Fuel Tech, Inc. 2019 Form 10-K Summary
Business Context and Reporting Period
Fuel Tech develops and commercializes air-pollution-control, combustion-optimization, fuel-treatment, water-treatment and engineering technologies. Its reportable segments are Air Pollution Control (APC) and FUEL CHEM. The water-treatment technology was not operational and generated no revenue. This filing covers the fiscal year ended December 31, 2019; the source does not present the filing as a standalone fourth-quarter report, although fourth-quarter data are included.
Financial Performance and Position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $30.5 million | $56.5 million | Down 46% |
| Gross margin | 36% | 35% | Up 1 percentage point |
| Operating income (loss) | $(8.2) million | $0.1 million | Down $8.4 million |
| Net income (loss) from continuing operations | $(7.9) million | $0.1 million | Down $7.9 million |
| Net loss | $(7.9) million | $(0.03) million | Worsened by $7.8 million |
| Basic and diluted loss per share | $(0.32) | Approximately $0.00 | Worsened |
| Cash flow from operating activities | $(3.4) million | $4.9 million | Declined $8.3 million |
- APC revenue was $14.1 million, down 63% from $38.4 million. APC gross margin declined to 20% from 29%, primarily due to project mix, execution timing and $2.2 million of remediation costs for customer contract non-conformance.
- FUEL CHEM revenue was $16.4 million, down 10% from $18.1 million. Segment gross margin was 49%, compared with 50% in 2018.
- SG&A declined 7% to $17.2 million, while R&D increased slightly to $1.1 million. The company recorded a $0.6 million restructuring charge and $0.1 million of patent abandonment charges.
- At December 31, 2019, cash and cash equivalents were $10.9 million, restricted cash was $2.6 million, and total cash, cash equivalents and restricted cash were $13.5 million. Working capital was $16.7 million versus $23.6 million in 2018.
- Total assets were $32.2 million and total liabilities were $6.0 million. The company reported no outstanding cash borrowings. The $76,000 of nil-coupon perpetual convertible loan notes were classified in equity.
- Capital expenditures and patent purchases were $0.6 million. Financing cash use was $0.1 million, primarily for tax withholding on vested equity awards.
Material Changes Versus the Prior Comparable Period
- Revenue declined sharply in both geographic markets: U.S. revenue fell 41% to $25.9 million and international revenue fell 64% to $4.6 million.
- APC backlog decreased to $9.7 million from $12.4 million. Approximately $5.8 million was expected to be recognized over the following 12 months.
- China APC operations were suspended. The related $0.6 million restructuring charge included severance and lease-termination costs; remaining China backlog was approximately $35,000.
- The discontinued Fuel Conversion business was fully wound down, including the sale of remaining assets for $0.5 million and a $20,000 gain recorded in discontinued operations.
- Accounts receivable declined to $6.5 million from $18.4 million, reflecting lower activity and collections. The allowance for doubtful accounts increased to $1.8 million from $1.4 million.
- Adoption of ASC 842 resulted in recognition of $1.0 million of operating lease liabilities and a $1.0 million right-of-use asset at year-end.
Guidance, Outlook, Risks and Unusual Items
Management provided no formal numerical revenue or earnings guidance. It stated that current cash and expected operating cash flows should fund planned operations for the next 12 months, while acknowledging that additional financing could become necessary and might be unavailable or dilutive.
- Demand remains sensitive to coal-fired power generation, natural-gas prices, fuel switching, capital spending, environmental regulation and enforcement, and customer project timing.
- The business has a concentrated product portfolio and customer base. Three customers each represented more than 10% of 2019 revenue; the largest represented 19%.
- Outstanding standby letters of credit and bank guarantees totaled $2.5 million and were fully cash-collateralized by $2.6 million of restricted cash. These instruments could require cash payments if performance obligations are not met.
- The company incurred $2.2 million of remediation costs related to a U.S. customer project. Insurance coverage was under review, but no insurance receivable was recorded because reimbursement was not yet certain.
- COVID-19 was identified as a potential risk because of operations and wind-down activities in China and operations in Italy. The filing does not quantify its financial effect.
- On January 7, 2020, NASDAQ notified the company that its stock price had remained below the $1.00 minimum bid requirement for 30 consecutive business days. The company received until July 6, 2020 to regain compliance and indicated that a reverse stock split might be considered.
- International operations are subject to foreign-exchange risk; the company does not use currency derivatives. A $370,000 foreign-exchange gain primarily reflected liquidation of the Chilean subsidiary.
Most Important Facts for Investors to Verify
- Whether APC backlog converts into revenue and cash at the expected pace, particularly the approximately $5.8 million scheduled for the next 12 months.
- Whether FUEL CHEM revenue stabilizes despite declining coal demand and fuel switching.
- Whether operating cash flow returns to positive levels or additional financing becomes necessary.
- The collectability of receivables and the adequacy of the $1.8 million allowance for doubtful accounts.
- The outcome and timing of insurance reimbursement related to the $2.2 million remediation costs.
- Compliance with NASDAQ’s minimum bid-price requirement and any resulting reverse-stock-split or dilution implications.
- The operational and financial impact of COVID-19, China wind-down activities and the company’s Italian operations.