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Item 2. Management’s Discussion and Analysis

2024-11-06 compared with 2024-08-06 · 45 added, 47 removed, 59 unchanged (61% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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..

In the third quarter of 2024, the Company continued to successfully execute on APC segment projects despite customer driven delays in project execution.

The Company continued to see improved performance in the FUEL CHEM segment.

We continue to invest in development of new technologies to expand our product offerings into the water and waste-water treatment market.

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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.

Our Air Pollution Control (APC) business experienced a decrease in revenue in the current quarter as compared to 2023, primarily due to customer driven delays 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.

Our Consolidated APC backlog at September 30, 2024 was $ 6,444 and our global sales pipeline is in the $50 -75 million range.

Results of Operations

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 .

Revenues for the three-month periods ending September 30, 2024 and 2023 were $7,851 and $7,988 , respectively, representing a decrease of $137 , or 2% , versus the same period last year.

Revenues for the nine-month periods ending September 30, 2024 and 2023 were $19,850 and $20,736 , respectively, representing a decrease of $886 , or 4% , versus the same period last year.

The APC technology segment generated revenues of $ 3,224 for the three-month period ended September 30, 2024 , representing a decrease of $487 , or 13% , from the prior year amount of $ 3,711 .

The APC technology segment generated revenues of $9,491 for the nine-month period ended September 30, 2024 , representing a decrease of $1,201 , or 11% , from the prior year amount of $10,692 .

This decrease in APC revenue was primarily related to timing of project execution on existing contracts.

Consolidated APC backlog at September 30, 2024 was $ 6,444 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.

domestic delivered projects totaling $ 1,142 and international delivered projects totaling $ 5,302 .

The FUEL CHEM technology segment generated revenues of $ 4,627 and $ 4,277 for the three-month periods ended September 30, 2024 and 2023 , respectively, representing an increase of $350 , or 8% .

The FUEL CHEM technology segment generated revenues of $10,359 and $10,044 for the nine-month periods ended September 30, 2024 and 2023 , respectively, representing an increase of $315 , or 3% .

This increase in FUEL CHEM revenue for the three and nine months ended September 30, 2024 as compared to the same period in the prior year was primarily due to outage completions and increased dispatch.

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.

Consolidated gross margin percentage for the three-month periods ended September 30, 2024 and 2023 was 43% and 45% , respectively .

For the three-month periods ended September 30, 2024 and 2023 the FUEL CHEM operating segment gross margins remained steady at 49% .

APC segment gross margin decreased to 35% from 40% primarily due to product and project mix.

Consolidated gross margin percentage for the nine-month periods ended September 30, 2024 and 2023 was 42% and 41% , 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.

For the nine-month periods ended September 30, 2024 and 2023 the FUEL CHEM operating segment gross margins decreased to 47% from 49% primarily as a result of prior period reduced revenue performance and start-up costs attributed to a new account.

APC segment gross margin increased to 38% from 33% 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.

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.

Selling, general and administrative expenses (SG&A) were $3,225 and $2,966 for the three-month periods ended September 30, 2024 and 2023 , respectively.

For the three-month period ended September 30, 2024 the increase of $259 is primarily the result of increases in employee compensation and benefit related costs of $163, professional and service fees of $120, and travel costs of $26, partially offset by decreases in international administrative expenses of $19, depreciation expense of $17, and insurance costs of $14.

For the three-month periods ending September 30, 2024 and 2023 , SG&A as a percentage of revenues increased to 41% from 37% .

The increase versus the comparable period is primarily due to the increase in expenses compared to prior quarter.

Selling, general and administrative expenses (SG&A) were $9,815 and $9,126 for the nine-month periods ended September 30, 2024 and 2023 , respectively.

For the nine-month period ended September 30, 2024 the increase of $689 is primarily the result of increases in employee compensation and benefit related costs of $488, professional and service fees of $147, travel costs of $42, and space rental costs of $38, partially offset by a decrease in insurance costs of $27.

For the nine-month periods ending September 30, 2024 and 2023 , SG&A as a percentage of revenues increased to 49% from 44% .

The increase versus the comparable period is primarily due to the increase in expenses 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.

Research and development expenses were $361 and $1,159 respectively for the three and nine -month periods ended September 30, 2024 , and for the same periods in 2023 were $513 and $1,144, 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.

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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 was $323 for the three-month period ended September 30, 2024 compared to $322 for the same period in 2023 .

Interest income was $968 for both the nine-month periods ended September 30, 2024 and September 30, 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 expense, net was $63 for the three-month period ended September 30, 2024 compared to Other income, net of $9 for the same period in 2023 .

Other income, net was $1,576 for the nine-month period ended September 30, 2024 compared to Other expense, net of $95 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.

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Liquidity and Sources of Capital

We have losses from operations during the six -month period ended June 30, 2024 totaling $2,407 .

We have losses from operations during the nine -month period ended September 30, 2024 totaling $2,586 .

Our cash used in operations for this same period totaled $1,785 .

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 .

Our cash and cash equivalent balance as of September 30, 2024 totaled $ 12,274 , which includes $2,452 of cash equivalents, and our working capital totaled $ 25,602 .

We have no outstanding debt other than our outstanding letters of credit, under our Investment Collateral Security agreement with BMO Harris Bank, N.A.

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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.

Operating activities used cash of $1,785 for the nine -month period ended September 30, 2024 , primarily due to an increase in accounts receivable of $2,522 (including the impact of $1,677 for the employee retention credit receivable) and a decrease in accrued expenses and other current liabilities of $1,215, offset by an increase in accounts payable of $842, a decrease in prepaid expenses, other current assets, and other non-current assets of $655, and removals of non-cash items from our net income from continuing operations of stock-based compensation of $337, depreciation and amortization of $290, and interest income on held-to-maturity securities of $108.

Operating activities provided cash of $391 for the nine -month period ended September 30, 2023 , primarily due to an increase in other liabilities of $520 due to timing of project related activity, a decrease in other current assets of $363, an increase in accounts payable of $172 due to timing of project related activity, and removals of non-cash items from our net loss from continuing operations for depreciation and amortization of $293 and stock-based compensation of $288.

Investing activities used cash of $3,388 and $10,227 for the nine -month periods ended September 30, 2024 and 2023 , respectively.

Investing activities for the nine -month periods ended September 30, 2024 and 2023 primarily consisted of purchases of debt securities as investments of $14,072 and $14,026, respectively.

Investing activities for the nine -month periods ended September 30, 2024 and 2023 were funded by the maturities of debt securities of $11,000 and $4,000, respectively.

Financing activities used cash of $95 for the nine months ended September 30, 2024 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 nine months ended September 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.

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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 .

At September 30, 2024 , the Company had outstanding standby letters of credit totaling approximately $ 1,722 under the Investment Collateral Security agreement.

At September 30, 2024 , the investments held as collateral totaled $ 2,584 .

Fuel Tech is committed to reimbursing the issuing bank for any payments made by the bank under these instruments.

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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.

There was no change in the warranty liability balance during the nine months ended September 30, 2024.

Forward-Looking Statements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis