Greetings, and welcome to the Arq Q2 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Anthony Nathan, Head of Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us today for our second quarter 2025 earnings results call. With me on the call today are Bob Rasmus, Arq's Chief Executive Officer; Jay Voncannon, Arq's Chief Financial Officer; and Stacia Hansen, Arq's Chief Accounting Officer. This conference call is being webcasted live within the Investors section of our website, and a downloadable version of today's presentation is available there as well. A webcast replay will also be available on our site, and you can contact Arq's Investor Relations team at investors@arq.com. Let me remind you that the presentation and remarks made today include forward-looking statements as defined in Section 21E of the Securities Exchange Act. These statements are based on information currently available to us and involve risks and uncertainties that could cause actual future results, performance and business prospects and opportunities to differ materially from those expressed in or implied by these statements. These risks and uncertainties include, but are not limited to, those factors identified on Slide 2 of today's slide presentation in our Form 10-Q for the quarter ended June 30, 2025, and other filings with the Securities and Exchange Commission. Except as expressly required by the securities laws, the company undertakes no obligation to update those factors or any forward-looking statements to reflect future events, developments or changed circumstances or for any other reason. In addition, it is especially important to review the presentation and today's remarks in conjunction with the GAAP references in the financial statements. With that, I would like to turn the call over to Bob.

Thank you, Anthony, and thanks to everyone for joining us this morning. Today's second quarter results and the recent successful completion of commissioning of our first GAC line at Red River are key achievements in the continuing transformation of Arq to a sustainably profitable environmental technology company. I'm extremely pleased to confirm that we have achieved a major milestone with the recent commissioning of our first GAC line, which is now beginning its ramp up towards nameplate capacity of 25 million pounds, which is anticipated within 6 months. We made our first granular activated carbon sales ahead of what we consider completion of commissioning, validating both market demand and product quality. While GAC is certainly our growth engine, we delivered another solid quarter from our foundational PAC business. Despite Q2 typically being a shoulder quarter, we delivered revenue of $29 million with higher volumes than the previous year combined with ASP growth. We narrowly missed our ninth straight quarter of double-digit year-over-year price growth. However, delivering a strong 9% increase in our ASP is still an outstanding result. We achieved our fifth consecutive quarter of positive adjusted EBITDA, which also represented an increase of more than 3x as compared to the same quarter last year. Our results are further confirmation that the foundational PAC business is well and truly turned around. The story remains consistent. Our PAC business continues a successful turnaround while we maintain focus on further optimization. We've identified additional opportunities to reduce both operational and corporate costs, which combined with our steady ASP improvements should continue to drive enhanced financial performance. With the successful commissioning of our first GAC line, we are adding a higher growth, higher-margin business, which we expect to further enhance profitability. Our PAC business remains robust with continued positive pricing momentum and strong…

Thanks, Bob, and thanks, everyone, for joining us today. Arq continued to deliver strong financial results during the second quarter with revenue growing 13% year-over-year to $29 million. This continues to be driven largely by enhanced contract terms, including 9% growth on average selling price and an increase in volumes. Our gross margin in the quarter was approximately 33%, which is slightly higher than the second quarter of 2024. As Bob mentioned, the turnaround of the PAC business through the combined effort of the entire Arq team has been achieved, evidenced by the improved profitability and volume growth. As we discussed in our last quarter call, we expected to continue to work towards commissioning of our new GAC line throughout Q2. We are excited about the recent announcement of that commissioning. We did, however, incur approximately $1.9 million of costs associated with the preproduction feedstock used in the commissioning of our GAC line. We generated positive adjusted EBITDA of approximately $3.7 million compared to adjusted EBITDA of $1.1 million in the prior year period. I would note that consistent with many market participants, we have added back stock-based compensation in Q2 2025 as a part of our adjusted EBITDA calculation and revised the Q2 2024 adjusted EBITDA calculation for comparability. We incurred a net loss of $2.1 million versus a net loss of $2 million in Q2 of 2024, primarily attributable to the cost incurred in preproduction feedstock used in the commissioning of our GAC line. 100% of our PAC sales contracts are now net contributors in 2025. Focusing our efforts on profitability over volume led to this milestone, a significant achievement in our PAC portfolio given that 24% of volumes were loss-making as of December 2022. Selling, general and administrative expenses totaled $5.9 million, reflecting a reduction of approximately 16% versus the prior year period. This reduction was primarily driven by a reduction in payroll and benefits as well as general and administrative expenses. Research and development costs for the second quarter increased 190% or $1.8 million compared to Q2 '24. Much of this increase is primarily attributable to the commissioning of the GAC line we discussed earlier. Overall, our performance in Q2 2025 demonstrates our ability to operate our PAC business in a way that contributes positively to our economic position in a truly sustainable manner, while further enabling us to pursue and execute on high-growth and high-margin opportunities within our expanding GAC business. We remain focused on enhancing the profitability of our PAC business even further and believe that is now generally cash generative on an annualized basis. As Bob noted, this PAC legacy business turnaround secures our foundational business on to which we are adding the higher growth GAC opportunity. To discuss the impacts of the quarter on our balance sheet, let me turn it over to our Chief Accounting Officer, Stacia Hansen.

Thanks, Jay. Turning to the balance sheet. We ended the second quarter with total cash of $15 million, of which approximately $7 million is unrestricted. The change versus the end of the year was driven primarily by trailing CapEx spend at Red River relating to the GAC line and buildup of Arq Wetcake inventory and critical spare parts. Today, we are reiterating our 2025 CapEx forecast of between $8 million and $12 million. We continue to expect to fund our operating and CapEx needs via our existing cash, cash generation and ongoing cost reduction initiatives. As discussed in our first quarter results, during the second quarter, we amended our agreement with MidCap to provide for additional borrowings under that facility, if needed. With that, I will turn things back to Bob.

Thanks, Jay and Stacia. Before we turn to questions, I'd like to leave you with 3 key takeaways. First, our PAC business continues to thrive, and we delivered another strong quarter. Without the impact of ongoing commissioning-related costs in Q2, our EBITDA would have been even better. I take great pride in our team, not only delivering a fifth consecutive quarter of positive adjusted EBITDA, but also a more than 3x improvement versus the second quarter of 2024. We remain focused on further enhancing the existing PAC business and believe the current annualized performance is not only sustainable but has room for further improvement. Second, the successful commissioning of our first GAC production phase at Red River marks a transformative milestone. This achievement enables us to begin ramping up toward nameplate capacity over the next 6 months while continuing to refine our processes to maximize margins and value. Third, alongside Phase 1 ramp-up, we're actively developing detailed plans for Phase 2, which would add another 25 million pounds of granular activated carbon capacity at Red River. The second GAC line is already fully permitted at Red River. Our existing feedstock capacity at Corbin is sufficient for our Phase 2 needs. Therefore, no additional permitting or capital investment is needed at Corbin. In summary, our foundational PAC business is delivering solid results. Our growth-oriented GAC business has achieved its most important milestone to date, and we're actively planning the next exciting stage of growth. We look forward to updating you on our progress across all elements of this strategy. With that, I'll hand it back to our operator to open for questions.

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

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

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

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

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

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

Sure. A couple of things. The answer, not to be obtuse on the timing is it varies anywhere really from 1 to 6 to 8 months. It depends upon the customer. It depends upon their testing -- final testing requirements. I think the key item there is that this final completion of in situ testing is the final element to finalize the negotiations. We've essentially agreed on the details. We've agreed on price. We've discussed potential volumes. They just want confirmation they being the RNG customers that it works within in actual field testing, not just lab or other types of testing. We're very confident in that as are our potential customers. In terms of optimal customer mix, again, it's a balance. While the RNG market has higher pricing and higher margins than the water market, you don't want to put all your eggs in one basket. You want to have a portfolio of risk across different industries, so you're not held captive to one particular industry. And I think that portfolio approach is in the best way and the best interest of shareholders. So it's going to be a mix between water, RNG and other industries.

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

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

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

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

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

That's right. That's right.

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

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

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

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

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

Yes. No, based on both the initial phases of testing, as I say, there have been at least 2 and in some instances, 3 phases of testing before the in situ testing, both ourselves and the potential customers are extremely pleased the initial indications show that our product performs significantly better than the competition, which is great. But we also want to make sure we get paid for that superior performance as it relates to that. So we're quite encouraged. And that's one of the reasons we've held back contracting capacity. We could contract all of our remaining capacity, as I've said before, right now in the water market. We'd like to hold it back and have held it back for the RNG market because of its higher pricing and higher margin. And another just a digression on contract pricing. I consistently talk about the market for granular activated carbon being undersupplied with excess demand. The best indicator or evidence of that is that the contracts we entered into a year ago or a year ago or more, if we entered into those today would be at higher pricing.

The next question is from Tim Moore from Clear Street.

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

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

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

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

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

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

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

I think that was an important point.

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

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

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

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

So a number of questions embedded in that, but all relating to asphalt and motion. I'll see if I can make sure I answer them all. It is unique to Arq in terms of our unique patent-protected process of converting bituminous coal waste into what we call Arq Wetcake into a feedstock. That the quality of that and the way we formulate that leads to unique properties that I mentioned, which leads to extra durability, less prone to freeze-thaw degradation, enhanced color, quicker setting, enhanced hardness. So it is unique to Arq. In terms of the opportunity size, it is quite immense. We're working, as I mentioned in my prepared remarks, with a leading U.S. asphalt company. We're involved in testing phase right now on that. If successful, quite frankly, the asphalt emulsion market could take up all of our current production capacity at Corbin and then some if we wanted to. So it's an enormous opportunity with significant advantages that our unique feedstock product adds to the asphalt market. I think that covers all the components. But if not, what did I miss?

Yes. Got it. Congratulations again.

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

Thanks, Sacha. In conclusion, much more has changed in the last 2 years than just our name and ticker symbol. On the financial side, we have just achieved our fifth consecutive quarter of positive adjusted EBITDA. Our ASP increased an average of 16% year-over-year over the last 8 quarters. Our PAC business is now generating cash on a sustainable ongoing basis with further improvements expected. We have used that foundational PAC business as a low-cost vehicle, not just to expand into the high-growth, high-margin granular activated carbon business, but to fundamentally improve the growth trajectory of our company for many, many years to come. While we were confident in the strategic decision we made to expand into the GAC market, we're even more confident today. The GAC market continues to see demand well in excess of supply. The best evidence, as I mentioned, is the contracts we entered into last year would be at higher prices if finalized today. We have reached the first critical milestone of that expansion by completing commissioning and entering into commercial production of the first GAC line. We're poised to make the FID on the second 25 million pounds GAC line by year-end. The market has also validated our ongoing transformation. 2 years ago, just one analyst covered our stock. Today, there are 6. Our market cap has grown more than sixfold in that same period since I became CEO. These results are a testament to the hard work and dedication of our entire team. And while they are impressive, we still see significant opportunities to improve and grow. We appreciate your taking the time and your interest in Arq, and we look forward to discussing further developments on our next quarterly call.

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