FUEL TECH INC

Previous wording

In the first quarter of 2024, the Company continued to successfully execute on APC segment projects despite customer driven delays in project execution. The Company faced challenges related to the FUEL CHEM segment due to unplanned maintenance outages at customer plants. 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 expendituresand that new business opportunities will lead to an improved market outlook.

Current wording

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 expendituresand that new business opportunities will lead to an improved market outlook.

Previous wording

Our FUEL CHEM segment experienced a decrease in revenue and segment operating profits in the current quarter as compared to 2023. The FUEL CHEM segment was impacted by weather and dispatch related decreases in operational demand from our client base and to a lesser degree by scheduled plant closures versus the same period in 2023.

Current wording

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 impacted 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.

Previous wording

Our Air Pollution Control (APC) business experienced a decrease in revenue in the current quarter as compared to 2023, primarily due to 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 March 31, 2024 was $6,181 and our global sales pipeline is in the $50 -75 million range.

Current wording

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.

Previous wording

The APC technology segment generated revenues of $2,318 for the three-month period ended March 31, 2024, representing a decrease of$1,241, or 35%, from the prior year amount of $3,559. This decrease in APC revenue was primarily related to customer-related delays in project execution. Consolidated APC backlog at March 31, 2024 was $6,181 versus backlog at December 31, 2023 of $7,458. Our current backlog consists of U.S. domestic projects totaling $5,523 and international projects totaling $658.

Current wording

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.

Previous wording

The FUEL CHEM technology segment generated revenues of $2,639 and $3,728 for the three-month periods ended March 31, 2024 and 2023, respectively, representing a decrease of$1,089, or 29%. This decrease in FUEL CHEM revenue for thethree months ended March 31, 2024 as compared to the same period in the prior year was primarily due to a decrease in electrical generation demand, unscheduled plant outages and plant closures.

Current wording

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 thethree and six months ended June 30, 2024 as compared to the same period in the prior year was primarily due tounscheduled plant outages.

Previous wording

Consolidated gross margin percentage for the three-month periods ended March 31, 2024 and 2023 was 41% 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 three-month periods ended March 31, 2024 and 2023 the FUEL CHEM operating segment gross margins decreased to 43% from 49% primarily due to the reduction in revenue. APC gross margin increased to 38% from 27% primarily due to product and project mix.

Current wording

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.

Previous wording

Selling, general and administrative expenses (SG&A) were$3,345 and$3,245 for the three-month periods ended March 31, 2024 and 2023, respectively. For the three-month period ended March 31, 2024 the increase of$100 is primarily the result of increases in employee compensation and benefit related costs of $66 and administrative expenses of $49, partially offset by decreases in costs related to our international locations of $25. For the three-month periods ending March 31, 2024 and 2023, SG&A as a percentage of revenues increased to 67% from 45%. The increase versus the comparable period is primarily due to the decrease in revenues compared to prior year quarter.

Current wording

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.

Previous wording

Research and development expenses were$376 and$218 for thethree-month periods ended March 31, 2024 and 2023, 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.

Current wording

Research and development expenses were$422 and $798 respectively for thethree 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.

Previous wording

Interest income was$311 for the three-month period ended March 31, 2024 compared to$339 for the same period in 2023. Interest income primarily relates to interest received on the held-to-maturity debt securities and money market funds.

Current wording

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.

Previous wording

Other income, net was$1,673 for the three-month period ended March 31, 2024 compared to Other expense, net of$90 for the same period in 2023. Other income in 2024 primarily relates to the employee retention credit. Other expense in 2023 was mainly due to transactional foreign exchange losses.

Current wording

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.

Previous wording

We have losses from operations during thethree-month period ended March 31, 2024 totaling$1,692. Our cash used in operations for this same period totaled$1,075.

Current wording

We have losses from operations during thesix-month period ended June 30, 2024 totaling$2,407. Our cash used in operations for this same period totaled$2,664.

Previous wording

Our cash and cash equivalent balance as of March 31, 2024 totaled $11,382, which includes $267 of cash equivalents, and our working capital totaled $27,660. 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.

Current wording

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.

Previous wording

Operating activities used cash of$1,075 for thethree-month period ended March 31, 2024, primarily due to an increase in accounts receivable of $427 (including the impact of the employee retention credit receivable), a decrease in accrued expenses and other current liabilities of $609, and a decrease in accounts payable of $563, offset by removals of non-cash items from our net income from continuing operations for depreciation and amortization of $96 and stock-based compensation of $104.

Current wording

Operating activities used cash of$2,664 for thesix-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.

Previous wording

Operating activities provided cash of $1,010 for thethree-month period ended March 31, 2023, primarily due to collection of accounts receivable balances, a decrease in other current assets of $51, and a decrease in accounts payable of $934 due to timing of project related activity, offset by an increase in inventory of $116 for anticipated ancillary project demand and a decrease in accrued liabilities of $518.

Current wording

Operating activities provided cash of $17 for thesix-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.

Previous wording

Investing activities used cash of$5,005 and $8,715 for thethree-month periods ended March 31, 2024 and 2023, respectively. Investing activities for thethree-month periods ended March 31, 2024 and 2023 primarily consisted of purchases of debt securities as investments of $7,641 and $9,685, respectively. Investing activities for thethree-month periods ended March 31, 2024 and 2023 were funded by the maturities of debt securities of $2,750 and $1,000, respectively.

Current wording

Investing activities used cash of$4,311 and $8,288 for thesix-month periods ended June 30, 2024 and 2023, respectively. Investing activities for thesix-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 thesix-month periods ended June 30, 2024 and 2023 were funded by the maturities of debt securities of $7,000 and $1,500, respectively.

Previous wording

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 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.

Current wording

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.

Previous wording

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 three months ended March 31, 2024.

Current wording

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.