Arq, Inc.

Good morning, ladies and gentlemen, and welcome to the AHRQ Third Quarter 2025 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you need assistance, please press star zero for the operator. 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, ARC's Chief Executive Officer, Jay von Kannon, ARC's Chief Financial Officer, and Stacia Hansen, ARC'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 AHRQ's investor relations team at investors at ahrq.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 two of today's slide presentation in our Form 10-K for the year ended December 31st, 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 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 GATT 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 non-recurring 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 pack 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 movements, 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, 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 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 carbon 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 pack 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 ARC wet cake 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 pack 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 startup 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 constraints 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 tariff and 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 four 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 non-binding MOU to test using our material as a coal substitute for making silicone wafers used in semiconductors, with our partner covering all the initial costs if we elect to proceed. Next, rare earth minerals. With growing demand for U.S. source 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 arc wet cake, 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 arc wet cake 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 II already essentially permitted, we continue to carefully evaluate future GAC facility expansions. Specifically, FID timing is now anticipated that coincide with reaching GAC Phase I nameplate capacity around mid-2026. We believe that the experiences gained from Phase I, 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, ARC 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 in-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 pre-production feedstock used in our granular activated carbon line. Additional negative impact to margin this quarter was related to low volumes versus higher fixed costs. We generated positive adjusted EBITDA of approximately $5.2 million compared to adjusted EBITDA $9 million in the prior year period. I would note that consistent with many market participants beginning in Q1 2025, we have added back stock-based compensation as part of our adjusted EBITDA calculation and revised corresponding 2024 adjusted EBITDA calculations for preparability. As Bob noted, this quarter saw a significant anticipated ramp-up cost associated with GAC. As we continue to work to get the GAC line to run rate capacity, With only approximately two 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, a third quarter adjusted EBITDA performance of $5.2 million included several million dollars non-recurring 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 one GAC line as we continue to ramp up to name plate capacity. Selling, general, and administrative total $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 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 Haynes.

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 arcway and critical spare parts. Today, we are also reiterating our full year 2025 CapEx forecast of between $8 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 four 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 non-recurring 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 costs across the business. And I now believe that 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 cost 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 path 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 four, I believe our ongoing review of potential feedstock alternatives helps to 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.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. And the first question comes from Jerry Sweeney at Roth Capital. Please go ahead.

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

Happy to do so, Jerry.

Bob, I don't know if you can answer this or would want to answer this, but 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 We'll just say break-even while you test alternatives, or is this going to be a drag until we get the problem solved?

And so, you know, if you look at it, what is break-even? We have an idea what that is on that. But, you know, 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'll help us get to profitability and commercial production even faster.

Speaking of alternatives, I'm assuming that's a dryer feedstock that would be met coal, which is traditionally used as GAC. 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. We're evaluating blending dryer 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, you know, we're also evaluating whether it makes sense to switch to dryer coal. Why would we switch to dryer coal? Well, if one of the four ultimate uses for carbon feedstock developed, it would account for all of the carbon 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, Jerry, 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 million dollars if these issues didn't arise, all things being equal, right?

So at the $5.2 million includes the negative impact of several million dollars of the cost 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 four quarters prior to this, so third quarter of 24, the second quarter of 25, and you added back those several million dollars in cost, our gross margin would have been several percentage points above the average for those four quarters.

No, I mean, listen, ASPs were up year over year and were up 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 quarter for the PAC business. I get it. Okay. Got it. I'll jump back in line. I know we have a follow-up call at some point. I have a bunch of other questions, but they can wait. So, thanks.

Okay. Thanks, Jerry.

Thank you. The next question comes from George Janarikis at Canaccord Genuity. Please go ahead.

Hi, good morning. Thank you for taking my questions. I'd like to dig in some more on the Corbin feed, Sakish. I'm just curious, can you go into a little bit more detail around what you mean about variability? When did you figure out that this was an issue? 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. Thank you.

Sure. You know, 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, you know, 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 one 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 towering. 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, 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, you know, 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 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 implications of the of some of the changes you're making. Thank you.

Yeah, no, a couple things. One, you know, 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, you know, one benefit of blending some drier coal, as I mentioned in my 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. Thank you. Thank you, George.

Thank you. The next question comes from Aaron Spichella at Craig Hallam. Please go ahead.

Yeah, hi, Bob, Jay, and Stacia. Thanks for taking the questions. You know, maybe just one on GAC. I mean, can you just, you know, 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, you know, design tweaks or are you seeing some benefit from, you know, the changes you're making on the feedstock side? It doesn't sound like there's a lot of costs you're expecting, but just, you know, again, trying to just understand the confidence in reaching these targets.

Yeah, 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 and 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 chair kiln. 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 six days, one day to cool the existing unit, one day for removal, and four days for replacement and connections. The GAC production will have to pause for roughly one week during this process, but operations should quickly get to full runway capacity once installation is complete. because all we're changing at that point is working through the full capacity of 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 the detail behind why we have changed our prognosis.

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

Sure. You know, we had, again, another strong quarter of average selling price increase. We were up 7% year over year, 6% quarter to quarter. You know, that pace has abated somewhat from our nine 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.

All right, thanks for taking the questions. I'll turn it over.

Thank you, George.

Thank you.

The next question... Oh, Aaron. Sorry, Aaron. Sorry.

Thank you. The next question comes from Peter Gastreich at Water Tower Research. Please go ahead.

Thank you. So, good morning, Bob, and thanks for taking my questions here. Just a few, if I may. The first one is, you know, regarding the delay for the GAC, is there any risk or, you know, penalties that could be associated with the contracted customers for the delay?

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

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

So we didn't sell anything on the spot market. We're concentrating 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 refer to that 7% are coming from the PAC business.

Okay, got it. Okay, thanks. And just a final question on the SG&A. Regarding the reduction of SG&A, how much of that can be sustained? And also, for that portion, I understand that was allocated to cost of goods sold. Why was that decision made?

Peter, this is Jay. Yeah, the SG&A reductions are coming from prior year to this current year. And yes, those are definitely sustainable. We actually think that 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 pre-production 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 one week of August cost for pre-production volumes. Once we commission the facility, all of that cost has been running through the cost of goods sold line. And that's why we're seeing it impact the negative or the margin in Q3 was negatively impacted by those fixed costs being spread across fewer pounds as we're not up to really a break even point yet for a grant.

Okay, great. Thanks very much. That's all of my questions. Appreciate it. Thank you.

Thank you. The next question comes from Tim Moore at Clear Street. Please go ahead.

Thanks. I just want to follow up an important thread. I mean, it's great that GAC is going underway. That's a really important milestone. And, you know, you've got a lot of things to optimize before you add additional lines over the coming years. But, you know, I just want to really dig into one other thing. You know, I got the SG&A reconciliation, and Jay just went through that. But, you know, how should we think about really gross margin in the next two quarters, you know, until you get enough utilization underway on GAC? You know, I was kind of under the impression that the really big drag was the June quarter and it wouldn't be as bad in September. But, you know, 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, you know, as we're producing volumes at this suboptimal point level, there's a lot of fixed costs at the plant, as I said, getting spread across fewer volumes, which are dragging the gross margin. What I would say is that it's not the fixed cost that's going to go up. So, you know, 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, you know, until we're able to get the volume up and actually have more pounds to sell and spreading those cost across that greater pounds, then we'll see the margin improve. So I would expect probably for the next two quarters and probably even some even in the Q3 once we get the new oxidizer installed, I mean it's Q2 of next year, get the new oxidizer installed, we'll probably see a fairly consistent gross margin. Now, we're also expecting, you know, hopefully we'll see a continued improvement in PAC as we have, you know, 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.

No, no, thanks for that. That's really helpful, Collar, on the cadence of – And the other question I had was, you know, I can, you know, understand right now that GAC revenue is not that much. It would be pretty, you know, sizable by, you know, the June quarter. And for competitive reasons, you might not want to disclose it. You know, Calvin Corbin 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, you know, you had another more lines, that you think you would break out maybe a year or two from now or, you know? GAC revenue, just to have the difference, and especially when maybe it starts cannibalizing PAC a little bit on the pizza later on.

A couple 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 to and further increase capacity. You mentioned competitive reasons. I'll refer to it more as competitive tension. There is 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.

uh on that and so uh the long-winded answer is maybe what i would say also add to bob's comments is you know once we get to the 25 million nameplate and then we add another line too and we're then at 50 million of uh capacity i mean you know we're probably you know we're at about 100 million pounds capacity on the pac there you'll be able to begin to see you can do correlations and kind of you know you it wouldn't take wouldn't be very difficult to back into what the ultimate margin is between the two. So that will, you know, and as we continue to grow and we start seeing PAC get cannibalized, as you mentioned, yeah, 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, you know, just kind of a base level that we know and talk

No, that's fine because I'll be able to back into the GAC revenue pretty closely when you have a full year if you keep announcing average price increase when you start going over a year on the GAC. But, no, thanks for that, Bob and Jay. We appreciate that. That was it for my question.

Okay. Thank you. 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 two years ago when the PAC business was a significant money loser. Short-term, there clearly remain some challenges to getting the granular activated carbon business up to full run rates. 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.