Advanced Emissions Solutions, Inc. Aktie

Greetings, and welcome to the Arq's Q1 2026 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded.

It is now my pleasure to introduce Anthony [indiscernible], Head of Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us today for our first quarter 2026 earnings results call. With me on the call today are Bob Rasmus, Arq's Chief Executive Officer; and Stacia Hansen, Arq's Chief Accounting Officer. This conference call is being webcasted live within the Investors section of our website, and a downloadable version of today's presentation is available there as well. A webcast replay will also be available on our site, and you can contact Arq's Investor Relations team at [email protected].

Let me remind you that the presentation and remarks made today include forward-looking statements as defined in Section 21E of the Securities Exchange Act. These statements are based on information currently available to us and involve risks and uncertainties that could cause actual future results, performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements.

These risks and uncertainties include, but are not limited to, those factors identified on Slide 2 of today's slide presentation, in our Form 10-K for the year ended December 31, 2025, and other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, the company undertakes no obligation to update those factors or any forward-looking statements to reflect future events, developments or changed circumstances or for any other reason.

In addition, it is especially important to review the presentation and today's remarks in conjunction with the GAAP references in the financial statements.

With that, I would like to turn the call over to Bob.

Thank you, Anthony, and thanks to everyone for joining us this morning. We will cover a lot of ground on today's call, so I'd like to begin by providing an overview of the key points we'll address. First, our first quarter performance establishes a solid foundation for the year ahead. Our foundational PAC business continues to perform well and the relative absence of GAC production costs aside from certain trailing costs, and I'll give you more on that in a moment, contributed to improved profitability relative to recent quarters. Based on our first quarter and visibility through today, we are pleased to reiterate the full year 2026 financial outlook we introduced last quarter.

Second, last quarter, we announced a strategic optimization review of our GAC operations to ensure we are deploying our financial and operating resources in a way that maximizes stakeholder value over the near and long term. We have made good progress on that effort, and we look forward to sharing our latest updates today.

And third, we remain active across several other priorities, including optimizing our capital structure, proactively maintaining our asset base and maximizing the value of our resources for the benefit of all stakeholders. On that point, our leadership team and Board continue to demonstrate their confidence in Arq by further aligning themselves with shareholders through additional ownership purchases made in recent weeks and months.

The first quarter provided a solid foundation for the year ahead and underscored the continued transformation of our PAC business. Revenues for the first quarter of $29.1 million were 7% higher year-on-year and gross margin in January and February were exceptionally strong, reflecting a business no longer carrying the full burden of GAC production costs.

Our first quarter performance was impacted by a noncash revaluation adjustment of around $800,000 related to inventory produced in 2025. This revaluation increased COGS, reduced gross margin and ultimately lowered adjusted EBITDA. In addition, there was approximately $600,000 of carryover GAC-related expense. Those costs will no longer affect the company going forward. Both of these items negatively impacted adjusted EBITDA for the quarter.

Despite the negative effects of this revaluation and certain trailing costs from GAC during the quarter, our underlying margin performance was strong, reflecting the continued transformation and improving performance of our core PAC business. January and February gross margins of 38% and 47%, respectively, are particularly encouraging, signaling a normalization of operations as PAC performance is no longer fully impacted by GAC production costs.

Immediately post quarter end, we experienced the impact of a planned 2-week biannual plant turnaround or routine maintenance. The turnaround, which involved a temporary shutdown of our Red River plant formally began April 5, although preparations began far in advance of that date and successfully concluded under budget in April. I'll share more detail on that shortly.

With that context and recognizing that Q1 is typically a solid though not our strongest quarter, we expect Q2 to be a transitional period with performance broadly in line with prior years. Importantly, this outlook is already reflected in the 2026 financial guidance we previously provided and are confidently reiterating today. This outlook includes full year 2026 revenue of between $120 million and $125 million and adjusted EBITDA of between $17 million and $20 million.

As I noted, we completed our scheduled biannual plant turnaround or TAR in mid-April. The work was completed under budget, which is a credit to Eric Robinson, our Senior VP of Operations and the entire Red River operations team. This outcome reflects our broader strategy of using the maintenance process to identify potential issues early and address them proactively. While completing the work under budget is important, the more important objective is ensuring the continued safety of our employees and the reliability of our plant, which will always remain our highest priority.

With the successful completion of the TAR under budget, we are maintaining our previously communicated CapEx guidance of $8 million to $10 million for full year 2026. That said, the outperformance does provide us with some incremental flexibility within that range.

Turning now to our full year outlook, where the trend for 2026 remains favorable. We continue to expect the PAC business to generate free cash flow in 2026 and beyond, which supports our confidence in reiterating our full year guidance. I would also note that while warmer-than-normal winter conditions created some headwinds for mercury emissions-focused products in Q1, demand for our core PAC products has remained resilient despite ongoing volatility in oil and natural gas-derived products, including volatility tied to events in the Middle East.

As many of you know, mercury emission solutions for coal-fired power plants remains our largest single market sector by total sales volumes. However, that percentage has steadily declined as we continue diversifying our end market exposure. Importantly, demand from these markets tends to be inversely correlated with natural gas prices. That is why hot summers, cold winters and higher natural gas prices are generally positive for PAC demand and pricing.

Turning to our GAC operations. As discussed on our last call, we initiated a strategic optimization review to determine the most practical path to achieving economically attractive GAC production. That work remains ongoing with continued progress in refining design plans, capital requirements and timing. As part of this effort, we are working with an independent equipment provider and an engineering design firm. These partners were selected following extensive diligence, particularly in light of the challenges we experienced with our original design firm. Both have performed above our already high expectations and are bringing a level of rigor and expertise that is informing our thinking in a meaningful way.

We are moving with urgency, but also with discipline. When we present a plan to the market, it will be fully scoped, properly costed, clearly timed, fully supported and will answer all of our questions and those we know our stakeholders will also ask. That includes a clear view on return profile, funding approach and the broader implications for the business. In parallel, we are evaluating incremental growth alternatives, such as adding reactivation or acid washing capacity to ensure we are prioritizing the highest return opportunities. Our current aim is to have initial results of our strategic optimization review in the third quarter of this year.

Against this backdrop, granular activated carbon market fundamentals remain very strong. We are beginning to see pricing move higher driven by tightening supply dynamics and the EPAs approaching PFAS monitoring deadline in April 2027. Importantly, customers are increasingly encouraging us to advance development. We recognize the central questions are around cost and timing. We are equally focused on bringing this work to a conclusion, and we'll provide a comprehensive update once the optimization process is complete.

Related to the optimization process and as outlined on our last call, we remain in active discussions with multiple parties regarding potential pathways to monetize our carbon facility and associated technologies. The potential appeal of the facility to provide alternative carbon products, including asphalt emulsion blending components and a feedstock for synthetic graphite as well as for rare earth elements, remains intact. We are particularly encouraged by our asphalt-related work, where testing with a leading U.S. asphalt company continues to progress.

Our collaboration partner has found that Corbin wet cake offers differentiated performance characteristics and the work is now advancing to the next stage of testing. At the same time, we remain appropriately measured. As we said in March, asphalt is the most advanced of these alternative applications, but it would be premature to expect significant revenue from it in the near term. Separately, since our last update, we have received indications of interest from various third parties regarding potential opportunities to monetize the asset, which we continue to evaluate.

While this is not our top priority, multiple potential monetization paths represent attractive optionality. If we identify a financially compelling solution that benefits shareholders, we will update the market accordingly.

Next, I want to step back and frame how we are thinking about the business and our responsibilities to shareholders. That perspective is grounded in our role as stewards of capital and the fact that following meaningful recent purchases, our Board and management now collectively own more than 20% of the company. That ownership shapes our approach to capital allocation. Every decision is made through the lens of maximizing and protecting long-term shareholder value.

From that vantage point, there appears to be a disconnect between the intrinsic value of our PAC business and how it is reflected in the public market. This may be influenced by a perception that PAC is a lower growth business facing near-term headwinds. Our operating performance suggests otherwise, with PAC delivering consistent growth and evolving into a material profitable business with multiple avenues for upside.

We see a clear path to improving pricing through expansion into higher-value end markets. Beyond traditional industrial and water applications, we are focused on opportunities tied to micropollutant control and PFAS-related solutions. High-grade PAC has the potential to serve as an effective bridging solution for low-level PFAS remediation, helping those utilities with PFAS concentrations below a certain range to reduce to at or below the 4-part per trillion threshold ahead of the EPA's April 2027 monitoring deadline. This is a compelling use case given the meaningful pricing differential between PAC and granular activated carbon.

While we are pleased with our Q1 performance, we view it as a starting point. The year will not be linear, but we have established a solid foundation and remain on track to achieve our full year guidance. Against that backdrop, our current market positioning does not appear to fully reflect the strength, stability and strategic value of the business, particularly given the steady noncyclical and nondiscretionary nature of the end markets we serve through PAC. It also may not fully capture the significance of the more than $500 million of assets we have in place at Red River, which provides exposure to a substantial domestic opportunity with potential for international expansion as well as upside associated with granular activated carbon.

As a result, one of our central priorities is to preserve the company's strategic flexibility and operational independence as we continue to execute. We highlight this to underscore what may be underappreciated. We have built a consistently profitable noncyclical core business, while market perceptions may continue to be influenced by concerns around potential dilution tied to GAC expansion or uncertainty regarding our path into that market. We recognize the importance of continuing execution against our financial and operating plan. That focus drives us each day, and we look forward to updating the market on our progress as we advance our near- and long-term objectives.

I'll now turn the call over to Stacia to review our first quarter performance in greater detail. Stacia?

Thanks, Bob. Revenue for the first quarter of 2026 totaled $29 million, up around 7% compared to the prior year period. This was driven principally by increased sales volumes. Our gross margin for the quarter was 34% compared to 36% reported in the prior year period. As noted earlier, this was primarily driven by decreases in pricing due to product mix and inventory revaluation charge and carryover GAC costs, which was partially offset by increases in sales volumes.

As Bob mentioned, gross margin was strong in January and February, which we believe is demonstrative of the materially improved start to the year after the challenges associated with GAC production costs.

Net loss was $800,000 in the first quarter of 2026 compared to net income of $200,000 in Q1 of 2025. This was primarily a result of the drivers discussed earlier. We generated positive adjusted EBITDA of approximately $2.7 million in the first quarter of 2026 compared to an adjusted EBITDA of $4.1 million in the same period during 2025, driven by reduced net income in the current year period.

Selling, general and administrative expenses totaled $7.4 million in Q1 of 2026 versus $6.1 million in the prior year period. This increase was a consequence of increases in insurance, recruiting and legal fees. Overall, our performance demonstrates our ability to operate the PAC business in a way that contributes positively to our economic position. We remain extremely confident that our PAC business will continue to be cash generative through fiscal year 2026 and beyond.

Turning to the balance sheet. We ended the first quarter with total cash of $15.9 million, of which approximately $4.7 million is unrestricted. Total debt inclusive of financing leases as of March 31, 2026, totaled $30.2 million as compared to $28.5 million as of December 31, 2025. The increase was primarily driven by increased borrowings on our company's revolving credit facility with MidCap Financial, which totaled $20.9 million as of March 31, 2026.

As many of you will have seen, we updated our terms of our credit facility with MidCap Financial late in March to accommodate covenant tightness as a result of lingering GAC production impacts carrying over from Q4 2025. We have found MidCap to be a very supportive and proactive financing partner, and they understand our business well.

As we look to our future growth plans and once the capital requirements are better defined, we anticipate that additional debt will be a significant part of our overall financing package. We believe that enlarged and sustained profitability from our PAC business, there is potential to materially increase overall debt. While it's premature to get into specifics, our overall philosophy is that we are prepared to take on more debt and the maximum level at which we'd be comfortable with would be around 3x adjusted EBITDA. This is the level we believe feasible based on our latest discussions with advisers.

Based on the top end of our 2026 guidance, this would suggest that securing debt of around $60 million is feasible. In addition to a larger debt facility, we are also reviewing possible alternative funding sources or solutions, including royalty agreements, customer prepayments, take-or-pays, et cetera. As always, equity remains our least preferred option.

As Bob mentioned, we remain extremely confident in our financial guidance for fiscal year 2026. which we issued for the first time in March. As a recap, for fiscal year 2026, we expect revenue of $120 million to $125 million and PAC volumes of between 122 million and 125 million pounds at an average sell price between $0.88 and $0.91 per pound. We also remain extremely confident in our adjusted EBITDA guidance of between $17 million and $20 million, which would represent a 30% improvement in 2025 at the bottom end of the range.

With that, I will turn things back to Bob.

Thanks, Stacia. Before we turn to questions, let me leave you with a few points that we believe should frame how investors think about Arq. First, our PAC business is performing well and in line with our expectations. While our reported results were impacted by noncash inventory revaluation, lingering GAC production costs, absent those items, adjusted EBITDA would have been materially higher. Importantly, this does not change our view of the business. We remain confident in our strategy and our full year guidance, and PAC continues to provide a profitable cash-generative foundation for the company.

Second, we remain focused on realizing value from our Corbin facility and associated technologies. While it is still early in defining the ultimate path, we continue to see a credible opportunity for an attractive financial outcome. Progress in asphalt testing is encouraging and interest from third parties reinforces the underlying value and optionality of Corbin.

Third, our GAC optimization work is advancing with urgency. Our focus is on delivering a clear fully developed plan that outlines the operational path, expected cost and timing and a financing approach designed to support execution while minimizing dilution.

Stepping back, we believe we are making the right decisions to maximize long-term value. That perspective is reinforced by the fact that I, along with members of our Board and management team, are significant shareholders. We have a profitable core business, multiple compelling avenues for growth and a clear responsibility to pursue those opportunities with discipline, protecting shareholder value and avoiding unnecessary dilution.

With that, I'll hand it back to our moderator to open for questions.

[Operator Instructions] Your first question is from Gerry Sweeney from ROTH Capital Partners.

Strategic review, I know you're probably limited on what you could probably say on that front. But just curious as to maybe the timing, would we get an update with 3Q or before? And then involved in that update, I'm just curious if the strategy around -- a potential strategy around reactivation and asset wash are involved in that strategic review. Or are they separate opportunities?

Sure. A couple of things on that in terms of your questions, Gerry. One, definitely in the third quarter or prior, certainly before the third quarter earnings call as it relates to that. As we've mentioned in our prepared remarks, the market fundamentals for granular activated carbon remain extremely strong. Prices continue to rise as does demand. There's a clear supply-demand imbalance we expect to persist well into the future.

As far as evaluating reactivation and asset washing, we're doing that in conjunction with the valuation and the optimization of our GAC plant design and costing. We want to ensure we make the best decisions as it relates to capital allocation and maximizing shareholder returns. And I want to also add that reactivation and/or asset washing would likely be pursued in tandem with granular activated carbon.

Got it. And I mean, we've discussed reactivation in the past. I mean there's a recurring revenue nature to it, and it's also I think, covers ultimate destruction of PFAS. But if you go down that path, does that change your production capacity at Red River? Or does that use up some of the existing capacity? Or can you build it next to or in tandem with the existing capacity?

The reactivation would be in addition to and possibly not even located at Red River.

Interesting. Got you. Okay. And then just one other question. Flipping over to the PAC business. Obviously, it's doing exceptionally well and continues to do better. At what point does the market for some of these alternative opportunities for PAC start to outstrip the traditional mercury opportunity? Or will Mercury just remain probably the main driver for the foreseeable future?

Mercury is the largest percentage of volume of our sales, but that has decreased remarkably or markedly, I should say, over the last 3 years. It's a great business for us. It's a core business for us, but we also see the expansion into these alternatives such as PAC before GAC and other alternative uses for our PAC product as being higher priced and higher margin. So our goal, if the cannibalization were to occur, and we still have some volumes we can continue to add, it would be from cannibalizing lower margin for higher-margin business.

Your next question is from Jason Ross Tilchen from Canaccord Genuity.

I guess to start, just a little bit of a follow-up there. You mentioned there's a clear path to increasing price and margin for the PAC business through expanding into these specialty end uses. Can you just talk maybe on the operational side, what sort of are the blocking and tackling steps that are needed to reduce these specialized variation to go down that path? And how much investment would potentially be needed? What sort of time line, any of those sort of parameters would be helpful.

Sure. I'll take the last portion of your question first. No additional investment would be needed. So that's a key characteristic. And I think you framed your question extremely well in talking about blocking and tackling. The enhancement or the expansion into alternative products is really basic blocking and tackling. And that's one of the things that Eric Robinson, our new Senior VP of Operations, has contributed to the team, and we continue to work on, is maximizing our furnace time, maximizing our furnace uptime, minimizing the changeover between product runs, doing more campaign style runs as opposed to going back and forth between products.

So as you said and articulated, it's basic blocking and tackling in terms of enhancement and getting into those alternative markets and does not require additional investment other than granular activated carbon.

Okay. That's really helpful. And just in terms of the current contract mix, how much opportunity is there like near term? What sort of would the time line be as you look to shift into some of these more tailored solutions?

We always want to do it as soon as possible, and we're in discussions every day. Jeanette McQueeney and her sales team are having conversations about these additional products and working in conjunction with Joe Wong and our research and development team in terms of development, making sure that we're meeting the customer specifications and inquiries as it relates to that. So it's on an ongoing nature.

Your next question is from Aaron Spychalla from Craig-Hallum.

Maybe first on GAC. You kind of talked about the strong market backdrop. Can you just maybe give a little bit more details on the drivers behind that? And then conversations you're having with current customers that have already been kind of booked and as you're awaiting kind of bringing on that production? And any changes in the competitive landscape that you're seeing?

Sure. So I think there's about 3 or 4 really, Aaron, questions as it relates to GAC. In terms of the overall market, as we talked about in our prepared remarks, it's just fundamental supply-demand imbalance. There's an excess of demand versus the existing supply. There's no new supply looking to come on market that we're aware of other than ourselves coming forward that the increase in demand is accelerating given that the municipalities have to start monitoring and reporting in April of 2027 their PFAS composition in the water supply, even though they don't need to comply until 2031. All of those are contributing to the factors of the supply-demand imbalance.

We're also seeing additional demand as it relates to renewable natural gas. As it relates to conversations with potential customers and contracted customers, on one hand, the contracted customers clearly aren't happy that we are not being in active production right now of granular activated carbon. That being said, they are actively encouraging us and actively calling and actively wanting us to get back into the production business as soon as possible. We've been able to maintain great relationships with those customers and potential customers. And a large part of that is due to the quality of our sales team, the quality of our product and the supply-demand imbalance.

Great. And then on the asphalt progressing to small infield testing, can you just talk about time lines there and what potential next steps could look like from that?

Sure. So one of the key features that the testing has shown, and again, this is testing that has been undertaken by the asphalt and paving company, not third-party testing independent of ourselves and the asphalt and paving company is that it shows that our product when using Arq wet taking as an additive to asphalt emotion contributes to longer-lasting blackness of the asphalt and additional traction.

And on one hand, you might say that the -- adding to the long-lived nature of the blackness is kind of a, if you will, a decorative. It's really not. It's very important because it allows the painted markings on the road to stand out longer and requires less maintenance. The other is that it shows that using Arq wet cake as an additive to asphalt emotion leads to improved traction, especially in rain and wet conditions. And so we're very pleased as it relates to that, that the idea is to move into actually live testing with state and local and, if you will, municipalities and parking lots and things of that nature. Federal testing is a longer-lasting item.

[Operator Instructions] And your next question is from Peter Gastreich from Water Tower Research.

Congratulations on the results. Just wanted to ask also further on the alternative pack uses that you mentioned outside of power generation. So presumably, utilization rates are going up across the entire industry. Are domestic suppliers meeting that incremental demand? Or are we seeing imports coming in to balance the market?

So I can't speak completely for the competitors in terms of product expansion, but we are seeing a greater restriction on imports and that we're seeing additional demand for domestic sourcing. Certain product that had been imported from Australia in the past is now not necessarily restricted, but is not being imported now. You've also had disruptions as it relates to char coconut product. That continues to be a lower amount of imports and a lower amount of domestic consumption for PAC in the U.S.

And are tariffs having an impact on the market as you see right now?

Tariffs did have some impact in the past, but I think it's more people are looking for reliable supplier, which we are. People are looking for a wholly domestic supplier, which we are the only fully vertically integrated fully domestic supplier of powdered activated carbon. And so people appreciate our reliability and the fact that we've been a trusted partner and a reliable partner.

Okay. Great. You had an uplift in SG&A by about $1.3 million year-on-year and Q-on-Q. You just mentioned that you've got insurance recruiting and legal expenses that are having that impact. How much of that uplift should be considered onetime? And can any of these carry over into subsequent quarters?

So a couple of things. I'm going to answer your question and answer a related question that you didn't ask on that. As it relates to SG&A, you are correct, related to additional legal and other costs and insurance. But there was also some, if you will, approximately $640,000 in the first quarter, and it relates to the maintenance of Corbin for optionality purposes. The big ticket items comprising that $640,000 are broken down as follows: roughly $195,000 for payroll, which includes some severance $225,000 for utilities to winterize and/or essentially mothball the facility, lease and various tax payments totaling about $125,000 and another $75,000 to $100,000 for security and contract labor.

The payroll component will go away as of June 30 as it relates to that. The $225,000 that we spent in the quarter on utilities essentially drops down to about $5,000 per month going forward. So we expect the total Corbin mothballing or maintenance costs to be about $1.2 million. So we spent roughly $640,000, $650,000 in the first quarter. We believe there's no expectation to increase that $1.2 million number. So essentially, it's going to be about $200,000 per quarter going forward for Corbin. So depending upon how you want to look at it, you could say that $400,000 of that was onetime expense. And all of that $640,000, $650,000 relating to Corbin hit SG&A. Previously, that would have gone through COGS in prior quarters because it would have been part of our GAC production process.

The other, it's not directly related to SG&A, but could be considered a onetime charge is the carryover cost that both Stacia and I mentioned as it relates to GAC production carryover. As you know, we made the decision to pause production and we made the decision to completely saying we were going to optimize and conduct a further review in late February, early March. At that time, we still had some large ticket items such as the rental of the thermal oxidizer, rental of heating blankets, et cetera. That was about -- all those totaled about $550,000 to $600,000 in what I'll call carryover GAC production costs. We shouldn't have any of those going forward in 2026. So you could consider those possibly as a onetime expense item as well. Sorry for being so long-winded.

No, great. I really appreciate the detail. I'll just ask one more question before getting back in the queue. So your restricted cash bumped up a bit to $11.2 million while your unrestricted fell. I just want to ask what drove that? And what considerations do you have for restricted cash?

So the restricted cash, I think, ended up about $11.2 million, $11.8 million. I know it had an $11 million handle as it relates to that. Part of that went to additional bonding requirements associated with reclamation obligations going forward. Cash drop is a normal course of financing -- not financing activities, but a normal course of our activities and just represents the normal quarter end results [indiscernible] where we are from a liquidity position.

There are no further questions at this time. I will now hand the floor back to Bob Rasmus, President and CEO, for closing remarks.

Thanks, Jenny. Before we finish the call, I want to reemphasize our key near-term priorities and objectives. We want to continue the optimization of our foundational PAC business to further enhance its performance. We want to continue to expand into adjacent PAC market opportunities as part of that optimization, and we want to complete the strategic optimization review of our granular activated carbon business. Thank you for your interest in Arq, and we look forward to our next update.

Thank you. This does conclude today's conference call. We thank you for your participation. You may now disconnect your lines.

Thank you for joining us today for a fireside chat with Robert Rasmus, Chief Executive Officer of Arq Inc. Nasdaq ticker ARQ. I'm Peter Gastreich, Energy Transition and Sustainable Investing Analyst here at Water Tower Research. So Arq is an environmental technology company producing activated carbon products, which are used to reduce or reverse environmental liabilities, including things like forever chemicals from public drinking water systems, removing mercury emissions from coal-fired power plants, remediating contaminated soil and groundwater and removing impurities from renewable natural gas.

Before we begin, I want to remind listeners that the company's safe harbor statements can be found under the Investor Relations tab on the company's corporate homepage. Also note, this fireside chat may not be reproduced or written transcript distributed without the expressed written consent of Water Tower Research. Our discussion could include forward-looking statements as of today, March 25, 2026. This fireside chat is an open access forum for investors, analysts and stakeholders and is being recorded. Recording can be accessed later via a Water Tower Research website.

With that, let's turn to Bob Rasmus. So Bob, good morning, and thank you so much for joining us today.

Thanks, Peter. It's a pleasure to be here, and thank you for taking the time.

Okay. Great. So Bob, can we please kick off here with a high-level background on Arq?

You actually did a pretty good job in your introduction on that. So I won't repeat all of that, but I'll just say to people, listen to what Peter said as it relates to that. As mentioned, we're an environmental technology company whose products are principally activated carbon and really in the form of 2 components: one, powdered activated carbon and the second is we're aspiring to granular activated carbon. The powdered activated carbon really focuses on the power generation industries, scrubbing mercury emissions from coal-fired power plants, improving the taste and odor and municipal drinking water, removing micropollutants, micropollutants being trace pharmaceuticals, being pesticides, being microplastics, other things that are harmful to aquatic life and human health. And we've got a leading market share in the powdered activated carbon business, and we've done a great job of transforming that business into the -- from the last 3 years from a money-losing operation to a free cash flow generating business. And the -- there's a diverse group of markets we serve there, and we're continuing to expand in that based on our technological capabilities and strong technical team.

On the granular activated carbon side, our principal focus is removing PFAS or the forever chemicals from municipal drinking water, scrubbing biogas, the sulfur and other pollutants from biogas before it enters pipeline grid and also looking at other things like food and beverage as well. The great thing about the granular activated carbon business and the reason we're looking to expand into that area is there has been and we expect to continue well into the future, a persistent demand/supply imbalance where there's significant excess demand versus the existing supply. In addition, there are barriers to entry that would make it very long and costly for any new entrant or greenfield entrant to come into the marketplace.

Well, you sort of touch there on the industry landscape, and we could have some listeners here who are sort of new to the activated carbon space. I think for those listeners, it would be useful if you could just elaborate a little bit more in terms of the activated carbon industry, sort of what's driving the demand today? How do we see that the market evolving over the next several years and kind of overlay that with the -- what the supply outlook is looking like?

Sure. And again, it's -- I'll break it down into the 2 components, the powdered activated carbon business and our granular activated carbon business. Powder activated carbon, we use lignite coal, which we grind up into a fine powder for our powder activated carbon. You can also use other feedstocks such as wood char, olive pits, coconut husk, again, being a predominant source of feedstock that some of our competition uses.

One of our competitive advantages is that we have the only fully domestic, fully vertically integrated supply chain on the powder activated carbon side of things. The competition there is widespread. It is from a wide variety, both domestic and imported. Most of the feedstock is imported. So our being the only domestic supplier with fully vertically integrated supply chain gives us an advantage.

On the granular activated carbon side that you really need to use bituminous coal-based granular activated carbon as the feedstock for your product. The reason being that the others don't have the pore space or the molecular structure to be able to attract and retain and remove the harmful pollutants such as PFAS from the water system as it relates to that. So that gives us a significant advantage.

It also means there's much less competition in the granular activated carbon space. And it is basically there's 2 or 3 people in the U.S. that compete on the granular activated carbon side of things. One of the reasons the market is so attractive to us from an entrant standpoint is because of that supply-demand imbalance that we can take market share without having to take market share from any competitors just through the normal growth of the market and the fact that it is undersupplied, there's a desperate need for additional granular activated carbon.

Okay. Great. So why don't we move on to your granular activated carbon business, maybe dive in a bit deeper there. You recently announced a pause in that GAC production. Could you walk us through the challenges that you faced and why you ultimately decided that this pause was necessary?

No, absolutely. It was a difficult decision in some respects, but it was absolutely the right decision made for the right reasons at the right time for long-term shareholder value. Based on the original design flaws from the original engineering firm with whom we're in active litigation, we have been systematically and methodically solving a variety of different production challenges with -- on the front end and the middle end. And then we also knew that there were design deficiencies on the back end in the off-gas system. That's why we brought in a thermal oxidizer as a temporary solution to be able to finish commissioning and to start producing granular activated carbon.

It became apparent that we were going to have to modify that existing thermal oxidizer. We knew it could only achieve 15 million pounds versus our stated goal, design goal of 25 million pounds, and we wanted to determine what modifications were necessary to the thermal oxidizer to get us to 25 million pounds of granular activated carbon production. Under new operating management, we decided to take a more proactive approach to test the existing off-gas system design to see if it was capable of producing 25 million pounds of granular activated carbon, assuming we made the necessary modifications to the thermal oxidizer. And the testing was completed in late December.

The analysis was completed in the test results in late January. And what it showed is that, again, due to original design deficiencies that no amount of modifications that we would undertake or make to the thermal oxidizer would get us to 25 million pounds of annual production. So working with the outside engineering firm, the new outside engineering firm, I want to emphasize, and with equipment manufacturers to come up with what the new design would be, what the cost would be and what the timing would be. And oh, by the way, we need this answer and want this answer prior to our earnings call, which occurred approximately a week ago today.

What they came back with was a new design, a new timing and new cost, but they said it was plus or minus 25% to 35% factor. So if you think about it, you've got to bracket, you've got 50% to 70%. That isn't something that it would be prudent to make a capital decision based on. So we made the decision to pause the granular activated carbon process. And two, we could further refine the [indiscernible] that is the outside engineering firm and the equipment manufacturer could further refine what the cost, timing and design would be down to a tolerance of roughly 5% or 10%.

And you've mentioned before, I think at the earnings call that the new plan could involve significant scaling versus the previous plan. I think you mentioned as high as 50 million pounds for the first phase. How should investors think about the potential shift in that profile?

We know there absolutely exists the underlying demand for granular activated carbon. If we could produce 50 million pounds right now, we could sell all 50 million pounds of granular activated carbon. So when we're taking this pause, we thought let's refine further what the cost would be because we know we ultimately are going to want to expand from 25 million pounds to 50 million pounds. And let's undertake the significant modifications we're going to have to undertake. If we're doing that now to get to 25 million is to get to 50 million 2x. Is it 1.5x? Is it 1.7x? Is it 1.25x. What that cost is? And it behooves us to do that analysis now for two reasons.

One, it all comes down to economics. what's the best economic return and long-term benefit for our shareholders as it relates to that. And second is we want to make sure that any modifications that we make now don't inhibit or create further problems down the road when we're trying to expand from 25 million to 50 million pounds.

And what do you think is kind of realistic framework in terms of the time that you could be coming out with a plan for investors?

Our goal is to definitely have an update by the next earnings call, which is the -- roughly the first week in May, less than 60 days away. That's our goal.

Okay. Great. So regarding the carbon feedstock facility, you've idled that facility. It took a significant write-down and you're switching from the wetcake at that facility to purchase bituminous coal. This is obviously a major pivot. What gives you the confidence that, that product quality is going to hold up with this change? And what -- and also for that facility, what kind of optionality do you still have in terms of other products?

Sure there are a number of questions there, Peter, and I'll try and take the most important first. And what makes us feel comfortable that we still have a competitive advantage for the performance of our product, given the fact that we'll be switching feedstock and that we'll be using a feedstock is similar to what our competitors use. And that relates to the unique shaping process that we undertake for our granular activated carbon.

Our granular activated carbon is spherically shaped. That means it has a larger surface area and therefore, a larger pore structure and therefore, that we can attract and inhibit PFAS to a much greater extent. So a pound of our granular activated carbon is much more effective than a pound of the competitor's activated granular activated carbon because of the unique spherical nature of our product as it relates to that.

In terms of what gives us confidence and comfort that the front end is going to work. I'm going to answer that question and be a politician and also answer another question as it relates to that. We're comfortable that both the front end and the middle is going to work. One, the front end switching to purchase coal, we know we can make granular activated carbon. We just couldn't make it in the quantities and the efficiencies we wanted with the Arq wetcake due to the design deficiencies and that using dryer 6% to 8% purchased bituminous coal as opposed to 40% to 42% Arq wetcake should alleviate those previous design flaws.

In terms of the quality, again, you've heard me say multiple times, both on this chat and previously that we have a best-in-class technical team on site. And when we identified that it was the right decision to go to switch feedstocks, we identified almost 55 separate coal streams that would meet our requirements as feedstocks. We then narrowed that down under 5 or 6 key criteria to about 13, then narrowed that down to less than 5 that were the best of the best and then have identified that further down to a top 2 or 3, all who could be interchangeable and wouldn't cause problems going forward as it relates to that.

So we're comfortable the front end is going to work. We know that we can bind, shape and activate in the middle process as it relates to granular activated carbon. And now what we're doing is using this pause to make sure we get the right answer to be most efficient on the back end and the off-gas design.

And how about the Corbin facility, probably a secondary consideration for now, but you have mentioned that you have other product optionality coming out of that facility. Could you share a bit of that with investors?

Sure, absolutely. So Corbin still has great optionality for us and for investors. There's really several components of additional products we're looking at, and I'll go into a little bit more detail on -- it's, one, asphalt emulsion; two, synthetic graphite and graphene; and the third is rare earth minerals and critical elements is part of the manufacturing process or creating the Arq or Corbin Wetcake that we wash those coal fines and that isolates rare earth minerals and critical elements.

The question is whether those are in sufficient quantities to be able to be commercial. We're working with the DOE and several prospective partners to analyze that to see if there's commercial possibility as it relates to that. We're also working with the DOE and the nuclear labs to analyze Arq wetcake as a source of synthetic graphite or graphene. That's going to take several years to be able to finish that research. The most likely in the nearest term is use of Arq wetcake as an additive to asphalt emulsion. You've heard me say in the past that it would create to a quicker setting, a less prone degradation in the freeze-thaw cycle, and it would retain its blackness longer on the testing.

We're working with a third-party national asphalt company, one which is in almost 80% of the United States in terms of their operations. They've already completed 2 phases of testing as it relates to that, and we're going to the third. The upside of that is that the testing continues to work as we expected it's going to work, and it appears so far that could take up all of the production of Corbin Wetcake, our existing capability and then some. As an aside, the 25 million pounds that we would produce in GAC when we were originally going to use our wetcake would use about 35% to 40% of Corbin production.

So it would be a significant cash flow and value enhancer for the company. And the way I would describe these is the asphalt emulsion is probably still a year away. I would describe that as ground [indiscernible] or maybe a lower grade [ stake ] and where I would put that the synthetic graphite and graphene are still more aroma or sizzle than substance at this point, but it's still worth going into and continuing the research on those products.

Okay. Thanks. That's great context. But let's move on to the powder activated carbon business, which has been kind of -- I view it as kind of the gift that keeps on giving. It's been a source of upside surprise for the last 1 or 2 years. So not without a lot of hard work out, obviously. But in the recent Q4 earnings call, you described the business model for Arq as essentially "selling furnace hours". Could you unpack this concept for investors and explain how pausing GAC improves your near-term outlook for powder activated carbon?

Sure. The context and description of selling furnace hours is critical because it really explains our business model. As you mentioned, we effectively operate by selling furnace hours. We have a finite number of hours we can run our furnaces each year, and we must make the optimal decisions about how to allocate those hours in terms of what products, what provides the most value, et cetera.

For the past year or more than a year, we've been allocating furnace hours to GAC production that generated losses instead of profits. And so by pausing the GAC, we're redirecting those furnace hours back to our proven and profitable PAC business. And so this isn't just about avoiding or limiting GAC losses by the pause, it's about actively improving our near-term financial performance by optimizing our PAC furnace hours.

So your contract visibility and customer retention numbers that you disclosed in the recent results look very strong for PAC. Could you talk about what's driving that customer loyalty and how your customer mix has evolved?

Sure. So a couple of things. In terms of why we have such strong loyalty and visibility on the contracts as well as such a high renewal rate. It really relates to our performance, one, the strong technical capabilities. We've been doing it for years, and people are going to say they can't -- they don't want to switch because they know that we perform and there's no reason to switch on that. We have performance. We have the customer service. Our product shows up in the quantities and in the requirements they need, when they need it and in the amounts they need.

So it's our customer service team, our sales team has great relationships and our technical capabilities. How it has changed over time. It was originally almost predominantly power generation, scrubbing mercury emissions from coal-fired power plants. We've expanded that into other industrial components. We've expanded that into the municipal water segment. We've expanded into the micropollutants. We're expanding into Europe right now through our sales agreement with LSR. And so it was predominantly scrubbing mercury emissions from coal-fired power plants. And now that's still the largest segment, but it is nowhere near. It's less than 40% of the business now.

I'd like to get your thoughts on the regulatory landscape with respect to your PAC business. There has been a little bit of a tailwind there. Does that existing regulation provide a durable demand floor? Or do you see any risk that there could be rollbacks?

I don't see any risk of rollbacks. You've had existing MATS or Mercury Emissions Regulations for coal-fired power plants for almost 2 decades now. So that's one. The second is the real cost of complying that is in the upfront installation of the equipment. The PAC that we sell is not even a rounding error for the utilities as it relates to that. So I think, one, I don't see any risk of regulation. Two, it's such a microscopic addition to their cost factor that even if the regulations were rolled back that I don't think people would stop and indications with customers said they would keep on providing mercury emission scrubbing as it relates to that.

So I don't see any possibility really of rolling back the mercury emissions. And the other question, I think, goes to the unasked question as it relates to the granular and the PFAS as it relates to that. So if you look at the original PFAS regulations or legislation authorizing the EPA to come up with regulations as it relates to PFAS exposure was passed on a bipartisan basis. Lee Zeldin, who was then in Congress voted in favor of that, who is now Head of the EPA that both Lee Zeldin and President Trump have been quite vociferous and strident in saying that clean air, clean water are a fundamental American right and an economic advantage for us. So I don't see any rollback of those regulations. And also, it occupies such a large component or segment of investor in the public's mindset right now that I don't see that it would be feasible to even attempt to roll that back.

So you issued formal guidance for the first time. And you have an EBITDA range, I believe, around $17 million to $20 million. What's behind the confidence at this time to come out with that guidance? And how should we think about the GAC pause impacting that year-on-year improvement?

We've issued the guidance for a couple of reasons. One, we wanted to increase investor transparency. Two, it's easier to provide the guidance right now that we don't have the distraction and the cost of trying to ramp up GAC production as it relates to that. And we also then understand is the only public company in a rather opaque industry that it would make it easier for investors to understand our company and understand the risk/reward dynamics by providing that guidance. And so as you mentioned, we have great contract visibility, 96% in 2026 for our PAC business, plus we know we're going to be able to sell additional volumes on a spot basis.

We know and have an understanding of both some of the hard and soft costs relating to GAC production. We know that several million dollars of hard costs detracted from the bottom line as it relates to GAC in 2025. We won't have those distractions in 2026 of those costs. And also, there were the soft costs. When we talked about furnace hours, there was the need to not utilize the furnaces because of changeovers, because of unplugging, because of trying to figure out what was going on, on GAC. So we know that we can be more efficient than we were. And so we thought it was important for transparency reasons and to reflect our confidence in the PAC turnaround to provide that guidance to investors.

So you have the excess furnace capacity between that, tariffs, rising electricity demand from AI data centers and other factors, would these be potential sources to upside risk to your scenario?

I don't view it as upside risk. I view it as upside potential in terms of the guidance scenario. But yes, we have -- going forward, we still plan on coal-fired power plants being retired, but that conversations with our customers show and the actual results, especially related to natural gas prices right now that those mothballing or idling of coal-fired power plants are being pushed out further and further into the future. So that's a great tailwind for our business, but we're not planning on that.

What we are planning on is going into new markets like micropollutants, municipal water and other industrial segments to further expand our -- both our average selling price and our margin. So we see upside in terms of volume and EBITDA over and above our current guidance.

From a financial perspective, squaring this EBITDA range against the CapEx range that you highlighted in the analyst briefing, it appears that you're headed toward free cash flow this year. You've got a stable cash position. But yet going forward, you will eventually need to fund this GAC ramp-up. What do you think is important for investors to understand with respect to your project funding plans for that GAC?

I think a couple of things. One, as you articulated that we will generate at least $8 million to $10 million of free cash flow, we believe, from the PAC business this year. You combine that with -- let's just assume the upper end of the range, $20 million of EBITDA and, let's say, 3x leverage, which is about the max I'd feel comfortable with. That implies $60 million of debt capability. We've got approximately $27 million of existing debt. So that's an additional $33 million of debt capability combined with the free cash flow. So that significant additional funding capacity depending upon what the results are of this pause and the refinement. Our goal is to not dilute shareholders on that. Our goal is to create the best long-term value for our shareholders.

So you've had -- you announced several leadership changes, a new Head of Sales, a CFO departure, the COO role has been eliminated. What was the thinking behind restructuring your team? And what does the evolved structure bring to the table here?

Sure. The whole idea is that we're always looking to upgrade the talent level of our team. We're always looking to see where we can perform and what we can do better. On the sales side, the previous sales head had done a great job. But when we were able to looking at when Jeanette McQueeney was available, we knew she not only had proven activated carbon and chemical sales experience, but also a strategic selling [ brand ] entering into new markets. And that's important to us, as you mentioned, that the power generation has been great for us, but we need to make sure we're not resting on our laurels. We need to make sure we're staying ahead of the curve and expanding into new markets with higher average selling price, higher margins. And so Jeanette was great for that.

The former COO had long and significant operating experience, but didn't have the necessary experience for dealing with more organic production materials that we have. We brought in Eric Robinson as a consultant to help him late in 2025. And it really became apparent that Eric's experience, both in activated carbon in general, operating in general as well as at the Red River plant, he had worked in 2012 at one of Arq's predecessors when they were having post-construction production challenges and increased the efficiency by 20% and doubled production that bringing Eric online would be additive. And one of the ways we've seen the immediate benefits of that in terms of upgrading that talent is the decision to do that off-gas testing before we spent the money to modify the thermal oxidizer. So it saved us time and money and allowed us to be proactive in our talent search. It will also allow us to increase the efficiencies that I mentioned, some of those soft costs or soft benefits by utilizing more furnace hours, looking at how we run production in various products rather than batch-based, maybe we run it 4 or 5 days at a time rather than on a bespoke basis to increase efficiency. Eric has definitely upgraded the talent level there.

And on the CFO side, it just wasn't a fit. The prior person there, he came from a private company, a large private company and working at a smaller public company involved a different set of challenges and just wasn't a good fit and wanted -- first way to solve a problem is recognizing you have a problem. And so I believe what we've done is upgraded significantly on 2 of those areas that I mentioned, sales and operations, and we're in advanced discussions on the CFO, which I also think will be an upgrade.

Okay. Great. Fantastic. So Bob, this has been very comprehensive today. But before we conclude, I just want to check if there's anything major that we might have missed or if you'd like to provide any concluding remarks?

I think a couple of things. One, that the PAC business transformation is real and ongoing. It's been almost a $35 million to $40 million turnaround in the last 3 years, and there's still room for further improvement. And more importantly, it's gone from a cash consumer to a cash flow generating machine going forward with great visibility going forward in terms of our contracts.

On the granular activated carbon side, the original assumptions we made about the marketplace being a persistent and long-term demand supply imbalance, barriers to entry, customers wanting new entrants like ourselves to come into the business, all are still there. The pause was made -- is a difficult decision, but was made for the right reasons at the right time for shareholder value. And management and the Board owns roughly 20% of the stock. And so we're definitely aligned with shareholder value and looking to make the right and best decisions for long-term shareholder interest.

Okay. That's great. So Bob, thank you again so much for joining us today and sharing your insights. We look forward to having you back very soon.

Great. Thanks, Peter. I appreciate it.

And also thank you to the investors who joined us today for the fireside chat with Bob Rasmus, CEO of Arq. We'll be following developments at ARQ very closely. So check in for our research content at Water Tower Research.

For investors who would like to follow our research on energy transition and sustainable investing and other sectors, please access our website, www.watertowerresearch.com. Of course, keep an eye out for a forthcoming write-up of today's fireside chat with ARQ, and that will be a management series.

Please note that the views expressed in this fireside chat may not necessarily reflect the views of Water Tower Research LLC and are provided for informational purposes only. This fireside chat may not be redistributed or reproduced without the written consent of Water Tower Research and should not be considered research nor recommendation. WTR is an investor engagement firm, not a licensed broker, broker-dealer, market maker, investment bank, underwriter or investment adviser. Additional disclaimers can be found at www.watertowerresearch.com. Thank you.

Greetings, and welcome to the Arq Fourth Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the call over to your host, Anthony Nathan, Head of Investor Relations. Thank you, sir. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us today for our fourth quarter and full year 2025 earnings results call. With me on the call today are Bob Rasmus, Arq's Chief Executive Officer; and Stacia Hansen, our Chief Accounting Officer. This conference call is being webcasted live within the Investors section of our website, and a downloadable version of today's presentation is available there as well. A webcast replay will also be available on our site, and you can contact Arq's Investor Relations team at [email protected].

Let me remind you that the presentation and remarks made today include forward-looking statements as defined in Section 21E of the Securities Exchange Act. These statements are based on information currently available to us and involve risks and uncertainties that could cause actual future results, performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements.

These risks and uncertainties include, but are not limited to, those factors identified on Slide 2 of today's slide presentation, in our Form 10-K for the period ended December 31, 2025, and other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, the company undertakes no obligation to update those factors or any forward-looking statements to reflect future events, developments or changed circumstances or for any other reason. In addition, it is especially important to review the presentation and today's remarks in conjunction with the GAAP references in the financial statements.

With that, I would like to turn the call over to Bob.

Thank you, Anthony, and thanks to everyone for joining us this morning. The decisions we're announcing this morning require significant detail, and we'll be providing you with that today. So let me address the most significant update directly.

After extensive additional evaluation and testing, we have made the decision to pause our GAC production project to conduct a comprehensive engineering and production process optimization review of the best path forward. I am confident it is the right decision for maximizing shareholder value and the long-term success of this company. So I'm going to walk you through exactly why we have reached this conclusion. I'm going to spend time on this. More time than you might expect because I think it's critical that you understand not just where we are today, but how we got here, what problems we solve, what challenges remain, why we have made this decision and what our past forward looks like. Then I'll turn to PAC, which continues to perform extremely well and provides a growing profitable foundation for the company.

But first, let's start with granular activated carbon. We are pausing GAC production to conduct a comprehensive engineering and production process assessment of the optimal path forward. We do not have a firm time line for completion. Our goal is to complete it as quickly as possible, ideally by our next earnings call. Let me be clear about what this means practically. There will be no GAC production in 2026. Our assessment will help determine when we can expect material GAC production to resume, while disappointing, it's the reality of where we are.

Let me walk you through the specific technical challenges we have faced thus far. First, the original design flaws. Our former engineering firm, with whom we remain in active litigation, created fundamental design flaws in the plan. These weren't minor issues. They include things like having structure and equipment elevations that are materially off, having around 320 feet of duct runs that allow gas to condense, material conveyance systems that are ill designed for the products being handled, inadequate control systems for utility supplies and so on. They were systemic problems that have manifested in different ways as we've attempted to commission and operate the facility, and they remain the root cause of initial cost overruns and timing delays versus the original budget.

Second, moisture content. The Corbin Wetcake feedstocks 40% moisture content created handling difficulties that were exacerbated by the ill-designed product handling systems at commercial scale. When received at Red River, this material becomes problematic, as conveyance and handling can cause moisture to squeeze to the surface, making it sticky and inhibiting efficient production. Solving the challenges created by the variable moisture content was exacerbated by the design flaws.

Third, design inefficiency. We identified inefficient design configurations, including numerous 90-degree angles in the material conveyance processes, that exacerbated our operational challenges.

Fourth, and most recently, the off-gas system design. The original design created an insufficiently heated off-gas duct of over 300 feet. When gas is pooled in this duct work, they condensed and solidified, requiring frequent shutdowns for cleaning and maintenance before we could restart production. This created a cycle of constant interruption.

Fifth, we solved the off-gas system design via the installation of a thermal oxidizer. At the time, we had thought this was a complete solution. But with hindsight, it turned out to be just a partial solution. When we conducted testing in late December to determine the modifications necessary to the existing thermal oxidizer, in order to reach our target of 25 million pounds production, it became apparent that the amount of gases, air and natural gas needed to process the off gas and destroy the tire, was grossly underestimated by the original engineering design. The original engineering did not appropriately consider or conduct a proper analysis to identify the tire composition and excess amount of off gas. This excess volume of resulted off gas could not be handled by the existing plant afterburner system as originally designed by our former engineering firm. No amount of modification to the thermal oxidizer would overcome the initial off-gas system design efficiencies.

Now I want to talk about the problems we have solved. We haven't been sitting idle. We've been methodically working to find solutions to these issues. Most recently, we addressed the moisture and design issues by making the strategic decision to transition to purchase domestic bituminous coal feedstock. This is proven technology used successfully throughout the industry. Using bituminous proven performance coal feedstock eliminates the moisture related production constraint, reduces freight costs significantly. Remember, we were essentially shipping water with the Corbin feedstock and improves yield through dryer input materials. We addressed the off-gas system by bringing in a thermal oxidizer to properly handle the off gases when [ char ] granules are heated during carbonization.

Meanwhile, our testing confirms that GAC product quality with purchased bituminous coal remains exceptionally high, often exceeding industry benchmarks as a direct result of our patent-pending technology and technical know-how. And it is worth adding that customers don't view the feedstock source as a material factor in their purchasing decisions, so we remain entirely confident that it will not impact customer uptake. These weren't minor fixes, each represented significant technical challenges that we methodically and systematically addressed.

This brings me to why we're pausing now after addressing these other issues. As we prepare to execute the purchase coal conversion, we took what I'd call a proactive belt and suspenders approach. We brought in an independent outside testing firm to analyze our entire off-gas system and determine precisely what modifications would be necessary to scale from our current approximately 15 million-pound capacity to our target production levels of 25 million pounds.

The testing was conducted in December. We received results in late January, and those results revealed a constraint that hadn't previously been identified. The thermal oxidizer we brought in on short notice was only capable of handling the equivalent of 15 million pounds of annual production. The results of the December off-gas testing revealed at the existing plant off-gas system could not handle the excess volume of resultant gases from properly burning off all the tires and volatiles at the thermal oxidizer at production levels of 25 million pounds or higher.

Now here's the economic reality that makes this a critical issue. Producing 15 million pounds of granular activated carbon does not provide sufficient returns on a stand-alone basis to make it economically attractive. The margins on the first pounds are significantly lower than the margins on subsequent pounds as we achieve production scale. The business case for GAC was always built around achieving 25 million pounds or more of production, and the return profile was predicated on the average margin across that higher volume. So it follows that a materially lower volume would not have as attractive a margin.

At present and due to the results of the off gas testing previously described, we don't have sufficient clarity on what it would cost to get from 15 million to 25 million pounds or whether it even makes sense to stop at 25 million, when 50 million pounds might be more economically attractive given the benefits of scaling fixed costs.

We have variables dependent upon variables. We have just received the final test results 10 days ago. We need to refine what the scaling will cost, what modifications will be required and what the return profile looks like at different production levels. This is why we're pausing, not because we can't solve these problems. We remain committed to GAC, but we must first clarify our spending plans and operating strategy. We've reached a point where it would be imprudent to continue deploying capital without further refinement and a complete understanding of the path to overcome the current production challenges and reach economic production. We're not going to spend material capital on a front-end conversion to purchase bituminous coal until we have further refined the off-gas related variables, including cost, timing and spending cadence to ensure we have the risks sufficiently mitigated.

Our job as stewards of your capital is to make disciplined decisions based on complete information, not to continue down the path just because we've already invested in it. That's the sunk cost fallacy, and it's a trap we refused to fall into.

The engineering assessment we're conducting will answer several critical questions. What modifications are required as the thermal oxidizer are in downstream off-gas treatment to achieve 25 million pounds of production? What would it cost to make those modifications? What is the timing required to make the necessary modification? Does it make more sense to target 25 million pounds or to jump directly to 50 million pounds? What are the return profiles at different production levels?

With all that being said, I want to address the question of market fundamentals because I know some of you are wondering whether this pause reflects concerns about the GAC market opportunity at [ bell ]. The answer is an emphatic no. GAC market fundamentals remain very strong. Pricing continues at attractive levels. Supply constraints persist. And despite the delays, our customer relationships remain solid, a testament to how tight the market is. We're seeing persistent supply shortages against steady annual growth from existing demand drivers, not even accounting for PFAS-related requirements that could add significant additional demand. The opportunity is real. We remain confident in the tremendous opportunity associated with granular activated carbon development.

We're also taking a $45 million write-down in our Corbin assets this quarter. This is an accounting measure that reflects our decision to idle Corbin operations given our decision to switch our GAC feedstock to purchase bituminous coal. The write-down is a noncash charge. It doesn't affect our near-term cash flow or our ability to fund operations and growth initiatives. What it does reflect is our commitment to being conservative in our accounting and transparent about the challenges we're facing. We're continuing to advance alternative applications for Corbin Wetcake, particularly asphalt [ emulsion ] blending, where we progressed to the next testing phase with encouraging results. But we don't expect that these applications will generate material cash flow in 2026.

Given the repeated challenges we face, we have been making significant changes to upgrade our leadership team. We've appointed Eric Robinson as Senior Vice President of Operations. Eric is an industry veteran with direct experience optimizing activated carbon facilities, including our Red River plant. In 2012, when the Red River plant was struggling with post-construction production issues, Eric's work delivered 20% yield improvements, doubled production and materially improved plant availability. Eric's expertise specifically addresses the types of plant ramp-up challenges we've encountered. His track record at this exact facility gives us confidence that he understands both the opportunities and the potential pitfalls.

We've also hired an on-site process engineer with technical oversight to augment our Red River team reporting directly to Eric. His strength and technical capability ensures we have the right expertise at the point of operation. With Eric's appointment and Corbin idling making us a single plant business, we no longer require a COO role. I want to thank Deke Williamson for his dedication since joining Arq. Deke played a pivotal role in enhancing our pack operations to their current profitable state.

On the financial leadership front, Jay Voncannon no longer serves as Arq's Chief Financial Officer. We have been interviewing CFO candidates with the intention to have an announcement shortly.

Anthony Nathan will become VP Finance. In addition to his current Investor Relations role, Anthony will also be responsible for strategic planning, financial analysis and budgeting. Anthony's 8-year tenure with Arq, including oversight of all equity and credit financings in the Arq Limited ADS combination, now Arq Inc., positions him well for this expanded role.

Stacia Hansen continues as Chief Accounting Officer responsible for accounting [ PAT ] and financial reporting, and will also serve as the company's Principal Financial Officer.

Last November, we also hired Jeanette McQueeney as Senior Vice President and Head of Sales. Jeanette has had a long and successful sales career with significant chemical and activated carbon sales experience. Jeanette is both a proven producer and a leader. In addition to her leadership abilities, Jeanette has brought the strategic orientation skills we were seeking. All of the changes just mentioned stem from our goal to upgrade the talent and performance level of our executive leadership team and company.

Now let me turn to our PAC business. I've spent significant time on GAC because that's what's changing, and that's what requires explanation. But it's important to recognize what hasn't changed, which is that we have a profitable growing PAC business that provides the foundation for this company. Our PAC business delivered exceptional performance in 2025. Full year revenues reached approximately $120 million, up 10% year-over-year, while reported adjusted EBITDA was $13 million, representing a 26% improvement over 2024. But that $13 million figure significantly understates the true performance of our PAC operations, and I want to be explicit about this. GAC start-up costs, unplanned downtime, inefficient furnace utilization and operational challenges cost us several million dollars in 2025.

Let me break that down. Taking Corbin off-line alone saves us several million dollars annually in operating costs. We incurred significant expenses from GAC start-up associated with plugging issues and constant maintenance shutdowns. We produced nonsellable GAC product that consumed furnace hours without generating revenue and which added costs. We had operational inefficiencies and distractions from trying to commission a troubled facility.

Even with the impact of certain of these GAC headwinds, our 2025 adjusted EBITDA was $13.2 million, which we believe highlights the true earning power of our PAC business. This context is critical because it explains our business model. We effectively operate by selling furnace hours. We have a finite number of hours we can run our furnaces each year, and we must make optimal decisions about how to allocate those hours.

For the past year, we've been allocating furnace hours to GAC production that generated losses instead of profit. By pausing GAC, we're redirecting those furnace hours back to our proven profitable PAC business. This isn't just about avoiding future GAC losses, it's about actively improving our near-term financial performance and optimizing our long-term potential.

We have over 15 years of experience operating in this PAC business. This is not a novel operation or an experimental process. It is a proven profitable business that we execute consistently. With Eric, activated carbon and experience at Red River, we believe we can further enhance this business. This performance reflects our strategic transformation, sustained volume growth, enhanced product mix and continued pricing strength as we capture higher value, higher margin applications beyond traditional power markets. Our shift towards specialty products and engineered materials commanding premium pricing has fundamentally improved our business profile.

The PAC market shows robust performance with excellent visibility. We have 96% contract visibility on 2026 targeted volumes, 75% visibility through 2027 and 43% through 2028. Our 3-year customer retention rate of 86% demonstrates customer stability and loyalty. This is a stable, profitable business with long-term customer relationships and clear visibility into future demand.

Now let me turn to guidance, which we're providing in detail for the first time. I recognize the irony of introducing guidance at the same time we're announcing a major project pause. I also recognize that some of you may be skeptical given our track record with GAC over the past year. But here's the critical distinction. We're providing guidance on a business we've operated successfully for over 15 years, not on a novel facility we're still trying to commission. This is a proven operation with clear visibility into volumes, pricing and costs. None of the factors contributing to our GAC challenges over the past year or so apply to our PAC business. With that in mind, we believe you, our investors, need a frame of reference to value of this company. We're providing this detail so you can make an informed decision.

With that said, for full year 2026, we anticipate revenue in the range of $120 million to $125 million, and adjusted EBITDA of $17 million to $20 million. These projections assume no GAC contribution, and are based entirely on our PAC business performance. We are also providing operational metrics that offer deeper insight into our business drivers. This includes PAC average selling price of $0.88 to $0.91 per pound compared to $0.89 in 2025 and $0.82 in 2024. Production volumes of 122 million to 125 million pounds compared to 117 million pounds in 2025 and 111 million pounds in 2024. The pricing guidance reflects continued success in market diversification and value capture. We're not just selling commodity pack products. We sell engineered products into specialty applications that command premium pricing.

The volume growth demonstrates both market demand and our operational capabilities. And here's an important point. Pausing GAC production creates additional path furnace capacity, enabling higher PAC production than we previously anticipated. Even with GAC Phase 1 online and at capacity, we believe it would likely not require any reduction in PAC production volumes, a significant operational advantage that preserves and extends the earnings power we're demonstrating in 2026. We expect additional revenues from other chemicals and products will contribute approximately 13% to 15% of total revenues, consistent with 2025 and previous years.

Now let me turn it over to Stacia to walk through the detailed financial results and provide additional context on our Q4 performance.

Thanks, Bob. We delivered strong financial results during the fourth quarter and full year of 2025, albeit offset by the frustrating impact of GAC start-up costs in the second half of the year. Revenue grew 10% year-over-year for the second year running to approximately $120 million. This was driven primarily by solid improvement in our average selling price and volumes. Gross margin for the year was 27.9%, representing a negative impact of GAC ramp-up costs, offsetting the otherwise positive momentum in PAC pricing and cost efficiencies. We delivered $13.2 million in adjusted EBITDA in 2025, a very impressive 26% improvement compared to 2024. This underlines the ongoing and sustained improvements we have made to our PAC business, which built on the progress of 2024, and which we believe will continue again through 2026.

Now turning to our discussion of the fourth quarter. Revenue totaled $29.4 million, up around 8% on the same period, driven in part by a 7% quarter-over-quarter growth in our average selling price and positive changes in our product mix. Our gross margin for the quarter was 13.6% compared to 36% reported in the prior year period, again, a reflection of the painful impact of our GAC ramp-up costs. It is also worth noting that the lower level of take-or-pay contracts collected in Q4 2025 versus Q4 2024 underscores the improved demand for our products.

Net loss was $50 million in the fourth quarter of 2025 compared to a net loss of $1.3 million in Q4 of 2024. We generated positive adjusted EBITDA of approximately $0.3 million in the fourth quarter of 2025 compared to the adjusted EBITDA of $3.8 million in the same period during 2024. Both these changes versus the prior year were primarily driven by the costs associated with the ramp-up of our GAC production at Red River, which totaled several million dollars in fiscal year 2025. Selling, general and administrative expenses totaled $6 million in Q4 of 2025, which is flat versus the prior year period.

Overall, and on an annualized basis, our performance demonstrates our ability to operate our PAC business in a way that contributes positively to our economic position, while further enabling us to pursue and execute on alternative growth opportunities within our business. We remain extremely confident that our PAC business will continue to be cash generative in fiscal year 2026 and beyond. The strong annual performance of our PAC business in 2025 demonstrates its potential to secure a foundation on which we can continue to build.

Turning to the balance sheet. We ended the year with a total cash of $15 million, of which approximately $6.6 million is unrestricted. The change versus last year was driven by CapEx spend to complete the GAC line. Total debt, inclusive of our financing leases at December 31, 2025, totaled $28.5 million compared to $24.8 million in 2024, with the increase driven by higher utilization of our mid-cap revolving credit facility.

Looking ahead, not only did the PAC business perform well in 2025, but we have sufficient visibility on the performance that we are today in a position to issue financial guidance for the first time. As Bob mentioned, for the fiscal year 2026, we expect revenue of $120 million to $125 million, driven in part by strong PAC volumes of between 122 million and 125 million pounds at an average selling price of between $0.88 and $0.91 per pound, which both pricing and volume expected to improve compared to 2025.

I would note that the delta between the PAC total and our overall revenue is the contribution from our other chemicals and products, which we anticipate will contribute between 13% and 15% of revenue as they have in previous years. Alongside this revenue guidance, we are also providing adjusted EBITDA guidance of between $17 million and $20 million, which would represent a 30% improvement on 2025 at the bottom end of the range. And as noted by Bob, but to reiterate, these forecasts assume no contribution from our GAC. While this is a source of collective frustration, it also demonstrates how strong our PAC business is performing.

Finally, I would add that pending completion of our optimization review, we currently anticipate CapEx for 2026 to be in the range of $8 million to $10 million. This is inclusive of around $3 million relating to our routine biannual 2-week maintenance, which is scheduled at our Red River plant.

With that, I will turn things back to Bob.

Thanks, Stacia. Before we turn to questions, let me leave you with the key takeaways that should frame how you think about our going forward. First, we are pausing GAC to conduct a comprehensive engineering and production process optimization review of the development of the GAC business. This is a disciplined capital allocation decision, not a reflection of lost confidence in the market opportunity.

Second, our PAC business is profitable, growing and provides a stable foundation. We have over a decade of operating experience, clear visibility into demand and strong customer relationship. The $17 million to $20 million adjusted EBITDA guidance we're providing for 2026 is based on this proven business, and we're confident in our ability to deliver it.

Third, we're taking our pain upfront rather than revenue across multiple quarters, and we're making the difficult decisions necessary to position this company for sustainable success. I'm confident that we're making the right decisions for the long-term value of this business. And as I am always keen to remind you, both I and many members of the Board and management team are significant shareholders. We must not overlook that we have a profitable core operation. We have experienced leadership in place to optimize it, and we have the discipline to make smart capital allocation decisions rather than continuing down a path that may not generate acceptable returns. We're committed to rebuilding your confidence through consistent execution. That starts with delivering on our 2026 PAC guidance, and it continues with providing you with a clear well-supported plan for GAC when our assessment is complete.

With that, I'll hand it back to our moderator to open for questions.

[Operator Instructions] Our first question comes from the line of Gerry Sweeney with ROTH Capital Partners.

Thanks for all the detail. I appreciate it. I'm just going to start off. Anything that you see today that would prevent you for not pursuing GAC? I understand that there's costs associated with some of these changes and opportunities. But our channel checks continuously indicate an extreme amount of demand for GAC on a go-forward basis. The demand characteristics are very positive. And I think even some of the larger competitors have had issues expanding some of their facilities and have taken a year, if not 18 months longer than anticipated. But just curious if there's anything that would stop you from pursuing GAC?

Really, the answer is an emphatic no. The market fundamentals, as you just articulated, and I tried to express in the prepared remarks, the market is in an extreme undersupply versus excess demand imbalance. We expect that imbalance to persist for many years to come, and that's even before the PFAS regulations formally come into effect.

Pricing continues to rise, and there are barriers to entry for both greenfield entrants as well as existing players. And so that we -- I don't see any reasonable alternative other than -- or I should say, not reasonable alternative. But any alternative about that, we would go forward because the market fundamentals are so great, and we're so well positioned to capture that once we've used this pause to further refine what modifications are necessary to be able to attack the market.

Got it. Switching gears to PAC. Obviously, lots of visibility into contracts, which is great, I mean, especially for this year and even into next year. But I think in your press release, you did highlight or mentioned that there are some regulatory undercurrents that I think that have been ebbing and flowing, I will say. Anything -- any commentary on that in terms of any potential changes on that front that you're seeing?

So 2 things, as you mentioned, we've got excellent visibility on the PAC business, with 96% of our expected volumes or targeted volumes for 2026 already contracted, and 75% for 2027. So we like the way that business is positioned for future growth.

As it relates to potential regulatory uncertainty, there really isn't regulatory uncertainty. There was some discussion from the EPA about new regulations that have been pushed further back. But that was not a rollback of existing regulations. So therefore, no effect on our existing PAC business.

Understood. And then one last question. Guidance, $17 million to $20 million; CapEx, $8 million to $10 million. You back [ up ] some interest costs. I think that implies maybe some free cash flow for $4 million or $5 million to upwards to $8 million. Is that a -- back envelope, it does appear that you're going to be free cash flow -- generating free cash flow for the year? And is there anything else that we should be thinking about on the balance sheet?

I think your math is good in terms of calculations. We expect the PAC business to be a free cash flow generator. We are doing the biannual plant turnaround scheduled for April. That's going to be about $3 million. That's included in that CapEx guidance as it relates to that. So next year, we would expect that maintenance CapEx for the PAC business to be even less and to generate even more free cash flow.

I'd like one more quick question. Obviously, there's a little bit of excess capacity still at Red River. I think it's [ 1 50 ] issue, around [ 1 20, 1 25 ]. If hot summer, lots of power generation, power -- I mean, AI is driving that to some degree. But there is potential upside. You have capacity to supply the market if there's more upside demand, is that correct?

That's absolutely correct. As I mentioned in my prepared remarks, when we bring on the 25 million pounds of GAC, we don't expect that to cannibalize PAC production at all. So we definitely have room in this interim period to further expand the PAC volumes and take advantage of high nat gas prices, increased electricity demand as it relates to AI and data centers and/or any weather-related increase in power demand. But again, PG&I, while it's an important component of the PAC business, is just a component of the PAC business.

Our next question comes from the line of Aaron Spychalla with Craig-Hallum Capital Group.

Maybe first for me -- I appreciate all the color. Just kind of want to square it with what we heard in April -- back in November. So I just want to confirm, on the thermal oxidizer side of things, it sounded like you were looking to purchase a new one of those and thought that, that could take care of some of the issues now. It sounds like it's more on the off gas side of things and making sure you have the proper kind of capacity and equipment there. But at this point, I just want to confirm, you think that those issues are solvable. It's just still trying to take a step back and determine the right path forward from a cost and capital standpoint.

Yes, absolutely, Aaron. I think what you're referring to is in our remarks last November, I mentioned that we expected to spend about $8 million to $10 million for a thermal oxidizer, and that was the case. But what we did is we decided to take a proactive approach to ensure that if we spent that $8 million to $10 million, we would solve the problems associated with getting production from 15 million pounds to 25 million pounds. Part of that proactive approach was the addition of Eric Robinson to our team, while he formerly was added as Senior VP, Operations at the beginning of March, he's been serving as a consultant to us since late 2025.

But what really happens is we needed so much more than just a thermal oxidizer. We need a complete air quality control system, which means heat recovery, acid gas removal, particulate control, et cetera. And the reason that was determined, again, as we decided to do that proactive approach. But if we conducted kiln off gas testing by a third-party lab right ahead of Christmas. And the results of that found that the kiln off gas contained heavier tire fractions than anticipated from the original flawed engineering design. In essence, this heavier tire would require additional heat and air inputs to the thermal oxidizer at the higher 25 million-pound throughput rates. And the existing off-gas system, the afterburner sulfur scrubber downstream of the thermal oxidizer wouldn't be able to handle the extra heat and gas volume.

The net result is we need to install an entirely new separate off gas train comprising the new thermal oxidizer we discussed back in November, along with some additional items like a water quencher, heat exchanger, wet scrubber, ID fan, a new stack. And as a result of all this is why we've hit the pause button, so we can use this optimization period to refine the recommendations, and that will determine the final timing and cost. I apologize for being so long-winded, but I understand people's frustration, and I wanted to be able to provide detail for your answer.

No, I appreciate that. And then maybe second, on the third-party feedstock, switching there, you kind of, in your commentary, talked about often exceeding industry benchmarks. So I just want to kind of confirm, you feel comfortable with the switch in the feedstock and kind of the resulting product. It's just about, again, solving the equipment and kind of the production line dynamics.

Absolutely, we feel comfortable. We've done testing of the material. And in fact, we originally evaluated over 55 potential feedstocks. We narrowed that down to 13, did extensive and even more extensive testing on those feedstocks. We narrowed that down to 7. We further narrowed it down to 5, that were essentially interchangeable as it relates to that. So we've done testing of the material. It's a proven process in the industry, and we know this is going to work.

Our next question comes from the line of [ Jason Tilton ] with [ Canaccord Genuity ].

The guidance implies the PAC ASP growth of sort of 1% at the midpoint. Obviously, you're lapping very strong growth from the past few years. But curious, what are some of the puts and takes to consider with that range of pricing expectations relative to recent trends?

Sure. We've seen excellent pricing growth on our ASP over the last 9, 10, 12 quarters. As we have said in previous calls that, that pace -- that double-digit pace of price increases had to moderate. We still expect to see price increases from the base business and also as we expand into more value-added markets, which are more highly engineered and so at much higher prices than the -- than our ASP more commodity-like sales.

Okay. Great. That's very helpful. And one quick follow-up. In the release, you also talked about some of the alternative applications for the Corbin Wetcake and those continuing to advance. Perhaps you could just maybe expand a bit more about how those developments are trending?

Sure. Really, alternative uses for the Corbin feedstock really come down to asphalt emulsion, synthetic graphite, graphene and potentially isolating rarer minerals or critical elements as part of the washing process. The most advanced is the asphalt emulsion. We've completed with a third-party asphalt company. That the initial round of testing, we've progressed to the next round recently. So we're making good progress there. However, I think it would be premature to expect significant revenues from asphalt emulsion in 2026 from Corbin. Synthetic graphite and graphene are more longer term. We're working with several firms and including the government doing and conducting research in that regard. And I would put those as potential, but I'd say more sizzle than stake or sirloin.

Our next question comes from the line of Peter Gastreich with Water Tower Research.

Sorry, can you hear me?

Yes, absolutely.

Okay. Great. So yes, I appreciate the detailed material action plan here. And it's great to see the formal forward guidance including the operating metrics coming through as well. Just a couple of questions. In the past, you've mentioned that there are tariff benefits for domestic producers like Arq. Just kind of curious if you are realizing that now. And is any of your EBITDA guidance for this year, taking into account [ the effect ] tariff benefit just because it would seem there would be some good operational leverage there, if that is the case.

The guidance we provided reflects steady state business and doesn't give any benefit from tariffs and the imposition of tariffs and our competitors, most of whom import material from overseas.

Okay. Great. And just a little bit more on the contract volume visibility of 75% for 2027 and 43% for 2028. Just for some context, would you characterize that as typical to your visibility for you? Or is that stronger than usual? It would appear that you're in a very good place just looking at this year given that your outlook is that is for PAC volumes to be rising?

I'd say it's the usual position that we are in. We have an extremely high renewal rate, thanks to the quality of Jeanette McQueeney and her sales team. We typically renew 86% or more on average of our contract. Some of those contracts are multiyear, some are 1 year, some are 2 years. So hence, the visibility profile. But we would expect that when we get to this same time next year, that we would have similar numbers going out the next 3 years.

Okay. And just one more question. I reckon you might not be able to answer this, but just regarding any potential litigation recovery in the future. Would you be looking for startup costs or lost revenues in terms of damages? Or are we still in kind of a wait-and-see mode right now?

As we mentioned, the lawsuit is ongoing, and it's our policy not to comment on the particulars of active litigation, but I will say that we feel very confident in our position.

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Rasmus for any final comments.

Thanks, Melissa. In closing, I want to emphasize that our PAC business has been transformed from a cash consumer to a cash generator, one, which after maintenance CapEx, creates free cash flow to help fund our GAC expansion. Our PAC business had a good 2025, and 2026 will be very good as it relates to the PAC business.

The company, even without GAC, is profitable, is growing and has visibility to sustain the PAC growth. It isn't a hockey stick style growth, but it's steady growth. Demand for GAC is not an issue. There's definitely a demand-supply imbalance that has persisted, and we think will continue to persist for many years. In addition, there are regulatory benefits and barriers to entry, which will delay any new entrant or greenfield expansion for many, many years.

For Arq and investors, the upside is about refining what is needed to complete [ line one ], execute on the build and successfully produce GAC. Bringing on experienced activated carbon operating management in the form of Eric Robinson and others will help further improve the business and mitigate that execution risk.

Thank you very much, and we look forward to providing updates on our next quarterly call.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

Good morning, ladies and gentlemen, and welcome to the Arq Third Quarter 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, November 6, 2025.

I will now turn the conference over to Anthony Nathan. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us today for our third quarter 2025 earnings results call. With me on the call today are Bob Rasmus, Arq's Chief Executive Officer; Jay Voncannon, Arq's Chief Financial Officer; and Stacia Hansen, Arq's Chief Accounting Officer. This conference call is being webcasted live within the Investors Section of our website, and a downloadable version of today's presentation is available there as well. A webcast replay will also be available on our site, and you can contact Arq's Investor Relations team at [email protected].

Let me remind you that the presentation and remarks made today include forward-looking statements as defined in Section 21E of the Securities Exchange Act. These statements are based on information currently available to us and involve risks and uncertainties that could cause actual future results, performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements. These risks and uncertainties include, but are not limited to, those factors identified on Slide 2 of today's slide presentation, in our Form 10-K for the year ended December 31, 2024, and other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, the company undertakes no obligation to update these factors or any forward-looking statements to reflect future events, developments or changed circumstances or for any other reason. In addition, it is especially important to review the presentation and today's remarks in conjunction with the GAAP references in the financial statements.

With that, I would like to turn the call over to Bob.

Thank you, Anthony, and thanks to everyone for joining us this morning. Our PAC business delivered yet another strong quarter. The continued and ongoing turnaround of our PAC operations yielded strong financial results, driven primarily by continued average selling price strength of 7% over the prior year as well as a further 43% reduction in SG&A expenses. We also made progress on the granular activated carbon front, achieving first commercial production, delivering initial product and generating our first GAC revenues. Third quarter financial performance was achieved despite operating GAC at well below capacity, which significantly reduced our financial results.

Our third quarter adjusted EBITDA of $5.2 million included the negative impact of several million dollars of inefficiencies caused by nonrecurring items associated with handling and post-commissioning costs for our granular activated carbon ramp as well as impacts due to inefficiencies driven by low early ramp volumes. We previously noted that early GAC production would carry elevated costs due to the high fixed expenses, meaning the first pounds produced would cost more than those made later. That proved true this quarter, but the impact of these dynamics was larger than expected. We expect profitability to improve as volumes ramp and production efficiencies are achieved.

Turning back to our PAC business. Third quarter prices increased by approximately 7% versus the prior year period and 6% versus last quarter, reinforcing that our foundational PAC platform is not only sustainably profitable, but also capable of fully funding maintenance capital needs for the broader business. Driven by continued price improvements, higher volumes in 2025, broader end market diversification and disciplined SG&A reductions, the company is generating $16.7 million of adjusted EBITDA on a trailing 12-month basis. This marks a significant achievement both in absolute terms and relative to our starting point at the end of September 2023 when trailing 12-month adjusted EBITDA was a negative $8.7 million at the outset of the turnaround. This is more than a $25 million improvement in trailing 12-month adjusted EBITDA. I'm proud of what the team has accomplished and even more encouraged by the upside that still lies ahead.

Turning now to our strategic investment in granular activated carbon. The operational ramp-up has been impacted by previously discussed design issues while processing the Corbin feedstock at scale. As a result, based on recent operational observations, we now expect to reach full GAC capacity sometime around mid-2026. While this timing adjustment is disappointing, we believe that this revised target is achievable. With that said, let me address head on the logical question of what has caused this extension. Our operation team is still working through certain design issues that have required refining and updating the process for handling the new Corbin waste-derived feedstock efficiently at scale. This feedstock differs from the traditional lignite coal that we have historically used to produce our PAC products. Specifically, the Corbin feedstock has some greater-than-anticipated variability, which due to design flaws and constraints has required adaptations to processing methodology. You might be wondering how this differs from the Red River commissioning challenges we faced earlier. To clarify, those earlier delays were about getting the plant up and running for the first time. The current issues are about scaling, reaching full efficient production of tens of millions of pounds. The delay in achieving nameplate GAC capacity is extremely frustrating. As we previously noted, design issues and flaws have impacted our production capacity, which combined with the inherent variability of our Arq Wetcake has required additional process and methodology changes. While we've solved several issues, we're continuing to explore additional options to further enhance performance and reduce operating costs. One potential solution is to blend or replace Corbin feedstock with low moisture coal. This should reduce feedstock variability as well as improve production rates and operating costs. We are working to resolve these challenges and are applying the same rigor and discipline utilized to successfully turn around the PAC business.

Importantly, despite the challenges noted, we successfully produced initial on-specification commercial granular activated carbon volumes in Q3 and completed our first sales into a supply-constrained market. As news of our production start-up spread, we received numerous inbound requests for spot purchases. These purchase requests were at pricing levels above our existing contract rates. This is further evidence of the supply constraint and favorable long-term market dynamics. While our strategy remains centered on long-term contracts, these spot inquiries are priced above our initial agreements and could offer attractive diversification opportunities alongside our contracted sales. In addition, we have extended numerous GAC contracts to account for the updated timelines.

We're also seeing positive results from ongoing renewable natural gas field testing and remain confident in our ability to capture value in that market once testing concludes. At the same time, the broader GAC water market provides a reliable outlet, and we expect both markets to grow significantly in the years ahead. Our operational focus is now on rapidly increasing volumes to leverage our fixed cost base and achieve consistent granular activated carbon profitability. As we previously discussed, we are also evaluating adjacent revenue opportunities that could further improve overall returns. This includes determining whether our Corbin feedstock can be used in profitable alternative applications creating diversified end use cases for the feedstock to maximize shareholder value. As such, I would like to provide an update on those efforts.

We've previously indicated that there are 4 key product avenues of interest, including asphalt, purified coal, rare earth materials and synthetic graphite. Starting with asphalt, we're continuing our testing with a major asphalt company. Early indications show it could make asphalt last longer and perform better in cold weather. Second, purified coal. We have signed a nonbinding MOU to test using our material as a coal substitute for making silicon wafers used in semiconductors, with our partner covering all the initial cost if we elect to proceed. Next, rare earth minerals. With growing demand for U.S.-sourced materials, we're working with the DOE to explore potential government funding to help us test this at our Corbin facility with research starting in 2026. And finally, synthetic graphite. This potential product would benefit from the high purity of our Arq Wetcake, and we are currently pursuing government funding opportunities to evaluate its commercial potential. Importantly, these opportunities aren't mutually exclusive, meaning we could theoretically produce Arq Wetcake for asphalt blending while generating byproducts for rare earth markets from the same source material. Success with these alternative products could create a stand-alone business line in new markets by turning these products into revenue contributors and thereby further improving profitability and margins.

Looking ahead, fundamentals for granular activated carbon remain very strong. With Phase 2 already essentially permitted, we continue to carefully evaluate future GAC facility expansions. Specifically, FID timing is now anticipated to coincide with reaching GAC Phase 1 nameplate capacity around mid-2026. We believe that the experiences gained from Phase 1, along with the ongoing improvements will provide a strong foundation for any future granular activated carbon expansion projects.

With that, I'll now turn it over to Jay for a detailed financial review.

Thanks, Bob, and thanks, everyone, for joining us today. Notwithstanding the impact of the granular activated carbon ramp-up, Arq continued to deliver strong financial results during the third quarter. With revenue of $35.1 million, this continues to be driven largely by enhanced contract terms, including a 7% growth in average selling price year-on-year, in part the result of ongoing successful end market diversification.

Our gross margin in the quarter was 28.8%, well below our steady-state margin of recent quarters, primarily due to the negative impact of GAC fixed production costs as we ramped up volumes. We continue to incur post-commissioning costs associated with preproduction feedstock used in our granular activated carbon line. Additional negative impact to margin this quarter was related to low volumes versus higher fixed cost. We generated positive adjusted EBITDA of approximately $5.2 million compared to adjusted EBITDA of $9 million in the prior year period. I would note that the -- consistent with many market participants beginning in Q1 2025, we have added back stock-based compensation as a part of our adjusted EBITDA calculation and revised corresponding 2024 adjusted EBITDA calculations for comparability.

As Bob noted, this quarter saw a significant anticipated ramp-up costs associated with GAC. As we continue to work to get the GAC line to run rate capacity with only approximately 2 months of commercial production in Q3, margins were materially impacted by the high fixed production costs related to granular activated carbon. While we do not intend to split our business lines in the future for competitive reasons, I think it is important to note today that we achieved an extremely strong quarter in regards to our PAC performance.

As noted earlier, our third quarter adjusted EBITDA performance of $5.2 million included several million dollars of nonrecurring expenses associated with handling and post-commissioning costs for our GAC ramp as well as impacts due to inefficiencies driven by low early ramp volumes. Q3 is often a strong quarter for us, but this was an especially solid quarter for our PAC business, demonstrating not only the impact of our enhanced pricing, but also our cost reduction initiatives. We incurred a net loss of approximately $700,000 versus net income of $1.6 million in Q3 of 2024, primarily attributable to the high fixed production cost on initial volumes from our Phase 1 GAC line as we continue to ramp up to nameplate capacity.

Selling, general and administrative expenses totaled $4.6 million, reflecting a reduction of approximately 43% versus the prior year period. This reduction was primarily driven by payroll and benefits as well as general and administrative expenses. Research and development costs for the third quarter increased to $2.6 million, up from approximately $800,000 in the prior year quarter. This increase was primarily attributable to the ramp-up of the GAC line we discussed earlier. Overall, our performance in Q3 2025 demonstrates our ability to operate our PAC business efficiently such that it contributes very positively and sustainably to our economic position, while further enabling us to pursue and execute on anticipated high-growth and high-margin opportunities with our expanding GAC business.

As always, we remain focused on enhancing the profitability of our PAC business even further, and I believe that is how a business which can, on a medium-term basis, feasibly generate significantly greater than our previous target of simply covering maintenance CapEx.

To discuss the impacts of the quarter on our balance sheet, let me turn it over to our Chief Accounting Officer, Stacia Hansen.

Thanks, Jay. Turning to the balance sheet. We ended the third quarter with total cash of $15.5 million, of which approximately $7 million is unrestricted. This is compared to total cash of $22.2 million as of year-end 2024. This change was driven primarily by trailing CapEx spend at Red River relating to the GAC line and buildup of Arq Wetcake delivery and critical spare parts.

Today, we are also reiterating our full year 2025 CapEx forecast of between $8 million and $12 million. This is particularly relevant given Bob's comments about potential work at Red River, which we do not believe will add materially to our budgeted CapEx for the year as we continue to expect to fund our operating and CapEx needs via our existing cash, cash generation, debt facilities and ongoing cost reduction initiatives.

With that, I will turn things back to Bob.

Thanks, Jay and Stacia. Before we turn to questions, I'd like to leave you with 4 key takeaways. First, our PAC business continues to perform extremely well. As mentioned earlier, the $5.2 million of adjusted EBITDA we reported this quarter included the negative effect of several million dollars of nonrecurring items associated with activated carbon. This reflects the underlying strength of our foundational PAC business. Our PAC turnaround has exceeded expectations. And while we view PAC's long-term growth potential as more limited than that of granular activated carbon or our potential emerging product lines, it's now clear that this foundational business delivers meaningful and sustained value. I remain confident there is still room to further improve our PAC business. My goal has always been for PAC profitability to fully cover maintenance CapEx across the business, and I now believe that it can do even more than that. As a major shareholder, I see this, combined with our substantial asset base, which has a replacement value well in excess of $500 million, is a strong foundation for the company's long-term valuation.

Second, while costs related to granular activated carbon ramp-up weighed on our financial results this quarter, it's important to recognize that we have now produced and sold commercial quantities of granular activated carbon from Red River, a major milestone for our company. My primary focus remains on driving profitability as we scale production. It is also important to highlight that we've overcome business challenges before. As I discussed earlier, we successfully transformed a loss-making PAC business to an attractive business generating attractive profit and cash flow. We are confident our best-in-class team will be able to work through the GAC production challenges. We will get this resolved.

Third, granular activated carbon’s underlying market fundamentals remain exceptionally strong, which makes the delays in scaling production even more frustrating. The market opportunity is there for us to capture. And fourth, I believe our ongoing review of potential feedstock alternatives will ensure we are scaling this business as efficiently and profitably as possible. Separately, our assessment of potential alternative product opportunities creates additional diversification and upside for the long term.

With that, I'll hand it back to our moderator to open for questions.

[Operator Instructions] And the first question comes from Gerry Sweeney at ROTH Capital.

Bob, I'm just going to -- I don't know if you can answer this or would want to answer this. But what -- how much GAC are you producing at spec? And I think what people want to know or what I would like to know is where you are today versus what nameplate capacity is?

We're producing less than we want to. That's for sure. What we're producing is on spec as it relates to that. You're right that for competitive reasons, I'm not going to -- and for other reasons, I'm not going to give you the specific answers. But it's clear that the suboptimal production volumes are impacting our gross margin and our financial results.

Can you produce GAC level that we'll just say, breakeven while you test alternatives? Or is this going to be a drag until we get the problem solved?

And so if you look at it, what is breakeven, we have an idea what that is on that. But as we start out -- any time you start out a new production process, there are going to be costs associated with the ramp-up. The costs have clearly been greater than we had anticipated, and we've had some greater difficulty in ramping up the production volume as it relates to that. And progress isn't linear. We believe that the best thing to do long term is to both evaluate blending of a feedstock, drier feedstock to overcome some of these design issues. That will help us get to profitability and commercial production even faster.

Speaking of alternatives, I'm assuming that's a drier feedstock that would be met coal, which is traditionally used as GAC and would that have an impact on margins?

First of all, we're going to do what's in the best economic interest for our shareholders. And we're evaluating blending drier coal as really one way to help overcome the design issues that have been affecting our ability to deal with the variable feedstock. And while we're evaluating that because the logical question is, we're also evaluating whether it makes sense to switch to drier coal. Why would we switch to drier coal? Well, if 1 of the 4 ultimate uses for carbon feedstock develop, it would account for all of the Corbin capacity and then some. So, it behooves us to evaluate alternative feedstock to maintain full optionality. And keep in mind, from an economic standpoint as well, as you mentioned in your question, Gerry, that the Corbin feedstock is essentially 50% water. We're paying to ship 50% water that we then take out of the product as it relates to that. So, we believe it's a distinct possibility that blending drier coal with the feedstock could also have positive CapEx implications.

Got it. One more for me. Just want to understand the numbers, $5.2 million in EBITDA in the quarter, that does not include some of the extraneous costs that were incurred with this ramp-up, correct? So, in other words, that $5.2 million in EBITDA would have been higher by a couple of million dollars if these issues didn't arise, all things being equal, right?

Yes. So, the $5.2 million includes the negative impact of several million dollars of costs associated with the GAC. Now again, what's several million dollars, it's more than a couple as it relates to that. I'm not going to be specific, but I can try and provide an analogy. If you look at the gross margin of the last 4 quarters prior to this, so third quarter of '24 to second quarter of '25, and you added back those several million dollars in costs, our gross margin would have been several percentage points above the average for those 4 quarters.

No. I mean, listen, 3Q -- ASPs were up year-over-year and coal plants aren't being shut down as fast. So, I mean there's demand for PAC out there. So, I mean, it would have been a very strong for the PAC business. I get it.

The next question comes from George Gianarikas at Canaccord Genuity.

I'd like to dig in some more on the Corbin feedstock. I'm just curious what -- can you go into a little bit more detail around what you mean about variability? And when did you figure out that this was an issue? And I'm assuming that there had been tests prior to starting production that indicated that this wouldn't. So just a little bit more detail as to exactly what you discovered and when?

Sure. This is really a design flaw issue. We always knew as part of our due diligence that there would be variability in the feedstock from Corbin. Regarding the design issues, we worked through many of those design flaws in the original engineering to just be able to complete commissioning and achieve commercial production. But those design flaws and some of those design flaws and constraints still impact our production on the granular Line 1 are essentially that the original engineering firm really failed to account for the moisture content and variability in the feedstock in the design of some of the openings and chutes and some of the -- if you consider what you have extremely sharp angles, which led to inefficiencies and led to plugging and tarring on that. So, we knew there was going to be variability, but that the design did not account for that.

Right. So, this sort of begs the question if it's a design issue as opposed to necessarily a feedstock issue because the feedstock is something that you knew about going in, wouldn't -- why are you exploring other alternatives to feedstock as opposed to just redesigning the facility?

Redesigning the facility would cost more. We know that. And we think that -- one of the issues relates to, as I say, if you think of a 90-degree angle and you're trying to push product that has some moisture content or some sticky content through that 90-degree angle, it's going to catch on that -- the [ curbs ] and on the corners, et cetera. By blending it with drier coal and reducing that moisture content on the input, it makes it easier to make that it's less likely to stick for lack of a more technical term as it relates to going around those corners. So, it would be easier to blend that feedstock and cheaper than it would be to redesign and put in place the additional equipment.

All right. And maybe just last question. In terms of -- I think it was asked previously as well. How do we think about the long-term margin implications of some of the changes you're making?

Yes. No, a couple of things. One, short term, there's clearly a negative impact from their ability or an inability to reach full run rate production on granular activated carbon. Long term, the granular activated carbon margins, we expect to be extremely strong for all the market fundamentals that I discussed in the prepared remarks and pricing continues to be even stronger than it was in terms of even a year ago as it relates to that. And if you look at one benefit of blending some drier coal, as I mentioned in my earlier question, is that we won't be shipping as much water that we're taking out of the system. So that in and of itself should lead to lower operating costs and improved margins.

The next question comes from Aaron Spychalla at Craig-Hallum.

Maybe just one on GAC. I mean, can you just -- maybe at a high level, just what gives you confidence in hitting the mid-2026 targets? I mean, have you started to implement some of these design tweaks? Or are you seeing some benefit from the changes you're making on the feedstock side? It doesn't sound like there's a lot of cost you're expecting, but just again, trying to just understand the confidence in reaching these targets.

Yes. Sure. Great question, Aaron. And I'm going to apologize in advance because it's going to be -- either depending on your point of view, long-winded or you ask what time it is, I'm going to tell you how to make a watch. But I think it's important to provide that context. As everybody knows, the design flaws led to the delays in commissioning the granular activated carbon facility earlier this year. And while we successfully addressed those issues to complete commissioning, the same design flaws as we've mentioned, have continued to affect our ongoing granular activated carbon production and the ramp-up to full capacity. And in answer to your question, I think it's important to provide context as to why and how we expect to achieve full run rate production around mid-2026. So going into that detail, and also this is some additional detail for George's question as well. The initial design and construction included a 320-foot off-gas line from the [indiscernible]. The design was not only inefficient but unworkable. And part of the original commissioning delay stemmed from addressing design defects in the system that led to the cooling of the line and subsequent tar and plugging and particulate plugging really. So, in collaboration with a new engineering firm, we determined that installing a thermal oxidizer and shortening that off-gas line from 320 feet to 28 feet was the best solution. Locating a suitable unit, a suitable thermal oxidizer was difficult as really only one with the required specifications existed in the U.S. We have secured that on a rental basis. And once installed, it enabled us to have successful plant commissioning and to start commercial production. And after getting that thermal oxidizer successfully in place and beginning production, we determined that the current rental thermal oxidizer could really only support production of about 15 million pounds of granular activated carbon per year. As a result, in working with that new design firm, we now plan to purchase and install a purpose-built thermal oxidizer, which is designed to support 25 million pounds of granular activated carbon production a year. The lead time for construction and installation of this new purpose-built 25-million-pound capable thermal oxidizer is why we have moved our expectations of full run rate production to around mid-2026. That is when we expect to receive and install that purpose-built thermal oxidizer. And once on site, installation will take about 6 days -- 1 day to cool the existing unit, 1 day for removal and 4 days for replacement and connections. The GAC production will have to pause for roughly 1 week during this process, but operations should quickly get to full run rate capacity once installation is complete because all we're changing then at that point is working through the full capacity of the -- having a thermal oxidizer, which allows us to get to 25 million pounds, and we're confident we'll be able to have solved the input issues prior to that time.

Logical question is, what's it going to cost? The new thermal oxidizer will require an estimated total investment of $8 million to $10 million. That includes roughly $3 million for the equipment and the remainder is for installation. The vast majority of the spending will occur at the time of final shipment and installation. This will be funded as 2026 CapEx, and based on our conversations with current and potential lenders, along with our available cash and operating cash flow, we believe that this can be readily funded in a capital-efficient manner. And to minimize disruption, we plan to complete our biannual TAR during that same period, that way we avoid any additional planned downtime in '26 or '27. So, I apologize for being so long-winded, but I think it's important to show that -- the detail behind why we have changed our prognosis.

No, I appreciate that color. That's helpful. And then you kind of talked to -- I mean, on the PAC business, if you back out a few million dollars, obviously, really good margin performance. It seems like the outlook still remains strong there. Can you just kind of talk about that and potential further diversification and kind of ASPs and just with the outlook on the PAC side?

Sure. We had, again, another strong quarter of average selling price increase. We were up 7% year-over-year, 6% quarter-to-quarter. That pace has abated somewhat from our previous quarters of 9% or better double-digit -- or excuse me, average selling price increases. And it was natural. We couldn't continue that cadence forever. We still expect to see continued improvement from the PAC business and the PAC-related results from a combination of increased volumes. We are still seeing increased average selling prices and also the additional fixed cost absorption related to additional volumes. As it relates to new markets, our sales force has done an outstanding job of looking to develop and penetrate additional markets. And those additional markets also have higher average selling prices than some of our additional outlets. So, we're optimistic about the future for PAC as our foundational business.

The next question comes from Peter Gastreich at Water Tower Research.

Just a few, if I may. The first one is regarding the delay for the GAC, is there any risk or penalties that could be associated with the contracted customers for the delay?

Our customers have been great with this. We work closely with all of our contracted customers to provide visibility on production outlet -- output, excuse me, as it relates to their needs. All of our customers have worked with us to amend their orders or ordering cadence and all of our GAC contracts that were 1 year or less have been extended. So, I think that's a testament both to the strength of our relationships and the undersupplied nature of the market. But everything is going as well as it should be.

Okay. Great. So, my second question, just following on from the previous question about the PAC prices. Yes, congratulations. It's great to see. Even though the momentum has slowed year-on-year, you're still able to raise, which is really commendable. I just wanted to ask though, is that -- for that 7% increase, are we talking purely about the PAC there? Or are we seeing any kind of a net measurable impact from the GAC spot volumes that you mentioned?

So we didn't sell anything on the spot market. We're concentrated on meeting our customer contracted orders on that, which is the right thing to do from a relationship standpoint. So, all of the price increases that we referred to that 7% are coming from the PAC business.

Okay. Got it. Okay. And just a final question on the SG&A. So regarding the reduction in SG&A, how much of that can be sustained? And also for that, I understand that was allocated to cost of goods sold, why was that decision made?

Peter, this is Jay. Yes, the SG&A reductions are coming from prior year to this current year. And yes, those are definitely sustainable. We actually think that the -- we'll see as a percentage of revenue as the granular line comes up and starts coming up in '26, you'll start seeing SG&A as a percentage of revenue decline because we don't anticipate needing to increase the SG&A cost as we ramp up the GAC line. With regard to, I think, your second question there, which is on the reclassification into R&D, most of that -- we won't have that going forward. We did that reclass also in Q2 as it relates to preproduction volumes as we were commissioning -- bringing the granular activated line to a commissioning point. So, most of that cost that was reclassed in Q3 was the July and really like 1 week of August cost for preproduction volumes. Once we commissioned the facility, all of that cost has been running through the cost of goods sold line. And that's why we're seeing an impact, the negative -- or the margin in Q3 was negatively impacted by those fixed costs being spread across fewer pounds as we are not up to really a breakeven point yet for granular.

The next question comes from Tim Moore at Clear Street.

I just want to follow up on an important thread. I mean it's great the GAC is going under way. That's a really important milestone. And you've got a lot of things to optimize before you add additional lines over the coming years. But I just want to really dig into one other thing. I get the SG&A reconciliation and Jay just went through that. But how should we think about really gross margin in the next 2 quarters until you get enough utilization underway on GAC? I was kind of under the impression that the really big drag was the June quarter and it won't be as bad in September, but you can expect a big step up? I mean, there should be a step-up in the December quarter for gross margin, right?

I mean what I would say is as we're producing volumes at this suboptimal point level, there's a lot of fixed cost at the plant that's getting -- as I said, getting spread across fewer volumes, which are dragging the gross margin. I would -- what I would say is that it's not the fixed cost is going to go up. So, the fixed cost is pretty stable. So, what we'll continue to see is probably in Q4 and in Q1 of next year, margins similar to what we produced in Q3. And it's until we're able to get the volume up and actually have more pounds to sell and spreading those costs across that greater pounds, then we'll see the margin improve. So, I would expect probably for the next 2 quarters and probably even some even into Q3 when we -- once we get the new oxidizer installed -- I mean Q2 of next year, get the new oxidizer installed that we'll probably see a fairly consistent gross margin. Now we're also expecting -- hopefully, we'll see a continued improvement in PAC as we have demonstrated over the last 12 months. And so that may offset some of that as we continue to grow and improve PAC performance going into next year as well.

That's really helpful color on the cadence of -- and the other question I had was -- I understand right now with GAC revenue not that much, it will be pretty sizable by the June quarter. And for competitive reasons, you might not want to disclose it. [ Cal Carbon ] is owned by another firm. It's a small sliver of their conglomerate. Do you think though at some point, I mean, given that it's 25 million pounds, we had another more lines that you think you would break out maybe a year or 2 from now or GAC revenue, just to have the difference and especially when maybe it starts cannibalizing PAC a little bit on the feedstock later on?

A couple of things on that. I think that, one, given the long-term favorable market dynamics, I think it's highly probable that we will build a line 2 and further increase capacity. You mentioned competitive reasons. I'll refer to it more as competitive tension. There's always competitive tension between the IR side of things and the sales side of things as to what we break out. As you know, I'm a big believer in providing detail, an informed investor is a good investor and is a long-term investor. The flip side of that is that we are the only public company. So, we're handing competitive information to our competitors on a platinum platter on that. And so, the long-winded answer is maybe.

What I would say also add to Bob's comments is once we get to the 25 million nameplate and then we add another line 2, and we're then at $50 million of capacity. I mean, we're probably -- we're at about 100 million pounds capacity on the PAC. There, you'll be able to -- again to see, you can do correlations and kind of -- it wouldn't take -- wouldn't be very difficult to back into what the ultimate margin is between the 2. So that will -- and as we continue to grow and we start seeing PAC get cannibalized, as you mentioned, yes, there probably will become a point where we'll be -- the bulk of our discussion in the MD&A and the Q will be around the granular business and the PAC will be just kind of a base level that we know and talk.

No, that's fine because I'll be off the back into the GAC revenue pretty closely when you lap a full year, just if you keep announcing average price increase when you start year-over-year on the GAC.

We have no further questions. I will turn the call back over to Bob Rasmus for closing comments.

Thank you very much. Both short term and long term, the outlook for the powdered activated carbon business is strong. We also continue to expect even better performance from the PAC side, and this is a dramatic improvement from 2 years ago when the PAC business was a significant money loser. Short term there clearly remains some challenges to getting the granular activated carbon business up to full run rate. We're applying the same rigor, discipline, focus and resolve we successfully applied to the PAC business to solving these challenges. The long-term market dynamics for granular activated carbon remain extremely strong. And as a reminder, I'm fully aligned with shareholders with my minimum salary and my large stock ownership. I want this fixed as badly, if not more so than you all do, and we will get this resolved. So, thank you all for your interest, and we look forward to continued communication.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.

Greetings, and welcome to the Arq Q2 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Anthony Nathan, Head of Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us today for our second quarter 2025 earnings results call.

With me on the call today are Bob Rasmus, Arq's Chief Executive Officer; Jay Voncannon, Arq's Chief Financial Officer; and Stacia Hansen, Arq's Chief Accounting Officer.

This conference call is being webcasted live within the Investors section of our website, and a downloadable version of today's presentation is available there as well. A webcast replay will also be available on our site, and you can contact Arq's Investor Relations team at [email protected].

Let me remind you that the presentation and remarks made today include forward-looking statements as defined in Section 21E of the Securities Exchange Act. These statements are based on information currently available to us and involve risks and uncertainties that could cause actual future results, performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements.

These risks and uncertainties include, but are not limited to, those factors identified on Slide 2 of today's slide presentation in our Form 10-Q for the quarter ended June 30, 2025, and other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, the company undertakes no obligation to update those factors or any forward-looking statements to reflect future events, developments or changed circumstances or for any other reason.

In addition, it is especially important to review the presentation and today's remarks in conjunction with the GAAP references in the financial statements.

With that, I would like to turn the call over to Bob.

Thank you, Anthony, and thanks to everyone for joining us this morning. Today's second quarter results and the recent successful completion of commissioning of our first GAC line at Red River are key achievements in the continuing transformation of Arq to a sustainably profitable environmental technology company.

I'm extremely pleased to confirm that we have achieved a major milestone with the recent commissioning of our first GAC line, which is now beginning its ramp up towards nameplate capacity of 25 million pounds, which is anticipated within 6 months. We made our first granular activated carbon sales ahead of what we consider completion of commissioning, validating both market demand and product quality. While GAC is certainly our growth engine, we delivered another solid quarter from our foundational PAC business.

Despite Q2 typically being a shoulder quarter, we delivered revenue of $29 million with higher volumes than the previous year combined with ASP growth. We narrowly missed our ninth straight quarter of double-digit year-over-year price growth. However, delivering a strong 9% increase in our ASP is still an outstanding result.

We achieved our fifth consecutive quarter of positive adjusted EBITDA, which also represented an increase of more than 3x as compared to the same quarter last year. Our results are further confirmation that the foundational PAC business is well and truly turned around. The story remains consistent. Our PAC business continues a successful turnaround while we maintain focus on further optimization.

We've identified additional opportunities to reduce both operational and corporate costs, which combined with our steady ASP improvements should continue to drive enhanced financial performance. With the successful commissioning of our first GAC line, we are adding a higher growth, higher-margin business, which we expect to further enhance profitability.

Our PAC business remains robust with continued positive pricing momentum and strong demand across both existing and new applications. A key driver of our ASP improvement has been our strategic diversification of customers and end markets. In volume terms, we have reduced our exposure to the mercury emissions market to under 40% of volumes as of the first half of 2025.

While mercury-related applications are an important component of our PAC business, their impact on our financial performance has diminished even further than this percentage suggests. Accessing new markets for our powdered activated carbon and expanding into granular activated carbon improves our margins, our overall financial performance and lessens our exposure to any one particular market sector.

Meanwhile, the granular activated carbon market continues to show exceptional strength. We're seeing persistent supply shortages with minimal new capacity entering the market against the backdrop of steady 3% to 5% annual growth from existing demand drivers. And as a reminder, this growth in demand does not take into account PFAS-related requirements and demand.

When we factor in the expected impact of EPA regulatory changes, which could add 3x to 5x today's demand, the growth opportunity becomes even more compelling. While some investors have recently expressed confusion on the implementation timing, 2 points are clear. First, competitors show no material supply response as new supply typically takes 3 to 4 years to develop. And second, customers are locking in supply early ahead of further expected constraints.

Beyond water treatment, additional demand drivers like renewable natural gas could further accelerate market growth. Currently, we estimate that RNG applications consume approximately 45 million pounds of granular activated carbon annually with the GAC being used to scrub carbon dioxide, hydrogen sulfide, nitrogen and other contaminants before the gas can enter the grid.

With total U.S. RNG production currently estimated to be around 600 million cubic feet per day, that would indicate that every 100 million cubic feet per day of incremental RNG growth would require nearly 8 million additional pounds of granular activated carbon. With industry projections suggesting RNG could grow 2x to 10x by 2030, this represents potential incremental demand of 45 million to 400 million pounds, directly coinciding with the anticipated spike in PFAS-related demand.

With that said, I'm proud to report that we've already sold initial Phase 1 GAC product during the third quarter to RNG customers as part of the trials mentioned during our previous earnings call in May. This positions us well to access this attractive high-growth market while still serving PFAS applications.

In summary, the overall market remains tight and competitive, creating favorable conditions for both demand and pricing.

Turning now to what is perhaps one of the most important operational developments since I became CEO, the successful commissioning of our first 25 million pound GAC line at Red River. I say one of the most important operational developments, not the most important, because I do not want to understate the team's achievements in turning around our foundational path business. These achievements reflect our team's remarkable dedication to finding solutions, adapting to unexpected challenges and continuing to optimize our existing business while ultimately delivering a successfully commissioned plant.

However, we only took a short pause to celebrate before focusing on our next task, ramping up production toward nameplate capacity. The extended commissioning period allowed us to address various fine points and minor issues in parallel, which we believe may accelerate our ramp-up time line. Nevertheless, we maintain our previous 6-month guidance out of prudence.

The lessons learned during construction and commissioning have positioned us exceptionally well to plan future expansions. I'm pleased to share that our current goal is to make the final investment decision on a second line prior to the end of 2025. To be clear, this is a goal, not formal guidance. The criteria for this decision remained unchanged, achieving smooth operational performance from Phase 1, securing customer demand for incremental capacity and establishing a clear path to financing. While delivering all this within 4 to 5 months may be challenging, the compelling GAC market opportunity and our potential role within it make it logical to add capacity as quickly and prudently as possible.

That said, we will not run before we can walk. Our operational team remains singularly focused on a successful ramp-up of Phase 1 to nameplate capacity of 25 million pounds and potentially higher as previously discussed. We anticipate completing negotiations for additional contracts to fill remaining Phase 1 capacity in the coming months as customer trial results are finalized. Many of our customers have requirements far exceeding what they've currently contracted with us.

Successful execution of Phase 1 will enable us to capture a greater share of their total demand while attracting new customers who wanted proof of delivery before finalizing discussions. As these elements fall into place, we believe we can execute our second line using an updated construction plan and enhanced design aided by Phase 1 lessons learned and backed by a solid order book. With these fundamentals in place, securing credit financing for an identical growth stage should be achievable. As a major shareholder and someone who is fully aligned with shareholders, my preference remains to issue no further equity, and I currently see no reason why that would need to change.

Moving on to the regulatory environment. Despite broader market uncertainty, the current administration has been favorable for our business. As the only fully integrated domestic producer selling predominantly to U.S. customers, tariff issues have had limited direct impact on our operations and finances. While the EPA suggested delay in full PFAS regulation implementation caused some investor concern, we view it as a pragmatic approach. My recent discussions with EPA officials revealed both their and our concern about supply meeting demand. The potential extension from 2029 to 2031, therefore, should not be seen as an environmental policy dilution, but rather a realistic acknowledgment that maintaining deadlines without sufficient GAC supply or other controls would be impractical. You cannot solve a problem without adequate tools. It would be like playing hockey without the right padding or equipment.

The EPA's commitment to ensuring Americans have the cleanest air, land and water aligns closely with our mission, and I firmly believe the administration remains committed to pragmatic environmental regulations. While our business doesn't require further regulatory changes to succeed, any such changes would only strengthen our position. Separately, we continue working closely with the Department of Energy on critical elements, rare earth minerals and synthetic graphite, all strategic priorities for the current administration. While commercial development of these products isn't near term, we're actively exploring potential federal public-private partnerships to advance these efforts.

On asphalt emulsion potential, we believe using our carbon feedstock as a blending component to extend freeze-thaw durability, increase hardness, and maintaining color as a significant potential future source of revenue. We are currently engaged in a testing program with a leading U.S. asphalt company.

With that, I'll now turn it over to Jay for a detailed financial review.

Thanks, Bob, and thanks, everyone, for joining us today. Arq continued to deliver strong financial results during the second quarter with revenue growing 13% year-over-year to $29 million. This continues to be driven largely by enhanced contract terms, including 9% growth on average selling price and an increase in volumes. Our gross margin in the quarter was approximately 33%, which is slightly higher than the second quarter of 2024.

As Bob mentioned, the turnaround of the PAC business through the combined effort of the entire Arq team has been achieved, evidenced by the improved profitability and volume growth. As we discussed in our last quarter call, we expected to continue to work towards commissioning of our new GAC line throughout Q2. We are excited about the recent announcement of that commissioning. We did, however, incur approximately $1.9 million of costs associated with the preproduction feedstock used in the commissioning of our GAC line.

We generated positive adjusted EBITDA of approximately $3.7 million compared to adjusted EBITDA of $1.1 million in the prior year period. I would note that consistent with many market participants, we have added back stock-based compensation in Q2 2025 as a part of our adjusted EBITDA calculation and revised the Q2 2024 adjusted EBITDA calculation for comparability.

We incurred a net loss of $2.1 million versus a net loss of $2 million in Q2 of 2024, primarily attributable to the cost incurred in preproduction feedstock used in the commissioning of our GAC line. 100% of our PAC sales contracts are now net contributors in 2025. Focusing our efforts on profitability over volume led to this milestone, a significant achievement in our PAC portfolio given that 24% of volumes were loss-making as of December 2022.

Selling, general and administrative expenses totaled $5.9 million, reflecting a reduction of approximately 16% versus the prior year period. This reduction was primarily driven by a reduction in payroll and benefits as well as general and administrative expenses.

Research and development costs for the second quarter increased 190% or $1.8 million compared to Q2 '24. Much of this increase is primarily attributable to the commissioning of the GAC line we discussed earlier.

Overall, our performance in Q2 2025 demonstrates our ability to operate our PAC business in a way that contributes positively to our economic position in a truly sustainable manner, while further enabling us to pursue and execute on high-growth and high-margin opportunities within our expanding GAC business. We remain focused on enhancing the profitability of our PAC business even further and believe that is now generally cash generative on an annualized basis. As Bob noted, this PAC legacy business turnaround secures our foundational business on to which we are adding the higher growth GAC opportunity.

To discuss the impacts of the quarter on our balance sheet, let me turn it over to our Chief Accounting Officer, Stacia Hansen.

Thanks, Jay. Turning to the balance sheet. We ended the second quarter with total cash of $15 million, of which approximately $7 million is unrestricted. The change versus the end of the year was driven primarily by trailing CapEx spend at Red River relating to the GAC line and buildup of Arq Wetcake inventory and critical spare parts.

Today, we are reiterating our 2025 CapEx forecast of between $8 million and $12 million. We continue to expect to fund our operating and CapEx needs via our existing cash, cash generation and ongoing cost reduction initiatives. As discussed in our first quarter results, during the second quarter, we amended our agreement with MidCap to provide for additional borrowings under that facility, if needed.

With that, I will turn things back to Bob.

Thanks, Jay and Stacia. Before we turn to questions, I'd like to leave you with 3 key takeaways. First, our PAC business continues to thrive, and we delivered another strong quarter. Without the impact of ongoing commissioning-related costs in Q2, our EBITDA would have been even better. I take great pride in our team, not only delivering a fifth consecutive quarter of positive adjusted EBITDA, but also a more than 3x improvement versus the second quarter of 2024. We remain focused on further enhancing the existing PAC business and believe the current annualized performance is not only sustainable but has room for further improvement.

Second, the successful commissioning of our first GAC production phase at Red River marks a transformative milestone. This achievement enables us to begin ramping up toward nameplate capacity over the next 6 months while continuing to refine our processes to maximize margins and value.

Third, alongside Phase 1 ramp-up, we're actively developing detailed plans for Phase 2, which would add another 25 million pounds of granular activated carbon capacity at Red River. The second GAC line is already fully permitted at Red River. Our existing feedstock capacity at Corbin is sufficient for our Phase 2 needs. Therefore, no additional permitting or capital investment is needed at Corbin.

In summary, our foundational PAC business is delivering solid results. Our growth-oriented GAC business has achieved its most important milestone to date, and we're actively planning the next exciting stage of growth. We look forward to updating you on our progress across all elements of this strategy.

With that, I'll hand it back to our operator to open for questions.

[Operator Instructions] The first question is from Gerry Sweeney from ROTH Capital Partners.

Red River, I figured we'd start there. Obviously, commissioning process is underway. Can you maybe elaborate a little bit on the key milestones that you're going to go through that process? And I think we had spoken earlier that in the commissioning process, you tweaked, I think, for lack of a better word, parts of the process around the heating, et cetera, and you had to bring in some permanent equipment. So I just want to see how the next 6 months sort of develop from your perspective?

Sure. As I mentioned in our remarks, the operations team is going to be singularly focused on getting up to full 25 million pounds nameplate capacity or higher as quickly as possible. That's why we've given that 6 months guidance. We identified as part of the process, the initial step was to complete commissioning to get into commercial production to initiate sales, which we've done. During that process, we also recognized additional tweaks or areas where we can improve the operations that will improve from our current commercial production rates and get us up to or close to that 25 million pounds or above. This process isn't going to be linear in that it's going to be in increments or in jumps, as you will, as we identify things. And the margin we're getting now based on current production levels versus what we'll get 2 months from now or when we're at full production rates will be different. So it's a lot of little things. It's kind of it takes a lot of pennies and nickels to make a $1. It's the same way in getting up to full production.

Got it. And then switching gears -- well, actually, we'll stay with Red River. Well, let me think here. Phase 2, Line 2, we -- in the past, we've discussed costs, but with permitting not needed, maybe some design improvements after Line 1, what would be the cost per pound or total cost to add Line 2?

That's one of the things that we're working on and we'll have finalized in the next 4 to 5 months. As you mentioned, there are definitely going to be some design enhancements over Line 1 that will both shorten the process and lower the cost on that. What we're doing now is looking at all those enhancements, looking at the lead time, taking into account what the current prices are versus when we made the financial investment decision on Line 1, and that's part of the process that we'll be undertaking and reviewing over the next 4 to 5 months. I'm sure -- I'm confident saying it's not going to be more than the current line and hopefully and would expect it to be less.

Got it. And then end markets, very well versed on the water market. We understand that through our context. But on the RNG side, what is the timeline to moving from, I guess, initial sales for testing to contracts? And the other part of the question is, what's the balance between water-related product and potentially RNG product in terms of maybe percentage of sales or optimal percentage of sales?

Sure. A couple of things. The answer, not to be obtuse on the timing is it varies anywhere really from 1 to 6 to 8 months. It depends upon the customer. It depends upon their testing -- final testing requirements. I think the key item there is that this final completion of in situ testing is the final element to finalize the negotiations. We've essentially agreed on the details. We've agreed on price. We've discussed potential volumes. They just want confirmation they being the RNG customers that it works within in actual field testing, not just lab or other types of testing. We're very confident in that as are our potential customers.

In terms of optimal customer mix, again, it's a balance. While the RNG market has higher pricing and higher margins than the water market, you don't want to put all your eggs in one basket. You want to have a portfolio of risk across different industries, so you're not held captive to one particular industry. And I think that portfolio approach is in the best way and the best interest of shareholders. So it's going to be a mix between water, RNG and other industries.

Got it. And then final question for me, and I'll jump back in line. I know on the adjusted EBITDA, you added back, I think, some product costs that were sort of embedded, I guess, probably in R&D and maybe a little bit in SG&A. But gross margins, it's reading the press release, it sounded like there was a little bit of cost associated with the commercialization and the gross margins as well. I'm not sure if that's maybe some overtime and people working, et cetera. But what was the impact on the gross margins from the commissioning aspect?

We moved -- the $1.9 million was originally in cost of sales. We moved that into R&D expense. So the $1.9 million was reclassified to R&D associated with the preproduction inventory that we were running through. There's probably some additional costs. I think Bob alluded to that as well in his remarks that is included in cost of sales. It's hard to say how much that is. It wasn't significant enough that we needed to go ahead and make an adjustment for it. But we think margins are probably above 33% for the PAC business on a go-forward basis. But -- and we anticipate because we didn't commission until early August. So we probably got another month of that preproduction inventory running through that will flow through in the third quarter and July as well.

Got it. So there's some leftover preproduction inventory. On the gross margin side, we're probably -- I get it, there's probably some labor, there's some…

Yes, theirs is… Yes, exactly. Yes. That is -- that is correct.

Higher ASPs, and we're also going into the third quarter where we had volume, so absorption of overhead.

That's right. That's right.

You got it?

Got it. Okay. Great. Well, congrats on commissioning. As you guys know, I think the water end market is huge for GAC and obviously, RNG is going to be additive to it. So excited for the next couple of years.

The next question is from Aaron Spychalla from Craig-Hallum.

Maybe first on the PAC progress. Can you just talk about the opportunity for further improvements there on ASP or kind of market diversification in the coming years, just where margins can go in that business?

Yes. No, a couple of things. One, there's a possibility as we continue to lessen reliance on the mercury market, as we mentioned during our remarks, and we expand into other markets, which are higher priced and have higher margins as it relates to that. So while we've averaged over 16% increase in our average selling price over the last 8 quarters, at some point, that has to abate. We saw it. We came just short of double digits again this quarter, but 9% is still extremely strong. And we still see momentum and have visibility towards increasing our average selling price as we expand into the newer markets.

All right. And then I appreciate all the color on the RNG. It sounds like a really good opportunity. Can you just -- any preliminary results as you've kind of started that in situ testing just on how your product stacks up? Any feedback there that you might have received already?

Yes. No, based on both the initial phases of testing, as I say, there have been at least 2 and in some instances, 3 phases of testing before the in situ testing, both ourselves and the potential customers are extremely pleased the initial indications show that our product performs significantly better than the competition, which is great. But we also want to make sure we get paid for that superior performance as it relates to that. So we're quite encouraged. And that's one of the reasons we've held back contracting capacity.

We could contract all of our remaining capacity, as I've said before, right now in the water market. We'd like to hold it back and have held it back for the RNG market because of its higher pricing and higher margin. And another just a digression on contract pricing. I consistently talk about the market for granular activated carbon being undersupplied with excess demand. The best indicator or evidence of that is that the contracts we entered into a year ago or a year ago or more, if we entered into those today would be at higher pricing.

The next question is from Tim Moore from Clear Street.

Congratulations on that key catalyst of starting the efficient optimized granular activated carbon line. And I like Bob's hockey analogy. Do you expect to possibly squeeze out the 10% to 20% more production from Phase 1? And when do you think you might know that? Is that more like an October, November time frame before your next earnings call?

We definitely have aspirations for producing more than the 25 million pounds. We'll only know that once we get to full nameplate capacity of 25 million pounds. I'm not going to say October, we'll know that in the next 6 months, as we said. So I'm not going to let myself get boxed in to the October time frame on that. But we still remain confident in the ability to produce more than the nameplate capacity.

I like how you mentioned you're not running before you can walk. And I know this might be premature to ask a bit more about Line 2, Phase 2. But is the equipment ordering and construction lead time still about 12 months? Or do you think it can be quicker because the lessons learned, sourcing best practices, setup optimization? Just wondering I got to imagine it would be faster than commissioning what you did for Phase 1. Just kind of curious on the timeline.

It sure better be faster than we did for Phase 1 with -- otherwise, we didn't learn anything on that. But I'm confident that the operations team has learned quite a bit. The lead time for certain pieces of equipment is lengthy. And when you combine it with, you have to wait to do final installation and construction and commissioning once it's installed, I think roughly a year lead time is good guidance to give people from initiation of the FID to actually beginning commissioning, beginning production.

That's very helpful. And then the only other question I get a lot on, and I think you nip it in the bud, but I think it would just be helpful for investors. You mentioned really no desire or preference to issue further equity for Phase 2. So just kind of wondering, it seems like you're highly confident to use what entirely debt to maybe finance Line 2. Just kind of curious about that.

Yes. No, when you look at it, one, with the ongoing turnaround in cash flow generation of the PAC business, you combine that with the granular activated carbon business, the cash flow we'll get from that, that the availability we have on our debt facilities and the ability to expand that if needed based on the enhanced cash flow that I just mentioned. And then you add the fact that it isn't just spending all that money in one fell swoop. It's over time, it's incremental. So when Jay and I discuss it and along with Stacia and the rest of the team, we feel very comfortable the ability to finance it out of cash flow, cost-cutting initiatives and debt availability.

Yes. I would add that the debt markets are still pretty wide open. That could change for sure. But once we have the proven story from Phase 1 and are able to show potential lenders the profile of that business, and we're going to be replicating it. I think it's a pretty easy opportunity.

I think that was an important point.

[Operator Instructions] The next question is from Peter Gastreich from Water Tower Research.

Congratulations on your results and your GAC Phase 1 start-up. Also, it's great to see that you've already got Phase 2 FID within your sites for later this year. Just a couple of questions from me on -- first one will be on RNG and the second one will be on the asphalt emulsion. Thanks for the color on the RNG market. I'm just sort of curious though following the Big Beautiful Bill, did you notice a further enhancement of interest from renewable natural gas customers? I understand the demand already looked good before that, but I'm just curious whether there was any noticeable increase after that policy clarity came through for RNG producers.

We've seen some, but it's difficult to separate that out from what I would call organic or ongoing versus anything that was stimulated by the Big Beautiful Bill. And if you look at it that one of the things we always try and look at is take politics out of the equation on that and that the RNG market fundamentals in and of themselves and as it relates to granular activated carbon are strong, we're strong, and we expect to remain strong irrespective of any potential benefits of the Big Beautiful Bill. So it was an extremely attractive market before the Big Beautiful Bill. Does it add to it? Yes. Are we counting on that addition? No, because it was already so attractive and had so much potential.

Okay. Great. That makes sense. And regarding the asphalt opportunity, can you talk a bit more about the scale or magnitude of this market opportunity? Also, is this a product that is unique to Arq? Or will you have competition either from that or similar or a competing product? And what kind of time frame before you make a decision on this one?

So a number of questions embedded in that, but all relating to asphalt and motion. I'll see if I can make sure I answer them all. It is unique to Arq in terms of our unique patent-protected process of converting bituminous coal waste into what we call Arq Wetcake into a feedstock. That the quality of that and the way we formulate that leads to unique properties that I mentioned, which leads to extra durability, less prone to freeze-thaw degradation, enhanced color, quicker setting, enhanced hardness. So it is unique to Arq.

In terms of the opportunity size, it is quite immense. We're working, as I mentioned in my prepared remarks, with a leading U.S. asphalt company. We're involved in testing phase right now on that. If successful, quite frankly, the asphalt emulsion market could take up all of our current production capacity at Corbin and then some if we wanted to. So it's an enormous opportunity with significant advantages that our unique feedstock product adds to the asphalt market. I think that covers all the components. But if not, what did I miss?

Yes. Got it. Congratulations again.

There are no further questions at this time. I would like to turn the floor back over to Bob Rasmus for closing comments.

Thanks, Sacha. In conclusion, much more has changed in the last 2 years than just our name and ticker symbol. On the financial side, we have just achieved our fifth consecutive quarter of positive adjusted EBITDA. Our ASP increased an average of 16% year-over-year over the last 8 quarters. Our PAC business is now generating cash on a sustainable ongoing basis with further improvements expected.

We have used that foundational PAC business as a low-cost vehicle, not just to expand into the high-growth, high-margin granular activated carbon business, but to fundamentally improve the growth trajectory of our company for many, many years to come. While we were confident in the strategic decision we made to expand into the GAC market, we're even more confident today.

The GAC market continues to see demand well in excess of supply. The best evidence, as I mentioned, is the contracts we entered into last year would be at higher prices if finalized today. We have reached the first critical milestone of that expansion by completing commissioning and entering into commercial production of the first GAC line.

We're poised to make the FID on the second 25 million pounds GAC line by year-end. The market has also validated our ongoing transformation. 2 years ago, just one analyst covered our stock. Today, there are 6. Our market cap has grown more than sixfold in that same period since I became CEO. These results are a testament to the hard work and dedication of our entire team. And while they are impressive, we still see significant opportunities to improve and grow. We appreciate your taking the time and your interest in Arq, and we look forward to discussing further developments on our next quarterly call.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.