Greetings, and welcome to the Fuel Tech Second Quarter 2023 Financial Results Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host, Conor Rodriguez, Investor Relations at The Equity Group. You may begin..

Good morning, everyone. Thank you for joining us today for Fuel Tech's Second Quarter 2023 Financial Results Conference Call. Yesterday, after the close, we issued a copy of the release, which is available at the company's website, www.fueltech.com.

Our speakers for today will be Vince Arnone, Chairman, President and Chief Executive Officer; and Ellen Albrecht, our Chief Financial Officer. After prepared remarks, we will open the call for questions from our analysts and investors.

Before turning things over to Vince, I'd like to remind everyone that matters discussed in this call, except for historical information, are forward-looking statements as defined in Section 21E of the Securities and 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 the information currently available to our company's 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 the 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 and Item 1A under the caption of Risk Factors and subsequent filings under the Securities Exchange Act of 1934 as amended, 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 of these statements.

Fuel Tech undertakes no obligation to update such factors or to publicly announce the results of any forward-looking statements contained herein to reflect future events, developments or changed circumstances for any other reason.

Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those in the company's filings with the SEC. With that said, I'd like to turn the call over to Vince Arnone. Vince, please go ahead..

Thank you, Conor. Good morning, and I'd like to thank everyone for joining us on the call today. Our results for the second quarter of this year were mixed between our business segments.

With APC segment revenues rising 25% from last year's second quarter, offset by a decline in revenue from the FUEL CHEM segment due to unscheduled and temporary maintenance-related downtime at units utilizing our technology.

We continue to maintain a conservative cost profile, invest in our growth specifically with respect to our water and wastewater treatment technology, optimize our balance sheet, and we ended the quarter with total cash and investments of nearly $33 million and no long-term debt.

As discussed last quarter, we commenced our first on-site demonstration as part of our Dissolved Gas Infusion technology initiative, which we call DGI, using a small-scale dissolved oxygen infusion system and an aquaculture setting in the Western United States.

The deployment, which is scheduled to conclude later in the third quarter of this year, has already demonstrated encouraging results that are in line with our objective of improving the customers' operational productivity and efficiency using optimized high levels of dissolved oxygen.

The DGI system is able to consistently maintain dissolved oxygen levels in excess of 150% of saturation across a variety of site conditions. And the DO level is being maintained within an optimal range for the aquaculture application, utilizing programming based on DO sensors and the treatment basin.

At this stage of the demonstration, it is too early to tell the total effect of the higher level of DO on the growth rate of the animals being farmed. However, initial data appears to show an improvement in this metric. We are meeting all of the customers' test objectives thus far and our internal expectations at this point as well.

We look forward to successfully completing this trial in Q3 and are in discussions for a longer-term solution with this customer pending the outcome of this pilot.

In addition to this demonstration, we are continuing to pursue additional demonstration opportunities across multiple end markets, finalizing marketing documentation for all markets of interest, are in the process of identifying channel partners and supply chain partners.

And lastly, we are working on the design basis for a commercial scale -- small-scale DGI system. Now let's spend a few minutes discussing our APC and FUEL CHEM business segments.

Our FUEL CHEM segment experienced a decrease in revenue and operating profit in the second quarter of this year due to the impact of unplanned unit outages for maintenance at multiple customer sites.

As we have now entered the third quarter of the year, all of our larger scale customer units are running at historically normalized levels due to weather-related dispatch and we expect improved performance for FUEL CHEM for the second half of 2023.

With respect to international opportunities for the FUEL CHEM segment, we are continuing to follow the opportunity to expand the provision of our chemical technology in Mexico via our partner in that country to address the emissions created by the burning of high sulfur fuel oil, which is being undertaken without the necessary environmental remediation and at the expense of the health of surrounding communities.

We recently executed the 2-year extension to the program that we currently have in place at one facility, and we do believe that political pressure is building in favor of the implementation of our FUEL CHEM program at additional facilities in this country.

Our partner is currently in discussions with the state-owned utility CFE regarding the application of our technology at several units.

As we look out to 2023 on a full year basis, we continue to expect that FUEL CHEM revenues will decline modestly from 2022 levels due primarily to a reduction in program utilization levels at our primary accounts from the high levels experienced in 2002, client maintenance-driven outages during the second quarter, which I just mentioned, and to the elimination of one account due to plant closure.

Now for the APC segment. Revenue rose to $3.4 million from $2.7 million in last year's second quarter, driven primarily by the timing of project awards and the commencement of work on contracts announced during 2022 and continuing through the first 6 months of 2023.

These projects involve our SCR, SNCR and ULTRA emissions control solutions at natural gas and coal-fired units in the U.S., Europe and the Pacific Rim. Last week, we were pleased to announce $2.2 million in new project awards.

These awards support projects during various end markets and with scheduled completion dates ranging from Q3 of this year to Q1 of 2024. Additionally, we have good visibility to incremental contract awards in the amount of $3 million to $5 million, which we would expect to be awarded before the end of Q3. Last quarter, we discussed the U.S.

Environmental Protection Agency's issuance of a rule finalizing requirements that obligate 23 states to reduce emissions of nitrogen oxides from power plants and certain industrial facilities.

According to EPA, this action was designed to tighten NOx emission requirements by updating the Cross-State Air Pollution Control Rule to meet the good neighbor requirements of the Clean Air Act.

We continue to believe that this new federal rule will serve as a catalyst for new APC orders over the next several years as utility and industrial customers explore ways to further reduce NOx emissions.

Based on our actual performance in the first half of this year, the effective backlog that we have in place today and the business development activities we are pursuing, we remain confident that our APC revenues for 2023 will exceed 2022 APC revenues of $10.6 million.

Driven primarily by the APC business, we also continue to expect that total revenues for 2023 will increase modestly to between $28 million and $30 million up from $26.9 million in 2022.

This base case outlook excludes any material contributions from DGI as we are still in the early stages of commercialization and any significant contributions to APC from the recent EPA ruling in March.

In closing, I want to once again thank the Fuel Tech team for their continued hard work and dedication and our shareholders for their continued support as we continue to evolve our operations and expand our presence as a global supplier of technologies that enable clean air and pure water. With that said, I'd like to turn the call over to Ellen.

Ellen, please go ahead..

Thank you, Vince, and good morning, everyone. For the quarter, consolidated revenues were $5.5 million compared to $6.4 million in last year's second quarter, reflecting higher APC segment revenues, offset by a decline in FUEL CHEM product revenue. APC segment revenue increased 25% to $3.4 million from $2.7 million in the prior year period.

This increase was primarily driven by timing of project execution and new APC orders announced during 2022 and continuing through the first 6 months of 2023. FUEL CHEM product revenue was $2 million compared to $3.6 million in the prior year quarter, primarily the result of unplanned client maintenance and outages throughout the quarter.

As Vince mentioned, we believe these outages have subsided and that FUEL CHEM's performance has returned to historical operating levels and will improve in the second half of the year. Consolidated gross margin for the second quarter was 37% of revenues as compared to 42% of revenues in the prior year period.

This decline can be attributed to changes in segment mix with a slight decline in APC gross margin due to project and technology mix and lower FUEL CHEM margin due to the lower revenue for the FUEL CHEM segment.

Consolidated APC segment backlog as of June 30 was $6.6 million, down sequentially from $7.6 million at March 31, 2023, and $8.2 million at December 31, 2022. Backlog at quarter end consisted of $3.4 million of domestic-delivered project backlog and $3.1 million of foreign-delivered project backlog.

SG&A expenses for the quarter were flat year-over-year at $2.9 million. For the full year 2023, we expect SG&A expenses to range between $13 million and $13.5 million as we invest in resources to support current business initiatives and in the development of our DGI technology operations.

Research and development expenses for the second quarter increased to $413,000 from $289,000 in last year's second quarter. The increase was driven by new product development efforts in water treatment technologies and more specifically, commercializing our Dissolved Gas Infusion technology.

Our operating loss was $1.3 million compared to $485,000 for the prior year period, primarily driven by lower FUEL CHEM revenues, the effect of which were mitigated by relatively stable year-on-year expense profile. As we discussed last quarter, we continue to take advantage of the favorable interest rate environment.

And as of June 30, 2023, have invested approximately $30 million in held-to-maturity debt securities and money market funds. This generated $307,000 of interest income in the second quarter and $646,000 for the 6-month period ended June 30 compared to $9,000 for the same period in 2022.

We continue to expect that interest income for 2023, barring any unusual deployments to grow the business, will exceed $1.2 million. Our net loss for the quarter was $1 million or $0.03 per share compared to a net loss of $356,000 or $0.01 per share in the same period 1 year ago.

Adjusted EBITDA loss was $1.2 million compared to an adjusted EBITDA loss of $200,000 in the prior year period. Our financial position remains quite strong. As of June 30, we had cash and cash equivalents of $15.1 million and short and long-term investments totaling an additional $17.7 million. Working capital was $31.2 million or $1.04 per share.

Stockholders' equity was $44.6 million or $1.44 per share, and the company continues to have no outstanding debt. I share Vince's optimism about our future and upcoming improved performance and our ability to support Fuel Tech's expected growth. I appreciate your time. And now I'll turn the call back over to Vince..

Thanks very much, Ellen. Operator, I'd now like to open the call for questions, please..

[Operator Instructions]. Our first question is coming from the line of Sameer Joshi with H.C. Wainwright..

On the FUEL CHEM front, are you getting the full benefit of the quarter that is with all the unplanned maintenance activities at your client sites complete before commencement of the 3Q?.

Can you ask that question one more time, Sameer? I lost a little bit of it, please..

Yes. Sorry, sorry.

On the FUEL CHEM front, for 3Q, are you getting all the -- like was there any unplanned maintenance or flow into the 3Q? Or was it all completed in 2Q, and 3Q you will have full revenues?.

Yes. It was largely completed in Q2, Sameer. Yes, as we've moved into Q3, those outages have been eliminated. We are seeing a more normalized run rate for our primary accounts here in Q3 thus far. So we are not expecting any material changes in that activity right now..

Right, right.

And this takes into account one of the plant closures previously discussed?.

That is correct. That is correct..

Okay. Okay. Got it. On the SG&A front, they came in a little bit lower than we had expected. And I know you have guided for a range.

But are there any specific actions that you took to bring the SG&A down? Or was there some onetime in this Q?.

No, I wouldn't say that there's anything unusual occurring right now with SG&A, Sameer. I mean we're watching our development on the DGI front. As I have mentioned on prior conference calls, we have not invested significantly in human resources or other SG&A-related expenses as it relates to DGI. So we're watching the timing of that quickly.

As we do see signs that this is going to fully turn into a commercially viable activity, we will see increases in SG&A related to that further investment. Other than bringing in our lead of DGI earlier this year, Bill Decker, we have not made material changes in human resources for DGI.

But as soon as we see signs of success, and particularly with the demonstration that's ongoing right now, as we move throughout this year into '24, we will be talking about expanded investment in SG&A as it relates to water and wastewater treatment. That just has not happened yet..

Understood.

That is on the SG&A front on DGI?.

Correct. Yes..

But on the R&D front, I know 2Q expenses were slightly higher because of this demonstration, and I think you are working on other opportunities.

Should we expect R&D expense to be couple hundred thousand dollars more or in line with 2Q rather than 1Q?.

I would say that the Q2 number that you're seeing right now, you would expect to see in Q3 and perhaps Q4. Yes, we are investing in the demonstration. That is going to continue into Q3. And we would expect as we move throughout the year to have the opportunity to engage in additional demonstrations as well.

So yes, I confirm that we would expect to see that uptick a little bit through the remainder of this year..

Okay.

And sticking to DGI, just maybe we have discussed this in the past, but would these systems, the installation be customized? Or do you have sort of a standard modular design that you can like put multiple units of -- can you just give us a sense of how it looks?.

Right. I mean the way we've originally looked at the design for the DGI systems is to be able to have the modular in nature, to be able to meet different application requirements. So that is our approach. The demonstration that we're doing right now is a small scale DGI system demonstration. It delivers about 15 pounds of oxygen per day.

As I've mentioned in prior conference calls, we actually have designed and built a DGI delivery system that can deliver up to 2,000 pounds of oxygen per day. So we're looking at developing a, call it, a modular range of systems that can be used for a variety of different end market applications. That's our intent..

Understood. And just maybe last one.

Are we expecting any -- I know in your outlook, you do not have any revenues from DGI but is there a possibility that one of these demonstrations would convert into an order that can be recognized, say, in the fourth quarter of 2023?.

I would say, yes, that is a possibility. I would not expect it to be material, Sameer, but yes, it is a definite possibility..

[Operator Instructions]. I'm not seeing any additional questions at this time. So I'd like to pass the floor back over to Vince Arnone for any additional closing remarks..

Thank you, operator. Once again, I'd like to thank all of our stakeholders, our employee team, our Board of Directors and, of course, our shareholders for their continued support. We are working diligently to bring our water and wastewater treatment initiative to commercialization.

At the same time, we're continuing our focus on efforts on expanding our base business segments to the extent we can on a global basis. Thanks again for your time, and thanks for your interest in Fuel Tech. Everyone, have a great day. Thank you..

Ladies and gentlemen, this does conclude today's teleconference and webcast. Once again, we thank you for your participation, and you may disconnect your lines at this time..