Overview of Arq, Inc.

Arq, Inc. is an environmental technology company that manufactures and sells air, water, and soil treatment solutions primarily based on activated carbon (AC). Their products enable customers to reduce contaminants like mercury, PFAS, and other pollutants to meet environmental regulations. Arq operates in the advanced purification technologies (APT) market, serving the coal-fired power generation, industrial, water treatment, and remediation industries.

Arq’s main products are powdered activated carbon (PAC) and granular activated carbon (GAC), which are produced from various carbonaceous raw materials. The company owns a lignite mine and a facility that converts coal waste into a purified carbon powder called Arq Powder, which Arq plans to use as a feedstock to manufacture high-quality GAC products.

Financial Performance

For the three months ended March 31, 2025, Arq reported net income of $0.2 million, compared to a net loss of $3.4 million in the same period in 2024. The key drivers of this improvement were:

• Increased revenue: Revenue grew 25% to $27.2 million, driven by higher sales volumes, higher pricing, and a favorable product mix. The increase in demand was partly due to higher natural gas prices, which led some customers to use more coal-fired power generation.

• Improved gross margin: Gross margin, excluding depreciation and amortization, remained flat as higher pricing and favorable customer mix offset start-up costs for the new GAC production line and a one-time accounting adjustment in 2024.

• Lower operating expenses: Selling, general, and administrative expenses decreased 21% to $6.1 million, primarily due to lower payroll, benefits, and general administrative costs. Research and development expenses also declined 46% to $0.9 million.

Arq’s non-GAAP metrics, EBITDA and Adjusted EBITDA, also improved significantly in the first quarter of 2025 compared to the prior year period, reflecting the company’s stronger operating performance.

Drivers of Demand and Profitability

Arq’s financial results are influenced by several key factors:

1. Manufacturing production and sales volumes
2. Pricing and product mix
3. Demand from coal-fired power generation and water treatment customers
4. Changes in environmental regulations
5. Acceptance of new GAC products

In Q1 2025, Arq benefited from higher demand for its products from coal-fired power generation customers due to increased natural gas prices, as well as higher overall electricity demand from seasonal weather patterns. The company also expects that new EPA regulations on PFAS in drinking water will drive increased GAC demand in the water purification market.

Arq is focused on improving its profitability by increasing prices, optimizing its product mix, and controlling costs. The company plans to begin commercial production of its new GAC products in the second half of 2025, which it expects will further enhance its margins.

Liquidity and Capital Resources

As of March 31, 2025, Arq had $6.3 million in cash on hand, $8.5 million in restricted cash, and $13.8 million in available borrowing capacity on its $30 million revolving credit facility. The company used $5.8 million in cash for operating activities in Q1 2025, primarily due to increases in inventory and receivables.

Arq continues to invest in capital expenditures, including the expansion and commissioning of its Red River Plant to produce the new GAC products. The company expects to complete this project by the end of Q2 or early Q3 2025, funded with cash on hand, borrowings, and cost reduction initiatives.

Looking ahead, Arq believes its current liquidity position and access to financing will provide sufficient funds to support operations over the next 12 months. However, the company’s long-term cash requirements will depend on its ability to grow revenue, improve margins, and successfully execute on its strategic initiatives.

Strengths and Weaknesses

Strengths:

• Leading provider of AC-based environmental remediation products
• Diversified customer base across power generation, industrial, and water treatment markets
• Ownership of raw material sources (lignite mine, coal waste reserves) provides supply chain control
• New GAC product development to access higher-margin opportunities
• Cost reduction efforts to improve profitability

Weaknesses:

• Reliance on coal-fired power generation, which faces long-term decline
• Exposure to fluctuations in natural gas and electricity prices that impact customer demand
• Significant capital requirements for plant expansions and new product development
• Regulatory risks related to changes in environmental policies

Outlook and Future Prospects

Arq’s near-term outlook appears positive, with the company expecting continued strong demand for its AC products, particularly from coal-fired power generators and the water treatment industry. The implementation of new PFAS regulations is also anticipated to drive increased GAC sales.

However, Arq faces long-term headwinds from the gradual decline of coal-fired power generation. To address this, the company is focused on diversifying its customer base, developing new GAC products, and exploring opportunities to utilize its Arq Powder technology in adjacent markets.

Overall, Arq’s financial performance has improved significantly in the first quarter of 2025, and the company appears well-positioned to navigate the near-term market dynamics. Its success in executing on its strategic initiatives, managing costs, and expanding into higher-margin products and markets will be critical to its long-term growth and profitability.