10-Q: Arq Reports Q3 Loss Amid GAC Facility Delays, Revenue Up

Arq, Inc. reported a net loss of $0.7 million in Q3 2025, a swing from profit in the prior year, despite a 1% revenue increase, as GAC facility ramp-up faces design flaws and delays.

Summary

• Arq, Inc. reported a net loss of $0.7 million for the three months ended September 30, 2025, compared to a net income of $1.6 million in the same period of 2024.
• Revenue for Q3 2025 increased by 1% to $35.1 million, primarily driven by higher pricing, offset by decreased volumes in the water purification market.
• For the nine months ended September 30, 2025, the net loss improved to $2.6 million from $3.8 million in the prior year, with revenue increasing 11% to $90.9 million.
• The initial production ramp-up of the Red River Plant's GAC Facility was adversely impacted by previously disclosed design flaws and feedstock variability, delaying nameplate capacity to mid-year 2026.
• Cost of revenue, exclusive of depreciation and amortization, increased by 17% in Q3 2025, primarily due to fixed production costs associated with the initial GAC facility production.
• Selling, general and administrative expenses decreased by 43% in Q3 2025, largely due to reduced accrued incentive compensation and allocation of Corbin Facility personnel costs to cost of revenue.
• Research and development expenses significantly increased by $1.8 million in Q3 2025, mainly due to feedstock consumed and outside services for pre-commencement testing of the GAC Facility.
• Cash and restricted cash decreased from $22.2 million at December 31, 2024, to $15.5 million at September 30, 2025.
• The company commenced legal proceedings against the design firm for the GAC facility, seeking damages for negligence and contractual breaches that led to increased costs and time delays.
• The Board of Directors terminated the $20.0 million stock repurchase program on August 12, 2025, with $7.0 million remaining unused.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the swing to a net loss in the current quarter, significant operational delays and design flaws impacting the key GAC facility ramp-up, and increased cost of revenue. While there are positives like overall revenue growth for the nine months and reduced SG&A, the immediate financial performance and the GAC project setbacks weigh heavily on the outlook.

Positives

• Revenue increased by 1% in Q3 2025 and 11% for the nine months ended September 30, 2025, driven by higher pricing and increased volumes from power generation customers.
• Net loss for the nine months ended September 30, 2025, improved to $2.6 million from $3.8 million in the prior year period.
• Selling, general and administrative expenses decreased significantly by 43% in Q3 2025 and 27% for the nine months, reflecting cost management and reclassification of certain expenses.
• Interest expense decreased by 27% in Q3 2025 and 21% for the nine months, primarily due to lower average interest rates on outstanding debt facilities.
• The Red River Plant's GAC Facility reached initial commercial production levels on August 6, 2025, marking a significant operational milestone.
• Increased demand for products from coal-fired power generation customers due to higher natural gas prices ($3.03/MMBtu in Q3 2025 vs. $2.11/MMBtu in Q3 2024).
• A $0.7 million gain was recognized from an insurance claim related to mining equipment at the Five Forks Mine in Q3 2025.
• The Tax Asset Protection Plan (TAPP) was extended to December 31, 2026, with stockholder approval, aiming to protect the company's ability to utilize net operating losses and tax credits.

Negatives

• The company reported a net loss of $0.7 million in Q3 2025, a decline from a net income of $1.6 million in Q3 2024.
• Initial production ramp-up of the GAC Facility was adversely impacted by previously disclosed design flaws and feedstock variability.
• The expected timeline to reach GAC nameplate capacity has been delayed to mid-year 2026.
• Cost of revenue, exclusive of depreciation and amortization, increased by 17% in Q3 2025, primarily due to higher fixed production costs at the Red River Plant and Corbin Facility relative to initial GAC production volumes.
• Operating income shifted to a loss of $0.8 million in Q3 2025 from an income of $2.0 million in Q3 2024.
• Cash and restricted cash decreased by $6.7 million from December 31, 2024, to September 30, 2025.
• The stock repurchase program was terminated with $7.0 million remaining, indicating a halt in direct shareholder returns through buybacks.

Risks

• The timing and scope of new and pending regulations and any legal challenges to or extensions of compliance dates of them.
• The U.S. government's failure to promulgate new regulations or enforce existing regulations that benefit the business.
• Changes in laws and regulations, accounting rules, prices, economic conditions, and market demand.
• Availability, cost of, and demand for alternative energy sources and other technologies and their impact on coal-fired power generation in the U.S.
• Technical, start-up, and operational difficulties, including those related to the GAC facility.
• Competition within the industries in which the company operates.
• Risks associated with the company's debt financing.
• Inability to effectively and efficiently commercialize new products, including GAC products.
• Disruptions at any of the facilities, including by natural disasters or extreme weather.
• Risks related to information technology systems, including cyberattacks.
• Failure to protect intellectual property from infringement or claims of infringement on others' intellectual property.
• Inability to obtain future financing or financing on favorable terms.
• Inability to ramp up operations to effectively address recent and expected growth.
• Loss of key personnel.
• Ongoing effects of inflation and macroeconomic uncertainty, including from increased domestic and international tariffs, lingering effects of the pandemic, and armed conflicts.
• Availability of materials and equipment for the business.
• Pending litigation, including the legal proceedings against the GAC facility design firm.
• Factors relating to business strategy, goals, and expectations concerning the acquisition of Arq Limited.
• Ability to maintain relationships with customers, suppliers, and others and meet supply requirements.
• Costs related to the ongoing manufacturing of products, including GAC products.
• Opportunities for additional sales of AC products and end-market diversification.
• The rate of coal-fired power generation in the U.S.
• The timing and cost of any future capital expenditures and the resultant impact to liquidity and cash flows.
• The impact of prices of competing power generation sources such as natural gas and renewable energy on demand for products.

Future Outlook

The company expects revenue to be positively impacted by product price increases and anticipates gross margin improvement as GAC production at the Red River Plant increases and fixed production costs are spread over higher volumes. GAC nameplate capacity is now expected around mid-year 2026, with a final investment decision for a potential second GAC line coinciding with this timeline. The implementation of EPA PFAS regulations is expected to drive a material increase in GAC demand in the water purification market, though compliance dates may be extended to 2031. The company believes its cash on hand and borrowing availability will provide sufficient liquidity for the next 12 months, with capital expenditures primarily focused on plant maintenance and improvements to reach GAC nameplate capacity.

Management Comments

• "The initial production ramp-up of the Red River Project was adversely impacted during the third quarter of 2025 by previously disclosed design flaws in our GAC Facility, both alone as well as in combination with the inherent variability of the Arq Powder feedstock used to manufacture our GAC products."
• "As a result of these adverse impacts, we now expect to reach GAC nameplate capacity around mid-year 2026."
• "We now also expect our final investment decision with respect to a potential second GAC line at our Red River Plant to coincide with reaching GAC nameplate capacity in mid-year 2026."
• "We expect that revenue will continue to be positively impacted by our product price increases. As production of our GAC products at our Red River Plant increases, we expect that gross margin will improve as the impact of fixed production costs on our gross margin lessens."
• "Based on current operating levels, we expect that our cash on hand and borrowing availability under the Revolving Credit Facility as of September 30, 2025 will provide sufficient liquidity to fund operations for the next 12 months."

Industry Context

The company operates in the environmental technology sector, specifically in advanced purification technologies (APT) using activated carbon. Demand for its products is significantly influenced by natural gas prices, which, when higher, increase the utilization of coal-fired power generation and thus demand for Arq's products. Macroeconomic trends like increased consumption from data centers and electric vehicles are also driving overall power generation demand. The tightening of EPA regulations on PFAS in municipal water is a major long-term driver for GAC demand, although the compliance timeline may be extended. The company's focus on GAC production aligns with these environmental regulatory trends and growing purification needs.

Corporate Governance

Legal Proceedings

• The company commenced legal proceedings against the firm engaged for the design of the GAC facility constructed at the Red River Plant in the U.S. District Court, Western District of Louisiana, Shreveport Division. The company alleges negligence and breach of contract, seeking to recover material damages including increased costs and time delays associated with the project.

Related Party Transactions

• The company has an unconsolidated equity investment in Tinuum Group (42.5% ownership), which is accounted for under the equity method. The company recognized earnings from Tinuum Group of $0.1 million for the three months and $0.2 million for the nine months ended September 30, 2025. Tinuum Group continues to wind down its operations.
• The company has a contractual obligation (Tinuum Group Obligation) of $1.7 million for its share of certain contingent liabilities of Tinuum Group, included in 'Other current liabilities'.

Stakeholder Impact

• **Shareholders**: Experienced a net loss in Q3 2025 and a delay in the GAC facility ramp-up, potentially impacting future profitability and stock performance. The termination of the stock repurchase program removes a mechanism for returning capital. The TAPP extension aims to protect long-term tax assets.
• **Customers**: Increased demand for products, particularly from coal-fired power generation due to higher natural gas prices. Delays in GAC production could impact supply for new water purification markets (PFAS).
• **Employees**: Payroll and benefits expenses decreased due to reduced incentive compensation and reclassification of some production personnel costs, potentially affecting employee morale or compensation expectations.
• **Creditors**: The company expects sufficient liquidity for the next 12 months, supported by cash on hand and the revolving credit facility, which should reassure creditors. Debt obligations are being managed, with interest expense decreasing.
• **Suppliers**: Ongoing operations at Five Forks Mine and Corbin Facility, along with GAC production, indicate continued demand for raw materials and services.

Next Steps

• Continue efforts to increase GAC production to reach nameplate capacity at the Red River Plant around mid-year 2026.
• Make a final investment decision regarding a potential second GAC line at the Red River Plant around mid-year 2026.
• Secure customer interest in Arq Powder as an additive in new markets (e.g., asphalt, purified coal, synthetic graphite).
• Explore uses for rare earth minerals and critical elements isolated during the Corbin Facility manufacturing process.
• Pursue legal proceedings against the GAC facility design firm to recover damages from negligence and contractual breaches.
• Monitor and adapt to the implementation timeline of EPA PFAS National Primary Drinking Water Regulation.

Key Dates

Recommendation

The company presents a mixed financial picture with a net loss in Q3 2025 but improved net loss for the nine-month period, coupled with revenue growth. The GAC facility, a key growth driver, is operational but faces significant delays and design flaws, leading to increased costs and pushing back full capacity. While long-term demand drivers like PFAS regulations and increased power generation are favorable, the immediate operational challenges and the swing to quarterly loss create uncertainty. The legal action against the design firm is a positive step to mitigate damages. A 'hold' recommendation is appropriate as investors await clearer execution on the GAC ramp-up, resolution of legal proceedings, and a sustained return to profitability, balancing the long-term potential against current headwinds.

Keywords

Activated Carbon, Environmental Technology, GAC Facility, PFAS, Air Quality, Water Treatment, Coal-fired Power Generation, Red River Plant, Arq Powder, Lignite Mine, Corbin Facility, SEC Filing, Quarterly Report, Financial Results