 1, 2023 and pursuant to the Arq Acquisition, the Company entered into Subscription Agreements with certain persons (the "Subscribers"), which included existing shareholders of Arq Ltd., three of which were appointed to the Company's Board of Directors (the "Board"), pursuant to which the Subscribers subscribed for and purchased 3,842,315 shares of Common Stock for an aggregate purchase price of $ 15.4 million and at a price per share of $ 4.00 (such transaction, the "PIPE Investment"). 56 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements Unaudited Pro Forma Financial Information The following represents the pro forma effects of the Arq Acquisition as if it had occurred on January 1, 2022. The pro forma net loss for each of the two years presented has been calculated after applying the Company’s accounting policies in effect for those years. In addition, pro forma net loss includes: (1) for the years ended December 31, 2023 and 2022, increases in depreciation and amortization resulting from fair value adjustments to Property, plant, equipment of $ 0.2 million and $ 0.1 million, respectively; (2) for the years ended December 31, 2023 and 2022, increases in amortization resulting from fair value adjustments to Intangibles of $ 0.1 million and $ 0.4 million, respectively; (3) for the year ended December 31, 2023 and 2022, increases to interest expense for: (a) the issuance of the CFG Loan (as defined below) including stated interest and the amortization of the CFG Loan's discount and issuance costs and (b) amortization of debt discount related to a fair value adjustment to the assumed CTB Loan (as defined below) of Arq of $ 0.2 million and $ 2.0 million, respectively; (4) the removal of $ 1.9 million of Payroll and benefits for compensation expense payable to certain Arq employees triggered by change in control provisions in employment agreements, as well as in employee severance agreements, for the year ended December 31, 2023 but included as additional Payroll and benefits expense for the year ended December 31, 2022; (5) for the years ended December 31, 2023 and 2022, decreases to general and administrative expenses resulting from fair value adjustments to operating leases acquired of $ 0.1 million and $ 0.5 million, respectively, and (6) for the year ended December 31, 2022, the addition of $ 2.4 million of transaction costs incurred for the period from January 1, 2023 through the Arq Acquisition Date, together with the income tax effects on (1) through (6). Since Arq had no revenue for the years ended December 31, 2023 or 2022, pro forma revenue is the same as the Company's reported revenue for those years. Years ended December 31, (in thousands) 2023 2022 Revenue $ 99,183 $ 102,987 Net loss $ ( 11,119 ) $ ( 75,788 ) Other The amounts of year to date revenue and net loss for Arq for the period from the Acquisition Date to December 31, 2023 are as follows: Year ended December 31, (in thousands) 2023 Revenue $ — Net loss $ ( 11,660 ) Note 3 - Inventories, net The following table summarizes the Company's inventories as of December 31, 2023 and 2022: As of December 31, (in thousands) 2023 2022 Product inventory $ 9,524 $ 9,479 Raw material inventory 10,169 8,349 $ 19,693 $ 17,828 57 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 4 - Property, Plant and Equipment The cost basis and accumulated depreciation of property, plant and equipment at December 31, 2023 and 2022 are summarized in the table below: Life in Years As of December 31, (in thousands) 2023 2022 Land and land improvements 5 + 1 $ 1,225 $ 1,225 Plant and operating equipment 3 - 29 81,266 33,180 Furniture and fixtures 1 - 19 1,765 1,709 Machinery and equipment 3 - 10 2,478 2,116 Leasehold improvements 12 2,149 2,149 Construction in progress 25,059 6,373 113,942 46,752 Less accumulated depreciation ( 19,293 ) ( 11,897 ) Total property, plant and equipment, net $ 94,649 $ 34,855 1 Land Improvements have a useful life between 5 and 31 years. Included in plant and operating equipment as of December 31, 2023 and 2022 is mining equipment financed under various lease facilities, and obligations due under these facilities are included in long-term debt in the Consolidated Balance Sheets. The total amount recorded for ROU assets as of December 31, 2023 and 2022 related to finance lease obligations was $ 1.7 million and $ 2.6 million, respectively, net of accumulated depreciation of $ 2.7 million and $ 2.0 million. Depreciation expense for the years ended December 31, 2023 and 2022 was $ 8.5 million and $ 4.9 million, respectively. Note 5 - Revenue For the years ended December 31, 2023 and 2022, all material performance obligations related to revenue recognized were satisfied at a point in time. For each of the years ended December 31, 2023 and 2022, approximately 8 %, respectively, of Consumables revenue was generated in Canada, and all other revenue was generated in the U.S. In accordance with its revenue recognition policy for MQ Contracts, in December 2023, the Company exercised its right under certain MQ Contracts and recognized $ 4.7 million of consumables revenue and recorded an unbilled receivable. Trade receivables Trade receivables represent an unconditional right to consideration in exchange for goods or services transferred to a customer. The Company invoices its customers in accordance with the terms of the contract. Credit terms are generally net 30 - 45 days from the date of invoice . The timing between the satisfaction of performance obligations and when payment is due from the customer is generally not significant. Contract assets Contract assets are comprised of unbilled receivables from customers and are included in Receivables, net in the Consolidated Balance Sheets. Unbilled receivables represent a conditional right to consideration in exchange for goods or services transferred to a customer. The following table shows the components of the Company's Receivables, net: As of December 31, (in thousands) 2023 2022 Trade receivables, net $ 11,289 $ 13,789 Unbilled receivables 4,862 — Other 41 75 Receivables, net $ 16,192 $ 13,864 58 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements Contract liabilities Contract liabilities are comprised of deferred revenue, which represents an obligation to transfer goods or services to a customer for which the Company has received consideration from the customer and, if deliverable within one year or less, is included in "Other current liabilities" in the Consolidated Balance Sheets and, if deliverable outside of one year, is included in "Other long-term liabilities" in the Consolidated Balance Sheets. Note 6 - Debt Obligations As of (in thousands) December 31, 2023 December 31, 2022 CFG Loan due February 2027, related party $ 10,000 $ — CTB Loan due January 2036 9,527 — Finance lease obligations 3,465 4,581 22,992 4,581 Unamortized debt discounts ( 815 ) — Unamortized debt issuance costs ( 1,250 ) — 20,927 4,581 Less: Current maturities ( 2,653 ) ( 1,131 ) Total long-term debt obligations $ 18,274 $ 3,450 CFG Term Loan As required under the Purchase Agreement, and on February 1, 2023 (the "Closing Date"), the Company, as borrower, certain of its subsidiaries, as guarantors, and CF Global ("CFG"), a related party, as administrative agent and lender (the "Lender"), entered into a term loan (the "CFG Loan") in the amount of $ 10.0 million, less original issue discount ("OID") of $ 0.2 million, upon execution of a Term Loan and Security Agreement (the "CFG Loan Agreement"). The Company received net cash proceeds of $ 8.5 million after deducting the OID and debt issuance costs of $ 1.3 million. The CFG Loan Agreement also required the issuance of a warrant (the "Warrant") to CFG to purchase 325,457 shares of Common Stock (the "Warrant Shares"), which represented 1 % of the post-Arq Acquisition and PIPE Investment (as defined below) fully diluted share capital (as defined in the CFG Loan Agreement), at an exercise price of $ 0.01 per share. The Warrant has a term of 7 years and contains a cashless exercise provision. The Company allocated the cash proceeds of the CFG Loan Agreement to both the CFG Loan and the Warrant based on their relative fair values. The amount allocated to the Warrant was recorded as a debt discount and is amortized to interest expense over the term of the CFG Loan. The standalone fair value of the CFG Loan was based on a comparison of borrowings and associated credit ratings consistent with those of the Company. The Warrant is exercisable for $ 0.01 per share, and the fair value is deemed to be equal to the fair value of the underlying shares. Accordingly, the fair value of the Warrant was determined as the number of shares issuable from the exercise of the Warrant (based on 1.0 % of post-transaction fully diluted share capital, as defined in the Purchase Agreement) multiplied by the closing share price of the Company's common stock on the Acquisition Date. The CFG Loan matures on February 1, 2027 and bears interest at a rate equal to either (a) Adjusted Term SOFR (subject to a 1.00 % floor and a cap of 2.00 %) plus a margin of 9.00 % paid in cash and 5.00 % paid in kind or (b) Base Rate plus a margin of 8.00 % paid in cash and 5.00 % paid in kind, which interest on the CFG Loan in each case shall be payable (or capitalized, in the case of in kind interest) quarterly in arrears. The Company may prepay the CFG Loan at any time subject to the following prepayment premium: (i) prior to the twelve month anniversary of the Closing Date, the Make-Whole Amount (as defined below), (ii) thereafter but prior to the thirty-six month anniversary of the Closing Date, 2.00 % of the outstanding principal amount of the CFG Loan being repaid or prepaid or (iii) thereafter until the maturity date, 1.00 % of the outstanding principal amount of the CFG Loan being repaid or prepaid. The "Make-Whole Amount," with respect to any repayment or prepayment, is (i) an amount equal to all required interest payable (except for currently accrued and unpaid interest) on the aggregate principal amount of the CFG Loan subject to such 59 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements prepayment or repayment from the date of such prepayment or repayment through but excluding the date that is the first anniversary of the Closing Date calculated using an interest rate equal to (x) Adjusted Term SOFR for an interest period of one month in effect on the third U.S. Government Securities Business Day prior to such prepayment or repayment plus (y) 14.00 % per annum and assuming all interest was paid in cash, plus (ii) a prepayment premium of 2.00 % on the aggregate principal amount of the CFG Loan subject to such prepayment or repayment. The CFG Loan is secured by substantially all of the assets of the Company and its subsidiaries (including those acquired in the Arq Acquisition, but excluding those pledged as collateral (the "Arq Loan Assets") under the "CTB Loan," as defined and described below), subject to customary exceptions. The CFG Loan Agreement includes, among others, the following covenants: (1) beginning with the first fiscal quarter after March 31, 2023 and as of the end of each fiscal quarter thereafter, the Company must maintain a minimum unrestricted cash balance of $ 5.0 million; (2) (x) as of December 31, 2023, for the fiscal year then ended, the Company must have a minimum annual revenue, on a consolidated basis, of $ 70.0 million, (y) as of December 31, 2024, for the fiscal year then ended, the Company must have a minimum annual revenue, on a consolidated basis, of $ 85.0 million and (z) for any fiscal year thereafter, the Company must have a minimum annual revenue, on a consolidated basis, of $ 100.0 million; (3) (x) as of December 31, 2024, for the fiscal year then ended, the Company must have a minimum Consolidated EBITDA of $ 3.0 million and (y) for any fiscal year thereafter, the Company must have a minimum Consolidated EBITDA of $ 16.0 million; and (4) beginning after the fiscal quarter ending September 30, 2023, during an LTV Trigger Period, Arq must not exceed a loan to value ratio of 0.40 :1.00 (based on the consolidated total assets of the Company and its subsidiaries, but excluding the Arq Loan Assets). CTB Term Loan As consideration in the Arq Acquisition, the Company assumed a term loan (the "CTB Loan") held by certain Arq subsidiaries, as borrowers, as set out in the Arq Loan (the "Arq Subsidiaries") held by Community Trust Bank ("CTB") in the principal amount of $ 10.0 million. The Company recorded the CTB Loan on the Acquisition Date at its estimated fair value of $ 9.7 million, with the difference of $ 0.3 million between the estimated fair value and the principal amount recorded as a debt discount and recognized as interest expense over the term of the CTB Loan. The CTB Loan was originally entered into on January 27, 2021 and is comprised of two promissory notes (the "Notes"): (1) "Note A" in the principal amount of $ 8.0 million, which is guaranteed by the U.S. Department of Agriculture; and (2) "Note B" in the principal amount of $ 2.0 million. The Notes mature on January 27, 2036 and bear interest at 6.0 % per annum through January 2026 and at the prime rate plus 2.75 % thereafter. Beginning January 27, 2023 and for the balance of the term of the CTB Loan, the Arq Subsidiaries are required to make combined interest and principal payments monthly in the fixed amount of $ 0.1 million. Interest is computed and payable on the outstanding principal as of the end of the prior month and the balance of the fixed monthly payment amount is applied to the outstanding principal. The Notes carry a prepayment penalty of 3.0 % of the outstanding principal if paid prior to January 27, 2024, 2.0 % of the outstanding principal if paid prior to January 27, 2025 and 1.0 % of the outstanding principal if paid prior to January 27, 2026. Thereafter, the CTB Loan may be prepaid without penalty. On June 2, 2023 (the "Amendment Date"), certain of the Arq Subsidiaries, which included Corbin Project LLC, Arq Projects Holding Company LLC, Arq St. Rose LLC, Arq Corbin LLC and Arq Corbin Land LLC (collectively, the "Borrowers") and CTB entered into a loan modification agreement (the "CTB Loan Modification Agreement") to the CTB Loan, as amended by that certain letter agreement by and among the CTB and Borrowers dated January 21, 2022, and as otherwise amended, modified and/or extended by the parties from time to time (collectively, the "CTB Loan Agreement"). As consideration for CTB entering into the CTB Loan Modification Agreement, the Borrowers agreed to pay a fee of $ 50,000 plus additional fees incurred by CTB and were required to deposit an additional $ 0.7 million into a deposit account (the "Interest Reserve Account" as defined in the CTB Loan Agreement), where the Interest Reserve Account is held as collateral by CTB. The Borrowers may withdraw funds from the Interest Reserve Account beginning one year from the Amendment Date, subject to restrictions as stated in the CTB Loan Modification Agreement. The CTB Loan Modification Agreement clarified and modified certain terms under the CTB Loan Agreement. The principal clarifications and modifications are as follows: • The Borrowers are not entitled to any further disbursements of proceeds under those promissory notes described in the CTB Loan Modification Agreement; • CTB agreed to waive certain financial delivery requirements for fiscal years 2021 and 2022; 60 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements • CTB agreed to waive certain required financial covenants required as of December 31, 2022 and certain required financial covenants as of December 31, 2023; • The Borrowers were required to establish their operating bank accounts with CTB no later than September 30, 2023; and • CTB is authorized to amend and/or amend and restate its then-current security instruments to include additional collateral represented by the Borrowers' acquisition of any equipment or other fixed and/or operating assets in which CTB does not then hold a lien or security interest. The CTB Loan is secured by substantially all assets of the Borrowers and includes among others, the following covenants with respect to the Borrowers, which are tested annually (Capitalized terms are defined in the CTB Loan Agreement): (a) Total Indebtedness to Net Worth greater than 4 to 1; (b) Balance Sheet Equity greater than or equal to 20 % of the book value of all assets of the Borrowers; (c) (i) net income plus interest, taxes, depreciation and amortization divided by (ii) interest expense plus current maturities on long-term debt greater than or equal to 1.25 to 1. The carrying value of our long-term debt under the CFG Loan and CTB Loan approximates its fair value because it bears interest at rates indexed to market rates. Note 7 - Leases The Company's operating and finance lease right-of-use ("ROU") assets and liabilities as of December 31, 2023 and 2022 consisted of the following items (in thousands): As of (in thousands) December 31, 2023 December 31, 2022 Leases Operating Leases Operating lease right-of-use assets, net of accumulated amortization (1) $ 10,592 $ 7,734 Operating lease obligations, current $ 1,944 $ 2,724 Long-term operating lease obligations 8,870 5,133 Total operating lease obligation $ 10,814 $ 7,857 Finance Leases Finance lease right-of-use assets, net of accumulated amortization (2) $ 1,694 $ 2,565 Finance lease obligations, current $ 2,131 $ 1,131 Long-term finance lease obligations 1,334 3,450 Total finance lease obligations $ 3,465 $ 4,581 (1) Operating lease assets are reported net of accumulated amortization of $ 5.1 million and $ 4.4 million as of December 31, 2023 and 2022, respectively. (2) Finance lease assets are reported net of accumulated amortization of $ 2.7 million and $ 2.0 million as of December 31, 2023 and 2022, respectively. Finance leases ROU assets under finance leases are reported in the "Property, plant and equipment" line item, and finance lease liabilities are included in the "Current portion of long-term debt" and "Long-term debt, net of current portion" line items in the Consolidated Balance Sheets as of December 31, 2023 and 2022. 61 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements Interest expense related to finance lease liabilities and amortization of ROU assets under finance leases are included in the "Interest expense" and "Depreciation, amortization, depletion and accretion" line items respectively, in the Consolidated Statement of Operations for the years ended December 31, 2023 and 2022. Operating leases ROU assets under operating leases are included in the "Other long-term assets" line item, and operating lease liabilities are included in " Other liabilities" and " Other long-term liabilities" line items, respectively, in the Consolidated Balance Sheets as of December 31, 2023 and 2022. Lease expense for operating leases for the year ended December 31, 2023 was $ 5.9 million, of which $ 4.5 million is included in "Consumables cost of revenue, exclusive of depreciation and amortization" line item and $ 1.4 million is included in "General and administrative" line item in the Consolidated Statement of Operations for the year ended December 31, 2023. Lease expense for operating leases for the year ended December 31, 2022 was $ 4.4 million, of which $ 4.0 million is included in the "Consumables cost of revenue, exclusive of depreciation and amortization" line item and $ 0.4 million is included in the "General and administrative" line item in the Consolidated Statement of Operations for the year ended December 31, 2022. Lease financial information as of and for the years ended December 31, 2023 and 2022 is provided in the following table: Year ended December 31, (in thousands) 2023 2022 Finance lease cost: Amortization of right-of-use assets $ 714 $ 818 Interest on lease liabilities 258 307 Operating lease cost 4,035 3,436 Short-term lease cost 1,642 989 Variable lease cost (1) 231 19 Total lease cost $ 6,880 $ 5,569 Other Information: Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from finance leases $ 258 $ 307 Operating cash flows from operating leases $ 2,887 $ 2,923 Financing cash flows from finance leases $ 1,130 $ 1,246 Right-of-use assets obtained in exchange for new finance lease liabilities $ — $ 1,641 Right-of-use assets obtained in exchange for new operating lease liabilities $ 2,719 $ 4,444 Weighted-average remaining lease term - finance leases 1.8 years 2.8 years Weighted-average remaining lease term - operating leases 7.6 years 4.1 years Weighted-average discount rate - finance leases 5.9 % 5.9 % Weighted-average discount rate - operating leases 11.3 % 6.9 % (1) Primarily includes common area maintenance, property taxes and insurance payable to lessors. 62 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following table summarizes the Company's future lease payments under finance and operating leases as of December 31, 2023: (in thousands) Operating Lease Commitments Finance Lease Commitments Total Lease Commitments 2024 $ 3,139 $ 2,274 $ 5,413 2025 2,930 935 3,865 2026 2,817 372 3,189 2027 1,464 85 1,549 2028 1,131 — 1,131 Thereafter 7,078 — 7,078 Total lease payments 18,559 3,666 22,225 Less: Imputed interest ( 7,745 ) ( 201 ) ( 7,946 ) Present value of lease payments $ 10,814 $ 3,465 $ 14,279 Note 8 - Commitments and Contingencies Surety Bonds and Restricted Cash As the owner of the Five Forks Mine, the Company is required to post a surety bond with a regulatory commission related to performance requirements associated with the Five Forks Mine. As of December 31, 2023 , the amount of this surety bond was $ 7.5 million . The Company leases land adjacent to the Corbin Facility and is required to post surety bonds with a regulatory commission for reclamation. As of December 31, 2023, the amount of these surety bonds was $ 3.0 million. The Company holds permits for an abandoned mine in West Virginia ("Mine 4") and is required to post a surety bond with a regulatory commission for reclamation. As of December 31, 2023, the amount of this surety bond was $ 0.7 million. As of December 31, 2023 and 2022, the Company posted cash collateral of $ 8.5 million and $ 10.0 million, respectively, as required by the Company's surety bond providers, which is reported as long-term restricted cash in the Consolidated Balance Sheets. As of December 31, 2023, the Company holds a deposit of $ 0.4 million with a third party for collateral as required under a bonding arrangement for Mine 4. This deposit is included in "Other long-term assets, net" in the Consolidated Balance Sheet as of December 31, 2023. The Company has a customer supply agreement, which was renewed January 1, 2024, that requires the Company to post a performance bond in an amount equal to the annual contract value of $ 3.7 million. Red River Plant Construction Contract In January 2024, the Company executed a contract with a third-party contractor for the construction of a GAC facility at the Red River Plant, and immediately commenced construction operations. The Company expects to complete the GAC Facility by the end of 2024 and estimates that total construction costs will be in the range of $ 62.0 - $ 67.0 million. 63 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements Tinuum Group The Company also has certain limited obligations contingent upon future events in connection with the activities of Tinuum Group. The Company, NexGen Refined Coal, LLC ("NexGen") and two entities affiliated with NexGen have provided another Tinuum Group owner with limited guarantees (the "Tinuum Group Party Guarantees") related to certain losses it may suffer as a result of inaccuracies or breach of representations and covenants. The Company also is a party to a contribution agreement with NexGen under which any party called upon to pay on a Tinuum Group Party Guaranty is entitled to receive contribution from the other party equal to 50 % of the amount paid. No liability or expense provision has been recorded by the Company related to this contingent obligation as the Company believes that it is not probable that a loss will occur with respect to Tinuum Group Party Guarantees. In December 2022, the Company, certain of the other owners of Tinuum Group (collectively, the "Tinuum Group Owners") and Tinuum Group executed the Distribution and Repayment Agreement (the "Repayment Agreement"). Under the terms of the Repayment Agreement, the Tinuum Group Owners received cash distributions (the "Distributions") equal to their percentage ownership and also agreed to be contractually liable for certain contingent liabilities of Tinuum Group (the "Tinuum Group Obligation") in amounts equal to their percentage ownership. In December 2022, the Company received its percentage share of the Distributions in the amount of $ 2.0 million and became contractually liable for $ 1.7 million of the Tinuum Group Obligation. As of December 31, 2022, the Company recorded the contractual obligation of $ 1.7 million as a liability in the "Other current liabilities" line item in the Consolidated Balance Sheet, with the difference between the cash distribution of $ 0.3 million recorded to equity method earnings for the year ended December 31, 2022. In the event that the Tinuum Group Obligation is discharged in its entirety or settled for an amount that is less than the total Tinuum Group Obligation, the Company will recognize future equity earnings for the difference in its contractual obligation amount and its pro rata share of the actual payment made by Tinuum Group, if any, for the Tinuum Group Obligation. Marken Separation Agreement Pursuant to Mr. Marken's termination as CEO of the Company effective July 17, 2023, the Company and Mr. Marken executed a separation agreement under which Mr. Marken will receive the following payments and benefits: (i) the severance payments and benefits set forth in the terms of his employment agreement upon a termination without "cause," (ii) accelerated vesting of 49,715 shares of restricted stock, (iii) continued eligibility for possible vesting of a pro rata target number of 25,941 performance share units ("PSUs") granted in 2021, subject to achievement of applicable performance measures, (iv) continued eligibility for possible vesting of a pro rata target number of 15,988 PSUs granted in 2022, subject to achievement of applicable performance measures, and (v) continued eligibility for possible vesting of a pro rata target number of 19,834 PSUs granted in 2023, subject to achievement of applicable performance measures. As of December 31, 2023, the amount of the liability related to (i) and (ii) above was $ 0.4 million. Legal Proceedings The Company is from time to time subject to various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of its business. Such matters are subject to many uncertainties and outcomes, the financial impacts of which are not predictable with assurance and that may not be known for extended periods of time. The Company records a liability in its consolidated financial statements for costs related to claims, settlements, and judgments where management has assessed that a loss is probable and an amount can be reasonably estimated. There were no significant legal proceedings as of December 31, 2023. Note 9 - Marshall Mine, LLC On March 27, 2023, (the "MM Closing Date"), the Company completed the sale of all of its membership interests in Marshall Mine, LLC to a third party (the "Buyer") in exchange for cash payment of $ 2.2 million (the "MM Purchase Price") made by the Company to the Buyer and the assumption by the Buyer of certain liabilities of Marshall Mine, LLC. As of the MM Closing Date, Marshall Mine, LLC had outstanding liabilities of approximately $ 4.9 million that were discharged upon payment of the MM Purchase Price by the Company, and the Company recognized a gain of approximately $ 2.7 million in the Statement of Operations for the year ended December 31, 2023. 64 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements Note 10 - Supplemental Financial Information Supplemental Balance Sheet Information The following table summarizes the components of "Prepaid expenses and other current assets" and "Other long-term assets, net" as presented in the Consolidated Balance Sheets: As of December 31, (in thousands) 2023 2022 Prepaid expenses and other current assets: Prepaid expenses $ 2,430 $ 2,570 Prepaid income taxes and income tax refunds 349 2,573 Other 2,436 2,395 $ 5,215 $ 7,538 Other long-term assets: Right of use assets, operating leases, net $ 10,592 $ 7,734 Spare parts, net 9,147 6,789 Upfront customer consideration (1) 5,967 6,475 Mine reclamation asset, net 1,955 1,641 Intangible assets, net 7,899 847 Mine development costs, net 7,377 5,478 Other long-term assets 2,663 1,683 $ 45,600 $ 30,647 (1) Represent remaining balance on consideration paid to a customer under a long-term supply contract executed in 2020. This asset is being amortized as a reduction to revenue on a straight-line basis over the expected 15 -year contractual period of the contract. Spare parts include critical spares required to support plant operations. Parts and supply costs are determined using the lower of cost or estimated replacement cost. Parts are recorded as maintenance expenses or capitalized in the period in which they are consumed or put into use. Mine development costs include acquisition costs, the cost of other development work and mitigation costs related to the Five Forks Mine and are depleted over the estimated life of the related mine reserves, which is estimated to be 14 years as of December 31, 2023. The Company performs an evaluation of the recoverability of the carrying value of mine development costs to determine if facts and circumstances indicate that their carrying value may be impaired and if any adjustment is warranted. Mine reclamation asset represents the ARO asset related to the Five Forks Mine and is depreciated over its estimated life. Highview Investment Other includes a long-term investment (the "Highview Investment") in Highview Enterprises Limited ("Highview"), a London, England based developmental stage company specializing in power storage. The Company accounts for the Highview Investment as an investment recorded at cost, less impairment, plus or minus observable changes in price for identical or similar investments of the same issuer. Fair value measurements, if any, represent Level 2 measurements. The Highview Investment is evaluated for indicators of impairment such as an event or change in circumstances that may have a significant adverse effect on the fair value of the investment. There were no changes to the carrying value of the Highview Investment for the years ended December 31, 2023 and 2022 as there were no indicators of impairment or observable price changes for equity issued by Highview. Since inception of Highview Investment, the Company has recognized $ 2.2 million of cumulative impairment losses. 65 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following table details the components of "Other current liabilities" and "Other long-term liabilities" as presented in the Consolidated Balance Sheets: As of December 31, (in thousands) 2023 2022 Other current liabilities: Current portion of operating lease obligations $ 1,944 $ 2,724 Sales, use and other taxes payable 948 1,039 Current portion of mine reclamation liability 182 548 Other current liabilities (1) 2,718 2,334 $ 5,792 $ 6,645 Other long-term liabilities: Mine reclamation liabilities $ 5,981 $ 7,985 Operating lease obligations, long-term 8,870 5,133 Other 929 733 $ 15,780 $ 13,851 (1) Included in Other current liabilities as of December 31, 2023 and 2022 is $ 1.7 million related to the Repayment Agreement as defined in Note 15. The Mine reclamation liabilities represent AROs. Changes in the AROs were as follows: As of December 31, (in thousands) 2023 2022 Asset retirement obligations, beginning of year $ 8,533 $ 9,959 Asset retirement obligations assumed (1) 1,500 — Accretion 582 611 Liabilities settled (2) ( 4,866 ) ( 2,071 ) Changes due to scope and timing of reclamation 414 34 Asset retirement obligations, end of year 6,163 8,533 Less current portion 182 548 Asset retirement obligations, long-term $ 5,981 $ 7,985 (1) Represents the Corbin Facility ARO and Mine 4 ARO in the amounts of $ 0.5 million and $ 1.0 million, respectively. (2) Includes the removal of a reclamation liability associated with Marshall Mine, LLC as a result of its sale to a third party in March 2023. Supplemental Consolidated Statements of Operations Information The following table details the components of "Interest expense" in the Consolidated Statements of Operations: Years Ended December 31, (in thousands) 2023 2022 Interest on CFG Loan $ 2,029 $ — Interest on CTB Loan 545 — Other 440 336 Total Interest expense $ 3,014 $ 336 66 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following table details the components of "Other" in the Consolidated Statements of Operations: Years Ended December 31, (in thousands) 2023 2022 Interest income $ 1,846 $ 239 Other 784 ( 84 ) Total Other income $ 2,630 $ 155 Note 11 - Stockholders' Equity The Company has two classes of capital stock authorized, common stock and preferred stock, which are described as follows: Preferred Stock The Company's Board of Directors (the "Board") is authorized to provide out of the unissued shares of Preferred Stock and to fix the number of shares constituting a series of Preferred Stock and, with respect to each series, to fix the number of shares and designation of such series, the voting powers, if any, the preferences and relative, participating, option or other special rights, if any, and any qualifications, limitations or restrictions thereof, of the shares of such series. As of December 31, 2023 and 2022, there were no shares of Preferred Stock designated or outstanding. Common Stock Holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Additionally, holders of common stock are entitled to receive dividends when and if declared by the Board, subject to any statutory or contractual restrictions on payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding shares of preferred stock. Upon dissolution, liquidation or the sale of all or substantially all of the Company's assets, after payment in full of any amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of shares of common stock will be entitled to receive the Company's remaining assets for distribution on a pro rata basis. Equity Transactions As discussed in Note 2: • On February 1, 2023, and as consideration for the Arq Acquisition, the Company issued 3,814,864 shares of common stock and 5,294,462 shares of Series A Preferred Stock. Additionally, the Company completed the PIPE Investment and sold 3,842,315 shares of common stock for cash proceeds of $ 15.4 million. • On March 31, 2023, the Company declared a dividend of 68,464 Series A PIK Shares with respect to the accrued dividends on the Series A Preferred Stock, which was recorded at the estimated fair value of $ 0.2 million as of March 31, 2023 and was paid on April 21, 2023. • On June 13, 2023, pursuant to stockholder approval, all shares of Series A Preferred Stock were converted into 5,362,926 shares of common stock. On July 14, 2023, the Board appointed Mr. Robert Rasmus to the positions of President and Chief Executive Officer effective July 17, 2023. On July 17, 2023, the Company entered into a Subscription Agreement (the "Subscription Agreement") with Mr. Rasmus and entities controlled by Mr. Rasmus, in connection with his appointment as the Company’s President and Chief Executive Officer. Pursuant to the Subscription Agreement, Mr. Rasmus subscribed for and agreed to purchase 950,000 shares of common stock from the Company for an aggregate purchase price of $ 1.8 million (at a price per share of approximately $ 1.90 ). In September 2023, the Company received cash of $ 1.0 million and issued 527,779 shares of common stock to Mr. Rasmus pursuant to the Subscription Agreement. Stock Repurchase Programs In November 2018, the Board authorized the Company to purchase up to $ 20.0 million of its outstanding common stock under a stock repurchase program (the "Stock Repurchase Program"). In November 2019, the Board authorized an incremental $ 7.1 million to the Stock Repurchase Program and provided that it will remain in effect until all amounts are utilized or it is 67 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements otherwise modified by the Board. As of December 31, 2023, the Company had $ 7.0 million remaining under the Stock Repurchase Program. Note 12 - Stock-Based Compensation On May 16, 2022, the Company's stockholders approved the 2022 Omnibus Incentive Plan (the "2022 Plan"), which permits grants of awards to employees, directors and consultants. Awards may be in the form of options (both nonqualified stock options and incentive stock options), stock appreciation rights, restricted stock, restricted stock units, performance share units, and other stock-based awards and cash-based awards as described under the 2022 Plan. As of December 31, 2023, the Company has 190,281 shares of its common stock authorized for issuance under the 2022 Plan. On June 20, 2017, the Company's stockholders approved the 2017 Omnibus Incentive Plan (the "2017 Plan"), which permits grants of awards to employees, directors and non-employees. Awards may be in the form of shares, rights to purchase restricted stock, bonuses of restricted stock, or other rights or benefits as described under the 2017 Plan. As of December 31, 2023, the Company has zero shares of its common stock authorized for issuance under the 2017 Plan. Expense RSAs - Restricted Stock Awards ("RSA's") are typically granted with vesting terms of three years . The fair value of RSAs is determined based on the closing price of the Company’s common stock on the authorization date of the grant multiplied by the number of shares subject to the stock award. Compensation expense for RSAs is generally recognized over the vesting term on a straight-line basis. PSUs - Performance share units ("PSU's") generally vest over three years and are based on the grantee’s continuous service with the Company, performance measures or a combination of both. Each PSU represents a contingent right to receive shares of the Company’s common stock if the Company meets certain performance measures over the requisite period. Compensation expense is recognized for PSU awards on a straight-line basis over the vesting period based on the estimated fair value at the date of grant using a Monte Carlo simulation model. The Company's Monte Carlo simulation models include the following assumptions: • Risk-free interest rate - The risk-free interest rate for PSUs granted during the period was determined by using a zero-coupon, U.S. Treasury rate for the periods that coincided with the expected terms listed above. • Dividends - As the PSUs granted receive dividend equivalent units, no discount was applied for any dividends declared. • Expected volatility - To calculate expected volatility, the historical volatility of the Company's common stock was used. • Performance period - The Company’s performance period is based on the vesting term of the Company’s PSU awards. Stock Options Stock options vest over three years and have a contractual limit of ten years from the date of grant to exercise. The fair value of stock options granted is determined on the date of grant using the Black-Scholes option pricing model, and the related expense is recognized on a straight-line basis over the entire vesting period. The determination of the grant date fair value of stock options issued is affected by a number of variables, including the fair value of the Company’s common stock, the expected common stock price volatility over the expected term of the stock option, the expected term of the stock option, risk-free interest rates, and the expected dividend yield of the Company’s common stock. The Company's Black Scholes option pricing models include the following assumptions: • Risk-free interest rate - The risk-free interest rate for stock options granted during the period was determined by using a zero-coupon U.S. Treasury rate for the periods that coincided with the expected term of the options. • Dividend yield - An expected dividend yield of zero was included in the calculations, as the Company does not currently pay nor does it anticipate paying dividends on its common stock as of the grant date of the stock options. • Expected volatility - To calculate expected volatility, the historical volatility of the Company's common stock was used. 68 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements • Expected term - The Company’s expected term of stock options was calculated using a simplified method whereby the midpoint between the vesting date and the end of the contractual term is utilized to compute the expected term, as the Company does not have sufficient historical data for options with similar vesting and contractual terms. The following table indicates the weighted average assumptions that were used related to the awards granted during the year ended December 31, 2023: Year ended December 31, 2023 Stock options granted: 1,000,000 Risk-free interest rate 4 % Dividend yield — % Volatility 62 % Expected term (in years) 6 The Company recorded the following compensation expense related to the Stock Plans: Years Ended December 31, (in thousands) 2023 2022 RSA expense $ 1,887 $ 1,679 PSU expense 650 302 Stock option expense 111 — Total stock-based compensation expense $ 2,648 $ 1,981 Stock-based compensation expense related to manufacturing employees and administrative employees is included in the "Consumables cost of revenue, excluding depreciation and amortization" and "Payroll and benefits" line items in the Consolidated Statements of Operations. Stock-based compensation expense related to non-employee directors is included in the "General and administrative" line item in the Consolidated Statements of Operations. The Company recognizes forfeitures as they occur. The amount of unrecognized compensation cost as of December 31, 2023, and the expected weighted-average period over which the cost will be recognized is as follows: As of December 31, 2023 (in thousands) Unrecognized Compensation Cost Expected Weighted-Average Period of Recognition (in years) RSA expense $ 1,412 1.67 Stock option expense 618 2.54 PSU expense 994 1.36 Total unrecognized stock-based compensation expense $ 3,024 1.30 69 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements Activity Restricted Stock A summary of activity of RSAs for the year ended December 31, 2023 is presented in the following table: Restricted Stock Weighted-Average Grant Date Fair Value (in thousands, except for share and per share amounts) Awards RSA's For the year ended December 31, 2023 Non-vested at January 1, 2023 652,962 $ 5.58 Granted 773,327 $ 1.91 Vested ( 435,013 ) $ 4.59 Forfeited ( 201,271 ) $ 3.29 Non-vested at December 31, 2023 790,005 $ 3.10 The weighted-average grant date fair value of RSAs granted or modified for the years ended December 31, 2023 and 2022 was $ 1.91 and $ 5.69 , respectively. The total grant-date fair value of RSAs vested for the years ended December 31, 2023 and 2022 was $ 2.0 million and $ 1.7 million, respectively. The aggregate intrinsic value of non-vested RSAs outstanding as of December 31, 2023 was $ 2.4 million. PSUs PSUs outstanding remain unvested until either the requisite performance condition of the grant is met, or the third anniversary of their issuance date, at which time the actual number of vested shares will be determined based on the actual price performances of the Company’s common stock relative to a broad stock index and a peer group performance index. A summary of PSU activity for the year ended December 31, 2023 is presented in the table below: Units Weighted-Average Grant Date Fair Value Aggregate Intrinsic Value (in thousands) Weighted-Average Remaining Contractual Term (in years) For the year ended December 31, 2023 PSU's outstanding, January 1, 2023 148,591 $ 7.85 Granted 982,709 1.52 Vested / Settled ( 41,855 ) 6.17 Forfeited / Canceled ( 120,527 ) 3.37 PSU's outstanding, December 31, 2023 968,918 $ 2.06 $ 2,887 1.33 70 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements Stock Options A summary of stock option activity for the year ended December 31, 2023 is presented below: Number of Options Outstanding and Exercisable Weighted-Average Exercise Price Aggregate Intrinsic Value Weighted-Average Remaining Contractual Term (in years) For the year ended December 31, 2023 Options outstanding, Options outstanding at January 1, 2023 — $ — Options granted 1,000,000 3.00 Options exercised — — Options expired / forfeited — — Options outstanding, Options outstanding at December 31, 2023 1,000,000 $ 3.00 $ — 9.54 Options vested and exercisable at December 31, 2023 — $ — $ — 0 Note 13 - Income Taxes The sources of pretax loss are as follows: Years ended December 31, (in thousands) 2023 2022 Domestic $ ( 9,123 ) $ ( 8,708 ) Foreign ( 2,973 ) — $ ( 12,096 ) $ ( 8,708 ) The provision for income taxes consists of the following: Years Ended December 31, (in thousands, except for rate) 2023 2022 Current portion of income tax expense: Federal $ — $ ( 10 ) State and other 153 219 153 209 Deferred portion of income tax expense (benefit): Federal — — State and other — — — — Total income tax expense $ 153 $ 209 Effective tax rate ( 1 ) % ( 2 ) % 71 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements Income tax expense (benefit) differed from the amount that would be computed by applying the U.S. statutory federal income tax rate of 21% to loss before income taxes for the years ended December 31, 2023 and 2022 as follows: Years Ended December 31, (in thousands) 2023 2022 Federal statutory rate $ ( 2,540 ) $ ( 1,829 ) State income taxes, net of federal benefit 116 115 Permanent differences 755 1,284 Valuation allowances 1,385 825 Changes in tax rates ( 74 ) ( 87 ) Stock-based compensation 367 10 Return to provision and other true-ups 144 ( 109 ) Income tax expense $ 153 $ 209 Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and their reported amounts in the accompanying Consolidated Balance Sheets. These temporary differences result in taxable or deductible amounts in future years. Details of the Company’s deferred tax assets and liabilities are summarized as follows: As of December 31, (in thousands) 2023 2022 Deferred tax assets Tax credits $ 86,125 $ 86,125 Net operating loss carryforwards 17,018 2,892 Intangible assets 1,061 2,638 Employee related liabilities 1,047 1,968 Operating lease obligations 2,506 1,828 ARO, net of reimbursements 1,428 1,448 Research and development capitalization 1,227 739 Other investments 515 518 Equity method investments — 325 Inventory 612 315 Interest limitations 121 77 Other 647 429 Total deferred tax assets 112,307 99,302 Less valuation allowance ( 98,836 ) ( 88,293 ) Deferred tax assets 13,471 11,009 Less: Deferred tax liabilities Property and equipment and other ( 9,230 ) ( 7,702 ) Right of use operating lease assets ( 2,454 ) ( 1,800 ) Upfront customer consideration ( 1,383 ) ( 1,507 ) Equity method investments ( 404 ) — Total deferred tax liabilities ( 13,471 ) ( 11,009 ) Net deferred tax assets $ — $ — Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against a deferred tax asset based on an assessment of the amount of the deferred tax asset that is "more likely than not" to be 72 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements realized. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company assesses a valuation allowance recorded against deferred tax assets at each reporting date. The determination of whether a valuation allowance is appropriate requires the evaluation of positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income available to realize a deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable income forecasts exclusive of the reversal of temporary differences and carryforwards, taxable income in carryback years and tax planning strategies. In estimating taxes, the Company assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance. As of December 31, 2023, the Company concluded it is more likely than not the Company will not generate sufficient taxable income within the applicable net operating loss and tax credit carry-forward periods to realize any of its net deferred tax assets. For the year ended December 31, 2023, the Company increased a valuation allowance from December 31, 2022 by $ 10.5 million and as of December 31, 2023, has a valuation allowance equal to 100 % of its net deferred tax assets. In reaching this conclusion, the Company primarily considered forecasts of future taxable losses. The following table presents the approximate amount of federal and state net operating loss carryforwards and federal tax credit carryforwards available to reduce future taxable income, along with the respective range of years that the net operating loss and tax credit carryforwards would expire if not utilized: As of December 31, (in thousands) 2023 Beginning expiration year Ending expiration year Federal net operating loss carryforwards (1) $ 10,177 2035 Indefinite Foreign net operation loss carryforwards $ 3,629 Indefinite Indefinite State and other net operating loss carryforwards $ 3,211 2025 Indefinite Federal tax credit carryforwards $ 86,125 2032 2041 (1) Approximately $ 8.8 million of the federal net operating loss carryforwards were acquired in the Arq Acquisition, of which $ 6.2 million have expiration dates beginning in 2035. The following table sets forth a reconciliation of the beginning and ending unrecognized tax positions on a gross basis for the years ended December 31, 2023 and 2022: Years Ended December 31, (in thousands) 2023 2022 Balance as of January 1 $ 54 $ 54 Lapse of applicable statute of limitations — — Balance as of December 31 $ 54 $ 54 For the years ended December 31, 2023 and 2022, the Company did not record any adjustments or recognize interest expense for uncertain tax positions. Interest and penalties related to uncertain tax positions are accrued and included in the "Interest expense" line item in the Consolidated Statements of Operations. Additional information related to the components of "Interest expense" is included in Note 10. The Company files income tax returns in the U.S., various states and the United Kingdom. The Company is no longer subject to U.S. federal examinations by tax authorities for years before 2020. The Company is generally no longer subject to state examinations by tax authorities for years before 2016. U.S. federal income tax rules, and Sections 382 of the Internal Revenue Code in particular, could substantially limit the use of Section 45 tax credits and other tax assets if the Company experiences an "ownership change" (as defined in the Internal Revenue Code). In general, an ownership change occurs if the aggregate stock ownership of certain stockholders (generally 5 % stockholders, applying certain look-through rules) increases by more than 50 percentage points over such stockholders' lowest percentage ownership during the testing period (generally three years ). 73 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements An entity that experiences an ownership change generally will be subject to an annual limitation on its pre-ownership change tax loss and credit carryforwards equal to the equity value of the entity immediately before the ownership change, multiplied by the long-term, tax-exempt rate posted monthly by the Internal Revenue Service (subject to certain adjustments). The annual limitation would be increased each year to the extent that there is an unused limitation in a prior year. In connection with the Arq Acquisition and PIPE Investment, we issued additional shares of our common stock. We performed an IRC Section 382 analysis as of the Acquisition Date and determined that we had not experienced an ownership change as of that date. The Company acquired certain tax assets (the "Legacy Arq Tax Assets") in the Arq Acquisition, totaling approximately $ 12.5 million. The Legacy Arq Tax Assets are comprised of net operating loss carryforwards, of which $ 8.8 million were in the U.S. Prior to the Acquisition Date, Legacy Arq completed numerous equity offerings that resulted in ownership changes. We have not completed a formal IRC Section 382 analysis of Legacy Arq equity changes from its inception through the Acquisition Date, however, the Company believes that one or more "ownership changes" occurred during this time period as defined under Sections 382 and 383 and that a portion or all the Legacy Arq Tax Assets may subject to an annual limitation. On May 5, 2017, the Board approved the declaration of a dividend of rights to purchase Series B Junior Participating Preferred Stock for each outstanding share of common stock as part of a tax asset protection plan (the "TAPP"), which is designed to protect the Company’s ability to utilize its net operating losses and tax credits. The TAPP is intended to act as a deterrent to any person acquiring beneficial ownership of 4.99 % or more of the Company’s outstanding common stock. During the years 2018-2023, we executed amendments to the TAPP (the "TAPP Amendments"), which amended the definition of "Final Expiration Date" under the TAPP to extend the duration of the TAPP and makes associated changes in connection therewith. The most recent TAPP Amendment was approved at our 2023 annual meeting of stockholders and extended the Final Expiration Date to the close of business on December 31, 2024. Note 14 - Major Customers Revenue from external customers who represent 10% or more of the Company’s revenue for the years ended December 31, 2023 and 2022 were as follows: Years ended December 31, Customer Revenue Type 2023 2022 A Consumables 19 % 18 % B Consumables 9 % 11 % Note 15 - Related Party Transactions Consumables Cost of Revenue For the year ended December 31, 2023, the Company recognized $ 0.7 million of Tinuum Group Royalty expense, which is included in the "Consumables cost of revenue, exclusive of depreciation and amortization" line item in the Consolidated Statement of Operations. Tinuum Group Obligation As of December 31, 2023 and 2022, the Company had an outstanding liability of $ 1.7 million related to its contractual amount due under the Tinuum Group Obligation, which is included in the "Other current liabilities" line item in the Consolidated Balance Sheet. Refer to Note 8 for further discussion. Note 16 - Defined Contribution Savings Plans The Company sponsors a qualified defined contribution savings plan (the "401(k) Plan") that allows participation by eligible employees who may defer a portion of their gross pay. The Company makes contributions to the 401(k) Plan based on percentages of an employee's eligible compensation as specified in the 401(k) Plan, and such employer contributions are in the form of cash. 74 Arq, Inc. and Subsidiaries Notes to Consolidated Financial Statements The following table presents the amount of the Company's contributions made to the 401(k) Plans: Years Ended December 31, (in thousands) 2023 2022 401(k) Plans employer contributions $ 613 $ 552 75 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.