Results of Operations
Revenues for the three month periods ending March 31, 2021 and 2020 were $5,033
and $3,778, respectively, representing an increase of $1,255 or 33% for the
quarter versus the same period last year.
The Air Pollution Control (APC) technology segment generated revenues of
$907 and $1,196 for the three month periods ending March 31, 2021, and 2020
respectively, representing a decrease on the quarter of $289 or 24%. The
variance in APC revenue was principally related to timing of project execution
on existing projects and the lack of new orders announced during 2020 and
continuing through the first three months of 2021.
Consolidated APC backlog at March 31, 2021 was $5,151 versus backlog at December
31, 2020 of $5,268. Our current backlog consists of U.S. domestic projects
totaling $4,747 and international projects totaling $404.
The FUEL CHEM® technology segment generated revenues of $4,126 for the three
months ended March 31, 2021, representing an increase of $1,544 or 60% for the
quarter from the prior year amounts of $2,582. The increase in FUEL CHEM revenue
for the three months ended March 31, 2021 as compared to the same period of the
prior year was due to demand from power generation and recovery from the initial
emergence of the COVID-19 pandemic which impacted the results in the prior year
period.
Consolidated gross margin percentage for the three month periods ended March 31,
2021 and 2020 was 47% and 40%, respectively. Gross margin increased versus the
comparable period due to the concentration of product mix that is heavily FUEL
CHEM weighted. FUEL CHEM margins increased to 48% from 43% in the current
quarter due to the product mix. Gross margins for the three months ended March
31, 2021 and 2020 for the APC segment were 41% and 36%, respectively. The
increase in APC gross margin in the three months ended March 31, 2021 from the
same period in 2020 is primarily due to the higher product mix of ancillary
products and services.
Selling, general and administrative expenses (SG&A) were $3,100 and $3,886,
respectively for the three month periods ended March 31, 2021 and 2020. For the
three month periods ended March 31, 2021 the decrease of $786 is primarily the
result of a reduction in administrative costs related to employee
compensation of $495, a reduction in administrative costs relating to foreign
subsidiaries of $44 (largely driven by the suspension of the APC business
operation in China), a reduction in administrative costs related to employees of
$149, and professional and consulting services of $71 and space rental of $20.
For the three month periods ending March 31, 2021 and 2020, SG&A as a percentage
of revenues decreased to 62% from 103%. The decrease versus the comparable
period is primarily due to the increase in overall revenues in the current year.
Research and development expenses for the three-month periods ended March 31,
2021 and 2020 were $415 and $324, respectively. The expenditures in our research
and development expenses were focused on new product development efforts on 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 technology has not yet met the criteria to be a separate operating segment
under ASC 280 Segment Reporting. This infusion process has a variety of
applications in the water and waste water 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.
Other income of $1,566 in three month period ending March 31, 2021 is due to the
recording of the gain on forgiveness of the Paycheck Protection Plan loan
received on January 8, 2021.
Income tax expense for the three month periods ended March 31, 2021 and 2020
was $0 and $118, respectively. The Company is projecting a consolidated
effective tax rate of approximately 0% for 2021 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 months ended March 31, 2021
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.
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Liquidity and Sources of Capital
We have generated income from continuing operations during the three month
period ended March 31, 2021 totaling $398. Our cash used in continuing
operations for this same period totaled $225.
Our cash balance as of March 31, 2021 totaled $36,131 (including restricted cash
of $420), and our working capital totaled $38,496. 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 continue to monitor our liquidity needs and in response to our continued
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.
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, 2021, the Company had outstanding standby
letters of credit totaling approximately $401 under the BMO Harris agreement. As
of March 31, 2021, the Company held $420 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.
On April 15, 2020, the Company received $1,556 in loan proceeds from the
Paycheck Protection Program (the "PPP"), established pursuant to the Coronavirus
Aid, Relief, and Economic Security Act (the "CARES 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 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 14. There was no change in the warranty liability
balance during the three months ended March 31, 2021.
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, 2020 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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