FUEL TECH, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview In the second quarter of 2024, the Company generated increased revenues in both product segments as compared to the same period in 2023. The Company continued to successfully execute on APC segment projects despite customer driven delays in project execution. The Company experienced recovery in the FUEL CHEM segment as dormant accounts returned to service as a result of outage completions and increased dispatch.. We continue to invest in development of new technologies to expand our product offerings into the water and waste-water treatment market. Our capital resources are sufficient for our immediate and longer-term needs, and we continue to enjoy the services and support of a dedicated workforce. We expect that our cost control efforts will maintain our existing levels of operating expenditures and that new business opportunities will lead to an improved market outlook. Key Operating Factors Our FUEL CHEM segment experienced an increase in revenue and segment operating profits in the current quarter as compared to 2023. The FUEL CHEM segment was positively impac ted by dispatch related increases in operational demand from our client base and to the addition of new business in the current quarter as compared to 2023. Our Air Pollution Control (APC) business experienced an increase in revenue in the current quarter as compared to 2023, primarily due to progress in project execution. We are encouraged by the depth of our business development activities, which reflects an increased focus on global emissions protocols across a variety of fuel sources. We continue to experience a challenging operational environment resulting from customers delaying the timing of purchasing decisions. Our Consolidated APC backlog at June 30, 2024 was $ 4,250 and our global sales pipeline is in the $50 -75 million range. Results of Operations Revenues Revenues for the three-month periods ending June 30, 2024 and 2023 were $7,042 and $5,461 , respectively, representing an increase of $1,581 , or 29% , versus the same period last year. Revenues for the six-month periods ending June 30, 2024 and 2023 were $11,999 and $12,748 , respectively, representing a decrease of $749 , or 6% , versus the same period last year. The APC technology segment generated revenues of $ 3,949 for the three-month period ended June 30, 2024 , representing an increase of $527 , or 15% , from the prior year amount of $ 3,422 . The APC technology segment generated revenues of $6,267 for the six-month period ended June 30, 2024 , representing a decrease of $714 , or 10% , from the prior year amount of $6,981 . This decrease in APC revenue was primarily related to timing of project execution. Consolidated APC backlog at June 30, 2024 was $ 4,250 versus backlog at December 31, 2023 of $7,458 . Our current backlog consists of U.S. domestic projects totaling $ 3,778 and international projects totaling $ 472 . The FUEL CHEM technology segment generated revenues of $ 3,093 and $ 2,039 for the three-month periods ended June 30, 2024 and 2023 , respectively, representing an increase of $1,054 , or 52% . The FUEL CHEM technology segment generated revenues of $5,732 and $5,767 for the six-month periods ended June 30, 2024 and 2023 , respectively, representing a decrease of $35 , or 1% . This slight decrease in FUEL CHEM revenue for the three and six months ended June 30, 2024 as compared to the same period in the prior year was primarily due to unscheduled plant outages. Cost of sales and gross margin Consolidated gross margin percentage for the three-month periods ended June 30, 2024 and 2023 was 42% and 37% , respectively . Gross margin increased versus the comparable period in 2023 due to increase s in both operating segments. For the three-month periods ended June 30, 2024 and 2023 the FUEL CHEM operating segment gross margins increased to 46% from 45% primarily due to the increase in segment revenue. APC gross margin increased to 39% from 31% primarily due to product and project mix. Consolidated gross margin percentage for the six-month periods ended June 30, 2024 and 2023 was 42% and 38% , respectively. Gross margin increased versus the comparable period in 2023 due to an increase in the APC operating segment gross margin partially offset by a decrease in FUEL CHEM operating segment gross margin. For the six-month periods ended June 30, 2024 and 2023 the FUEL CHEM operating segment gross margins decreased to 44% from 48% primarily due to the reduction in revenue in the prior quarter. APC gross margin increased to 39% from 29% primarily due to product and project mix. Selling, general and administrative Selling, general and administrative expenses (SG&A) were $3,245 and $2,915 for the three-month periods ended June 30, 2024 and 2023 , respectively. For the three-month period ended June 30, 2024 the increase of $330 is primarily the result of increases in employee compensation and benefit related costs of $260, international administrative expenses of $57 and domestic administrative expenses of $33 partially offset by a decrease in business and real estate taxes of $84. For the three-month periods ending June 30, 2024 and 2023 , SG&A as a percentage of revenues decreased to 46% from 53% . The decrease versus the comparable period is primarily due to the increase in revenues compared to prior year quarter. 15 Table of Contents Selling, general and administrative expenses (SG&A) were $6,590 and $6,160 for the six-month periods ended June 30, 2024 and 2023 , respectively. For the six-month period ended June 30, 2024 the increase of $430 is primarily the result of increases in employee compensation and benefit related costs of $326, depreciation of $28, international administrative expenses of $32 and domestic administrative expenses of $130, partially offset by a decrease is costs related to business and real estate taxes of $87. For the six-month periods ending June 30, 2024 and 2023 , SG&A as a percentage of revenues increased to 55% from 48% . The increase versus the comparable period is primarily due to the decrease in revenues compared to the prior year. Research and development Research and development expenses were $422 and $798 respectively for the three and six -month periods ended June 30, 2024 , and for the same periods in 2023 were $413 and $631, respectively. The expenditures in our research and development expenses are focused on new product development efforts in the pursuit of commercial applications for technologies outside of our traditional markets, and in the development and analysis of new technologies that could represent incremental market opportunities. This includes water treatment technologies and more specifically, our DGI® Dissolved Gas Infusion Systems, an innovative alternative to current aeration technology. This infusion process has a variety of applications in the water and wastewater industries, including remediation, treatment, biological activity, and wastewater odor management. DGI® technology benefits include reduced energy consumption, installation costs, and operating costs, while improving treatment performance. Interest income Interest income was $334 for the three-month period ended June 30, 2024 compared to $307 for the same period in 2023 . Interest income was $645 for the six-month period ended June 30, 2024 compared to $646 for the same period in 2023 . Interest income primarily relates to interest received on the held-to-maturity debt securities and money market funds. Other income (expense), net Other expense, net was $34 for the three-month period ended June 30, 2024 compared to Other expense, net of $14 for the same period in 2023 . Other income, net was $1,639 for the six-month period ended June 30, 2024 compared to Other expense, net of $104 for the same period in 2023 . Other income in 2024 primarily relates to the employee retention credit of $1, 677 recorded in the first quarter of 2024. Other expense in 2023 was mainly due to transactional foreign exchange losses. Liquidity and Sources of Capital We have losses from operations during the six -month period ended June 30, 2024 totaling $2,407 . Our cash used in operations for this same period totaled $2,664 . Our cash and cash equivalent balance as of June 30, 2024 totaled $ 10,404 , which includes $1,236 of cash equivalents, and our working capital totaled $ 25,821 . We have no outstanding debt other than our outstanding letters of credit, under our Investment Collateral Security agreement with BMO Harris Bank, N.A. (the Investment Collateral Security agreement), which does not have any financial covenants. We expect to continue operating under this arrangement for the foreseeable future. Operating activities used cash of $2,664 for the six -month period ended June 30, 2024 , primarily due to an increase in accounts receivable of $1,928 (including the impact of the employee retention credit receivable), a decrease in accrued expenses and other current liabilities of $1,728, offset by an increase in accounts payable of $524,removals of non-cash items from our net income from continuing operations for depreciation and amortization of $192 and stock-based compensation of $228. Operating activities provided cash of $17 for the six -month period ended June 30, 2023 , primarily due to collection of accounts receivable balances, a decrease in other current assets of $114, an increase in accounts payable of $383 due to timing of project related activity, and the impact of non-cash items of $168, offset by an increase in inventory of $135 for anticipated ancillary project demand. Investing activities used cash of $4,311 and $8,288 for the six -month periods ended June 30, 2024 and 2023 , respectively. Investing activities for the six -month periods ended June 30, 2024 and 2023 primarily consisted of purchases of debt securities as investments of $11,107 and $9,685, respectively. Investing activities for the six -month periods ended June 30, 2024 and 2023 were funded by the maturities of debt securities of $7,000 and $1,500, respectively. Financing activities used cash for the six months ended June 30, 2024 of $95 due to taxes paid on behalf of the equity award participants on the vesting of restricted stock units. Financing activities provided cash of $42 for the six months ended June 30, 2023 due to proceeds from the exercise of stock options. We continue to monitor our liquidity needs and in response to our recent periods of declines in revenue and net losses have taken measures to reduce expenses and restructure operations which we feel are necessary to ensure we maintain sufficient working capital and liquidity to operate the business and invest in our future. We have evaluated our ongoing business needs and considered the cash requirements of our base business of Air Pollution Control and FUEL CHEM. This evaluation included consideration of the following: a) customer and revenue trends in our APC and FUEL CHEM business segments, b) current operating structure and expenditure levels, and c) other research and development initiatives. Based on this analysis, management believes that currently we have sufficient cash and working capital to operate our base APC and FUEL CHEM businesses. We believe our current cash position and net cash flows expected to be generated from operations are adequate to fund planned operations of the Company for the next 12 months. 16 Table of Contents We expect additional capital expenditures in 2024 for the DGI business, maintenance of field equipment, computer and systems, and general office equipment. We expect to fund our capital expenditures with cash from operations or cash on hand. In 2022, the Board of Directors approved an investment plan that would hold $20,000 in funds at BMO Harris Bank (BMO Harris) to be invested in held-to-maturity debt securities of United States (US) Treasuries, including Notes, Bonds, and Bills, or US Government Agency securities. The funds are held in money market funds until they are invested in those securities. The investments are structured to create a maturity “ladder” where the proceeds from maturities are re-invested to maintain a balance of short- and long-term investments based on expected business needs. Maturities are between three and thirty-six months. This strategy allows the Company to provide returns on excess cash, while managing liquidity and minimizing exposure to interest rate fluctuations. On June 30, 2022, the Company entered into the Investment Collateral Security agreement to use for the sole purpose of issuing standby letters of credit, which replaces the Cash Collateral Security agreement with BMO Harris Bank, N.A. (the Former Collateral agreement). 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 June 30, 2024 , the Company had outstanding standby letters of credit totaling approximately $ 480 under the Investment Collateral Security agreement. At June 30, 2024 , the investments held as collateral totaled $ 720 . Fuel Tech is committed to reimbursing the issuing bank for any payments made by the bank under these instruments. Contingencies and Contractual Obligations Fuel Tech issues a standard product warranty with the sale of its products to customers as discussed in Note 13. There was no change in the warranty liability balance during the six months ended June 30, 2024. Forward-Looking Statements This Quarterly Report on Form 10-Q contains “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, and opportunities, as well as assumptions made by, and information currently available to, our 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 for the year ended December 31, 2023 in Item 1A under the caption “Risk Factors,” 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 of the 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 Fuel Tech’s filings with the Securities and Exchange Commission. Item 3. Quantitative and Qualitative Disclosures about Market Risk Fuel Tech’s earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. We do not enter into foreign currency forward contracts nor into foreign currency option contracts to manage this risk due to the immaterial nature of the transactions involved.