Executive Summary / Key Takeaways

• Dual Transformation Underway: Arq, Inc. has successfully revitalized its foundational Powdered Activated Carbon (PAC) business into a sustainably profitable, cash-generative segment, providing a robust financial springboard for its high-growth Granular Activated Carbon (GAC) expansion.
• GAC Poised for Explosive Growth: The recent commissioning of the first Red River GAC line, coupled with strong market demand driven by PFAS regulations and Renewable Natural Gas (RNG) applications, positions Arq as a critical domestic supplier in a significantly undersupplied market.
• Technological Edge and Vertical Integration: Arq's proprietary process of converting bituminous coal waste into high-performance GAC, supported by a fully integrated domestic supply chain, offers a distinct competitive advantage, enabling superior product performance and insulation from import tariffs.
• Strategic Capacity Expansion: With 16 million pounds of GAC capacity already contracted and a potential 10-20% upside on the first line with no additional CapEx, Arq aims for a Final Investment Decision (FID) on a second 25 million-pound GAC line by year-end 2025, funded primarily through internal cash flow and debt.
• Diversified Future Opportunities: Beyond GAC, Arq is actively exploring new revenue streams by leveraging its unique Arq Powder feedstock for asphalt additives and investigating rare earth mineral and synthetic graphite extraction, signaling a long-term vision for sustainable materials.

From Legacy Emissions to Environmental Innovation

Arq, Inc., formerly Advanced Emissions Solutions, Inc., has undergone a profound transformation, evolving from a company grappling with loss-making contracts into a dynamic environmental technology leader. Founded in 1997, Arq's initial focus on consumable air, water, and soil treatment solutions, primarily using activated carbon (AC), laid the groundwork for its current strategic pivot. The company's journey, marked by the establishment of key assets like the Five Forks Mine for raw materials and the Corbin Facility for processing bituminous coal waste into Arq Powder, has culminated in a dual strategy: fortifying its foundational Powdered Activated Carbon (PAC) business while aggressively expanding into the high-growth Granular Activated Carbon (GAC) market.

This strategic evolution is set against a backdrop of compelling industry trends. The tightening of environmental regulations, particularly the EPA's nationally enforceable PFAS National Primary Drinking Water Regulation, is poised to dramatically increase demand for GAC, potentially tripling to quintupling current market needs. Concurrently, the burgeoning Renewable Natural Gas (RNG) sector presents another significant demand driver, with industry projections suggesting a 2x to 10x growth by 2030. These macro tailwinds, combined with a persistent supply shortage in the GAC market, create an exceptionally favorable environment for Arq's specialized offerings.

At the heart of Arq's competitive advantage lies its proprietary technology. The company's unique process converts bituminous coal waste into a purified, microfine carbon powder known as Arq Powder Wetcake. This feedstock is then utilized to produce both PAC and high-quality GAC products. This vertically integrated approach, from raw material sourcing at the Five Forks Mine to manufacturing at the Corbin Facility and Red River Plant, ensures a consistent, high-quality, and cost-effective supply chain. The tangible benefits of this technology are evident in its product performance; initial trials in RNG applications show Arq's GAC performing "significantly better than the competition," and testing confirms it "significantly surpasses the required specification for most customers." This superior performance, coupled with the ability to reduce harmful environmental liabilities like PFAS, forms a critical competitive moat.

Arq's commitment to innovation extends beyond its core AC products. The company is actively engaged in R&D initiatives to leverage its Arq Powder feedstock in new markets. A testing program with a leading U.S. asphalt company explores using Arq Powder as a blending component to enhance freeze-thaw durability, increase hardness, and maintain color in asphalt emulsion. While commercialization is not expected before 2026, this represents a "significant potential future source of revenue" with "strong economics." Furthermore, Arq is investigating the extraction of rare earth minerals and synthetic graphite from its coal waste feedstock, aligning with strategic priorities of the current administration and potentially attracting federal public-private partnerships. These technological differentiators and diversification efforts are crucial for Arq to capture higher average selling prices (ASPs), lower production costs, improve margins, and solidify its long-term growth trajectory.

The Resilient PAC Foundation: A Turnaround Masterclass

The transformation of Arq's Powdered Activated Carbon (PAC) business serves as the bedrock for its ambitious growth plans. Starting in early 2023, the company embarked on a "nothing is sacred" approach to cost optimization and strategic price management. This initiative successfully converted a business where nearly one-quarter of all volumes were sold at a loss into a sustainably profitable entity. By 2025, all PAC sales contracts are net contributors, a testament to this focused execution.

Recent financial results underscore this turnaround. In Q2 2025, the PAC business contributed to a 13% year-over-year increase in overall revenue, reaching $29 million. This growth was fueled by higher volumes and a robust 9% increase in ASP, marking a near-decade-long streak of double-digit year-over-year price growth. For the first six months of 2025, revenue surged 18% year-over-year, driven by a $3.8 million increase in volumes and a $4.5 million boost from higher pricing, complemented by a $0.4 million gain from a favorable product mix. Gross margins for Q2 2025 stood at approximately 33%, a slight improvement over the prior year, with management anticipating future PAC gross margins "probably above 33%."

Operational efficiencies have been a key driver of this improved profitability. Selling, General & Administrative (SG&A) expenses decreased by approximately 16% in Q2 2025 year-over-year, largely due to the capitalization of payroll and benefits associated with the Corbin Facility and reduced incentive compensation. This follows a 15% reduction in SG&A in 2024, from $34 million to $29 million. The company has also strategically diversified its PAC customer base, reducing its exposure to the mercury emissions market to under 40% of volumes by the first half of 2025 and expanding into higher-margin water, cement, and industrial sectors. This diversification, coupled with a 95% customer retention rate in 2024, provides stability and a clear runway for ongoing profitability. Management is confident the PAC business can deliver "double-digit millions in annual EBITDA," ensuring it remains a consistent cash flow generator for 2025 and beyond.

GAC: The High-Growth Engine and Strategic Expansion

The successful commissioning of Arq's first Granular Activated Carbon (GAC) line at the Red River Plant in Q2 2025 marks a pivotal moment in the company's growth trajectory. This achievement, despite initial delays attributed to "inherited design errors" from a previous contractor and mechanical "fine-tuning," has enabled the company to commence commercial sales and begin its ramp-up towards a nameplate capacity of 25 million pounds within six months. The company's Chief Technology Officer, Joe Wong, clarified that while initial challenges related to product shaping and binding (Zone 3 issues) impacted consistency, there are "no fatal flaws" in the technology, and the team is focused on optimizing for "uninterrupted manufacturing."

This GAC expansion is strategically timed to capitalize on a market characterized by "exceptional strength" and "persistent supply shortages." The EPA's PFAS regulations are expected to drive a "material increase" in GAC demand, potentially adding "3x to 5x today's demand." While the EPA has suggested a potential extension of the compliance date from 2029 to 2031, management views this as a "pragmatic approach" to ensure supply meets demand, rather than a dilution of environmental policy. Customers are already "locking in supply early ahead of further expected constraints," as evidenced by large, long-term contracts like American Water (AWK)'s nine-year GAC supply agreement with a competitor, signaling tightening market dynamics.

Beyond PFAS, the Renewable Natural Gas (RNG) market presents another significant opportunity. RNG applications currently consume approximately 45 million pounds of GAC annually, with projections for 2x to 10x growth by 2030, potentially adding 45 million to 400 million pounds of incremental demand. This market offers "higher pricing and higher margins," with a "20% to 40% or more" pricing differential compared to the water market. Arq has already sold initial Phase 1 GAC product to RNG customers for trials, strategically reserving capacity for these higher-margin contracts.

Arq's competitive positioning in the GAC market is bolstered by its fully integrated domestic supply chain, which provides insulation from tariffs impacting competitors reliant on imported materials. While larger competitors like Cabot Corporation (CBT) and Ingevity Corporation (NGVT) possess broader global footprints and diversified portfolios, Arq's specialized technology and focused approach allow it to achieve superior product performance in niche environmental applications. The company's smaller scale, however, presents vulnerabilities in terms of R&D investment and global reach compared to these larger players.

Looking ahead, Arq has identified the potential to increase Red River's Phase 1 capacity by an additional 10% to 20% beyond its 25 million-pound nameplate, with "no anticipated additional CapEx required," achievable by Q3 2025 through "detuning" its product to meet customer specifications more efficiently. This upside, not yet factored into forecasts, further enhances the project's economics. The company's goal is to make a Final Investment Decision (FID) on a second 25 million-pound GAC line by the end of 2025. This Phase 2, already fully permitted, is estimated to cost approximately $75 million ($3 per pound of annual production) and is expected to take "12 months or less" to construct, benefiting from "lessons learned" from Phase 1. Management intends to fund this expansion through a combination of cash flow from its robust PAC and emerging GAC businesses, coupled with debt, explicitly stating a preference "to issue no further equity." This strategy is supported by the company's strengthened balance sheet, including a $30 million revolving credit facility secured in late 2024.

Financial Strength and Outlook

Arq's financial health reflects its ongoing transformation. As of June 30, 2025, the company held $7.0 million in unrestricted cash and had access to its $30 million revolving credit facility, with $18.5 million drawn. This facility, secured in December 2024, replaced a more expensive $10 million term loan, significantly reducing the cost of capital and expanding liquidity. Management projects that existing cash and credit availability will sufficiently fund operations for the next 12 months.

Despite the positive trends, the company has faced financial challenges. The Red River GAC project incurred $80 million in CapEx for 2024, exceeding forecasts by $10 million due to issues with piping, electrical work, and disputed invoices, leading to legal proceedings against the former design firm. Research and Development expenses also saw a significant increase in Q2 2025, absorbing approximately $1.9 million in pre-production feedstock costs for GAC commissioning. These costs contributed to a net loss of $2.1 million in Q2 2025, compared to a $2.0 million net loss in Q2 2024. However, the company's Adjusted EBITDA for Q2 2025 was positive at $3.7 million, a more than 3x improvement over the prior year, demonstrating underlying operational strength.

For 2025, capital expenditures are forecast between $8 million and $12 million, primarily for plant maintenance and the ramp-up of the first GAC line, excluding any potential Phase 2 CapEx. The Corbin Facility, commissioned in January 2025, is expected to resume normal operations in the latter half of Q3 2025 after a temporary reduction. Arq anticipates providing comprehensive financial guidance in 2026, once GAC production is fully ramped up and its over-nameplate capacity potential is definitively established.

Conclusion

Arq, Inc. stands at a pivotal juncture, having successfully executed a remarkable turnaround of its foundational PAC business while simultaneously launching its transformative GAC growth engine. The company's proprietary technology, converting coal waste into high-performance activated carbon, provides a distinct competitive edge in a market driven by stringent environmental regulations and burgeoning demand from sectors like PFAS mitigation and Renewable Natural Gas. This technological leadership, coupled with a fully integrated domestic supply chain, positions Arq as a crucial player in the North American environmental solutions landscape, offering superior product performance and resilience against import tariffs.

While the GAC commissioning faced initial hurdles and capital expenditure overruns, management's transparent communication and proactive problem-solving, including legal action against former contractors, underscore a commitment to accountability. The successful commissioning of the first GAC line and the ambitious plans for a second, to be funded without further equity, signal a clear path to significant value creation. With a robust financial foundation, a compelling growth strategy, and diversified opportunities in asphalt additives and critical minerals, Arq is poised to leverage its unique capabilities to meet escalating environmental demands, making it a compelling investment story for discerning investors.