Greetings and welcome to the Fuel Tech Inc. Second Quarter 2022 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] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Devin Sullivan, Senior Vice President of The Equity Group. Please go ahead.

Thank you operator. Good morning everyone and thank you for joining us today for Fuel Tech's second quarter 2022 financial results conference call. Yesterday after the close, we issued a copy of the release which is available at the company's website www.ftek.com. Our speakers for today will be Vince Arnone, President and Chief Executive Officer; and Ellen Albrecht, the company's 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 on this call except for historical information are forward-looking statements as defined in Section 21-E of the Securities 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 of results of operations, cash flows, performance, and 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 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 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 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 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'd 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 posted another improved quarter and believe that our recovery is continuing in a measured and sustainable fashion. For the 2022 second quarter, revenues improved by 22%, SG&A reflected our continuing commitment to cost control and operational efficiency, and our backlog rose to more than $10 million. Our balance sheet at June 30th reflected total cash of more than $33 million with no long-term debt. In addition we announced $3.6 million of new APC awards during the quarter, which brings us to approximately $9 million year-to-date. We commenced operations of a new FUEL CHEM Targeted In-Furnace Injection system and importantly, demonstrated material progress in commercializing our Dissolved Gas Infusion or DGI program with the completion of a white paper that will be published shortly, which validates this technology's best-in-class oxygen transfer efficiency. APC revenues increased by approximately $1.8 million from last year's second quarter and we are confident that APC revenues for the year will exceed the $6.9 million reported for full year 2021 and this could happen as early as the end of the current third quarter. We continue to pursue a global sales pipeline of between $50 million to $75 million, consisting of a variety of projects and end markets. And we are tracking projects with a contract value of $5 million to $10 million that are expecting to be awarded before the end of the third quarter of this year or early in the fourth. FUEL CHEM revenues declined from last year's second quarter due largely to the expected loss of one customer due to permanent plant retirement and to unforeseen plant outages. We did receive some good news within this business segment regarding client attrition as one of…

Thank you, Vince and good morning, everyone. For the second quarter of 2022 consolidated revenues rose by 22% to $6.4 million from $5.2 million in last year's second quarter. The increase was driven by a $1.8 million increase in the APC segment revenue to $2.7 million from $1 million in last year's second quarter reflecting project execution timing and revenue generation from the new orders booked in 2021 and continued during the first six months of 2022. FUEL CHEM product line revenue declined to $3.6 million from $4.2 million in last year's second quarter, primarily due to the loss of one customer from permanent plant retirement and unforeseen plants and unit outages. Partially offsetting this decline was contribution from a new customer that commenced operations in the quarter. Consolidated gross margin was 42.1% compared to 49.5% of revenues in the second quarter of 2021, reflecting lower gross profit margins from both operating segments. APC gross margin was 34.2% compared to 48.6% in last year's second quarter due to the shift in product and project mix. While gross margin for the FUEL CHEM segment was 48% for the 2022 second quarter down slightly from 49.7% in last year's second quarter due to lower revenues combined with higher material freight and labor costs. Consolidated APC segment backlog at June 30, 2022 rose to $10.5 million from $9.1 million at December 31. Backlog at June 30, included $4.5 million of domestically delivered projects and $5.7 million of international delivered project backlog. We expect that $8.4 million of current consolidated backlog will be recognized in the next 12 months. SG&A expenses for the quarter fell to $2.9 million from $3 million in the second quarter of 2021. As a percentage of revenue, SG&A in the 2022 second quarter declined to 45% compared to 57%…

Thanks very much Ellen. Operator why don't we go ahead and open up the line for calls. Thank you.

[Operator Instructions] Our first question comes from Amit Dayal with H.C. Wainwright.

Thank you. Good morning, everyone.

Good morning.

Good morning.

Hi guys. You were giving some color on the FUEL CHEM revenues. I think you said $13 million to $15 million. But while you're talking about it there was some static on the line. Do you mind just going over that briefly please?

Yes. I have said that our range of revenue for FUEL CHEM for this year is going to be somewhere in the $13 million to $15 million range and that's for 2022. Now one of the other comments I said that is one of our longer term primary customers for FUEL CHEM that had been considering discontinuing the use of our program has basically told us that the benefits of our program are too significant for them not to use it. So at a minimum they're going to be running through 2023 and in all likelihood after that time frame. So as we sit here right now we're looking at that revenue range for FUEL CHEM at a minimum through 2023 and then we'll address that range as we move into 2023 and beyond.

Understood. Thank you for that. Typically, we see a little bit of a step-up in revenues from 2Q to 3Q. Do you think that will play out in 2022 as well?

Yes, I do. And in particular for the FUEL CHEM revenues. The third quarter of the year is typically our highest revenue generating quarter for our chemical technology business and we would expect the same thing for this year.

Understood. Thank you. You were highlighting the Mexico opportunity that relatively remains still in play. Could you remind us Vince how big that opportunity is for you?

Yes. The opportunity is large Amit. And we've talked about Mexico on a regular basis for a little while now as an opportunity for us. It's something that -- it's an opportunity that we can't control. The Mexican government makes -- needs to go ahead and take the decision to place requirements for pollution controls on these units that are indeed burning the heavy sulfur fuel oil, okay? But the opportunity is for -- and this is a range. It's for 20 to 25 units that we believe today are burning heavy sulfur fuel oil that could utilize our program down there. And in Mexico we operate under a licensing arrangement with our partner. And so we realize royalties revenues on our sales that occur down in Mexico. But just say one plant site that has four to five units if they're running our program on an annualized basis, we're talking about $3 million to $4 million in royalty revenues just from that one plant site. So the opportunity is significant and material. I mentioned it on the call because of that fact, but it is very difficult for us to predict when that might come to fruition.

Okay. Understood. This IRA legislation that's potentially going to pass, is there any benefits to you guys from legislation or funds available for the clean tech sector?

Yeah, yeah. We've taken a look at what's been proposed Amit, and obviously it still needs to be completely passed and put into play. And I think it's going to take a little bit of time before we fully understand all of the implications. Anything that ends up preserving the utilization of fossil fuels or enhancing the utilization of fossil fuels whether it be natural gas, coal, biomass or waste is potentially providing a longer term benefit for our technologies just as a general statement. So, I mean the bill is large and pervasive. It has a lot of incentives for furthering the development of renewables and the like but that will take time. What I will tell you is that what we're seeing in this country and in other parts of the world is that decisions that had been taken to close down certain facilities as of certain dates have been delayed. We've seen it in this country. There was just an article that we saw from Reuters come through yesterday whereby coal-fired utilities that had been scheduled to close are being delayed. And that's happening in Europe as well basically because of lack of power generation capability in certain regions of this country and in certain countries in different parts of the world. So, I think we are going to see cases whereby plants that are burning coal specifically are going to remain open longer. And as we've discussed many times our technologies work with natural gas as well. And anything that continues the utilization of natural gas for power generation or in support of industrial manufacturing processes provides opportunity or benefit for Fuel Tech. So, more to come as we better understand this piece of legislation. But as a general rule anything that could enhance the extension of life or the -- for any fossil fuel-running facility or the expansion of use of fossil fuels, particularly for natural gas, could be positive benefit for us.

Thank you. Understood. And then just last one on DGI, Vince, it looks like you are in the process of hiring some leadership to for commercialization-related efforts. What's sort of the expectation around resources now that you have to put into this in terms of dollar amounts going forward to sort of bring this to market from here?

Right. I think Amit I'll be better prepared to talk about that more specifically as we move to a point later in the year where as I noted we are taking the step now. Now, that we have our performance documented and attested to by experts in the field, it's given us the confidence now to take some further steps forward in terms of investment and moving DGI forward. Our first step in that aspect is going to be bringing on some water and wastewater treatment experienced leadership okay? That's Phase 1. Once this person comes on board, we'll then be better to assess how we're going to look to go to market, where we're going to go first and how fast we're actually going to look to move, okay? So, we still have some unknowns. The most positive point about my comments today is the fact that we feel strongly that this technology is going to be viable in markets based upon the performance testing that we have done. We will be publishing this white paper here shortly. It will happen before the end of the third quarter and we'll go out there with that information as well as some marketing documentation on DGI. And then we'll take steps from there. As you know we've been very measured with how we move forward with DGI. We did have some delays as it relates to the impact of COVID and our ability to move some steps forward. But now we're in a good position and we're ready to take some further steps forward here towards commercialization. So, let's revisit that question if you don't mind a little bit later in the year. And I'll have a little bit more to discuss once we are online for call it the third quarter conference call. We'll know more then.

Thank you. That’s all I have Vince. Appreciate it.

Okay. Thanks, Amit.

Our next question comes from the line of Peter Enderlin with MAZ Partners. Please proceed.

Hey, good morning, Pete.

Good morning, Vince and Ellen, very thorough review and I appreciate the discussion especially about coal generation and CSAPR and opportunities for FUEL CHEM and all that. I just have one sort of different approach or different question, which is have you collected all the accounts receivable from China yet? That's not the question but that's a lead-in to it.

Yes. Actually we appreciate the question. We've talked about this at Fuel Tech board level for the better part of the past 2.5 years since we initiated the wind-down of the operation. And I have to say that we've been more than pleased with the results that we've had with our collection efforts from China. Today, we are virtually complete with our efforts for collection. However, we still have approximately and I'll have Ellen verify this approximately $1 million left to repatriate from China back to our US bank accounts. And that will be done before the end of this year. Ellen, anything to comment?

Yes, that's correct.

So we've done very well there Pete with our wind-down. We do have a tranche of cash that needs to come back into the United States. That will be completed by the end of this year.

Well, given that time frame I'm just curious – and given also that you clearly experienced some what you might call intellectual property abuse or infringement in China, has the company ever talked to government agencies like for example FTC or the International Trade Commission or the World Trade Organization about what happened over there? And if so, I guess it would be good corporate citizenship but it would provide a data point for them. But I'm not sure whether there would be any benefit for you to do that. And obviously there would be some risks. So I guess the basic question is have you told anybody other than your accountants what happened?

Perhaps offline Pete, we can have a little bit of a deeper discussion. But generally speaking, we took all efforts that as a public company, we could take to go ahead and take action trying to preserve our IP rights in China. And we did have discussions with US governmental organizations as part of that process. So I'll keep it short and sweet like that. But yes we did.

Okay. Well thanks and – interesting results and keep up the progress. Thanks a lot.

Thank you, Pete. Take care. Have a good day.

You too. Bye.

There are no further questions at this time. And I'd like to turn the call back to Vince Arnone for any closing remarks.

Thank you, operator. I'd just like to thank everyone for their interest in Fuel Tech. To all of our shareholders thank you for your ownership and continued belief in the company. And to the Fuel Tech employee team, once again thanks for all of your support and efforts. And I look forward to some exciting results as we move towards the end of this year and into 2023. Thanks, everyone. Operator, thank you.

You're welcome. This concludes today's conference. Thank you for your participation and you may now disconnect.