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FUEL TECH, INC. - Quarter Report: 2019 September (Form 10-Q)



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to______.             
Commission file number: 001-33059
FUEL TECH, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
20-5657551
(State or other jurisdiction of
incorporation of organization)
 
(I.R.S. Employer
Identification Number)
Fuel Tech, Inc.
27601 Bella Vista Parkway
Warrenville, IL 60555-1617
630-845-4500
www.ftek.com
(Address and telephone number of principal executive offices)
  ________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
 
¨
Accelerated filer
 
¨
Non-accelerated filer
 
x
Smaller reporting company
 
x
 
 
 
Emerging growth company

 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
On October 31, 2019 there were outstanding 24,186,824 shares of Common Stock, par value $0.01 per share, of the registrant.
 



FUEL TECH, INC.
Form 10-Q for the nine-month period ended September 30, 2019
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2019 and 2018
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I.        FINANCIAL INFORMATION

Item 1.        Financial Statements
FUEL TECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share and per share data)

September 30,
2019
December 31,
2018



ASSETS


Current assets:


Cash and cash equivalents
$
12,850

$
12,039

Restricted cash
988

6,020

Accounts receivable, net of allowance for doubtful accounts of $1,175 and $1,411, respectively
10,124

18,399

Inventories, net
291

957

Prepaid expenses and other current assets
1,834

3,184

Income taxes receivable
130

118

Total current assets
26,217

40,717

Property and equipment, net of accumulated depreciation of $25,993 and $26,528, respectively
5,712

5,976

Goodwill
2,116

2,116

Other intangible assets, net of accumulated amortization of $6,611 and $6,608, respectively
966

1,164

Restricted cash
1,494

—

Right-of-use operating lease assets
1,104

—

Assets held for sale
—

485

Other assets
270

1,261

Total assets
$
37,879

$
51,719

LIABILITIES AND STOCKHOLDERS' EQUITY


Current liabilities:


Accounts payable
$
2,618

$
9,499

Accrued liabilities:


Operating lease liabilities - current
376

—

Employee compensation
661

1,563

Other accrued liabilities
2,419

6,099

Total current liabilities
6,074

17,161

Operating lease liabilities - non-current
715

—

Deferred income taxes
171

171

Other liabilities
278

335

Total liabilities
7,238

17,667

COMMITMENTS AND CONTINGENCIES (Note 14)


Stockholders’ equity:


Common stock, $.01 par value, 40,000,000 shares authorized, 24,843,668 and 24,825,891 shares issued, and 24,186,824 and 24,170,585 shares outstanding, respectively
248

248

Additional paid-in capital
139,349

138,992

Accumulated deficit
(105,985
)
(102,495
)
Accumulated other comprehensive loss
(1,561
)
(1,285
)
Nil coupon perpetual loan notes
76

76

Treasury stock, at cost
(1,486
)
(1,484
)
Total stockholders’ equity
30,641

34,052

Total liabilities and stockholders’ equity
$
37,879

$
51,719

See notes to condensed consolidated financial statements.

1


FUEL TECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share and per-share data)
 
 
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
 
2019
2018
2019
2018
Revenues
$
6,452

$
16,070

$
25,555

$
40,708

Costs and expenses:




Cost of sales
3,563

10,654

14,754

26,545

Selling, general and administrative
3,822

4,105

12,735

13,789

Restructuring charge
—

—

625

—

Research and development
352

265

823

814

Intangible assets abandonment
76

—

127

317


7,813

15,024

29,064

41,465

Operating income (loss) from continuing operations
(1,361
)
1,046

(3,509
)
(757
)
Interest expense
(4
)
—

(8
)
—

Interest income
19

1

30

3

Other expense
71

8

(1
)
(59
)
Income (loss) from continuing operations before income taxes
(1,275
)
1,055

(3,488
)
(813
)
Income tax expense
(21
)
—

(23
)
(2
)
Net income (loss) from continuing operations
(1,296
)
1,055

(3,511
)
(815
)
Income (loss) from discontinued operations (net of income tax benefit of $0 in 2019 and 2018)
18

(10
)
(1
)
(109
)
Net income (loss)
$
(1,278
)
$
1,045

$
(3,512
)
$
(924
)
Net income (loss) per common share:




Basic








Continuing operations
$
(0.05
)
$
0.04

$
(0.15
)
$
(0.04
)
Discontinued operations
$
—

$
—

$
—

$
—

Basic net income (loss) per common share
$
(0.05
)
$
0.04

$
(0.15
)
$
(0.04
)
Diluted




Continuing operations
$
(0.05
)
$
0.04

$
(0.15
)
$
(0.04
)
Discontinued operations
$
—

$
—

$
—

$
—

Diluted net loss per common share
$
(0.05
)
$
0.04

$
(0.15
)
$
(0.04
)
Weighted-average number of common shares outstanding:




Basic
24,187,000

24,171,000

24,183,000

24,162,000

Diluted
24,187,000

24,588,000

24,183,000

24,162,000

See notes to condensed consolidated financial statements.

2


FUEL TECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)
 
 
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
 
2019
2018
2019
2018
Net income (loss)
$
(1,278
)
$
1,045

$
(3,512
)
$
(924
)
Other comprehensive income (loss):




Foreign currency translation adjustments
(337
)
(263
)
(276
)
(441
)
Unrealized losses from marketable securities, net of tax
—

—

—

(3
)
Total other comprehensive income (loss)
(337
)
(263
)
(276
)
(444
)
Comprehensive income (loss)
$
(1,615
)
$
782

$
(3,788
)
$
(1,368
)
See notes to condensed consolidated financial statements.

3


Fuel Tech, Inc.
Condensed Statements of Stockholders’ Equity
(in thousands of dollars or shares, as appropriate)

The following summarizes the changes in total stockholders' equity for the three and nine months ended September 30, 2018:
 
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Nil
Coupon
Perpetual Loan Notes
 
Treasury Stock
 
Total
 
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2017
 
24,133

 
$
248

 
$
138,760

 
$
(102,672
)
 
$
(768
)
 
$
76

 
$
(1,472
)
 
$
34,172

Net loss
 
 
 
 
 
 
 
(216
)
 
 
 
 
 
 
 
(216
)
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
416

 
 
 
 
 
416

Unrealized loss on marketable securities, net of tax
 
 
 
 
 
 
 
 
 
(1
)
 
 
 
 
 
(1
)
Stock compensation expense
 
 
 
 
 
(59
)
 
 
 
 
 
 
 
 
 
(59
)
Common shares issued upon vesting of restricted stock units
 
45

 
 
 
 
 
 
 
 
 
 
 
 
 
—

Treasury shares withheld
 
(10
)
 
 
 
 
 
 
 
 
 
 
 
(10
)
 
(10
)
Adoption of ASC 606
 
 
 
 
 
 
 
205

 
 
 
 
 
 
 
205

Balance at March 31, 2018
 
24,168

 
$
248

 
$
138,701

 
$
(102,683
)
 
$
(353
)
 
$
76

 
$
(1,482
)
 
$
34,507

Net loss
 
 
 
 
 
 
 
(1,753
)
 
 
 
 
 
 
 
(1,753
)
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
(594
)
 
 
 
 
 
(594
)
Unrealized loss on marketable securities, net of tax
 
 
 
 
 
 
 
 
 
(2
)
 
 
 
 
 
(2
)
Stock compensation expense
 
 
 
 
 
97

 
 
 
 
 
 
 
 
 
97

Common shares issued upon vesting of restricted stock units
 
4

 
 
 
(1
)
 
 
 
 
 
 
 
 
 
(1
)
Treasury shares withheld
 
(2
)
 
 
 
 
 
 
 
 
 
 
 
(2
)
 
(2
)
Balance at June 30, 2018
 
24,170

 
$
248

 
$
138,797

 
$
(104,436
)
 
$
(949
)
 
$
76

 
$
(1,484
)
 
$
32,252

Net loss
 
 
 
 
 
 
 
1,045

 
 
 
 
 
 
 
1,045

Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
(263
)
 
 
 
 
 
(263
)
Unrealized loss on marketable securities, net of tax
 
 
 
 
 
 
 
 
 
—

 
 
 
 
 
—

Stock compensation expense
 
 
 
 
 
97

 
 
 
 
 
 
 
 
 
97

Balance at September 30, 2018
 
24,170

 
$
248

 
$
138,894

 
$
(103,391
)
 
$
(1,212
)
 
$
76

 
$
(1,484
)
 
$
33,131























4


Fuel Tech, Inc.
Condensed Statements of Stockholders’ Equity (Continued)
(in thousands of dollars or shares, as appropriate)

The following summarizes the changes in total stockholders' equity for the three and nine months ended September 30, 2019:
 
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Nil
Coupon
Perpetual Loan Notes
 
Treasury Stock
 
Total
 
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2018
 
24,170

 
$
248

 
$
138,992

 
$
(102,495
)
 
$
(1,285
)
 
$
76

 
$
(1,484
)
 
$
34,052

Net loss
 
 
 
 
 
 
 
(1,289
)
 
 
 
 
 
 
 
(1,289
)
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
104

 
 
 
 
 
104

Stock compensation expense
 
 
 
 
 
96

 
 
 
 
 
 
 
 
 
96

Common shares issued upon vesting of restricted stock units
 
18

 

 
 
 
 
 
 
 
 
 
 
 
—

Treasury shares withheld
 
(2
)
 
 
 
 
 
 
 
 
 
 
 
(2
)
 
(2
)
Adoption of ASC 842
 
 
 
 
 
 
 
22

 
 
 
 
 
 
 
22

Balance at March 31, 2019
 
24,186

 
$
248

 
$
139,088

 
$
(103,762
)
 
$
(1,181
)
 
$
76

 
$
(1,486
)
 
$
32,983

Net loss
 
 
 
 
 
 
 
(945
)
 
 
 
 
 
 
 
(945
)
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
(43
)
 
 
 
 
 
(43
)
Stock compensation expense
 
 
 
 
 
123

 
 
 
 
 
 
 
 
 
123

Balance at June 30, 2019
 
24,186

 
$
248

 
$
139,211

 
$
(104,707
)
 
$
(1,224
)
 
$
76

 
$
(1,486
)
 
$
32,118

Net loss
 
 
 
 
 
 
 
(1,278
)
 
 
 
 
 
 
 
(1,278
)
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
(337
)
 
 
 
 
 
(337
)
Stock compensation expense
 
 
 
 
 
138

 
 
 
 
 
 
 
 
 
138

Balance at September 30, 2019
 
24,186

 
$
248

 
$
139,349

 
$
(105,985
)
 
$
(1,561
)
 
$
76

 
$
(1,486
)
 
$
30,641


See notes to condensed consolidated financial statements.


5


FUEL TECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 

Nine Months Ended 
 September 30,
 
2019
2018
Operating Activities


Net loss
$
(3,512
)
$
(924
)
Loss from discontinued operations
1

109

Net loss from continuing operations
(3,511
)
(815
)
Adjustments to reconcile net loss to net cash used in operating activities:


Depreciation
644

502

Amortization
118

158

Loss (gain) on disposal of equipment
4

(11
)
Provision for doubtful accounts, net of recoveries
—

(62
)
Intangible assets abandonment
127

317

Stock-based compensation, net of forfeitures
357

135

Changes in operating assets and liabilities:


Accounts receivable
8,601

(7,192
)
Inventories
654

280

Prepaid expenses, other current assets and other non-current assets
1,804

1,840

Accounts payable
(6,812
)
3,896

Accrued liabilities and other non-current liabilities
(4,306
)
(1,378
)
Net cash used in operating activities - continuing operations
(2,320
)
(2,330
)
Net cash used in operating activities - discontinued operations
(21
)
(334
)
Net cash used in operating activities
(2,341
)
(2,664
)
Investing Activities


Purchases of equipment and patents
(431
)
(392
)
Proceeds from the sale of equipment
—

1

Net cash used in investing activities - continuing operations
(431
)
(391
)
Net cash provided by investing activities - discontinued operations (Note 4)
505

—

Net cash provided by (used in) investing activities
74

(391
)
Financing Activities


Taxes paid on behalf of equity award participants
(2
)
(12
)
Net cash used in financing activities
(2
)
(12
)
Effect of exchange rate fluctuations on cash
(458
)
(601
)
Net decrease in cash, cash equivalents and restricted cash
(2,727
)
(3,668
)
Cash, cash equivalents, and restricted cash at beginning of period (Note 2)
18,059

14,386

Cash, cash equivalents and restricted cash at end of period (Note 2)
$
15,332

$
10,718

See notes to condensed consolidated financial statements.

6


FUEL TECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(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") provides advanced engineered solutions for the optimization of combustion systems in utility and industrial applications. Our primary focus is on the worldwide marketing and sale of NOx reduction technologies as well as our FUEL CHEM program. The Company’s NOx reduction technologies reduce nitrogen oxide emissions from boilers, furnaces and other stationary combustion sources.
Our FUEL CHEM program is based on proprietary TIFI® Targeted In-Furnace™ Injection technology, in combination with advanced Computational Fluid Dynamics (CFD) and Chemical Kinetics Modeling (CKM) boiler modeling, in the unique application of specialty chemicals to improve the efficiency, reliability and environmental status of combustion units by controlling slagging, fouling, corrosion, opacity and other sulfur trioxide-related issues in the boiler.
Our business is materially dependent on the continued existence and enforcement of air quality regulations, particularly in the United States. We have expended significant resources in the research and development of new technologies in building our proprietary portfolio of air pollution control, fuel and boiler treatment chemicals, computer modeling and advanced visualization technologies.
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 a fair presentation of the statements for the periods presented. All significant intercompany transactions and balances have been eliminated. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019. 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, 2018 as filed with the Securities and Exchange Commission.

2.    Summary of Significant Accounting Policies
Restricted cash
Restricted cash as of September 30, 2019 represents funds that are restricted to satisfy any amount borrowed against the Company's Cash Collateral Security agreement with BMO Harris Bank N.A. The balance of restricted cash totaling $2,482 is comprised of $988 in current assets relating to existing standby letters of credit with varying maturity dates and expire no later than September 30, 2020 and $1,494 in long-term assets will remain through the expiration dates of the underlying standby letter of credits (the latest maturity date is February 1, 2023) with BMO Harris Bank N.A. Refer to Note 10 Debt Financing for further information on the Cash Collateral Security agreement with BMO Harris Bank N.A.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheet that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows:
 
September 30,
2019
December 31,
2018
Cash and cash equivalents
$
12,850

$
12,039

Restricted cash included in current assets
988

6,020

Restricted cash included in long-term assets
1,494

—

Total cash, cash equivalents, and restricted cash shown in the Consolidated Statements of Cash Flows
$
15,332

$
18,059



7


Leases

On January 1, 2019, we adopted ASC 842 using the modified retrospective method outlined in ASU 2018-11, “Leases (Topic 842) Targeted Improvements.” Refer to Note 12 for further details regarding the effect of adoption. We determine if an arrangement is a lease at inception. Operating leases are included in right-of-use ("ROU") operating lease assets, operating lease liabilities - current, and operating lease liabilities - non-current on our Consolidated Balance Sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which we elected the practical expedient to not separate lease and non-lease components for the majority of our leases. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. We also elected the practical expedient to keep leases with an initial term of 12 months or less off of the consolidated balance sheet.

3.    Revenue

The Company recognizes revenue when control of the promised goods or services is transferred to our customers, in amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Fuel Tech’s sales of products to customers represent single performance obligations. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.

We generally expense sales commissions on a ratable basis when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses within the Condensed Consolidated Statements of Operations.

FUEL CHEM

Revenues from the sale of chemical products are recognized when control transfers to customer upon shipment or delivery of the product based on the applicable shipping terms. We generally recognize revenue for these arrangements at a point in time based on our evaluation of when the customer obtains control of the promised goods or services.

Air Pollution Control Technology
Fuel Tech’s APC contracts are typically six to eighteen months in length. A typical contract will have three or four critical operational measurements that, when achieved, serve as the basis for us to invoice the customer via progress billings. At a minimum, these measurements will include the generation of engineering drawings, the shipment of equipment and the completion of a system performance test.
As part of most of its contractual APC project agreements, Fuel Tech will agree to customer-specific acceptance criteria that relate to the operational performance of the system that is being sold. These criteria are determined based on modeling that is performed by Fuel Tech personnel, which is based on operational inputs that are provided by the customer. The customer will warrant that these operational inputs are accurate as they are specified in the binding contractual agreement. Further, the customer is solely responsible for the accuracy of the operating condition information; typically all performance guarantees and equipment warranties granted by us are voidable if the operating condition information is inaccurate or is not met.

8


Since control transfers over time, revenue is recognized based on the extent of progress towards completion of the single performance obligation. Fuel Tech uses the cost-to-cost input measure of progress for our contracts since it best depicts the transfer of assets to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost input measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred. Costs to fulfill include all internal and external engineering costs, equipment charges, inbound and outbound freight expenses, internal and site transfer costs, installation charges, purchasing and receiving costs, inspection costs, warehousing costs, project personnel travel expenses and other direct and indirect expenses specifically identified as project- or product-line related, as appropriate (e.g. test equipment depreciation and certain insurance expenses).
Fuel Tech has installed over 1,000 units with APC technology and normally provides performance guarantees to our customers based on the operating conditions for the project. As part of the project implementation process, we perform system start-up and optimization services that effectively serve as a test of actual project performance. We believe that this test, combined with the accuracy of the modeling that is performed, enables revenue to be recognized prior to the receipt of formal customer acceptance.
Disaggregated Revenue by Product Technology
The following table presents our revenues disaggregated by product technology:
 
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
 
2019
2018
2019
2018
Air Pollution Control
 
 
 
 
  Technology solutions
$
1,191

$
10,202

$
9,727

$
25,516

  Spare parts
299

334

832

863

  Ancillary revenue
326

346

1,849

1,493

Total Air Pollution Control Technology revenues
1,816

10,882

12,408

27,872

FUEL CHEM
 
 
 
 
   FUEL CHEM technology solutions
4,636

5,188

13,147

12,836

Total Revenues
$
6,452

$
16,070

$
25,555

$
40,708

Disaggregated Revenue by Geography
The following table presents our revenues disaggregated by geography, based on the billing addresses of our customers:
 
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
 
2019
2018
2019
2018
United States
$
5,727

$
11,629

$
22,104

$
30,701

Foreign Revenues
 
 
 
 
  South America
282

278

474

904

  Europe
283

1,907

1,568

4,935

  Asia
160

2,256

1,409

4,168

Total Foreign Revenues
725

4,441

3,451

10,007

Total Revenues
$
6,452

$
16,070

$
25,555

$
40,708


9


Timing of Revenue Recognition
The following table presents the timing of our revenue recognition:
 
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
 
2019
2018
2019
2018
Products transferred at a point in time
$
5,261

$
5,868

$
15,828

$
15,192

Products and services transferred over time
1,191

10,202

9,727

25,516

Total Revenues
$
6,452

$
16,070

$
25,555

$
40,708


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 consolidated balance sheets. In our Air Pollution Control 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. These assets are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period. At September 30, 2019 and December 31, 2018, contract assets were approximately $1,589 and $5,540, respectively, and are included in accounts receivable on the consolidated balance sheets.

However, the Company will periodically bill in advance of costs incurred before revenue is recognized, resulting in contract liabilities. These liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period. Contract liabilities were $682 and $1,234, at September 30, 2019 and December 31, 2018, respectively, and are included in other accrued liabilities on the consolidated balance sheets.

Changes in the contract asset and liability balances during the nine month period ended September 30, 2019, 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 $302 and $1,059 for the three and nine months ended September 30, 2019 and $7 and $2,165 for three and nine months ended September 30, 2018, respectively, which represented primarily revenue from progress towards completion of our Air Pollution Control technology contracts.
As of September 30, 2019, we had six construction contracts in progress that were identified as loss contracts and a provision for losses of $74 was recorded in other accrued liabilities on the consolidated balance sheet. Refer to Footnote 14 for an accrual related to certain non-conformance issues with a U.S. customer associated with equipment that requires remedy under the warranty provision of the customer contract. As of December 31, 2018, we had five construction contracts in progress that were identified as loss contracts and a provision for losses in the amount of $123 was recorded in other accrued liabilities on the consolidated balance sheet.
Remaining Performance Obligations
Remaining performance obligations, represents the transaction price of Air Pollution Control technology booked orders for which work has not been performed. As of September 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $6,773. The Company expects to recognize revenue on approximately $5,150 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
 
September 30, 2019
 
December 31, 2018
Trade receivables
$
7,563

 
$
14,261

Unbilled receivables
1,589

 
5,540

Insurance proceeds receivable (Note 14)
1,991

 
—

Other short-term receivables
156

 
9

Allowance for doubtful accounts
(1,175
)
 
(1,411
)
Total accounts receivable
$
10,124

 
$
18,399

 

10



4.    Discontinued Operations

During the second quarter of 2017, the Company suspended all operations associated with the Fuel Conversion business segment. The components of the net assets of the Fuel Conversion discontinued operations are Assets held for sale (which consists primarily of certain equipment) on the Consolidated Balance Sheets totaling $0 and $485 as of September 30, 2019 and December 31, 2018, respectively. The Company sold the remaining Fuel Conversion equipment within Assets held for sale during the nine month period ended September 30, 2019 for sales proceeds net of selling costs of $505, resulting in a gain on sale of $20 recorded in discontinued operations.  Following the sale of the remaining Fuel Conversion equipment during the third quarter, the Company completed the wind-down activities associated with the Fuel Conversion business segment.

In addition, accrued severance of $0 and $65 is included in the other accrued liabilities line of the Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, respectively. A total of $5 and $65 was paid during the three and nine months ended September 30, 2019.

The Fuel Conversion business segment had no other assets or liabilities associated with it.

The activity of the Fuel Conversion discontinued operations consisted primarily of storage costs for holding the equipment at a third-party location totaling $2 and $21 for the three and nine months ended September 30, 2019 and the gain on sale of $20 recorded in discontinued operations during the third quarter. The activity for the Fuel Conversion discontinued operations consisted of Research and Development, severance and other costs for the three and nine months ended September 30, 2018 of $10 and $109, respectively. The Fuel Conversion business segment had no revenues associated with it.

5.    Restructuring Activities

On January 18, 2019, the Company announced a planned suspension of its Air Pollution Control (“APC”) business operation in China. This action is 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 September 30, 2019 includes staff rationalization and reduction, supplier and partner engagement, and the monetization of certain assets. The remaining transition activities include the execution of the remaining activities to satisfy the requirements for the remaining APC projects in China (with a backlog totaling approximately $47) in addition to collection efforts for the remaining accounts receivable.

The following table presents our revenues and net loss (which includes the Restructuring charge line item within the Condensed Statements of Operations) in China as follows:
 
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
 
2019
2018
2019
2018
Total revenues
$
—

$
1,066

$
311

$
2,406

Net loss
(80
)
(435
)
(1,469
)
(1,588
)

Total assets primarily consist of cash, accounts receivable, contract assets, prepaid expenses and other current assets. Total liabilities consist of accounts payable and certain accrued liabilities.

The following table presents net assets in China as follows:
 
As of
 
September 30, 2019
December 31, 2018
Total assets
$
4,308

$
8,546

Total liabilities
(266
)
(2,953
)
Total net assets
$
4,042

$
5,593


The Company incurred approximately $562 of severance costs relating to the suspension of the APC business in China, of which $90 and $562 were paid during the three and nine months ended September 30, 2019.

On January 23, 2019, the Company notified the landlord of our intention to early terminate the lease on July 22, 2019. The Company incurred an early termination penalty of $63 during the first quarter of 2019, which is included in restructuring expense for the nine months ended September 30, 2019.

11



The Company recorded restructuring charges of $0 and $625 for the three and nine months ended September 30, 2019 and $0 and $0 in 2018, respectively. The charge consisted primarily of one-time severance costs of $562 and the early termination penalty for our lease associated with the suspension of our APC business in China of $63. The following is a reconciliation of the accrual for the workforce reduction that is included within the "Accrued Liabilities - Employee Compensation" line of the consolidated balance sheets for the three and nine months ending September 30, 2019 and 2018:
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2019
2018
2019
2018
Restructuring liability at beginning of period
$
155

$
188

$
65

$
391

      Amounts expensed
—

—

625

—

      Amounts paid
(155
)
(93
)
(690
)
(296
)
Restructuring liability at end of period
$
—

$
95

$
—

$
95


The restructuring liability for the three and nine months ended September 30, 2018 relates to severance costs associated with the suspension of the Fuel Conversion business segment.

6.    Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss by component were as follows: 
 
Three months ended September 30,
Nine Months Ended 
 September 30,
 
2019
2018
2019
2018
Foreign currency translation
 
 
 
 
Balance at beginning of period
$
(1,224
)
$
(950
)
$
(1,285
)
$
(772
)
Other comprehensive loss:
 
 
 
 
Foreign currency translation adjustments (1)
(337
)
(263
)
(276
)
(441
)
Balance at end of period
$
(1,561
)
$
(1,213
)
$
(1,561
)
$
(1,213
)
Available-for-sale marketable securities
 
 
 
 
Balance at beginning of period
$
—

$
1

$
—

$
4

Other comprehensive income:
 
 
 
 
Net unrealized holding loss (2)
—

—

—

(3
)
Balance at end of period
$
—

$
1

$
—

$
1

Total accumulated other comprehensive loss
$
(1,561
)
$
(1,212
)
$
(1,561
)
$
(1,212
)

(1)
In all periods presented, there were no tax impacts related to rate changes and no amounts were reclassified to earnings.
(2)
In all periods presented, there were no realized holding gains or losses and therefore no amounts were reclassified to earnings.

7.    Treasury Stock
Common stock held in treasury totaled 656,844 and 655,306 with a cost of $1,486 and $1,484 at September 30, 2019 and December 31, 2018, respectively. These shares were withheld from employees to settle personal tax withholding obligations that arose as a result of restricted stock units that vested in the periods presented.


12


8.    Earnings per Share
Basic earnings per share excludes the dilutive effects of stock options, restricted stock units (RSUs), 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, 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 are excluded from diluted earnings per share because they are anti-dilutive. For the three and nine months ended September 30, 2019 and for the nine months ended September 30, 2018, basic earnings per share is equal to diluted earnings per share because all outstanding stock awards and convertible loan notes are considered anti-dilutive during periods of net loss. For the three months ended September 30, 2018, diluted earnings per share includes unexercised options and unvested RSUs since net income was generated in that period and the effect of those instruments is dilutive. The following table sets forth the weighted-average shares used in calculating the earnings per share for the three and nine months ended September 30, 2019 and 2018.
 
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
 
2019
2018
2019
2018
Basic weighted-average shares
24,187,000

24,171,000

24,183,000

24,162,000

Conversion of unsecured loan notes
—

—

—

—

Unexercised options and unvested RSUs
—

417,000

—

—

Diluted weighted-average shares
24,187,000

24,588,000

24,183,000

24,162,000

 
Fuel Tech had 1,269,000 and 1,286,000 weighted average equity awards outstanding at September 30, 2019 and 2018, respectively, that were not dilutive for the purposes of inclusion in the calculation of diluted earnings per share but could potentially become dilutive in future periods.

9.    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, Restricted Stock Units (“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 5,600,676 shares that may be issued or reserved for awards to participants under the Incentive Plan. As of September 30, 2019, Fuel Tech had 2,092,136 shares available for share-based awards under the 2014 Plan.

We did not record any excess tax benefits within income tax expense for the three and nine months ended September 30, 2019. Given the Company has a full valuation allowance on its deferred tax assets, there were no excess tax benefits to record for the three and nine months ended September 30, 2019. In addition, we account for forfeitures of awards based on an estimate of the number of awards expected to be forfeited and adjusting 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 Consolidated Statements of Operations. The components of stock-based compensation for the three and nine months ended September 30, 2019 and 2018 were as follows:
 
Three Months Ended 
 September 30,
Nine Months Ended September 30,
 
2019
2018
2019
2018
Stock options and restricted stock units, net of forfeited
$
138

$
97

$
357

$
135

Tax benefit of stock-based compensation expense
—

—

—

—

After-tax effect of stock-based compensation
$
138

$
97

$
357

$
135

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.

13


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 nine months ended September 30, 2019 was as follows:
 
Number
of
Options
Weighted-
Average
Exercise Price
Weighted- Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Outstanding on January 1, 2019
932,500

$
4.68

 
 
Granted
—

—

 
 
Exercised
—

—

 
 
Expired or forfeited
(185,000
)
10.14

 
 
Outstanding on September 30, 2019
747,500

$
3.33

4.98
$
4

Exercisable on September 30, 2019
747,500

$
3.33

4.98
$
4

As of September 30, 2019, there was no unrecognized compensation cost related to non-vested stock options granted under the Incentive Plans.

Restricted Stock Units

Restricted stock units (RSUs) granted to employees vest over time based on continued service (typically vesting over a period between two and four years). Such time-vested RSUs are valued at the date of grant using the intrinsic value method 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 period.

In addition to the time vested RSUs, the Company entered into a 2019 Executive Performance RSU Award Agreement (the “2019 Agreement”) with certain officers, including its President and Chief Executive Officer and Principal Financial Officer and Controller pursuant to which each 2019 Participating Executive will have the opportunity to earn a specified amount of restricted stock units (RSUs). The amount of RSUs awarded, if any, will be based on the Company’s achievement of varying levels of operating income before the impact of incentive pay (but including adjustments to reflect the payment of sales commissions) in fiscal 2019 (“Operating Income”), as determined by the Company, in its sole discretion. Nevertheless, no Participating Executive will be entitled to any such RSUs unless the Company achieves a minimum of $2 million in Operating Income in 2019. If awarded, such RSUs will vest in equal amounts (i.e., 1/3, 1/3 and 1/3) over three years commencing one year after the grant date based on continued service. Such RSUs are valued at the date of grant using the intrinsic value method based on the closing price of the Company’s common stock on the grant date.
At September 30, 2019, there is $489 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 1.56 years.
A summary of restricted stock unit activity for the nine months ended September 30, 2019 is as follows:
 
Shares
Weighted Average
Grant Date
Fair Value
Unvested restricted stock units at January 1, 2019
1,110,277

$
1.21

Granted
228,135

1.52

Forfeited
—

—

Vested
(17,777
)
1.59

Unvested restricted stock units at September 30, 2019
1,320,635

$
1.26

The fair value of restricted stock that vested during the nine month period ending September 30, 2019 was $22.

14


Deferred Directors Fees
In addition to the Incentive Plans, Fuel Tech has a Deferred Compensation Plans 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 ASC 718, Fuel Tech accounts for these awards as equity awards as opposed to liability awards. During the nine month periods ended September 30, 2019 and 2018, Fuel Tech recorded no stock-based compensation expense under the Deferred Plan.
 
10.    Debt Financing

On June 19, 2019, the Company entered into a Cash Collateral Security agreement with BMO Harris Bank, N.A. (the BMO Harris agreement) to use for the sole purpose of issuing standby letters of credit. The BMO Harris agreement requires us to pledge as cash collateral 105% 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 BMO Harris agreement. At September 30, 2019, the Company had outstanding standby letters of credit totaling approximately $2,361 under the BMO Harris agreement. As of September 30, 2019, the Company held $2,482 in a separate restricted use designated BMO Harris Bank N.A. deposit account. Fuel Tech is committed to reimbursing the issuing bank for any payments made by the bank under these instruments. 
 
In connection with the transition to BMO Harris Bank N.A., the Company canceled its U.S. Domestic credit facility with JPMorgan Chase Bank, N.A. effective on September 25, 2019.

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:
•
The Air Pollution Control technology segment includes technologies to reduce NOx emissions in flue gas from boilers, incinerators, furnaces and other stationary combustion sources. These include Low and Ultra Low NOx Burners (LNB and ULNB), Over-Fire Air (OFA) systems, NOxOUT® and HERT™ Selective Non-Catalytic Reduction (SNCR) systems, and Advanced Selective Catalytic Reduction (ASCR™) systems. Our ASCR systems include ULNB, OFA, and SNCR components, along with a downsized SCR catalyst, Ammonia Injection Grid (AIG), and Graduated Straightening Grid GSG™ systems to provide high NOx reductions at significantly lower capital and operating costs than conventional SCR systems. The NOxOUT CASCADE® and NOxOUT-SCR® processes are more basic, using just SNCR and SCR catalyst components. ULTRA™ technology creates ammonia at a plant site using safe urea for use with any SCR application. 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 CFD and CKM 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.
Information about reporting segment net sales and gross margin from continuing operations are provided below:

15


Three months ended September 30, 2019
Air Pollution
Control Segment
FUEL CHEM
Segment
Other
Total
Revenues from external customers
$
1,816

$
4,636

$
—

$
6,452

Cost of sales
(1,197
)
(2,366
)
—

(3,563
)
Gross margin
619

2,270

—

2,889

Selling, general and administrative
—

—

(3,822
)
(3,822
)
Research and development
—

—

(352
)
(352
)
Intangible assets abandonment
—

—

(76
)
(76
)
Operating income (loss) from continuing operations
$
619

$
2,270

$
(4,250
)
$
(1,361
)
 `
Three months ended September 30, 2018
Air Pollution
Control Segment
FUEL CHEM
Segment
Other
Total
Revenues from external customers
$
10,882

$
5,188

$
—

$
16,070

Cost of sales
(8,116
)
(2,538
)
—

(10,654
)
Gross margin
2,766

2,650

—

5,416

Selling, general and administrative
—

—

(4,105
)
(4,105
)
Research and development
—

—

(265
)
(265
)
Operating income (loss) from continuing operations
$
2,766

$
2,650

$
(4,370
)
$
1,046


Nine months ended September 30, 2019
Air Pollution
Control Segment
FUEL CHEM
Segment
Other
Total
Revenues from external customers
$
12,408

$
13,147

$
—

$
25,555

Cost of sales
(8,061
)
(6,693
)
—

(14,754
)
Gross margin
4,347

6,454

—

10,801

Selling, general and administrative
—

—

(12,735
)
(12,735
)
Restructuring charge
—

—

(625
)
(625
)
Research and development
—

—

(823
)
(823
)
Intangible assets abandonment




(127
)
(127
)
Operating income (loss) from continuing operations
$
4,347

$
6,454

$
(14,310
)
$
(3,509
)

Nine months ended September 30, 2018
Air Pollution
Control Segment
FUEL CHEM
Segment
Other
Total
Revenues from external customers
$
27,872

$
12,836

$
—

$
40,708

Cost of sales
(20,040
)
(6,505
)
—

(26,545
)
Gross margin
7,832

6,331

—

14,163

Selling, general and administrative
—

—

(13,789
)
(13,789
)
Research and development
—

—

(814
)
(814
)
Intangible assets abandonment
—

—

(317
)
(317
)
Operating income (loss) from continuing operations
$
7,832

$
6,331

$
(14,920
)
$
(757
)

Geographic Segment Financial Data

16


Information concerning our operations by geographic area is provided below. Revenues are attributed to countries based on the location of the customer. Assets are those directly associated with operations of the geographic area.
 
Three Months Ended 
 September 30,
Nine Months Ended September 30,
 
2019
2018
2019
2018
Revenues:




United States
5,727

11,629

22,104

30,701

Foreign
725

4,441

3,451

10,007


6,452

16,070

25,555

40,708

 
September 30,
2019
December 31,
2018
Assets:


United States
$
29,437

$
36,784

Foreign
8,442

14,935


$
37,879

$
51,719

 
12.    Leases

Adoption of ASC 842, "Leases"
On January 1, 2019, we adopted ASC 842 using the modified retrospective method outlined in ASU 2018-11 "Leases (Topic 842) Targeted Improvements." Results for reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior period amounts are not adjusted and continue to be reported in accordance with our legacy accounting under Accounting Standards Codification Topic 840: Leases (ASC 840). The Company recorded the transition to ASC 842 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented.

We have elected the package of practical expedients permitted under the transition guidance, which among other things, allow us to carry forward the historical accounting relating to lease identification and classification for existing leases upon adoption. We have also elected the practical expedient to not separate lease and non-lease components for the majority of our leases and the election to keep leases with an initial term of 12 months or less off of the consolidated balance sheet.

The cumulative effect of the changes made to our January 1, 2019 consolidated balance sheet for the adoption of ASC 842 were as follows:
 
Balance at December 31, 2018
Adjustments Upon Adoption of ASC 842
Balance at January 1, 2019
Assets
 
 
 
Right-of-use operating lease assets
$
—

$
1,592

$
1,592

Liabilities
 
 
 
Other accrued liabilities
6,099

(22
)
6,077

Operating lease liabilities - current
—

650

650

Operating lease liabilities - non-current
—

942

942

Equity
 
 
 
Accumulated deficit
(102,495
)
22

(102,473
)

The adjustment made to the January 1, 2019 consolidated balance sheet related to an accrued liability for lease escalation clauses in certain of our leases under ASC 840 which is a cumulative-effect adjustment to the opening balance of accumulated deficit upon the adoption of ASC 842.

Leases
We have nine total operating leases which relate to both office space locations and certain office equipment. Our leases have remaining lease terms of 1 year to 6 years. Our leases do not contain any material residual value guarantees or material restricted covenants and we currently have no material sublease arrangements. We have no financing leases as defined under ASC 842.

17



Total operating lease expense for the three and nine months ended September 30, 2019 is as follows:
 
For the Three Months ended September 30, 2019
For the Nine Months ended September 30, 2019
Operating lease cost
$
171

$
514

Short-term lease cost
1

135

   Total lease cost
$
172

$
649


The weighted average remaining lease term was 4.33 years as of September 30, 2019. The weighted average discount rate was 3.52% as of September 30, 2019.

Remaining maturities of our existing lease liabilities as of September 30, 2019 were as follows:
Year Ending December 31,
Operating Leases
2019 (excluding the nine months ended September 30, 2019)
$
160

2020
310

2021
218

2022
165

2023
152

Thereafter
196

Total lease payments
$
1,201

Less imputed interest
(110
)
Total
$
1,091


The following is the balance sheet classification of our existing lease liabilities as of September 30, 2019:

Operating lease liabilities - current
$
376

Operating lease liabilities - non-current
715

Total operating lease liabilities
$
1,091


Supplemental cash flow information related to leases was as follows:
 
For the Three Months ended September 30, 2019
For the Nine Months ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
$
162

$
505

Leased assets obtained in exchange for operating lease liabilities
154

482

13.    Accrued Liabilities

The components of other accrued liabilities are as follows:
 
As of
 
September 30, 2019
 
December 31, 2018
Contract liabilities (Note 3)
$
682

 
$
1,234

Accrued remediation contingency (Note 14)
760

 
—

Other accrued liabilities
977

 
4,865

Total other accrued liabilities
$
2,419

 
$
6,099



18


14.    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.

During the fourth quarter of 2018, the Company was notified of certain non-conformance issues with a U.S. customer associated with equipment that requires remedy under the warranty provision of the contract. The Company is in the process of remedying the non-conformance issues. During the first quarter of 2019, the Company filed a notice of claim with our insurance carrier and received a confirmation of insurance coverage. As a result, the company recorded $973 as expected insurance proceeds from our insurance carrier and $1,223 (including the insurance policy deductible of $250) as an accrued liability associated with the remedy of the non-conformance issues identified with our customer for the three months ended March 31, 2019. During the second quarter of 2019, we revised our claim estimate with our insurance carrier and recorded an additional $1,005 as expected insurance proceeds from our insurance carrier and an additional $1,005 as an accrued liability associated with the completion of the non-conformance issues for the three months ended June 30, 2019. As of September 30, 2019, we have total receivables from the insurance carrier of $1,991 in the accounts receivable line of the Consolidated Balance Sheets and a total accrued liability associated with the completion of the non-conformance issues of $760 in the other accrued liabilities line of the Consolidated Balance Sheets. The Company recorded the amount due from our insurance carrier as our insurance coverage and the terms are not in dispute and the claim submitted is consistent with the terms of insurance coverage provided. The Company currently has $500 of accounts receivable which is past due associated with this project. Upon satisfactory completion of non-conformance issues identified with the customer, the Company expects to collect the remaining accounts receivable due from the customer.

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 during the nine months ended September 30, 2019 and 2018. The warranty liability balance was $159 at September 30, 2019 and 2018.
 
15.    Income Taxes

The Company’s effective tax rate is approximately 0% for the three and nine month periods ended September 30, 2019 and 2018, respectively. The Company's effective tax rate differs from the statutory federal tax rate of 21% for the three and nine month periods ended September 30, 2019 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 and nine month periods ended September 30, 2019 and 2018.

On April 3, 2019, the Company received notice from the Internal Revenue Service that our U.S. income tax return for the year ended December 31, 2016 is currently under audit.
Fuel Tech had no unrecognized tax benefits as of September 30, 2019 and December 31, 2018.  


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16.    Goodwill and Other Intangibles
Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. Fuel Tech has two reporting units for goodwill evaluation purposes: the FUEL CHEM® technology segment and the APC technology segment. There is no goodwill associated with our APC segment.  At both September 30, 2019 and December 31, 2018, our entire goodwill balance of $2,116 was allocated to the FUEL CHEM® technology segment.
Goodwill is allocated to each of our reporting units after considering the nature of the net assets giving rise to the goodwill and how each reporting unit would enjoy the benefits and synergies of the net assets acquired. There were no indications of goodwill impairment in the nine months ended September 30, 2019 and 2018.
Fuel Tech reviews other intangible assets, which include customer lists and relationships, covenants not to compete, patent assets, tradenames, and acquired technologies, for impairment on a recurring basis or when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In the event that impairment indicators exist, a further analysis is performed and if the sum of the expected undiscounted future cash flows resulting from the use of the asset is less than the carrying amount of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. Management considers historical experience and all available information at the time the estimates of future cash flows are made, however, the actual cash values that could be realized may differ from those that are estimated.

During the third quarter of 2019, the Company recorded an abandonment charge of $76 principally associated with the remaining patent assets in China which the Company elected to not maintain and abandon as a result of the planned suspension of the APC business operation in China. The abandonment charge was calculated by determining the net book values of the abandoned patent assets by deducting the accumulated amortization from the acquisition cost. The abandonment charge is included in “Intangible assets abandonment” line in the accompanying Condensed Statements of Operations for the three and nine months ended September 30, 2019.
There were no indications of intangible asset impairments for the nine month period ended September 30, 2019.

FUEL TECH, INC.

Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations    
Results of Operations
Revenues for the three and nine month periods ending September 30, 2019 and 2018 were $6,452 and $16,070 and $25,555 and $40,708, respectively, representing a decrease of $9,618 or 60% and $15,153 or 37% versus the same periods last year.
The Air Pollution Control (APC) technology segment generated revenues of $1,816 and $12,408 for the three and nine month periods ending September 30, 2019, representing a decrease of $9,066 or 83% and $15,464 or 55% from the prior year amount of $10,882 and $27,872, respectively. The decrease in APC revenue was principally related to timing of project execution and the decline in backlog of $12.4 million at December 31, 2018 versus $22.1 million at December 31, 2017, resulting from lower new APC orders announced during 2018 and continuing through the first three quarters of 2019.
Consolidated APC backlog at September 30, 2019 was $6,773 versus backlog at December 31, 2018 of $12,384. Our current backlog consists of U.S. domestic projects totaling $5,423 and international projects totaling $1,350.
The FUEL CHEM® technology segment generated revenues of $4,636 and $13,147 for the three and nine months ended September 30, 2019, representing an decrease of $552 or 11% and an increase of $311 or 2% from the prior year amount of $5,188 and $12,836, respectively. The decrease in FUEL CHEM revenue for the three months ended September 30, 2019 as compared to the same period of the prior year was due to soft electric demand market and low natural gas prices, which leads to fuel switching, unscheduled outages, and combustion units operating at less than capacity. The increase in FUEL CHEM revenue for the nine months ended September 30, 2019 as compared to the same period of the prior year was principally related to the sale of equipment and installation of two new coal-fired units with a U.S. customer. We remain focused on attracting new customers in our FUEL CHEM business, for both coal and non-coal applications, but our ability to attract new coal customers continues to be affected by the soft electric demand market and fuel switching as a result of low natural gas prices.

Consolidated gross margin percentage for the three month periods ended September 30, 2019 and 2018 was 45% and 34%, respectively, and was 42% and 35% for the nine month periods then ended. The overall increase in gross margin is primarily attributable to the mix between APC and FUEL CHEM revenues recognized during the quarter and to an improvement in APC

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gross margin for the three and nine month periods ended September 30, 2019 and 2018 to 34% from 25% and 35% from 28%, respectively. The increase in APC gross margin is primarily due to project mix and timing of execution.

For the FUEL CHEM technology segment, the gross margin percentage decreased to 49% from 51% for the three and nine month periods ended September 30, 2019 due to the customer make-up and its related margin mix profile. The gross margin percentage for the FUEL CHEM technology segment remained consistent at 49% for the three and nine month periods ended September 30, 2018.

Selling, general and administrative expenses (SG&A) were $3,822 and $4,105 for the three month periods ended September 30, 2019 and 2018 and $12,735 and $13,789 for nine month periods ending September 30, 2019 and 2018, respectively. For the three and nine month periods ended September 30, 2019, this represents a decrease of $283 and $1,054, respectively. For the three month period ended September 30, 2019, the decrease is the primary result of a reduction in administrative costs relating to foreign subsidiaries of $375 (largely driven by the suspension of the APC business operation in China), a reduction in other administrative costs relating to agent commissions and travel of $135 offset by an increase in employee related and other administrative costs of $85 and professional and consulting services of $142. For the nine month period ended September 30, 2019 the decrease was primarily the result of a reduction in administrative costs relating to foreign subsidiaries of $958, largely driven by the suspension of the APC business operation in China, and a reduction in other administrative costs primarily relating to agent commissions of $96. SG&A as a percentage of revenues increased to 59% from 26% and 50% from 34% in the three and nine month periods ending September 30, 2019 and 2018. The increase in SG&A percentage is primarily attributed to the decrease in revenues due to the timing of project execution as well as lower new APC orders announced during 2018 and the first three quarters of 2019.

During the second quarter of 2017, the Company suspended all operations associated with the Fuel Conversion business segment. The activity of the Fuel Conversion discontinued operations consisted primarily of storage costs for holding the equipment at a third-party location totaling $2 and $21 for the three and nine months ended September 30, 2019 and the gain on sale of $20 recorded in discontinued operations during the third quarter. The activity for the Fuel Conversion discontinued operations consisted of Research and Development, severance and other costs for the three and nine months ended September 30, 2018 of $10 and $109, respectively. The Fuel Conversion business segment had no revenues associated with it. The Fuel Conversion business segment had no revenues associated with it. The overall reduction in the discontinued operations for the three and nine month period ending September 30, 2019 in comparison to the same period in 2018 is due to the overall wind-down of operations for the Fuel Conversion discontinued operations and offset with the gain on sale related to the sale of the remaining equipment in Assets held for sale of $20 recorded in discontinued operations during the third quarter of 2019.

On January 18, 2019, the Company announced a planned suspension of its APC business operation in China. This action is 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 Company recorded restructuring charges of $0 and $0 and $625 and $0 for the three and nine months ended September 30, 2019 and 2018, respectively. The charge consisted primarily of one-time severance payments and the early termination penalty for our lease associated with the suspension of our APC business in China. For further information related to restructuring, refer to Note 5 - Restructuring Activities.

Research and development expenses for the three and nine month periods ended September 30, 2019 was $352 and $823, respectively, and for the same periods in 2018 were $265 and $814, respectively. The expenditures in our research and development expenses were 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 that include DGI™ Dissolved Gas Infusion Systems, an innovative alternative to current aeration technology. This technology has not yet met the criteria to be a separate operating segment under ASC 280 Segment Reporting. This infusion process has a variety of applications in the water and waste water 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.

Income tax expense for the three and nine month periods ended September 30, 2019 and 2018 were $21 and $0 and $23 and $2, respectively. The Company is projecting a consolidated effective tax rate of 0% for 2019 which was lower than the federal income tax rate of 21%. The Company's effective tax rate differs from the statutory federal tax rate of 21% for the three and nine months ended September 30, 2019 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.


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On January 1, 2019, we adopted ASC 842 using the modified retrospective method outlined in ASU 2018-11 "Leases (Topic 842) Targeted Improvements." Results for reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior period amounts are not adjusted and continue to be reported in accordance with our legacy accounting under Accounting Standards Codification Topic 840: Leases (ASC 840). The Company recorded the transition to ASC 842 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented.

We have elected the package of practical expedients permitted under the transition guidance, which among other things, allow us to carry forward the historical accounting relating to lease identification and classification for existing leases upon adoption. We have also elected the practical expedient to not separate lease and non-lease components for the majority of our leases and the election to keep leases with an initial term of 12 months or less off of the consolidated balance sheet. Refer to Footnote 12 to the Consolidated Financial Statements for the impact of the adoption of ASC 842.

Liquidity and Sources of Capital

On June 19, 2019, the Company entered into a Cash Collateral Security agreement with BMO Harris Bank, N.A. (the BMO Harris agreement) to use for the sole purpose of issuing standby letters of credit. The BMO Harris agreement requires us to pledge as cash collateral 105% 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 BMO Harris agreement. At September 30, 2019, the Company had outstanding standby letters of credit totaling approximately $2,361 under the BMO Harris agreement. As of September 30, 2019, the Company held $2,482 in a separate restricted use designated BMO Harris Bank N.A. deposit account. Fuel Tech is committed to reimbursing the issuing bank for any payments made by the bank under these instruments. 
 
In connection with the transition to BMO Harris Bank N.A., the Company canceled its U.S. Domestic credit facility with JPMorgan Chase Bank, N.A. effective on September 25, 2019.

We continue to monitor our liquidity needs and in response to our continued 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 sustained losses from continuing operations during the nine month period ended September 30, 2019 totaling $3,512. Our cash used from continuing operations for this same period totaled $2,320. We have taken measures to reduce our expense infrastructure and our ability to operate our base businesses prospectively is based on our ability to secure new orders in the APC business and our ability to successfully execute existing APC projects in line with our internal budgets.
Our cash balance as of September 30, 2019 totaled $15,332 (including restricted cash of $2,482), and our working capital totaled $20,143. We do not have any outstanding debt obligations other than for our outstanding letters of credit, and our current credit agreement does not have any financial covenants as we are currently in a Cash Collateral Security agreement with our lender.
We have evaluated our ongoing business needs, and considered the cash requirements of our base business of Air Pollution Control and FUEL CHEM, as well as our efforts to wind-down our APC operations in China. 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) the costs of winding up our Fuel Conversion business and APC operations in China as well as 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.
Contingencies and Contractual Obligations
Fuel Tech issues a standard product warranty with the sale of its products to customers as discussed in Note 14. There was no change in the warranty liability balance during the nine months ended September 30, 2019.
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

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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, 2018 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
Foreign Currency Risk Management
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.
Fuel Tech is also exposed to changes in interest rates primarily due to its debt facility (refer to Note 10 to the consolidated financial statements). A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not have a materially adverse effect on interest expense during the upcoming year ended December 31, 2019.
 
Item 4.        Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Fuel Tech maintains disclosure controls and procedures and internal controls designed to ensure (a) that information required to be disclosed in Fuel Tech’s filings under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) that such information is accumulated and communicated to management, including the principal executive and financial officer, as appropriate to allow timely decisions regarding required disclosure. Fuel Tech’s Chief Executive Officer and principal financial officer have evaluated the Company’s disclosure controls and procedures, as defined in Rules 13a – 15(e) and 15d -15(e) of the Exchange Act, as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.
Changes in Internal Control over Financial Reporting
Beginning January 1, 2019, we adopted ASC 842 "Leases". It did not have a material impact on our ongoing net income; however, we implemented changes to our processes related to accounting for leases and related internal controls. These changes included the development of new policies related to the new leasing framework, training, ongoing contract review requirements, and gathering of information to comply with disclosure requirements.
There has been no change in the Company's internal control over financial reporting during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.


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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings
We are from time to time involved in litigation incidental to our business. We are not currently involved in any litigation in which we believe an adverse outcome would have a material effect on our business, financial conditions, results of operations, or prospects.
 
Item 1A.        Risk Factors

The risk factors included in our Annual Report on Form 10-K for fiscal year ended December 31, 2018 have not materially changed.


Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds

None

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Item 6.        Exhibits
a.
Exhibits (all filed herewith)
 
31.1
 
31.2
 
32
 
101.1
INSXBRL Instance Document
 
101.2
SCHXBRL Taxonomy Extension Schema Document
 
101.3
CALXBRL Taxonomy Extension Calculation Linkbase Document
 
101.4
DEFXBRL Taxonomy Extension Definition Linkbase Document
 
101.5
LABXBRL Taxonomy Extension Label Linkbase Document
 
101.6
PREXBRL Taxonomy Extension Prevention Linkbase Document


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FUEL TECH, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date: 11/13/2019
By:
/s/ Vincent J. Arnone
 
 
Vincent J. Arnone
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)

Date: 11/13/2019
By:
/s/ James M. Pach
 
 
James M. Pach
 
 
Vice President, Treasurer and Controller
 
 
(Principal Financial Officer)


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