FUEL TECH, INC. - Quarter Report: 2020 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended

September 30, 2020

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)

  ________________________________

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	FTEK	NASDAQ

 

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  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☒    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		☒	Smaller reporting company		☒
			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  ☒

 

On October 31, 2020 there were outstanding 24,701,159 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, 2020

 

INDEX

 

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	1
	Condensed Consolidated Statements of Operations for the Three- and Nine-Month Periods Ended September 30, 2020 and 2019	2
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three- and Nine-Month Periods Ended September 30, 2020 and 2019	2
	Condensed Consolidated Statements of Stockholders' Equity for the Three- and Nine-Month Periods Ended September 30, 2020 and 2019	4
	Condensed Consolidated Statements of Cash Flows for the Three- and Nine-Month Periods Ended September 30, 2020 and 2019	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	22
Item 4.	Controls and Procedures	22
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 6.	Exhibits	24
SIGNATURES		25

 

 

 

		September 30, 2020				December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents		$	9,418			$	10,914
Restricted cash			2,025				2,080
Accounts receivable, net			5,989				6,473
Insurance Receivable			2,589				—
Inventories, net			337				264
Prepaid expenses and other current assets			1,678				1,879
Income taxes receivable			69				—
Total current assets			22,105				21,610
Property and equipment, net of accumulated depreciation of $26,692 and $26,174, respectively			5,347				5,662
Goodwill			2,116				2,116
Other intangible assets, net of accumulated amortization of $6,810 and $6,671, respectively			794				906
Restricted cash			367				507
Right-of-use operating lease assets			430				362
Other assets			366				443
Total assets		$	31,525			$	31,606
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	2,963			$	2,117
Current portion of long-term borrowings			945				—
Accrued liabilities:
Operating lease liabilities - current			175				182
Employee compensation			687				519
Income taxes payable			36				—
Other accrued liabilities			1,566				1,976
Total current liabilities			6,372				4,794
Operating lease liabilities - non-current			247				180
Long-term borrowings, net of current portion			611				—
Deferred income taxes, net			172				171
Other liabilities			292				286
Total liabilities			7,694				5,431
COMMITMENTS AND CONTINGENCIES (Note 13)
Stockholders’ equity:
Common stock, $.01 par value, 40,000,000 shares authorized, 25,509,298 and 25,053,480 shares issued, and 24,701,159 and 24,592,578 shares outstanding, respectively			255				254
Additional paid-in capital			139,767				139,560
Accumulated deficit			(113,060	)			(110,325	)
Accumulated other comprehensive loss			(1,589	)			(1,778	)
Nil coupon perpetual loan notes			76				76
Treasury stock, at cost			(1,618	)			(1,612	)
Total stockholders’ equity			23,831				26,175
Total liabilities and stockholders’ equity		$	31,525			$	31,606

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2020				2019				2020				2019
Revenues		$	8,155			$	6,452			$	16,334			$	25,555
Costs and expenses:
Cost of sales			2,249				3,563				8,299				14,754
Selling, general and administrative			3,184				3,822				9,825				12,735
Restructuring charge			—				—				—				625
Research and development			285				352				880				823
Intangible assets abandonment			—				76				—				127
			5,718				7,813				19,004				29,064
Operating income (loss) from continuing operations			2,437				(1,361	)			(2,670	)			(3,509	)
Interest expense			(9	)			(4	)			(15	)			(8	)
Interest income			3				19				16				30
Other income (expense), net			(55	)			71				83				(1	)
Income (loss) from continuing operations before income taxes			2,376				(1,275	)			(2,586	)			(3,488	)
Income tax expense			—				(21	)			(149	)			(23	)
Net income (loss) from continuing operations			2,376				(1,296	)			(2,735	)			(3,511	)
Income (Loss) from discontinued operations			—				18				—				(1	)
Net income (loss)		$	2,376			$	(1,278	)		$	(2,735	)		$	(3,512	)
Net income (loss) per common share:
Basic
Continuing operations		$	0.10			$	(0.05	)		$	(0.11	)		$	(0.15	)
Discontinued operations		$	—			$	—			$	—			$	—
Basic net income (loss) per common share		$	0.10			$	(0.05	)		$	(0.11	)		$	(0.15	)
Diluted
Continuing operations		$	0.09			$	(0.05	)		$	(0.11	)		$	(0.15	)
Discontinued operations		$	—			$	—			$	—			$	—
Diluted net income (loss) per common share		$	0.09			$	(0.05	)		$	(0.11	)		$	(0.15	)
Weighted-average number of common shares outstanding:
Basic			24,701,000				24,187,000				24,656,000				24,183,000
Diluted			25,120,000				24,187,000				24,656,000				24,183,000

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2020				2019				2020				2019
Net income (loss)		$	2,376			$	(1,278	)		$	(2,735	)		$	(3,512	)
Other comprehensive income (loss):
Foreign currency translation adjustments			268				(337	)			189				(276	)
Comprehensive income (loss)		$	2,644			$	(1,615	)		$	(2,546	)		$	(3,788	)

 

		Common Stock								Additional Paid-in				Accumulated				Accumulated Other Comprehensive				Nil Coupon Perpetual				Treasury
		Shares				Amount				Capital				Deficit				Income (Loss)				Loan Notes				Stock				Total
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

		Common Stock								Additional Paid-in				Accumulated				Accumulated Other Comprehensive				Nil Coupon Perpetual				Treasury
		Shares				Amount				Capital				Deficit				Income (Loss)				Loan Notes				Stock				Total
Balance at December 31, 2019			24,592			$	254			$	139,560			$	(110,325	)		$	(1,778	)		$	76			$	(1,612	)		$	26,175
Net loss			—				—				—				(2,567	)			—				—				—				(2,567	)
Foreign currency translation adjustments			—				—				—				—				(231	)			—				—				(231	)
Stock compensation expense			—				—				81				—				—				—				—				81
Common shares issued upon vesting of restricted stock units			55				—				—				—				—				—				—				—
Treasury shares withheld			(11	)			—				—				—				—				—				(5	)			(5	)
Balance at March 31, 2020			24,636			$	254			$	139,641			$	(112,892	)		$	(2,009	)		$	76			$	(1,617	)		$	23,453
Net Loss			—				—				—				(2,544	)			—				—				—				(2,544	)
Foreign currency translation adjustments			—				—				—				—				152				—				—				152
Stock compensation expense			—				—				69				—				—				—				—				69
Common shares issued upon vesting of restricted stock units			66				1				—				—				—				—				(1	)			—
Treasury shares withheld			(1	)			—				—				—				—				—				—				—
Balance at June 30, 2020			24,701			$	255			$	139,710			$	(115,436	)		$	(1,857	)		$	76			$	(1,618	)		$	21,130
Net Income			—				—				—				2,376				—				—				—				2,376
Foreign currency translation adjustments			—				—				—				—				268				—				—				268
Stock compensation expense			—				—				57				—				—				—				—				57
Balance at September 30, 2020			24,701			$	255			$	139,767			$	(113,060	)		$	(1,589	)		$	76			$	(1,618	)		$	23,831

 

		Nine Months Ended September 30,
		2020				2019
Operating Activities
Net loss		$	(2,735	)		$	(3,512	)
Loss from discontinued operations			—				1
Net loss from continuing operations			(2,735	)			(3,511	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			495				644
Amortization			139				118
(Gain) loss on disposal of equipment			(3	)			4
Provision for doubtful accounts, net of recoveries			(1,144	)			—
Adjustment for Operating Lease (Note 2)			(11	)			—
Intangible assets abandonment			—				127
Stock-based compensation, net of forfeitures			208				357
Changes in operating assets and liabilities:
Accounts receivable			(863	)			8,601
Inventories			(71	)			654
Prepaid expenses, other current assets and other non-current assets			250				1,804
Accounts payable			820				(6,812	)
Accrued liabilities and other non-current liabilities			(376	)			(4,306	)
Net cash used in operating activities - continuing operations			(3,291	)			(2,320	)
Net cash used in operating activities - discontinued operations			—				(21	)
Net cash used in operating activities			(3,291	)			(2,341	)
Investing Activities
Purchases of equipment and patents			(206	)			(431	)
Net cash used in investing activities - continuing operations			(206	)			(431	)
Net cash provided by investing activities - discontinued operations			—				505
Net cash (used in) provided by investing activities			(206	)			74
Financing Activities
Proceeds from borrowings			1,556				—
Taxes paid on behalf of equity award participants			(6	)			(2	)
Net cash provided by (used in) financing activities			1,550				(2	)
Effect of exchange rate fluctuations on cash			256				(458	)
Net decrease in cash, cash equivalents and restricted cash			(1,691	)			(2,727	)
Cash, cash equivalents, and restricted cash at beginning of period (Note 2)			13,501				18,059
Cash, cash equivalents and restricted cash at end of period (Note 2)		$	11,810			$	15,332

 

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, 2020 are not necessarily indicative of the results to be expected for the full year ending December 31, 2020. 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, 2019 as filed with the Securities and Exchange Commission.

 

COVID-19 Pandemic

 

The emergence of the coronavirus (COVID-19) around the world presents significant risks to the Company, not all of which the Company is able to fully evaluate or even foresee at the current time. The COVID-19 pandemic has affected the Company’s operations in the three and nine months ended September 30, 2020, although the impact of the pandemic is difficult to quantify, and may continue to do so indefinitely thereafter. The Company has experienced, and may continue to experience, reductions in demand for certain of our products as several accounts remained offline due to soft electric demand and unplanned outage activities and due to the delay or abandonment of ongoing or anticipated projects due to our customers’, suppliers’ and other third parties’ financial distress or concern regarding the volatility of global markets.

 

Management cannot predict the full impact of the COVID-19 pandemic on the Company’s sales and marketing channels and supply chain, and as a result, the ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and will depend on future developments. Such effects could exist for an extended period of time even after the pandemic might end.

 

 

 

2.     Summary of Significant Accounting Policies

 

Restricted cash

 

Restricted cash as of September 30, 2020 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 $2,392 is comprised of $2,025 in current assets relating to existing standby letters of credit with varying maturity dates and expire no later than September 30, 2021 and $367 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 9 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 Sheets that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows:

 

 

Leases

 

The Company applies the provisions of Accounting Standards Codification ("ASC") 842, Leases.  The Company determines if an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. Right-of-use ("ROU") assets and lease liabilities are recognized at the lease commencement date based on the present value of the future minimum lease payments over the lease term. Operating ROU assets also include the impact of any lease incentives. 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, and 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.

 

During the quarter ending September 30, 2020, an error was detected in the calculation of the adoption of ASC 842. “Leases” made on January 1, 2019.  The calculation included an incorrect lease amount associated with one of our leases.   This error did not correctly present the Right of Use Operating Lease Asset and related Operating Lease Liability on the Company’s balance sheet.

 

We evaluated the revision in accordance with Accounting Standards Codification (ASC) 250, Accounting Changes and Error Corrections and evaluated the materiality of the revision on prior periods' financial statements in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 108, Quantifying Financial Statement Errors. We concluded that the revision was not material to any prior period and therefore, amendments of previously filed reports are not required. In accordance with ASC 250, we have corrected the error in all prior periods presented by revising the consolidated financial statements appearing herein. Periods not presented herein will be revised, as applicable, in future filings. The revision did not have an impact on net loss or earnings per share data for the year ended December 31, 2019.

 

 

 

3.     Revenue

 

The Company recognizes revenue when control of the promised goods or services is transferred to our customers, in an 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 generally 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.

 

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.

 

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’s APC product line also includes ancillary revenue for post contractual goods and services.  Revenue associated with these activities are recognized at point in time when delivery of goods or completion of the service obligation is performed.

 

Fuel Tech has installed over 1,100 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.

 

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.

 

On occasion, Fuel Tech will engineer and sell its chemical pumping equipment.  These projects are similar in nature to the APC projects described above and for those project where control transfers over time,  revenue is recognized based on the extent of progress towards completion of the single performance obligation. 

 

 

Disaggregated Revenue by Product Technology

 

The following table presents our revenues disaggregated by product technology:

 

 

Disaggregated Revenue by Geography

 

The following table presents our revenues disaggregated by geography, based on the billing addresses of our customers:

 

 

Timing of Revenue Recognition

 

The following table presents the timing of our revenue recognition:

 

 

 

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, 2020 and December 31, 2019, contract assets were approximately $1,929 and $1,857, 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 $357 and $712, at September 30, 2020 and December 31, 2019, 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, 2020, 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 $97 and $555 for the three and nine months ended September 30, 2020, respectively and $302 and $1,059 for three and nine months ended September 30, 2019, respectively, which represented primarily revenue from progress towards completion of our Air Pollution Control technology contracts.

 

As of September 30, 2020, we had three construction contracts in progress that were identified as loss contracts and a provision for losses of $3 was recorded in other accrued liabilities on the consolidated balance sheet. Refer to Footnote 13 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, 2019, we had three construction contracts in progress that were identified as loss contracts and a provision for losses in the amount of $26 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, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $6,417. The Company expects to recognize revenue on approximately $4,130 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:

 

 

 

 

4.     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, 2020 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 $25) 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 for 2020 and 2019 in China as follows:

 

 

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:

 

 

The Company incurred $0 in the three and nine month periods ending September 30, 2020 and $0 and $625 during the three and nine month periods ending September 30, 2019 for severance and lease cancellation costs related to the suspension of the APC business in China.

 

There is no liability for restructuring activities for the three and nine months ending September 30, 2020. 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, 2020 and 2019:

 

 

 

 

5.     Accumulated Other Comprehensive Loss

 

The changes in accumulated other comprehensive loss by component were as follows:

 

 

(1)	In all periods presented, there were no tax impacts related to rate changes and no amounts were reclassified to earnings.

 

 

6.     Treasury Stock

 

Common stock held in treasury totaled 808,139 and 796,090 with a cost of $1,618 and $1,612 at September 30, 2020 and December 31, 2019, 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.

 

 

7.     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 nine months ended September 30, 2020 and 2019, 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. 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, 2020 and 2019.

 

 

For the three month period ended September 30, 2020, there were 110,000 outstanding equity awards that were excluded from the computation of diluted EPS as the inclusion of such would have been anti-dilutive.  

 

 

 

8.     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, 2020, Fuel Tech had 2,359,333 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, 2020. 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, 2020. 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, 2020 and 2019 were as follows:

 

 

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.

 

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, 2020 was as follows:

 

 

As of September 30, 2020, 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 2020 Executive Performance RSU Award Agreement (the “2020 Agreement”) with certain officers, including its President and Chief Executive Officer pursuant to which each 2020 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 2020 (“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 $1 million in Operating Income in 2020. 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, 2020, there is $151 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 1.22  years.

 

A summary of restricted stock unit activity for the nine months ended September 30, 2020 is as follows:

 

 

The fair value of restricted stock that vested during the nine month period ending September 30, 2020 was $190.

 

Deferred Directors Fees

 

In addition to the Incentive Plans, Fuel Tech has a Deferred Compensation Plan 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, 2020 and 2019, Fuel Tech recorded no stock-based compensation expense under the Deferred Plan.

 

 

9.     Debt Financing

 

On April 17, 2020, the Company received $1,556 in loan proceeds from the Paycheck Protection Program (the “PPP”), established pursuant to the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and administered by the U.S. Small Business Administration (“SBA”). The unsecured loan is evidenced by a promissory note of the Company dated April 15, 2020 (the “Note”) in the principal amount of $1,556, issued to BMO Harris Bank N.A. (the “Bank”), the lender.

 

Under the terms of the Note, interest will accrue on the outstanding principal at the rate of 1.0% per annum. The term of the Note is two years, though it may be payable sooner in connection with an event of default under the Note. To the extent the loan amount is not forgiven under the PPP, the Company is obligated to make equal monthly payments of principal and interest, beginning seven months from the date of the Note, until the maturity date. The Note contains covenants by the Company, including obtaining the written consent of the Bank prior to material changes in the management or ownership of the Company.

 

As of September 30, 2020 the Company has utilized the entire balance of loan proceeds to fund its payroll expenses.  As a result, the Company believes it has met the eligibility criteria for forgiveness.  To the extent any amount is deemed unforgiveable, such amount will be payable over the terms of the note.

 

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, 2020 and December 31, 2019, respectively, the Company had outstanding standby letters of credit totaling approximately $2,278 and $2,461 under the BMO Harris agreement. As of September 30, 2020 and December 31, 2019 respectively, the Company held $2,392 and $2,587 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. credit facility with JPMorgan Chase Bank, N.A. effective on September 25, 2019.

 

 

 

10.     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:

 

 

 

 

 

 

 

Geographic Segment Financial Data

 

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.

 

 

 

 

 

11.     Leases

 

Leases

We have seven total operating leases which relate to both office space locations and certain office equipment. Our leases have remaining lease terms of 8 months to 5 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.

 

Total operating lease expense for the three and nine months ended September 30, 2020 and 2019, adjusted for correction referenced in Note 2, is as follows:

 

 

The weighted average remaining lease term was 3.23 years as of September 30, 2020. The weighted average discount rate was 4.72% as of September 30, 2020.

 

Remaining maturities of our existing lease liabilities as of September 30, 2020 were as follows:

 

 

The following is the balance sheet classification of our existing lease liabilities as of September 30, 2020:

 

 

Supplemental cash flow information related to leases, adjusted for correction referenced in Note 2, was as follows:

 

 

  

 

12.     Accrued Liabilities

 

The components of other accrued liabilities are as follows:

 

 

 

13.     Commitments and 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. During the second quarter of 2020 a charge of $1,150 to remedy this non-conformance issue was incurred. Offsetting this amount was a reversal of $499 of expense to reduce the allowance of doubtful accounts that had been previously reserved. The Company has completed all work associated with this issue. As of September 30, 2020 and December 31, 2019, we have $0 and $146 of accrued liability associated with the completion of the non-conformance issues in the other accrued liabilities line of the Consolidated Balance Sheets.  During the third quarter of 2020, the Company settled an outstanding claim with our insurance provider for these remediation efforts and recorded a receivable in the amount of $2,589. The settlement is recorded in the cost of sales line on the Consolidated Statement of Operations and in the Insurance Receivable line in the current asset section of the Consolidated Balance Sheets. Collection of the funds was completed in October 2020.

 

During the third quarter of 2020, the Company was notified of an equipment component failure at a foreign customer location.  The failure is under investigation and will be remedied under the warranty provision of the contracts that are in place with the customer and supplier.  As of September 30, 2020 a charge of $238 was recorded in the accounts payable line of the Consolidated Balance Sheets.  

 

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 included in the other accrued liabilities line of the Consolidated Balance Sheets during the nine months ended September 30, 2020 and 2019. The warranty liability balance was $159 at September 30, 2020 and 2019.

 

 

14.     Income Taxes

 

The Company’s effective tax rate is approximately 5.8% and 0.7% for the nine-month period ended September 30, 2020 and 2019, respectively. The Company's effective tax rate differs from the statutory federal tax rate of 21% for the nine month period ended September 30, 2020 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 nine month periods ended September 30, 2020 and 2019.

 

Fuel Tech had no unrecognized tax benefits as of September 30, 2020 and December 31, 2019.

 

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (the “CARES Act”). Among the changes to the U.S. federal income tax rules, the Cares Act restored net operating loss carryback rules that were eliminated by 2017 Tax Cuts and Jobs Act, restored 100 percent bonus depreciation for qualified improvement property, modified the limit on the deduction for net interest expense and accelerated the timeframe for refunds of AMT credits.   At this time we do not anticipate a material impact to the Company’s current or deferred income taxes as a result of the CARES Act.  We will continue to evaluate the effects of the CARES Act as additional legislative guidance become available.

 

 

 

15.     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, 2020 and December 31, 2019, 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, 2020 and 2019.

 

Fuel Tech reviews other intangible assets, which include patent assets, 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.

 

There were no indications of intangible asset impairments for the nine month periods ended September 30, 2020 and 2019.

 

 

16.     Subsequent Events

 

The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q, and determined that there have been no events that have occurred that would require adjustments to our disclosures in the consolidated financial statements.

 

 

17.     Liquidity

 

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 experienced continued declines in revenues and recurring losses. As a result, we have evaluated our ongoing business needs, and considered the cash requirements of our base business of Air Pollution Control (APC) and Fuel Chem businesses. 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, c) current availability of working capital, and d) support for our research and development initiatives. We continue to monitor our liquidity needs and 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 believe our current cash position and net cash flows expected to be generated from operations are adequate to fund planned operations of the Company for the next 12 months. In the event we determine we need to raise additional working capital, we may consider various financing alternatives which may include debt financing, common stock offerings, or financing involving convertible debt or other equity-linked securities; however, such financing alternatives may not be available on acceptable terms or at all and any such additional financing could be dilutive to our shareholders.