Greetings. Welcome to the Fuel Tech Second Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Devin Sullivan, Senior Vice President of The Equity Group. Thank you. You may begin.

Thank you, Alex. Good morning, everyone and thank you for joining us today for Fuel Tech’s second quarter 2021 financial results conference call. Yesterday after the close, we issued a copy of our results which are available at the company’s website, www.ftek.com. Our speakers for today call will be Vince Arnone, President and Chief Executive Officer and Ellen Albrecht, the company’s Principal Financial Officer. After prepared remarks, we will open the call for questions from our analysts and investors. Before turning things over to Vince, I would like to remind everyone that matters discussed on this call, except for historical information are 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, business prospects and opportunities as well as assumptions made by and information currently available to our company’s management. Fuel Tech has tried to identify forward-looking statements by using such words 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 in Item 1A under the caption 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 conditions, 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 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 the company’s filings with the SEC. With that said, I would now like to turn the call over to Vince Arnone, President and CEO of Fuel Tech. Vince please go ahead.

Thank you, Devin. Good morning. And I want to thank everyone for joining us on the call today. We are continuing to emerge from the restrictions imposed by the COVID-19 pandemic and our optimism for the balance of 2021 and beyond is strengthening. Although challenges remain, our FUEL CHEM and Air Pollution Control business segments are each making progress in their respective end markets. And our developmental wastewater treatment business that we call Dissolved Gas Infusion, or DGI, is taking positive steps forward as well. Our financial position is the strongest it has been in our near-term history having ended the second quarter with nearly $37 million in cash and no debt. We significantly narrowed our losses in the border and continue to pursue sustainable operating profitability. To that end, we continue to maintain a lean operating structure that will allow us to produce breakeven operating results at an annual revenue range of $25 million to $30 million depending on project mix. Our second quarter 2021 revenues rose approximately 19% from the prior year driven by a nearly 72% increase in net sales for our FUEL CHEM business segment. This segment has continued to benefit from the operations of our current installed base, including new program installations that occurred in the fourth quarter of last year and an overall rise in demand for energy. Some of this demand is tied to the resumption of economic activity and some is tied to increased seasonal power usage, specifically in the summer months. Through the first 6 months of 2021, FUEL CHEM remains on pace to eclipse its full year 2020 performance when the segment generated $14 million of revenue and gross margin of $6.7 million. Although our results at APC continued to be impacted by pandemic driven project delays and cancellations through…

Thank you, Vince, and good morning, everyone. Consolidated revenues during the quarter increased 18.6% to $5.2 million from $4.4 million in last year’s second quarter, reflecting significantly higher revenues in our FUEL CHEM segment, offset by a revenue decline in our Air Pollution Control or APC segment. FUEL CHEM segment revenues rose $4.2 million from $2.4 million in last year’s second quarter, primarily reflecting higher power demand, revenue attributed to the addition of new accounts and recovery from the initial emergence of the COVID-19 pandemic, which significantly impacted results in the prior year period. Segment gross margins improved to 49.7% in the 2021 second quarter from 40% in last year’s second quarter as many customers return to normalized run rate. APC segment revenues declined to $1 million in the second quarter from $1.9 million in the second quarter of 2020, primarily the result of timing of completion on current projects and delayed project awards related to the COVID-19 pandemic. APC gross margin in the second quarter of 2021 was $479,000 or 48.6% of revenue compared to a negative gross margin of $383,000 in last year’s second quarter that included a $1.1 million charge for warranty remediation. Excluding this charge, APC gross margins for the second quarter of 2020 was $700,000 or 39%. The increase in margin for the APC segment is attributed to product mix. Consolidated margin for the second quarter was 49.5% of revenues compared to 13.7% of revenues in last year’s second quarter. Excluding the impact of the aforementioned $1.1 million charge for the APC segment, consolidated gross margin for the same quarter in 2020 was 40%. Consolidated APC segment backlog at June 30, 2021 was $4.9 million compared to $5.3 million at December 31, 2020. Backlog at June 30 included $4.6 million of domestic backlog as compared…

Thank you, Ellen. Operator, please go ahead and open the line for the questions.

Thank you. [Operator Instructions] Our first question comes from Sameer Joshi with H.C. Wainwright. Please proceed with your question.

Thank you. Good morning, Vince, Ellen.

Good morning, Sameer.

Just digging into the revenue for the rest of the year, the $4.5 million is the new orders from Korea, North America, Europe. They are not included in your $2.8 million expectations for the next 12 months. But based on the time line that was provided in the previous press release, it seems like the North American and the European orders are likely to be delivered during 2021. How does that impact the APC revenues over the next two quarters?

Right. I think that given where we are in the year right now, Sameer, we are not going to have a great deal of revenue contribution from contract awards that are indeed part of the $4.5 million that we were awarded in the month of July, nor from anything incremental that would be coming our way, as I had noted, somewhere between $5 million and $10 million possible new orders between now and the end of the year. We’re just – we wouldn’t expect a lot of revenue flowing into 2021 from those contract awards. Okay? As we look at the remainder of this year, total APC revenue will likely be at the same level as prior year, perhaps a little bit less just based upon timing. But what we’re looking to do right now is to indeed build a, call it, a little bit more of a respectable, healthy backlog as we end this year and look to move into 2022, okay? From the backlog that Ellen noted as of the end of the month of June, we’re looking at around between $2.5 million and $3 million that will roll into 2021’s revenue line for APC. And then anything over and above that would come from the new orders that we were just discussing.

Understood. Thanks for that. And then just staying on revenues, do you expect any additional FUEL CHEM TC/TIFI installations during the rest of the year that could be incremental to the FUEL CHEM revenue line?

As we sit here today, Sameer, we are not forecasting anything incremental for the remainder of 2021. Do we have upside potential? We do. We talked about Mexico, but that timing is uncertain. And in all likelihood, the contributions that we would give here in 2021 would be minimal in nature, just due to the timing that would be required to: A, receive the contract award; B, going through the procurement and fabrication process for equipment that we would then need to have installed at a site for starting up our program. So I would not necessarily expect anything incremental for FUEL CHEM this year. However, as we had noted on prior calls, our current run rate for FUEL CHEM is nicely ahead of what we realized in 2020. So FUEL CHEM, we are indeed expecting somewhere in the $15 million to $16 million range in revenues for full year, perhaps a little bit more depending on dispatch rates, depending on also the weather for the remainder of this summer, which indeed also would impact utility – our facility dispatch rates and will require our units to run a little bit more frequently. But – so that run rate is healthy as we sit here today.

Yes. Yes. Thanks for that. That was great. Those were going to be my couple of next questions about Mexico and the summer months. Thanks for that. Moving to DGI, was there a third facility or third demonstration that was being planned or is that going to be done only after the DGI scale-up is accomplished? Can you give us any insight into that?

Right. We actually did have a third demonstration. That was actually started towards the end of 2020 and went slightly into 2021. That was also at a municipal wastewater treatment facility that also did work very well from a customer receptiveness perspective. We don’t have anything incremental on the table right now that we’re planning for from the demonstration perspective, okay? What we are looking at in terms of our focus on DGI right now is finalizing the study that we’re in the midst of with our third-party consultants, and then going ahead and looking to put together a very specific development and commercialization plan for the technology. As you know, over this past couple of years, prior to our financing, we have not put a great deal of incremental funds into the development and commercialization of DGI. Due to our financial position, now that we have the ability to invest further, we are going to look to move forward on incremental investment for DGI. But we need to be a little bit more specifically aware of the directions that we need to go and to capture the best opportunity for that business.

Understood. And I think maybe I have asked this question in previous calls, but the strong balance sheet, how do you intend to utilize it over the next few quarters in terms of expanded sales force, new product offerings? I mean, DGI is part of that development, but also maybe some kind of M&A activity. Can you give us what your thoughts are?

Right. Right now, Sameer, the focus is very strongly on DGI. We will get, call it, our indicative results from our study here on or around the end of Q3. Once we have that in hand, we will be better positioned to better understand how much we are going to need to invest in DGI. And then relative to what we think that is, be able to then take decisions in terms of where else we could go for further development activities over and above DGI. But today, our focus is indeed DGI.

Understood. Great. Thanks for the continued recovery and I will speak to you later. Thanks.

Okay. Thanks Sameer.

[Operator Instructions] Our next question comes from Pete Enderlin with MAZ Partners. Please proceed with your question.

Good morning Vince and Ellen. Thanks for taking my question.

Hi Pete. Good morning.

The – can you quantify in any way the project delays that you have talked about in the APC area? Just give us any sense of the size of what has been delayed or canceled?

Yes. I will give you a range, Pete. And it has been a combination of delays and some cancellations just due to lack of financing and/or funding for projects. But I would tell you right now that it’s $10 million to $15 million at a minimum.

And some of that presumably will come back at some point, but – and that’s included in your prospective pipeline, I suppose?

From – definitely from a delays perspective, yes. Cancellations, those – I mean, those – again, they would need to develop new life in and of itself to, depending on the project owner and whether or not they decide to continue to pursue those opportunities. But the delays, absolutely so. And some of the projects that indeed were delayed, we are including as part of our sales pipeline here for the near-term.

And that $40 million to $50 million pipeline, roughly, how does that break down by geographic regions?

It’s still predominantly U.S. based in terms of where the contracts would originate from. So, I would say 75% of that sales pipeline is indeed domestic.

Well, yes, which is maybe even a little more international than the current mix of business, so this shows there is some potential to expand overseas as well, I guess?

There is. And keep in mind that as an example, the contract that we announced at the end of the month of July, one of the contracts are, I should say, the most material contract is it’s a contract with Fuel Tech here in the United States. But the actual project is located out in China. So again, there are opportunities whereby we will work through engineering organizations or OEMs that do business on a global basis. The projects themselves won’t necessarily be here in the U.S., but the contracts may come through the U.S.

Right. For FUEL CHEM, do the existing arrangements have any sort of like – you wouldn’t call it that, but a sunset provision or any aspects that would mean that the long-term outlook would show some kind of phase out or anything that would limit the life of the new streams of FUEL CHEM revenues in the foreseeable future? In other words, is there anything to keep them from just being ongoing long-term contracts for a definite period of time?

Understood. There aren’t sunset provisions specifically, Pete. However, given what we know about coal-fired units, and given what we have seen happen over the past decade, in particular here in this country. There is no guarantee that any of the customers that represent our base of customers will take chemical next month. There are no guarantees along those lines. So, it is something that we watch day-in, day-out, month-in, month-out as economic activities develop on a regional basis here in this country that could indeed impact our base accounts. So, it’s – there aren’t some tech clauses, but given the direction that we have seen the impact of environmental regulation and pressure on coal-fired units has been going, we anticipate it will indeed continue. Hence, there is likely an end game in mine for FUEL CHEM at some point in time. Also, hence, our focus on trying to get another business unit up and running as quickly as we can, because there is some uncertainty there.

Well, yes, understood. But as it stands now of the existing FUEL CHEM installations, you don’t know of any – where that particular utility is scheduled or even contemplated to shutdown. Is that fair to say?

There is at least one unit that we are aware of today that is likely going to shutdown in 2022. It impact $0.5 million to $1 million or so. But that planning evolves on a recurring basis piece. So again, we are watching it closely. Fortunately, as we look at the remainder of this year, our outlook is very positive and very strong. And we will look to the extent we have opportunities to add additional units where the opportunities could come our way. As you know, we have had the good fortune to be able to add units at two facilities over this past 1.5 years that have been contributing nicely based upon their specific economic drivers for their region.

Great. Thank you. And just one last one, Vince, you mentioned green hydrogen. I guess you are talking about green hydrogen. And that process or some aspects of that would produce NOx. Can you elaborate a little bit on that on where you would apply your technology in that process?

Yes. It wouldn’t be the actual, call it, manufacture of the hydrogen itself, Pete, not as part of that process. But if hydrogen use is used as a fuel source to generate power, that’s where there is a likelihood that incremental NOx nitrogen oxide emissions would result, and there could be some opportunities there. But that would be on, call it, larger scale operations where an entity would choose to utilize hydrogen as the fuel source itself for power generation.

Okay. So, not for fuel cells or hydrogen operated vehicles and things like that?

Correct.

Okay. Alright. Thanks for that clarification and good luck. Thank you.

Thank you, Pete.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Vince Arnone for closing remarks.

Thank you very much, Alex. I would like to thank everyone for joining us on the call today. Again, thanks for the support of our shareholder base, and thank you to the Fuel Tech team for their continued contributions. And we look forward to talking with everyone again on our third quarter conference call in the month of November. Thank you. Have a great day, everyone.

This concludes today’s conference. And you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.