ARQ — Q2 2026 Financial Report Analysis

Overview

Arq, Inc. (formerly Advanced Emissions Solutions) makes activated carbon, a highly porous charcoal-like material that traps pollutants. Most of its sales are powdered activated carbon (PAC) that coal-fired power plants inject into flue gas to capture mercury, plus carbon used by municipal water plants. In the second quarter of 2026 revenue rose 4.5% to $29.9 million and the net loss narrowed to $0.7 million from $2.4 million a year earlier. The bigger story sits outside the income statement: the company has paused its new granular activated carbon (GAC) plant, the project it spent the last several years building, and now says it does not expect any GAC production in 2026 or 2027.

At a glance

• Revenue $29.9 million, up 4.5%. Higher prices added $1.3 million and higher activated-carbon volumes about $1.0 million, partly offset by $1.1 million less from lower-margin chemical products. The demand came mainly from power plants burning more coal during hot weather.
• Net loss $0.7 million vs $2.4 million. About $1.45 million of that improvement comes from an accounting change adopted on April 1, 2026, not from the business. Under the old method the quarter's loss would have been $2.2 million, roughly the same as a year ago.
• Unrestricted cash of $0.9 million at June 30, with $21.4 million drawn on a $30 million revolving credit line. Management says that is enough to fund operations for the next 12 months "based on current operating levels."

Q2 2026 results

Prior-year figures are as restated by the company for the new maintenance accounting method. Gross margin here is revenue minus cost of revenue, which excludes depreciation and amortization (D&A). "n/m" = not meaningful (loss in both periods). Arq reports a single business segment, so the geographic split is the only revenue breakdown in the filing.

For the first half of 2026, revenue was $58.9 million (+5.6%) and the net loss was $1.9 million vs $2.4 million.

What drove the quarter

Pricing and power-plant demand. Management attributes the revenue gain to "increased pricing, which contributed additional revenues of $1.3 million, as well as higher sales volumes of our AC products, which contributed additional revenues of approximately $1.0 million," mostly from "customers in the power-generation market, driven by seasonal electricity demand." Arq's sales track how much coal US utilities burn. The filing points to hot and cold weather, steady natural gas prices that made coal competitive (Henry Hub averaged $3.87/MMBtu in the first half vs $3.67 a year earlier) and growing electricity demand from data centers.

Less low-margin chemical sales. Chemical product revenue fell $1.1 million. Because those products carry lower margins than activated carbon, the drop helped the product mix.

Lower costs from the idled Corbin plant. Cost of revenue fell 4% to $18.4 million. The filing credits the Corbin Facility in Kentucky, idled indefinitely since December 2025, partly offset by higher unit costs from operations wages and utilities.

Lower R&D, higher overhead. R&D fell $1.7 million to $1.0 million because the year-ago quarter included $1.9 million of feedstock burned in GAC plant testing. Selling, general and administrative expense rose 15% to $6.8 million, driven by severance for three departing executives (the CFO, COO and chief accounting officer transitions) and higher property taxes and software costs. D&A rose 30% to $3.5 million as GAC plant equipment placed in service in late 2025 began depreciating.

What the headline numbers hide

An accounting change explains most of the improvement. From April 1, 2026, Arq stopped expensing the cost of planned major maintenance shutdowns ("turnarounds") at its Red River Plant in Louisiana when it incurs them. It now records them as an asset and spreads the cost over the years until the next shutdown. Q2 2026 included one of these twice-yearly shutdowns, so the change mattered a lot this quarter. Per Note 12 of the 10-Q:

• Cost of revenue would have been $20.1 million instead of $18.4 million (a $1.77 million difference).
• The net loss would have been $2.2 million instead of $0.7 million, and loss per share $0.05 instead of $0.02.
• Gross margin on the old basis would have been about 32.6%, slightly below last year's 33.3%.

The company argues that spreading the cost better matches it to the years the maintenance benefits, which is a reasonable argument and is common practice in refining and chemicals. The change was applied to prior periods too, and the restated year-ago loss is slightly larger ($2.37 million vs $2.13 million originally reported). But readers comparing headline profit should know that on the accounting basis Arq used until March, the bottom line barely moved year over year.

Adjusted EBITDA flatters the picture further. EBITDA is earnings before interest, taxes, depreciation and amortization, a rough proxy for operating cash profit. Arq's adjusted version also adds back $1.0 million of stock compensation, $0.8 million of executive severance and a $0.3 million loss on scrapped machinery. It rose 59% to $5.8 million, but that figure also benefits from the $1.77 million of capitalized maintenance. Without it, adjusted EBITDA would have been roughly $4.1 million, up about 11%.

Cash still went out the door. For the first half, operating cash flow was -$2.7 million (better than -$5.3 million a year ago), and capital spending was $2.0 million, so free cash flow was about -$4.8 million. The operating figure already includes $2.2 million paid into "other long-term assets," which is where capitalized turnaround spending sits. The change moves the cost to a different line but does not reduce the cash spent.

Receivables jumped. Receivables rose to $20.0 million from $15.0 million at year-end, while inventory rose to $19.4 million from $15.9 million. Some of this is seasonal, since summer is a peak sales period. But the lender's March 31 amendment allows "higher single customer concentration until August 2026" in the borrowing base, which suggests a large share of the receivables is owed by one customer. Separately, the filing discloses a supply contract worth $4.0 million a year that expires December 31, 2026.

The balance sheet is thin. Unrestricted cash was $0.9 million, down from $6.6 million at year-end. Another $11.2 million is restricted (mostly collateral for mine-reclamation surety bonds). Total debt was $30.7 million, including $21.4 million on the MidCap revolver at SOFR + 4.50% with a 2.50% floor. Lenders have been accommodating: the revolver was amended five times between May 2025 and March 2026. The latest amendment replaced the minimum-liquidity covenant with a $2.5 million availability reserve that rises to $5.0 million in January 2027. Community Trust Bank waived the 2025 covenants on its $10 million term loan and suspended testing for 2026. Interest expense rose 26% to $0.7 million. Share count grew only 1.4% (to 42.1 million weighted average), so dilution has not been an issue yet.

The GAC plant: from growth engine to open question

The GAC facility was meant to move Arq into higher-value granular carbon for water treatment, including PFAS ("forever chemical") removal. The company commissioned the plant and produced its first on-spec product in August 2025. By December it was clear the plant could not reach nameplate capacity "because of design flaws." Independent testing in January 2026 showed the thermal oxidizer could support only about 15 million pounds a year versus a design capacity of 25 million or more. Management concluded that "a 15 million pound per year scenario on a stand-alone basis does not provide sufficient returns." In March it paused GAC production, kept the Corbin Facility idle and began an engineering review. It also plans to switch GAC feedstock from Corbin's coal-waste "wetcake" to conventional bituminous coal. The review has since been widened to the whole business, with a focus on furnace throughput and unit costs for PAC as well. Litigation with the original engineering firm is ongoing.

The financial footprint is already visible. Retained earnings fell from $65.4 million at June 30, 2025 to $14.2 million at December 31, 2025, a period that included the fourth-quarter 2025 impairment of the Corbin Facility assets. The GAC plant itself still carries depreciation, which is part of why D&A rose this quarter.

Takeaway: Arq's legacy powdered-carbon business is doing a bit better on pricing and coal-plant demand. But most of this quarter's narrower loss comes from a new way of accounting for plant maintenance, not from the business, and the GAC project that was supposed to transform the company is shelved through at least 2027. With $0.9 million of free cash and a heavily amended credit line, Arq's room to act depends on the PAC business generating cash and on its lenders.

Outlook

Management expects PAC demand to keep supporting revenue and gross margin to improve "as the impact of fixed production costs related to our GAC products on our gross margin lessens." It expects natural gas prices to stay "relatively consistent through 2026 at an elevated level," which would keep coal plants running. Capex for the rest of 2026 is limited to plant maintenance and improvements. No revenue or earnings guidance is given in the 10-Q.

Our read: the next few quarters depend on three things.

1. The optimization review. The review will set production scale and capital needs for the GAC plant. Any restart is likely to require new capital, which would be hard to fund from $0.9 million of cash and a mostly drawn revolver, so equity, asset sales or a partner are plausible routes.
2. Seasonality. Q3 is historically one of Arq's strongest quarters (summer power demand plus peak municipal water treatment), so it should show whether cash flow can turn positive without one-off help.
3. Credit. The revolver's availability reserve doubles to $5.0 million in January 2027, which tightens borrowing room right when the winter season ends.

Leadership turnover (three executive departures) adds execution risk to all three.