FUEL TECH, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview The Company experienced a return to profitable operations during the current quarter, brought on by strong margin contributions from both the FUEL CHEM and Air Pollution Control (APC) operating segments. Improved performance from the FUEL CHEM segment was bolstered by the commercialization of a demonstration program in the second half of 2024, and the APC segment margins were positively impacted by the increase in contributions from ancillary revenues. The Company continues to execute on existing project backlog and support our legacy accounts while actively pursuing additional market opportunities. 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 financial and 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 2024. The FUEL CHEM segment continues to thrive from operational demand from our client base and the contribution of a new account added in the second half of 2024. Our APC business experienced a decrease in revenue in the current quarter as compared to 2024, primarily due to timing of project execution and customer driven delays. 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. Our Consolidated APC backlog at September 30, 2025 was $ 9,472 and our global sales pipeline is in the $75 -100 million range. Results of Operations Revenues Revenues for the three-month periods ending September 30, 2025 and 2024 were $7,490 and $7,851 , respectively, representing a decrease of $361 , or 5% , versus the same period last year. Revenues for the nine-month periods ending September 30, 2025 and 2024 were $19,430 and $19,850, respectively, representing a decrease of $420, or 2%, versus the same period last year. The APC technology segment generated revenues of $ 2,707 for the three-month period ended September 30, 2025 , representing a decrease of $517 , or 16% , from the prior year amount of $ 3,224 . The APC technology segment generated revenues of $6,515 for the nine-month period ended September 30, 2025 , representing a decrease of $2,976 , or 31% , from the prior year amount of $9,491 . This decrease in APC revenue was primarily related to timing of project execution on existing contracts. Consolidated APC backlog at September 30, 2025 was $ 9,472 versus backlog at December 31, 2024 of $6,175 . Our current backlog consists of U.S. domestic delivered projects totaling $ 3,989 and international delivered projects totaling $ 5,483 . The FUEL CHEM technology segment generated revenues of $ 4,783 and $ 4,627 for the three-month periods ended September 30, 2025 and 2024 , respectively, representing an increase of $156 , or 3%, versus the same period last year. The FUEL CHEM technology segment generated revenues of $12,915 and $10,359 for the nine-month periods ended September 30, 2025 and 2024 , respectively, representing an increase of $2,556 , or 25% . This increase in FUEL CHEM revenue for the three and nine months ended September 30, 2025 as compared to the same period in the prior year was primarily due to outage completions and increased operation dispatch at legacy accounts, as well as sustained business from a new customer account added midyear in 2024. Cost of sales and gross margin Consolidated gross margin percentage for the three-month periods ended September 30, 2025 and 2024 was 49% and 43% , respectively . For the three-month periods ended September 30, 2025 and 2024 the FUEL CHEM operating segment gross margin was 50% and 49%, respectively. FUEL CHEM gross margin increased from the prior year primarily due to an increased volume of sales activity combined with relatively flat segment administrative expenses. APC segment gross margin increased to 47% from 35% primarily due to product and project mix. Consolidated gross margin percentage for the nine-month periods ended September 30, 2025 and 2024 was 47% and 42% , respectively. For the nine-month periods ended September 30, 2025 and 2024 the FUEL CHEM operating segment gross margin was 49% and 47%, respectively. FUEL CHEM gross margin increased from the prior year primarily due to an increased volume of sales activity combined with relatively flat segment administrative expenses. APC segment gross margin increased to 43% from 38% primarily due to product and project mix. Selling, general and administrative Selling, general and administrative expenses (SG&A) were $3,207 and $3,225 for the three-month periods ended September 30, 2025 and 2024 , respectively. For the three-month period ended September 30, 2025, the decrease of $18 is primarily the result of a decrease in administrative expenses. For the three-month periods ending September 30, 2025 and 2024 , SG&A as a percentage of revenues increased to 43% from 41% . The increase versus the comparable period is primarily due to the decrease in revenues compared to prior quarter. Selling, general and administrative expenses (SG&A) were $9,895 and $9,815 for the nine-month periods ended September 30, 2025 and 2024 , respectively. For the nine-month period ended September 30, 2025, the increase of $80 is primarily the result of an increase in domestic and international administrative expenses. For the nine-month periods ending September 30, 2025 and 2024 , SG&A as a percentage of revenues increased to 51% from 49%. The increase versus the comparable period is primarily due to the decrease in revenues compared to prior year. 15 Table of Contents Research and development Research and development expenses were $450 and $361 for the three-month periods ended September 30, 2025 and 2024 , respectively. Research and development expenses were $1,510 and $1,159 for the nine-month periods ended September 30, 2025 and 2024 , 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 $311 for the three-month period ended September 30, 2025 compared to $323 for the same period in 2024 . Interest income was $1,127 for the nine-month period ended September 30, 2025 compared to $968 for the same period in 2024 . Interest income primarily relates to interest received on the held-to-maturity debt securities and money market funds. Interest income for the nine-month period ended September 30, 2025 included $263 in interest income related to collection of our ERC benefit. Other income (expense), net Other expense, net was $5 for the three-month period ended September 30, 2025 compared to Other expense, net of $63 for the same period in 2024 . Other income, net was $15 for the nine-month period ended September 30, 2025 compared to Other income, net of $1,576 for the same period in 2024 . Other income and expense in 2025 and Other expense for the three-month period ended September 30, 2024 was mainly due to transactional foreign exchange gains and losses recognized from repayment of intercompany balances. Other income for the nine-month period ended September 30, 2024 primarily relates to the employee retention credit of $1,677 recorded in the first quarter of 2024. Liquidity and Sources of Capital We have losses from operations during the nine -month period ended September 30, 2025 totaling $2,256 . Our cash provided by operations for this same period totaled $4,583 . Our cash and cash equivalent balance as of September 30, 2025 totaled $ 13,677 , which includes $2,221 of cash equivalents, and our working capital totaled $ 26,043 . 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 provided cash of $4,583 for the nine -month period ended September 30, 2025 , primarily due to a decrease in accounts receivable of $3,082, collections of the ERC receivable of $1,677, an increase in accrued liabilities and other noncurrent liabilities of $516, a decrease in prepaid expenses, other current assets, and other non-current assets of $302, and removals of non-cash items from our net loss from continuing operations of depreciation and amortization of $517 and stock-based compensation, net of forfeitures of $269, offset by a decrease in accounts payable of $560. 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. Investing activities provided cash of $765 and used cash of $3,388 for the nine -month periods ended September 30, 2025 and 2024 , respectively. Investing activities for the nine -month periods ended September 30, 2025 and 2024 primarily consisted of purchases of debt securities as investments of $10,004 and $14,072, respectively. Investing activities for the nine -month periods ended September 30, 2025 and 2024 were funded by the maturities of debt securities of $11,000 in both periods. Financing activities used cash of $222 and $95, respectively, for the nine months ended September 30, 2025 and 2024 due to taxes paid on behalf of the equity award participants on the vesting of restricted stock units. 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 during the fourth quarter of 2025 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. The Company's investment policy provides for $20,000 in funds at BMO Harris Bank, N.A. (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. The Company's Investment Collateral Security agreement is used for the sole purpose of issuing standby letters of credit and 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 September 30, 2025 , the Company had outstanding standby letters of credit totaling approximately $ 3,141 under the Investment Collateral Security agreement. At September 30, 2025 , the investments held as collateral totaled $ 4,711 . 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 nine months ended September 30, 2025. 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, 2024 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.