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 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 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 1st 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-$125 million and adjusted EBITDA of between $17 million-$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-125 million pounds at an average sale price between $0.88-$0.91 per pound. We also remain extremely confident in our adjusted EBITDA guidance of between $17 million-$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 Hansen. 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 Gerard Sweeney from ROTH Capital Partners, LLC. Your line is now open.
Good morning, Bob and Stacia. Thanks for taking my call.
Happy to do so, Gerard.
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, Gerard Sweeney. 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, Jerry.
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 Vice President 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 Carax LLC. 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 1 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 Q on Q. 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 thirtieth 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.