Fuel Tech, Inc. 2020 Form 10-K Summary
Business context and reporting period
Fuel Tech develops and commercializes air pollution control, combustion optimization, fuel and flue-gas treatment, water treatment, and engineering technologies. Its two reportable segments are Air Pollution Control (APC) and FUEL CHEM. This filing covers the fiscal year ended December 31, 2020; quarterly data indicate fourth-quarter revenue of $6.2 million and a fourth-quarter net loss of $1.5 million.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $22.550 million | $30.467 million | Down 26% |
| Gross profit | $10.638 million | $10.830 million | Down $0.192 million |
| Gross margin | 47% | 36% | Up 11 percentage points |
| Operating loss | $4.336 million | $8.240 million | Improved $3.904 million |
| Net loss | $4.278 million | $7.852 million | Improved $3.574 million |
| Basic and diluted loss per share | $0.17 | $0.32 | Improved $0.15 |
| Cash flow from operations | $(2.707) million | $(3.387) million | Use decreased $0.680 million |
- APC revenue was $8.557 million, down 39% from $14.082 million. APC gross margin increased to 46% from 20%, helped by a $2.589 million insurance settlement, favorable project timing and mix, partly offset by $1.427 million of remediation costs.
- FUEL CHEM revenue was $13.993 million, down 15% from $16.385 million. Segment gross margin was 48%, compared with 49% in 2019.
- SG&A declined 21% to $13.600 million, primarily from lower foreign subsidiary, travel, professional service, bad debt and administrative costs. R&D increased modestly to $1.177 million.
- Total assets were $30.088 million and stockholders’ equity was $22.321 million at year-end, compared with $31.606 million and $26.175 million, respectively, in 2019.
- Cash and cash equivalents were $10.640 million, excluding $1.966 million of restricted cash. Working capital was $15.542 million, compared with $16.816 million in 2019.
- Investing activities used $0.247 million, primarily for equipment. Financing activities provided $1.282 million, including $1.556 million of Paycheck Protection Program loan proceeds, partly offset by equity-related tax payments.
Material changes versus the prior comparable period
- Revenue declined $7.917 million, driven by lower U.S. sales in both segments, project timing, reduced APC backlog, soft electricity demand, fuel switching and the effects of COVID-19.
- Management reduced operating losses substantially through cost controls. No restructuring charge was recorded in 2020, compared with $0.625 million in 2019 related primarily to the suspension of the Beijing APC operation.
- APC backlog fell to $5.3 million at December 31, 2020 from $9.7 million. Approximately $3.0 million was expected to be recognized over the following 12 months.
- The Company recorded a $0.197 million fourth-quarter abandonment charge for patents and trademarks no longer considered beneficial to operations; the comparable 2019 charge was $0.127 million.
- The allowance for doubtful accounts declined to $0.835 million from $1.816 million, reflecting recoveries and reductions in expected credit losses.
- Foreign currency translation adjustments produced $0.408 million of other comprehensive income in 2020, compared with a $0.493 million loss in 2019.
Liquidity, debt and contingencies
- Management stated that available resources and expected operating cash flows were adequate to fund planned operations for at least the next 12 months, while noting recurring losses and continued revenue declines.
- The $1.556 million PPP loan outstanding at year-end was forgiven in full on January 8, 2021. The Company also had $1.873 million of standby letters of credit and performance guarantees, supported by $1.966 million of restricted cash.
- The Company had no other material conventional debt reported. Its $76,000 nil-coupon perpetual convertible loan notes are classified in stockholders’ equity.
- The Company recorded a $0.176 million provision for one loss-making construction contract. Warranty and non-conformance matters included $1.150 million of 2020 remediation costs, substantially offset by a $2.589 million insurance settlement; management stated that related work was completed and no material pending loss contingencies were expected.
Guidance, outlook, management commentary and risks
- Management expects continued benefits from cost controls and believes diminishing pandemic effects may improve the market outlook, but the filing does not provide formal revenue, earnings or margin guidance.
- Growth remains dependent on environmental regulation and enforcement, particularly rules governing NOx and particulate emissions. Conversely, regulatory changes, delayed enforcement, coal-plant closures, fuel switching and renewable or natural-gas substitution could reduce demand.
- COVID-19 reduced demand and delayed or threatened projects as customers and suppliers faced financial stress, offline facilities and market uncertainty. The duration and ultimate financial impact remained uncertain.
- Key risks include customer concentration, fixed-price project execution, contract cancellations or delays, dependence on third-party suppliers and subcontractors, competition, foreign operations, foreign-exchange exposure, dependence on magnesium hydroxide supply, and the ability to protect intellectual property.
- In February 2021, the Company completed a private placement of 5.0 million common shares and warrants for gross proceeds of approximately $25.8 million, before fees and expenses. Proceeds were intended for general corporate purposes. The transaction materially strengthened post-year-end liquidity but also increased potential share dilution.
- The Company regained compliance with NASDAQ’s minimum bid-price requirement in December 2020 after receiving a prior deficiency notice.
Most important facts for investors to verify
- Whether revenue and backlog stabilize following the 26% annual revenue decline and APC backlog reduction.
- The sustainability of the improved 47% consolidated gross margin, including the effect of the non-recurring insurance settlement and remediation costs.
- The timing of a return to positive operating and free cash flow, given the continuing net losses and $2.707 million of operating cash use in 2020.
- Use of the approximately $25.8 million private-placement proceeds, post-transaction share count, and dilution from the issued warrants and placement-agent warrants.
- Whether COVID-19 effects, coal-to-gas and renewable substitution, regulatory developments and customer concentration materially affect future demand.
- Completion and cash-collateral release for outstanding letters of credit and performance guarantees, as well as any remaining warranty exposure.
- The assumptions supporting goodwill and long-lived-asset impairment conclusions, particularly projected revenue growth, operating margins, royalty rates and discount rates.