Overview
In the first quarter of 2022, the Company continued to experience a challenging
operational environment resulting from the ongoing substitution of gas-fired and
renewable energy plants for coal-fired installations and the ongoing impacts of
the coronavirus (COVID-19) global pandemic. We continue to invest in new
technologies to expand our product offerings into the water pollution control
and treatment market. Our capital resources are sufficient for our immediate and
longer-term needs, and we continue to enjoy the services and support of a
dedicated workforce. We expect that our cost control efforts will maintain our
existing levels of operating expenditures and the diminishing effects of the
pandemic should lead to an improved market outlook.
COVID-19 Pandemic and Geopolitical Events
The effects of the coronavirus (COVID-19) global pandemic
have presented significant risks to the Company, not all of which the Company is
able to fully evaluate or even foresee at the current time. Although the impact
of the pandemic is difficult to quantify, the Company has experienced, and may
continue to experience, reductions in demand for certain of our products due to
the delay or abandonment of ongoing or anticipated projects due to our
customers', suppliers' and other third parties' financial distress or concern
regarding the volatility of global markets. Geopolitical events and global
economic sanctions resulting from the ongoing conflict between Russia and
Ukraine may impact new or existing projects and the prices and availability of
raw materials, energy and other materials. These events may also impact energy
and regulatory policy nationally or regionally for the impacted
regions. Management cannot predict the full impact of the COVID-19 pandemic and
geopolitical events on the Company's sales and marketing channels and supply
chain, and as a result, the ultimate extent of the effects on the Company is
highly uncertain and will depend on future developments. Such effects could
exist for an extended period of time. The Company continues to monitor the
potential impacts on the business.
Key Operating Factors
Our FUEL CHEM segment experienced a decline in revenues and segment operating
profits in the quarter compared to 2021. FUEL CHEM faced some headwinds in the
quarter due to the loss of one customer from permanent plant retirement and the
reduction in demand from other customers due to climate and operating and
maintenance scheduling.
Our Air Pollution Control (APC) business experienced improvement in the
quarter compared to 2021, due to the execution on projects awarded in the second
half of 2021 and the first quarter of 2022. We are also encouraged by the pace
and depth of our business development activities, which reflects an increased
focus on global emissions protocols across a variety of fuel sources. Our
Consolidated APC backlog at year end was $9,119 and our global sales pipeline is
in the $50 -75 million range.
Results of Operations
Revenues
Revenues for the three month periods ending March 31, 2022 and 2021 were
$5,535 and $5,033, respectively, representing an increase of $502, or 10%,
versus the same period last year.
The APC technology segment generated revenues of $2,204 and $907 for the three
month periods ended March 31, 2022 and 2021, respectively, representing an
increase of $1,297, or 143%. The increases in APC revenue were primarily related
to timing of project execution and new APC orders announced during 2021 and
continuing through the first three months of 2022. Consolidated APC backlog at
March 31, 2022 was $9,552 versus backlog at December 31, 2021 of $9,119. Our
current backlog consists of U.S. domestic projects totaling $8,862 and
international projects totaling $690.
The FUEL CHEM® technology segment generated revenues of $3,331 and $4,126 for
the three month periods ended March 31, 2022 and 2021, respectively,
representing a decrease of $795, or 19%. The decreases in FUEL CHEM revenue for
the three months ended March 31, 2022 as compared to the same period of the
prior year were due to decreased demand for power generation.
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Cost of sales and gross margin
Consolidated gross margin percentage for the three month periods ended March 31,
2022 and 2021 were 41% and 47%, respectively. Gross margin decreased versus the
comparable period due to the decrease in both operating segment gross margins.
For the three month periods ended March 31, 2022 and 2021 the APC gross margin
decreased to 35% from 41%, respectively, primarily due to product mix. FUEL CHEM
gross margins decreased to 45% from 48% in the current quarter due to the
decrease in revenue volume and higher material, freight, and labor costs.
Selling, general and administrative
Selling, general and administrative expenses (SG&A) were $3,054 and $3,100 for
the three month periods ended March 31, 2022 and 2021, respectively. For the
three month period ended March 31, 2022 the decrease of $46 is primarily the
result of decreases in employee related costs of $84, depreciation expense of
$25, and other costs of $9, partially offset by increases in certain
administrative overhead expenses of $30, outside services of $22, and travel
costs $20. For the three month periods ending March 31, 2022 and 2021, SG&A as a
percentage of revenues decreased to 55% from 62%. The decrease versus the
comparable period is primarily due to the increase in overall revenues in the
current year.
Research and development
Research and development expenses for the three month period ended March 31,
2022 was $220 and for the same period in 2021 was $415. The decrease in
expenditures was related to reduced employee related costs and timing of
execution on current project initiatives. The expenditures in our research and
development expenses are focused on new product development efforts in the
pursuit of commercial applications for technologies outside of our traditional
markets, and in the development and analysis of new technologies that could
represent incremental market opportunities. This includes water treatment
technologies and more specifically, our DGI™ Dissolved Gas Infusion Systems, an
innovative alternative to current aeration technology. This infusion process has
a variety of applications in the water and wastewater industries, including
remediation, treatment, biological activity, and wastewater odor management. DGI
technology benefits include reduced energy consumption, installation costs, and
operating costs, while improving treatment performance.
Income tax
Income tax expense for both of the three month periods ended March 31, 2022 and
2021 was $0. The Company is projecting a consolidated effective tax rate of
approximately 0% for 2022, which is lower than the federal income tax rate of
21%. The Company's effective tax rate differs from the statutory federal tax
rate of 21% for the three month period ended March 31, 2022 primarily due to a
full valuation allowance recorded on our United States, China and Italy deferred
tax assets since we cannot anticipate when or if we will have sufficient taxable
income to utilize the deferred tax assets in the future. Further, our effective
tax rate differs from the statutory federal tax rate due to state taxes,
differences between U.S. and foreign tax rates, foreign losses incurred with no
related tax benefit, non-deductible commissions, and non-deductible meals and
entertainment expenses.
Other (expense) income, net
Other expense, net was $10 for the three month period ended March 31,
2022 compared to Other income, net of $1,558 for the same period in 2021. Other
(expense) income, net decreased $1,568 due to the forgiveness of the Paycheck
Protection Program Loan in 2021 consisting of $1,556 of principal and $10 of
accrued interest.
Liquidity and Sources of Capital
We have losses from operations during the three month period ended March 31,
2022 totaling $984. Our cash used by operations for this same period totaled
$1,746.
Our cash balance as of March 31, 2022 totaled $35,240 (including restricted cash
of $1,066), and our working capital totaled $37,474. We have no outstanding debt
other than our outstanding letters of credit, under our current credit
agreement which does not have any financial covenants as we are currently in a
Cash Collateral Security agreement with our lender. We expect to continue
operating under this arrangement for the foreseeable future.
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Operating activities used cash of $1,746 for the three month period ended March
31, 2022, primarily due to an increase in accounts receivable balances of $1,520
and the net loss from continuing operations, partially offset by removals of
non-cash items from our net income from continuing operations for depreciation
and amortization of $108 and an increase in accounts payable balances of $682.
Operating activities used $225 of cash for the three month period ended March
31, 2021, primarily due to the add back of a non-cash items from our net income
from continuing operations of $398 for the gain on the Paycheck Protection
Program Loan forgiveness of $1,556 and decreases in our accounts payable balance
of $874 and accrued liabilities and other non-current liabilities of $658,
partially offset by decreases in our accounts receivable balance of $1,831
and prepaid expenses and other current and non-current assets of $422 and the
add back of non-cash items from our net income including depreciation and
amortization of $202 and provision for doubtful accounts net of recoveries of
$47.
Investing activities used cash of $53 and $4 for the three month periods ended
March 31, 2022 and 2021, respectively. Investing activities for the three month
periods ended March 31, 2022 and 2021 primarily consisted of purchases of
equipment.
Financing activities used cash of $17 for the three month period ended March 31,
2022 compared to cash provided of $23,977 for the three month period ended March
31, 2021. In 2022, the financing activity was related to the taxes paid on
behalf of the equity award participants on the vesting of restricted stock
units. In 2021, the Company issued common stock in connection with the private
placement offering. Proceeds from the private placement offering were $25,812,
partially offset by the costs related to the offering of $1,783.
The effects of the COVID-19 global pandemic have presented significant risks to
the Company, not all of which the Company is able to fully evaluate or even
foresee at the current time. Although the impact of the pandemic is difficult to
quantify, the Company has experienced, and may continue to experience,
reductions in demand for certain of our products due to the delay or abandonment
of ongoing or anticipated projects due to our customers', suppliers' and other
third parties' financial distress or concern regarding the volatility of global
markets. Other directly or indirectly COVID-19 related effects, such as supply
chain disruptions and travel restrictions, have been impacting operations and
financial performance to varying degrees. We continue to monitor our liquidity
needs and in response to our recent periods of declines in revenue and net
losses have taken measures to reduce expenses and restructure operations which
we feel are necessary to ensure we maintain sufficient working capital and
liquidity to operate the business and invest in our future. We have evaluated
our ongoing business needs and considered the cash requirements of our base
business of Air Pollution Control and FUEL CHEM, as well as our efforts to
wind-down our APC operations in China. This evaluation included consideration of
the following: a) customer and revenue trends in our APC and FUEL CHEM business
segments, b) current operating structure and expenditure levels, and c) the
costs of winding down our APC operations in China as well as other research and
development initiatives. Based on this analysis, management believes that
currently we have sufficient cash and working capital to operate our base APC
and FUEL CHEM businesses. We believe our current cash position and net cash
flows expected to be generated from operations are adequate to fund planned
operations of the Company for the next 12 months.
We expect additional capital expenditures in 2022 for maintenance of field
equipment, computer and systems, and general office equipment. We expect to fund
our capital expenditures with cash from operations or cash on hand.
On June 19, 2019, the Company entered into a Cash Collateral Security agreement
with BMO Harris Bank, N.A. (the BMO Harris agreement) to use for the sole
purpose of issuing standby letters of credit. The BMO Harris agreement requires
us to pledge as cash collateral 105% of the aggregate face amount of outstanding
standby letters of credit. The Company pays 250 basis points on the face values
of outstanding letters of credit. There are no financial covenants set forth in
the BMO Harris agreement. At March 31, 2022, the Company had outstanding standby
letters of credit totaling approximately $1,015 under the BMO Harris agreement.
As of March 31, 2022, the Company held $1,066 in a separate restricted use
designated BMO Harris Bank N.A. deposit account. Fuel Tech is committed to
reimbursing the issuing bank for any payments made by the bank under these
instruments. The outstanding standby letters of credit all have maturities
within the next 12 months.
On February 11, 2021, Fuel Tech entered into a securities purchase agreement to
issue and sell, in a private placement, 5,000,000 shares of Common Stock and
2,500,000 warrants exercisable for a total of 2,500,000 shares of Common Stock
with an exercise price of $5.10 per Warrant Share, at a purchase price of
$5.1625 per Share and associated warrant. The gross proceeds to the Company from
the Private Placement were $25,812, before deducting placement agent fees and
offering expenses of $1,783.
In 2020, the Company received $1,556 in loan proceeds from the Paycheck
Protection Program, established pursuant to the Coronavirus Aid, Relief, and
Economic Security Act and administered by the U.S. Small Business Administration
(SBA). On January 8, 2021 the Company received full forgiveness from the SBA for
the entire balance of loan proceeds used to fund its qualified payroll expenses.
When the loan was forgiven, the Company reduced the non-current liability by the
amount forgiven and recorded other income in the condensed consolidated
statement of operations.
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Contingencies and Contractual Obligations
Fuel Tech issues a standard product warranty with the sale of its products to
customers as discussed in Note 13. There was no change in the warranty liability
balance during the three months ended March 31, 2022.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements," as
defined in Section 21E of the Securities Exchange Act of 1934, as amended, which
are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 and reflect Fuel Tech's current expectations
regarding future growth, results of operations, cash flows, performance and
business prospects, and opportunities, as well as assumptions made by, and
information currently available to, our management. Fuel Tech has tried to
identify forward-looking statements by using words such as "anticipate,"
"believe," "plan," "expect," "estimate," "intend," "will," and similar
expressions, but these words are not the exclusive means of identifying
forward-looking statements. These statements are based on information currently
available to Fuel Tech and are subject to various risks, uncertainties, and
other factors, including, but not limited to, those discussed in Fuel Tech's
Annual Report on Form 10-K for the year ended December 31, 2021 in Item 1A under
the caption "Risk Factors," which could cause Fuel Tech's actual growth, results
of operations, financial condition, cash flows, performance and business
prospects and opportunities to differ materially from those expressed in, or
implied by, these statements. Fuel Tech undertakes no obligation to update such
factors or to publicly announce the results of any of the forward-looking
statements contained herein to reflect future events, developments, or changed
circumstances or for any other reason. Investors are cautioned that all
forward-looking statements involve risks and uncertainties, including those
detailed in Fuel Tech's filings with the Securities and Exchange Commission.
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