FUEL TECH, INC. 10-Q

Item 1. Financial Statements FUEL TECH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)(in thousands, except share and per share data) March 31, December 31, 2024 2023 ASSETS Current assets: Cash and cash equivalents $ 11,382 $ 17,578 Short-term investments 11,872 12,136 Accounts receivable, less current expected credit loss of $ 111 and $ 111 , respectively 7,104 6,729 Inventories, net 537 439 Prepaid expenses and other current assets 1,295 1,439 Total current assets 32,190 38,321 Property and equipment, net of accumulated depreciation of $ 18,763 and $ 18,703 , respectively 4,572 4,539 Goodwill 2,116 2,116 Other intangible assets, net of accumulated amortization of $ 483 and $ 468 , respectively 343 358 Right-of-use operating lease assets, net 582 609 Long-term investments 8,879 3,664 Other assets 764 781 Total assets $ 49,446 $ 50,388 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,852 $ 2,421 Accrued liabilities: Operating lease liabilities - current 105 81 Employee compensation 1,289 1,252 Other accrued liabilities 1,284 1,934 Total current liabilities 4,530 5,688 Operating lease liabilities - non-current 512 533 Deferred income taxes, net 172 172 Other liabilities 276 281 Total liabilities 5,490 6,674 Stockholders’ equity: Common stock, $ .01 par value, 40,000,000 shares authorized, 31,361,303 and 31,361,303 shares issued, and 30,385,297 and 30,385,297 shares outstanding, respectively 313 313 Additional paid-in capital 164,957 164,853 Accumulated deficit ( 117,248 ) ( 117,529 ) Accumulated other comprehensive loss ( 1,891 ) ( 1,748 ) Nil coupon perpetual loan notes 76 76 Treasury stock, at cost ( 2,251 ) ( 2,251 ) Total stockholders’ equity 43,956 43,714 Total liabilities and stockholders’ equity $ 49,446 $ 50,388 See notes to condensed consolidated financial statements. 1 Table of Contents FUEL TECH, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except share and per-share data) Three Months Ended March 31, 2024 2023 Revenues $ 4,957 $ 7,287 Costs and expenses: Cost of sales 2,928 4,482 Selling, general and administrative 3,345 3,245 Research and development 376 218 6,649 7,945 Operating loss ( 1,692 ) ( 658 ) Interest expense — ( 5 ) Interest income 311 339 Other income (expense), net 1,673 ( 90 ) Income (loss) before income taxes 292 ( 414 ) Income tax expense ( 11 ) — Net income (loss) $ 281 $ ( 414 ) Net income (loss) per common share: Basic net income (loss) per common share $ 0.01 $ ( 0.01 ) Diluted net income (loss) per common share $ 0.01 $ ( 0.01 ) Weighted-average number of common shares outstanding: Basic 30,385,000 30,296,000 Diluted 30,756,000 30,296,000 See notes to condensed consolidated financial statements. 2 Table of Contents FUEL TECH, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (in thousands) Three Months Ended March 31, 2024 2023 Net income (loss) $ 281 $ ( 414 ) Other comprehensive (loss) income: Foreign currency translation adjustments ( 143 ) 86 Comprehensive income (loss) $ 138 $ ( 328 ) See notes to condensed consolidated financial statements. 3 Table of Contents FUEL TECH, INC. CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)(in thousands of dollars or shares, as appropriate) The following summarizes the changes in total stockholders' equity for the three months ended March 31, 2023: Accumulated Nil Additional Other Coupon Common Stock Paid-in Accumulated Comprehensive Perpetual Treasury Shares Amount Capital Deficit Loss Loan Notes Stock Total Balance at December 31, 2022 30,296 $ 313 $ 164,422 $ ( 115,991 ) $ ( 1,728 ) $ 76 $ ( 2,251 ) $ 44,841 Net loss — — — ( 414 ) — — — ( 414 ) Foreign currency translation adjustments — — — — 86 — — 86 Stock compensation expense — — 89 — — — — 89 Balance at March 31, 2023 30,296 $ 313 $ 164,511 $ ( 116,405 ) $ ( 1,642 ) $ 76 $ ( 2,251 ) $ 44,602 The following summarizes the changes in total stockholders' equity for the three months ended March 31, 2024: Accumulated Nil Additional Other Coupon Common Stock Paid-in Accumulated Comprehensive Perpetual Treasury Shares Amount Capital Deficit Loss Loan Notes Stock Total Balance at December 31, 2023 30,385 $ 313 $ 164,853 $ ( 117,529 ) $ ( 1,748 ) $ 76 $ ( 2,251 ) $ 43,714 Net income — — — 281 — — — 281 Foreign currency translation adjustments — — — — ( 143 ) — — ( 143 ) Stock compensation expense — — 104 — — — — 104 Balance at March 31, 2024 30,385 $ 313 $ 164,957 $ ( 117,248 ) $ ( 1,891 ) $ 76 $ ( 2,251 ) $ 43,956 See notes to condensed consolidated financial statements. 4 Table of Contents FUEL TECH, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three Months Ended March 31, 2024 2023 Operating Activities Net income (loss) $ 281 $ ( 414 ) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation 80 79 Amortization 16 11 Non-cash interest income on held-to-maturity securities ( 9 ) ( 95 ) Stock-based compensation, net of forfeitures 104 89 Changes in operating assets and liabilities: Accounts receivable 1,250 990 Employee retention credit receivable ( 1,677 ) — Inventory ( 99 ) ( 116 ) Prepaid expenses, other current assets and other non-current assets 151 51 Accounts payable ( 563 ) 934 Accrued liabilities and other non-current liabilities ( 609 ) ( 519 ) Net cash (used in) provided by operating activities ( 1,075 ) 1,010 Investing Activities Purchases of equipment and patents ( 114 ) ( 30 ) Purchases of debt securities ( 7,641 ) ( 9,685 ) Maturities of debt securities 2,750 1,000 Net cash used in investing activities ( 5,005 ) ( 8,715 ) Financing Activities Net cash provided by financing activities — — Effect of exchange rate fluctuations on cash ( 116 ) 75 Net decrease in cash and cash equivalents ( 6,196 ) ( 7,630 ) Cash and cash equivalents at beginning of period 17,578 23,328 Cash and cash equivalents at end of period $ 11,382 $ 15,698 See notes to condensed consolidated financial statements. 5 Table of Contents FUEL TECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2024 (Unaudited) (in thousands, except share and per-share data) 1. General Organization Fuel Tech, Inc. and subsidiaries ("Fuel Tech", the "Company", "we", "us" or "our") develops and provides proprietary technologies for air pollution control, process optimization, water treatment, and advanced engineering services. These technologies enable customers to operate in a cost-effective and environmentally sustainable manner. The Company’s nitrogen oxide (NOx) reduction technologies reduce nitrogen oxide emissions from boilers, furnaces, and other stationary combustion sources. To reduce NOx emissions, our technologies utilize advanced combustion modification techniques and post-combustion NOx control approaches including non-catalytic, catalytic, and combined systems. The Company also provides solutions for the mitigation of particulate matter, including particulate control with electrostatic precipitator products and services, and using flue gas conditioning systems which modify the ash properties of particulate for improved collection efficiency. The Company’s FUEL CHEM® technology improves the efficiency, reliability, fuel flexibility, boiler heat rate, and environmental status of combustion units by controlling slagging, fouling, corrosion, and opacity. Water treatment technologies include DGI® Dissolved Gas Infusion Systems which utilize a patented gas-infusing saturator vessel and a patent-pending channel injector to deliver supersaturated oxygen-water solutions and potentially other gas-liquid combinations to target process applications or environmental issues within the municipal and industrial water sectors. The infusion process has a variety of potential applications in the water and wastewater treatment sector, including aquaculture, agriculture/horticulture, pulp & paper, tanneries, landfill leachate, irrigation, treatment of natural waters, wastewater odor management as well as supplying oxygen or other gases for biochemical reactions and pH adjustment. Many of Fuel Tech’s products and services rely heavily on the Company’s computational fluid dynamics modeling capabilities, which are enhanced by internally developed, high-end visualization software. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10 -Q and Article 10 of Regulation S- X of the Exchange Act. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for the fair statement of Fuel Tech's financial position, cash flows, and results of operations for the periods presented. All significant intercompany transactions and balances have been eliminated. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the full year ending December 31, 2024 . For further information, refer to the audited consolidated financial statements and footnotes thereto included in Fuel Tech’s Annual Report on Form 10 -K for the year ended December 31, 2023 as filed with the Securities and Exchange Commission. CARES Act On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") to provide certain relief as a result of the COVID- 19 pandemic. The CARES Act provides tax relief, along with other stimulus measures, including a provision for an Employee Retention Credit (“ERC”), which allows for employers to claim a refundable tax credit against the employer share of Social Security tax for qualifying periods in 2020 and 2021. Under the provisions of the CARES Act, the Company is eligible for a refundable employee retention credit subject to certain criteria. As there is no authoritative guidance under U.S. GAAP on accounting for government assistance to for-profit business entities, we account for the ERC by analogy to International Accounting Standard ("IAS") 20, Accounting for Government Grants and Disclosure of Government Assistance. In accordance with IAS 20, management determined it has reasonable assurance for receipt of the ERC and recorded the ERC benefit of $ 1,677 as other income on the Statement of Operations and as a component of Accounts Receivable on the Balance Sheet as of March 31, 2024. 2. Summary of Significant Accounting Policies Investments In 2022, the Board of Directors approved a plan to invest up to $ 20,000 of excess capital in debt securities, or held in money market funds until such investments can be made, with BMO Harris Bank N.A (BMO Harris). A portion of the funds invested are restricted as collateral under the Investment Collateral Security agreement (see Note 10 ). At March 31, 2024 , the amount of funds collateralized under the Investment Collateral Security agreement is $ 1,332 relating to existing standby letters of credit that is comprised of $ 1,134 with varying maturity dates that expire no later than March 31, 2025 and $ 198 with the latest maturity date no later than November 30, 2025. We consider all highly liquid debt investments with original maturities from the date of purchase of three months or less as cash equivalents. Cash equivalents include investments in money market funds. Carrying value of cash equivalents approximates fair value due to the maturities of three months or less. 6 Table of Contents Our investments in debt securities consist of United States (US) Treasury securities, including Notes, Bonds, and Bills, and US Government Agency securities, which are designated as held-to-maturity (HTM) and stated at amortized cost. The Company has the positive intent and ability to hold these investments to maturity and does not expect to sell any debt securities before maturity to settle an obligation under the Investment Collateral Security agreement. The maturities of our HTM investments range from three to thirty-six months. HTM debt investments with original maturities of approximately three months or less from the date of purchase are classified within cash and cash equivalents. HTM debt investments with original maturities at the date of purchase greater than approximately three months and remaining maturities of less than one year are classified as short-term investments. HTM debt investments with remaining maturities beyond one year are classified as long-term investments. Interest income, including amortization of premium and accretion of discount, is included on the Condensed Consolidated Statements of Operations in Interest income under the effective yield method. Accrued interest is included in Prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. Due to the creditworthiness of the entities issuing these securities, there is no impairment recorded related to the unrealized losses. The following table provides the amortized cost, gross unrealized gains and losses, and fair value of our HTM debt securities: As of Held-to-maturity debt securities: March 31, 2024 December 31, 2023 Amortized cost $ 20,751 $ 15,800 Gross unrecognized gains 6 — Gross unrecognized losses ( 92 ) ( 86 ) Fair value $ 20,665 $ 15,714 The following table provides the amortized cost and fair value of debt securities by maturities at March 31, 2024 : Amortized Cost Fair Value Within one year $ 11,872 $ 11,824 After one year through two years 8,879 8,841 Total $ 20,751 $ 20,665 Inventories Inventories consist primarily of equipment constructed for resale and spare parts and are stated at the lower of cost or net realizable value, using the weighted-average cost method. At March 31, 2024 and December 31, 2023 , inventory included equipment constructed for resale of $ 207 and $ 207 , respectively, and spare parts, net of reserves, of $ 330 and $ 232 , respectively. Usage is recorded in cost of sales in the period that parts were issued to a project, used to service equipment, or sold to customers. Equipment constructed for resale that is in process is recorded in Other assets. In process equipment for inventory recorded as Other assets was $ 607 and $ 618 as of March 31, 2024 and December 31, 2023 , respectively. In ventories are periodically evaluated to identify obsolete or otherwise impaired parts and are written off when management determines usage is not probable. The Company estimates the balance of excess and obsolete inventory by analyzing inventory by age using last used and original purchase date and existing sales pipeline for which the inventory could be used. Allowance for Credit Losses In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016 - 13, Financial Instruments - Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments, and in November 2019, the FASB issued ASU 2019 - 10, Financial Instruments - Credit Losses (Topic 326 ), Derivatives and Hedging (Topic 815 ), and Leases (Topic 842 ). This guidance requires the measurement of all expected losses based on historical experience, current conditions and reasonable and supportable forecasts. For trade receivables and other financial instruments, we are required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The Company adopted these ASUs on January 1, 2023 using the prospective method. Application of the amendments did not require a cumulative-effect adjustment to retained earnings as of the effective date and did not have a material impact on our financial statements. For the general risk categories, the Company uses historical losses over a fixed period, excluding certain write-off activity that was not considered a credit loss event, to determine the historical credit loss. Historical loss rates are then adjusted to consider current economic conditions and past, current, and future events and circumstances when determining expected credit losses. Investments in financial assets issued by US Government and Government Agency are considered as having zero expected credit losses and are excluded from the allowance for credit loss calculation. The following table provides the roll forward of the allowance for credit losses: At January 1, 2023 $ 110 Provision charged to expense 24 (Write-offs) / Recoveries ( 23 ) At December 31, 2023 $ 111 Provision charged to expense — (Write-offs) / Recoveries — At March 31, 2024 $ 111 7 Table of Contents 3. Revenue Disaggregated Revenue by Product Technology The following table presents our revenues disaggregated by product technology: Three Months Ended March 31, 2024 2023 Air Pollution Control Technology solutions $ 1,664 $ 2,982 Spare parts 199 174 Ancillary revenue 455 403 Total Air Pollution Control technology revenues 2,318 3,559 FUEL CHEM FUEL CHEM technology solutions 2,639 3,728 Total Revenues $ 4,957 $ 7,287 Disaggregated Revenue by Geography The following table presents our revenues disaggregated by geography, based on t he location of the end-user: Three Months Ended March 31, 2024 2023 United States $ 3,595 $ 5,981 Foreign Revenues Latin America 315 — Europe 856 579 Asia 191 727 Total Foreign Revenues 1,362 1,306 Total Revenues $ 4,957 $ 7,287 Timing of Revenue Recognition The following table presents the timing of our revenue recognition: Three Months Ended March 31, 2024 2023 Products transferred at a point in time $ 3,293 $ 4,305 Products and services transferred over time 1,664 2,982 Total Revenues $ 4,957 $ 7,287 Contract Balances The timing of revenue recognition, billings, and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Condensed Consolidated Balance Sheets. In our Air Pollution Control (APC) technology segment, amounts are billed as work progresses in accordance with agreed-upon contractual terms. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. For the FUEL CHEM technology segment, deliveries made in the current period but billed in subsequent periods are also considered contract assets. These assets are reported on the Condensed Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period. At March 31, 2024 , December 31, 2023 , and December 31, 2022, contract assets for APC technology projects were approximately $ 1,507 , $ 2,285 , and $ 3,082 , respectively. There were no contract assets for the FUEL CHEM technology segment as of March 31, 2024 , December 31, 2023 , and December 31, 2022. The Company will periodically bill in advance of costs incurred before revenue is recognized, resulting in contract liabilities. These liabilities are reported on the Condensed Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period. Contract liabilities were $ 761 , $ 1,279 , and $ 372 at March 31, 2024 , December 31, 2023 , and December 31, 2022, respectively, and are included in other accrued liabilities on the Condensed Consolidated Balance Sheets. 8 Table of Contents Changes in the contract asset and liability balances during the three -month period ended March 31, 2024 were not materially impacted by any other items other than amounts billed and revenue recognized as described previously. Revenue recognized that was included in the contract liability balance at the beginning of the period was $ 1,121 for the three months ended March 31, 2024 and $ 359 for the three months ended March 31, 2023 , which represented primarily revenue from progress towards completion of our APC technology contracts. As of March 31, 2024 and December 31, 2023 , we had no construction contracts in progress that were identified as a loss contract. Remaining Performance Obligations Remaining performance obligations represents the transaction price of APC technology booked orders for which work has not been performed. As of March 31, 2024 , the aggregate amount of the transaction price allocated to remaining performance obligations was $ 6,181 . The Company expects to recognize revenue on approximately $ 6,019 of the remaining performance obligations over the next 12 months with the remaining recognized thereafter. Accounts Receivable The components of accounts receivable are as follows: As of March 31, 2024 December 31, 2023 Trade receivables $ 3,769 $ 4,300 Unbilled receivables 1,507 2,285 Receivable for employee retention credit 1,677 — Other short-term receivables 262 255 Allowance for credit losses ( 111 ) ( 111 ) Total accounts receivable $ 7,104 $ 6,729 4. Restructuring Activities On January 18, 2019, the Company announced a planned suspension of its APC business operation in China. This action was part of Fuel Tech’s ongoing operational improvement initiatives designed to prioritize resource allocation, reduce costs, and drive profitability for the Company on a global basis. The transition associated with the suspension of the APC business which has taken place through March 31, 2024 includes staff rationalization and reduction, supplier and partner engagement, and the monetization of certain assets. The remaining transition activities include the execution of the activities to satisfy the requirements for the remaining APC projects in China (with a backlog totaling approximately $ 3 ) and those related to subsidiary closure. The following table presents our revenues and net loss for the three months ended March 31, 2024 and 2023 in China as follows: Three Months Ended March 31, 2024 2023 Total revenues $ — $ — Net loss ( 13 ) ( 20 ) The following table presents net assets in China as of March 31, 2024 and December 31, 2023 : As of March 31, 2024 December 31, 2023 Total assets $ 824 $ 846 Total liabilities 74 67 Total net assets $ 750 $ 779 Total assets primarily consist of cash and other receivables. Total liabilities consist of accounts payable and certain accrued liabilities. 9 Table of Contents 5. Accumulated Other Comprehensive Loss The changes in accumulated other comprehensive loss by component were as follows: Three Months Ended March 31, 2024 2023 Foreign currency translation Balance at beginning of period $ ( 1,748 ) $ ( 1,728 ) Other comprehensive (loss) income: Foreign currency translation adjustments (1) ( 143 ) 86 Total accumulated other comprehensive loss $ ( 1,891 ) $ ( 1,642 ) ( 1 ) In all periods presented, there were no tax impacts related to rate changes and no amounts were reclassified to earnings. 6. Treasury Stock Common stock held in treasury totaled 976,006 with a cost of $ 2,251 at March 31, 2024 and December 31, 2023 . These shares were withheld from employees to settle personal tax withholding obligations that arose as a result of restricted stock units that vested in a previous period. 7. Earnings per Share Basic earnings per share excludes the dilutive effects of stock options, restricted stock units (RSUs), warrants, and the nil coupon non-redeemable convertible unsecured loan notes. Diluted earnings per share includes the dilutive effect of the nil coupon non-redeemable convertible unsecured loan notes, RSUs, warrants, and unexercised in-the-money stock options, except in periods of net loss where the effect of these instruments is anti-dilutive. Out-of-money stock options and warrants are excluded from diluted earnings per share because they are unlikely to be exercised and would be anti- dilutive if they were exercised. For the three months ended March 31, 2024 , basic earnings per share has been adjusted to include dilutive options and RSU's. For the three months ended March 31, 2023 , basic earnings per share is equal to diluted earnings per share because all outstanding stock awards, warrants, and convertible loan notes are considered anti-dilutive during periods of net loss. The following table sets forth the weighted-average shares used in calculating the earnings per share for the three months ended March 31, 2024 and 2023 : Three Months Ended March 31, 2024 2023 Basic weighted-average shares 30,385,000 30,296,000 Unexercised options and unvested RSUs 371,000 — Diluted weighted-average shares 30,756,000 30,296,000 For the three months ended March 31, 2024 and 2023 , Fuel Tech had weighted-average outstanding equity awards of 263,775 and 315,400 , respectively, and warrants of 2,850,000 in both periods, which were antidilutive or represent out-of-the-money options for the purpose of the calculation of diluted earnings per share. For the three months ended March 31, 2023 , Fuel Tech had incremental equity awards of 266,000 that were excluded from the computation of diluted earnings per share as the inclusion of such would have been anti-dilutive due to a net loss in the period. These equity awards could potentially dilute basic earnings per share in future years. 10 Table of Contents 8. Stock-Based Compensation Under our stock-based employee compensation plan, referred to as the Fuel Tech, Inc. 2014 Long-Term Incentive Plan (Incentive Plan), awards may be granted to participants in the form of Non-Qualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, RSUs, Performance Awards, Bonuses or other forms of share-based or non-share-based awards or combinations thereof. Participants in the Incentive Plan may be our directors, officers, employees, consultants, or advisors (except consultants or advisors in capital-raising transactions) as the directors determine are key to the success of our business. There are a maximum of 5,742,376 shares that may be issued or reserved for awards to participants under the Incentive Plan. As of March 31, 2024 , Fuel Tech had 1,106,450 shares available for issuance under the Incentive Plan. We did not record any excess tax benefits within income tax expense for the three months ended March 31, 2024 and 2023 . Given the Company has a full valuation allowance on its deferred tax assets, there were no excess tax benefits to record for the three months ended March 31, 2024 and 2023 . In addition, we account for forfeitures of awards based on an estimate of the number of awards expected to be forfeited and adjust the estimate when it is no longer probable that the employee will fulfill the service condition. Stock-based compensation is included in selling, general, and administrative costs in our Condensed Consolidated Statements of Operations. The components of stock-based compensation for the three months ended March 31, 2024 and 2023 were as follows: Three Months Ended March 31, 2024 2023 Stock options and restricted stock units, net of forfeitures $ 104 $ 89 After-tax effect of stock-based compensation $ 104 $ 89 Stock Options Stock options granted to employees under the Incentive Plans have a 10 -year life and they vest as follows: 50 % after the second anniversary of the award date, 25 % after the third anniversary, and the final 25 % after the fourth anniversary of the award date. Fuel Tech calculates stock compensation expense for employee option awards based on the grant date fair value of the award, less expected annual forfeitures, and recognizes expense on a straight-line basis over the four -year service period of the award. Stock options granted to members of our board of directors vest immediately. Stock compensation for these awards is based on the grant date fair value of the award and is recognized in expense immediately. Fuel Tech uses the Black-Scholes option pricing model to estimate the grant date fair value of employee stock options. The principal variable assumptions utilized in valuing options and the methodology for estimating such model inputs include: ( 1 ) risk-free interest rate – an estimate based on the yield of zero–coupon treasury securities with a maturity equal to the expected life of the option; ( 2 ) expected volatility – an estimate based on the historical volatility of Fuel Tech’s Common Stock for a period equal to the expected life of the option; and ( 3 ) expected life of the option – an estimate based on historical experience including the effect of employee terminations. Stock option activity for Fuel Tech’s Incentive Plans for the three months ended March 31, 2024 was as follows: Weighted- Average Number Weighted- Remaining Aggregate of Average Contractual Intrinsic Options Exercise Price Term Value Outstanding on January 1, 2024 270,500 $ 3.09 Granted — — Exercised — — Expired or forfeited — — Outstanding on March 31, 2024 270,500 $ 3.09 1.31 $ 11 Exercisable on March 31, 2024 270,500 $ 3.09 1.31 $ 11 As of March 31, 2024 , there was no unrecognized compensation cost related to non-vested stock options granted under the Incentive Plans. 11 Table of Contents Restricted Stock Units RSUs granted to employees vest over time based on continued service (typically vesting over a period between two to four ye ars), and RSUs granted to directors vest after a one year vesting period based on continued service. Su ch time-vested RSUs are valued at the date of grant based on the closing price of the Common Shares on the grant date. Compensation cost, adjusted for estimated forfeitures, is amortized on a straight-line basis over the requisite service perio d. In addition to the time vested RSUs, the Company entered into an Executive Performance RSU Award Agreement (the “Agreement”) with certain officers, including its President and Chief Executive Officer, Chief Financial Officer and Senior Vice President, Sales (each a “2024 Participating Executive”) pursuant to which each 2024 Participating Executive will have the opportunity to earn a specified amount of restricted stock units (RSUs) based on Fuel Tech’s performance in 2024. The target amount of RSUs for each of four possible RSU award components is set for each Participating Executive for 2024. The amount of actual RSU awards to be issued is contingent on performance by the Participating Executive and the Company in the performance areas and for the measurement periods set forth in the Agreement as determined by the Company. The Agreement provides for four possible RSU awards: “Look-Back RSUs,” “Total Revenue RSUs,” “New Business Growth RSUs,” and “Operating Income Growth” RSUs. If the Look-Back RSU’s are awarded, these RSUs will follow a vesting schedule that provides for vesting of one - third of the granted Look-Back RSUs after the first anniversary of the grant determination date, one - third after the second anniversary date and one - third after the third anniversary date. If the Total Revenue RSUs, New Business Growth RSUs, or Operating Income Growth RSUs targets are achieved, these RSU’s will follow a vesting schedule whereby 100 % of the granted RSUs will vest one year following the grant determination date. All RSUs are valued at the date of grant based on the closing price of the Company’s common stock on the grant date. At March 31, 2024 , there is $ 1,135 of unrecognized compensation cost related to all non-vested share-based compensation arrangements granted under the Incentive Plan. That cost is expected to be recognized over the remaining requisite service period of 1.81 yea rs. A summary of restricted stock unit activity for the three months ended March 31, 2024 is as follows: Weighted Average Grant Date Shares Fair Value Unvested restricted stock units at January 1, 2024 1,762,248 $ 1.29 Granted 106,000 1.10 Forfeited ( 425,100 ) 1.26 Unvested restricted stock units at March 31, 2024 1,443,148 $ 1.20 The fair value of restricted stock that vested during the three -month period ended March 31, 2024 was $ 0 . Deferred Directors Fees In addition to the Incentive Plans, Fuel Tech has a Deferred Compensation Plan for Directors (Deferred Plan). Under the terms of the Deferred Plan, Directors can elect to defer Directors’ fees for shares of Fuel Tech Common Stock that are issuable at a future date as defined in the agreement. In accordance with Accounting Standards Codification (ASC) 718, Fuel Tech accounts for these awards as equity awards as opposed to liability awards. During the three -month periods ended March 31, 2024 and 2023 , Fuel Tech recorded no stock-based compensation expense under the Deferred Plan. 9. Warrants The following table summarizes information about warrants outstanding and exercisable at March 31, 2024 : Exercise Price Number Outstanding/Exercisable Weighted Average Remaining Life in Years Weighted Average Exercise Price $5.10 2,500,000 2.37 $ 5.10 $6.45 350,000 2.37 $ 6.45 2,850,000 12 Table of Contents 10. Debt Financing On June 30, 2022, the Company entered into an Investment Collateral Security agreement to use for the sole purpose of issuing standby letters of credit that replaces the former Cash Collateral agreement with BMO Harris. The Investment Collateral Security agreement requires us to pledge our investments as collateral for 150 % of the aggregate face amount of outstanding standby letters of credit. The Company pays 250 basis points on the face values of outstanding letters of credit. There are no financial covenants set forth in the Investment Collateral Security agreement. At March 31, 2024 , the Company had outstanding standby letters of credit totaling approximately $ 888 under the Investment Collateral Security agreement. At March 31, 2024 , the investments held as collateral totaled $ 1,332 . Fuel Tech is committed to reimbursing the issuing bank for any payments made by the bank under these instruments. 11. Business Segment and Geographic Financial Data Business Segment Financial Data We segregate our financial results into two reportable segments representing two broad technology segments as follows: • T he Air Pollution Control technology segment includes technologies to reduce NOx emissions in flue gas generated by the firing of natural gas or coal from boilers, incinerators, furnaces, and other stationary combustion sources. These include Over-Fire Air systems, NOxOUT ® and HERT™ Selective Non-Catalytic Reduction systems, and Selective Catalytic Reduction (SCR) systems. Our SCR systems can also include Ammonia Injection Grid, and Graduated Straightening Grid GSG™ systems to provide high NOx reductions at significantly lower capital and operating costs than conventional SCR systems. ULTRA ® technology creates ammonia at a plant site using safe urea for use with any SCR application. Electrostatic Precipitator technologies make use of electrostatic precipitator products and services to reduce particulate matter. Flue Gas Conditioning systems are chemical injection systems offered in markets outside the U.S. and Canada to enhance electrostatic precipitator and fabric filter performance in controlling particulate emissions. • The FUEL CHEM ® technology segment, which uses chemical processes in combination with advanced Computational Fluid Dynamics and Chemical Kinetics Modeling boiler modeling, for the control of slagging, fouling, corrosion, opacity and other sulfur trioxide-related issues in furnaces and boilers through the addition of chemicals into the furnace using TIFI ® Targeted In-Furnace Injection™ technology. The “Other” classification includes those profit and loss items not allocated to either reportable segment. There are no inter-segment sales that require elimination. We evaluate performance and allocate resources based on reviewing gross margin by reportable segment. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies (Note 1 in our annual report on Form 10 -K). We do not review assets by reportable segment, but rather, in aggregate for the Company as a whole. 13 Table of Contents Information about reporting segment net sales and gross margin from operations is provided below: Air Pollution FUEL CHEM Three months ended March 31, 2024 Control Segment Segment Other Total Revenues from external customers $ 2,318 $ 2,639 $ — $ 4,957 Cost of sales ( 1,428 ) ( 1,500 ) — ( 2,928 ) Gross margin 890 1,139 — 2,029 Selling, general and administrative — — ( 3,345 ) ( 3,345 ) Research and development — — ( 376 ) ( 376 ) Operating income (loss) from operations $ 890 $ 1,139 $ ( 3,721 ) $ ( 1,692 ) Air Pollution FUEL CHEM Three months ended March 31, 2023 Control Segment Segment Other Total Revenues from external customers $ 3,559 $ 3,728 $ — $ 7,287 Cost of sales ( 2,594 ) ( 1,888 ) — ( 4,482 ) Gross margin 965 1,840 — 2,805 Selling, general and administrative — — ( 3,245 ) ( 3,245 ) Research and development — — ( 218 ) ( 218 ) Operating income (loss) from operations $ 965 $ 1,840 $ ( 3,463 ) $ ( 658 ) Geographic Segment Financial Data Information concerning our operations by geographic area is provided below. Revenues are attributed to countries based on the location of the end-user. Assets are those directly associated with operations of the geographic area. Three Months Ended March 31, 2024 2023 Revenues: United States $ 3,595 $ 5,981 Foreign 1,362 1,306 $ 4,957 $ 7,287 March 31, December 31, 2024 2023 Assets: United States $ 45,744 $ 46,487 Foreign 3,702 3,901 $ 49,446 $ 50,388 14 Table of Contents 12. Accrued Liabilities The components of other accrued liabilities are as follows: As of March 31, 2024 December 31, 2023 Contract liabilities (Note 3) $ 761 $ 1,279 Warranty reserve (Note 13) 159 159 Deferred revenue 100 103 Accrued professional fees — 101 Other accrued liabilities 264 292 Total other accrued liabilities $ 1,284 $ 1,934 13. Commitments and Contingencies Fuel Tech is subject to various claims and contingencies related to, among other things, workers compensation, general liability (including product liability), and lawsuits. The Company records liabilities where a contingent loss is probable and can be reasonably estimated. If the reasonable estimate of a probable loss is a range, the Company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. The Company discloses a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that a material loss may have been incurred. From time to time we are involved in litigation with respect to matters arising from the ordinary conduct of our business. In the opinion of management, based upon presently available information, either adequate provision for anticipated costs have been accrued or the ultimate anticipated costs will not materially affect our consolidated financial position, results of operations, or cash flows. We do not believe we have any pending loss contingencies that are probable or reasonably possible of having a material impact on our consolidated financial position, results of operations or cash flows. Fuel Tech issues a standard product warranty with the sale of its products to customers. Our recognition of warranty liability is based primarily on analyses of warranty claims experienced in the preceding years as the nature of our historical product sales for which we offer a warranty are substantially unchanged. This approach provides an aggregate warranty accrual that is historically aligned with actual warranty claims experienced. There was no change in the warranty liability balance included in the other accrued liabilities line of the Condensed Consolidated Balance Sheets during the three months ended March 31, 2024 and 2023 . The warranty liability balance was $ 159 at March 31, 2024 and December 31, 2023 . 14. Income Taxes The Company’s effective tax rate is approximately 3.8 % and 0.0 % for the three -month periods ended March 31, 2024 and 2023 , respectively. The Company's effective tax rate differs from the statutory federal tax rate of 21 % for the three -month periods ended March 31, 2024 and 2023 primarily due to a full valuation allowance recorded on our United States, China and Italy deferred tax assets since we cannot anticipate when or if we will have sufficient taxable income to utilize the deferred tax assets in the future. Further, our effective tax rate differs from the statutory federal tax rate due to state taxes, differences between U.S. and foreign tax rates, foreign losses incurred with no related tax benefit, non-deductible commissions, and non-deductible meals and entertainment expenses for the three -month periods ended March 31, 2024 and 2023 . Fuel Tech had no unrecognized tax benefits as of March 31, 2024 and December 31, 2023 . 15 Table of Contents FUEL TECH, INC.