Business context and reporting period
The supplied filing is Advanced Emissions Solutions, Inc. (ADES), not Arq, Inc. It is a Form 10-Q for the quarter and six months ended June 30, 2022. ADES sells activated-carbon and chemical-based air and water treatment products; its former refined-coal affiliates, Tinuum Group and Tinuum Services, ceased material operations at the end of 2021 after expiration of the Section 45 tax credit program.
Financial results and liquidity
Amounts below are in millions except per-share data. Comparisons are with the corresponding 2021 period.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $24.7 | $21.1 | $51.1 | $43.7 |
| Operating income (loss) | ($2.7) | $0.4 | ($6.1) | $0.8 |
| Equity-method earnings | $2.4 | $21.4 | $3.2 | $39.7 |
| Net income (loss) | ($0.3) | $16.6 | ($3.4) | $30.3 |
| Diluted earnings (loss) per share | ($0.02) | $0.90 | ($0.18) | $1.65 |
| Operating cash flow | Not stated separately | $1.8 | $18.2 |
Consumables gross margin, before depreciation and amortization, was approximately 19.5% in Q2 2022 versus 15.4% a year earlier; for the first half it was approximately 19.0% versus 20.1%. These are calculated from reported consumables revenue and cost of revenue. At June 30, cash was $80.8 million, restricted cash was $10.0 million, and current assets and current liabilities were $113.0 million and $20.6 million, respectively. Total liabilities were $39.2 million, including $5.2 million of finance-lease obligations; the filing reports no term loan outstanding.
Material changes versus the prior comparable period
- Consumables revenue increased 42% in both the quarter and first half, reflecting higher sales volumes and favorable pricing. Q2 volume gains were associated with higher natural-gas prices and electricity demand, which increased coal-fired generation.
- Revenue included no license royalties in 2022, compared with $3.7 million in Q2 2021 and $7.7 million in the first half of 2021.
- Equity-method earnings fell sharply as the Tinuum businesses wound down. Despite this, 2022 reported equity earnings include distributions exceeding the carrying value of those investments; these distributions are not an ongoing source of earnings or liquidity.
- First-half operating cash flow declined to $1.8 million from $18.2 million, while cash and restricted cash increased $2.0 million to $90.8 million.
Outlook, risks, and unusual items
- Management said cash on hand at June 30 was expected to fund operations for the next 12 months. It forecast 2022 capital expenditures of $11.0 million, up from $7.6 million in 2021, funded from cash on hand.
- Management expected continued inventory purchases through at least the rest of 2022 due to demand and high Red River Plant utilization. A planned 2023 plant turnaround is expected to weigh on consumables gross margin. Product price increases and a shift toward higher-margin products are intended to offset inflation and inventory-related costs.
- The February Norit change-of-control payment totaled $10.6 million. It included $8.5 million for the reclamation reimbursement, resulting in a $0.5 million loss versus its carrying amount; $1.3 million of advance Specific Capital payments was deferred for future revenue recognition. Norit has no further liability for Marshall Mine reclamation reimbursement.
- Marshall Mine reclamation is expected to continue through 2030; management reported that dirt work was materially complete. Outstanding surety bonds totaled $24.1 million, with $10.0 million of restricted cash pledged as collateral. A bond call could trigger reimbursement obligations.
- Key risks include the loss of Tinuum earnings and distributions, exposure to coal dispatch and competing energy prices, seasonal demand, inflation in raw materials and transport, customer closures, and execution of plant and reclamation work. Management forecast a pretax loss for 2022 and recorded a valuation allowance, resulting in no income-tax benefit for the first half.
- Disclosure controls were reported ineffective at June 30 because of a previously identified material weakness involving accounting guidance monitoring, freight accounting, and review of policies for material accounts. Remediation controls had been implemented, but management said effectiveness could be assessed only after they operated for a sufficient period, with a target conclusion by year-end. No material risk-factor updates or significant legal proceedings were reported.
Important facts for investors to verify
- Confirm the intended issuer: the filing provided identifies Advanced Emissions Solutions, Inc. (ADES), not Arq, Inc.
- Track consumables margins after price increases, inflation, inventory purchases, and the planned 2023 turnaround.
- Assess the pace of cash use and capital spending as Tinuum distributions diminish; distinguish unrestricted cash from the $10.0 million of restricted cash.
- Review progress on the internal-control remediation and the company’s year-end effectiveness assessment.
- Monitor Marshall Mine reclamation costs, surety-bond requirements, and potential releases of collateral.