Fuel Tech, Inc. — Q1 2020 Form 10-Q Summary
Business Context and Reporting Period
Fuel Tech provides engineered solutions for combustion optimization, emissions reduction and boiler treatment. Its reportable segments are Air Pollution Control (APC) technology and FUEL CHEM technology. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $3.778 million | $10.155 million | Down 63% |
| Gross profit | $1.527 million | $4.014 million | Down 62% |
| Gross margin | 40% | 40% | Flat |
| Operating loss | $2.683 million | $1.305 million | Loss increased |
| Net loss | $2.567 million | $1.289 million | Loss increased 99% |
| Net loss per share | $0.10 | $0.05 | Loss increased |
| Cash used in operating activities | $1.905 million | $4.890 million | Use decreased |
Revenue declined primarily because of project timing, lower APC orders and reduced FUEL CHEM demand from coal-fired utilities. APC revenue fell 79% to $1.196 million, while FUEL CHEM revenue fell 41% to $2.582 million. Selling, general and administrative expense declined 13% to $3.886 million, but increased to 103% of revenue from 44% because of the sharp revenue decline. Research and development expense increased to $324 thousand from $266 thousand.
Cash, cash equivalents and restricted cash totaled $11.136 million at March 31, 2020, including $3.133 million of restricted cash. Unrestricted cash and cash equivalents were $8.003 million. Working capital was $14.327 million. Total assets were $28.921 million and total liabilities were $5.468 million.
The company reported no outstanding debt obligations at March 31, 2020 other than obligations associated with standby letters of credit. Standby letters of credit totaled approximately $2.984 million and were supported by restricted cash collateral of $3.133 million. The BMO Harris agreement has no financial covenants.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue decreased $6.377 million, or 63%.
- APC revenue decreased $4.593 million, or 79%, principally due to project execution timing and reduced backlog.
- FUEL CHEM revenue decreased $1.784 million, or 41%, due to lower coal-fired power generation demand, low natural-gas prices, fuel switching, outages and lower operating capacity at customer facilities.
- APC backlog declined to $9.192 million at March 31, 2020 from $9.671 million at December 31, 2019 and $12.4 million at December 31, 2018. Approximately $5.717 million of remaining APC performance obligations was expected to be recognized over the next 12 months.
- Operating loss more than doubled despite lower SG&A, reflecting the revenue shortfall. The prior-year period included $595 thousand of restructuring charges; no restructuring charge was recorded in Q1 2020.
- Cash used in operating activities improved by $2.985 million, primarily reflecting working-capital changes, but operations remained cash-flow negative.
Guidance, Outlook, Risks and Unusual Items
Management believes current cash and expected operating cash flows are adequate to fund planned operations for the next 12 months. Management also stated that additional financing could be considered if necessary, including debt, equity or convertible securities, but such financing may be unavailable or dilutive.
The company projected an effective tax rate of approximately 5% for 2020. Q1 income tax expense was $118 thousand, and the company maintains a full valuation allowance on certain U.S., China and Italy deferred tax assets.
COVID-19 caused temporary office closures and a shift to remote operations. Management identified potential disruption to employees, suppliers, customers, operations, financial markets, results and cash flows, but stated that the ultimate impact was not yet determinable.
After quarter-end, on April 15, 2020, the company received a $1.556 million Paycheck Protection Program loan bearing interest at 1.0% with a two-year term. The loan may be forgiven in whole or in part if applicable requirements are met; no assurance was provided that forgiveness would be obtained. Any unforgiven amount requires repayment beginning six months after issuance.
The company continued winding down its APC business operation in China. Remaining China APC backlog was approximately $32 thousand. A $146 thousand liability remained for remediation of equipment non-conformance issues with a U.S. customer, and warranty liabilities totaled $159 thousand. Management stated that no pending litigation or other loss contingency was expected to have a material effect.
Important Facts for Investors to Verify
- Whether APC orders and backlog stabilize or continue to decline.
- Whether FUEL CHEM demand recovers from utility outages, fuel switching and weak power-generation conditions.
- The pace of operating cash use and whether unrestricted cash remains sufficient without additional financing.
- The amount of the PPP loan ultimately forgiven and the resulting debt obligation.
- The operational and financial effects of COVID-19 on project execution, customers, suppliers and cash flow.
- Whether the $9.192 million APC performance-obligation balance converts to revenue as expected.
- The potential cost and timing of the U.S. customer remediation and other warranty obligations.