Arq(ARQ) - 2023 Q4 - Annual Results

Executive Summary Financial and Business Highlights Arq achieved its first positive net income since Q4 2021, with strong Q4 2023 financial performance and strategic GAC project advancement Q4 2023 Key Financial Metrics | Metric | Q4 2023 | Change vs. Q4 2022 | Key Drivers | | :--- | :--- | :--- | :--- | | Revenue | $28.1 million | +20% YoY | Higher selling prices, positive product mix, take-or-pay revenue | | Gross Margin | 50% | Nearly Doubled | Higher revenue, focus on profitability, cost management | | Net Income | $3.3 million | Positive (from loss) | First positive net income since Q4 2021 | | Adjusted EBITDA | $7.2 million | Positive (from loss) | Second consecutive quarter of positive Adjusted EBITDA | - Corporate Rebranding: Completed rebrand and began trading under the new Nasdaq ticker "ARQ" to reflect its evolution into an environmental technology company - PAC Portfolio Optimization: Prioritized profitability over volume, leading to positive cash flow from the PAC business in Q4 2023 - GAC Growth Projects: The Corbin facility optimization is on track for Q2 2024, and the Red River GAC facility expansion is targeted for commissioning in Q4 2024 - European Market Expansion: Entered a framework for a definitive supply agreement with LSR Materials to serve the European water purification market, targeting PFAS CEO Commentary CEO highlighted strong Q4 2023 PAC momentum, confirmed GAC projects on schedule, and reaffirmed attractive Red River economics despite cost increases - The company's primary focus is on executing high-return strategic growth projects in the robust GAC market, with commissioning of the Red River facility expected in Q4 2024[4][6] - The cost to complete the Red River Phase 1 expansion has increased due to higher construction and equipment costs, but the project's investment economics remain attractive[6] - The expansion will be funded through a combination of cash on hand, cash generation, cost reductions, potential customer prepayments, and debt refinancing, with no plans to issue equity[6] Financial Performance Fourth Quarter 2023 Results Arq reported a significant Q4 2023 turnaround, with strong revenue growth and gross margin expansion, leading to positive operating and net income Q4 2023 vs. Q4 2022 Performance | Metric | Q4 2023 | Q4 2022 | Change | | :--- | :--- | :--- | :--- | | Revenues | $28.1 million | $23.4 million | +20.1% | | Gross Margin | 49.8% | 25.4% | +24.4 pts | | Operating Income (Loss) | $3.1 million | ($3.4 million) | Improved by $6.5 million | | Net Income (Loss) | $3.3 million | ($3.2 million) | Improved by $6.5 million | | Diluted EPS | $0.10 | ($0.17) | Improved by $0.27 | | Adjusted EBITDA | $7.2 million | ($1.2 million) | Improved by $8.4 million | - The increase in other operating expenses to $10.9 million was mainly driven by higher payroll and G&A expenses associated with the acquisition of Arq Limited subsidiaries[9] Full Year 2023 Results Full year 2023 revenues decreased 3.7% to $99.2 million, and despite improved gross margin, higher operating expenses led to an increased net loss Full Year 2023 vs. Full Year 2022 Performance | Metric | FY 2023 | FY 2022 | Change | | :--- | :--- | :--- | :--- | | Revenues | $99.2 million | $103.0 million | -3.7% | | Gross Margin | 32.1% | 21.9% | +10.2 pts | | Operating Loss | ($13.3 million) | ($12.1 million) | Increased Loss | | Net Loss | ($12.2 million) | ($8.9 million) | Increased Loss | | Diluted EPS | ($0.42) | ($0.48) | Improved Loss per Share | | Adjusted EBITDA (Loss) | ($2.6 million) | $1.3 million | Declined | - The decline in Adjusted EBITDA was mainly driven by higher operating costs, which included $4.9 million in one-time transaction costs for the legacy Arq acquisition and $1.7 million in severance expenses[28] Capital Expenditures and Strategic Projects Capex & Balance Sheet Capital expenditures more than tripled to $27.5 million in 2023, reducing cash and increasing total debt due to strategic growth projects Key Financial Position Changes (as of Dec 31, 2023) | Metric | 2023 | 2022 | Change Driver | | :--- | :--- | :--- | :--- | | Capital Expenditures | $27.5 million | $8.9 million | Ongoing strategic growth projects (Red River, Corbin) | | Cash & Restricted Cash | $54.2 million | $76.4 million | Capital expenditures for facility expansions | | Total Debt | $20.9 million | $4.6 million | $10.0 million term loan for legacy Arq acquisition | Red River Update & 2024 Capex Forecast Arq forecasts $55-60 million in 2024 capex, primarily for the Red River GAC expansion, which saw a 36% budget increase but remains on track for Q4 2024 commissioning - The 2024 capex forecast is $55-60 million, with $45-50 million for the Red River Phase 1 project[17] - The Red River capex forecast increased by ~36% due to: - ~45% from construction cost inflation and an accelerated workweek - ~45% from increased equipment costs and design changes for greater efficiency - ~10% from other items like engineering fees[18] - The project is expected to be funded via cash, cash generation, cost initiatives, potential customer prepayments, and debt refinancing, without issuing new equity[20] Financial Statements Consolidated Balance Sheets As of December 31, 2023, Arq's total assets increased to $235.5 million, driven by property, plant, and equipment, with liabilities growing to $57.1 million Selected Balance Sheet Data (in thousands) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total current assets | $86,461 | $105,662 | | Cash | $45,361 | $66,432 | | Property, plant and equipment, net | $94,649 | $34,855 | | Total Assets | $235,502 | $181,164 | | Total current liabilities | $23,048 | $23,884 | | Long-term debt, net | $18,274 | $3,450 | | Total Liabilities | $57,102 | $41,185 | | Total stockholders' equity | $178,400 | $139,979 | Consolidated Statements of Operations Q4 2023 saw a net income of $3.3 million, a significant improvement, though the full year 2023 net loss widened to $12.2 million due to lower revenue and higher operating expenses Statement of Operations Highlights (in thousands) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $28,104 | $23,409 | $99,183 | $102,987 | | Gross Profit | $13,999 | $5,936 | $31,860 | $22,522 | | Operating income (loss) | $3,104 | ($3,374) | ($13,335) | ($12,068) | | Net income (loss) | $3,290 | ($3,167) | ($12,249) | ($8,917) | | Diluted EPS | $0.10 | ($0.17) | ($0.42) | ($0.48) | Consolidated Statements of Cash Flows Full year 2023 saw $16.7 million net cash used in operations and $28.5 million in investing, partially offset by $22.9 million from financing, decreasing cash by $22.3 million Cash Flow Summary for Year Ended Dec 31 (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | ($16,653) | ($6,061) | | Net cash used in investing activities | ($28,535) | ($4,608) | | Net cash provided by (used in) financing activities | $22,909 | ($1,679) | | Decrease in Cash and Restricted Cash | ($22,279) | ($12,348) | Non-GAAP Reconciliation The company reconciled Q4 2023 Net Income of $3.3 million to $7.2 million Adjusted EBITDA, and FY2023 Net Loss of $12.2 million to $2.6 million Adjusted EBITDA loss Reconciliation of Net (Loss) Income to Adjusted EBITDA (in thousands) | Metric | Q4 2023 | Q4 2022 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | :--- | | Net (loss) income | $3,290 | ($3,167) | ($12,249) | ($8,917) | | Depreciation, amortization, etc. | $3,267 | $1,651 | $10,543 | $6,416 | | Interest expense (income), net | $346 | ($66) | $1,168 | $97 | | Income tax expense | $186 | $209 | $153 | $209 | | EBITDA (EBITDA Loss) | $7,216 | ($1,246) | $123 | ($1,687) | | Other Adjustments | ($37) | ($1) | ($2,732) | $2,961 | | Adjusted EBITDA (EBITDA loss) | $7,179 | ($1,245) | ($2,609) | $1,274 |