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Item 7. Management’s Discussion and Analysis

2025-03-05 compared with 2024-03-12 · 155 added, 129 removed, 175 unchanged (62% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

We are an environmental technology company and are principally engaged in the sale of consumable air and water treatment solutions primarily based on AC.

Our proprietary AC products enable customers to reduce air, soil, and water contaminants, including mercury, PFAS and other pollutants, to help our customers maximize utilization effectiveness and to improve operating efficiencies to meet the challenges of existing and pending air quality, soil, and water regulations.

We manufacture and sell AC and other chemicals used to capture and remove contaminants for coal-fired power generation, industrial and water treatment markets, which we collectively refer to as the advanced purification technologies or "APT" market.

We are an environmental technology company and are principally engaged in the sale of consumable air, water, and soil treatment solutions primarily based on AC.

Our proprietary AC products enable customers to reduce air, soil, and water contaminants, including mercury, PFAS and other pollutants to meet the challenges of existing and pending air quality, soil, and water regulations.

We manufacture and sell AC and other chemicals used to capture and remove impurities, contaminants and pollutants for the coal-fired power generation, industrial, water treatment, and water and soil remediation markets, which we collectively refer to as the APT market.

Our primary products are comprised of AC, which is produced from a variety of carbonaceous raw materials.

Our AC products include both PAC and GAC.

Additionally, we own the Five Forks Mine, a lignite mine that currently supplies the primary raw material for the manufacturing of our products.

In February 2023, we acquired 100% of the equity of the subsidiaries of Arq Limited (hereafter the Arq Limited subsidiaries referred to as "Legacy Arq", and the acquisition itself referred to as the "Arq Acquisition") to secure access to a feedstock, a manufacturing facility and certain patented processes as a means to manufacture additional GAC products for sale into the APT and other markets.

With the Arq Acquisition, we now control bituminous coal waste reserves and own a manufacturing facility, both located in Corbin, Kentucky (the "Corbin Facility"), and a process to recover and purify the bituminous coal fines for sale or further conversion to GAC products.

Under this manufacturing process, we convert coal waste into a purified, microfine carbon powder known as Arq powder TM ("Arq Powder").

We expect to begin using Arq Powder as a feedstock to begin manufacturing GAC products by the end of 2024 to begin using Arq Powder as a feedstock to produce high-quality GAC products for sale in the APT and other markets.

We believe Arq Powder has additional potential for us to access new markets and applications.

We expect to secure customer interest in Arq Powder as an additive into other markets, such as components for asphalt.

These products utilizing Arq Powder are expected to have a lower carbon footprint compared to similar products utilizing conventional materials.

Our AC products include both PAC and GAC, among others.

Additionally, we own the Five Forks Mine, a lignite coal mine that currently supplies the primary raw material for the manufacturing of our products.

In February 2023, we acquired 100% of the equity interests, assets and liabilities of the subsidiaries of Arq Limited, an environmental technology company incorporated under the laws of Jersey (hereafter the Arq Limited subsidiaries referred to as "Legacy Arq", and the acquisition itself referred to as the "Arq Acquisition") to secure access to additional U.S.

based bituminous coal feedstock, a manufacturing facility located in Corbin, Kentucky (the "Corbin Facility") and certain patented processes as a means to manufacture new advanced GAC products for sale into the APT and other markets.

Under this manufacturing process, we convert high-quality recovered bituminous coal fines into a purified, microfine carbon powder known as Arq powder TM ("Arq Powder") for high value applications, such as for a raw material to produce GAC products.

We expect to begin using Arq Powder as a feedstock to produce high-quality GAC products by the end of the first quarter of 2025 for sale into the APT and other markets.

We anticipate that our GAC products made using these highly purified recovered bituminous coal fines will have a materially lower carbon footprint than other coal-based competitor alternatives.

We believe Arq Powder has additional potential to enable us to access new markets and applications.

We intend to secure customer interest in Arq Powder as an additive into other markets, such as components for asphalt.

These products utilizing Arq Powder are expected to have a lower carbon footprint compared to similar products utilizing conventional materials and have demonstrated other beneficial performance attributes during lab-scale customer testing.

These applications are currently in various stages of proof of concept testing or preliminary customer testing.

In February 2024, as part of a larger rebranding, the Company changed its name to Arq, Inc., and on February 1, 2024, our common stock commenced trading under the ticker symbol, "ARQ".

In February 2024, as part of a larger rebranding, the Company changed its name to Arq, Inc., and on February 1, 2024, our common stock commenced trading on the Nasdaq Global Market under the ticker symbol, "ARQ."

Drivers of Demand and Key Factors Affecting Profitability

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(2) changes in price and product mix;

(3) changes in coal-fired dispatch and electricity power generation sources and (4) changes in demand for contaminant removal within water treatment facilities.

(3) changes in coal-fired dispatch and electricity power generation sources;

(4) changes in demand for contaminant removal within water treatment facilities;

(5) changes in environmental regulations;

and (6) state or municipal approval and customer acceptance for our new GAC products.

Components of Revenue, Expenses and Equity Method Investees

The following briefly describes the components of revenue and expenses as presented in the Consolidated Statements of Operations.

The following narrative briefly describes the components of revenue and expenses as presented in the Consolidated Statements of Operations.

Descriptions of the revenue recognition policies are included in Note 1 to the Consolidated Financial Statements included in Item 8 of this Report.

Revenue and cost of revenue

Our revenue is comprised of the sale of AC products and other chemical-based technology products in the APT market, as well as the sale of other AC products to our largest customer, who services other diverse markets.

Consumables cost of revenue

Consumables cost of revenue is comprised of all labor, fringe benefits, subcontract labor, additive and coal costs, materials, equipment, supplies, travel costs and any other costs and expenses directly related to the cost of production of consumables.

Our revenue is comprised of the sale of AC products and other chemical-based technology products into the APT market, as well as the sale of other AC products to our largest customer, who services other diverse markets.

Cost of revenue

Cost of revenue is comprised of all labor, fringe benefits, subcontract labor, additive and coal costs, materials, equipment, supplies, travel costs and any other costs and expenses directly related to the cost of production of consumables.

License Royalties Payable to Tinuum Group

In December 2022, the Company and Tinuum Group entered into an agreement (the "Tinuum Group Royalty Agreement") whereby we pay Tinuum Group a royalty (the "Tinuum Group Royalty") for certain of our sales of M-Prove TM products after the expiration of the tax credit program under IRC Section 45 ("Section 45 Tax Credit Program") (beginning January 1, 2022) to certain of the M-45 Facilities.

The Tinuum Group Royalty is calculated based on "Net Profit" (as defined in the Tinuum Royalty Agreement) on our sales of M-Prove TM product to certain of the M-45 Facilities.

The Tinuum Group Royalty is calculated based on "Net Profit" (as defined in the Tinuum Royalty Agreement) on our sales of M-Prove TM product to certain of the Refined Coal Facilities.

The Tinuum Group Royalty Agreement is for an initial term of five years with automatic renewals of five years unless we and Tinuum Group agree to terminate it.

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Other Operating Expenses

Payroll and benefits

Payroll and benefits costs include payroll costs, payroll related fringe benefits and stock based compensation expense of research and development, sales and administrative personnel, but exclude such costs related to direct labor that are included in Cost of revenue.

Legal and professional fees

Selling, general and administrative

Selling, general and administrative costs include payroll and benefits costs, legal and professional fees, and general and administrative expenses.

Payroll and benefits costs include payroll costs, payroll-related fringe benefits and stock-based compensation expense of sales and administrative personnel, but exclude such costs related to direct labor that are included in Cost of revenue.

Payroll costs, payroll-related fringe benefits, and stock-based compensation expense of research and development personnel are reported in the Research and development line item in the Consolidated Statements of Operations.

Legal and professional costs include external legal, audit and consulting expenses.

General and administrative

General and administrative costs include director fees and expenses, bad debt expense, research and development expense and other general costs of conducting business.

Research and development costs provided by third parties, net of reimbursements from cost-sharing arrangements, are charged to expense in the period incurred and are reported in the General and administrative line item in the Consolidated Statements of Operations.

General and administrative costs include director fees and expenses, bad debt expense, rent and occupancy expense and other general costs of conducting business.

Research and development

Research and development costs include payroll expenses related to research and development personnel and other expenses incurred related to research and development activities.

Research and development costs provided by third parties, net of reimbursements from cost-sharing arrangements, are charged to expense in the period incurred.

Depreciation, amortization, depletion and accretion

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Depletion and accretion expense consists of depletion expense related to the depletion of mine development costs and the accretion of mine reclamation liabilities.

Other Income (Expense), net

Other (Expense) Income, net

Earnings from equity method investments

Earnings from equity method investments represent our share of earnings (losses) related to equity method investments, and in 2023, primarily from Tinuum Group.

Earnings from equity method investments represent our share of earnings related to equity method investments, and in 2023 and 2024, primarily from Tinuum Group.

Through December 31, 2021, we had substantial earnings from Tinuum Group and Tinuum Services, LLC ("Tinuum Services").

With the expiration of the tax credit program under IRC Section 45 afforded to producers of refined coal as of December 31, 2021, both Tinuum Group and Tinuum Services commenced winding down their operations related to the Section 45 tax credit program, although we have recognized earnings in both 2022 and 2023 related to residual cash distributions received.

Other income (expense)

The remaining components of other income (expense) include interest income, interest expense and other miscellaneous items.

We have recognized earnings in both 2023 and 2024 related to residual cash distributions received from Tinuum Group.

Tinuum Services ceased operations and completed its wind down in 2024.

Other (expense) income

The remaining components of other (expense) income include interest income, interest expense and other miscellaneous items.

Results of Operations

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The year-to-year comparison of financial results is not necessarily indicative of financial results that may be achieved in future years.

Our Annual Report on Form 10-K for the year ended December 31, 2023 includes a discussion and analysis of our financial condition and results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022, disclosed in Item 7 of Part II, "Management’s Discussion and Analysis of Financial Condition and Results of Operations."

This discussion and analysis compares 2024 results to 2023 results.

For discussion and analysis that compares 2023 results to 2022 results, see Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II of our Annual Report on Form 10-K for the year ended December 31, 2023.

Year ended December 31, 2024 Compared to Year ended December 31, 2023

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2024 2023 ($) (%)

Consumables $ 99,183 $ 102,987 $ (3,804) (4) %

Total revenue $ 99,183 $ 102,987 $ (3,804) (4) %

Consumables cost of revenue, exclusive of depreciation and amortization $ 67,323 $ 80,465 $ (13,142) (16) %

Consumables revenue and consumables cost of revenue

For the years ended December 31, 2023 and 2022, consumables revenue decreased year over year primarily driven by lower volumes sold, which comprised $20.0 million of the total change.

Product volumes decreased among power generation customers, primarily due to lower natural gas prices compared to 2022, which contributed to decreased utilization of coal-fired generation and decreased demand for our products.

Partially offsetting the decrease was an increase due to improved pricing for our products of approximately $10.6 million, $4.7 million of revenue recognized from the settlement of certain contracts with customers containing minimum quantity purchases ("MQ Contacts") and the impact of favorable product mix of approximately $0.7 million.

Revenue $ 108,959 $ 99,183 $ 9,776 10 %

Cost of revenue, exclusive of depreciation and amortization $ 69,515 $ 67,323 $ 2,192 3 %

Revenue and cost of revenue

For the years ended December 31, 2024 and 2023, revenue increased year over year primarily driven by the impact of favorable product mix of approximately $6.9 million and improved pricing for our products of approximately $4.9 million.

These increases were partially offset by lower volumes sold, which negatively impacted revenue by $2.2 million.

Product volumes decreased among power generation customers in 2024, primarily due to lower natural gas prices compared to 2023, which contributed to decreased utilization of coal-fired generation and decreased demand for our products.

Also offsetting the overall increase was a decrease in revenue recognized from the settlement of certain contracts with customers containing minimum quantity purchases ("MQ Contracts").

Consumables gross margin, exclusive of depreciation and amortization, increased for the year ended December 31, 2024 compared to 2023.

Driving the increase in gross margin were the impact of the MQ contracts and decreased cost of our feedstock and additives, primarily as a result of decreased production volumes during 2023.

Our consumables gross margin was negatively impacted by a decrease in volumes sold.

The increase in gross margin was primarily driven by an increase in revenue resulting from increased pricing of our products, while the cost to manufacture our products increased between periods, partially due to increased variable production costs on lower production volumes during 2024.

Our consumables gross margin was negatively impacted by a decrease in volumes sold and lower revenue recognized from MQ Contracts in 2024 compared to 2023.

We currently expect consumables revenue to increase in the coming years as a result of increased regulatory requirements finalized by the EPA in April 2024, especially with respect to PFAS substances.

However, there is substantial uncertainty regarding the future of these regulations in light of the change in the U.S.

presidential administration.

See "Legislation and Environmental Regulations" included in Item 1 and our risk factor discussion in Item 1A of this Report for further information.

Consumables revenue continues to be affected by electricity demand, driven by seasonal weather and related power generation needs, as well as competitor prices related to alternative power generation sources such as natural gas and renewables.

Other Operating Expenses

Operating Expenses

A summary of the components of our operating expenses, exclusive of cost of revenue items (presented above), for the years ended December 31, 2024 and 2023 is as follows:

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Operating expenses:

Selling, general and administrative $ 28,695 $ 34,069 $ (5,374) (16) %

Research and development 4,050 3,314 736 22 %

Depreciation, amortization, depletion and accretion 8,594 10,543 (1,949) (18) %

Loss (gain) on sale of assets 64 (2,731) 2,795 *

$ 41,403 $ 45,195 $ (3,792) (8) %

* Percent change in excess of 100% not considered meaningful.

Selling, general and administrative

A summary of the components of selling, general and administrative expenses for the years ended December 31, 2024 and 2023, exclusive of cost of revenue items (presented above), is as follows:

Years Ended December 31, Change

(in thousands, except percentages)

2024 2023 ($) (%)

Payroll and benefits $ 9,507 $ 13,491 $ (3,984) (30) %

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General and administrative 13,601 11,368 2,233 20 %

Depreciation, amortization, depletion and accretion 10,543 6,416 4,127 64 %

Gain on sale of Marshall Mine, LLC (2,695) — (2,695) *

Other (36) 34 (70) (206) %

$ 45,195 $ 34,590 $ 10,605 31 %

* Calculation not meaningful

Total Selling, general and administrative $ 28,695 $ 34,069 $ (5,374) (16) %

Payroll and benefits

Payroll and benefits expenses increased year over year primarily due to the addition of Legacy Arq employees, which increased expenses by $4.9 million for the year, of which $1.1 million related to severance expense of former executives of Legacy Arq.

In addition, for the year ended December 31, 2023, we incurred severance related costs of $1.7 million associated with the termination of three executive employees.

These increases were partially offset by a decrease in incentive compensation related

to non-Legacy Arq employees for the year ended December 31, 2023 of $1.3 million compared to the corresponding period in 2022.

An additional decrease in payroll and benefits was due to retention bonuses with our executive officers and certain other key employees of $1.2 million, which were paid in full in January 2023.

Payroll and benefits expenses decreased year over year primarily due to expenses recorded during the year ended December 31, 2023 relating to severance expense of former executives, which comprised $1.7 million of the total payroll and benefit expense, and $1.1 million related to severance expense of former executives of Legacy Arq.

Additionally, salaries and wages and other benefit-related expenses decreased by $1.0 million year over year primarily as a result of lower CEO compensation beginning in July 2023.

Legal and professional fees

Legal and professional fees remained flat year over year.

Legal and professional fees decreased year over year primarily from decreased consulting, legal, and accounting costs incurred related to the acquisition of Legacy Arq during 2023.

General and administrative

General and administrative expenses increased for the year ended December 31, 2023 compared to the corresponding period in 2022 as a result of $2.5 million of expenses incurred on behalf of Legacy Arq, which included $1.2 million from rent and occupancy expense from additional leased space.

Additional increases period over period of approximately $2.0 million were due to increases in insurance, research and development, travel, recruiting and other outside labor, and director compensation as three new directors were added to the board in connection with the Arq Acquisition.

General and administrative expenses increased year over year by approximately $2.2 million, primarily due to increases in franchise & use tax expenses, rent and occupancy expenses, outside construction-related labor and license and fee expenses, partially offset by decreases in property and liability insurance.

Research and development

Research and development expenses increased year over year primarily due to increased research and development payroll costs and conducting product qualification testing with potential lead-adopters as part of our GAC contracting process.

Depreciation, amortization, depletion and accretion

Depreciation and amortization expense increased for the year ended December 31, 2023 compared to the corresponding period in 2022 primarily due to depreciation and amortization of approximately $2.8 million from the addition of long-lived assets and intangible assets acquired in the Arq Acquisition.

Also contributing to the increase was an increase in Depreciation and amortization expense due to higher production volumes compared to sales volumes which resulted in $1.0 million additional absorption of depreciation in inventory.

Gain on sale of Marshall Mine, LLC

As discussed above, for the year ended December 31, 2023, we recognized a gain of $2.7 million on the sale of Marshall Mine, LLC.

Other Income (Expense), net

A summary of the components of our other income (expense), net for the years ended December 31, 2023 and 2022 is as follows:

Depreciation.

amortization, depletion and accretion expense decreased by approximately $1.9 million year over year primarily due to higher absorption of depreciation into cost of goods sold during 2024 compared to 2023, which resulted in lower expense of $2.0 million for the year ended December 31, 2024, and decreased amortization of leasehold improvements, customer relationships and developed technology of $0.6 million.

These decreases were partially offset by an increase in depreciation expense for property, plant and equipment acquired and placed in service during 2024.

Loss (gain) on sale of assets

For the year ended December 31, 2023, we recognized a one-time gain of $2.7 million on the sale of Marshall Mine, LLC.

Loss on sale of assets was not significant for the year ended December 31, 2024.

Other (Expense) Income, net

A summary of the components of our other (expense) income, net for the years ended December 31, 2024 and 2023 is as follows:

Years Ended December 31, Change

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2024 2023 ($) (%)

Other income, net:

Other (expense) income:

Earnings from equity method investments $ 127 $ 1,623 $ (1,496) (92) %

Interest expense (3,257) (3,014) (243) 8 %

Loss on extinguishment of debt (1,422) — (1,422) *

Other 1,238 2,630 (1,392) (53) %

Total other income, net $ 1,239 $ 3,360 $ (2,121) (63) %

Total other (expense) income $ (3,314) $ 1,239 $ (4,553) *

* Percent change in excess of 100% not considered meaningful.

Earnings from equity method investments

The following table presents the equity method earnings by investee for the years ended December 31, 2023 and 2022:

The following table presents the equity method earnings for the years ended December 31, 2024 and 2023:

Years Ended December 31, Change

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Earnings from Tinuum Services — 475 (475) (100) %

Earnings from other — 1 (1) (100) %

Earnings from equity method investments $ 127 $ 1,623 $ (1,496) (92) %

Earnings from equity method investments for the year ended December 31, 2023 and 2022 represented cash distributions received from Tinuum Group and Tinuum Services.

The decrease was primarily due to Tinuum Group and Tinuum Services continuing to wind down their operations in 2023.

Earnings from equity method investments for the year ended December 31, 2024 represented cash distributions from Tinuum Group.

Earnings from equity method investments for the year ended December 31, 2023 represented cash distributions received from both Tinuum Group and Tinuum Services.

Tinuum Group continues to wind down their services into 2025.

The Tinuum Group Royalty Agreement expires at the end of 2027, with an option to extend.

We do not expect further distributions from Tinuum Services as Tinuum Services has completed its wind-down.

Interest expense

Interest expense increased for the year ended December 31, 2023 compared to the corresponding period in 2022 primarily due to interest expense of $2.0 million related to the $10 million CFG Loan and interest expense of $0.5 million incurred for the same period related to the $10 million CTB Loan assumed by us in the Arq Acquisition.

The increase in Other is primarily driven by interest income of $1.8 million generated from the use of cash sweep accounts in 2023.

Income tax expense

For the year ended December 31, 2023, our reported income tax expense was $0.2 million and was based on an effective rate of (1)%.

The difference between our reported income tax expense and the expected federal benefit, as a result of pretax loss recognized for the year ended December 31, 2023, was primarily due to permanent differences related to acquisition-related costs, an increase in the valuation allowance on our deferred tax assets and stock-based compensation.

For the year ended December 31, 2022, our reported income tax expense was $0.2 million and was based on an effective rate of (2)%.

The difference between our reported income tax expense and the expected federal benefit, as a result of pretax loss recognized for the year ended December 31, 2023, was primarily due to permanent differences related to acquisition-related costs and an increase in the valuation allowance on our deferred tax assets.

Interest expense increased for the year ended December 31, 2024 compared to the corresponding period in 2023 primarily due to paid in kind interest on the $10 million term loan with CF Global (the "CFG Loan"), which accrues to the principal portion and is payable upon the termination of the CFG Loan.

The CFG Loan was paid in full in December 2024, and the loan agreement was terminated.

Loss on extinguishment of debt

Loss on extinguishment of debt increased year over year due to the write-off of deferred financing costs associated and unamortized debt discount with the termination of the CFG Loan.

The decrease in Other year over year is primarily driven by a decrease in interest income of $0.7 million as a result of lower cash on hand in 2024, and was driven by increased capital expenditures during 2024.

Income tax (benefit) expense

For the year ended December 31, 2024, we reported income tax benefit of $0.2 million and an effective tax rate of 3%.

The difference between our reported income tax benefit and the expected federal benefit of $1.1 million, as a result of pretax loss recognized for the year ended December 31, 2024, was primarily due to an increase in the valuation allowance on our deferred tax assets offset by the benefit of permanent differences related to stock-based compensation.

For the year ended December 31, 2023, we reported income tax expense of $0.2 million and an effective rate of (1)%.

The difference between our reported income tax expense and the expected federal benefit of 2.5 million, as a result of pretax loss recognized for the year ended December 31, 2024, was primarily due to the expense of permanent differences related to acquisition-related costs and an increase in the valuation allowance on our deferred tax assets.

Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against their deferred tax asset based on an assessment of the amount of the deferred tax asset that is "more likely than not" to be realized.

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As of December 31, 2024, we concluded it is more likely than not we will not generate sufficient taxable income within the allowable carryforward periods to realize any of our net deferred tax assets, and fully reserved for such assets as of December 31, 2024.

In reaching this conclusion, we primarily considered forecasts of future taxable losses.

In reaching this conclusion, we primarily considered our pretax losses incurred over a cumulative three-year look-back period.

As of December 31, 2024 and 2023, we had a valuation allowance of $101.6 million and $98.8 million, respectively, on our deferred tax assets.

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See additional discussion in Note 12 of the Consolidated Financial Statements included in Item 8 of this Report.

Through December 31, 2021, we earned substantial tax credits under the Section 45 tax credit program, which expired on December 31, 2021.

As of December 31, 2023, we had approximately $86.1 million in Section 45 tax credit carryforwards.

As of December 31, 2024, we had approximately $86.1 million in tax credit carryforwards.

In the hypothetical event of an "ownership change," as defined by IRC Sections 382, utilization of general business credits ("Tax Credits") generated prior to the change would be subject to an annual limitation imposed by IRC Section 383 for Tax Credits.

In connection with the Arq Acquisition and PIPE Investment, we issued additional shares of our common stock.

We performed an IRC Section 382 analysis as of the Acquisition Date and determined that we had not experienced an ownership change as of that date.

In connection with the equity offerings completed at various dates during 2024, we issued additional shares of our common stock.

We performed an IRC Section 382 analysis as of those dates and determined that we had not experienced an ownership change as of those dates.

Prior to the Acquisition Date, Legacy Arq completed numerous equity offerings that resulted in ownership changes.

We have not completed a formal IRC Section 382 analysis of Legacy Arq equity changes from its inception through the Acquisition Date, however, we believe that one or more "ownership changes" occurred during this time period as defined under Sections 382 and 383 and that a portion or all the Legacy Arq Tax Assets may subject to an annual limitation.

Non-GAAP Financial Measures

To supplement our financial information presented in accordance with U.S.

Generally Accepted Accounting Principles ("GAAP"), we provide certain supplemental financial measures, including EBITDA and Adjusted EBITDA, which are measurements that are not calculated in accordance with U.S.

Generally Accepted Accounting Principles ("GAAP").

EBITDA is defined as earnings before interest, taxes, depreciation and amortization, and Adjusted EBITDA is defined as EBITDA reduced by the non-cash impact of equity earnings from equity method investments and gain on sale of the Marshall Mine, increased by cash distributions from equity method investments, loss on early settlement of a long-term receivable and loss on change in estimate, asset retirement obligations.

EBITDA is defined as earnings before interest, taxes, depreciation and amortization, and Adjusted EBITDA is defined as EBITDA reduced by the non-cash impact of equity earnings from equity method investment, loss on extinguishment of debt, loss (gain) on sale of assets, increased by cash distributions from equity method investments, loss on change in estimate, asset retirement obligations and charges incurred in as a result of our financing activities.

EBITDA and Adjusted EBITDA should be considered in addition to, and not as a substitute for, net income in accordance with GAAP as a measure of performance.

See below for a reconciliation from Net income, the nearest GAAP financial measure, to EBITDA and Adjusted EBITDA.

We believe that the EBITDA and Adjusted EBITDA measures are less susceptible to variances that affect the Company's operating performance.

We include these non-GAAP measures because management uses them in the evaluation of our operating performance, and believe they help to facilitate comparison of operating results between periods.

We believe that the EBITDA and Adjusted EBITDA measures are less susceptible to variances that affect our operating performance.

We include these non-GAAP measures because management uses them in the evaluation of our operating performance, and believe such measures facilitate comparison of operating results between periods.

We believe the non-GAAP measures provide useful information to both management and users of the financial statements by excluding certain expenses, gains, and losses which can vary widely across different industries or among companies within the same industry and may not be indicative of core operating results and business outlook.

EBITDA and Adjusted EBITDA

The following table reconciles net loss, our most directly comparable as-reported financial measure calculated in accordance with GAAP to EBITDA, (EBITDA Loss), (Adjusted EBITDA Loss) and Adjusted EBITDA.

The following table reconciles net loss, our most directly comparable as-reported financial measure calculated in accordance with GAAP to EBITDA, Adjusted EBITDA and (Adjusted EBITDA Loss).

Year ended December 31,

(in thousands)

$ (5,109) $ (12,249)

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Interest expense, net 2,154 1,168

Income tax expense 153 209

EBITDA (EBITDA Loss) 123 (1,687)

Income tax (benefit) expense (164) 153

EBITDA 5,983 123

Cash distributions from equity method investees 127 1,623

Equity earnings (127) (1,623)

Gain on sale of Marshall Mine, LLC (2,695) —

Loss (gain) on change in estimate, asset retirement obligation (37) 34

Loss on early settlement of an account receivable — 535

Adjusted (EBITDA Loss) EBITDA $ (2,609) $ 1,274

(1) Included in Net loss for the year ended December 31, 2023 and 2022 was $4.9 million and $5.0 million, respectively, of transaction and integration costs incurred related to the Arq Acquisition.

Additionally, for the year ended December 31, 2023, Net loss included $4.9 million of Legacy Arq payroll and benefit costs and $1.7 million of severance expense related to three executive employees.

Loss on extinguishment of debt 1,422 —

Loss (gain) on sale of assets 64 (2,695)

Gain on change in estimate, asset retirement obligation — (37)

Financing costs 275 —

Adjusted EBITDA (Adjusted EBITDA Loss) $ 7,744 $ (2,609)

(1) Included in Net loss for the year ended December 31, 2023 was $4.9 million of transaction and integration costs incurred related to the Arq Acquisition, $4.9 million of Legacy Arq payroll and benefit costs and $1.7 million of severance expense related to three executive employees.

Liquidity and Capital Resources

Current Resources and Factors Affecting Our Liquidity

As of December 31, 2023, our principal future sources of liquidity included:

Current Capital Resources and Factors Affecting Our Liquidity

For the year ended December 31, 2024, our principal sources of liquidity consisted of:

• cash on hand, excluding restricted cash of $8.7 million primarily pledged as collateral under a surety bond agreement;

• our operations

• cash flows from operations of $10.5 million;

• proceeds received from issuance and sale of our common stock, which totaled $42.4 million in the current year;

• availability of $16.2 million under our recent $30.0 million secured revolving credit facility (the "Revolving Credit Facility").

For the year ended December 31, 2024, our principal uses of liquidity included:

• capital expenditures, including those related to the Red River Plant expansion and commissioning of the Corbin Facility;

• our business operating expenses;

• capital and spare parts expenditures;

• payments on our lease obligations;

• payments for reclamation associated with the Five Forks Mine;

• payment required under the sale of Marshall Mine, LLC.

On February 1, 2023, in connection with the Arq Acquisition, we closed the PIPE Investment for an aggregate purchase price of $15.4 million.

Further, on February 1, 2023 we entered into the CFG Loan Agreement for $10.0 million, of which we received $8.5 million net proceeds.

• payments on our debt obligations, including the extinguishment of the CFG Loan principal and accrued interest in the amount of $11.1 million.

Tinuum Group and Tinuum Services Distributions

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Distributions from equity method investees $ 127 $ 1,623

Cash distributions from Tinuum Group and Tinuum Services for 2023 decreased by $4.3 million compared to 2022 primarily due to Tinuum Group and Tinuum Services ceasing material operations as of December 31, 2021.

Cash distributions from Tinuum Group and Tinuum Services for 2024 decreased by $1.5 million compared to 2023, as both Tinuum Group and Tinuum Services ceased material operations as of December 31, 2021, and began wind-down of their business at that time.

Tinuum Group continues to wind down their services into 2025;

the Tinuum Group Royalty Agreement currently remains active through 2027 with options to extend.

We do not expect further distributions from Tinuum Services as Tinuum Services has completed its wind-down.

Cash and restricted cash decreased from $54.2 million as of December 31, 2023, to $22.2 million as of December 31, 2024, a decrease of $31.9 million.

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Cash flows from operating activities

Cash flows used in operating activities for the year ended December 31, 2023 was $16.7 million compared to cash flows used in operating activities of $6.1 million for the year ended December 31, 2022.

The increase in cash used in operating activities was primarily due to the following:

(1) an increase in net loss of $3.3 million year over year;

(2) a $2.7 million gain on the sale of the Marshall Mine, LLC;

(3) a decrease in Distributions from equity method investees, return on investment of $2.3 million year over year;

and (4) a net decrease in working capital of $8.9 million primarily as a result of significant payments made in 2023 on accounts payable and accrued expenses assumed in the Arq Acquisition.

Offsetting the net increase in cash flows used in operating activities year over year were (1) an increase in Depreciation, amortization, depletion and accretion of $4.1 million;

and (2) a decrease in Earnings from equity method investments of $1.9 million.

Cash flows provided by operating activities for the year ended December 31, 2024 was $10.5 million compared to cash flows used in operating activities of $16.7 million for the year ended December 31, 2023.

The increase in cash provided by operating activities was primarily due to the following:

(1) a decrease in net loss of $7.1 million year over year;

(2) a net increase in working capital of $17.8 million primarily as a result of significant payments made in 2023 on accounts payable and accrued expenses assumed in the Arq Acquisition, (3) a one-time $2.7 million gain on the sale of the Marshall Mine, LLC in 2023, and (4) a decrease in Earnings from equity method investments of $1.5 million.

Partially offsetting the net increase in cash flows used in operating activities year over year was a decrease in Depreciation, amortization, depletion and accretion of $1.9 million.

Cash flows from investing activities

Cash flows used in investing activities for the year ended December 31, 2024 was $85.1 million compared to cash flows used in investing activities of $28.5 million for the year ended December 31, 2023.

The increase was primarily due to an increase in acquisition of property, equipment and intangibles, net, of $18.6 million primarily related to acquisition costs related to the Arq Acquisition, a payment of $2.2 million related to the disposal of Marshall Mine, LLC, increased mine development costs of $2.1 million, and a decrease in distributions from equity earnings in excess of cumulative earnings of $2.0 million.

Offsetting the net increase in cash flows used in investing activities year over year was $2.2 million cash acquired as part of the Arq Acquisition.

The increase in cash used was primarily due to an increase in acquisition of property, equipment and intangibles, net, of $57.7 million primarily related to capital expenditures for our Red River Plant expansion, $2.2 million cash acquired as part of the Legacy Arq Acquisition in 2023, and a decrease in distributions from equity earnings in excess of cumulative earnings of $1.5 million.

Partially offsetting the net increase in cash flows used in investing activities year over year was a payment of $2.2 million related to the disposal of Marshall Mine, LLC in 2023 and a decrease in mine development costs of $2.5 million.

Cash flows from financing activities

Cash flows provided by (used in) financing activities for the year ended December 31, 2023 increased by $24.6 million compared to the year ended December 31, 2022 primarily due to proceeds from common stock issued of $16.2 million,

including $1.0 million of proceeds from common stock issued to related parties, and net proceeds from the issuance of the CFG Loan Agreement of $8.5 million.

Cash flows provided by financing activities for the year ended December 31, 2024 increased by $19.8 million compared to the year ended December 31, 2023 primarily due to proceeds from the issuance and sale of our common stock in a public offering of $26.7 million and a net increase in borrowings year over year of $5.3 million associated with a borrowing on the Revolving Credit Facility in 2024 that exceeded proceeds from the CFG Loan in 2023.

These increases were offset by decreases due to the prepayment of the principal of the CFG Loan of $10.0 million in 2024 and a net decrease in proceeds from common stock issued and sold in private placements of $0.5 million year over year.

Additional decreases in cash flows year over year provided by financing activities were due to costs associated with extinguishment of the CFG Loan and associated financing costs for the Revolving Credit Facility, both in 2024.

Material Cash Requirements

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These include executing on our contracts and initiatives and increasing our share of the market for APT consumables, including expanding our overall AC business into additional adjacent markets and increasing our gross margin from improving our customer and product mix.

Based on current operating levels, we expect that our cash on hand as of December 31, 2023 will provide sufficient liquidity to fund operations for the next 12 months.

Based on current operating levels, we expect that our cash on hand and borrowing availability on the Revolving Credit Facility as of December 31, 2024 will provide sufficient liquidity to fund operations for the next 12 months.

Capital expenditures

We have targeted the end of 2024 for the completion of our Red River Plant expansion that is necessary to commence production of our new GAC products.

To meet this target, we will incur substantial capital spend in excess of our originally forecasted amount for additional equipment, labor, and project costs.

The Company anticipates financing the timely completion of the project funded with cash on hand, cash generation, ongoing cost reduction initiatives, potential customer prepayments for GAC contracts, and a planned refinancing and potential expansion of our term loan.

If we are not able to secure additional financing, the project timeline for our Red River Plant expansion may be delayed beyond the end of 2024.

During 2024, we expect to spend between $45 and $50 million on the Red River Plant expansion, depending on the pace of the project, as well as between $5 and $10 million to complete our commissioning of the Corbin Facility.

Capital expenditures planned for 2024 are dependent on many factors, including the ability to raise additional funding and approval of certain environmental permits, both of which may impact the timing and amount of capital expenditures.

We are targeting the first quarter of 2025 for the completion of our Red River Plant expansion which is necessary to commence production of our new GAC products.

To meet this target, we have incurred and may continue to incur substantial capital spend in excess of our originally forecasted amount for additional equipment, labor, and project costs.

The Company anticipates financing the timely completion of the project funded with cash on hand, borrowing availability on the Revolving Credit Facility, and ongoing cost reduction initiatives.

During 2025, we expect our capital expenditures to primarily relate to the completion of the Red River Project.

Capital expenditures planned for 2025 are dependent on many factors, including the approval of certain environmental permits, and the pace and progression of the project, which may impact the timing and amount of capital expenditures.

As of December 31, 2024, we had outstanding surety bonds with regulatory commissions totaling $11.1 million primarily related to the Five Forks Mine and the Corbin Facility.

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We expect that the obligations secured by these surety bonds will be performed in the ordinary course of business and in accordance with the applicable contractual terms.

To the extent that the obligations are performed, the related surety bonds may be released and collateral requirements may be reduced.

To the extent that the

obligations are performed, the related surety bonds may be released and collateral requirements may be reduced.

However, in the event any surety bond is called, our indemnity obligations could require us to reimburse the surety bond provider.

Long Term Requirements

For a discussion of our long-term cash requirements, see Item 8.

Note 6 of this Report.

For a discussion of our long-term cash requirements, see Item 8, Note 5 of this Report.

Contractual Obligations

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(in thousands) Total Less than 1 year 1-3 years 4-5 years After 5 years

CFG Loan $ 12,199 $ — $ — $ 12,199 $ —

CTB Loan $ 12,303 $ 1,110 $ 2,220 $ 2,220 $ 6,753

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The table above excludes our asset retirement obligation ("ARO") related to reclamation of the Five Forks Mine, as the timing and amount of payments to satisfy the ARO are uncertain and are based on numerous factors including, but not limited to, the expected closure date of the Five Forks Mine.

As of December 31, 2023, our Consolidated Balance Sheet reflects a liability for AROs of $6.2 million.

Additionally, the table above excludes construction costs related to the Red River Plant expansion and Corbin Facility commissioning referred to under "Capital Expenditures" caption above, as the timing and amount of payments

to satisfy these obligations are conditional and based on numerous factors including, but not limited to, the pace of construction activities and the timing of mechanical completion of the Red River Plant expansion and commissioning activities at the Corbin Facility.

As of December 31, 2024, our Consolidated Balance Sheet reflects a liability for ARO related to reclamation of the Five Forks Mine of $4.5 million.

The table above also excludes amounts outstanding under our Revolving Credit Facility, as the timing and amount of repayments are uncertain and are based on the nature and timing of our operating cash flows.

Our outstanding borrowings under the Revolving Credit Facility were $13.8 million as of December 31, 2024.

Additionally, the table above excludes construction costs related to the Red River Plant expansion referred to under the "Capital Expenditures" caption above, as the timing and amount of payments to satisfy these obligations are conditional and based on numerous factors including, but not limited to, the pace of construction activities and the timing of mechanical completion of the Red River Plant expansion.

Critical Accounting Policies and Estimates

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis