Arq(ARQ) - 2023 Q4 - Annual Report

PART I Item 1. Business Arq, Inc. is an environmental technology company providing AC and chemical solutions for air, water, and soil treatment, expanding GAC products via the Legacy Arq acquisition - Arq, Inc. is an environmental technology company specializing in consumable air, water, and soil treatment solutions, including activated carbon (AC) and chemical technologies[12][13] - The company acquired Legacy Arq in February 2023 to gain access to bituminous coal waste reserves, a manufacturing facility, and patented processes to produce Arq Powder, a feedstock for new advanced granular activated carbon (GAC) products[13][22] - In February 2024, the company officially changed its name to Arq, Inc. and commenced trading under the ticker symbol 'ARQ'[13] General Company Overview - Arq, Inc. is an environmental technology company focused on selling consumable air, water, and soil treatment solutions, including activated carbon (AC) and chemical technologies[12][13] - The company's proprietary AC products help customers reduce contaminants like mercury and PFAS to meet environmental regulations[12] - Key acquisitions include ADA Carbon Solutions, LLC in 2018 and Legacy Arq in February 2023, providing access to new feedstocks and manufacturing capabilities for advanced GAC products[13] Products and Markets - Activated carbon (AC) is a specialized sorbent material used to remove impurities from gas, water, soil, and other streams, manufactured as powdered activated carbon (PAC), granular activated carbon (GAC), and colloidal carbon product (CCP)[15] - Key markets include coal-fired power generation (mercury control), municipal water and air treatment, industrial applications, and soil/groundwater remediation, with demand driven by increasing environmental regulations[16][17][20] - The acquisition of Legacy Arq provides access to bituminous coal waste reserves and a manufacturing facility to produce Arq Powder, expected to be used as a feedstock for high-quality GAC products by the end of 2024[22] - Arq Powder also has potential as an additive in new markets like asphalt, offering a lower carbon footprint[22] Sales and Customers - The company sells consumables primarily through its internal sales group, generally under contracts ranging from one to five years[23] - Revenue from the top three customers comprised approximately 37% of consumables revenue for the year ended December 31, 2023, indicating significant customer concentration[23] Seasonality - Revenue is generally higher in the first and third fiscal quarters due to weather-dependent power generation (heating/cooling demands) and increased impurities in water sources during summer and rainy seasons[24][27] - Sales volumes are highly dependent on coal consumption at coal-fired power plants, affected by prices of competing energy sources like natural gas and renewables[25][26] Competition - Primary competitors in the AC consumables industry include Cabot Norit Americas, Inc., Calgon Carbon, and Donau Carbon Company[28] Sources and Availability of Raw Materials - The principal raw material for AC manufacturing is lignite coal, sourced from the company's 100% owned Five Forks Mine in Louisiana[29] - The Arq Acquisition in 2023 secured a second feedstock, Arq Powder, made from bituminous coal waste, which will be used for GAC products[30] - The company aims for a fully integrated supply chain with both bituminous coal fines (Corbin Facility) and lignite coal (Five Forks Mine) to produce GAC and PAC products[30] Facilities - The company owns and operates the Red River Plant in Louisiana for AC manufacturing and the Corbin Facility in Kentucky for processing bituminous coal waste into Arq Powder[34] - Construction of a new GAC facility at the Red River Plant commenced in January 2024, with commissioning expected by the end of 2024, at an estimated cost of $62 million to $67 million[34] - Commissioning activities at the Corbin Facility are expected to begin in the first half of 2024, with total construction and commissioning costs estimated between $10 million and $15 million[35] Research and Development Activities Research and Development Costs | Year Ended December 31, | R&D Costs (in millions) | | :---------------------- | :---------------------- | | 2023 | $3.3 | | 2022 | $2.1 | Legislation and Environmental Regulations - The U.S. EPA's MATS Rule, effective April 2012, requires coal- and oil-fired Electric Utility Steam Generating Units (EGUs) to control hazardous air pollutants, including mercury, driving demand for the company's products[38] - The EPA reaffirmed the 'appropriate and necessary' finding for MATS in February 2023 and proposed an update in April 2023 to reduce mercury emission limits for lignite coal-fired EGUs[39][95] - New regulations are emerging, including the EPA's PFAS Strategic Roadmap (October 2021) and a proposed National Primary Drinking Water Regulation (NPDWR) for six PFAS substances (March 2023), which could significantly increase demand for AC in water purification[44] - International regulations, such as the Minimata Convention on Mercury and proposed EU directives for urban wastewater treatment, are expected to expand the global market for activated carbon products[45][46] Mining Environmental and Reclamation Matters - The company's coal mining operations are subject to federal, state, and local environmental regulations, including SMCRA, requiring permits and reclamation[47][48] - As of December 31, 2023, the company posted surety bonds of approximately $7.5 million for the Five Forks Mine and $3.0 million for the Corbin Facility for reclamation obligations[49] Intellectual Property - As of December 31, 2023, the company held 83 U.S. patents and 8 international patents, with 13 U.S. and 2 international applications pending[50] - The Arq Acquisition added 87 patents and patent applications, including 7 granted U.S. patents, 10 pending U.S. applications, 19 granted international patents, and 51 pending international applications[50] - The company also owned over 50 trademark registrations and applications globally, with an additional 33 obtained from the Arq Acquisition[52] Safety, Health and Environment - Operations are subject to numerous federal, state, and local SH&E Regulations, including permit requirements for facilities and mine health and safety laws for the Five Forks Mine[53] Employees - As of December 31, 2023, the company employed 173 personnel, with 171 full-time[54] Arq Acquisition Details - On February 1, 2023, Arq, Inc. acquired Legacy Arq's subsidiaries for $31.2 million, consisting of 3,814,864 shares of common stock ($12.4 million) and 5,294,462 shares of Series A Convertible Preferred Stock ($18.8 million)[55][340] - Stockholders approved the conversion of all Series A Preferred Stock into 5,362,926 shares of Common Stock on June 13, 2023[56] - A PIPE Investment of approximately $15.4 million was completed on February 1, 2023, with subscribers purchasing 3,842,315 shares of Common Stock at $4.00 per share[57] - A $10.0 million term loan (CFG Loan) was secured on February 1, 2023, with a 48-month term and interest rates tied to SOFR or Base Rate plus margins, and included the issuance of a warrant to purchase 325,457 shares of Common Stock[59] Item 1A. Risk Factors The company faces significant risks from Legacy Arq integration, capital needs, regulatory dependence, competition, and potential tax asset limitations - The company's ability to meet projected construction timelines, costs, and production ramp-up for Red River Plant upgrades and to generate demand for new GAC products is uncertain, potentially harming financial results[68][69] - Managing expanded operations post-Arq Acquisition poses substantial challenges, with no assurance of realizing expected operating efficiencies, cost savings, or revenue enhancements[70][81][82] - Manufacturing Legacy Arq's products and GAC products requires significant capital, and failure to obtain additional financing in 2024 could delay business plan execution[71] - Demand for products is highly dependent on environmental laws and regulations; changes, delays, or repeal of such regulations (e.g., MATS, PFAS) could adversely affect the business[90][91][95] - The company operates in a highly competitive market, with larger and more established competitors, which could impede growth and financial results[97] - Reduction of coal consumption by North American electricity generators due to alternative energy sources (natural gas, renewables) could decrease demand for the company's products[98][99][100] - The company's ability to utilize its tax assets (NOLs and Tax Credits) could be limited by an 'ownership change' under IRC Sections 382 and 383, despite the Tax Asset Protection Plan (TAPP)[124][125][126][128][130] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report Item 1C. Cybersecurity The company integrates cybersecurity risk management into overall operations, with audit committee oversight, but operational disruption risk remains - The company has established policies and processes for assessing, identifying, and managing material risks from cybersecurity threats, integrated into its overall risk management[142] - Third-party service providers assist in monitoring and testing safeguards, including external penetration testing and real-time vulnerability assessments[143] - A formal information security awareness training program for all employees includes phishing tests and data protection best practices[145] - The audit committee oversees cybersecurity risk management, receiving quarterly briefings from the VP of IT, who has approximately five years of cybersecurity experience[148][149] - To date, no cybersecurity incidents have materially affected the company or its operations, but the risk of operational disruption remains[147] Item 2. Properties The company owns or leases office and manufacturing facilities in Colorado, Louisiana (Red River Plant, Five Forks Mine), and Kentucky (Corbin Facility) - The company leases approximately 24,000 square feet for its corporate headquarters and primary R&D laboratory in Colorado[150] - In Louisiana, the company owns the Red River Plant (61 acres) and leases approximately 141,000 square feet for production, distribution, and storage[150] - In Kentucky, the company leases approximately 470 acres for the Corbin Facility, where it processes bituminous coal waste[151] - As of December 31, 2023, the company owned or controlled about 1,975 acres of coal land for surface mining at the Five Forks Mine in Louisiana and approximately 380 acres of land containing bituminous coal waste at the Corbin Facility[152][153] Item 3. Legal Proceedings The company is involved in various ordinary course legal proceedings, with no significant matters reported as of December 31, 2023 - The company is subject to various pending or threatened legal actions and proceedings in the ordinary course of business[155] - No significant legal proceedings were reported as of December 31, 2023[403] Item 4. Mine Safety Disclosures Mine safety disclosures required by the Dodd-Frank Wall Street Reform and Consumer Protection Act are included in Exhibit 95 of this report - Mine safety disclosures are provided in Exhibit 95 to the report, as required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K[156] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades as 'ARQ' on Nasdaq, with no foreseeable cash dividends, a $7.0 million repurchase program, and recent equity issuances - Effective February 1, 2024, the company's common stock trades on the Nasdaq Global Market under the symbol 'ARQ', previously 'ADES'[159] - The company does not intend to declare or pay cash dividends in the foreseeable future, with the most recent payment in March 2020[160] - As of March 5, 2024, there were 875 holders of record of the common stock[161] - A PIPE Investment on February 1, 2023, involved the purchase of 3,842,315 shares of Common Stock for $15.4 million[162] - The CEO, Mr. Robert Rasmus, subscribed for and purchased 950,000 shares of common stock for $1.8 million in July 2023[163] - The company has a stock repurchase program with $7.0 million remaining as of December 31, 2023, but no purchases were made in Q4 2023, and future repurchases are unlikely in the near term[165] Item 6. Reserved This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses the company's financial performance, highlighting revenue and cost drivers, the impact of the Arq Acquisition, and liquidity, with a focus on 2023 results Overview - Arq, Inc. is an environmental technology company primarily engaged in selling consumable air and water treatment solutions based on Activated Carbon (AC)[169] - The company's products help customers reduce contaminants like mercury and PFAS to meet environmental regulations in coal-fired power generation, industrial, and water treatment markets (APT market)[169] - The February 2023 acquisition of Legacy Arq provides access to bituminous coal waste reserves and a manufacturing facility (Corbin Facility) to produce Arq Powder, a feedstock for new GAC products, expected to begin manufacturing by end of 2024[171] Drivers of Demand and Key Factors Affecting Profitability - Changes in manufacturing production and sales volumes[173] - Changes in price and product mix[173] - Changes in coal-fired dispatch and electricity power generation sources[173] - Changes in demand for contaminant removal within water treatment facilities[173] Components of Revenue, Expenses and Equity Method Investees - Revenue primarily comes from the sale of AC products and other chemical-based technologies in the APT market[175] - Consumables cost of revenue includes all direct production costs, such as labor, materials, additives, and coal costs[176] - A royalty is paid to Tinuum Group for certain M-Prove product sales after the expiration of the Section 45 Tax Credit Program, included in Consumables cost of revenue[177] - Operating expenses include payroll and benefits (excluding direct labor), legal and professional fees, general and administrative costs (including R&D), and depreciation, amortization, depletion, and accretion[178][179][180][181] - Other income (expense), net, includes earnings from equity method investments (primarily Tinuum Group), interest income, interest expense, and other miscellaneous items[182][183] Results of Operations (2023 vs. 2022) Total Revenue and Cost of Revenue (in thousands) | Category | 2023 | 2022 | Change ($) | Change (%) | | :------------------------ | :------ | :------- | :--------- | :--------- | | Consumables Revenue | $99,183 | $102,987 | $(3,804) | (4)% | | Total Revenue | $99,183 | $102,987 | $(3,804) | (4)% | | Consumables Cost of Revenue | $67,323 | $80,465 | $(13,142) | (16)% | - Consumables revenue decreased by $3.8 million (4%) year-over-year, primarily due to lower volumes sold ($20.0 million decrease) driven by lower natural gas prices reducing coal-fired generation[186] - Partially offset by improved pricing ($10.6 million increase), $4.7 million from minimum quantity contract settlements, and $0.7 million from favorable product mix[187] - Consumables gross margin, exclusive of depreciation and amortization, increased due to MQ contracts and decreased feedstock/additive costs, despite lower volumes[187] Operating Expenses (in thousands) | Operating Expenses | 2023 | 2022 | Change ($) | Change (%) | | :-------------------------------------- | :------ | :------ | :--------- | :--------- | | Payroll and benefits | $15,154 | $10,540 | $4,614 | 44% | | Legal and professional fees | $9,588 | $9,455 | $133 | 1% | | General and administrative | $12,641 | $8,145 | $4,496 | 55% | | Depreciation, amortization, depletion and accretion | $10,543 | $6,416 | $4,127 | 64% | | Gain on sale of Marshall Mine, LLC | $(2,695) | $0 | $(2,695) | * | | Other | $(36) | $34 | $(70) | (206)% | | Total Operating Expenses | $45,195 | $34,590 | $10,605 | 31% | - Payroll and benefits increased by $4.9 million due to Legacy Arq employees (including $1.1 million severance for former executives) and $1.7 million severance for three executive employees, partially offset by decreased incentive compensation and retention bonuses[190] - General and administrative expenses rose by $2.5 million due to Legacy Arq (including $1.2 million rent/occupancy) and $2.0 million from increases in insurance, R&D, travel, recruiting, and director compensation[193] - Depreciation, amortization, depletion, and accretion increased by $2.8 million from Arq Acquisition assets and $1.0 million from higher depreciation absorption in inventory due to higher production volumes[194] Other Income (Expense), Net (in thousands) | Category | 2023 | 2022 | Change ($) | Change (%) | | :-------------------------------- | :------ | :------ | :--------- | :--------- | | Earnings from equity method investments | $1,623 | $3,541 | $(1,918) | (54)% | | Interest expense | $(3,014) | $(336) | $(2,678) | 797% | | Other | $2,630 | $155 | $2,475 | 1,597% | | Total Other Income, Net | $1,239 | $3,360 | $(2,121) | (63)% | - Earnings from equity method investments decreased by $1.9 million (54%) due to Tinuum Group and Tinuum Services winding down operations[198] - Interest expense increased significantly by $2.7 million (797%) due to $2.0 million from the $10 million CFG Loan and $0.5 million from the $10 million CTB Loan assumed in the Arq Acquisition[199] - Other income increased by $2.5 million, primarily driven by $1.8 million in interest income from cash sweep accounts[200] - The company reported a net loss of $12.2 million in 2023, compared to $8.9 million in 2022[262] - Income tax expense was $0.2 million in both 2023 and 2022, with an effective rate of (1)% and (2)% respectively, primarily due to permanent differences, increased valuation allowance on deferred tax assets, and stock-based compensation[201][202] - As of December 31, 2023, the company fully reserved for its net deferred tax assets with a valuation allowance of $98.8 million, up from $88.3 million in 2022, due to forecasts of future taxable losses[205] Non-GAAP Financial Measures - The company uses non-GAAP measures like EBITDA (earnings before interest, taxes, depreciation, and amortization) and Adjusted EBITDA to supplement GAAP financial information[211] - Adjusted EBITDA is defined as EBITDA reduced by non-cash equity earnings and gain on sale of Marshall Mine, and increased by cash distributions from equity method investments, loss on early settlement of long-term receivable, and loss on change in estimate, asset retirement obligations[211] EBITDA and Adjusted EBITDA Reconciliation (in thousands) | Category | 2023 | 2022 | | :---------------------------------------------- | :-------- | :-------- | | Net loss | $(12,249) | $(8,917) | | Depreciation, amortization, depletion and accretion | 10,543 | 6,416 | | Amortization of Upfront Customer Consideration | 508 | 508 | | Interest expense, net | 1,168 | 97 | | Income tax expense | 153 | 209 | | EBITDA (EBITDA Loss) | $123 | $(1,687) | | Cash distributions from equity method investees | 1,623 | 5,933 | | Equity earnings | (1,623) | (3,541) | | Gain on sale of Marshall Mine, LLC | (2,695) | — | | Loss (gain) on change in estimate, asset retirement obligation | (37) | 34 | | Loss on early settlement of an account receivable | — | 535 | | Adjusted (EBITDA Loss) EBITDA | $(2,609) | $1,274 | - Net loss for 2023 and 2022 included $4.9 million and $5.0 million, respectively, in transaction and integration costs related to the Arq Acquisition. 2023 also included $4.9 million of Legacy Arq payroll and benefit costs and $1.7 million of severance expense[215] Liquidity and Capital Resources - As of December 31, 2023, principal liquidity sources included cash on hand ($45.4 million, excluding $8.8 million restricted cash) and operations[216][259] - Principal uses of liquidity in 2023 included business operating expenses, capital and spare parts expenditures, lease obligations, reclamation payments, and payment for the sale of Marshall Mine, LLC[217] - The PIPE Investment provided $15.4 million, and the CFG Loan provided $8.5 million net proceeds in February 2023[216] Cash Distributions from Equity Method Investments (in thousands) | Investee | 2023 | 2022 | | :-------------- | :------ | :------ | | Tinuum Group | $1,148 | $3,455 | | Tinuum Services | $475 | $2,476 | | Other | $0 | $2 | | Total | $1,623 | $5,933 | - Cash distributions from equity method investments decreased by $4.3 million in 2023 compared to 2022, primarily due to Tinuum Group and Tinuum Services winding down operations[218] Summary of Cash Flows (in thousands) | Cash Flows From | 2023 | 2022 | Change ($) | | :-------------------- | :--------- | :--------- | :--------- | | Operating activities | $(16,653) | $(6,061) | $(10,592) | | Investing activities | $(28,535) | $(4,608) | $(23,927) | | Financing activities | $22,909 | $(1,679) | $24,588 | | Net change in Cash and Restricted Cash | $(22,279) | $(12,348) | $(9,931) | - Cash used in operating activities increased by $10.6 million, primarily due to increased net loss, gain on sale of Marshall Mine, decreased distributions from equity method investees, and a net decrease in working capital[220] - Cash used in investing activities increased by $23.9 million, mainly due to increased acquisition of property, equipment, and intangibles related to the Arq Acquisition, payment for Marshall Mine disposal, and increased mine development costs[221] - Cash provided by financing activities increased by $24.6 million, driven by $16.2 million from common stock issuance (including related parties) and $8.5 million net proceeds from the CFG Loan Agreement[222] - The company expects cash on hand as of December 31, 2023, to provide sufficient liquidity for the next 12 months[225] - Capital expenditures for 2024 are projected to be $45 million to $50 million for the Red River Plant expansion and $5 million to $10 million for Corbin Facility commissioning, dependent on additional funding and environmental permits[227] Contractual Obligations as of December 31, 2023 (in thousands) | Obligation | Total | Less than 1 year | 1-3 years | 4-5 years | After 5 years | | :---------------------- | :------- | :--------------- | :-------- | :-------- | :------------ | | CFG Loan | $12,199 | $0 | $0 | $12,199 | $0 | | CTB Loan | $13,413 | $1,110 | $2,220 | $2,220 | $7,863 | | Finance lease obligations | $3,666 | $2,274 | $1,307 | $85 | $0 | | Operating lease obligations | $18,559 | $3,139 | $5,747 | $2,595 | $7,078 | | Total | $47,837 | $6,523 | $9,274 | $17,099 | $14,941 | Critical Accounting Policies and Estimates - Business Combinations, including asset acquisitions: Requires significant estimates and assumptions for fair value allocation of acquired assets and liabilities[234] - Carrying value of long-lived assets and intangibles: Reviewed annually for impairment using income or market approaches, involving estimates of future cash flows, useful lives, and discount rates[235][236] - Asset Retirement Obligations (AROs): Estimates future reclamation and remediation costs, timing, and scope, which can materially impact earnings[238][239] - Income Taxes: Involves judgment in determining tax expense, deferred tax assets/liabilities, and valuation allowances based on future operating results and tax planning strategies[240] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This item is not required for smaller reporting companies - The information under this Item is not required to be provided by smaller reporting companies[242] Item 8. Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2023 and 2022, with an unqualified opinion, highlighting the critical audit matter of acquired asset valuation - The consolidated financial statements for Arq, Inc. and Subsidiaries as of and for the years ended December 31, 2023 and 2022, are presented, including balance sheets, statements of operations, changes in stockholders' equity, and cash flows[246][248] - Moss Adams LLP, the independent registered public accounting firm, issued an unqualified opinion, stating the financial statements present fairly, in all material respects, the company's financial position and results of operations[248] - A critical audit matter was the valuation of acquired property, plant, and equipment ($39.2 million) and developed technology intangible assets ($7.7 million) from the Arq Acquisition, due to significant management judgment in projecting future financial performance and complex auditor evaluation of assumptions like revenue growth, production capacity, and discount/royalty rates[253][254][255] Note 1 - Summary of Operations and Significant Accounting Policies - Arq Inc. is an environmental technology company selling AC and chemical solutions for air, water, and soil treatment, with manufacturing, mining, and logistics operations in Louisiana and Kentucky[273][274] - The February 2023 Arq Acquisition secured access to feedstock, a manufacturing facility, and patented processes to produce GAC products from bituminous coal waste[275] - The company consolidates wholly-owned subsidiaries and VIEs where it is the primary beneficiary, and uses the equity method for investments where it has significant influence (e.g., 42.5% in Tinuum Group, 50.0% in Tinuum Services)[276][277] - Revenue from consumables is recognized at the point of time when control transfers, typically upon shipment or delivery. For Minimum Quantity Contracts (MQ Contracts), revenue is recognized when a shortfall is probable, quantifiable, and the company elects to enforce billing[304][306] - Research and development costs were $3.3 million in 2023 and $2.1 million in 2022, expensed as incurred[317] - The company adopted ASU 2016-13 (Credit Losses) effective January 1, 2023, with no material impact, and is evaluating ASU 2023-09 (Income Tax Disclosures) effective for fiscal years beginning after December 15, 2024[336][337] Note 2 - Arq Acquisition - On February 1, 2023, Arq, Inc. acquired Legacy Arq's subsidiaries for a total consideration of $31.2 million, comprising $12.4 million in common stock and $18.8 million in Series A Convertible Preferred Stock[338][340] - The acquisition resulted in $8.7 million in expensed acquisition-related costs[338][340] Final Purchase Price Allocation (in thousands) | Category | Amount | | :---------------------------- | :---------- | | Fair value of assets acquired | $55,330 | | Fair Value of liabilities assumed | $24,125 | | Net assets acquired | $31,205 | - Identified intangible assets included $7.7 million in developed technology with a weighted average useful life of 20 years[342] - All Series A Preferred Stock was converted into 5,362,926 shares of Common Stock on June 13, 2023, following stockholder approval[344][350] - A PIPE Investment on February 1, 2023, generated $15.4 million from the sale of 3,842,315 shares of Common Stock[351] Unaudited Pro Forma Financial Information (in thousands) | Category | 2023 | 2022 | | :-------- | :--------- | :--------- | | Revenue | $99,183 | $102,987 | | Net loss | $(11,119) | $(75,788) | Note 3 - Inventories, net - Inventories are valued at the lower of average cost or net realizable value, consisting primarily of raw materials and finished goods for AC products[283] Inventories, Net (in thousands) | Category | 2023 | 2022 | | :------------------ | :-------- | :-------- | | Product inventory | $9,524 | $9,479 | | Raw material inventory | $10,169 | $8,349 | | Total | $19,693 | $17,828 | Note 4 - Property, Plant and Equipment Property, Plant and Equipment, Net (in thousands) | Category | 2023 | 2022 | | :---------------------------- | :--------- | :--------- | | Land and land improvements | $1,225 | $1,225 | | Plant and operating equipment | $81,266 | $33,180 | | Furniture and fixtures | $1,765 | $1,709 | | Machinery and equipment | $2,478 | $2,116 | | Leasehold improvements | $2,149 | $2,149 | | Construction in progress | $25,059 | $6,373 | | Total Cost | $113,942 | $46,752 | | Less accumulated depreciation | $(19,293) | $(11,897) | | Total Net | $94,649 | $34,855 | - Depreciation expense for the years ended December 31, 2023 and 2022 was $8.5 million and $4.9 million, respectively[361] - ROU assets related to finance lease obligations were $1.7 million in 2023 and $2.6 million in 2022, net of accumulated depreciation[360] Note 5 - Revenue - All material performance obligations related to revenue recognized were satisfied at a point in time for 2023 and 2022[362] - Approximately 8% of Consumables revenue in both 2023 and 2022 was generated in Canada, with the rest in the U.S.[362] - In December 2023, the company recognized $4.7 million of consumables revenue from the settlement of certain minimum quantity contracts (MQ Contracts)[363] Receivables, Net (in thousands) | Category | 2023 | 2022 | | :------------------ | :-------- | :-------- | | Trade receivables, net | $11,289 | $13,789 | | Unbilled receivables | $4,862 | $0 | | Other | $41 | $75 | | Total | $16,192 | $13,864 | Note 6 - Debt Obligations Debt Obligations (in thousands) | Category | 2023 | 2022 | | :---------------------------- | :--------- | :-------- | | CFG Loan due February 2027 | $10,000 | $0 | | CTB Loan due January 2036 | $9,527 | $0 | | Finance lease obligations | $3,465 | $4,581 | | Unamortized debt discounts | $(815) | $0 | | Unamortized debt issuance costs | $(1,250) | $0 | | Less: Current maturities | $(2,653) | $(1,131) | | Total long-term debt obligations | $18,274 | $3,450 | - The $10.0 million CFG Loan, closed February 1, 2023, provided $8.5 million net cash proceeds after OID and issuance costs, matures February 1, 2027, and bears interest at Adjusted Term SOFR or Base Rate plus margins (9% cash, 5% PIK)[369][372] - The CFG Loan is secured by substantially all company assets (excluding CTB Loan collateral) and includes covenants for minimum unrestricted cash ($5.0 million), annual revenue ($70.0 million for 2023, $85.0 million for 2024), and Consolidated EBITDA ($3.0 million for 2024)[376] - The $10.0 million CTB Loan, assumed in the Arq Acquisition, matures January 27, 2036, bears 6.0% interest through January 2026, and requires monthly principal and interest payments of $0.1 million[377][378] - The CTB Loan Modification Agreement (June 2, 2023) waived certain financial delivery and covenant requirements for 2021-2023 and required an additional $0.7 million deposit into an Interest Reserve Account[379][380] Note 7 - Leases Lease ROU Assets and Liabilities (in thousands) | Category | 2023 | 2022 | | :-------------------------------------- | :--------- | :--------- | | Operating lease right-of-use assets, net | $10,592 | $7,734 | | Total operating lease obligation | $10,814 | $7,857 | | Finance lease right-of-use assets, net | $1,694 | $2,565 | | Total finance lease obligations | $3,465 | $4,581 | Lease Financial Information (in thousands) | Category | 2023 | 2022 | | :-------------------------------- | :------ | :------ | | Total lease cost | $6,880 | $5,569 | | 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 | | 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% | Future Lease Payments as of December 31, 2023 (in thousands) | Year | 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 | $0 | $1,131 | | Thereafter | $7,078 | $0 | $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 - As of December 31, 2023, the company had outstanding surety bonds totaling $11.2 million for reclamation of the Five Forks Mine ($7.5 million), Corbin Facility ($3.0 million), and Mine 4 ($0.7 million)[394][395] - Restricted cash of $8.5 million was pledged as collateral for surety bonds as of December 31, 2023[396] - In January 2024, the company executed a contract for the construction of a GAC facility at the Red River Plant, with estimated costs between $62.0 million and $67.0 million[398] - The company has limited obligations related to Tinuum Group, including guarantees and a contractual liability of $1.7 million as of December 31, 2023, related to the Tinuum Group Obligation[400][401][455] - A separation agreement with former CEO Mr. Marken resulted in severance payments, accelerated vesting of restricted stock, and continued eligibility for PSUs, with a liability of $0.4 million as of December 31, 2023[402] Note 9 - Marshall Mine, LLC - On March 27, 2023, the company sold all membership interests in Marshall Mine, LLC for a $2.2 million cash payment and the buyer's assumption of $4.9 million in liabilities[404] - The sale resulted in a gain of approximately $2.7 million recognized in the Statement of Operations for 2023[404] Note 10 - Supplemental Financial Information Prepaid Expenses and Other Current Assets (in thousands) | Category | 2023 | 2022 | | :-------------------------------- | :------ | :------ | | Prepaid expenses | $2,430 | $2,570 | | Prepaid income taxes and income tax refunds | $349 | $2,573 | | Other | $2,436 | $2,395 | | Total | $5,215 | $7,538 | Other Long-Term Assets, Net (in thousands) | Category | 2023 | 2022 | | :-------------------------------- | :--------- | :--------- | | Right of use assets, operating leases, net | $10,592 | $7,734 | | Spare parts, net | $9,147 | $6,789 | | Upfront customer consideration | $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 | | Total | $45,600 | $30,647 | - Mine development costs for the Five Forks Mine are depleted over an estimated 14-year life[407] - The Highview Investment, an investment in a power storage company, is recorded at cost less impairment, with no changes to carrying value in 2023 or 2022[408][409] Other Current Liabilities (in thousands) | Category | 2023 | 2022 | | :-------------------------------- | :------ | :------ | | 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 | $2,718 | $2,334 | | Total | $5,792 | $6,645 | Other Long-Term Liabilities (in thousands) | Category | 2023 | 2022 | | :-------------------------------- | :--------- | :--------- | | Mine reclamation liabilities | $5,981 | $7,985 | | Operating lease obligations, long-term | $8,870 | $5,133 | | Other | $929 | $733 | | Total | $15,780 | $13,851 | Mine Reclamation Liabilities (AROs) (in thousands) | Category | 2023 | 2022 | | :-------------------------------------- | :------ | :------ | | Asset retirement obligations, beginning of year | $8,533 | $9,959 | | Asset retirement obligations assumed | $1,500 | $0 | | Accretion | $582 | $611 | | Liabilities settled | $(4,866) | $(2,071) | | Changes due to scope and timing of reclamation | $414 | $34 | | Asset retirement obligations, end of year | $6,163 | $8,533 | Interest Expense (in thousands) | Category | 2023 | 2022 | | :-------------- | :------ | :------ | | Interest on CFG Loan | $2,029 | $0 | | Interest on CTB Loan | $545 | $0 | | Other | $440 | $336 | | Total | $3,014 | $336 | Other Income (in thousands) | Category | 2023 | 2022 | | :------------ | :------ | :------ | | Interest income | $1,846 | $239 | | Other | $784 | $(84) | | Total | $2,630 | $155 | Note 11 - Stockholders' Equity - The Board is authorized to issue preferred stock, but none were outstanding as of December 31, 2023 and 2022[414] - Common stockholders have one vote per share, are entitled to dividends when declared, and receive remaining assets upon liquidation after creditors and preferred stockholders[415][416] - Equity transactions in 2023 included the issuance of 3,814,864 common shares and 5,294,462 Series A Preferred Stock for the Arq Acquisition, a $15.4 million PIPE Investment for 3,842,315 common shares, and the conversion of all Series A Preferred Stock into 5,362,926 common shares[417][419] - The company has a Stock Repurchase Program with $7.0 million remaining as of December 31, 2023, but no repurchases were made in Q4 2023[421] Note 12 - Stock-Based Compensation - The company's 2022 Omnibus Incentive Plan permits grants of various equity awards to employees, directors, and consultants, with 190,281 shares authorized for issuance as of December 31, 2023[422] - Stock-based compensation expense is measured at grant date fair value and expensed over the vesting/performance period, with forfeitures recognized when incurred[424][425][426] Stock-Based Compensation Expense (in thousands) | Category | 2023 | 2022 | | :------------------------ | :------ | :------ | | RSA expense | $1,887 | $1,679 | | PSU expense | $650 | $302 | | Stock option expense | $111 | $0 | | Total | $2,648 | $1,981 | Unrecognized Compensation Cost as of December 31, 2023 (in thousands) | Category | 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 | $3,024 | 1.30 | - As of December 31, 2023, 790,005 non-vested RSAs were outstanding, with a weighted-average grant date fair value of $3.10[433] - As of December 31, 2023, 968,918 PSUs were outstanding, with a weighted-average grant date fair value of $2.06 and an aggregate intrinsic value of $2.9 million[434] - As of December 31, 2023, 1,000,000 stock options were outstanding with a weighted-average exercise price of $3.00 and a remaining contractual term of 9.54 years[436] Note 13 - Income Taxes Sources of Pretax Loss (in thousands) | Category | 2023 | 2022 | | :------- | :-------- | :-------- | | Domestic | $(9,123) | $(8,708) | | Foreign | $(2,973) | $0 | | Total | $(12,096) | $(8,708) | Provision for Income Taxes (in thousands) | Category | 2023 | 2022 | | :------------------------ | :------ | :------ | | Current portion of income tax expense | $153 | $209 | | Deferred portion of income tax expense (benefit) | $0 | $0 | | Total income tax expense | $153 | $209 | | Effective tax rate | (1)% | (2)% | Deferred Tax Assets and Liabilities (in thousands) | Category | 2023 | 2022 | | :---------------------------- | :--------- | :--------- | | 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 | $(13,471) | $(11,009) | | Net deferred tax assets | $0 | $0 | - As of December 31, 2023, the company concluded it is more likely than not that it will not generate sufficient taxable income to realize its net deferred tax assets, resulting in a 100% valuation allowance of $98.8 million[443] Net Operating Loss and Tax Credit Carryforwards (in thousands) | Category | 2023 | Beginning Expiration Year | Ending Expiration Year | | :-------------------------------------- | :-------- | :------------------------ | :--------------------- | | Federal net operating loss carryforwards | $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 | - The company performed an IRC Section 382 analysis as of the Arq Acquisition Date and determined no ownership change occurred for Arq, Inc., but believes Legacy Arq experienced ownership changes prior to acquisition, potentially limiting its tax assets[450][451] - The Tax Asset Protection Plan (TAPP) was extended to December 31, 2024, to deter acquisitions of 4.99% or more of outstanding common stock without Board approval, aiming to protect the ability to utilize tax assets[452] Note 14 - Major Customers Revenue from Major Customers | Customer | Revenue Type | 2023 | 2022 | | :------- | :----------- | :--- | :--- | | A | Consumables | 19% | 18% | | B | Consumables | 9% | 11% | Note 15 - Related Party Transactions - For 2023, the company recognized $0.7 million in Tinuum Group Royalty expense, included in consumables cost of revenue[454] - 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[455] Note 16 - Defined Contribution Savings Plans - The company sponsors a 401(k) Plan for eligible employees, making cash contributions based on percentages of eligible compensation[456] 401(k) Plans Employer Contributions (in thousands) | Year Ended December 31, | Contributions | | :---------------------- | :------------ | | 2023 | $613 | | 2022 | $552 | PART III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement - Information required by this Item is incorporated by reference from the Registrant's definitive proxy statement to be filed no later than 120 days after the end of the fiscal year[470] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement - Information required by this Item is incorporated by reference from the Registrant's definitive proxy statement to be filed no later than 120 days after the end of the fiscal year[471] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information for beneficial owners and management is incorporated by reference, with details on equity compensation plan issuances - Information on security ownership of certain beneficial owners and management is incorporated by reference from the definitive proxy statement[472] - As of December 31, 2023, 190,281 securities remained available for future issuance under equity compensation plans approved by security holders[473] - Outstanding options, warrants, and rights included 1,000,000 non-qualified stock options (weighted-average exercise price $3.00), 790,005 unvested restricted stock awards, and 968,918 unvested performance share units[473] Item 13. Certain Relationships and Related Transaction and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's definitive proxy statement - Information required by this Item is incorporated by reference from the Registrant's definitive proxy statement to be filed no later than 120 days after the end of the fiscal year[474] Item 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's definitive proxy statement - Information required by this Item is incorporated by reference from the Registrant's definitive proxy statement to be filed no later than 120 days after the end of the fiscal year[475] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all exhibits and financial statement schedules, including corporate documents, incentive plans, agreements, and certifications, with financial statements filed as part of Item 8 - The report includes consolidated financial statements of Arq, Inc. as part of Item 8[478] - All financial statement schedules are omitted because the required information is either not applicable, not present in sufficient amounts, or already included in the consolidated financial statements and notes[478] - A comprehensive list of exhibits is filed, including corporate governance documents (e.g., Certificate of Incorporation, Bylaws), incentive plans (2017 and 2022 Omnibus Incentive Plans), various agreements (e.g., Securities Purchase Agreement, Term Loan and Security Agreement), and certifications (e.g., Principal Executive Officer and Principal Financial Officer certifications)[478][479][480] Item 16. Form 10-K Summary This item indicates that no Form 10-K Summary is provided - No Form 10-K Summary is provided in this report[486]