Fuel Tech, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2022, compared with the corresponding 2021 periods. The unaudited statements are prepared under U.S. GAAP. Fuel Tech develops air-pollution-control, process-optimization, water-treatment, and engineering technologies, with reportable segments consisting of Air Pollution Control (APC) and FUEL CHEM.
Financial Results and Key Metrics
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Revenue | $6.368 million | $5.218 million | $11.903 million | $10.251 million |
| Gross margin | 42% | 50% | 42% | 48% |
| Operating loss | $(0.485) million | $(0.689) million | $(1.469) million | $(1.846) million |
| Net loss | $(0.356) million | $(0.778) million | $(1.354) million | $(0.380) million |
| Net loss per share | $(0.01) | $(0.03) | $(0.04) | $(0.01) |
| Cash flow from operations | Not provided quarterly | Not provided quarterly | $(3.321) million | $0.229 million |
Revenue mix: APC revenue increased 178% year over year in Q2 to $2.738 million and increased 161% for the six-month period to $4.942 million. FUEL CHEM revenue declined 14% in Q2 to $3.630 million and 17% year to date to $6.961 million.
Profitability: Q2 gross profit was $2.678 million, compared with $2.583 million in the prior-year quarter. APC gross margin fell to 34% from 49%, primarily because of product and project mix. FUEL CHEM gross margin fell to 48% from 50% due to lower volume and higher material, freight, and labor costs. SG&A declined 3% year over year to $2.874 million, while research and development expense declined to $0.289 million.
Cash flow and liquidity: Six-month operating cash use was $3.321 million, primarily reflecting a $3.245 million increase in accounts receivable and the net loss. Investing cash use was $0.138 million, primarily for equipment and patents. Financing cash use was $0.017 million. Cash, cash equivalents, and restricted cash totaled $33.298 million at June 30, 2022, including $1.990 million of restricted cash; working capital was $36.953 million.
Balance sheet and debt: Total assets were $49.118 million versus $49.974 million at December 31, 2021. Total liabilities were $4.535 million versus $3.774 million, and stockholders’ equity was $44.583 million versus $46.200 million. The company reported no outstanding debt other than standby letters of credit. Letters of credit totaled approximately $1.326 million and were collateralized by $1.990 million of investments under a new Investment Collateral Security agreement with BMO Harris Bank. The agreement has no financial covenants.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue increased 22% in Q2 and 16% for the first six months, driven by APC project execution.
- APC backlog increased to $10.547 million at June 30, 2022 from $9.119 million at December 31, 2021; approximately $8.414 million of remaining performance obligations are expected to be recognized within 12 months.
- The global sales pipeline was reported at approximately $50 million to $75 million. Current backlog included $8.303 million of U.S. projects and $2.244 million of international projects.
- FUEL CHEM revenue declined because of the permanent retirement of one customer’s plant, unforeseen plant outages, and lower demand related to climate and operating and maintenance scheduling.
- Gross margin declined despite higher revenue, reflecting APC project mix and higher FUEL CHEM input costs.
- Six-month net loss increased substantially from the prior-year period, although the prior year benefited from approximately $1.566 million of PPP loan forgiveness income. Excluding that unusual prior-year benefit, the comparison is less unfavorable.
- Foreign revenue increased to $2.089 million in Q2 and $3.936 million for the six-month period, while U.S. revenue declined to $4.279 million and $7.967 million, respectively.
- Accounts receivable increased to $6.424 million from $3.259 million at year-end, primarily reflecting project milestone billing timing.
Outlook, Commentary, Risks, and Unusual Items
- Management described the operating environment as challenging because of the continuing shift from coal-fired installations to gas-fired and renewable plants, COVID-19 effects, and geopolitical conditions.
- Management expects cost-control efforts to maintain existing operating-expense levels and believes diminishing pandemic effects could improve the market outlook.
- Management stated that current cash and expected operating cash flows are adequate to fund planned operations for the next 12 months and that capital expenditures will be funded with cash on hand or operations.
- The board approved a plan to invest up to $10 million of excess capital in U.S. Treasury or government agency debt securities, with maturities from three to 36 months. At June 30, 2022, $10 million was held in a money market fund pending investment.
- The company continues to wind down its APC operations in China. Remaining activities include completing projects with approximately $6 thousand of backlog and collecting remaining receivables.
- COVID-19 and the Russia-Ukraine conflict may reduce demand, delay or cancel projects, disrupt supply chains, increase raw-material and energy costs, and affect regulatory or energy policy. Management stated that the ultimate impact remains highly uncertain.
- Foreign-currency fluctuations affect earnings and cash flow; the company does not use currency hedging instruments because management considers the exposures immaterial.
- The company reported no pending loss contingencies believed to be probable or reasonably possible of having a material financial impact. Product warranty liability was $0.159 million and unchanged during the six months.
- Management projects a consolidated effective tax rate of approximately 0% for 2022, primarily because of a full valuation allowance on U.S., China, and Italy deferred tax assets.
- Disclosure controls and procedures were concluded to be effective, and no material change in internal control over financial reporting was reported.
Important Facts for Investors to Verify
- Whether APC backlog converts to revenue as projected, particularly the $8.414 million expected within 12 months.
- Whether FUEL CHEM customer losses, plant retirements, outages, and lower utilization continue to pressure revenue and margins.
- The sustainability of liquidity given six-month operating cash usage of $3.321 million and the increase in accounts receivable.
- The allocation, maturity profile, liquidity, and yield of the planned $10 million investment portfolio, including the $1.990 million pledged as collateral.
- The effect of project mix, material, freight, and labor costs on APC and FUEL CHEM gross margins.
- The impact of COVID-19, geopolitical events, foreign exchange, supply-chain conditions, and customer project delays.
- The status and remaining costs of the China APC wind-down and collection of related receivables.
- The potential dilution from 2.850 million outstanding warrants and outstanding equity awards, which were antidilutive during the reported loss periods.