FUEL TECH, INC. annual report, FY2022

Fuel Tech, Inc. 2022 Form 10-K Summary

Business context and reporting period

Fuel Tech develops proprietary technologies for air pollution control, process optimization, water treatment and advanced engineering services. Its reportable segments are Air Pollution Control (APC) and FUEL CHEM. The filing covers the fiscal year ended December 31, 2022, with comparisons to 2021. Although the request references 2022 Q4, this filing is an annual Form 10-K rather than a standalone quarterly report.

APC products include NOx reduction, selective catalytic and non-catalytic reduction, electrostatic precipitator and flue gas conditioning technologies.
FUEL CHEM uses chemical injection and modeling technologies to address slagging, fouling, corrosion, opacity and sulfur trioxide issues.
Water treatment technology, including DGI, remained in the demonstration phase with limited revenue.

Financial performance and key metrics

Metric ($ in thousands, except per-share data)	2022	2021	Change
Revenue	$26,941	$24,261	+$2,680; +11%
Gross profit	$11,643	$11,898	-$255
Gross margin	43%	49%	-6 percentage points
Operating loss	$(1,527)	$(1,489)	$(38)
Net income (loss)	$(1,442)	$54	-$1,496
Basic and diluted EPS	$(0.05)	$0.00	Declined
Operating cash flow	$(4,139)	$761	-$4,900

APC revenue increased 54% to $10.6 million from $6.9 million. APC gross margin declined to 35% from 49%, primarily due to product and project mix and supply-chain costs.
FUEL CHEM revenue declined 6% to $16.3 million from $17.4 million. Segment gross margin remained 49%.
Consolidated gross margin was approximately 43%; operating margin was approximately negative 5.7%; net margin was approximately negative 5.4%.
Selling, general and administrative expense increased 2% to $12.3 million, while research and development expense decreased 33% to $0.9 million.
Interest income increased to $202,000 from $6,000 due to held-to-maturity debt securities and money market funds. The 2021 results included $1.6 million of other income from PPP loan forgiveness; 2022 included no comparable benefit.

Liquidity, cash flow and capital structure

Cash and cash equivalents were $23.3 million at December 31, 2022, compared with $35.9 million at December 31, 2021. Working capital was $31.1 million versus $38.2 million.
Total assets were $50.1 million and stockholders’ equity was $44.8 million at year-end.
Operating activities used $4.1 million of cash, driven primarily by a $4.4 million increase in accounts receivable.
Investing activities used $9.5 million, including $9.8 million of purchases of U.S. Treasury and government agency securities and $206,000 of equipment and patent purchases.
The company reported no outstanding debt other than $76,000 of nil-coupon perpetual convertible loan notes classified in equity. Operating lease liabilities totaled $191,000.
Standby letters of credit and bank performance guarantees totaled approximately $689,000, collateralized by $1.0 million of investments. The agreement has no financial covenants.
Management stated that cash on hand and expected operating cash flows are adequate to fund planned operations for the next 12 months.
The Board approved investments of up to $20 million in excess capital during 2022, with maturities generally ranging from three to 36 months.

Material changes versus the prior comparable period

Revenue grew 11%, led by execution of APC projects awarded in late 2021 and 2022, while FUEL CHEM revenue declined because of a permanent customer plant retirement, lower demand and plant outages.
Profitability weakened despite higher revenue: gross profit declined, the company reported a $1.4 million net loss compared with $54,000 of net income, and operating cash flow moved from positive to negative.
Accounts receivable increased to $7.7 million from $3.3 million, including $3.1 million of unbilled receivables compared with $1.3 million.
APC backlog was $8.2 million at year-end versus $9.1 million in 2021; approximately $7.9 million was expected to be recognized over the following 12 months.
The global APC sales pipeline increased to an indicated range of approximately $50 million to $75 million, but the filing does not provide a probability-weighted estimate of conversion.
The company transferred $20 million into an investment account during 2022 to earn returns on excess cash while preserving liquidity.
No goodwill or long-lived asset impairment was recorded in 2022. The FUEL CHEM goodwill balance was $2.1 million.
China APC operations continued to wind down; China revenue was approximately $3,000 and the China business reported a $209,000 net loss in 2022.

Guidance, outlook, commentary and risks

Management expects cost-control efforts to maintain existing operating expense levels and believes diminishing pandemic effects may improve the market outlook.
Management expects 2023 capital expenditures for the DGI business, field equipment, computer systems and office equipment, funded with operating cash or cash on hand.
Growth opportunities include global emissions regulation, European emissions upgrades, particulate-control projects in Asia and continued international APC activity.
Key risks include continued substitution of natural gas and renewable generation for coal, changes in environmental regulation or enforcement, customer project delays or cancellations, fixed-price project cost overruns, supply-chain disruption, inflation, geopolitical events and COVID-19 effects.
Customer concentration is significant: the five largest customers represented approximately 61% of 2022 revenue, and the largest represented approximately 22%.
The company depends materially on air-quality regulations and enforcement, fossil-fuel power generation, key employees, third-party suppliers and subcontractors, and protection of its intellectual property.
APC revenue is recognized over time using a cost-to-cost method. Estimated project costs and progress toward completion are significant judgments and were identified as a critical audit matter.
Goodwill impairment testing also depends on forecast revenue growth, operating margins and discount rates; it was identified as a critical audit matter, although no impairment was recorded.
The magnesium hydroxide supply agreement covering U.S. and Canadian FUEL CHEM requirements expires December 31, 2023.
The company has never paid cash dividends and currently plans to reinvest earnings in operations.

Important facts for investors to verify

Whether APC backlog and the $50 million–$75 million pipeline convert into revenue at expected timing and margins.
Whether APC gross margins recover from 35% after 2022 project-mix and supply-chain pressure.
Whether FUEL CHEM can offset customer retirements, lower coal demand and plant-outage effects.
The collectability and timing of the significant increase in accounts receivable and unbilled contract assets.
The sustainability of liquidity while operating cash flow remains negative and the company funds investments and new technology development.
Potential effects of energy transition, environmental regulation, inflation, supply-chain conditions and geopolitical events on customer demand.
The renewal or replacement of the magnesium hydroxide supply agreement before its December 31, 2023 expiration.
The potential dilution from 2.85 million outstanding warrants, 384,500 exercisable options and 767,048 unvested restricted stock units.