Fuel Tech, Inc. — Form 10-Q Summary
Business context and reporting period
Fuel Tech develops technologies for air pollution control, process optimization, water treatment, and advanced engineering services. Its reportable segments are Air Pollution Control (APC) and FUEL CHEM. This unaudited filing covers the three and six months ended June 30, 2023, with comparisons to the corresponding 2022 periods.
Key financial metrics
| Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 |
|---|---|---|---|---|
| Revenue | $5.461 million | $6.368 million | $12.748 million | $11.903 million |
| Gross margin | 37% | 42% | 38% | 42% |
| Operating loss | $(1.332) million | $(0.485) million | $(1.990) million | $(1.469) million |
| Net loss | $(1.044) million | $(0.356) million | $(1.458) million | $(1.354) million |
| Net loss per diluted share | $(0.03) | $(0.01) | $(0.05) | $(0.04) |
| Cash provided by operating activities | Not separately provided | Not separately provided | $0.017 million | $(3.321) million |
At June 30, 2023, cash and cash equivalents were $15.134 million, short-term investments were $12.855 million, long-term investments were $4.874 million, working capital was $31.459 million, and total assets were $49.609 million. Total liabilities were $5.959 million. The company reported no outstanding debt other than standby letters of credit totaling approximately $0.414 million. Investments of $0.621 million were pledged as collateral for those letters of credit, and the related agreement has no financial covenants.
Material changes versus the prior comparable period
- Second-quarter revenue declined $0.907 million, or 14%, primarily because FUEL CHEM revenue decreased $1.591 million, or 44%, due to unplanned customer maintenance and outages. APC revenue increased $0.684 million, or 25%.
- Six-month revenue increased $0.845 million, or 7%. APC revenue rose 41% to $6.981 million, while FUEL CHEM revenue fell 17% to $5.767 million.
- Consolidated gross margin declined to 37% from 42% in the second quarter and to 38% from 42% for the six-month period. Management attributed the quarterly decline to segment mix, product and project mix, and lower FUEL CHEM volume.
- Second-quarter operating loss widened to $1.332 million from $0.485 million. Six-month operating loss widened to $1.990 million from $1.469 million.
- SG&A increased to $2.915 million in the quarter and $6.160 million for the six-month period. Research and development increased to $0.413 million and $0.631 million, respectively, reflecting continued development of new technologies, including water and wastewater applications.
- Interest income increased substantially to $0.307 million in the quarter and $0.646 million for the six-month period, primarily from held-to-maturity debt securities and money market funds.
- Cash declined by $8.194 million during the first six months, primarily because the company invested $9.685 million in debt securities, partially offset by $1.500 million of maturities. Operating cash flow was approximately breakeven.
- APC backlog was $6.613 million at June 30, 2023, down from $8.245 million at December 31, 2022. The backlog included $5.244 million of domestic projects and $1.369 million of international projects.
Guidance, outlook, risks, contingencies, and unusual items
- Management stated that cost-control efforts are expected to maintain current operating-expense levels and that diminishing pandemic effects could improve the market outlook. No quantitative revenue or earnings guidance was provided.
- Management reported a global sales pipeline of approximately $50 million to $75 million and said APC business-development activity remained encouraging.
- Remaining APC performance obligations totaled $6.613 million at June 30, 2023; approximately $6.305 million was expected to be recognized over the next 12 months.
- The company expects current cash, working capital, and anticipated operating cash flows to fund planned operations for the next 12 months. Additional 2023 capital expenditures are expected for field equipment, information systems, and office equipment.
- Fuel Tech continues to wind down its APC operations in China. Remaining China APC project backlog was approximately $3 thousand at June 30, 2023, and China had net assets of $0.790 million.
- COVID-19 effects, geopolitical events, customer purchasing delays, supply-chain disruption, foreign-exchange movements, customer outages, and project timing remain stated risks. The company does not use foreign-currency hedging instruments because management considers the exposure immaterial.
- The company reported no pending loss contingencies believed to be probable or reasonably possible of having a material effect. The product-warranty liability was $0.159 million and was unchanged during the six-month period.
- The company adopted the expected-credit-loss standard on January 1, 2023; management reported no material impact. U.S., China, and Italy deferred tax assets remain subject to a full valuation allowance.
- Management concluded that disclosure controls and procedures were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether APC backlog converts to revenue as expected and whether the $50 million to $75 million sales pipeline produces new orders.
- Whether FUEL CHEM customer outages and maintenance interruptions persist and affect recurring chemical purchases.
- Whether gross margins recover from the reported 37% quarterly level, particularly in APC.
- The pace of cash utilization, investment maturities, and operating cash-flow generation given continuing operating losses.
- The liquidity and restrictions associated with held-to-maturity investments pledged against standby letters of credit.
- Progress and remaining costs associated with the China APC wind-down and the company’s water and wastewater technology investments.
- The potential future dilution from approximately 1.687 million unvested RSUs, 2.850 million warrants, and other equity awards.