Overview
In the second 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
geopolitical events and 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. In June, the Board approved a plan to
invest excess capital to provide returns on excess cash, while preserving
capital and managing liquidity. 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 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 half 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 June 30, 2022 was $10,547 and our global sales pipeline is in the
$50 -75 million range.
Results of Operations
Revenues
Revenues for the three month periods ending June 30, 2022 and 2021 were
$6,368 and $5,218, respectively, representing an increase of $1,150, or 22%,
versus the same period last year. Revenues for the six month periods ending June
30, 2022 and 2021 were $11,903 and $10,251, respectively, representing an
increase of $1,652, or 16%, versus the same period last year.
The APC technology segment generated revenues of $2,738 for the three month
period ended June 30, 2022, representing an increase of $1,752, or 178%, from
the prior year amount of $986. The APC technology segment generated revenues
of $4,942 and $1,893 for the six month periods ended June 30, 2022 and 2021,
respectively, representing an increase of $3,049, or 161%. These increases in
APC revenue were primarily related to timing of project execution and new APC
orders announced during 2021 and continuing through the first six months of
2022. Consolidated APC backlog at June 30, 2022 was $10,547 versus backlog at
December 31, 2021 of $9,119. Our current backlog consists of U.S. domestic
projects totaling $8,303 and international projects totaling $2,244.
The FUEL CHEM® technology segment generated revenues of $3,630 and $4,232 for
the three month periods ended June 30, 2022 and 2021, respectively, representing
a decrease of $602, or 14%. The FUEL CHEM® technology segment generated revenues
of $6,961 and $8,358 for the six month periods ended June 30, 2022 and 2021,
respectively, representing a decrease of $1,397, or 17%. The decreases in FUEL
CHEM revenue for the three and six months ended June 30, 2022 as compared to the
same period of the prior year were partially due to the loss of one customer due
to permanent plant retirement and unforeseen plant outages.
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Cost of sales and gross margin
Consolidated gross margin percentage for the three month periods ended June 30,
2022 and 2021 were 42% and 50%, respectively. Gross margin decreased versus the
comparable period due to the decrease in both operating segment gross margins.
For the three month periods ended June 30, 2022 and 2021 the APC gross margin
decreased to 34% from 49%, respectively, primarily due to product and project
mix. FUEL CHEM gross margins decreased to 48% from 50% in the current quarter
due to the decrease in revenue volume and higher material, freight, and labor
costs.
Consolidated gross margin percentage for the six month periods ended June 30,
2022 and 2021 were 42% and 48%, respectively. Gross margin decreased versus the
comparable period due to the decrease in both operating segment gross margins.
For the six month periods ended June 30, 2022 and 2021 the APC gross margin
decreased to 35% from 45%, respectively, primarily due to product and project
mix. FUEL CHEM gross margins decreased to 47% from 49% 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 $2,874 and $2,957 for
the three month periods ended June 30, 2022 and 2021, respectively. For the
three month period ended June 30, 2022 the decrease of $83 is primarily the
result of decreases in outside services of $48, depreciation expense of
$33, certain administrative overhead expenses for our international operations
of $24, and other costs of $55, partially offset by increases in employee
related costs of $44 and travel costs of $33. For the three month periods ending
June 30, 2022 and 2021, SG&A as a percentage of revenues decreased to 45% from
57%. The decrease versus the comparable period is primarily due to the increase
in overall revenues and the decrease in SG&A in the current year.
SG&A expenses were $5,928 and $6,057 for the six month periods ended June 30,
2022 and 2021, respectively. For the six month period ended June 30, 2022 the
decrease of $129 is primarily the result of decreases in depreciation expense of
$58, employee related costs of $40, outside services of $27, and other costs of
$64, partially offset by increases in travel costs of $54 and certain
administrative overhead expenses for our international operations of $6. For
the six month periods ending June 30, 2022 and 2021, SG&A as a percentage of
revenues decreased to 50% from 59%. The decrease versus the comparable period
is primarily due to the increase in overall revenues and the decrease in SG&A in
the current year.
Research and development
Research and development expenses for the three and six month periods ended June
30, 2022 were $289 and $509, respectively, and for the same periods in 2021
were $315 and $730, respectively. The decreases in expenditures were 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 and six month periods ended June 30,
2022 was $9. Income tax expense for both of the three and six month periods
ended June 30, 2021 was $10. 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 and six month periods ended June 30, 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 income, net was $134 for the three month period ended June 30,
2022 compared to Other expense, net of $76 for the same period in 2021. Other
income (expense), net changed $210 mainly due to transactional foreign exchange
gain/loss.
Other income, net was $124 for the six month period ended June 30, 2022 compared
to $1,482 for the same period in 2021. Other income, net decreased $1,358 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 six month period ended June 30, 2022
totaling $1,469. Our cash used by operations for this same period totaled
$3,321.
Our cash and cash equivalent balance as of June 30, 2022 totaled $33,298, which
includes $8,010 of cash equivalents and $1,990 of restricted cash equivalents,
and our working capital totaled $36,953. We have no outstanding debt other than
our outstanding letters of credit, under our Investment Collateral Security
agreement with BMO Harris Bank, N.A. (the Investment Collateral Security
agreement), which does not have any financial covenants. We expect to continue
operating under this arrangement for the foreseeable future.
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Operating activities used cash of $3,321 for the six month period ended June 30,
2022, primarily due to an increase in accounts receivable balances of $3,245 due
to the timing of project milestone billings and the net loss from continuing
operations, partially offset by removals of non-cash items from our net loss
from continuing operations for depreciation and amortization of $232, increases
in accounts payable balances of $812, and a decrease in other assets of $205.
Operating activities provided $229 of cash for the six month period ended June
30, 2021, primarily due to decreases in our accounts receivable balance of
$3,079 and prepaid expenses and other current and non-current assets of $681 and
the add back of non-cash items from our net loss including depreciation and
amortization of $390, partially offset by the add back of a non-cash items from
our net loss for the gain on the Paycheck Protection Program Loan forgiveness of
$1,556 and decreases in our accounts payable balance of $943 and accrued
liabilities and other non-current liabilities of $1,021.
Investing activities used cash of $138 and $237 for the six month periods ended
June 30, 2022 and 2021, respectively. Investing activities for the six month
periods ended June 30, 2022 and 2021 primarily consisted of purchases of
equipment.
Financing activities used cash of $17 for the six month period ended June 30,
2022 compared to cash provided of $23,977 for the six month period ended June
30, 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.
In June 2022, the Board of Directors approved an investment plan that would hold
$10,000 in funds at BMO Harris Bank (BMO Harris) to be invested in
held-to-maturity debt securities of United States (US) Treasuries, including
Notes, Bonds, and Bills, or US Government Agency securities. The funds would be
held in money market funds until they are invested in those securities. The
investments would be structured to create a maturity "ladder" where the proceeds
from maturities are re-invested to maintain a balance of short- and long-term
investments based on the expected business needs. Maturities will be between
three and thirty-six months. This strategy allows the Company to provide returns
on excess cash, while managing liquidity and minimizing exposure to interest
rate fluctuations.
On June 30, 2022, the Company entered into the Investment Collateral Security
agreement to use for the sole purpose of issuing standby letters of credit,
which replaces the Cash Collateral Security agreement with BMO Harris Bank, N.A.
(the Former Collateral agreement). The Investment Collateral Security agreement
requires us to pledge our investments as collateral for 150% 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 Investment Collateral Security agreement.
At June 30, 2022, the Company had outstanding standby letters of credit totaling
approximately $1,326 under the Investment Collateral Security agreement. At June
30, 2022, the investments held as collateral totaled $1,990. Fuel Tech is
committed to reimbursing the issuing bank for any payments made by the bank
under these instruments.
On June 19, 2019, the Company entered into the Former Collateral agreement to
use for the sole purpose of issuing standby letters of credit. The Former
Collateral agreement requires us to pledge as cash collateral 105% of the
aggregate face amount of outstanding standby letters of credit. The Company
paid 250 basis points on the face values of outstanding letters of credit. There
were no financial covenants set forth in the Former Collateral agreement. At
June 30, 2022, the Company had no outstanding standby letters of credit under
the Former Collateral agreement.
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
Statements 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 six months ended June 30, 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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