Fuel Tech, Inc. — Form 10-Q Summary
Business context and reporting period
Fuel Tech develops air-pollution-control, process-optimization, water-treatment, and engineering technologies. Reported results cover the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. The company reports two operating segments: Air Pollution Control (APC) and FUEL CHEM.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $5.218 million | $4.401 million | $10.251 million | $8.179 million |
| Gross margin | 50% | 14% | 48% | 26% |
| Operating loss | $(0.689) million | $(2.424) million | $(1.846) million | $(5.107) million |
| Net loss | $(0.778) million | $(2.544) million | $(0.380) million | $(5.111) million |
| Basic and diluted loss per share | $(0.03) | $(0.10) | $(0.01) | $(0.21) |
| Cash provided by operating activities | Not separately provided | Not separately provided | $0.229 million | $(3.414) million |
- Q2 revenue increased 19%; first-half revenue increased 25%.
- FUEL CHEM revenue increased 72% in Q2 and 66% for the first half, while APC revenue declined 49% and 40%, respectively.
- Cash, cash equivalents, and restricted cash totaled $36.562 million at June 30, 2021, including $36.194 million of unrestricted cash and $0.368 million of restricted cash.
- Working capital was $37.892 million. Total assets were $50.061 million and total liabilities were $4.163 million.
- The company had no outstanding long-term borrowings at June 30, 2021. The $1.556 million PPP loan was fully forgiven on January 8, 2021, generating other income.
- Outstanding standby letters of credit totaled approximately $0.351 million and were supported by restricted cash under a cash-collateral agreement.
Material changes versus the prior comparable period
- Revenue growth was driven by FUEL CHEM, reflecting new accounts, increased power-generation demand, and recovery from COVID-19-related outages and reduced operations in 2020.
- APC revenue declined because of project-execution timing, lower new orders, and reduced backlog. APC backlog was $4.943 million at June 30, 2021, versus $5.268 million at December 31, 2020.
- Consolidated gross margin improved substantially because the revenue mix was more heavily weighted toward FUEL CHEM and because the prior-year APC results included $1.150 million of charges related to a customer warranty non-conformance.
- SG&A increased 7% in Q2 but declined as a percentage of first-half revenue to 59% from 81%, primarily due to higher revenue and the prior-year allowance-for-doubtful-accounts charge.
- The company raised $25.812 million in gross proceeds through a February 2021 private placement of 5.0 million shares and warrants to purchase 2.5 million shares. Net proceeds after $1.783 million of offering costs were approximately $24.029 million. Additional warrants to purchase 350,000 shares were issued to the placement agent.
- APC operations in China remain suspended and are being wound down. Remaining China APC backlog was approximately $12 thousand at June 30, 2021.
Guidance, outlook, risks, contingencies, and unusual items
- Management believes existing cash and expected operating cash flows are adequate to fund planned operations for the next 12 months, while continuing to monitor expenses, restructuring needs, and liquidity.
- Management projected a consolidated effective tax rate of approximately 3% for 2021. Deferred tax assets remain subject to a full valuation allowance because the timing of future taxable income is uncertain.
- Remaining APC performance obligations totaled $4.943 million at June 30, 2021; approximately $2.825 million was expected to be recognized over the following 12 months.
- COVID-19 remains a risk to demand, project timing, customer and supplier financial condition, sales channels, and the supply chain. Management stated that the ultimate impact remains highly uncertain.
- The company recorded an $11 thousand accrual related to a foreign customer equipment-component failure being remedied under warranty. Total warranty liability was $159 thousand.
- Management stated that no pending litigation or other loss contingencies were probable or reasonably possible of having a material impact. Risk factors were reported as unchanged from the 2020 Form 10-K.
- Foreign-currency movements affect earnings and cash flow; the company does not hedge this exposure because management considers it immaterial. A hypothetical 100-basis-point interest-rate increase was not expected to materially affect interest expense.
- Executive performance RSUs require achievement of at least $1 million of 2021 operating income before incentive pay; no expense had been recorded because achievement was not considered probable at June 30, 2021.
Facts investors should verify
- Whether FUEL CHEM growth is sustainable and offsets continued APC revenue and backlog declines.
- Conversion and timing of the $4.943 million APC backlog into revenue and cash flow.
- Cash burn, operating profitability, and the company’s ability to remain cash-flow positive without additional equity financing.
- Dilution from the 5.0 million shares issued and 2.85 million outstanding warrants.
- Potential additional costs from the China APC wind-down, customer warranties, and other contingencies.
- Whether COVID-19-related demand, project delays, or supply-chain disruptions materially affect future results.