Arq, Inc. — Q1 2024 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2024, compared with Q1 2023. Arq sells activated carbon and related contaminant-treatment products. Its strategy includes converting coal waste at its Corbin facility into feedstock for granular activated carbon (GAC). The company changed its name to Arq, Inc. in February 2024.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $21.7 million | $20.8 million |
| Gross profit, before depreciation and amortization | $8.0 million; 36.9% margin | $3.6 million; 17.5% margin |
| Operating loss | $3.0 million | $7.8 million |
| Net loss | $3.4 million | $7.5 million |
| Adjusted EBITDA loss (non-GAAP) | $1.1 million | $7.7 million |
| Operating cash flow | $0.5 million provided | $17.7 million used |
| Capital expenditures on property, plant, equipment and intangible assets | $9.6 million | $3.5 million |
Revenue increased 4%, driven by approximately $1.3 million each from higher pricing and favorable product mix, partly offset by about $1.7 million from lower sales volumes. Cost of revenue fell 20%, reflecting lower feedstock and additive costs; lower production volumes also increased fixed costs as a share of cost of revenue. SG&A declined 32%, primarily because Q1 2023 included acquisition-related legal and consulting costs and Legacy Arq severance expense. Research and development expense increased to $1.6 million, largely for GAC product qualification testing.
Financial position and liquidity
- At March 31, 2024, cash was $35.2 million, down from $45.4 million at year-end. Restricted cash was $8.8 million; total cash and restricted cash was $44.0 million.
- Current assets were $72.0 million and current liabilities $22.0 million. Total liabilities were $54.6 million.
- Debt obligations, net of discounts and issuance costs, were $20.7 million, including $2.5 million current maturities. This includes finance lease obligations.
- Cash and restricted cash decreased $10.1 million in the quarter. Operating cash flow was positive, but investing activities used $9.6 million, principally for capital spending.
- Management expects cash on hand and anticipated additional debt financing to fund operations for the next 12 months while maintaining planned capital spending. That expectation depends in part on obtaining financing.
Outlook, commentary and risks
- Management expects to complete the Red River GAC facility by year-end 2024. It estimates total construction costs of $75–$80 million and expects 2024 spending of $55–$60 million on the expansion, plus $5–$10 million to complete Corbin facility commissioning.
- Completion depends on funding, including cash generation, potential customer prepayments and a planned refinancing and expansion of the CFG Loan. Management says the project could be delayed beyond year-end if expanded or additional financing is not secured.
- Arq expects to begin using Arq Powder to produce GAC by year-end 2024. Commercialization, customer qualification, construction and ramp-up remain execution risks.
- Management attributed weaker power-generation customer volumes to low natural-gas prices and mild winter and spring weather, and expected natural-gas prices to remain relatively consistent through 2024. Alternative energy prices, weather, coal dispatch, input costs and inflation may affect sales and margins.
- The EPA announced a national drinking-water PFAS regulation on April 10, 2024. Management expects the phase-in over approximately five years to materially increase GAC demand; timing, implementation and potential legal challenges remain uncertainties.
- The CFG Loan is a $10 million related-party loan due February 2027, with cash and payment-in-kind interest and financial covenants, including a $5 million minimum unrestricted cash balance and minimum annual revenue and EBITDA requirements. Verify covenant compliance and refinancing terms.
- The company recorded no income tax benefit on its Q1 loss because a valuation allowance offset the benefit. It reported no material pending legal proceedings and said disclosure controls were effective.
Important facts for investors to verify
- Whether the company secures financing on acceptable terms and can satisfy CFG Loan covenants while funding the Red River expansion and Corbin commissioning.
- Actual project spending, completion timing, GAC production ramp-up, customer qualification and contracted demand.
- Whether pricing and product mix can offset volume weakness, input-cost inflation and changes in coal-fired power generation.
- Cash use, operating performance and liquidity as construction spending accelerates.
- A filing inconsistency: Note 12 says the $2.7 million Marshall Mine sale gain was recognized in Q1 2024, while the statements and MD&A show the gain in Q1 2023 and none in Q1 2024. Confirm the correct period.