Fuel Tech(FTEK) - 2022 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Fuel Tech's unaudited condensed consolidated financial statements for Q1 2022, detailing balance sheets, operations, comprehensive income, equity, cash flows, and accounting notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :--------------------------------- | :------------- | :---------------- | | Total Assets | $49,621 | $49,974 | | Total Liabilities | $4,488 | $3,774 | | Total Stockholders' Equity | $45,133 | $46,200 | | Cash and cash equivalents | $34,174 | $35,893 | | Accounts receivable, net | $4,795 | $3,259 | | Total current liabilities | $3,982 | $3,223 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands, except per-share data) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Revenues | $5,535 | $5,033 | +10.0% | | Cost of sales | $3,245 | $2,675 | +21.3% | | Operating loss | $(984) | $(1,157) | -15.0% | | Net (loss) income | $(998) | $398 | N/A (loss vs. income) | | Basic net (loss) income per common share | $(0.03) | $0.01 | N/A | | Diluted net (loss) income per common share | $(0.03) | $0.01 | N/A | Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Net (loss) income | $(998) | $398 | | Foreign currency translation adjustments | $(70) | $(193) | | Comprehensive (loss) income | $(1,068) | $205 | Condensed Consolidated Statements of Stockholders' Equity Changes in Total Stockholders' Equity (in thousands) | Metric | Balance at Dec 31, 2021 | Net Loss | Foreign Currency Adjustments | Stock Compensation | Taxes Paid on Equity Awards | Balance at Mar 31, 2022 | | :--------------------------------- | :---------------------- | :--------- | :--------------------------- | :----------------- | :-------------------------- | :---------------------- | | Total Stockholders' Equity | $46,200 | $(998) | $(70) | $18 | $(17) | $45,133 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(1,746) | $(225) | | Net cash used in investing activities | $(53) | $(4) | | Net cash (used in) provided by financing activities | $(17) | $23,977 | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(1,814) | $23,525 | | Cash, cash equivalents, and restricted cash at end of period | $35,240 | $36,131 | Notes to Condensed Consolidated Financial Statements Note 1. General - Fuel Tech develops and provides proprietary technologies for air pollution control (NOx reduction, particulate matter mitigation), process optimization (FUEL CHEM), water treatment (DGI™ Dissolved Gas Infusion Systems), and advanced engineering services, leveraging Computational Fluid Dynamics modeling[21][22][23] - The company continues to face significant risks from the COVID-19 pandemic, including reductions in demand and project delays, and potential impacts from geopolitical events like the Russia-Ukraine conflict on raw material prices and energy policy[25][26][27] Note 2. Summary of Significant Accounting Policies Restricted Cash Reconciliation (in thousands) | Metric | March 31, 2022 | March 31, 2021 | | :--------------------------------- | :------------- | :------------- | | Cash and cash equivalents | $34,174 | $35,711 | | Restricted cash included in current assets | $1,066 | $150 | | Restricted cash included in long-term assets | $— | $270 | | Total cash, cash equivalents, and restricted cash | $35,240 | $36,131 | - Inventories, primarily equipment for resale and spare parts, are valued at the lower of cost or net realizable value using the weighted-average cost method and are periodically evaluated for obsolescence[30] Note 3. Revenue Disaggregated Revenue by Product Technology (in thousands) | Product Technology | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Air Pollution Control technology solutions | $1,841 | $373 | +393.6% | | Total Air Pollution Control technology revenues | $2,204 | $907 | +143.0% | | FUEL CHEM technology solutions | $3,331 | $4,126 | -19.3% | | Total Revenues | $5,535 | $5,033 | +10.0% | Disaggregated Revenue by Geography (in thousands) | Geography | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | United States | $3,688 | $4,463 | -17.4% | | Asia | $1,374 | $120 | +1045.0% | | Total Foreign Revenues | $1,847 | $570 | +224.0% | | Total Revenues | $5,535 | $5,033 | +10.0% | - Contract assets for APC technology projects increased from $1,277 thousand at December 31, 2021, to $2,222 thousand at March 31, 2022, reflecting billing subsequent to revenue recognition. Remaining performance obligations for APC technology totaled $9,552 thousand as of March 31, 2022, with approximately $7,403 thousand expected to be recognized over the next 12 months[34][38] Note 4. Restructuring Activities - Fuel Tech is in the process of suspending its APC business in China, a restructuring effort initiated in January 2019 to prioritize resource allocation and reduce costs[40] China Operations Financials (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Total revenues | $1 | $11 | | Net (loss) income | $(13) | $25 | China Net Assets (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :--------------------------------- | :------------- | :---------------- | | Total assets | $1,232 | $1,235 | | Total liabilities | $98 | $92 | | Total net assets | $1,134 | $1,143 | Note 5. Accumulated Other Comprehensive Loss Accumulated Other Comprehensive Loss (in thousands) | Metric | March 31, 2022 | March 31, 2021 | | :--------------------------------- | :------------- | :------------- | | Balance at beginning of period | $(1,604) | $(1,370) | | Foreign currency translation adjustments | $(70) | $(193) | | Total accumulated other comprehensive loss | $(1,674) | $(1,563) | Note 6. Treasury Stock - Treasury stock increased to 976,006 shares (cost of $2,251 thousand) at March 31, 2022, from 963,509 shares (cost of $2,234 thousand) at December 31, 2021, due to shares withheld for employee tax obligations on vested restricted stock units[44] Note 7. Earnings per Share Weighted-Average Shares Outstanding | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Basic weighted-average shares | 30,267,000 | 27,510,000 | | Diluted weighted-average shares | 30,267,000 | 27,737,000 | - For Q1 2022, basic and diluted EPS were both $(0.03) because all outstanding stock awards, warrants, and convertible loan notes were considered anti-dilutive due to the net loss[45] Note 8. Stock-Based Compensation - Fuel Tech's Incentive Plan allows for various stock-based awards, with 2,616,298 shares available as of March 31, 2022[48] Stock-Based Compensation Expense (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Stock options and restricted stock units, net of forfeited | $18 | $20 | - As of March 31, 2022, there was no unrecognized compensation cost related to non-vested stock options or restricted stock units[53][54] Note 9. Warrants Warrants Outstanding at March 31, 2022 | Range of Exercise Price | Number Outstanding/Exercisable | Weighted Average Remaining Life in Years | Weighted Average Exercise Price | | :---------------------- | :----------------------------- | :--------------------------------------- | :------------------------------ | | $5.10 | 2,500,000 | 4.37 | $5.10 | | $6.45 | 350,000 | 4.37 | $6.45 | | Total | 2,850,000 | | | Note 10. Debt Financing - The company received a $1,556 thousand Paycheck Protection Program (PPP) loan in April 2020, which was fully forgiven by the SBA on January 8, 2021, and recorded as other income in the Condensed Consolidated Statement of Operations[58][59] Note 11. Business Segment and Geographic Financial Data - Fuel Tech operates in two reportable segments: Air Pollution Control (NOx reduction, particulate matter control) and FUEL CHEM (chemical processes for boiler optimization)[62] Segment Net Sales and Gross Margin (in thousands) | Metric | APC Segment (Q1 2022) | FUEL CHEM Segment (Q1 2022) | Total (Q1 2022) | APC Segment (Q1 2021) | FUEL CHEM Segment (Q1 2021) | Total (Q1 2021) | | :--------------------------------- | :-------------------- | :-------------------- | :-------------- | :-------------------- | :-------------------- | :-------------- | | Revenues from external customers | $2,204 | $3,331 | $5,535 | $907 | $4,126 | $5,033 | | Gross margin | $775 | $1,515 | $2,290 | $376 | $1,982 | $2,358 | | Operating income (loss) from operations | $775 | $1,515 | $(984) | $376 | $1,982 | $(1,157) | Geographic Revenues and Assets (in thousands) | Metric | March 31, 2022 | March 31, 2021 | December 31, 2021 | | :--------------------------------- | :------------- | :------------- | :---------------- | | Revenues - United States | $3,688 | $4,463 | N/A | | Revenues - Foreign | $1,847 | $570 | N/A | | Total Revenues | $5,535 | $5,033 | N/A | | Assets - United States | $46,142 | N/A | $46,271 | | Assets - Foreign | $3,479 | N/A | $3,703 | | Total Assets | $49,621 | N/A | $49,974 | Note 12. Accrued Liabilities Other Accrued Liabilities (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :--------------------------------- | :------------- | :---------------- | | Contract liabilities | $522 | $390 | | Other accrued liabilities | $477 | $471 | | Total other accrued liabilities | $999 | $861 | Note 13. Commitments and Contingencies - Fuel Tech records liabilities for probable and estimable contingent losses and discloses reasonably possible material losses, but management believes no pending loss contingencies will materially affect its financial position or results[68][69] - The warranty liability balance remained unchanged at $159 thousand at March 31, 2022, and December 31, 2021, based on historical claims analysis[71] Note 14. Income Taxes - The company's effective tax rate was 0.0% for Q1 2022 and Q1 2021, significantly lower than the 21% federal statutory rate, primarily due to a full valuation allowance on deferred tax assets in the U.S., China, and Italy[72] Note 15. Subsequent Events - On April 6, 2022, Fuel Tech entered into a 2022 Executive Performance RSU Award Agreement, where officers can earn RSUs based on achieving at least $1 million in 2022 operating income, with awards vesting over three years[74] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion of Fuel Tech's Q1 2022 financial condition and results, covering operational environment, COVID-19, segment performance, revenue, costs, and liquidity Overview - Q1 2022 was challenging due to the shift from coal-fired to gas-fired and renewable energy plants, and ongoing COVID-19 impacts[76] - Fuel Tech is investing in new water pollution control and treatment technologies and expects cost control efforts and diminishing pandemic effects to lead to an improved market outlook[76] COVID-19 Pandemic and Geopolitical Events - The COVID-19 pandemic continues to pose significant risks, causing reductions in demand and project delays due to customer/supplier distress and market volatility[77] - Geopolitical events, specifically the Russia-Ukraine conflict, may impact new/existing projects, raw material/energy prices, and regulatory policy, with the ultimate effects on the company being highly uncertain[77] Key Operating Factors - FUEL CHEM segment revenues and operating profits declined in Q1 2022 due to a permanent plant retirement and reduced customer demand[78] - The Air Pollution Control (APC) business improved significantly in Q1 2022 due to project execution and new orders, with a consolidated APC backlog of $9,552 thousand and a global sales pipeline of $50-75 million[79][81] Results of Operations Revenues Revenue Performance (in thousands) | Segment | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Total Revenues | $5,535 | $5,033 | +10.0% | | APC technology segment revenues | $2,204 | $907 | +143.0% | | FUEL CHEM® technology segment revenues | $3,331 | $4,126 | -19.3% | Cost of sales and gross margin Gross Margin Performance | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Consolidated gross margin percentage | 41% | 47% | -6 percentage points | | APC gross margin | 35% | 41% | -6 percentage points | | FUEL CHEM gross margin | 45% | 48% | -3 percentage points | Selling, general and administrative SG&A Expenses (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | SG&A expenses | $3,054 | $3,100 | -1.5% | | SG&A as a percentage of revenues | 55% | 62% | -7 percentage points | Research and development R&D Expenses (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | R&D expenses | $220 | $415 | -47.0% | - R&D efforts are focused on new product development for commercial applications outside traditional markets, including DGI™ Dissolved Gas Infusion Systems for water and wastewater treatment, aiming for reduced energy and installation costs[85] Income tax - Income tax expense was $0 for Q1 2022 and Q1 2021, with a projected 0% effective tax rate for 2022, mainly due to a full valuation allowance on deferred tax assets in the U.S., China, and Italy[86] Other (expense) income, net Other (Expense) Income, Net (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change (YoY) | | :--------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Other (expense) income, net | $(10) | $1,558 | -100.6% | - The significant decrease in other income was primarily due to the forgiveness of the $1,556 thousand Paycheck Protection Program Loan (plus $10 thousand accrued interest) in Q1 2021, which did not recur in Q1 2022[87] Liquidity and Sources of Capital - Fuel Tech had a net loss of $984 thousand and used $1,746 thousand in operating cash in Q1 2022[88] - As of March 31, 2022, the company had $35,240 thousand in cash (including restricted cash) and $37,474 thousand in working capital, which management believes is adequate to fund planned operations for the next 12 months[89][94] - Operating activities used $1,746 thousand cash in Q1 2022, primarily due to increased accounts receivable and net loss, while Q1 2021 used $225 thousand cash, impacted by the PPP loan forgiveness. Financing activities used $17 thousand in Q1 2022 (taxes on equity awards) compared to providing $23,977 thousand in Q1 2021 (private placement proceeds)[90][91][93] Contingencies and Contractual Obligations - The warranty liability balance remained unchanged during Q1 2022, and management does not believe any pending loss contingencies will materially impact the company's financial position, results of operations, or cash flows[99][69] Forward-Looking Statements - The report contains forward-looking statements, which are subject to risks and uncertainties detailed in the company's Form 10-K, and Fuel Tech disclaims any obligation to update them[100] Item 3. Quantitative and Qualitative Disclosures about Market Risk Addresses Fuel Tech's exposure to market risks, primarily foreign currency exchange rate fluctuations, noting no hedging instruments are used due to immateriality - Fuel Tech's earnings and cash flow are subject to foreign currency exchange rate fluctuations, but the company does not use hedging instruments due to the immaterial nature of the transactions[101] Item 4. Controls and Procedures Details evaluation of Fuel Tech's disclosure controls and procedures, confirming effectiveness and reporting no material changes in internal control Evaluation of Disclosure Controls and Procedures - Fuel Tech's disclosure controls and procedures were evaluated by the CEO and principal financial officer as of March 31, 2022, and deemed effective in ensuring timely and accurate reporting[102] Changes in Internal Control over Financial Reporting - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2022[103] PART II. OTHER INFORMATION Item 1. Legal Proceedings Fuel Tech is not involved in any legal proceedings expected to have a material adverse effect on its business, financial condition, or results - Fuel Tech is not currently involved in any litigation expected to have a material adverse effect on its business, financial condition, results of operations, or prospects[105] Item 1A. Risk Factors Risk factors from the Annual Report on Form 10-K for fiscal year ended December 31, 2021, have not materially changed - The risk factors from the Annual Report on Form 10-K for fiscal year ended December 31, 2021, have not materially changed[106] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported for the period - No unregistered sales of equity securities or use of proceeds were reported[107] Item 6. Exhibits Lists all exhibits filed with the Form 10-Q, including CEO/CFO certifications and Inline XBRL documents - The exhibits include CEO and CFO certifications (31.1, 31.2, 32), various Inline XBRL documents (101.1-101.6), and the Cover Page Interactive Data File (104)[110] SIGNATURES Signatures Contains official signatures for the Form 10-Q, certifying its submission by the registrant's authorized officers - The report was signed on May 10, 2022, by Vincent J. Arnone (President and CEO) and Ellen T. Albrecht (Acting Treasurer and Controller)[113]