Notes to Consolidated Financial Statements
(
in thousands of dollars, except share and per-share data
)
1.
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
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 NO
x
reduction technologies as well as our FUEL CHEM program. The Company’s NO
x
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.
International revenues were
$12,616
,
$22,179
, and
$28,116
for the years ended
December 31, 2016, 2015 and 2014
, respectively. These amounts represented
23%
,
30%
, and
36%
of Fuel Tech’s total revenues for the respective periods of time. Foreign currency changes did not have a material impact on the calculation of these percentages. We have foreign offices in Beijing, China and Gallarate, Italy.
Basis of Presentation
The consolidated financial statements include the accounts of Fuel Tech and its wholly-owned subsidiaries. All intercompany transactions have been eliminated.
Reclassifications
Certain reclassifications to prior year amounts have been made in the consolidated financial statements to conform to the current period presentation. In the third quarter of 2016, the Company concluded that it was appropriate to separately present restructuring charges in the Consolidated Statements of Operations. Accordingly, the corresponding reclassifications have also been made to the Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014.
Use of Estimates
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company uses estimates in accounting for, among other items, revenue recognition, allowance for doubtful accounts, income tax provisions, excess and obsolete inventory reserve, impairment of long-lived assets, and warranty expenses. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable, and accounts payable are reasonable estimates of their fair value due to their short-term nature. Our marketable securities are carried at fair value based on quoted market prices in an active market.
Cash and Cash Equivalents
We include cash and investments having an original maturity of three months or less at the time of acquisition in cash and cash equivalents. We have never incurred realized or unrealized holdings gains or losses on securities classified as cash equivalents. Income resulting from short-term investments is recorded as interest income. At
December 31, 2016
, we had cash on hand of approximately
$3,222
at our Beijing, China subsidiary that is subject to certain local regulations that may limit the immediate availability of these funds outside of China. Cash on hand at our Italy subsidiary totaled approximately
$2,408
at
December 31, 2016
.
Restricted Cash
Restricted cash represents funds that are restricted to satisfy any amount borrowed against the Company's existing revolving credit facility (the Facility) with JPMorgan Chase Bank, N.A. The amount of restricted cash was reduced by
$1,000
on July 31, 2016 and became unrestricted cash and cash equivalents. The remaining balance of restricted cash totaling
$6,020
will remain through the Maturity Date of the Facility. Refer to Note 10 Debt Financing for further information on the Facility.
Foreign Currency Risk Management
Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. We do not enter into foreign currency forward contracts or into foreign currency option contracts to manage this risk due to the nature of the transactions involved.
Accounts Receivable
Accounts receivable consist of amounts due to us in the normal course of our business, are not collateralized, and normally do not bear interest. Accounts receivable includes unbilled receivables, representing costs and estimated earnings in excess of billings on uncompleted contracts under the percentage of completion method. At
December 31, 2016 and 2015
, unbilled receivables were approximately
$6,755
and
$7,312
, respectively.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is our management's best estimate of the amount of credit losses in accounts receivable. In order to control and monitor the credit risk associated with our customer base, we review the credit worthiness of customers on a recurring basis. Factors influencing the level of scrutiny include the level of business the customer has with Fuel Tech, the customer’s payment history, and the customer’s financial stability. Receivables are considered past due if payment is not received by the date agreed upon with the customer, which is normally
30 days
. Representatives of our management team review all past due accounts on a weekly basis to assess collectability. At the end of each reporting period, the allowance for doubtful accounts balance is reviewed relative to management’s collectability assessment and is adjusted if deemed necessary through a corresponding charge or credit to bad debts expense, which is included in selling, general, and administrative expenses in the consolidated statements of operations. Bad debt write-offs are made when management believes it is probable a receivable will not be recovered. The table below sets forth the components of the Allowance for Doubtful Accounts for the years ended December 31.
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|
Year
|
|
Balance at
January 1
|
|
Provision charged
to expense
|
|
Write-offs /
Recoveries
|
|
Balance at
December 31
|
2014
|
|
$
|
1,189
|
|
|
$
|
1,099
|
|
|
$
|
(366
|
)
|
|
$
|
1,922
|
|
2015
|
|
$
|
1,922
|
|
|
$
|
—
|
|
|
$
|
(150
|
)
|
|
$
|
1,772
|
|
2016
|
|
$
|
1,772
|
|
|
$
|
172
|
|
|
$
|
(375
|
)
|
|
$
|
1,569
|
|
Prepaid expenses and other current assets
Prepaid expenses and other current assets includes Chinese banker acceptances of
$838
and
$2,144
as of December 31, 2016 and 2015. These are short-term commitments of typically 30 to 60 days for future payments and can be redeemed at a discount or applied to future vendor payments.
Inventories
Inventories consist primarily of spare parts and are stated at the lower of cost or market using the first-in, first-out method. Usage is recorded in cost of sales in the period that parts were issued to a project or used to service equipment. Inventories are periodically evaluated to identify obsolete or otherwise impaired parts and are written off when management determines usage is not probable. On December 31, 2016, the Company established an excess and obsolete inventory reserve of
$825
of which
$175
is included in inventories and
$650
is included in other assets
on the consolidated balance sheet. The Company estimates the balance of excess and obsolete inventory by analyzing inventory by age using last used and original purchase date and existing sales pipeline for which the inventory could be used. The table below sets forth the components of the Excess and Obsolete Inventory Reserve for the years ended December 31.
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Year
|
|
Balance at
January 1
|
|
Provision charged
to expense
|
|
Write-offs /
Recoveries
|
|
Balance at
December 31
|
2016
|
|
$
|
—
|
|
|
$
|
825
|
|
|
$
|
—
|
|
|
$
|
825
|
|
Foreign Currency Translation and Transactions
Assets and liabilities of consolidated foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at year end. Revenues and expenses are translated at average exchange rates prevailing during the year. Gains or losses on foreign currency transactions and the related tax effects are reflected in net income. The resulting translation adjustments are included in stockholders’ equity as part of accumulated other comprehensive income.
Accumulated Other Comprehensive (Loss)
The changes in accumulated other comprehensive (loss) by component were as follows:
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December 31,
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2016
|
|
2015
|
Foreign currency translation
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(1,568
|
)
|
|
$
|
(471
|
)
|
Other comprehensive (loss):
|
|
|
|
|
Foreign currency translation adjustments (1)
|
|
(6
|
)
|
|
(1,097
|
)
|
Balance at end of period
|
|
$
|
(1,574
|
)
|
|
$
|
(1,568
|
)
|
Available-for-sale marketable securities
|
|
|
|
|
Balance at beginning of period
|
|
$
|
12
|
|
|
$
|
23
|
|
Other comprehensive (loss):
|
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|
|
|
Net unrealized holding (loss) (2)
|
|
(6
|
)
|
|
(11
|
)
|
Balance at end of period
|
|
$
|
6
|
|
|
$
|
12
|
|
Total accumulated other comprehensive (loss)
|
|
$
|
(1,568
|
)
|
|
$
|
(1,556
|
)
|
|
|
(1)
|
In all periods presented, there were no tax impacts related to rate changes and no amounts were reclassified to earnings.
|
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(2)
|
In all periods presented, there were no realized holding gains or losses and therefore no amounts were reclassified to earnings.
|
Research and Development
Research and development costs are expensed as incurred. Research and development projects funded by customer contracts are reported as part of cost of goods sold. Internally funded research and development expenses are reported as operating expenses.
Product/System Warranty
We typically warrant our air pollution control products and systems against defects in design, materials and workmanship for
one
to
two
years. A provision for estimated future costs relating to warranty expense is recorded when the products/systems become commercially operational.
Goodwill
Goodwill is not amortized, but is reviewed annually or more frequently if indicators arise, for impairment. Our evaluation of goodwill impairment involves first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. We may bypass this qualitative assessment, or determine that based on our qualitative assessment considering the totality of events and circumstances including macroeconomic factors, industry and market considerations, current and projected financial performance, a sustained decrease in our share price, or other factors, that additional impairment analysis is necessary. This additional analysis involves comparing the current fair value of our reporting units to their carrying values. We use a discounted cash flow (DCF) model to determine the current fair value of our
two
reporting units. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including markets and market share, sales volumes and prices, costs to produce and working capital changes. Management considers historical experience and all available information at the time the fair values of its reporting units are estimated. However, actual fair values that could be realized in an actual transaction may differ from those used to evaluate the impairment of goodwill.
Goodwill is allocated to each of our reporting units, which is defined as an operating segment or one level below an operating segment, upon acquisition 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. Goodwill is also evaluated for impairment at the reporting unit level. We have
two
reporting units for goodwill evaluation purposes: the FUEL CHEM technology segment and the APC technology segment. There is no goodwill associated with either our APC or Fuel Conversion business segment.
During the fourth quarter of 2014, we experienced a decrease in our stock price that caused our market capitalization to fall below the equity value on our consolidated balance sheet, which can be a potential indicator of goodwill impairment. This, along with an overall slowdown in APC technology segment orders and corresponding downward adjustments to our financial forecasts, was considered during a detailed evaluation of the fair value of our reporting units. Fuel Tech performed its annual goodwill impairment analysis for each of its reporting units as of October 1, 2014 and determined that no impairment of goodwill existed within the FUEL CHEM technology segment. At the same time, we determined that our APC technology reporting unit failed the first step test because the estimated fair value of the reporting unit was less than its carrying value, thus requiring additional analysis of the segment. Based on this additional analysis, Fuel Tech determined that the fair value of the APC technology reporting unit as of the test date was less than the fair value of the assets and liabilities of the unit, resulting in an implied fair value of goodwill of zero, and accordingly we recorded a non-cash goodwill impairment charge in the fourth quarter of 2014 of
$23,400
representing the full carrying value of goodwill related to this reporting unit.
The following table shows our goodwill activity by reporting unit during the periods ending
December 31, 2016 and 2015
:
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2016
|
Reporting Unit
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Beginning Carrying Amount
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Acquired Goodwill
|
|
Impairment Charge
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Ending Carrying Amount
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FUEL CHEM Technology Segment
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|
$
|
2,116
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,116
|
|
APC Technology Segment
|
|
—
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|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
2,116
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,116
|
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|
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|
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2015
|
Reporting Unit
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Beginning Carrying Amount
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|
Acquired Goodwill
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|
Impairment Charge
|
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Ending Carrying Amount
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|
|
|
|
|
|
|
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|
FUEL CHEM Technology Segment
|
|
$
|
2,116
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,116
|
|
APC Technology Segment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
2,116
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,116
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|
|
|
|
|
|
|
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|
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|
|
2014
|
Reporting Unit
|
|
Beginning Carrying Amount
|
|
Acquired Goodwill
|
|
Impairment Charge
|
|
Ending Carrying Amount
|
|
|
|
|
|
|
|
|
|
FUEL CHEM Technology Segment
|
|
$
|
2,116
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,116
|
|
APC Technology Segment
|
|
18,935
|
|
|
4,465
|
|
|
(23,400
|
)
|
|
—
|
|
|
|
$
|
21,051
|
|
|
$
|
4,465
|
|
|
$
|
(23,400
|
)
|
|
$
|
2,116
|
|
Other Intangible Assets
Management reviews other finite-lived intangible assets, which include customer lists and relationships, covenants not to compete, patent assets, trade names, and acquired technologies, for impairment when events or changes in circumstances indicate the carrying amount of an asset or asset group 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 or asset group is less than the carrying amount of the asset or asset group, an impairment loss equal to the excess of the asset or asset group'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. In the fourth quarter of 2016, the Company performed an impairment test of the carrying value of our intangible assets to determine whether any impairment existed given the decline in our stock price and sustained operating losses in our APC segment. The Company determined that the sum of the expected undiscounted cash flows attributable to certain intangible assets was less than its carrying value and that an impairment charge was required. The impairment loss primarily related to the developed technology, customer relationships and trademarks acquired in the 2014 acquisition of PECO and FGC. The Company calculated the estimated fair value of the intangible asset by summing the present value of the expected cash flows over its life. The impairment was calculated by deducting the present value of the expected cash flows from the carrying value. This assessment resulted in an impairment charge of
$2,074
, which was included in “Goodwill and intangible assets impairment” in the accompanying Consolidated Statements of Operations for the year ended December 31, 2016.
In the fourth quarter of 2015, the Company performed an impairment test of the carrying value of our intangible assets to determine whether any impairment existed. The Company determined that the sum of the expected undiscounted cash flows attributable to certain intangible assets was less than its carrying value and that an impairment write-down was required. The impairment loss primarily related to the customer lists acquired in the 2009 acquisition of Advanced Combustion Technology and the 2014 acquisition of PECO. The Company calculated the estimated fair value of the intangible asset by summing the present value of the expected cash flows over its life. The impairment was calculated by deducting the present value of the expected cash flows from the carrying value. This assessment resulted in an impairment write-down of
$1,425
, which was included in “Goodwill and intangible assets impairment” in the accompanying Consolidated Statements of Operations for the year ended December 31, 2015.
Third-party costs related to the development of patents are included within other intangible assets on the consolidated balance sheets. As of
December 31, 2016 and 2015
, the net patent asset balance, excluding patents acquired in business acquisitions, was
$1,656
and
$1,699
, respectively. The third-party costs capitalized as patent costs during the years ended
December 31, 2016 and 2015
were
$166
and
$244
, respectively. Third-party costs are comprised of legal fees that relate to the review and preparation of patent disclosures and filing fees incurred to present the patents to the required governing body.
Our intellectual property portfolio has been a significant building block for the Air Pollution Control and FUEL CHEM technology segments. The patents are essential to the generation of revenue for our businesses and are essential to protect us from competition in the markets in which we serve. These costs are being amortized on the straight-line method over the period beginning with the patent issuance date and ending on the patent expiration date. Patent maintenance fees are charged to operations as incurred.
In 2014 we acquired intangible assets as a result of the business acquisitions described in Note 2 in the amount of
$5,158
. In addition, we acquired intellectual property rights and know-how that was not part of a business acquisition in the amount of
$3,010
related to the CARBONITE
®
fuel conversion process that has an estimated useful life of
5 years
.
Amortization expense for intangible assets was
$1,720
,
$2,138
and
$2,384
for the years ended
December 31, 2016, 2015 and 2014
, respectively. The table below shows the amortization period and other intangible asset cost by intangible asset as of
December 31, 2016 and 2015
, and the accumulated amortization and net intangible asset value in total for all other intangible assets.
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|
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|
|
|
|
|
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|
|
2016
|
|
2015
|
Description of Other Intangibles
|
|
Amortization
Period
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Customer relationships
|
|
11-15 years
|
|
$
|
3,119
|
|
|
$
|
(2,979
|
)
|
|
$
|
140
|
|
|
$
|
3,633
|
|
|
$
|
(3,114
|
)
|
|
$
|
519
|
|
Trademarks and trade names
|
|
8 years
|
|
351
|
|
|
(351
|
)
|
|
—
|
|
|
441
|
|
|
(382
|
)
|
|
59
|
|
Patent assets
|
|
1- 20 years
|
|
3,100
|
|
|
(1,444
|
)
|
|
1,656
|
|
|
3,007
|
|
|
(1,210
|
)
|
|
1,797
|
|
Acquired technologies
|
|
5-8 years
|
|
4,138
|
|
|
(2,483
|
)
|
|
1,655
|
|
|
7,515
|
|
|
(2,746
|
)
|
|
4,769
|
|
Total
|
|
|
|
$
|
10,708
|
|
|
$
|
(7,257
|
)
|
|
$
|
3,451
|
|
|
$
|
14,596
|
|
|
$
|
(7,452
|
)
|
|
$
|
7,144
|
|
The table below shows the estimated future amortization expense for intangible assets:
|
|
|
|
|
Year
|
Estimated
Amortization
Expense
|
2017
|
$
|
805
|
|
2018
|
785
|
|
2019
|
574
|
|
2020
|
123
|
|
2021
|
123
|
|
Thereafter
|
1,041
|
|
Total
|
$
|
3,451
|
|
Property and Equipment
Property and equipment is stated at historical cost. Provisions for depreciation are computed by the straight-line method, using estimated useful lives that range based on the nature of the asset. Leasehold improvements are depreciated over the shorter of the associated lease term or the estimated useful life of the asset. Depreciation expense was
$1,780
,
$2,067
, and
$1,922
for the years ended December 31, 2016, 2015 and 2014, respectively. The table below shows the depreciable life and cost by asset class as of
December 31, 2016 and 2015
, and the accumulated depreciation and net book value in total for all classes of assets.
|
|
|
|
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|
|
|
|
Description of Property and Equipment
|
|
Depreciable
Life
|
|
2016
|
|
2015
|
Land
|
|
|
|
$
|
1,440
|
|
|
$
|
1,440
|
|
Building
|
|
39 years
|
|
4,535
|
|
|
4,535
|
|
Building and leasehold improvements
|
|
3-39 years
|
|
5,087
|
|
|
5,102
|
|
Field equipment
|
|
3-4 years
|
|
19,870
|
|
|
19,797
|
|
Computer equipment and software
|
|
2-3 years
|
|
2,973
|
|
|
2,978
|
|
Furniture and fixtures
|
|
3-10 years
|
|
1,521
|
|
|
1,527
|
|
Vehicles
|
|
5 years
|
|
36
|
|
|
36
|
|
Total cost
|
|
|
|
35,462
|
|
|
35,415
|
|
Less accumulated depreciation
|
|
|
|
(24,542
|
)
|
|
(23,414
|
)
|
Total net book value
|
|
|
|
$
|
10,920
|
|
|
$
|
12,001
|
|
Property and equipment is reviewed for impairment when events and circumstances indicate that the carrying amount of the assets (or asset group) may not be recoverable. If impairment indicators exists, we perform a more detailed analysis and an impairment loss is recognized when estimated future undiscounted cash flows expected to result from the use of the asset (or asset group) and its eventual disposition are less than the carrying amount. This process of analyzing impairment involves examining the operating condition of individual assets (or asset group) and estimating a fair value based upon current condition, relevant market factors and remaining estimated operational life compared to the asset’s remaining depreciable life. Quoted market prices and other valuation techniques are used to determine expected cash flows. Due to the existence of impairment indicators as more fully described above, we performed a more detailed analysis of potential long-lived asset impairment in the APC technology asset group during the fourth quarter of 2016 and 2015 using the aforementioned undiscounted cash flows analysis and concluded that no impairment of our fixed assets exists. A significant portion of our property and equipment is comprised of assets deployed at customer locations relating to our FUEL CHEM technology asset group, and due to the shorter-term duration over which this equipment is depreciated, the likelihood of impairment is mitigated. The discontinuation of a FUEL CHEM program at a customer site would most likely result in the re-deployment of all or most of the affected assets to another customer location rather than an impairment.
Revenue Recognition
Revenues from the sales of chemical products are recorded when title transfers, either at the point of shipment or at the point of destination, depending on the contract with the customer.
We utilize the percentage of completion method of accounting for equipment construction and license contracts that are sold within the Air Pollution Control technology segment. Under the percentage of completion method, revenues are recognized as work is performed based on the relationship between actual construction costs incurred and total estimated costs at completion. Construction costs include all direct costs such as materials, labor, subcontracting costs, and indirect costs allocable to the particular contract such as indirect labor, tools and equipment, and supplies. Revisions in completion estimates and contract values are made in the period in which the facts giving rise to the revisions become known and can influence the timing of when revenues are recognized under the percentage of completion method of accounting. Such revisions have historically not had a material effect on the amount of revenue recognized. Provisions are made for estimated losses on uncompleted contracts in the period in which such losses are determined. The completed contract method is used for certain contracts when reasonably dependable estimates of the percentage of completion cannot be made. When the completed contract method is used, revenue and costs are deferred until the contract is substantially complete, which usually occurs upon customer acceptance of the installed product.
Cost of Sales
Cost of sales includes all internal and external engineering costs, equipment and chemical 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). Certain depreciation and amortization expenses related to tangible and intangible assets, respectively, are allocated to cost of sales. We classify shipping and handling costs in cost of sales in the consolidated statements of operations.
Selling, General and Administrative Expenses
Selling, general and administrative expenses primarily include the following categories except where an allocation to the cost of sales line item is warranted due to the project- or product-line nature of a portion of the expense category: salaries and wages, employee benefits, non-project travel, insurance, legal, rent, accounting and auditing, recruiting, telephony, employee training, Board of Directors’ fees, auto rental, office supplies, dues and subscriptions, utilities, real estate taxes, commissions and bonuses, marketing materials, postage and business taxes. Departments comprising the selling, general and administrative line item primarily include the functions of executive management, finance and accounting, investor relations, regulatory affairs, marketing, business development, information technology, human resources, sales, legal and general administration.
Income Taxes
The provision for income taxes is determined using the asset and liability approach of accounting for income taxes. Under this approach, the provision for income taxes represents income taxes paid or payable (or received or receivable) for the current year plus the change in deferred taxes during the year. Deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid, and result from differences between the financial and tax bases of our assets and liabilities and are adjusted for changes in tax rates and tax laws when enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. In evaluating the need for a valuation allowance, management considers all potential sources of taxable income, including income available in carryback periods, future reversals of taxable temporary differences, projections of taxable income, and income from tax planning strategies, as well as all available positive and negative evidence. Positive evidence includes factors such as a history of profitable operations, projections of future profitability within the carryforward period, including from tax planning strategies, and our experience with similar operations. Negative evidence includes items such as cumulative losses, projections of future losses, or carryforward periods that are not long enough to allow for the utilization of a deferred tax asset based on existing projections of income. Deferred tax assets for which no valuation allowance is recorded may not be realized upon changes in facts and circumstances.
Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are recorded when such benefits meet a more likely than not threshold. Otherwise, these tax benefits are recorded when a tax position has been effectively settled, which means that the statute of limitation has expired or the appropriate taxing authority has completed their examination even though the statute of limitations remains open. Interest and penalties related to uncertain tax positions are recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized.
Stock-Based Compensation
Our stock-based employee compensation plan, referred to as the Fuel Tech, Inc. 2014 Long-Term Incentive Plan (Incentive Plan), was adopted in May 2014 and allows for awards to be granted to participants in the form of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, and 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
4,400,676
shares that may be issued or reserved for awards to participants under the Incentive Plan as of December 31, 2016. Based on the existing issued or reserved awards in Incentive Plan, there are
748,742
shares available to be used for future awards to participants in the Incentive Plan as of December 31, 2016.
Basic and Diluted Earnings per Common Share
Basic earnings per share excludes the antidilutive effects of stock options, restricted stock units (RSUs) and the nil coupon non-redeemable convertible unsecured loan notes (see Note 7). 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 antidilutive. Out-of-the-money stock options are excluded from diluted earnings per share because they are anti-dilutive. At December 31, 2016, 2015 and 2014, we had outstanding equity awards of
1,800,000
,
2,068,000
and
1,628,000
, respectively, which were antidilutive for the purpose of inclusion in the diluted earnings per share calculation because the exercise prices of the options were greater than the average market price of our common stock. As of
December 31, 2016
and 2015, respectively, we had an additional
184,000
and
169,000
equity awards that were antidilutive because of the net loss in the year then ended. These equity awards could potentially dilute basic EPS in future years.
The table below sets forth the weighted-average shares used at December 31 in calculating earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Basic weighted-average shares
|
|
23,365,000
|
|
|
23,101,000
|
|
|
22,782,000
|
|
Conversion of unsecured loan notes
|
|
—
|
|
|
—
|
|
|
—
|
|
Unexercised options and unvested restricted stock units
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted weighted-average shares
|
|
23,365,000
|
|
|
23,101,000
|
|
|
22,782,000
|
|
Risk Concentrations
Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. However, management believes the Company is not exposed to significant credit risk due to the financial position of its primary depository institution where a significant portion of its deposits are held.
For the year ended
December 31, 2016
, we had
one
customer which individually represented greater than
10%
of revenues. This customer contributed primarily to our APC technology segment and represented
19%
of consolidated revenues. We had no customers that accounted for greater than 10% of our current assets as of December 31, 2016.
For the year ended December 31, 2015, we had one customer which individually represented greater than 10% of revenues. This customer contributed primarily to our FUEL CHEM technology segment and represented 12% of consolidated revenues. We had no customers that accounted for greater than 10% of our current assets as of December 31, 2015.
For the year ended December 31, 2014, we had two customers which individually represented greater than 10% of revenues. One of these customers contributed primarily to our FUEL CHEM technology segment and represented 20% of consolidated revenues. The other customer contributed to our APC technology segment and represented 11% of our consolidated revenues. We had no customers that accounted for greater than 10% of our current assets as of December 31, 2014.
We control credit risk through requiring milestone payments on long-term contracts, performing ongoing credit evaluations of its customers, and in some cases obtaining security for payment through bank guarantees and letters of credit.
Treasury Stock
We use the cost method to account for its common stock repurchases. During the years ended
December 31, 2016 and 2015
, we withheld
103,097
and
84,486
shares of our Common Shares, valued at approximately
$172
and
$252
, respectively, to settle personal tax withholding obligations that arose as a result of restricted stock units that vested. Refer to Note 6, “Treasury Stock,” for further discussion.
Recently Adopted Accounting Standards
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in this Update require that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. Current accounting principles require an entity to separate deferred income tax liabilities and assets into current and non-current amounts in a classified statement of financial position. ASU 2015-17 is effective for interim and annual periods beginning after December 15, 2016. The Company elected to early adopt ASU 2015-17 prospectively for the interim period beginning in the second quarter of 2016; thus, the prior reporting period was not retrospectively adjusted. See Note 4, Income Taxes, for further discussion.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09 "Revenue from Contracts with Customers" (Topic 606). This new accounting guidance on revenue recognition provides for a single five-step model to be applied to all revenue contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. In August 2015, the FASB approved a one-year deferral to January 1, 2018. Early adoption is permitted as of the original effective date. The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is in the initial stages of evaluating the impact of the new standard on the accounting policies, processes, and system requirements. While the Company continues to assess the potential impacts of the new standard and anticipate this standard could have a material impact on the consolidated financial statements, the Company does not know or cannot reasonably estimate quantitative information related to the impact of the new standard on the financial statements at this time.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This new accounting guidance more clearly articulates the requirements for the measurement and disclosure of inventory. Topic 330, Inventory, currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. This new accounting guidance requires the measurement of inventory at lower of cost and net realizable value. ASU 2015-11 will be effective for the Company beginning on January 1, 2017. The adoption of this guidance in not expected to have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The amendments in this Update increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 will be effective for the Company beginning on January 1, 2019. The Company is in the initial stages of evaluating the impact of the new standard on the accounting policies, processes, and system requirements. While the Company continues to assess the potential impacts of the new standard and anticipate this standard could have a material impact on the consolidated financial statements, the Company does not know or cannot reasonably estimate quantitative information related to the impact of the new standard on the financial statements at this time.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this Update simplify the income tax effects, minimum statutory tax withholding requirements and impact of forfeitures related to how share-based payments are accounted for and presented in the financial statements. ASU 2016-09 will be effective for the Company beginning on January 1, 2017. The Company is in the initial stages of evaluating the impact of the new standard on the accounting policies, processes, and system requirements. While the Company continues to assess the potential impacts of the new standard and anticipate this standard could have a material impact on the consolidated financial statements, the Company does not know or cannot reasonably estimate quantitative information related to the impact of the new standard on the financial statements at this time.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 will be effective for the Company beginning on January 1, 2018. The Company is in the initial stages of evaluating the impact of the new standard on the accounting policies, processes, and system requirements. While the Company continues to assess the potential impacts of the new standard and anticipate this standard could have a material impact on the consolidated financial statements, the Company does not know or cannot reasonably estimate quantitative information related to the impact of the new standard on the financial statements at this time.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this Update simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 will be effective for the Company beginning on January 1, 2020. The Company is in the initial stages of evaluating the impact of the new standard on the accounting policies, processes, and system requirements. While the Company continues to assess the potential impacts of the new standard and anticipate this standard could have a material impact on the consolidated financial statements, the Company does not know or cannot reasonably estimate quantitative information related to the impact of the new standard on the financial statements at this time.
2. BUSINESS ACQUISITIONS
On April 30, 2014 Fuel Tech acquired
100%
of the capital stock of Cleveland Roll Forming Environmental Division, Inc. d/b/a PECO (“PECO”), and FGC, Inc. ("FGC"), both Ohio corporations. Pursuant to the stock purchase agreements, PECO and FGC became wholly owned subsidiaries of Fuel Tech. Fuel Tech paid to the sellers total net cash consideration of
$8,079
, which consisted of the agreed upon purchase price of
$8,250
plus a working capital adjustment of
$391
, less cash acquired of
$562
. The stock purchase agreements contain customary representations, warranties, and indemnities.
PECO specializes in electrostatic precipitator (ESP) rebuilds, retrofits and associated products and services. FGC specializes in flue gas conditioning to enhance electrostatic precipitator and fabric filter performance in boilers. These acquisitions broaden our APC product portfolio and grants us immediate access into the fast-growing particulate control market, creating opportunities both domestically and abroad.
The PECO and FGC acquisitions are being accounted for using the acquisition method of accounting whereby the total purchase price is allocated to tangible and intangible assets and liabilities based on their estimated fair market values on the date of acquisition. These fair value estimates are based on third party valuations.
The fair value of identifiable intangible assets was measured based upon significant inputs that were not observable in the market, and therefore are classified as Level 3. The key assumptions include: (i) management's projection of future cash flows based upon past experience and future expectations, and (ii) an assumed discount rate of
18.5%
for PECO and
33.5%
for FGC.
The following table summarizes the approximate fair values of the assets acquired and liabilities assumed at the date of acquisition and incorporates the measurement period adjustments since they were originally reported in our Form 10-Q for the period ended June 30, 2014. The fair value of the assets and liabilities assumed, and the related tax balances, are based on their estimated fair values as of the acquisition date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported on June 30, 2014
|
Measurement Adjustments
|
Final Purchase Price Allocation
|
Current assets
|
|
$
|
2,365
|
|
$
|
26
|
|
$
|
2,391
|
|
Property, plant and equipment
|
|
281
|
|
(281
|
)
|
—
|
|
Identifiable intangible assets
|
|
—
|
|
5,158
|
|
5,158
|
|
Current and long-term liabilities assumed
|
|
(2,035
|
)
|
(1,900
|
)
|
(3,935
|
)
|
Total identifiable net assets acquired
|
|
611
|
|
3,003
|
|
3,614
|
|
Goodwill
|
|
7,468
|
|
(3,003
|
)
|
4,465
|
|
Total assets acquired
|
|
$
|
8,079
|
|
$
|
—
|
|
$
|
8,079
|
|
The goodwill recorded in connection with the above acquisition is primarily attributable to the strong cash flow expected from the acquisitions as a result of the synergies with our APC technology segment expected to arise after the Company's acquisition of the businesses. However, as a result of factors not related to these acquisitions, all goodwill related to the APC technology segment was written off during 2014, as more fully described in Note 1. The goodwill and identifiable intangibles are not deductible for tax purposes.
The fair value assigned to finite lived intangible assets as a result of the acquisitions was as follows:
|
|
|
|
|
|
|
Description
|
|
Amount
|
Useful Life (Years)
|
Order backlog
|
|
$
|
1,172
|
|
1.0
|
Trademarks
|
|
90
|
|
2.0
|
Customer relationships
|
|
870
|
|
4.0
|
Developed technology
|
|
3,230
|
|
7.0
|
Net assumed contractual obligations
|
|
(204
|
)
|
1.0
|
Total identifiable assets acquired
|
|
$
|
5,158
|
|
5.3
|
The following table summarizes the net sales and earnings after income taxes of PECO and FGC since the acquisition date, April 30, 2014 through December 31, 2014, which is included in the consolidated statements of operations for the years ended December 31, 2014:
|
|
|
|
|
|
Year Ended December 31, 2014
|
Revenue
|
$
|
4,193
|
|
Net income (loss)
|
(120
|
)
|
|
|
Net loss per Common Share
|
|
Basic
|
$
|
—
|
|
Diluted
|
$
|
—
|
|
The following unaudited pro-forma information represents the Company's results of operations as if the acquisition date had occurred on January 1, 2014:
|
|
|
|
|
|
Year Ended December 31, 2014
|
Revenue
|
$
|
84,713
|
|
Net income / (loss)
|
(15,596
|
)
|
|
|
Net income / (loss) per Common Share
|
|
Basic
|
$
|
(0.68
|
)
|
Diluted
|
$
|
(0.68
|
)
|
The pro-forma results have been prepared for informational purposes only and include adjustments to eliminate acquisition related expenses of
$59
and
$0
, amortization of acquired intangible assets with finite lives in the amount of
$1,449
and
$0
, inter-company transactions resulting in a decrease in pro-forma gross margin of
$70
and
$500
, and to record the income tax consequences of the pro-forma adjustments resulting in additional pro-forma tax expense of
$561
and
$242
in the years ended December 31, 2014 and 2013, respectively. These pro-forma results do not purport to be indicative of the results of operations that would have occurred had the purchases been made as of the beginning of the periods presented or of the results of operations that may occur in the future.
Transaction costs incurred related to the acquisition were
$59
and are included in general and administrative expenses in the Consolidated Statement of Operations for the year ended December 31, 2014.
3. CONSTRUCTION CONTRACTS IN PROGRESS
The status of contracts in progress as of
December 31, 2016 and 2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Costs incurred on uncompleted contracts
|
|
$
|
111,925
|
|
|
$
|
94,686
|
|
Estimated earnings
|
|
55,527
|
|
|
52,246
|
|
Earned revenue
|
|
167,452
|
|
|
146,932
|
|
Less billings to date
|
|
(162,427
|
)
|
|
(141,478
|
)
|
Total
|
|
$
|
5,025
|
|
|
$
|
5,454
|
|
Classified as follows:
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
6,755
|
|
|
$
|
7,312
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
(1,730
|
)
|
|
(1,858
|
)
|
Total
|
|
$
|
5,025
|
|
|
$
|
5,454
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts are included in accounts receivable on the consolidated balance sheet, while billings in excess of costs and estimated earnings on uncompleted contracts are included in other accrued liabilities on the consolidated balance sheet.
As of
December 31, 2016
we had
two
construction contracts in progress that were identified as loss contracts and a provision for losses of
$41
was recorded in other accrued liabilities on the consolidated balance sheet. As of
December 31, 2015
, we had
two
construction contract in progress that was identified as a loss contract and a provision for losses of
$3
was recorded in other accrued liabilities on the consolidated balance sheet.
4. INCOME TAXES
The components of (loss) income before taxes for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origin of income before taxes
|
|
2016
|
|
2015
|
|
2014
|
United States
|
|
$
|
(13,016
|
)
|
|
$
|
(9,763
|
)
|
|
$
|
(25,142
|
)
|
Foreign
|
|
(2,708
|
)
|
|
1,140
|
|
|
(661
|
)
|
(Loss) before income taxes
|
|
$
|
(15,724
|
)
|
|
$
|
(8,623
|
)
|
|
$
|
(25,803
|
)
|
Significant components of income tax (benefit) expense for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
357
|
|
|
$
|
(1,155
|
)
|
|
$
|
158
|
|
State
|
|
—
|
|
|
14
|
|
|
(34
|
)
|
Foreign
|
|
105
|
|
|
120
|
|
|
1,108
|
|
Total current
|
|
462
|
|
|
(1,021
|
)
|
|
1,232
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
—
|
|
|
4,143
|
|
|
(7,260
|
)
|
State
|
|
—
|
|
|
548
|
|
|
(959
|
)
|
Foreign
|
|
1,202
|
|
|
87
|
|
|
(1,091
|
)
|
Total deferred
|
|
1,202
|
|
|
4,778
|
|
|
(9,310
|
)
|
Income tax (benefit) expense
|
|
$
|
1,664
|
|
|
$
|
3,757
|
|
|
$
|
(8,078
|
)
|
A reconciliation between the provision for income taxes calculated at the U.S. federal statutory income tax rate and the consolidated income tax expense in the consolidated statements of operations for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Provision at the U.S. federal statutory rate
|
|
(34.0
|
)%
|
|
(34.0
|
)%
|
|
(34.0
|
)%
|
State taxes, net of federal benefit
|
|
(2.4
|
)%
|
|
(5.2
|
)%
|
|
(3.6
|
)%
|
Foreign tax rate differential
|
|
—
|
%
|
|
(0.6
|
)%
|
|
0.1
|
%
|
Valuation allowance
|
|
42.7
|
%
|
|
72.3
|
%
|
|
1.2
|
%
|
Other true up
|
|
0.6
|
%
|
|
7.8
|
%
|
|
(0.4
|
)%
|
Intangible assets impairment and other non-deductibles
|
|
—
|
%
|
|
2.2
|
%
|
|
5.9
|
%
|
Other
|
|
4.1
|
%
|
|
1.1
|
%
|
|
(0.5
|
)%
|
Income tax expense (benefit) effective rate
|
|
11.0
|
%
|
|
43.6
|
%
|
|
(31.3
|
)%
|
The deferred tax assets and liabilities at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
Stock compensation expense
|
|
$
|
2,624
|
|
|
$
|
3,394
|
|
Goodwill
|
|
2,235
|
|
|
2,673
|
|
Royalty accruals
|
|
353
|
|
|
992
|
|
Intangible assets
|
|
967
|
|
|
—
|
|
Bad debt allowance
|
|
389
|
|
|
333
|
|
Inter-company interest expense accrual
|
|
629
|
|
|
476
|
|
Net operating loss carryforwards
|
|
5,485
|
|
|
1,576
|
|
Credit carry-forwards
|
|
584
|
|
|
359
|
|
Inventory reserve
|
|
318
|
|
|
—
|
|
Other
|
|
399
|
|
|
637
|
|
Total deferred tax assets
|
|
13,983
|
|
|
10,440
|
|
Deferred tax liabilities:
|
|
|
|
|
Depreciation
|
|
(460
|
)
|
|
(777
|
)
|
Intangible assets
|
|
—
|
|
|
(294
|
)
|
Other
|
|
(344
|
)
|
|
(306
|
)
|
Total deferred tax liabilities
|
|
(804
|
)
|
|
(1,377
|
)
|
Net deferred tax asset before valuation allowance
|
|
13,179
|
|
|
9,063
|
|
Valuation allowances for deferred tax assets
|
|
(13,179
|
)
|
|
(7,832
|
)
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
1,231
|
|
Net deferred tax assets and liabilities are recorded as follows within the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
—
|
|
|
$
|
239
|
|
Long-term assets (liabilities)
|
|
—
|
|
|
992
|
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
1,231
|
|
The change in the valuation allowance for deferred tax assets for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Balance at
January 1
|
|
Charged to costs
and expenses
|
|
(Deductions)/Other
|
|
Balance at
December 31
|
2014
|
|
$
|
1,833
|
|
|
—
|
|
|
173
|
|
|
$
|
2,006
|
|
2015
|
|
$
|
2,006
|
|
|
6,625
|
|
|
(799
|
)
|
|
$
|
7,832
|
|
2016
|
|
$
|
7,832
|
|
|
5,347
|
|
|
—
|
|
|
$
|
13,179
|
|
For the years ended December 31, 2016, 2015, there were no exercises of stock options. For the year ended December 31, 2014, we recorded tax benefits from the exercise of stock options in the amount of
$7
. This amount was recorded as an increase in additional paid-in capital on the consolidated balance sheet and as cash from financing activities on the consolidated statements of cash flows. We also reduced the deferred tax asset related to stock-based compensation by
$0
and
$908
for fully vested options that expired unexercised and by
$0
and
$421
for the excess of stock-based compensation over the related tax benefit recognized for restricted stock units that vested during
2016
and
2015
, respectively. These reductions in deferred tax assets were recorded against additional paid-in capital and had no impact on our results from operations.
As required by ASC 740, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than
50%
likelihood of being realized upon ultimate settlement with the relevant tax authority.
The following table summarizes our unrecognized tax benefit activity (excluding interest and penalties) during the years ended
December 31, 2016, 2015 and 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
2016
|
|
2015
|
|
2014
|
Balance at beginning of period
|
|
$
|
140
|
|
|
$
|
117
|
|
|
$
|
65
|
|
Increases in positions taken in a current period
|
|
—
|
|
|
38
|
|
|
52
|
|
Decreases due to settlements
|
|
(140
|
)
|
|
(15
|
)
|
|
—
|
|
Balance at end of period
|
|
$
|
—
|
|
|
$
|
140
|
|
|
$
|
117
|
|
We recognize interest and penalties related to unrecognized tax benefits in income tax expense for all periods presented. There were no interest and penalties recognized in income tax expense during the years ended
December 31, 2016, 2015 and 2014
. The total amount of unrecognized tax benefits as of
December 31, 2016, 2015 and 2014
, including interest and penalties, was
$0
,
$140
and
$117
, respectively, all of which if ultimately recognized will reduce our annual effective tax rate. None of the unrecognized tax benefit will be recognized into income in 2016 due to the lapsing of statutes of limitations.
We are subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for the years before 2013.
Management periodically estimates our probable tax obligations using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which we transact business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to or further interpretations of regulations. If such changes take place, there is a risk that the tax rate may increase or decrease in any period. Tax accruals for tax liabilities related to potential changes in judgments and estimates for both federal and state tax issues are included in current liabilities on the consolidated balance sheet.
The investment in our foreign subsidiaries is considered to be indefinite in duration and therefore we have not provided a provision for deferred U.S. income taxes on the unremitted earnings from those subsidiaries. A provision has not been established because it is not practicable to determine the amount of unrecognized deferred tax liability for such unremitted foreign earnings and because it is our present intention to reinvest the undistributed earnings indefinitely.
As required by ASC 740, a valuation allowance must be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. At December 31, 2016, we recorded a full valuation allowance of
$1,268
on our China 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. We have approximately
$8,981
of US net operating loss carryforwards available to offset future US taxable income as of December 31, 2016. The net operating loss carry-forwards related to tax losses generated in prior years in the US begin to expire in 2035. Further, we have tax loss carry-forwards of approximately
$4,209
available to offset future foreign income in Italy as of
December 31, 2016
. We have recorded a full valuation allowance against the resulting
$1,158
deferred tax asset because we cannot anticipate when or if this entity will have taxable income sufficient to utilize the net operating losses in the future. There is no expiration of the net operating loss carry-forwards related to tax losses generated in prior years in Italy.
Effective beginning April 1, 2016, Fuel Tech prospectively adopted ASU 2015-17, "Balance Sheet Classification of Deferred Taxes" and as a result classified all deferred tax assets and liabilities as non-current.
5. COMMON SHARES
At
December 31, 2016
and 2015, respectively, we had
23,800,924
and
23,419,008
Common Shares issued and
23,446,035
and
23,167,216
outstanding, with an additional
6,715
shares reserved for issuance upon conversion of the nil coupon non-redeemable convertible unsecured loan notes (see Note 7). As of December 31, 2016, we had
4,400,676
shares reserved for issuance upon the exercise or vesting of equity awards, of which
1,039,750
are stock options that are currently exercisable (see Note 8).
6. TREASURY STOCK
Common shares held in treasury totaled
354,889
and
251,792
with a cost of
$1,214
and
$1,042
at
December 31, 2016 and 2015
, respectively. These shares were withheld from employees to settle personal tax withholding obligations that arose as a result of restricted stock units that vested during the current and prior years.
7.
NIL COUPON NON-REDEEMABLE CONVERTIBLE UNSECURED LOAN NOTES
At
December 31, 2016 and 2015
, respectively, we had a principal amount of
$76
of nil coupon non-redeemable convertible unsecured perpetual loan notes (the “Loan Notes”) outstanding. The Loan Notes are convertible at any time into Common Shares at rates of
$6.50
and
$11.43
per share, depending on the note. As of
December 31, 2016
, the nil coupon loan notes were convertible into
6,715
common shares. Based on our closing stock price of
$1.15
at
December 31, 2016
, the aggregate fair value of the common shares that the holders would receive if all the loan notes were converted would be approximately
$8
, which is less than the principal amount of the loans outstanding as of that date. The Loan Notes bear no interest and have no maturity date. They are repayable in the event of our dissolution and the holders do not have the option to cash-settle the notes. Accordingly, they have been classified within stockholders’ equity in the accompanying balance sheet. The notes do not hold distribution or voting rights unless and until converted into common shares.
In
2016, 2015 and 2014
, there were no Loan Notes repurchased by the Company.
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
4,400,676
shares that may be issued or reserved for awards to participants under the Incentive Plan. At
December 31, 2016
, we had approximately
748,742
equity awards available for issuance under the Incentive Plan.
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 years ended December 31,
2016, 2015 and 2014
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Stock options
|
|
$
|
90
|
|
|
$
|
194
|
|
|
$
|
236
|
|
Restricted stock units
|
|
1,901
|
|
|
1,615
|
|
|
2,086
|
|
Total stock-based compensation expense
|
|
1,991
|
|
|
1,809
|
|
|
2,322
|
|
Tax benefit of stock-based compensation expense
|
|
—
|
|
|
(696
|
)
|
|
(892
|
)
|
After-tax effect of stock based compensation
|
|
$
|
1,991
|
|
|
$
|
1,113
|
|
|
$
|
1,430
|
|
As of
December 31, 2016
, there was
$1,840
of total 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
1.6 years
.
Stock Options
The stock options granted to employees under the Incentive Plan 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.
Based on the results of the model, the weighted-average fair value of the stock options granted during the 12-month periods ended
December 31, 2016, 2015 and 2014
, respectively, were
$1.11
,
$1.54
and
$2.20
per share using the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Risk-free interest rate
|
|
1.85
|
%
|
|
2.21
|
%
|
|
1.55
|
%
|
Expected volatility
|
|
62.3
|
%
|
|
51.6
|
%
|
|
47.4
|
%
|
Expected life of option
|
|
8.8 years
|
|
|
8.8 years
|
|
|
4.9 years
|
|
The following table presents a summary of our stock option activity and related information for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
Number
of
Options
|
|
Weighted-
Average
Exercise Price
|
|
Number
of
Options
|
|
Weighted-
Average
Exercise Price
|
|
Number
of
Options
|
|
Weighted-
Average
Exercise Price
|
Outstanding at beginning of year
|
|
1,191,125
|
|
|
$
|
10.48
|
|
|
1,546,500
|
|
|
$
|
11.62
|
|
|
1,688,500
|
|
|
$
|
11.88
|
|
Granted
|
|
81,000
|
|
|
1.58
|
|
|
126,000
|
|
|
2.44
|
|
|
94,500
|
|
|
5.22
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(60,000
|
)
|
|
4.96
|
|
Expired or forfeited
|
|
(232,375
|
)
|
|
16.72
|
|
|
(481,375
|
)
|
|
12.04
|
|
|
(176,500
|
)
|
|
13.01
|
|
Outstanding at end of year
|
|
1,039,750
|
|
|
$
|
8.39
|
|
|
1,191,125
|
|
|
$
|
10.48
|
|
|
1,546,500
|
|
|
$
|
11.62
|
|
Exercisable at end of year
|
|
1,039,750
|
|
|
$
|
8.39
|
|
|
1,191,125
|
|
|
$
|
10.48
|
|
|
1,546,500
|
|
|
$
|
11.62
|
|
Weighted-average fair value of options granted during the year
|
|
|
|
$
|
1.11
|
|
|
|
|
$
|
1.54
|
|
|
|
|
$
|
2.20
|
|
The following table provides additional information regarding our stock option activity for the 12 months ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Options
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic Value
|
Outstanding on January 1, 2016
|
|
1,191,125
|
|
|
$
|
10.48
|
|
|
|
|
|
Granted
|
|
81,000
|
|
|
1.58
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
Expired or forfeited
|
|
(232,375
|
)
|
|
16.72
|
|
|
|
|
|
Outstanding on December 31, 2016
|
|
1,039,750
|
|
|
$
|
8.39
|
|
|
4.6 years
|
|
$
|
—
|
|
Exercisable on December 31, 2016
|
|
1,039,750
|
|
|
$
|
8.39
|
|
|
4.6 years
|
|
$
|
—
|
|
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on our closing stock price of
$1.15
as of
December 31, 2016
, which would have been received by the option holders had those options holders exercised their stock options as of that date.
The following table summarizes information about stock options outstanding at
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of
Exercise Prices
|
|
Number of
Options
|
|
Weighted-
Average
Remaining
Contractual Life
|
|
Weighted-
Average
Exercise Price
|
|
Number of
Options
|
|
Weighted-
Average
Exercise Price
|
$ 1.58 - $6.58
|
|
531,500
|
|
|
6.9 years
|
|
$
|
3.70
|
|
|
531,500
|
|
|
$
|
3.70
|
|
$ 6.59 - $11.59
|
|
367,250
|
|
|
2.6 years
|
|
9.73
|
|
|
367,250
|
|
|
9.73
|
|
$11.60 - $16.60
|
|
20,000
|
|
|
1.6 years
|
|
15.42
|
|
|
20,000
|
|
|
15.42
|
|
$16.70 - $21.70
|
|
15,000
|
|
|
1.2 years
|
|
17.82
|
|
|
15,000
|
|
|
17.82
|
|
$21.80 - $26.80
|
|
106,000
|
|
|
0.9 years
|
|
24.56
|
|
|
106,000
|
|
|
24.56
|
|
$ 1.58 - $26.80
|
|
1,039,750
|
|
|
4.6 years
|
|
$
|
8.39
|
|
|
1,039,750
|
|
|
$
|
8.39
|
|
Non-vested stock option activity for the 12 months ended
December 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
Non-Vested Stock
Options
Outstanding
|
|
Weighted-Average
Grant Date
Fair Value
|
Outstanding on January 1, 2016
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
81,000
|
|
|
1.11
|
|
Vested
|
|
(81,000
|
)
|
|
1.11
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Outstanding on December 31, 2016
|
|
—
|
|
|
—
|
|
As of
December 31, 2016
, there was
$0
of total unrecognized compensation cost related to non-vested stock options granted under the Incentive Plan. Fuel Tech received proceeds from the exercise of stock options of
$0
,
$0
and
$297
in the years ended
December 31, 2016, 2015 and 2014
, respectively. The intrinsic value of options exercised in the years ended
December 31, 2016, 2015 and 2014
was
$0
,
$0
and
$103
, respectively. It is our policy to issue new shares upon option exercises, loan conversions, and vesting of restricted stock units. We have not used cash and do not anticipate any future use of cash to settle equity instruments granted under share-based payment arrangements.
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 described above, performance-based RSU agreements (the Agreements) are issued annually to our Executive Chairman; President/Chief Executive Officer; Senior Vice President, Fuel Conversion Marketing; Senior Vice President, Treasurer/Chief Financial Officer; and Senior Vice President, General Counsel and Corporate Secretary. The Agreements provide each participating executive the opportunity to earn three types of awards with each award type specifying a targeted number of RSUs that may be granted to each executive based on either the individual performance of the executive or our relative performance compared to a peer group, as determined by the award type. The Compensation Committee of our Board of Directors (the Committee) determines the extent to which, if any, RSUs will be granted based on the achievement of the applicable performance criteria specified in the Agreement. This determination will be made following the completion of the applicable performance period (each a Determination Date). Such performance based awards include the following:
|
|
•
|
The first type of award is based on individual performance during the respective calendar year as determined by the Committee based on performance criteria specified in the Agreement. These awards will vest over a
three
-year period beginning on the Determination Date. We estimated the fair value of these performance-based RSU awards on the date of the Agreement using the trading price of the Company’s stock and our estimate of the probability that the specified performance criteria will be met. The fair value measurement and probability estimate will be re-measured each reporting date until the Determination Date, at which time the final award amount will be known. For these job performance-based awards, we amortize compensation costs over the requisite service period, adjusted for estimated forfeitures, for each separately vesting tranche of the award.
|
|
|
•
|
The second type of RSU award contains a targeted number of RSUs to be granted based on our revenue growth relative to a specified peer group during a period of
two
calendar years. These awards vest
67%
on the second anniversary of the Agreement date and
33%
on the third anniversary of the Agreement date. We estimated the fair value of these performance-based RSU awards on the Agreement date using the trading price of the Company’s stock and our estimate of the probability that the specified performance criteria will be met. For these revenue growth performance-based awards, we amortize compensation costs over the requisite service period, adjusted for estimated forfeitures, for each separately vesting tranche of the award.
|
|
|
•
|
The third type of RSU award contains a targeted number of RSUs to be granted based on the total shareholder return (TSR) of our Common Shares relative to a specified peer group during a period of
two
calendar years. These awards vest
67%
on the second anniversary of the Agreement date and
33%
on the third anniversary of the Agreement date. We estimated the fair value of these market-based RSU awards on the Agreement date using a Monte Carlo valuation methodology and amortize the fair value over the requisite service period for each separately vesting tranche of the award. The principal variable assumptions utilized in valuing these RSUs under this valuation methodology include the risk-free interest rate, stock volatility and correlations between our stock price and the stock prices of the peer group of companies.
|
We recorded expense of approximately
$1,901
,
$1,615
and
$2,086
associated with our restricted stock unit awards in
2016, 2015 and 2014
, respectively. At
December 31, 2016
there was
$1,840
of unrecognized compensation costs related to restricted stock unit awards to be recognized over a weighted average period of
1.6
years. During the years ended
December 31, 2016 and 2015
, there were
381,916
and
351,938
restricted stock units that vested with a grant date fair value of
$1,667
and
$1,821
, respectively.
A summary of restricted stock unit activity for the years ended
December 31, 2016, 2015 and 2014
is as follows:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
Unvested restricted units at January 1, 2014
|
|
772,016
|
|
|
5.35
|
|
Granted
|
|
484,450
|
|
|
5.63
|
|
Forfeited
|
|
(13,306
|
)
|
|
5.27
|
|
Vested
|
|
(266,091
|
)
|
|
5.84
|
|
Unvested restricted stock units at December 31, 2014
|
|
977,069
|
|
|
5.36
|
|
Granted
|
|
789,500
|
|
|
3.33
|
|
Forfeited
|
|
(209,748
|
)
|
|
4.62
|
|
Vested
|
|
(351,938
|
)
|
|
5.17
|
|
Unvested restricted stock units at December 31, 2015
|
|
1,204,883
|
|
|
4.21
|
|
Granted
|
|
845,862
|
|
|
1.88
|
|
Forfeited
|
|
(205,033
|
)
|
|
4.25
|
|
Vested
|
|
(381,916
|
)
|
|
4.36
|
|
Unvested restricted stock units at December 31, 2016
|
|
1,463,796
|
|
|
2.82
|
|
Deferred Directors Fees
In addition to the Incentive Plan, 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. In
2016, 2015 and 2014
, there was no stock-based compensation expense under the Deferred Plan.
9. 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.
Operating Leases
We lease office space, automobiles and certain equipment under agreements expiring on various dates through 2020. Future minimum lease payments under non-cancellable operating leases that have initial or remaining lease terms in excess of one year as of
December 31, 2016
are as follows:
|
|
|
|
|
Year of Payment
|
Amount
|
2017
|
$
|
778
|
|
2018
|
476
|
|
2019
|
439
|
|
2020
|
88
|
|
Total
|
$
|
1,781
|
|
For the years ended December 31,
2016, 2015 and 2014
, rent expense, net of related party sub-lease income, approximated
$1,006
,
$1,166
, and
$1,041
, respectively.
We are party to a sublease agreement with American Bailey Corporation (ABC) that obligates ABC to reimburse us for its share of lease and lease-related expenses under our February 1, 2010 lease of executive offices in Stamford, Connecticut. Please refer to Note 11 to the consolidated financial statements for a discussion of our relationship with ABC. The future minimum lease income under this non-cancellable sublease as of
December 31, 2016
is as follows:
|
|
|
|
|
Year of Payment
|
Amount
|
2017
|
$
|
155
|
|
2018
|
155
|
|
2019
|
155
|
|
Total
|
$
|
465
|
|
The terms of the Company’s
eight
primary lease arrangements are as follows:
|
|
•
|
The Stamford, Connecticut building lease, for approximately
6,440
square feet, runs from February 1, 2010 to December 31, 2019. The facility houses certain administrative functions.
|
|
|
•
|
The Beijing, China building lease, for approximately
8,000
square feet, runs from September 1, 2014 to August 31, 2017. This facility serves as the operating headquarters for our Beijing Fuel Tech operation.
|
|
|
•
|
The Durham, North Carolina building lease, for approximately
2,590
square feet, runs from July 1, 2016 to July 31, 2019. This facility houses engineering operations.
|
|
|
•
|
The Gallarate, Italy building lease, for approximately
1,300
square feet, runs from May 1, 2013 to April 30, 2019. This facility serves as the operating headquarters for our European operations.
|
|
|
•
|
The Westlake, Ohio building lease, for approximately
5,000
square feet, runs from May 1, 2014 to April 30, 2017. This facility houses engineering operations. Upon expiration of the existing lease on April 30, 2017, the Company will move to a smaller location with 3,000 square feet of space, and with the lease term commencing on May 1, 2017 and ending on April 30, 2020.
|
|
|
•
|
The Aurora, IL warehouse lease, for approximately
11,000
square feet, runs from September 1, 2013 to December 31, 2020. This facility serves as an outside warehouse facility.
|
|
|
•
|
The Overland Park, KS lease, for approximately
600
square feet, runs from October 16, 2015 to October 15, 2018. This facility serves primarily as a sales office.
|
|
|
•
|
The Aberdeen Corners, GA lease, for an office suite, runs from June 1, 2015 to May 31, 2017. This facility primarily serves as a sales office.
|
Performance Guarantees
The majority of Fuel Tech’s long-term equipment construction contracts contain language guaranteeing that the performance of the system that is being sold to the customer will meet specific criteria. On occasion, performance surety bonds and bank performance guarantees/letters of credit are issued to the customer in support of the construction contracts as follows:
|
|
•
|
in support of the warranty period defined in the contract; or
|
|
|
•
|
in support of the system performance criteria that are defined in the contract.
|
As of
December 31, 2016
, we had outstanding bank performance guarantees and letters of credit in the amount of
$3,314
and performance surety bonds in the amount of
$4,598
in support of equipment construction contracts that have not completed their final acceptance test or that are still operating under a warranty period. The performance guarantees and letters of credit expire in dates ranging from March 2017 through October 2019. The expiration dates may be extended if the project completion dates are extended. Our management believes it is probable that these projects will be successfully completed and that there will not be a material adverse impact on our operations from these bank performance guarantees and letters of credit. As a result, no liability has been recorded for these performance guarantees.
Product Warranties
We issue a standard product warranty with the sale of our products to customers. Our recognition of warranty liability is based primarily on analyses of warranty claims experience 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. Changes in the warranty liability in
2016, 2015 and 2014
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Aggregate product warranty liability at beginning of year
|
|
$
|
268
|
|
|
$
|
268
|
|
|
$
|
596
|
|
Net aggregate expense (income) related to product warranties
|
|
(109
|
)
|
|
8
|
|
|
(311
|
)
|
Aggregate reductions for payments
|
|
—
|
|
|
(8
|
)
|
|
(17
|
)
|
Aggregate product warranty liability at end of year
|
|
$
|
159
|
|
|
$
|
268
|
|
|
$
|
268
|
|
During the second quarter of 2016, the Company received a notice from a contractor that performed installation work on one of the Company's APC projects regarding $3.9 million in purported expenses beyond the contractually agreed cap on expenses. The Company initiated the process, as required by the Company's contract with the subcontractor, to submit the dispute into mediation. On March 2, 2017, the Company agreed to a final settlement with the subcontractor of $1,150,000 and the full amount is included in the accrued liabilities line of the consolidated balance sheet as of December 31, 2016.
10. DEBT FINANCING
On June 30, 2015, Fuel Tech amended its existing revolving credit facility (the Facility) with JPMorgan Chase Bank, N.A. (JPM Chase) to extend the maturity date through June 30, 2017. The total availability under the facility was $15,000 and contained a provision to increase the facility up to a total principal amount of $25,000 upon approval from JPM Chase. The Facility was unsecured, bears interest at a rate of LIBOR plus 300 basis points, and has the Company’s Italian subsidiary, Fuel Tech S.r.l., as a guarantor. Fuel Tech can use this Facility for cash advances and standby letters of credit. As of December 31, 2016 and December 31, 2015, there were no outstanding borrowings on the credit facility.
The Facility contained several debt covenants with which the Company must comply on a quarterly or annual basis. The Facility required a minimum trailing-twelve month EBITDA of $500 for the quarters ending March 31, 2016 and June 30, 2016; Beginning with the fiscal quarter ended September 30, 2016, the Facility required a minimum EBITDA for the trailing twelve-month period then ended of not less than $1,000. EBITDA includes after tax earnings with add backs for interest expense, income taxes, depreciation and amortization, stock-based compensation expense, and other non-cash items. This covenant was waived by our bank through the period ending December 31, 2015. In addition, the Facility required a minimum working capital requirement of $35,000, starting as of December 31, 2015. Finally, the Facility had an annual capital expenditure limit of $5,000.
On May 9, 2016, the Company amended its existing U.S. Domestic credit facility with JPM Chase such that the financial covenants as set forth in the credit agreement would not be measured for the period ending as of March 31, 2016, and were removed in their entirety from the Facility. The credit availability under the Facility has been reduced from $15,000 to $7,000 with this amendment, and further, JPM Chase's then current Revolving Commitment under the Facility is now secured by cash held by the Company in a separate restricted use designated JPM Chase deposit account. The amount of credit available to the Company under the Facility was $7,000 from the date of the effective date of the amended facility through May 31, 2016, at which time the credit available to the Company under the Facility was reduced to $6,000 from June 1, 2016 through July 31, 2016, at which time the credit available to the Company under the Facility was reduced to $5,000 and will remain as such until the Maturity Date of the Facility on June 30, 2017. The Company intends to renew the U.S. Domestic credit facility at its maturity. During the entire period of the Facility the Company must maintain sufficient cash balances in a segregated deposit account equal to the amount of the Facility and will fully pledge such cash as collateral to the bank to support the credit available to the Company under the Facility.
At
December 31, 2016 and 2015
, we had outstanding standby letters of credit and bank guarantees totaling approximately
$3,292
and
$7,803
, respectively, on our domestic credit facility in connection with contracts in process. We are committed to reimbursing the issuing bank for any payments made by the bank under these instruments. At
December 31, 2016 and 2015
, there were no cash borrowings under the domestic revolving credit facility and approximately
$1,708
and
$7,197
, respectively, was available for future borrowings. We pay a commitment fee of
0.25%
per year on the unused portion of the revolving credit facility.
On June 24, 2016, Beijing Fuel Tech Environmental Technologies Company, Ltd. (Beijing Fuel Tech), a wholly-owned subsidiary of Fuel Tech, entered into a new revolving credit facility (the China Facility) agreement with JPM Chase for RMB 6.5 million (approximately
$936
), which expires on June 23, 2017. The Company intends to renew the China Facility at its maturity. This new credit facility replaced the previous RMB 35 million facility that expired on June 24, 2016. The facility is unsecured, bears interest at a rate of 125% of the People’s Bank of China (PBOC) Base Rate, and is guaranteed by Fuel Tech. Beijing Fuel Tech can use this facility for cash advances and bank guarantees. As of December 31, 2016 and December 31, 2015, Beijing Fuel Tech had no cash borrowings under the China Facility.
At
December 31, 2016 and 2015
, we had outstanding standby letters of credit and bank guarantees totaling approximately
$22
and
$57
, respectively, on its Beijing Fuel Tech revolving credit facility in connection with contracts in process. At
December 31, 2016 and 2015
, approximately
$914
and
$5,335
was available for future borrowings.
In the event of default on either the domestic facility or the China facility, the cross default feature in each allows the lending bank to accelerate the payments of any amounts outstanding and may, under certain circumstances, allow the bank to cancel the facility. If we were unable to obtain a waiver for a breach of covenant and the bank accelerated the payment of any outstanding amounts, such acceleration may cause our cash position to deteriorate or, if cash on hand were insufficient to satisfy the payment due, may require us to obtain alternate financing to satisfy the accelerated payment.
11. RELATED PARTY TRANSACTIONS
Persons now or formerly associated with American Bailey Corporation (ABC), including our Chairman, currently own approximately
29%
of our outstanding Common Shares. On January 1, 2004, we entered into an agreement whereby ABC reimburses us for services that certain employees provide to ABC. In addition, ABC is a sub-lessee under our February 1, 2010 lease of its offices in Stamford, Connecticut, which runs through December 31, 2019. ABC reimburses us for its share of lease and lease-related expenses under the sublease agreement. The Stamford facility houses certain administrative functions. The amounts earned from ABC related to the subleases for the years ended
December 31, 2016, 2015 and 2014
, were
$165
,
$155
and
$144
, respectively. The amount due from ABC related to the sublease agreement was
$13
,
$14
and
$13
at
December 31, 2016, 2015 and 2014
respectively.
12. DEFINED CONTRIBUTION PLAN
We have a retirement savings plan available for all our U.S. employees who have met minimum length-of-service requirements. Our contributions are determined based upon amounts contributed by the employees with additional contributions made at the discretion of the Board of Directors. Costs related to this plan were
$376
,
$433
and
$464
in 2016. 2015 and 2014, respectively.
13. BUSINESS SEGMENT, GEOGRAPHIC AND QUARTERLY FINANCIAL DATA
Business Segment Financial Data
We segregate our financial results into
three
reportable segments representing three broad technology segments as follows:
|
|
•
|
The Air Pollution Control technology segment includes technologies to reduce NO
x
emissions in flue gas from boilers, incinerators, furnaces and other stationary combustion sources. These include Low and Ultra Low NO
x
Burners (LNB and ULNB), Over-Fire Air (OFA) systems, NO
x
OUT
®
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 NO
x
reductions at significantly lower capital and operating costs than conventional SCR systems. The NO
x
OUT CASCADE
®
and NO
x
OUT-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 Fuel Conversion segment represents a new business initiative we commenced in 2014. As described in Note 1, we acquired intellectual property rights and know-how related to the CARBONITE® fuel conversion process and technology. This process can convert coals of various grades into value-added products that are high in energy content, carbon-rich and less pollutive. This technology has a number of potential applications including certain coal replacement, electric arc furnace (EAF) reductant, ferro-alloy feedstock, absorbent and Hg reduced carbon stock. During 2015, we have been testing and developing the engineered carbon products for specific markets. We are in the process of evaluating the commercialization of these product offerings with prospective customers and considering alternatives. We have earned no significant revenue other than for test products from perspective customers for the years ended December 31,
2016
,
2015
and
2014
.
|
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 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. 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 are provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2016
|
|
Air Pollution
Control Segment
|
|
FUEL CHEM
Segment
|
|
Fuel Conversion Segment
|
|
Other
|
|
Total
|
Revenues from external customers
|
|
$
|
34,052
|
|
|
$
|
21,109
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
55,161
|
|
Cost of sales
|
|
(25,370
|
)
|
|
(10,997
|
)
|
|
—
|
|
|
—
|
|
|
(36,367
|
)
|
Gross margin
|
|
8,682
|
|
|
10,112
|
|
|
—
|
|
|
—
|
|
|
18,794
|
|
Selling, general and administrative
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(25,564
|
)
|
|
(25,564
|
)
|
Restructuring charge
|
|
(537
|
)
|
|
(891
|
)
|
|
—
|
|
|
—
|
|
|
(1,428
|
)
|
Research and development
|
|
—
|
|
|
—
|
|
|
(2,800
|
)
|
|
(1,752
|
)
|
|
(4,552
|
)
|
Goodwill and intangible assets impairment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,074
|
)
|
|
(2,074
|
)
|
Operating (loss) income
|
|
$
|
8,145
|
|
|
$
|
9,221
|
|
|
$
|
(2,800
|
)
|
|
$
|
(29,390
|
)
|
|
$
|
(14,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2015
|
|
Air Pollution
Control Segment
|
|
FUEL CHEM
Segment
|
|
Fuel Conversion Segment
|
|
Other
|
|
Total
|
Revenues from external customers
|
|
$
|
43,485
|
|
|
$
|
30,179
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
73,664
|
|
Cost of sales
|
|
(30,612
|
)
|
|
(14,495
|
)
|
|
—
|
|
|
—
|
|
|
(45,107
|
)
|
Gross margin
|
|
12,873
|
|
|
15,684
|
|
|
—
|
|
|
—
|
|
|
28,557
|
|
Selling, general and administrative
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(30,897
|
)
|
|
(30,897
|
)
|
Restructuring charge
|
|
(149
|
)
|
|
(70
|
)
|
|
—
|
|
|
—
|
|
|
(219
|
)
|
Research and development
|
|
—
|
|
|
—
|
|
|
(2,826
|
)
|
|
(1,447
|
)
|
|
(4,273
|
)
|
Goodwill and intangible assets impairment
|
|
(1,425
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,425
|
)
|
Operating (loss) income
|
|
$
|
11,299
|
|
|
$
|
15,614
|
|
|
$
|
(2,826
|
)
|
|
$
|
(32,344
|
)
|
|
$
|
(8,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2014
|
|
Air Pollution
Control Segment
|
|
FUEL CHEM
Segment
|
|
Fuel Conversion Segment
|
|
Other
|
|
Total
|
Revenues from external customers
|
|
$
|
42,031
|
|
|
$
|
36,986
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
79,017
|
|
Cost of sales
|
|
(26,586
|
)
|
|
(17,303
|
)
|
|
—
|
|
|
—
|
|
|
(43,889
|
)
|
Gross margin
|
|
15,445
|
|
|
19,683
|
|
|
—
|
|
|
—
|
|
|
35,128
|
|
Selling, general and administrative
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(35,432
|
)
|
|
(35,432
|
)
|
Restructuring charge
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Research and development
|
|
—
|
|
|
—
|
|
|
(277
|
)
|
|
(1,182
|
)
|
|
(1,459
|
)
|
Goodwill and intangible assets impairment
|
|
(23,400
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(23,400
|
)
|
Operating (loss) income
|
|
$
|
(7,955
|
)
|
|
$
|
19,683
|
|
|
$
|
(277
|
)
|
|
$
|
(36,614
|
)
|
|
$
|
(25,163
|
)
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Revenues:
|
|
|
|
|
|
|
United States
|
|
$
|
42,545
|
|
|
$
|
51,485
|
|
|
$
|
50,901
|
|
Foreign
|
|
12,616
|
|
|
22,179
|
|
|
28,116
|
|
|
|
$
|
55,161
|
|
|
$
|
73,664
|
|
|
$
|
79,017
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Assets:
|
|
|
|
|
United States
|
|
$
|
37,684
|
|
|
$
|
47,437
|
|
Foreign
|
|
20,104
|
|
|
28,574
|
|
|
|
$
|
57,788
|
|
|
$
|
76,011
|
|
14. FAIR VALUE MEASUREMENTS
We apply authoritative accounting guidance for fair value measurements of financial and nonfinancial assets and liabilities. This guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis and clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the standard establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
|
|
•
|
Level 1 – Observable inputs to the valuation methodology such as quoted prices in active markets for identical assets or liabilities
|
|
|
•
|
Level 2 – Inputs to the valuation methodology including quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means
|
|
|
•
|
Level 3 – Significant unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own estimates and assumptions or those expected to be used by market participants. Generally, these fair value measures are model-based valuation techniques such as discounted cash flows, option pricing models, and other commonly used valuation techniques
|
The fair value of our marketable securities was
$9
and
$19
at
December 31, 2016 and 2015
, respectively, and was determined using quoted prices in active markets for identical assets (level 1 fair value measurements). Transfers between levels of the fair value hierarchy are recognized based on the actual date of the event or change in circumstances that caused the transfer. We had no assets or liabilities that were valued using level 2 or level 3 inputs and therefore there were no transfers between levels of the fair value hierarchy during the periods ended
December 31, 2016 and 2015
.
The carrying amount of our short-term debt and revolving line of credit approximates fair value due to its short-term nature and because the amounts outstanding accrue interest at variable market-based rates.
The following table summarizes the Company's assets measured at fair value on a non-recurring basis relating to an intangible assets impairment charge recognized during 2016 primarily related to the customer lists, developed technology and trademarks acquired in the 2014 acquisition of PECO and FGC in the APC technology segment, as more fully described in Note 1.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Impairment Losses
|
Fair Value at December 31, 2016
|
Other intangible assets, net
|
$
|
—
|
|
$
|
—
|
|
$
|
5,525
|
|
$
|
(2,074
|
)
|
$
|
3,451
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
5,525
|
|
$
|
(2,074
|
)
|
$
|
3,451
|
|
The following table summarizes the Company's assets measured at fair value on a non-recurring basis relating to an intangible assets impairment charge recognized during 2015 primarily related to the customer lists acquired in the 2014 acquisition of PECO and FGC in the APC technology segment, as more fully described in Note 1.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Impairment Losses
|
Fair Value at December 31, 2015
|
Other intangible assets, net
|
$
|
—
|
|
$
|
—
|
|
$
|
8,569
|
|
$
|
(1,425
|
)
|
$
|
7,144
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
8,569
|
|
$
|
(1,425
|
)
|
$
|
7,144
|
|
The following table summarizes the Company's assets measured at fair value on a non-recurring basis relating to a goodwill impairment charge recognized during 2014 for the full carrying value of goodwill in the APC technology segment, as more fully described in Note 1.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Impairment Losses
|
Fair Value at December 31, 2014
|
Goodwill
|
$
|
—
|
|
$
|
—
|
|
$
|
23,400
|
|
$
|
(23,400
|
)
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
23,400
|
|
$
|
(23,400
|
)
|
$
|
—
|
|
15. RESTRUCTURING ACTIVITIES
In July 2016, the Company reduced its workforce to better align its organizational infrastructure to its revised operating plans. The Company recorded a charge of
$1,428
in 2016 in connection with the workforce reduction. The charge consisted primarily of one-time severance payments and benefit continuation costs. The Company incurred restructuring charges of
$219
for the twelve-months ended December 31, 2015. The following is a reconciliation of the accrual for the workforce reduction that is included within the "Accrued Liabilities" line of the consolidated balance sheets for the three- and twelve-months ending December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
2016
|
2015
|
Restructuring liability at January 1,
|
|
$
|
—
|
|
$
|
—
|
|
Amounts expensed
|
|
1,428
|
|
219
|
|
Amounts paid
|
|
(1,119
|
)
|
(219
|
)
|
Restructuring liability at December 31,
|
|
$
|
309
|
|
$
|
—
|
|
16. Unaudited Quarterly Financial Data
Set forth below are the unaudited quarterly financial data for the fiscal years ended
December 31, 2016 and 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarters ended
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
2016
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
17,822
|
|
|
$
|
15,175
|
|
|
$
|
12,596
|
|
|
$
|
9,568
|
|
Cost of sales
|
|
11,774
|
|
|
9,595
|
|
|
7,281
|
|
|
7,717
|
|
Net (loss)
|
|
(2,637
|
)
|
|
(2,628
|
)
|
|
(3,019
|
)
|
|
(9,104
|
)
|
Net (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.11
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.39
|
)
|
Diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.39
|
)
|
2015
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
15,103
|
|
|
$
|
18,683
|
|
|
$
|
21,677
|
|
|
$
|
18,201
|
|
Cost of sales
|
|
8,437
|
|
|
11,547
|
|
|
13,829
|
|
|
11,294
|
|
Net (loss)
|
|
(1,654
|
)
|
|
(1,371
|
)
|
|
(289
|
)
|
|
(9,066
|
)
|
Net (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.07
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.39
|
)
|
Diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.39
|
)
|