Fuel Tech, Inc. 10-Q Summary
Business Context and Reporting Period
Fuel Tech develops technologies for air-pollution control, process optimization, water treatment and engineering services. Its reportable segments are Air Pollution Control (APC) and FUEL CHEM. This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. Unless otherwise stated, amounts are in thousands.
Financial Performance and Position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $5,033 | $3,778 | +33% |
| Gross profit | $2,358 | $1,527 | +54% |
| Gross margin | 47% | 40% | +7 percentage points |
| Operating loss | ($1,157) | ($2,683) | Improved by $1,526 |
| Net income (loss) | $398 | ($2,567) | Improved by $2,965 |
| Diluted EPS | $0.01 | ($0.10) | Improved |
| Net cash used in operating activities | ($225) | ($1,905) | Improved by $1,680 |
- FUEL CHEM revenue increased 60% to $4,126, reflecting power-generation demand and recovery from the initial COVID-19 impact in the prior-year quarter. FUEL CHEM gross margin increased to 48% from 43%.
- APC revenue decreased 24% to $907 because of project-execution timing and a lack of new orders announced during 2020 and the first quarter of 2021. APC gross margin increased to 41% from 36%.
- Selling, general and administrative expense declined 20% to $3,100, primarily due to lower employee compensation, foreign-subsidiary costs, professional fees and space-rental costs.
- Research and development expense increased to $415 from $324, focused on new technologies, including DGI water-treatment systems.
- Other income included a $1,556 gain from forgiveness of the company’s Paycheck Protection Program loan. Total other income was $1,558, making the quarterly profit dependent in part on this unusual item.
- Cash, cash equivalents and restricted cash totaled $36,131 at March 31, 2021, including $35,711 of unrestricted cash and $420 of restricted cash. Working capital was $38,496.
- Total assets were $51,043 versus $30,088 at December 31, 2020. Stockholders’ equity was $46,523 versus $22,321, primarily reflecting the equity financing and quarterly income.
- The company had no outstanding debt at quarter-end other than obligations associated with outstanding standby letters of credit. Long-term borrowings declined from $1,556 at year-end 2020 to zero after PPP forgiveness.
Material Changes Versus the Prior Comparable Period
- Revenue increased $1,255, driven by a $1,544 increase in FUEL CHEM revenue, partially offset by a $289 APC decline.
- Gross profit increased $831, and consolidated gross margin expanded because of the more FUEL CHEM-weighted product mix.
- Operating loss narrowed substantially as higher revenue and lower SG&A more than offset higher research and development spending.
- The company reported net income rather than a loss, principally due to improved operations and the $1,556 PPP-loan forgiveness gain.
- On February 11, 2021, Fuel Tech completed a private placement of 5,000,000 common shares and 2,500,000 warrants, generating gross proceeds of $25,813 and net cash proceeds of approximately $24,029 after offering costs. Placement-agent warrants for 350,000 shares were also issued.
- Shares outstanding increased to 30,263,791 at April 30, 2021, from 25,228,951 at December 31, 2020, creating dilution risk for existing holders.
- Operating cash use improved but remained negative despite reported net income, while financing activities provided $23,977 from the private placement.
Guidance, Outlook, Risks and Unusual Items
- Management expects the current cash position and anticipated operating cash flows to fund planned operations for the next 12 months and states that liquidity is sufficient for the base APC and FUEL CHEM businesses.
- APC backlog was $5,151 at March 31, 2021, compared with $5,268 at December 31, 2020. Management expects approximately $3,000 of remaining performance obligations to be recognized over the next 12 months.
- The company continues to wind down its APC business in China. Remaining activities include completing approximately $16 of backlog and collecting remaining receivables.
- Management projects a consolidated effective tax rate of approximately 0% for 2021 because of a full valuation allowance on U.S., China and Italy deferred tax assets and the tax-exempt PPP forgiveness income.
- COVID-19 has affected operations and may continue to reduce demand, delay or eliminate customer projects, and disrupt suppliers and other third parties. Management states that the ultimate impact remains highly uncertain.
- A foreign-customer equipment failure is being remedied under warranty. The related accrued remediation contingency declined to $50 at March 31, 2021 from $176 at year-end 2020. The standard warranty liability remained $159.
- The company had one loss-making construction contract and recorded a $50 provision at quarter-end. Management states that no pending legal or other loss contingencies are probable or reasonably possible of having a material impact.
- Foreign-currency movements affect earnings and cash flow; the company does not hedge this exposure because it considers the transactions immaterial. Management also states that a 100-basis-point adverse interest-rate move would not materially affect expected interest expense.
- Executive performance RSUs require at least $1,000 of 2021 operating income before incentive pay for any award to vest; no related expense had been recorded because achievement was not considered probable.
Important Facts for Investors to Verify
- Whether FUEL CHEM demand and margins remain strong after the favorable prior-year COVID comparison and product mix benefit.
- Whether APC receives new orders and converts its $5,151 backlog into revenue and cash on the expected timetable.
- Whether operating cash flow turns positive without relying on additional equity financing or other non-operating items.
- The sustainability of profitability excluding the $1,556 PPP-forgiveness gain.
- The potential dilution from 5,000,000 newly issued shares and 2,850,000 outstanding warrants, including exercise prices of $5.10 and $6.45.
- The continuing financial effects and completion costs of the China APC wind-down and the foreign-customer warranty matter.
- The extent to which COVID-19, customer project delays, supply-chain conditions and foreign-exchange movements affect future results.