ARQ

Thanks, and welcome to the Arq Q1 2026 earnings call. It is now my pleasure to introduce 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 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 investor 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 of 1934.

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. It is especially important to review the presentation in 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'll 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. 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 non-cash 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 biennial plant turnaround for routine maintenance. The turnaround, which involved a temporary shutdown of our Red River plant, formally began April 5th, 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 biennial 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-$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. 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, 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 EPA's 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 will 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. 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, non-cyclical, and non-discretionary 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, non-cyclical 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, an 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 3 times adjusted EBITDA. This is the level we believe feasible based on our latest discussions with advisors. 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-pay, 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-$125 million and PAC volumes of between 122 million and 125 million pounds at an average sale 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 non-cash 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. 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. 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.

Thank you. Your first question is from Gerry Sweeney from ROTH Capital Partners. Your line is now open.

Good morning, Bob and Stacia. Thanks for taking my call.

Happy to do so, Gerry.

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? Involved in that update, I'm just curious if the strategy around a potential strategy around reactivation and acid washing are involved in that strategic review, or are they separate opportunities?

Sure. A couple of things on that and 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. You know, 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 acid washing, we're doing that in conjunction with the evaluation 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. I wanna also add that, you know, reactivation and/or acid washing would likely be pursued in tandem with Granular Activated Carbon.

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

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

Oh, interesting. Gotcha. Okay. Then just one other question. Flipping over 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? Will mercury just remain probably the main driver for the foreseeable future?

You know, mercury is the largest percentage of, by volume of our sales, but that has, you know, decreased remarkably, or remarkably, I should say, over the last three 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. Our goal, if the cannibalization were to occur and we still have some volumes we can continue to add, it would be cannibalizing lower margin for higher margin business.

Understood. I appreciate it. Thanks.

Thanks, Gerry.

Thank you. Your next question is from Jason Tilchen from Canaccord Genuity. Your line is now open.

Good morning, thanks for taking my questions. I guess to start, just a little bit of a follow-up there. You mentioned there's this clear path to increasing price and margin for the PAC business through expanding into these specialty end uses. Can you just talk to me on the operational side, what sort of are the blocking and tackling steps that are needed to produce these specialized variations to go down that path, and how much investment would potentially be needed? What sort of timeline, 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. 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. 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. Just in terms of the current contract mix, you know, how much opportunity is there, like near term? What sort of would the timeline be, as you look to shift into some of these more tailored solutions?

We always wanna 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 is in terms of development, making sure that we're meeting the customer's specifications and inquiries as it relates to that. It's on an ongoing nature.

Great. Thank you very much.

Thank you.

Thank you. Your next question is from Aaron Spychalla from Craig-Hallum. Your line is now open.

Yeah, good morning. Thanks for taking the questions. Maybe first on GAC, you know, you kinda talked about the strong market backdrop. Can you just maybe give a bit more details on the drivers behind that? Then, you know, conversations you're having with current customers that have already been kind of booked and, you know, as you're awaiting kinda bringing on that production and any changes, you know, in the competitive landscape that you're seeing.

Sure. I think there's about 3 or 4 really, yeah, Aaron, questions as it relates to GAC. In terms of the overall market, you know, 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, you know, 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, you know, 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. Thanks for the color there. You know, on the asphalt, progressing to small, in-field testing, could you just talk about, you know, timelines there and what potential next steps could look like from that?

Sure. One of the key features that the testing has shown, 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 Wetcake as an additive to asphalt emulsion, contributes to longer lasting blackness of the asphalt and additional traction. On one hand, you might say that the adding to the long live nature of the blackness is kind of a, you know, 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 Wetcake as an additive to asphalt emulsion leads to improved traction, especially in rain and wet conditions. We're very pleased as it relates to 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.

Great. Thank you for taking the questions. I'll turn it over.

Thank you once again. That is star one should you wish to ask a question. Your next question is from Peter Gastreich from Water Tower Research. Your line is now open.

Good morning, and congratulations on the results. Also, thanks for taking my questions this morning. Just wanted to ask also further on the alternative PAC uses that you mentioned outside of power generation. Presumably, utilization rates are going up, you know, across the entire industry. Are domestic suppliers meeting that incremental demand, or are we seeing imports, you know, coming in to balance the market?

I can't speak completely for the competitors in terms of product expansion, but we are seeing a greater restriction on imports in 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 it's not being imported now. You've also had disruptions as it relates to charred coconut product. That continues to be a lower amount of imports and a lower amount of domestic consumption for PAC in the U.S.

Are tariffs, you know, having an impact on the market, as you see right now?

Tariffs did have some impact in the past. I think it's more people are looking for a 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. People appreciate our reliability and the fact that we've been a trusted partner and a reliable partner.

Okay. Great. Thank you. You had an uplift in SG&A by about $1.3 million, you know, year-over-year at [Q1, Q2]. You know, it is mentioned that you've got, you know, insurance, recruiting, and legal expenses that are, you know, having that impact. How much of that uplift should be considered one time? Can any of these, you know, carry over into subsequent quarters?

A couple things. I'm gonna answer your question and answer a related question that you didn't ask on that. As it relates to SG&A, you are correct. It related to additional legal and other costs and insurance. 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. You know, 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-$100,000 for security and contract labor.

The payroll component will go away as of June 30th 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. We expect the total Corbin mothballing or maintenance cost to be about $1.2 million. We spent roughly $640,000-$650,000 in the first quarter. We believe there's no expectation to increase that $1.2 million number. Essentially, it's gonna be about $200,000 per quarter going forward for Corbin. Depending upon how you wanna look at it, you could say that $400,000 of that was one-time expense. In 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 one-time 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, we made the decision to completely saying we were gonna 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. All those totaled about $550,000-$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 one-time expense item as well. Sorry for being so long-winded.

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

The restricted cash, I think it ended up at 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 our activities and just represents the normal quarter-end results.

Okay. Thank you very much.

We feel comfortable where we are from a liquidity position.

Okay, great. Thank you very much.

Thank you. 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. I 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.

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, 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 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've 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've solved, what challenges remain, why we have made this decision and what our path 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 plant. 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 feedstock 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 and efficiency. 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 after burner 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 carbon 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 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 that 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 a path just because we've already invested in it. That's the sunk cost fallacy and it's a trap we refuse to fall into. The engineering assessment we're conducting will answer several critical questions. What modifications are required to the thermal oxidizer and 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 itself. 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 on 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 pitfall. We've also hired an on-site process engineer with technical oversight to augment our Red River team reporting directly to Eric. The strengthened 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 PAC 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, tax 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 offline 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 non-sellable 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's 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 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 PAC 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 improvements 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 Arq 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 spreading it 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 path 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 from not pursuing GAC. I understand there's costs associated with some of these changes and opportunities. But our channel checks continuously indicate there's 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, but that we would go forward because the market fundamentals are so great, and we're so well positioned to capture that once we use 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 mention that there are some regulatory undercurrents that I think that have been ebbing and flowing, let's 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 out some interest costs. I think that implies maybe some free cash flow of $4 million or $5 million to upwards to $8 million. Is that back of the 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 biennial 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.

One more quick question. Obviously, there's a little bit of excess capacity still at Red River. I think it's 150-ish, you're running around $120 million, $125 million. If hot summer, lots of power generation, power -- I mean, AI is driving that to some degree, but there's 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 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 formally 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 was we decided to do that proactive approach that we had 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 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 Tilchen with Canaccord Genuity.

The guidance implies 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 sell at much higher prices than the -- than our ASP, our 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 carbon feedstock really come down to asphalt emulsion, synthetic graphite, graphene and potentially isolating rare earth 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 steak or sirloin.

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

I do appreciate the detail and clear action plan. Can you hear me?

Yes, absolutely.

Okay. Great. So yes, I appreciate the detail and the clear 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 effective 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 on 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 a typical 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 contracts. 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 recognize you might not be able to answer this, but just regarding any potential litigation recovery in the future, would you be looking for start-up 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 1, 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.