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 Air Pollution Control (APC) technologies as well as our FUEL CHEM program. The Company’s NOx reduction technologies reduce nitrogen oxide emissions from boilers, furnaces and other stationary combustion sources.
Our FUEL CHEM program is based on proprietary TIFI® Targeted In-Furnace™ Injection technology, in combination with advanced Computational Fluid Dynamics (CFD) and Chemical Kinetics Modeling (CKM) boiler modeling, in the unique application of specialty chemicals to improve the efficiency, reliability and environmental status of combustion units by controlling slagging, fouling, corrosion, opacity and other sulfur trioxide-related issues in the boiler.
Our business is materially dependent on the continued existence and enforcement of air quality regulations, particularly in the United States. We have expended significant resources in the research and development of new technologies in building our proprietary portfolio of air pollution control, fuel and boiler treatment chemicals, computer modeling and advanced visualization technologies.
International revenues were $4,585, $12,648, and $15,656 for the years ended December 31, 2019, 2018 and 2017, respectively. These amounts represented 15%, 22%, and 35% 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.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The books and records of subsidiaries located in foreign countries are maintained according to generally accepted accounting principles in those countries. Upon consolidation, the Company evaluates the differences in accounting principles and determines whether adjustments are necessary to convert the foreign financial statements to the accounting principles upon which the consolidated financial statements are based. As a result of this evaluation no material adjustments were identified. All intercompany transactions have been eliminated.
Liquidity
We have experienced continued declines in revenues and recurring losses. As a result, we have evaluated our ongoing business needs, and considered the cash requirements of our base business of Air Pollution Control (APC) and Fuel Chem businesses. This evaluation included consideration of the following: a) customer and revenue trends in our APC and Fuel Chem business segments, b) current operating structure and expenditure levels, c) current availability of working capital, and d) support for our research and development initiatives. We continue to monitor our liquidity needs and have taken measures to reduce expenses and restructure operations which we feel are necessary to ensure we maintain sufficient working capital and liquidity to operate the business and invest in our future. We believe our current cash position and net cash flows expected to be generated from operations are adequate to fund planned operations of the Company for the next 12 months. In the event we determine we need to raise additional working capital, we may consider various financing alternatives which may include debt financing, common stock offerings, or financing involving convertible debt or other equity-linked securities; however, such financing alternatives may not be available on acceptable terms or at all and any such additional financing could be dilutive to our shareholders.
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.
Cash, cash equivalents and restricted cash
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, 2019, we had cash on hand of approximately $1,417 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 $1,695 at December 31, 2019. Cash on hand at our Chilean subsidiary totaled approximately $322 at December 31, 2019.
Restricted cash as of December 31, 2019 represents funds that are restricted to satisfy any amount borrowed against the Company's Cash Collateral Security agreement with BMO Harris Bank N.A. The balance of restricted cash totaling $2,587 is comprised of $2,080 in current assets relating to existing standby letters of credit with varying maturity dates and expire no later than December 31, 2020 and $507 in long-term assets will remain through the expiration dates of the underlying standby letter of credits (the latest maturity date is February 1, 2023) with BMO Harris Bank N.A. Refer to Note 11 Debt Financing for further information on the Facility.
Restricted cash as of December 31, 2018 represents funds that are restricted to satisfy any amount borrowed against the Company's then existing revolving credit facility (the Facility) with JPMorgan Chase Bank, N.A. In connection with the transition to BMO Harris Bank N.A., the Company canceled its U.S. Domestic credit facility with JPMorgan Chase Bank, N.A. effective on September 25, 2019.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheet that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows:
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|
|
|
|
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|
December 31, 2019
|
December 31, 2018
|
Cash and cash equivalents
|
$
|
10,914
|
|
$
|
12,039
|
|
Restricted cash included in current assets
|
2,080
|
|
6,020
|
|
Restricted cash included in long-term assets
|
507
|
|
—
|
|
Total cash, cash equivalents, and restricted cash shown in the Consolidated Statements of Cash Flows
|
$
|
13,501
|
|
$
|
18,059
|
|
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 contract assets, billings occurring subsequent to revenue recognition under ASC 606 Revenue from Contracts with Customers. At December 31, 2019 and 2018, unbilled receivables were approximately $1,857 and $5,540, respectively. Refer to Note 3 for further detail.
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
|
2017
|
|
$
|
1,569
|
|
|
$
|
—
|
|
|
$
|
(24
|
)
|
|
$
|
1,545
|
|
2018
|
|
$
|
1,545
|
|
|
$
|
—
|
|
|
$
|
(134
|
)
|
|
$
|
1,411
|
|
2019
|
|
$
|
1,411
|
|
|
$
|
573
|
|
|
$
|
(168
|
)
|
|
$
|
1,816
|
|
Prepaid expenses and other current assets
Prepaid expenses and other current assets includes Chinese banker acceptances of $43 and $997 as of December 31, 2019 and 2018. 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 net realizable value, using the weighted-average cost 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. 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
|
2017
|
|
825
|
|
|
228
|
|
|
—
|
|
|
1,053
|
|
2018
|
|
1,053
|
|
|
78
|
|
|
—
|
|
|
1,131
|
|
2019
|
|
1,131
|
|
|
—
|
|
|
(131
|
)
|
|
1,000
|
|
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.
During the fourth quarter of 2019, the Company reclassified the cumulative foreign currency translation associated with Fuel Tech S.p.A (Chile) of $370 to net income given the substantial completion of the liquidation of that legal entity in accordance with ASC 830 Foreign Currency Matters.
Accumulated Other Comprehensive (Loss)
The changes in accumulated other comprehensive (loss) by component were as follows:
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|
|
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|
|
December 31,
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|
2019
|
|
2018
|
Foreign currency translation
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(1,285
|
)
|
|
$
|
(772
|
)
|
Other comprehensive (loss):
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|
|
|
|
Foreign currency translation adjustments (1)
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|
(493
|
)
|
|
(513
|
)
|
Balance at end of period
|
|
$
|
(1,778
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)
|
|
$
|
(1,285
|
)
|
Available-for-sale marketable securities
|
|
|
|
|
Balance at beginning of period
|
|
$
|
—
|
|
|
$
|
4
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|
Other comprehensive (loss):
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|
|
|
|
Net unrealized holding (loss) (2)
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|
—
|
|
|
(4
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)
|
Balance at end of period
|
|
$
|
—
|
|
|
$
|
—
|
|
Total accumulated other comprehensive (loss)
|
|
$
|
(1,778
|
)
|
|
$
|
(1,285
|
)
|
|
|
(1)
|
In all periods presented, there were no tax impacts related to rate changes and certain foreign currency translation adjustments were reclassified to earnings in 2019. The adjustments reclassified to earnings in 2019 relate to the substantial completion of the liquidation of Fuel Tech S.p.A (Chile) during the fourth quarter of 2019.
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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.
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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 tested for impairment at least annually as of the first day of our fourth quarter, or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. 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. For the APC business segment, the Company used working capital as a proxy of fair value for the business segment given the on-going losses in that segment. Fuel Tech performed its annual goodwill impairment analysis for each of its reporting units as of October 1, 2019 and determined that no impairment of goodwill existed within the FUEL CHEM technology segment.
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 our APC business technology segment.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU is meant to 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. The Company early adopted ASU 2017-04 on October 1, 2018 for the annual goodwill impairment test completed during the fourth quarter which simplified the test by comparing the implied fair value of the reporting unit's goodwill with the carrying amount of goodwill and eliminating Step 2.
The entire goodwill balance of $2,116 was allocated to the FUEL CHEM technology segment as of December 31, 2019 and 2018. The Company did not recognize a charge for goodwill impairment for the periods ended December 31, 2019, 2018 and 2017.
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.
During the year ended December 31, 2019, the Company recorded an abandonment charge of $127 principally associated with the remaining patent assets in China which the Company elected to not maintain and abandon as a result of the planned suspension of the APC business operation in China. The abandonment charge was calculated by determining the net book values of the abandoned patent assets by deducting the accumulated amortization from the acquisition cost. The abandonment charge is included in “Intangible assets abandonment and building impairment” line in the accompanying Consolidated Statements of Operations for the year then ended December 31, 2019.
During the year ended December 31, 2018, Fuel Tech recorded an abandonment charge of $317 associated with certain international patent assets which the Company elected to not maintain and abandon due to limited business opportunities in those regions. The abandonment charge was calculated by determining the net book values of the abandoned patent assets by deducting the accumulated amortization from the acquisition cost. The abandonment charge of $317 is included in “Intangible assets abandonment and building impairment” line in the accompanying Consolidated Statements of Operations for the year ended December 31, 2018.
Third-party costs related to the development of patents are included within other intangible assets on the consolidated balance sheets. As of December 31, 2019 and 2018, the net patent asset balance was $906 and $1,164, respectively. The third-party costs capitalized as patent costs during the years ended December 31, 2019 and 2018 were $56 and $59, 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.
Amortization expense from continuing operations for intangible assets was $186, $193 and $215 for the years ended December 31, 2019, 2018 and 2017, respectively. The table below shows the amortization period and other intangible asset cost by intangible asset as of December 31, 2019 and 2018, 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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|
|
2019
|
|
2018
|
Description of Other Intangibles
|
|
Amortization
Period
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Patent assets
|
|
1- 20 years
|
|
1,897
|
|
|
(991
|
)
|
|
906
|
|
|
2,092
|
|
|
(928
|
)
|
|
1,164
|
|
Total
|
|
|
|
$
|
1,897
|
|
|
$
|
(991
|
)
|
|
$
|
906
|
|
|
$
|
2,092
|
|
|
$
|
(928
|
)
|
|
$
|
1,164
|
|
The table below shows the estimated future amortization expense for intangible assets:
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|
|
|
Year
|
Estimated
Amortization
Expense
|
2020
|
$
|
144
|
|
2021
|
150
|
|
2022
|
116
|
|
2023
|
83
|
|
2024
|
62
|
|
Thereafter
|
351
|
|
Total
|
$
|
906
|
|
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 from continuing operations was $810, $654, and $1,312 for the years ended December 31, 2019, 2018 and 2017, respectively. The table below shows the depreciable life and cost by asset class as of December 31, 2019 and 2018, 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
|
|
2019
|
|
2018
|
Land
|
|
|
|
$
|
1,050
|
|
|
$
|
1,050
|
|
Building
|
|
39 years
|
|
3,950
|
|
|
3,950
|
|
Building and leasehold improvements
|
|
3-39 years
|
|
2,886
|
|
|
3,242
|
|
Field equipment
|
|
3-4 years
|
|
19,507
|
|
|
19,541
|
|
Computer equipment and software
|
|
2-3 years
|
|
2,936
|
|
|
3,154
|
|
Furniture and fixtures
|
|
3-10 years
|
|
1,475
|
|
|
1,535
|
|
Vehicles
|
|
5 years
|
|
32
|
|
|
32
|
|
Total cost
|
|
|
|
31,836
|
|
|
32,504
|
|
Less accumulated depreciation
|
|
|
|
(26,174
|
)
|
|
(26,528
|
)
|
Total net book value
|
|
|
|
$
|
5,662
|
|
|
$
|
5,976
|
|
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. 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.
During the second quarter of 2017, 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 resulted in an indicator of impairment. This, along with an overall slowdown in APC technology and corresponding downward adjustments to our financial forecasts, was considered during a detailed evaluation of the fair value of our reporting units. As a result of these triggering events, Fuel Tech performed a long-lived asset impairment analysis for each of the reporting units as of April 1, 2017. Based on this evaluation, we determined that our APC segment failed the first step of our impairment analysis because the estimated gross cash flows and fair value of the reporting unit was less than its carrying value, thus requiring additional analysis of the segment. However, no impairment resulted as the fair values of the underlying patents and equipment equaled or exceeded their carrying values. We evaluated the corporate asset group, which contains our corporate headquarters office building and land in Warrenville, Illinois, using the residual method and management determined that there was not adequate gross cash flows to support the carrying value. After obtaining an appraisal from a third-party appraiser, management determined that the carrying value of the office building and land exceeded the fair value and recorded an impairment charge of $2,965 for the year ended December 31, 2017.
Revenue Recognition
On January 1, 2018, we adopted ASC 606 "Revenue from Contracts with Customers" ("ASC 606") using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our legacy accounting under Accounting Standards Codification Topic 605: Revenue Recognition (ASC 605).
For the years ended prior to January 1, 2018
Revenues from the sales of chemical products are recorded when title transferred, either at the point of shipment or at the point of destination, depending on the contract with the customer in accordance with ASC 605. We used the percentage of completion method of accounting for equipment construction, equipment supply 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, and 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.
Years beginning after January 1, 2018
The Company recognizes revenue when control of the promised goods or services is transferred to our customers, in amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Fuel Tech’s sales of products to customers represent single performance obligations, which are not impacted upon the adoption of ASC 606. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.
FUEL CHEM
Revenues from the sale of chemical products are recognized when control transfers to customer upon shipment or delivery of the product based on the applicable shipping terms. We generally recognize revenue for these arrangements at a point in time based on our evaluation of when the customer obtains control of the promised goods or services.
Air Pollution Control Technology
Fuel Tech’s APC contracts are typically six to eighteen months in length. A typical contract will have three or four critical operational measurements that, when achieved, serve as the basis for us to invoice the customer via progress billings. At a minimum, these measurements will include the generation of engineering drawings, the shipment of equipment and the completion of a system performance test.
As part of most of its contractual APC project agreements, Fuel Tech will agree to customer-specific acceptance criteria that relate to the operational performance of the system that is being sold. These criteria are determined based on modeling that is performed by Fuel Tech personnel, which is based on operational inputs that are provided by the customer. The customer will warrant that these operational inputs are accurate as they are specified in the binding contractual agreement. Further, the customer is solely responsible for the accuracy of the operating condition information; typically all performance guarantees and equipment warranties granted by us are voidable if the operating condition information is inaccurate or is not met.
Since control transfers over time, revenue is recognized based on the extent of progress towards completion of the single performance obligation. Fuel Tech uses the cost-to-cost input measure of progress for our contracts since it best depicts the transfer of assets to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost input measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred. Costs to fulfill include all internal and external engineering costs, equipment charges, inbound and outbound freight expenses, internal and site transfer costs, installation charges, purchasing and receiving costs, inspection costs, warehousing costs, project personnel travel expenses and other direct and indirect expenses specifically identified as project- or product-line related, as appropriate (e.g. test equipment depreciation and certain insurance expenses).
Fuel Tech has installed over 1,100 units with APC technology and normally provides performance guarantees to our customers based on the operating conditions for the project. As part of the project implementation process, we perform system start-up and optimization services that effectively serve as a test of actual project performance. We believe that this test, combined with the accuracy of the modeling that is performed, enables revenue to be recognized prior to the receipt of formal customer acceptance.
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.
Leases
On January 1, 2019, we adopted ASC 842 "Leases" using the modified retrospective method outlined in ASU 2018-11, “Leases (Topic 842) Targeted Improvements.” Refer to Note 10 for further details regarding the effect of adoption. We determine if an arrangement is a lease at inception. Operating leases are included in right-of-use ("ROU") operating lease assets, operating lease liabilities - current, and operating lease liabilities - non-current on our Consolidated Balance Sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which we elected the practical expedient to not separate lease and non-lease components for the majority of our leases. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. We also elected the practical expedient to keep leases with an initial term of 12 months or less off of the consolidated balance sheet.
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 5,600,676 shares that may be issued or reserved for awards to participants under the Incentive Plan as of December 31, 2019. Based on the existing issued or reserved awards in Incentive Plan, there are 2,231,382 shares available to be used for future awards to participants in the Incentive Plan as of December 31, 2019.
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, 2019, 2018 and 2017, we had outstanding equity awards of 913,000, 757,000 and 2,210,000, 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, 2019, 2018 and 2017, respectively, we had an additional 728,000, 620,000 and 168,000 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Basic weighted-average shares
|
|
24,202,000
|
|
|
24,164,000
|
|
|
23,872,000
|
|
Conversion of unsecured loan notes
|
|
—
|
|
|
—
|
|
|
—
|
|
Unexercised options and unvested restricted stock units
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted weighted-average shares
|
|
24,202,000
|
|
|
24,164,000
|
|
|
23,872,000
|
|
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, 2019, we had three customers which individually represented greater than 10% of revenues. One customer contributed primarily to our APC technology segment and represented 19% of consolidated revenues. The other two customers contributed to FUEL CHEM technology segment and each customer represented 11% of consolidated revenues. We had no customers that accounted for greater than 10% of our current assets as of December 31, 2019.
For the year ended December 31, 2018, we had two customers which individually represented greater than 10% of revenues. One customer contributed primarily to our APC technology segment and represented 27% of consolidated revenues. The other customer contributed to our APC technology and FUEL CHEM technology segment and represented 13% of consolidated revenues. We had no customers that accounted for greater than 10% of our current assets as of December 31, 2018.
For the year ended December 31, 2017, we had one customer which individually represented greater than 10% of revenues. This customer contributed primarily to our FUEL CHEM technology segment and represented 10% of consolidated revenues. We had no customers that accounted for greater than 10% of our current assets as of December 31, 2017.
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, 2019, 2018 and 2017, we withheld 140,784, 11,215 and 289,202 shares of our Common Shares, valued at approximately $128, $12 and $258, 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 Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The new rules reduce complexity by removing specific exceptions to general principles related to intraperiod tax allocations, ownership changes in foreign investments, and interim period income tax accounting for year-to-date losses that exceed anticipated losses. The new rules also simplify accounting for franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill, separate financial statements of legal entities that are not subject to tax, and enacted changes in tax laws in interim periods. The new rules will be effective for the Company in the first quarter of 2021, with early adoption permitted. The ASU permits either a retrospective basis or a modified retrospective transition approach. The Company is currently in the process of evaluating the impact of adoption of the new rules on the Company’s financial condition, results of operations, cash flows and disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the current accounting guidance and requires the measurement of all expected losses based on historical experience, current conditions and reasonable and supportable forecasts. For trade receivables, loans, and other financial instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The standard will become effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. The Company is currently in the process of evaluating the impact of adoption, but we do not believe the adoption of this standard will have a material impact on our financial statements.
2. DISCONTINUED OPERATIONS
During 2017, the Company suspended all operations associated with the Fuel Conversion business segment. The components of the net assets of the Fuel Conversion discontinued operations in Assets held for sale (which consisted primarily of certain equipment) on the Consolidated Balance Sheets totaling $0 and $485 as of December 31, 2019 and 2018, respectively. The Company sold the remaining Fuel Conversion equipment within Assets held during the year ended December 31, 2019 for sales proceeds net of selling costs of $505, resulting in a gain on sale of $20 recorded in discontinued operations. Following the sale of the remaining Fuel Conversion equipment during 2019, the Company completed the wind-down activities associated with the Fuel Conversion business segment. The Fuel Conversion business segment had no other assets or liabilities associated with it.
In addition, accrued severance of $0 and $65 is included in the other accrued liabilities line of the Consolidated Balance Sheets as of December 31, 2019 and 2018 respectively. The Company incurred $581 of severance costs relating to the suspension of the Fuel Conversion business segment, of which $205 was paid in 2017, $311was paid in 2018 and $65 was paid in 2019.
The activity of the Fuel Conversion discontinued operations consisted of Research and Development, severance, an impairment charge and other costs for the years ended December 31, 2019, 2018, and 2017 of $1, $113 and $3,914, respectively. The activity of the Fuel Conversion discontinued operations consisted primarily of storage costs for holding the equipment at a third-party location totaling $21 for the year ended December 31, 2019 and the gain on sale of $20 recorded in discontinued operations. The loss from discontinued operations in the Consolidated Statement of Operations for the year ended December 31, 2018 includes an impairment charge related to the Carbonite patent assets of $56 during the second quarter of 2018 as a result of not being able to reach an agreement with a third-party to acquire or license the Carbonite technology in combination with the sale of certain equipment included in Assets held for sale. The loss from discontinued operations in the Consolidated Statement of Operations for the year ended December 31, 2017 includes the severance charges associated with suspension of the Fuel Conversion business segment of $581. The loss from discontinued operations in the Consolidated Statement of Operations for the year ended December 31, 2017 includes an impairment charge related to the Carbonite intangible asset of $1,354 as a result of not being able to reach an agreement with a third-party to acquire or license the Carbonite technology. Absent a third-party agreement, management determined there was not adequate gross cash flows to support the carrying value of the asset and recorded the impairment charge during the fourth quarter of 2017. The Fuel Conversion business segment had no revenues associated with it.
3. REVENUE RECOGNITION
Adoption of ASC 606, "Revenue from Contracts with Customers"
On January 1, 2018, we adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our legacy accounting under Accounting Standards Codification Topic 605: Revenue Recognition (ASC 605).
The cumulative effect of the changes made to our January 1, 2018 consolidated balance sheet for the adoption of ASC 606 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
Adjustments Upon Adoption of ASC 606
|
Balance at January 1, 2018
|
Liabilities
|
|
|
|
Other accrued liabilities
|
$
|
5,098
|
|
(205
|
)
|
$
|
4,893
|
|
Equity
|
|
|
|
Accumulated deficit
|
(102,672
|
)
|
205
|
|
(102,467
|
)
|
The adjustment made to the January 1, 2018 consolidated balance sheet related to deferred revenue under ASC 605 for the license of standalone functional intellectual property to a customer in one of our foreign locations which is recognized at a point in time upon adoption of ASC 606.
Practical Expedients and Exemptions
We generally expense sales commissions on a ratable basis when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses within the Consolidated Statements of Operations. A practical expedient was elected to not recognize shipping and handling costs as a separate performance obligation under ASC 606.
Disaggregated Revenue by Product Technology
The following table presents our revenues disaggregated by product technology:
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
2019
|
2018
|
2017
|
Air Pollution Control
|
|
|
|
Technology solutions
|
$
|
10,640
|
|
$
|
35,176
|
|
$
|
24,422
|
|
Spare parts
|
1,031
|
|
1,083
|
|
1,022
|
|
Ancillary revenue
|
2,411
|
|
2,158
|
|
2,364
|
|
Total Air Pollution Control Technology
|
14,082
|
|
38,417
|
|
27,808
|
|
FUEL CHEM
|
|
|
|
FUEL CHEM technology solutions
|
16,385
|
|
18,118
|
|
17,358
|
|
Total Revenues
|
$
|
30,467
|
|
$
|
56,535
|
|
$
|
45,166
|
|
(1) As noted above, 2017 amounts have not been adjusted under the modified retrospective method.
Disaggregated Revenue by Geography
The following table presents our revenues disaggregated by geography, based on the billing addresses of our customers:
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
2019
|
2018
|
2017
|
United States
|
$
|
25,882
|
|
$
|
43,887
|
|
$
|
29,510
|
|
Foreign Revenues
|
|
|
|
South America
|
777
|
|
1,290
|
|
2,118
|
|
Europe
|
2,322
|
|
6,260
|
|
6,206
|
|
Asia
|
1,486
|
|
5,098
|
|
7,332
|
|
Total Foreign Revenues
|
4,585
|
|
12,648
|
|
15,656
|
|
Total Revenues
|
$
|
30,467
|
|
$
|
56,535
|
|
$
|
45,166
|
|
(1) As noted above, 2017 amounts have not been adjusted under the modified retrospective method.
Timing of Revenue Recognition
The following table presents the timing of our revenue recognition:
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
2019
|
2018
|
2017
|
Products transferred at a point in time
|
$
|
19,827
|
|
$
|
21,359
|
|
$
|
20,744
|
|
Products and services transferred over time
|
10,640
|
|
35,176
|
|
24,422
|
|
Total Revenues
|
$
|
30,467
|
|
$
|
56,535
|
|
$
|
45,166
|
|
(1) As noted above, 2017 amounts have not been adjusted under the modified retrospective method.
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the consolidated balance sheets. In our Air Pollution Control Technology segment, amounts are billed as work progresses in accordance with agreed-upon contractual terms. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. These assets are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period. At December 31, 2019 and 2018, contract assets were approximately $1,857 and $5,540, respectively, and are included in accounts receivable on the consolidated balance sheets.
However, the Company will periodically bill in advance of costs incurred before revenue is recognized, resulting in contract liabilities. These liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period. Contract liabilities were $712 and $1,234 at December 31, 2019 and 2018, respectively, and are included in other accrued liabilities on the consolidated balance sheets.
As of December 31, 2019 we had three construction contracts in progress that were identified as loss contracts and a provision for losses of $26 was recorded in other accrued liabilities on the consolidated balance sheet. As of December 31, 2018, we had five construction contracts in progress that were identified as loss contracts and a provision for losses of $123 was recorded in other accrued liabilities on the consolidated balance sheet.
Remaining Performance Obligations
Remaining performance obligations, represents the transaction price of Air Pollution Control technology booked orders for which work has not been performed. As of December 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was $9,671. The Company expects to recognize revenue on approximately $5,780 of the remaining performance obligations over the next 12 months with the remaining recognized thereafter.
Accounts Receivable
The components of accounts receivable are as follows:
|
|
|
|
|
|
|
|
|
|
As of
|
|
December 31, 2019
|
|
December 31, 2018
|
Trade receivables
|
$
|
6,425
|
|
|
$
|
14,261
|
|
Unbilled receivables
|
1,857
|
|
|
5,540
|
|
Other short-term receivables
|
7
|
|
|
9
|
|
Allowance for doubtful accounts
|
(1,816
|
)
|
|
(1,411
|
)
|
Total accounts receivable
|
$
|
6,473
|
|
|
$
|
18,399
|
|
4. INCOME TAXES
On December 22, 2017, the United States (“U.S.”) enacted significant changes to the U.S. tax law following the passage and signing of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”). The Tax Act included significant changes to existing tax law, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, a one-time repatriation tax on deferred foreign income (“Transition Tax”), deductions, credits and business-related exclusions.
On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. The Company did not record additional provisional income tax given the Company has full valuation allowances on its deferred tax assets and liabilities and the net operating loss generated in 2017.
Accordingly, the Company’s income tax provision as of December 31, 2018 and 2017 reflects (i) the current year impacts of the U.S. Tax Act on the estimated annual effective tax rate and (ii) the following discrete items resulting directly from the enactment of the Tax Act based on the information available, prepared, or analyzed (including computations) in reasonable detail:
(a) The Tax Act reduced the U.S. federal corporate tax rate from 35% to 21%. The impact from the permanent reduction to the U.S. federal corporate income tax rate from 35% to 21% is effective January 1, 2018. The Company adjusted the deferred tax asset and liabilities and the corresponding valuation reserve as a result of the reduction in the U.S. federal corporate tax rate.
The Tax Act created a new requirement that certain income (commonly referred to as “GILTI”) earned by controlled foreign corporations (CFC’s) must be included currently in the gross income of the CFC’s U.S. shareholder. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). Our selection of an accounting policy of the new GILTI tax rules will depend on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. The Company has included an estimate of the GILTI tax in the Company’s annualized effective tax rate used to determine tax expense for the years ended December 31, 2019 and 2018.
Within the calculation of the Company’s annual effective tax rate the Company has used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, and the FASB and/or various other taxing jurisdictions. For example, the Company anticipates that the state jurisdictions will continue to determine and announce their conformity to the Tax Act which could have an impact on the annual effective tax rate.
The components of income (loss) before taxes for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origin of income before taxes
|
|
2019
|
|
2018
|
|
2017
|
United States
|
|
$
|
(5,387
|
)
|
|
$
|
3,277
|
|
|
$
|
(9,821
|
)
|
Foreign
|
|
(2,378
|
)
|
|
(3,272
|
)
|
|
(1,208
|
)
|
Income (Loss) before income taxes
|
|
$
|
(7,765
|
)
|
|
$
|
5
|
|
|
$
|
(11,029
|
)
|
Significant components of income tax benefit (expense) for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(18
|
)
|
|
$
|
111
|
|
State
|
|
(14
|
)
|
|
(13
|
)
|
|
—
|
|
Foreign
|
|
—
|
|
|
—
|
|
|
(65
|
)
|
Total current
|
|
(14
|
)
|
|
(31
|
)
|
|
46
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
—
|
|
|
(2
|
)
|
|
534
|
|
Foreign
|
|
—
|
|
|
—
|
|
|
—
|
|
Total deferred
|
|
—
|
|
|
(2
|
)
|
|
534
|
|
Income tax benefit (expense)
|
|
$
|
(14
|
)
|
|
$
|
(33
|
)
|
|
$
|
580
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Provision at the U.S. federal statutory rate
|
|
21.0
|
%
|
|
21.0
|
%
|
|
34.0
|
%
|
State taxes, net of federal benefit
|
|
2.7
|
%
|
|
(86.5
|
)%
|
|
—
|
%
|
Foreign tax rate differential
|
|
—
|
%
|
|
(2,210.3
|
)%
|
|
(0.9
|
)%
|
Valuation allowance
|
|
(29.2
|
)%
|
|
(7,152.8
|
)%
|
|
15.0
|
%
|
Federal tax rate change
|
|
—
|
%
|
|
—
|
%
|
|
(43.9
|
)%
|
Other true up
|
|
1.6
|
%
|
|
8,904.9
|
%
|
|
—
|
%
|
Intangible assets impairment and other non-deductibles
|
|
2.3
|
%
|
|
2,194.6
|
%
|
|
(1.8
|
)%
|
Other
|
|
1.8
|
%
|
|
(994.6
|
)%
|
|
2.1
|
%
|
Income tax benefit (expense) effective rate
|
|
0.2
|
%
|
|
676.3
|
%
|
|
4.5
|
%
|
The deferred tax assets and liabilities at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
|
Stock compensation expense
|
|
$
|
1,882
|
|
|
$
|
1,867
|
|
Goodwill
|
|
1,490
|
|
|
1,927
|
|
Royalty accruals
|
|
560
|
|
|
484
|
|
Bad debt allowance
|
|
466
|
|
|
345
|
|
Net operating loss carryforwards
|
|
9,146
|
|
|
6,654
|
|
Credit carry-forwards
|
|
814
|
|
|
685
|
|
Inventory reserve
|
|
243
|
|
|
277
|
|
Depreciation
|
|
502
|
|
|
515
|
|
Other
|
|
340
|
|
|
539
|
|
Total deferred tax assets
|
|
15,443
|
|
|
13,293
|
|
Deferred tax liabilities:
|
|
|
|
|
Intangible assets
|
|
(220
|
)
|
|
(283
|
)
|
Other
|
|
—
|
|
|
(137
|
)
|
Total deferred tax liabilities
|
|
(220
|
)
|
|
(420
|
)
|
Net deferred tax asset before valuation allowance
|
|
15,223
|
|
|
12,873
|
|
Valuation allowances for deferred tax assets
|
|
(15,394
|
)
|
|
(13,044
|
)
|
Net deferred tax liability
|
|
$
|
(171
|
)
|
|
$
|
(171
|
)
|
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
|
2017
|
|
$
|
13,179
|
|
|
(945
|
)
|
|
—
|
|
|
$
|
12,234
|
|
2018
|
|
$
|
12,234
|
|
|
810
|
|
|
—
|
|
|
$
|
13,044
|
|
2019
|
|
$
|
13,044
|
|
|
2,350
|
|
|
—
|
|
|
$
|
15,394
|
|
For the years ended December 31, 2019, 2018 and 2017, there were no exercises of stock options.
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.
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, 2019, 2018 and 2017. There were no unrecognized tax benefits as of December 31, 2019, 2018 and 2017.
We are subject to taxation in the U.S., various states, and in non-U.S. jurisdictions. Our U.S. income tax returns are primarily subject to examination from 2016 through 2018; however, U.S. tax authorities also have the ability to review prior tax years to the extent loss carryforwards and tax credit carryforwards are utilized. The open years for the non-U.S. tax returns range from 2011 through 2018 based on local statutes.
On April 3, 2019, the Company received notice from the Internal Revenue Service that our U.S. income tax return for the year ended December 31, 2016 is currently under audit.
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 foreign subsidiaries other than Fuel Tech S.p.A (Chile) and Beijing Fuel Tech 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 of December 31, 2019, the investment in Fuel Tech S.p.A (Chile) was no longer considered to be indefinite and a provision for deferred U.S income taxes was recorded. The deferred income taxes associated with this investment are offset by a valuation allowance.
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. We have approximately $17,469 of US net operating loss carryforwards available to offset future US taxable income as of December 31, 2019. The net operating loss carry-forwards related to tax losses generated in prior years in the US begin to expire in 2034. Further, we have tax loss carry-forwards of approximately $5,681 available to offset future foreign income in Italy as of December 31, 2019. We have recorded a full valuation allowance against the resulting $1,363 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. Finally, we have tax loss carry-forwards of approximately $12,689 available to offset future foreign income in China as of December 31, 2019. The net operating loss carry-forwards related to tax losses generated in prior years in China expire in 2022.
5. COMMON SHARES
At December 31, 2019 and 2018, respectively, we had 25,053,480 and 24,825,891 Common Shares issued and 24,592,578 and 24,170,585 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, 2019, we had 5,600,676 shares reserved for issuance upon the exercise or vesting of equity awards, of which 747,500 are stock options that are currently exercisable (see Note 8).
6. TREASURY STOCK
Common shares held in treasury totaled 796,090 and 655,306 with a cost of $1,612 and $1,484 at December 31, 2019 and 2018, respectively. These shares were withheld from employees to settle personal tax withholding obligations that arose as a result of restricted stock units that vested during the current and prior years.
7. NIL COUPON NON-REDEEMABLE CONVERTIBLE UNSECURED LOAN NOTES
At December 31, 2019 and 2018, 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, 2019, the nil coupon loan notes were convertible into 6,715 common shares. Based on our closing stock price of $0.95 at December 31, 2019, the aggregate fair value of the common shares that the holders would receive if all the loan notes were converted would be approximately $6, 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.
For the years ended December 31, 2019 and 2018, 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 5,600,676 shares that may be issued or reserved for awards to participants under the Incentive Plan which includes 1,200,000 additional shares as a result of an amendment to the Incentive Plan approved by our stockholders in May 2018. At December 31, 2019, we had approximately 2,231,382 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 from continuing operations for the years ended December 31, 2019, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Stock options
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
120
|
|
Restricted stock units
|
|
574
|
|
|
233
|
|
|
1,269
|
|
Total stock-based compensation expense
|
|
574
|
|
|
233
|
|
|
1,389
|
|
Tax benefit of stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
After-tax effect of stock based compensation
|
|
$
|
574
|
|
|
$
|
233
|
|
|
$
|
1,389
|
|
As of December 31, 2019, there was $359 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 1.5 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 period ended December 31, 2017 were $0.68 per share using the following weighted average assumptions:
|
|
|
|
|
|
|
2017
|
Expected dividend yield
|
|
—
|
%
|
Risk-free interest rate
|
|
2.33
|
%
|
Expected volatility
|
|
61.2
|
%
|
Expected life of option
|
|
10 years
|
|
There were no stock options granted during the year ended December 31, 2019 and 2018.
The following table presents a summary of our stock option activity and related information for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
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
|
|
932,500
|
|
|
$
|
4.68
|
|
|
1,116,750
|
|
|
$
|
6.34
|
|
|
1,039,750
|
|
|
$
|
8.39
|
|
Granted
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
176,000
|
|
|
0.96
|
|
Expired or forfeited
|
|
(185,000
|
)
|
|
10.14
|
|
|
(184,250
|
)
|
|
14.72
|
|
|
(99,000
|
)
|
|
18.32
|
|
Outstanding at end of year
|
|
747,500
|
|
|
$
|
3.33
|
|
|
932,500
|
|
|
$
|
4.68
|
|
|
1,116,750
|
|
|
$
|
6.34
|
|
Exercisable at end of year
|
|
747,500
|
|
|
$
|
3.33
|
|
|
932,500
|
|
|
$
|
4.68
|
|
|
1,116,750
|
|
|
$
|
6.34
|
|
Weighted-average fair value of options granted during the year
|
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
0.68
|
|
Weighted-Average Remaining Contractual Life
|
|
|
|
4.73 years
|
|
|
|
|
4.67 years
|
|
|
|
|
4.80 years
|
|
Aggregate Intrinsic Value
|
|
|
|
$
|
—
|
|
|
|
|
$
|
40
|
|
|
|
|
$
|
27
|
|
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on our closing stock price of $0.95 as of December 31, 2019, 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, 2019:
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding and Exercisable
|
Range of
Exercise Prices
|
|
Number of
Options
|
|
Weighted-
Average
Remaining
Contractual Life
|
|
Weighted-
Average
Exercise Price
|
$0.96 - $1.27
|
|
176,000
|
|
|
7.9 years
|
|
$
|
0.97
|
|
$1.28 - $3.00
|
|
207,000
|
|
|
5.8 years
|
|
2.10
|
|
$3.01 - $4.54
|
|
140,000
|
|
|
3.0 years
|
|
3.72
|
|
$4.55 - $9.06
|
|
224,500
|
|
|
2.4 years
|
|
6.08
|
|
|
|
747,500
|
|
|
4.7 years
|
|
$
|
3.33
|
|
As of and for the 12 months ended December 31, 2019, there was no non-vested stock option activity and $0 of total unrecognized compensation cost related to non-vested stock options granted under the Incentive Plan. Fuel Tech received no proceeds from the exercise of stock options in the years ended December 31, 2019, 2018 and 2017, 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.
During the years ended December 31, 2019 and 2018, there were 562,777 and 48,890 restricted stock units that vested with a grant date fair value of $554 and $77, respectively.
A summary of restricted stock unit activity for the years ended December 31, 2019, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
Unvested restricted stock units at December 31, 2016
|
|
1,463,796
|
|
|
2.82
|
|
Granted
|
|
1,090,000
|
|
|
0.97
|
|
Forfeited
|
|
(213,001
|
)
|
|
2.99
|
|
Vested (1)
|
|
(981,633
|
)
|
|
2.85
|
|
Unvested restricted stock units at December 31, 2017
|
|
1,359,162
|
|
|
1.28
|
|
Forfeited
|
|
(199,995
|
)
|
|
1.59
|
|
Vested
|
|
(48,890
|
)
|
|
1.59
|
|
Unvested restricted stock units at December 31, 2018
|
|
1,110,277
|
|
|
1.21
|
|
Granted
|
|
228,135
|
|
|
1.52
|
|
Vested
|
|
(562,777
|
)
|
|
0.98
|
|
Unvested restricted stock units at December 31, 2019
|
|
775,635
|
|
|
1.47
|
|
(1) The increase in shares vested in 2017 is due to the accelerated time vesting of outstanding remaining restricted stock units approved by the Company's Board of Directors on June 28, 2017.
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 2019, 2018 and 2017, 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.
From time to time we are involved in litigation with respect to matters arising from the ordinary conduct of our business. In the opinion of management, based upon presently available information, either adequate provision for anticipated costs have been accrued or the ultimate anticipated costs will not materially affect our consolidated financial position, results of operations, or cash flows. We do not believe we have any pending loss contingencies that are probable or reasonably possible of having a material impact on our consolidated financial position, results of operations or cash flows.
During the fourth quarter of 2018, we were notified of certain design non-conformances in a project with a U.S. customer that required remedial warranty work under the contract. For the year ended December 31, 2019, we recognized remediation costs of $2,241 included within costs of sales in the Consolidated Statements of Operations. The Company believes there are no ongoing remedial obligations to the customer. In connection with this matter, in early 2019 we notified our errors and omission insurer of the claim and were issued a letter confirming coverage of the claim under the applicable policy. Although we have periodically submitted expenses for reimbursement to our insurer, as of the filing date the insurer has not yet fully completed its
review of submitted reimbursement requests. In light of the pending status of the settlement, the Company determined, in the exercise of its judgment as prescribed by ASC 450 Contingencies, to not reflect any benefits that might be realized from our insurer and will reflect such benefit at such time as settlement with our insurer becomes certain.
As of December 31, 2019, we have recorded no receivables from the insurance carrier and a total accrued liability associated with the completion of the non-conformance issues of $146 in the other accrued liabilities line of the Consolidated Balance Sheets.
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, 2019, we had outstanding bank performance guarantees and letters of credit in the amount of $2,461 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 May 2020 through February 2023. 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. There was 0 changes in the warranty liability from continuing operations in 2019, 2018 and 2017. The warranty balance was $159 at December 31, 2019, 2018 and 2017.
10. LEASES
Adoption of ASC 842, "Leases"
On January 1, 2019, we adopted ASC 842 using the modified retrospective method outlined in ASU 2018-11 "Leases (Topic 842) Targeted Improvements." Results for reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior period amounts are not adjusted and continue to be reported in accordance with our legacy accounting under Accounting Standards Codification Topic 840: Leases (ASC 840). The Company recorded the transition to ASC 842 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented.
We have elected the package of practical expedients permitted under the transition guidance, which among other things, allow us to carry forward the historical accounting relating to lease identification and classification for existing leases upon adoption. We have also elected the practical expedient to not separate lease and non-lease components for the majority of our leases and the election to keep leases with an initial term of 12 months or less off of the consolidated balance sheet.
The cumulative effect of the changes made to our January 1, 2019 consolidated balance sheet for the adoption of ASC 842 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
Adjustments Upon Adoption of ASC 842
|
Balance at January 1, 2019
|
Assets
|
|
|
|
Right-of-use operating lease assets
|
$
|
—
|
|
$
|
1,592
|
|
$
|
1,592
|
|
Liabilities
|
|
|
|
Other accrued liabilities
|
6,099
|
|
(22
|
)
|
6,077
|
|
Operating lease liabilities - current
|
—
|
|
650
|
|
650
|
|
Operating lease liabilities - non-current
|
—
|
|
942
|
|
942
|
|
Equity
|
|
|
|
Accumulated deficit
|
(102,495
|
)
|
22
|
|
(102,473
|
)
|
The adjustment made to the January 1, 2019 consolidated balance sheet related to an accrued liability for lease escalation clauses in certain of our leases under ASC 840 which is a cumulative-effect adjustment to the opening balance of accumulated deficit upon the adoption of ASC 842.
Leases
The terms of the Company’s four primary office space lease arrangements are as follows:
|
|
•
|
The Gallarate, Italy building lease, for approximately 1,636 square feet, runs from May 1, 2019 to April 30, 2025. This facility serves as the operating headquarters for our European operations.
|
|
|
•
|
The Westlake, Ohio building lease, for approximately 3,000 square feet, runs from May 1, 2017 to April 30, 2020. This facility houses engineering operations.
|
|
|
•
|
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. On January 30, 2020, the Company extended the lease for three years to expire on December 31, 2023.
|
|
|
•
|
The Overland Park, KS lease, for approximately 600 square feet, runs from October 16, 2018 to October 15, 2021. This facility serves primarily as a sales office.
|
The Company also has four additional operating leases related to certain office equipment and company leased vehicles. Our leases have remaining lease terms of 1 year to 6 years. Our leases do not contain any material residual value guarantees or material restricted covenants and we currently have no material sublease arrangements. We have no financing leases as defined under ASC 842.
We were party to a sublease agreement with American Bailey Corporation (ABC) that obligated 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. The Company did not renew the lease following its expiration on December 31, 2019. Please refer to Note 12 to the consolidated financial statements for a discussion of our relationship with ABC.
Total operating lease expense for the year ended December 31, 2019 is as follows:
|
|
|
|
|
Operating lease cost
|
$
|
661
|
|
Short-term lease cost
|
136
|
|
Total lease cost
|
$
|
797
|
|
Prior to the adoption of ASC 842, rent expense, net of related party sub-lease income, was approximately $745 and $902 for the years ended December 31, 2018 and 2017.
The weighted average remaining lease term was 4.5 years as of December 31, 2019. The weighted average discount rate was 3.37% as of December 31, 2019.
Remaining maturities of our existing lease liabilities as of December 31, 2019 were as follows:
|
|
|
|
|
Year Ending December 31,
|
Operating Leases
|
2020
|
318
|
|
2021
|
227
|
|
2022
|
170
|
|
2023
|
161
|
|
Thereafter
|
207
|
|
Total lease payments
|
$
|
1,083
|
|
Less imputed interest
|
(103
|
)
|
Total
|
$
|
980
|
|
The following is the balance sheet classification of our existing lease liabilities as of December 31, 2019:
|
|
|
|
|
Operating lease liabilities - current
|
$
|
300
|
|
Operating lease liabilities - non-current
|
680
|
|
Total operating lease liabilities
|
$
|
980
|
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
For the Twelve Months ended December 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
$
|
645
|
|
Leased assets obtained in exchange for operating lease liabilities
|
609
|
|
11. DEBT FINANCING
On June 19, 2019, the Company entered into a Cash Collateral Security agreement with BMO Harris Bank, N.A. (the BMO Harris agreement) to use for the sole purpose of issuing standby letters of credit. The BMO Harris agreement requires us to pledge as cash collateral 105% of the aggregate face amount of outstanding standby letters of credit. The Company pays 250 basis points on the face values of outstanding letters of credit. There are no financial covenants set forth in the BMO Harris agreement. At December 31, 2019, the Company had outstanding standby letters of credit totaling approximately $2,461 under the BMO Harris agreement. As of December 31, 2019, the Company held $2,587 in a separate restricted use designated BMO Harris Bank N.A. deposit account. Fuel Tech is committed to reimbursing the issuing bank for any payments made by the bank under these instruments.
In connection with the transition to BMO Harris Bank N.A., the Company canceled its U.S. Domestic credit facility (the Facility) with JPMorgan Chase Bank, N.A. (JPM Chase) effective on September 25, 2019.
The Company was previously obligated under the Facility with JPM Chase which provided for maximum revolving credit borrowings of $5,500. Fuel Tech used this Facility primarily for standby letters of credit. The Facility was secured by $5,500 in cash held by the Company in a separate restricted use designated JPM Chase deposit account and has the Company’s Italian subsidiary, Fuel Tech S.r.l., as a guarantor. Outstanding borrowings under the Facility bore interest at a rate of LIBOR plus 300 basis points. There were no financial covenants set forth in this Facility. The Facility was amended on several occasions during 2019 and 2018, most recently June 19, 2019, in order to amend the maximum availability under the Facility. As of December 31, 2018, there were no outstanding borrowings under the Facility.
At December 31, 2018, we had outstanding standby letters of credit and bank guarantees totaling approximately $5,028 on our domestic credit facility in connection with contracts in process. We were committed to reimbursing the issuing bank for any payments made by the bank under these instruments. At December 31, 2018, there were no cash borrowings under the domestic revolving credit facility and approximately $443 was available for future borrowings under the Facility. We paid a commitment fee of 0.25% per year on the unused portion of the revolving credit facility.
Beijing Fuel Tech Environmental Technologies Company, Ltd. (Beijing Fuel Tech), was previously obligated under a revolving credit facility (the China Facility) agreement, as most recently amended on October 19, 2018, with JPM Chase which provided for maximum revolving credit borrowings of RMB 2.625 million (approximately $382) and matured on June 30, 2019. The Facility was secured by $520 in cash held by the Company in a separate restricted use designated JPM Chase deposit account. The China Facility bears interest at a rate of 140% of the People’s Bank of China (PBOC) Base Rate, and is guaranteed by the Company. Beijing Fuel Tech can use this facility for cash advances and bank guarantees. As of December 31, 2018, Beijing Fuel Tech had no cash borrowings under the China Facility. At December 31, 2018, we had no outstanding standby letters of credit and bank guarantees on its Beijing Fuel Tech revolving credit facility in connection with contracts in process. At December 31, 2018, approximately $382 was available for future borrowings. As a result of the announcement of the suspension of the Air Pollution Control business in Beijing, the Company did not renew the China Facility upon its expiration on June 30, 2019.
12. RELATED PARTY TRANSACTIONS
Persons now or formerly associated with American Bailey Corporation (ABC) currently own approximately 27% of our outstanding Common Shares. ABC was a sub-lessee under our February 1, 2010 lease of its offices in Stamford, Connecticut, which ran through December 31, 2019. The Company did not renew the lease following its expiration on 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, 2019, 2018 and 2017, were $165, $164 and $164, respectively. The amount due from ABC related to the sublease agreement was $27 and $40 at December 31, 2019 and 2018 respectively.
13. 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 $262, $231 and $285 in 2019, 2018 and 2017, respectively.
14. BUSINESS SEGMENT, GEOGRAPHIC AND QUARTERLY FINANCIAL DATA
Business Segment Financial Data
We segregate our financial results into two reportable segments representing two broad technology segments as follows:
|
|
•
|
The Air Pollution Control technology segment includes technologies to reduce NOx emissions in flue gas from boilers, incinerators, furnaces and other stationary combustion sources. These include Low and Ultra Low NOx Burners (LNB and ULNB), Over-Fire Air (OFA) systems, NOxOUT® and HERT™ Selective Non-Catalytic Reduction (SNCR) systems, and Advanced Selective Catalytic Reduction (ASCR™) systems. Our ASCR systems include ULNB, OFA, and SNCR components, along with a downsized SCR catalyst, Ammonia Injection Grid (AIG), and Graduated Straightening Grid GSG™ systems to provide high NOx reductions at significantly lower capital and operating costs than conventional SCR systems. The NOxOUT CASCADE® and NOxOUT-SCR® processes are more basic, using just SNCR and SCR catalyst components. ULTRA® technology creates ammonia at a plant site using safe urea for use with any SCR application. Flue Gas Conditioning systems are chemical injection systems offered in markets outside the U.S. and Canada to enhance electrostatic precipitator and fabric filter performance in controlling particulate emissions.
|
|
|
•
|
The FUEL CHEM® technology segment, which uses chemical processes in combination with advanced CFD and CKM boiler modeling, for the control of slagging, fouling, corrosion, opacity and other sulfur trioxide-related issues in furnaces and boilers through the addition of chemicals into the furnace using TIFI® Targeted In-Furnace Injection™ technology.
|
The “Other” classification includes those profit and loss items not allocated to either reportable segment. There are no inter-segment sales that require elimination.
We evaluate performance and allocate resources based on 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 from continuing operations are provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2019
|
|
Air Pollution
Control Segment
|
|
FUEL CHEM
Segment
|
|
Other
|
|
Total
|
Revenues from external customers
|
|
$
|
14,082
|
|
|
$
|
16,385
|
|
|
$
|
—
|
|
|
$
|
30,467
|
|
Cost of sales
|
|
(11,256
|
)
|
|
(8,381
|
)
|
|
—
|
|
|
(19,637
|
)
|
Gross margin
|
|
2,826
|
|
|
8,004
|
|
|
—
|
|
|
10,830
|
|
Selling, general and administrative
|
|
—
|
|
|
—
|
|
|
(17,191
|
)
|
|
(17,191
|
)
|
Restructuring charge
|
|
(625
|
)
|
|
—
|
|
|
—
|
|
|
(625
|
)
|
Research and development
|
|
—
|
|
|
—
|
|
|
(1,127
|
)
|
|
(1,127
|
)
|
Intangible assets abandonment
|
|
—
|
|
|
—
|
|
|
(127
|
)
|
|
(127
|
)
|
Operating income (loss) from continuing operations
|
|
$
|
2,201
|
|
|
$
|
8,004
|
|
|
$
|
(18,445
|
)
|
|
$
|
(8,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2018
|
|
Air Pollution
Control Segment
|
|
FUEL CHEM
Segment
|
|
Other
|
|
Total
|
Revenues from external customers
|
|
$
|
38,417
|
|
|
$
|
18,118
|
|
|
$
|
—
|
|
|
$
|
56,535
|
|
Cost of sales
|
|
(27,382
|
)
|
|
(9,089
|
)
|
|
—
|
|
|
(36,471
|
)
|
Gross margin
|
|
11,035
|
|
|
9,029
|
|
|
—
|
|
|
20,064
|
|
Selling, general and administrative
|
|
—
|
|
|
—
|
|
|
(18,564
|
)
|
|
(18,564
|
)
|
Research and development
|
|
—
|
|
|
—
|
|
|
(1,073
|
)
|
|
(1,073
|
)
|
Intangible assets abandonment
|
|
—
|
|
|
—
|
|
|
(317
|
)
|
|
(317
|
)
|
Operating income (loss) from continuing operations
|
|
$
|
11,035
|
|
|
$
|
9,029
|
|
|
$
|
(19,954
|
)
|
|
$
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2017
|
|
Air Pollution
Control Segment
|
|
FUEL CHEM
Segment
|
|
Other
|
|
Total
|
Revenues from external customers
|
|
$
|
27,808
|
|
|
$
|
17,358
|
|
|
$
|
—
|
|
|
$
|
45,166
|
|
Cost of sales
|
|
(18,478
|
)
|
|
(8,666
|
)
|
|
—
|
|
|
(27,144
|
)
|
Gross margin
|
|
9,330
|
|
|
8,692
|
|
|
—
|
|
|
18,022
|
|
Selling, general and administrative
|
|
—
|
|
|
—
|
|
|
(20,933
|
)
|
|
(20,933
|
)
|
Restructuring charge
|
|
(58
|
)
|
|
(61
|
)
|
|
—
|
|
|
(119
|
)
|
Research and development
|
|
—
|
|
|
—
|
|
|
(1,070
|
)
|
|
(1,070
|
)
|
Building impairment
|
|
—
|
|
|
—
|
|
|
(2,965
|
)
|
|
(2,965
|
)
|
Operating income (loss) from continuing operations
|
|
$
|
9,272
|
|
|
$
|
8,631
|
|
|
$
|
(24,968
|
)
|
|
$
|
(7,065
|
)
|
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,
|
|
2019
|
|
2018
|
|
2017
|
Revenues:
|
|
|
|
|
|
|
United States
|
|
$
|
25,882
|
|
|
$
|
43,887
|
|
|
$
|
29,510
|
|
Foreign
|
|
4,585
|
|
|
12,648
|
|
|
15,656
|
|
|
|
$
|
30,467
|
|
|
$
|
56,535
|
|
|
$
|
45,166
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Assets:
|
|
|
|
|
United States
|
|
$
|
23,460
|
|
|
$
|
36,784
|
|
Foreign
|
|
8,764
|
|
|
14,935
|
|
|
|
$
|
32,224
|
|
|
$
|
51,719
|
|
15. FAIR VALUE MEASUREMENTS
We apply authoritative accounting guidance for fair value measurements of financial and non-financial 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
|
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, 2019 and 2018.
16. RESTRUCTURING ACTIVITIES
On January 18, 2019, the Company announced a planned suspension of its Air Pollution Control (“APC”) business operation in China (“Beijing Fuel Tech”). This action is part of Fuel Tech’s ongoing operational improvement initiatives designed to prioritize resource allocation, reduce costs, and drive profitability for the Company on a global basis. The transition associated with the suspension of the APC business includes staff rationalization, supplier and partner engagement, and the monetization of certain assets. The remaining transition activities include the execution of the remaining activities to satisfy the requirements for the remaining APC projects in China (with a backlog totaling approximately $35) in addition to collection efforts for the remaining accounts receivable.
The following table presents our revenues and net loss in China for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Total revenues
|
|
$
|
329
|
|
|
$
|
3,006
|
|
|
$
|
8,034
|
|
Net loss
|
|
(1,767
|
)
|
|
(1,868
|
)
|
|
(1,343
|
)
|
The following table presents net assets in China for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Total assets
|
|
$
|
4,249
|
|
|
$
|
8,546
|
|
|
$
|
13,005
|
|
Total liabilities
|
|
399
|
|
|
2,953
|
|
|
5,245
|
|
Total net assets
|
|
3,850
|
|
|
5,593
|
|
|
7,760
|
|
Total assets primarily consist of cash, accounts receivable, contract assets, prepaid expenses and other current assets. Total liabilities consist of accounts payable and certain accrued liabilities.
The Company recorded restructuring charges $625 for the twelve months ended December 31, 2019 associated with the suspension of its APC business operation in China. The charge consisted primarily of one-time severance costs of $562 and the early termination penalty for our lease associated with the suspension of our APC business in China of $63. On January 23, 2019, the Company notified the landlord of our intention to early terminate the lease on July 22, 2019 resulting in the early termination penalty.
The Company recorded no restructuring charge for the twelve-months ending December 31, 2018. The Company recorded a charge of approximately $700 in 2017 in connection with the workforce reduction. This charge included $581 related to severance and benefit continuation costs due to the suspension of all operations associated with the Fuel Conversion business segment. 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:
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
2019
|
2018
|
2017
|
Restructuring liability at January 1,
|
$
|
65
|
|
$
|
391
|
|
$
|
309
|
|
Amounts expensed
|
625
|
|
—
|
|
119
|
|
Amounts expensed - discontinued operations
|
—
|
|
—
|
|
581
|
|
Amounts paid
|
(690
|
)
|
(326
|
)
|
(618
|
)
|
Restructuring liability at December 31,
|
$
|
—
|
|
$
|
65
|
|
$
|
391
|
|
17. Unaudited Quarterly Financial Data
Set forth below are the unaudited quarterly financial data for the fiscal years ended December 31, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarters ended
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
2019
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
10,155
|
|
|
$
|
8,948
|
|
|
$
|
6,452
|
|
|
$
|
4,912
|
|
Cost of sales
|
|
6,141
|
|
|
5,050
|
|
|
3,563
|
|
|
4,883
|
|
Net (loss) from continuing operations
|
|
(1,279
|
)
|
|
(936
|
)
|
|
(1,296
|
)
|
|
(4,340
|
)
|
Income (loss) from discontinued operations
|
|
(10
|
)
|
|
(9
|
)
|
|
18
|
|
|
—
|
|
Net income (loss)
|
|
(1,289
|
)
|
|
(945
|
)
|
|
(1,278
|
)
|
|
(4,340
|
)
|
Basic net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
(0.05
|
)
|
|
(0.04
|
)
|
|
(0.05
|
)
|
|
(0.18
|
)
|
Discontinued operations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Basic net income (loss) per common share:
|
|
$
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.18
|
)
|
Diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
(0.05
|
)
|
|
(0.04
|
)
|
|
(0.05
|
)
|
|
(0.18
|
)
|
Discontinued operations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted net income (loss) per common share:
|
|
$
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
12,791
|
|
|
$
|
11,847
|
|
|
$
|
16,070
|
|
|
$
|
15,827
|
|
Cost of sales
|
|
7,766
|
|
|
8,125
|
|
|
10,654
|
|
|
9,926
|
|
Net income (loss) from continuing operations
|
|
(191
|
)
|
|
(1,679
|
)
|
|
1,055
|
|
|
900
|
|
Loss from discontinued operations
|
|
(25
|
)
|
|
(74
|
)
|
|
(10
|
)
|
|
(4
|
)
|
Net income (loss)
|
|
(216
|
)
|
|
(1,753
|
)
|
|
1,045
|
|
|
896
|
|
Basic net income (loss) per common share:
|
|
|
|
|
|
—
|
|
|
—
|
|
Continuing operations
|
|
(0.01
|
)
|
|
(0.07
|
)
|
|
0.04
|
|
|
0.04
|
|
Discontinued operations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Basic net income (loss) per common share:
|
|
$
|
(0.01
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
Diluted net income (loss) per common share:
|
|
|
|
|
|
|
|
—
|
|
Continuing operations
|
|
(0.01
|
)
|
|
(0.07
|
)
|
|
0.04
|
|
|
0.04
|
|
Discontinued operations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted net income (loss) per common share:
|
|
$
|
(0.01
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|