Fuel Tech, Inc. (FTEK) CEO Vincent Arnone on Q3 2020 Results – Earnings Call Transcript

Fuel Tech, Inc. (NASDAQ:FTEK) Q3 2020 Earnings Conference Call November 11, 2020 10:00 AM ET Company Participants Devin Sullivan – SVP, The Equity Group Vincent Arnone – Chairman, President and CEO Ellen Albrecht – Principal Financial Officer Conference Call Participants Amit Dayal – H.C. Wainwright Pete Enderlin – MAZ Partners […]

Fuel Tech, Inc. (NASDAQ:FTEK) Q3 2020 Earnings Conference Call November 11, 2020 10:00 AM ET

Company Participants

Devin Sullivan – SVP, The Equity Group

Vincent Arnone – Chairman, President and CEO

Ellen Albrecht – Principal Financial Officer

Conference Call Participants

Amit Dayal – H.C. Wainwright

Pete Enderlin – MAZ Partners

George Gaspar – Private Investor

Operator

Greetings, and welcome to the Fuel Tech Third Quarter 2020 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.

It is now my pleasure to introduce your host, Devin Sullivan, Senior Vice President of The Equity Group. Thank you. You may begin.

Devin Sullivan

Thank you, Jessy. Good morning, everyone and thank you for joining us today for Fuel Tech’s third quarter 2020 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’s call will be Vince Arnone, Chairman, 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’d 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 and business prospects, 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, Chairman, President and CEO of Fuel Tech. Vince, please go ahead.

Vincent Arnone

Thank you, Devin. Good morning. And I want to thank everyone for joining us on the call today. I hope that you and your families are safe and in good health. And I’d like to thank all of our veterans for their service. I want to begin by thanking everyone at Fuel Tech for their hard work and adaptability in addressing the challenges of the COVID-19 pandemic. The effects of the pandemic continue to affect our operations, most notably at our Air Pollution Control business with respect to the timing of New Business Awards.

I want to emphasize however, that we remain intensely focused on providing support for client bid requests for custom engineered solutions that fulfill the unique needs of each of our customers and expect the final decisions to be made on multiple projects for an aggregate contract value of $10 million to $15 million by the end of the year. These awards are weighted towards the U.S. and Europe and primarily for our SCR, ULTRA and SNCR offerings.

Our FUEL CHEM segment produced strong results in the third quarter, reflecting contributions from the installation of our TIFI targeted in furnace injection technology on three new domestic coal-fired units for a repeat customer in the Northeast, as well as a return to more normalized run rates across our fleet following a period of slower unit activity in Q2 of 2020 due to the impact of the COVID-19 pandemic.

The commercial programs represented by these three new units will generate revenue when the units are dispatched to produce power in their geographic area. If these units are operational and utilizing the technology on a continual basis throughout the year, we would expect to see revenues of $500,000 to $750,000 per unit which would be welcome upside for 2021.

Anticipating the combined effect of these factors during our second quarter conference call, we stated that we expected third quarter revenue at FUEL CHEM to approximate revenue generated from the first six months of the year.

In fact, third quarter revenue with FUEL CHEM exceeded that benchmark by approximately $350,000. For the remainder of the year, we would expect to continue to see revenue at more normalized levels. We’re also continuing to work with our partner in Mexico to employ our solutions to help them mitigate harmful emissions derived from the burning of high sulfur fuel oil.

Our partner continues to engage with local officials in Mexico to advance this solution. The reduction in oil price has provided the impetus for the Mexican government to explore the burning of high sulfur fuel oil produced by Pemex, the state owned oil company, and this oil is currently being burned, however largely without pollution control measures.

In June, our partner solidified contract extensions with CFE, the state owned utility for the two sites at which we currently have our FUEL CHEM program installed.

Last month, we provided cost estimates to our partner for the expansion of our program to a site in Mexico that has five large power generation units, all that burn high sulfur fuel oil, this site is adjacent to a Pemex refinery. Our partner is now in the midst of discussions with CFE regarding this expansion opportunity, and we’ll watch the development of this activity closely as we move throughout the remainder of this year. We’re also continuing to pursue opportunities for additional FUEL CHEM applications at biomass in municipal solid waste units in Europe, in Southeast Asia via our partner, Amazon Papyrus for the pulp and paper industry, where we’re using our RECOVERY CHEM program. And in other Southeastern Asian countries where coal is the primary source of fuel, power demand and related pricing is high and where slagging and falling is an issue.

Notwithstanding the impact of COVID-19 on new project awards. SCR and ULTRA offer natural gas applications and industrial markets continue to provide our best business opportunity. This includes focusing on small to medium sized gas turbine combined cycle plant projects, such as the combined heat and power upgrades at universities, and large medical complexes, and new opportunities in the oil and gas segment.

We continue to support and partner with small turbine suppliers and suppliers of internal combustion engines for stationary deployment and are looking to exploit — excuse me looking to exploit the development of plug and play small engine SCR solutions for the distributed power generation market. We’re also monitoring activities at the state level where new environmental guidelines including compliance with the EPA Boiler MACT and regional haze rules may produce opportunities to install best available retrofits control technology on certain sources of emissions.

We continue to attract opportunities in Europe related to our ULTRA, SNCR, and SCR technologies, as well as those associated with breath, the best available reference technology guidelines that were issued in August of 2017 and with compliance timelines throughout 2020 and beyond. Longer-term, we’re tracking APC opportunities in India, Southeast Asia and South Africa. We’re continuing to advance our DGI, Dissolved Gas Infusion initiative against the headwinds of COVID-19.

Although COVID continues to delay the commencements of a product demonstration at a pulp and paper facility in the Midwest, that was planned for early in Q2 of this year. We have added three additional demonstration opportunities for our DGI Technology. Two for the municipal wastewater treatment market, and one with a new customer in the pulp and paper business.

The municipal wastewater opportunities resulted from our new license agreement with Kadance Corporation, which purchased the assets from the prior licensor of the technology, NanO2 LLC. Kadance Corporation is a company active in municipal wastewater treatment with a focus on delivering biological solutions to this market. And we’re grateful for the support and introductions they’re facilitating on our behalf.

Regarding timing, our DGI trailer is expected to arrive at a wastewater treatment facility in California next week for the first demonstration, which will last 30 to 45 days. And then we will likely move the trailer directly to either one of the other demonstration sites as we anticipate that the demonstrations could occur consecutively. I look forward to keeping everyone apprised of our progress on this initiative prospectively.

Turning to a summary of our financial results. As announced in September, we finalized a settlement with our insurance carrier in the amount of $2.6 million related to an outstanding claim that was previously reported in 2019.

In the quarter, we recorded a receivable for this amount from the insurance company, with the offset being a reduction in cost of sales for the APC business. The funds were actually received during the month of October. We remain diligent with respect to our cost structure and financial position relative to the opportunities offered by our current market environment. Our SG&A declined by $600,000 in the third quarter of 2020 versus the prior-year and we remain on track to achieve our full-year SG&A target of $13 million to $13.5 million.

Our cost reduction initiatives and the wind down of our China operation should allow us to profitably leverage top line growth with annual breakeven revenue of between $28 million to $32 million per year, depending on the product segment mix.

With respect to China, we have collected and repatriated in excess of $1 million in cash from our China customers as of September 30 of this year, against an estimated available total of $2 million to $2.5 million. We expect to repatriate additional funds later in this year and then again next year. We ended the quarter with $11.8 million in cash and cash equivalents. As I noted, during our first quarter conference call this year, on April 15, the company entered into an agreement with its lender pursuant to the Paycheck Protection Program under the Coronavirus Aid Relief and Economic Security Act, providing for a loan in the principal amount of approximately $1.6 million.

This funding was completed in the second quarter. As of September 30 of this year, the company has utilized the entire balance of the loan proceeds to fund its qualifying expenses. As a result, the company believes, it has met the eligibility criteria for forgiveness. We believe that our current cash position, combined with the cash flow expected to be generated from operations are adequate to fund planned operations of the company for the next 12 months. The cost reduction efforts that we executed as a company over these past few years have provided us with a platform for material improvement and our financial performance as we move through the remainder of 2020 and beyond and endeavor to capitalize on the business opportunities that I described previously.

The Fuel Tech team remains focused and committed to delivering long-term value for our shareholders. And with that said, I’ll turn the call over to Ellen, for some financial commentary. Please go ahead, Ellen.

Ellen Albrecht

Thank you, Vince and good morning everyone. As Vince mentioned, Fuel Tech received a $2.6 million insurance settlement related to an outstanding claim that was previously reported in 2019. The amount of the settlement reduced cost of sales for the APC segments by a like amount in the third quarter and our consolidated results for the period reflecting the positive impact of this settlement. Consolidated revenues during the quarter increased 26.4% to $8.2 million from $6.5 million in the last year’s third quarter reflecting higher revenue for both the APC and FUEL CHEM business segments.

International revenues comprised 20.6% of total revenues compared to 11.2% in last year’s prior-quarter. APC segment revenues improved $2.9 million from $1.8 million in the prior-year quarter, primarily the results of project timing.

APC backlog at the end of the quarter was $6.4 million, $6 million of which was domestic, projects included in backlog represent a variety of Fuel Tech APC technology offerings across multiple geographies. We anticipate approximately $4.1 million of the current backlog to be recognized over the next 12 months. FUEL CHEM segment revenues rose $5.3 million from $4.6 million in last year’s third quarter, primarily reflecting contributions from the installation of equipment on three new units during the third quarter of 2020 as well as the recovery to more normalized run rates across our fleet.

Consolidated gross margins for the 2020 third quarter were 72.4% of revenues, compared to 44.8% of revenues in last year’s third quarter, primarily reflecting the impact of the settlement on APC cost of sales. Excluding the settlement, consolidated gross margins for the third quarter were 40.7%, reflecting a decrease from prior year quarter due to project mix. APC gross margin was $3.2 million or 110% of revenue, reflecting the above reference settlement, compared to gross margin of $0.6 million or 34.1% in last year’s third quarter. Excluding the settlement, APC gross margin for Q3 of 2020 was 20.8%. FUEL CHEM gross margin rose to 51.7% from 49% in the third quarter of 2019 due to product mix largely attributed to the aforementioned installation of equipment of three new units.

As Vince mentioned, our cost control initiatives are ongoing, which continue to be reflected in our SG&A. SG&A for the third quarter declined by 16.7% to $3.2 million from $3.8 million in the comparable prior-year period. Factors driving this increase include cost savings realized by employee related expenses, along with reduction in certain administrative and consulting fees. We have achieved these reductions without sacrificing the level of support for our current customer base and our business development activities.

Net income from continuing operations was $2.4 million or $0.10 per share, compared to a net loss from continuing operations of $1.3 million or $0.05 per share in the 2019 third quarter, due in large part to the impact of the settlement in Q3 of 2020. Excluding the insurance settlement, we would have been slightly below breakeven on the quarter. R&D expenses declined slightly to $285,000 from $352,000 in last year’s third quarter, the components of our R&D spending included dedicated employee resources and depreciation and amortization of other intangible assets.

Adjusted EBITDA was $2.7 million in the 2020 third quarter compared to adjusted EBITDA loss of $0.8 million in the third quarter of 2019. Our balance sheet at September 30 2020 reflected the proceeds and obligation of $1.6 million from our SBA PPP loans and we had cash and cash equivalents of $11.8 million, including restricted cash of $2.4 million. Our working capital balance at quarter-end was $15.7 million which will continue to support the ongoing operating needs of the business. With respect to valuation, our book value per share was $0.96, our tangible book value per share was $0.85, and our working capital per share was $0.64 at September 30, 2020.

Given our cumulative net operating loss of $2.7 million at September 30, which covered several geographies, we expect that our income tax expense for 2020 will be near zero. Now I’d like to turn the call back over to Vince.

Vincent Arnone

Thank you, Ellen. Operator, I think it is time to open up the line for questions from the folks that have dialed in.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Amit Dayal with H.C. Wainwright. Please proceed with your question.

Amit Dayal

Good morning, thank you for taking my questions.

Vincent Arnone

Hello, Amit. Good morning.

Amit Dayal

Hi, Vince. How are you?

Vincent Arnone

Good. How are you?

Amit Dayal

Good. Thank you. So with respect to your opportunities in Mexico and potentially moves into the distributed generation space, et cetera. Do you expect these to become part of backlog again in 2021 or how should we view sort of the build-up towards these materializing into revenues for you guys?

Vincent Arnone

Okay, Amit can you please repeat the first part of your question, if you don’t mind. You are a little bit mold. So can you please try that one more time?

Amit Dayal

With respect to your opportunities in Mexico, and other opportunities you highlighted, including the distributed generation market, do you expect these to become part of backlog in 2021?

Vincent Arnone

Okay, so first of all, regarding Mexico, thank you for your question. Mexico is obviously, it’s a FUEL CHEM application. So we typically don’t consider our FUEL CHEM applications as building up as part of backlog because that’s our recurring revenue business application. So what we’re tracking on Mexico is we’re looking for our partner to work with CFE, the state owned utility to, for them to take the decision to actually move forward with the implementation of the FUEL CHEM program, as to one large site that I noted as part of my commentary that has five units, okay, if that does go forward, whether it be later in the year, this year or early next year, it would probably be another six to seven months before we would actually order equipment, have it located on site and installed at that site and then look to start up.

So at the soonest that application would start running in early in the second half of 2021, if everything goes smoothly, okay, so that’s how I see the Mexico application moving forward, but obviously will keep everyone apprised as to how that does go forward. Now related to some of the other opportunities that are more on the APC side, we’re expecting, as I noted to have contract award decisions made by four or five of our customers that we’re currently working with on or about the end of this year, sometime between now and the end of this year, early next year at the latest.

So we would expect to have those decisions made. And we’re hoping that a good portion of those contract awards come to Fuel Tech. So to the extent they’re finalized this year, they’ll be in backlog before the end of the year and rolling into 2021.

Amit Dayal

Understood, thank you for that.

Vincent Arnone

You’re welcome.

Amit Dayal

How much cash now remains in China, have you covered most of it with this $1 million received this quarter? How much is remaining in China?

Vincent Arnone

Yes, we still have right now the balance is between a $1 million and $1.5 million, in China basically, as of the end of the third quarter, we’re still collecting some additional cash there as well. So we would expect that in addition to the $1 million to $1.5 million that exists there right now, there’s another $0.5 million, [$2 million] that we’re going to collect. Okay, so we would then look to repatriate and again ballpark another $1.5 million plus to the U.S. later this year or into next year. So that that’s what we’re looking at in terms of bringing the additional cash back to the U.S.

Amit Dayal

Understood. And given that you had a pretty strong bounce in the third quarter, do you expect some momentum to continue in the fourth quarter?

Vincent Arnone

Relative to when you say strong bounce relative to what specifically, just from a financial performance perspective?

Amit Dayal

Relative to the second quarter, third quarter came in much stronger?

Vincent Arnone

Understood, so the third quarter obviously an improved quarter for us. If you extract I’d call it a one-time item, extracts the income that we reported from the insurance settlement in Q3, we end-up being just a little bit below breakeven. And so what does that mean? On the quarter, we generated revenues of around a little bit over $8 million. I had said that with what we’ve done with cost structure, that our breakeven annualized revenue number is somewhere in that $28 million to $32 million range and our performance here in Q3 actually proved that out.

Okay, so from a performance perspective, Q3 was an uptick in performance. Q4, as you know, our backlog on APC it’s declining, that needs to be replenished. And Q4 itself is typically a slower quarter from a FUEL CHEM revenue generation perspective, because we call it one of the shoulder periods of the year whereby, as we go from summer into fall, we have a lot of units, power generation units that will take their outages for maintenance, because of the more moderate temperatures. So we typically see a little bit of a downturn in FUEL CHEM revenue in Q4. So as I sit here, right now Amit, I don’t expect a recurrence in Q4 of the same performance level that we had in Q3, it will be a lesser performance level again without being completely specific.

Amit Dayal

Understood, no, I appreciate that color, Vince.

Vincent Arnone

You’re welcome.

Amit Dayal

I think those are my questions. Thank you. I’ll get back in queue.

Vincent Arnone

Thank you very much, Amit.

Operator

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

Pete Enderlin

Good morning, Vince and Ellen.

Ellen Albrecht

Good morning.

Vincent Arnone

Good morning, Pete.

Pete Enderlin

Following-up on the question about the performance in the third quarter versus the second quarter, significant up tick, one of the parts of relatively minor was that foreign revenues in the third quarter more than doubled after being down in the first half? Can you give us a little more color on what happened there?

Vincent Arnone

Right, we largely had some call it timing of project execution, if you will, on one specific European project, and a couple of other smaller ones that was working through call it a more intensive execution timeframe for that project work. And that happened in Q3. Our projects typically have phases Pete, as you know, we typically start out with engineering and design work. And then we move into a procurement phase prior to delivering equipment to a customer site.

It’s typically when we’re working through the procurement phase of equipment where we start to incur the majority of the costs relative to our Air Pollution Control projects. And it’s at that point in time where we start to recognize the majority of the revenues as well, as we use a percentage of completion method for accounting. So that’s what happens. That’s why we had an uptick in foreign revenues, specifically due to project execution timing on one project in particular in Europe.

Pete Enderlin

Okay, and then on the FUEL CHEM side, when you get a new utility to start using your technology, and you mentioned that you order some equipment to put in there, what’s the magnitude of the cost of that equipment? And how do you account for that?

Vincent Arnone

Right, the situation that I just described relative to the installation on three new coal fired units with a repeat customer, is a little bit of a unique situation as it relates to the FUEL CHEM business because what we did with this customer is we actually sold the customer both equipment and installation services for those three sites. And we’re recognizing revenue for that equipment and installation services on a percentage of completion basis.

Okay, we have not sold them chemical yet. Those units have not started up yet, and they won’t start up until late this year. And so it’s a little bit of a unique scenario for us in terms of how we’re handling the equipment and installation work for this customer. But it is a repeat customer of ours and we handled their other units in a similar way last year. So we did recognize.

Pete Enderlin

That means that the FUEL CHEM revenues actually include some equipment sales as those things happen?

Vincent Arnone

They do, that is correct.

Pete Enderlin

Okay.

Vincent Arnone

We had expected some of that activity for the third quarter of this year, just due to the planned timing of installation on those sites. And so the timing worked out to our expectation.

Pete Enderlin

And can you tell us what the magnitude of the equipment sale for one of those, let’s say, for all three would be?

Vincent Arnone

Well, one of the units for equipment and installation was between $300,000 and $400,000.

Pete Enderlin

Okay. And then excuse me, I have a sort of a high 50,000 foot level philosophical question, if you’ll indulge me a little bit. And that is, excuse me my voice is giving out here. Coal is going to be with us long-term. I mean, even some of the most aggressive forecasts and people who propound going to completely non-carbon based sources of energy acknowledged, we’re going to have to have coal, especially in some of the foreign markets for the long-term foreseeable future. And the same applies in a stronger sense to both natural gas and biomass.

So your APC technology and FUEL CHEM both talk about reducing NOx emissions, SOx emissions, particulate emissions, and CO2. And nobody would argue that those improvements would be great, they’re not controversial. And anything that can be done to improve the efficiency, the emissions of all these bad things over a long period of time would certainly be worth doing, all other things being equal not so the question is, why aren’t those technologies being universally applied in these large, large bases of installed and electrical utilities and many other facilities as well?

And I guess what I’m finally boiling down to is the question, is it mainly cost? Or is there more of a mindset that these utilities and other entities just don’t want to invest in what is basically a declining asset base? And maybe one that’s politically unpopular or incorrect? Sorry, to make such a long winded question. But the base of that is why doesn’t your stuff get much more universal acceptance and applicability?

Vincent Arnone

The answer to that, there’s a couple of questions that are in your commentary there, Pete. And I think, realistically, coal has been under pressure for, coal and fossil fuel has been under pressure for quite some time. And that will continue, okay. Relative to utilization to have pollution control technologies. I think if we polled the base loaded units, the base loaded fossil fuel units in this country, for what they have installed already for what I would call critical pollution controls, surrounding SOx and NOx and particulate, I’ll think we’d find that those units have all invested in those controls already as we sit here today, those larger base loaded units.

So as it relates to a coal universe, there really aren’t that many incremental units that would require Pollution Control Solutions on a prospective basis, most of what we’re looking at today for incremental businesses in the industrial market space, they’re actually upgrading operations to either increase their output, so it’s a new source of generations, or they’re looking to retrofit existing production capacity for improvement as well.

So, it’s a little bit of a combination, and are there some units coal-fired units out there that could still require some pollution control? Yes, there are, I’m sure there are, but then your comment about whether or not the investment is just a viable then comes into play because then the owner of those assets has to actually do an evaluation of the estimated useful life of that unit vis-à-vis the investments and is that going to be offset by a profit generation opportunity if those units are going to be dispatched, if at all.

So it’s a complex situation for utility owners just generally speaking, and but we’re seeing more and more of those owners, diversifying their portfolios to have the broad base of power generation capability, whether it be renewables, coal, fossil fuel or others. So, your question is applicable, Pete, but it’s a multipronged analysis that that needs to be evaluated.

Pete Enderlin

Yes, just to follow-up a little bit on that, if efficiency is not the same as reducing CO2, let’s say directly, but

how many of the existing coal-fired utilities in the United States just to pick one area, have FUEL CHEM technology installed at this point?

Vincent Arnone

Today, we’re probably actively running on it’s probably less than 15 in total, approximately 15 to 20 coal-fired units, somewhere in that range in terms of what were installed and running. Okay, is there a large base of opportunity? Of course, there are, of course there is. And the FUEL CHEM application is only applicable, if indeed the unit is utilizing a source of fuel, that it cannot burn efficiently within their units. And if they’re creating slagging and falling issues within that boiler, okay.

In most cases, that that unit needs to be running on a rather heavy capacity factor and needs to be running on a fairly consistent basis. And using a fuel that the unit itself was not designed for. So special conditions need to be in place for a boiler owner to be able to utilize our FUEL CHEM program. And believe me, we canvass all the time, some of the opportunities that we’ve had over this past couple of years. In fact, the one that that we were just discussing is it becomes applicable because the unit is going to be looking to burn, they’re changing their fuel source to burn a coal, that they’re going to have difficulty burning on those units. It’s a special situation at this point in time.

Pete Enderlin

Yes, okay. Well, that helps clarify that. Thank you very much.

Vincent Arnone

You’re welcome, Pete.

Operator

Thank you. Our next question comes from the line of George Gaspar, a Private Investor, please proceed with your question.

George Gaspar

Yes. Good morning, good morning, Vince and everyone.

Vincent Arnone

Hello, George.

George Gaspar

Very nice report. Vince, I’d like to get into this water treatment activity, this test that you implied that is going to be carried out in California next week is it?

Vincent Arnone

Correct, we’ll start at the end of next week timeframe.

George Gaspar

What kind of application is it that you’re going to be attempting to treat?

Vincent Arnone

It is a wastewater treatment application, it’s municipal wastewater. And we’re correct and what is actually happening here George is that, we and working with our partner Kadance are actually assisting them, technically with their demonstration at this site, because our demonstration trailer has five times the capacity to deliver oxygen than theirs does. So we’re working a little more closely with them these days to be able to assist them with development situations that they have in progress, which at the same time is going to enable us to become intimately more familiar with the capabilities of our equipment, and also more familiar with the process application specifically. So we’re working closely with Kadance on this. And but we’re using our demonstration trailer as the source of oxygen for the application, but it is a municipal wastewater treatment application.

George Gaspar

Okay. And then you indicated that you would be moving on to do another one after that?

Vincent Arnone

If the timing works out properly, we’re working with a pulp and paper customer. And this would be a Fuel Tech customer who has needs as well, they’re located in the State of Washington. And if the timing works well, we’ll likely keep the trailer on the West Coast and actually bring it up to this customer location. And again, if the timing works out well.

And then Kadance has another municipal application in California, that has a timeframe in the first quarter of next year as well, that we may be able to assist them with additionally. So we’re watching all three of these, these all materialized George, within this past month to two month timeframe, we’re excited to see the activity. As you know, we’ve been waiting to have the opportunity to bring our trailer out to demonstration sites to go ahead and whether it be assist Kadance or work with a customer directly on our own. We have been wanting to better understand document demonstrate everything that we can relative to the DGI, the trailers performance, its capability to deliver oxygen to support a solution. And these are great opportunities for us.

George Gaspar

Is the application, the first application here? Is this a large municipality in California or it’s let’s say sort of a regionalized outside of a large area of activity?

Vincent Arnone

I call it more regionalized, George without having call it specific figures in mind relative to how I would compare, call it application sizing. I would call it more regionalized though.

George Gaspar

Great, okay. All right, and then one question follow-up on the gas turbine side, the opportunity area as you’re looking at it going forward, I know you’ve been trying to expand in that horizon. How optimistic are you that you can roll this forward in a much broader scale in the next year?

Vincent Arnone

Yes, one of the opportunities that we’re working with right now on George is the deployment of actually engines for distributed power at this point in time and that that’s an opportunity that we’re hoping comes to which you’ll hear before the end of the year, but we’re evaluating our landscape of opportunity, whether they be gas turbines, gas engines, and anything along those sorts that we can be assisting that customer base with is something that we’re going to follow very, very closely.

Our primary objective is rebuilding the backlog today, George that’s priority number one and once we have that in hand, we’ll be in a better business situation overall.

George Gaspar

Well, good, it sounds like you really have some significant opportunities in the near-term here. And looks like you could be setting yourself up by the end of the year to be looking at a pretty positive outlook for 2021.

Vincent Arnone

We hope so, George, we’re doing everything on our part to be able to get there, yes. Thank you for your comments.

George Gaspar

Thank you.

Operator

Thank you, we have reached the end of our question-and-answer session. So I’d like to pass the floor back over to Mr. Arnone for any additional closing comments.

Vincent Arnone

Thank you, operator. Before we close, we did have one investor actually write in with a question and I’d like to answer that briefly. The question was related to our DGI demonstration opportunities and the question is it sounds like there are four possible DGI demonstration opportunities. Does Fuel Tech have any additional demonstration units under construction as of today, okay.

And so to answer that question, as we sit here today, we do not have another DGI trailer in hand that we’re working on constructing. But given the wave of opportunity that has come our way within this past two months, we’re going to look at what it takes to go ahead to have an additional demonstration trailer built for Fuel Tech’s utilization or to assist our partner Kadance as well. The lead time for getting that done is somewhere in the 12 to 14 week timeframe.

And from a cost structure basis, probably in the range of $100,000 or thereabouts. So that answers that question. Lastly, for everyone on the call, I want to thank everyone for joining the call today. Again, thanks for your interest in Fuel Tech. And again, thanks to all of our veterans for their support of our country. Everyone, have a great day, and we’ll talk again soon. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s teleconference and webcast. We thank you for your participation. And you may disconnect your lines at this time.

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