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Item 7. Management’s Discussion and Analysis

2021-03-15 compared with 2020-03-12 · 80 added, 206 removed, 209 unchanged (58% of the section changed)

ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (amounts in thousands of dollars)

Executive Summary

In 2020, the Company continued to experience a challenging operational environment resulting from the ongoing substitution of gas-fired and renewable energy plant for coal-fired installations.

Our cost control efforts reduced selling, general and administrative expenses from fiscal 2019 by 21% and the net loss by 46%.

We continue to invest in new technologies to expand our product offerings into the water pollution control and treatment market.

Our capital resources are sufficient for our immediate and longer-term needs and we continue to enjoy the services and support of a dedicated workforce.

We expect that our cost control efforts will continue to yield reduced losses and the diminishing effects of the pandemic should lead to an improved market outlook.

We have two broad technology segments that provide advanced engineered solutions to meet the pollution control, efficiency improvement and operational optimization needs of energy-related facilities worldwide.

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Air Pollution Control Technologies

The Air Pollution Control technology segment includes technologies to reduce NO x emissions in flue gas from boilers, incinerators, furnaces and other stationary combustion sources.

These include Low and Ultra Low NO x Burners (LNB and ULNB), OFA systems, NO x OUT and HERT SNCR systems, and ASCR systems.

The ASCR system includes ULNB, OFA, and SNCR components, along with a downsized SCR catalyst, AIG, and GSG systems to provide high NO x reductions at significantly lower capital and operating costs than conventional SCR systems.

The NO x OUT CASCADE and NO x OUT-SCR processes are basic types of ASCR systems, using just SNCR and SCR catalyst components.

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 SCR systems, NOxOUT and HERT SNCR systems, Low NOx Burners (LNB), and OFA systems, and I-NOx systems.

The I-NOx system includes LNB, 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.

ULTRA technology creates ammonia at a plant site using safe urea for use with any SCR application.

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Coal currently accounts for approximately 21% of all U.S.

electricity generation and roughly 59% of Chinese electricity generation.

electricity generation and roughly 33% of global electricity generation.

Major coal consumers include China, the United States and India.

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Revenue Recognition

Change in Accounting Policy

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 transfered, 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.

The Company recognizes revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

Fuel Tech’s sales of products to customers represent single performance obligations, which are not impacted upon the adoption of ASC 606.

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We generally recognize revenue for these arrangements at a point in time based on our evaluation of when the customer obtains control of the promised goods or services.

On occasion, Fuel Tech will engineer and sell its chemical pumping equipment.

These projects are similar in nature to the APC projects described above and for those projects where control transfers over time, revenue is recognized based on the extent of progress towards completion of the single performance obligation.

For projects containing multiple performance obligations, the Company allocates the transaction price based on the estimated standalone selling price.

The Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract.

The Company utilizes key assumptions to determine the stand-alone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction and the estimated costs.

Variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration relate to the satisfaction of the performance obligation and the resulting amounts allocated are consistent with the amounts the Company would expect to receive for the satisfaction of each performance obligation.

The consideration allocated to each performance obligation is recognized as revenue when control is transferred for the related goods or services.

For performance obligations which consist of licenses and other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress.

The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

The Company receives payments from its customers based on billing schedules established in each contract.

Up-front payments and fees are recorded as deferred revenue upon receipt or when due until the Company performs its obligations under these arrangements.

Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional.

Air Pollution Control Technology

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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.

As of December 31, 2020 we had one construction contract in progress that were identified as a loss contract and a provision for losses of $176 was recorded in other accrued liabilities on the consolidated balance sheet.

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.

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.

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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.

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 debt 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 .

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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.

Inventories are carried at weighted average cost and periodically evaluated to identify obsolete or otherwise impaired parts that 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.

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The implied fair value of goodwill is the excess of the fair value of the reporting unit over the fair values assigned to all of the assets and liabilities of that unit as if the reporting unit was acquired in a business combination and the fair value of the reporting unit represented the purchase price.

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 Company utilizes ASU 2017-04, Intangibles-Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment for the annual goodwill impairment test.

Fuel Tech performed its annual goodwill impairment analysis for each of its reporting units as of October 1, 2020 and determined that no impairment of goodwill existed within the FUEL CHEM technology segment.

Building 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.

Impairment of Long-Lived Assets and Amortizable Intangible Assets

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Quoted market prices and other valuation techniques are used to determine expected cash flows.

Due to the existence of impairment indicators as more fully described in Note 1 to our consolidated financial statements, we performed a more detailed analysis of potential long-lived and intangible asset impairment in the APC technology asset group during the fourth quarter of 2019 using the aforementioned undiscounted cash flows analysis.

During the second and third quarters of 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.

During the fourth quarter of 2020 , the Company recorded an abandonment charge of $197 due to the Company's decision to no longer maintain and defend certain patents and trademarks which are no longer contributing to operations.

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, 2020 .

In the second quarter of 2018, the Company recorded an abandonment charge of $317 associated with certain international patent assets which the Company elected to not maintain and abandon in certain international locations due to limited business opportunities in those regions.

In the second and third quarters of 2019 , the Company recorded an abandonment charge of $127 associated with certain international patent assets which the Company elected to not maintain and abandon in certain international locations 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.

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As required by ASC 740 "Income Taxes", 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.

This assessment resulted in a valuation allowance on our deferred tax assets of $15,394 , $13,044 and $12,234 for the years ended December 31, 2019, 2018 and 2017 respectively.

This assessment resulted in a valuation allowance on our deferred tax assets of $15,971 and $15,394 at December 31, 2020 and 2019 , respectively.

Stock-Based Compensation

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and (3) expected life of the option - an estimate based on historical experience including the effect of employee terminations.

In addition, we utilize a Monte Carlo valuation pricing model to determine the fair value of certain restricted stock units (RSUs) that contain market conditions.

Determining the fair value of these RSUs requires judgment and involves simulating potential future stock prices based on estimates for the risk-free interest rate, stock volatility, and correlations between our stock price and the stock prices of a peer group of companies.

If any of these assumptions differ significantly from actual results, stock-based compensation expense could be impacted.

There were no stock options or RSUs granted during the year ended December 31, 2019.

Recently Adopted Accounting Standards

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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.

We have lease agreements with lease and non-lease components, and we elected the practical expedient to not separate lease and non-lease components for the majority of our leases.

For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component.

We also elected the practical expedient to keep leases with an initial term of 12 months or less off of the consolidated balance sheet.

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09 "Revenue from Contracts with Customers" (ASC 606).

These changes created a comprehensive framework for all entities in all industries to apply in the determination of when to recognize revenue, and, therefore, supersede virtually all existing revenue recognition requirements and guidance.

This framework is expected to result in less complex guidance in application while providing a consistent and comparable methodology for revenue recognition.

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

To achieve this principle, an entity should apply the following steps:

(i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract(s), and (v) recognize revenue when, or as, the entity satisfies a performance obligation.

The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts.

In August 2015, the FASB approved a one-year deferral to January 1, 2018.

The Company adopted the standard on January 1, 2018 using the modified retrospective transition method.

See Note 3, Revenue Recognition, for further discussion.

Other Accounting Pronouncements

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230):

Restricted Cash (a consensus of the FASB Emerging Issues Task Force).

The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.

Accordingly, restricted cash will be included with cash and cash equivalents when reconciling the beginning-of period and end-of-period total amounts shown on the Consolidated Statement of Cash Flows.

The Company adopted ASU 2016-18 beginning on January 1, 2018 and adopted the standard using a retrospective approach.

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.

ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.

The adoption did not have a material impact on the Company’s consolidated financial statements.

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.

Simplifying the Accounting for Income Taxes.” The new rules reduce complexity by removing specific exceptions to general principles related to intra-period 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.

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The standard will become effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted.

Application of the amendments is through a

cumulative-effect adjustment to retained earnings as of the effective date.

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.

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Research and development

Intangible assets abandonment and building impairment

Intangible assets abandonment

Total Costs and Expenses

Operating income (loss) from continuing operations

Interest income

Operating loss from continuing operations

Interest (expense) income

Foreign exchange gain

Other expense

Income (loss) from continuing operations before income taxes

Income tax benefit (expense)

Net income (loss) from continuing operations

Other income (expense)

Loss from continuing operations before income taxes

Income tax expense

Net loss from continuing operations

Loss from discontinued operations (net of income tax benefit of $0 in 2020 and 2019)

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Revenues for the APC technology segment were $8,557 for the year ended December 31, 2020 , a decrease of $5,525, or 39%, versus fiscal 2019 .

The decrease in APC revenue for the twelve month period ending December 31, 2019 in comparison to prior year amount was principally related to the timing of project execution and the decline in backlog of $9.7 million and $12.4 million,

for the years ended December 31, 2019 and 2018 respectively.

The decrease in APC revenue for the twelve month period ending December 31, 2020 in comparison to prior year amount was principally related to the timing of project execution and the decline in backlog which was $5.3 million and $9.7 million, for the years ended December 31, 2020 and 2019 , respectively.

Revenues for the FUEL CHEM technology segment for the year ended December 31, 2020 were $13,993, a decrease of $2,392, or 15% versus fiscal 2019 .

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Consolidated gross margin percentages for the years ended December 31, 2020 and 2019 were 47% and 36%, respectively.

The gross margins for the APC technology segment decreased to 20% in 2019 from 29% in 2018 .

The overall decrease in gross margin in the APC technology segment from 2018 to 2019 is primarily due to project mix, timing of project execution and $2,241 of remediation costs incurred during 2019 to address non-conformance issues under the terms of a contract with a U.S.

The gross margins for the APC technology segment increased to 46% in 2020 from 20% in 2019 .

The overall increase in gross margin in the APC technology segment from 2019 to 2020 is primarily due to the timing of a large insurance settlement of $2,589 which was used to fund the recovery plan for the project affected and project mix, timing of project execution and net of $1,427 of remediation costs incurred during 2020 to address non-conformance issues under the terms of a contract with a U.S.

Gross margin percentage for the FUEL CHEM technology segment decreased to 48% from 49% for the years ended December 31, 2020 and 2019 .

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A decrease in office and administrative costs relating to our foreign subsidiaries of $1,226 primarily related to the suspension of the APC business in Beijing, China

An increase in other administrative costs of $ 31

A decrease in travel expense of $377

A decrease in professional service fees of $165

A decrease in bad debt of $997

An decrease in other administrative costs of $613

Depreciation and Amortization

Depreciation and amortization are calculated using the straight line method and included in selling, general and administrative expense.

For the years ended December 31, 2020 and 2019 , the Company recorded depreciation of $ 663 and $ 810 and amortization of $ 185 and $ 186 , respectively.

Restructuring charge

Restructuring costs were $0 and $625 for the years ended December 31, 2020 and 2019 .

On January 18, 2019, the Company announced a planned suspension the APC business operation in China.

On January 18, 2019, the Company announced a planned suspension of the APC business operation in China.

This action is part of Fuel Tech’s ongoing operational improvement initiatives designed to prioritize resource allocation, reduce costs, and drive profitability for the Company on a global basis.

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Research and development (“R&D”) expenses were $1,177 and $1,127 for the years ended December 31, 2020 and 2019 , respectively.

Intangible assets abandonment and building impairment

During the second and third quarter of 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.

Intangible assets abandonment

In the fourth quarter of 2020 , the Company recorded an abandonment charge of $197 due to the Company's decision to no longer maintain and defend certain patents and trademarks which are no longer contributing to operations.

In the second quarter of 2019, Fuel Tech recorded an abandonment charge of $127 associated with certain international patent assets which the Company elected to not maintain and abandon in certain international locations 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 twelve months ended December 31, 2019 .

Interest income

Interest income for the year ended December 31, 2019 increased by $35 to $41 versus $6 in 2018 .

The abandonment charges were calculated by determining the net book values of the abandoned patent assets by deducting the accumulated amortization from the acquisition cost.

The abandonment charges are included in “Intangible assets abandonment” line in the accompanying Consolidated Statements of Operations for the twelve months ended December 31, 2020 and 2019 , respectively.

Interest (income) / expense

Interest expense for the year ended December 31, 2020 was $4 versus income of $41 in 2019 .

Foreign exchange gain

Foreign exchange gain for the year ended December 31, 2019 of $370 primarily relates to realized foreign currency gains associated with the planned liquidation of the subsidiary in Chile.

Other expense

Other expenses remained consistent for the years ended December 31, 2019 and 2018 of $(8) from $2 .

Foreign exchange gain for the year ended December 31, 2020 was $0 after a gain of $370 in 2019 related to the Chile subsidiary.

Other income of $119 increased by $127 for the years ended December 31, 2020 compared to $(8) in 2019 due to the interest collected on resolution of legal judgment on a receivable payment from our China operations.

Income tax benefit (expense)

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The effective tax rate for the year-ended December 31, 2020 , differed from the federal statutory rate of 21% as a result of establishing a deferred tax liability associated with a certain book-to-tax timing difference.

For the year ended December 31, 2018 , we recorded an income tax benefit of $33 on pre-tax loss of $118 .

The effective tax rate for the year-ended December 31, 2018 differed from the federal statutory rate of 34% as a result of net operating losses generated in the United States, China, and Italy, which were offset by establishment of full valuation allowances.

The full valuation allowances previously established apply for the year ended December 31, 2019 as well.

For the year ended December 31, 2019 , we recorded an income tax expense of $14 on pre-tax loss of $7,837.

The effective tax rate for the year-ended December 31, 2020 and 2019 differed from the federal statutory rate of 34% as a result of net operating losses generated in the United States, China, and Italy, which were offset by establishment of full valuation allowances.

Loss from discontinued operations

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 and 2018 of $1 and $113 , respectively.

The activity of the Fuel Conversion discontinued operations consisted of other costs for the years ended December 31, 2020 and 2019 of $0 and $1, 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 from the sale of the remaining Fuel Conversion Assets Held for Sale 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.

2018 versus 2017

Highlights for the year ended December 31, 2018 , compared to 2017 :

For the years ended December 31,

Costs and expenses:

Cost of sales

Selling, general and administrative

Restructuring charge

Research and development

Intangible assets abandonment and building impairment

Total Costs and Expenses

Operating income (loss) from continuing operations

Interest income

Foreign exchange gain

Other expense

Income (loss) from continuing operations before income taxes

Income tax benefit (expense)

Net income (loss) from continuing operations

Loss from discontinued operations (net of income tax benefit of $0 in 2018 and 2017)

Revenues for the years ended December 31, 2018 and 2017 were $56,535 and $45,166, respectively.

The year-over-year increase of $11,369 or 25%, was driven by increased revenue in both APC and FUEL CHEM technology segments in our United States (U.S.) operations.

revenues increased by $14,377 or 49% from $29,510 to $43,887, and our international revenues decreased by $3,008 or 19% from $15,656 to $12,648.

Revenues for the APC technology segment were $38,417 for the year ended December 31, 2018, an increase of $10,609, or 38%, versus fiscal 2017.

The increase in APC revenue for the twelve month period ending December 31, 2018 in comparison to prior year amount is related to the timing of project execution as a result of conversion of new orders announced during 2017 and 2018.

Backlog for the years ended December 31, 2018 and 2017 was $12.4 million and $22.1 million, respectively.

Revenues for the FUEL CHEM technology segment for the year ended December 31, 2018 were $18,118, an increase of $760, or 4% versus fiscal 2017.

We remain focused on attracting new customers in our FUEL CHEM business, for both coal and non-coal applications, but our ability to attract new coal customers continues to be affected by the soft electric demand market and fuel switching as a result of low natural gas prices.

Cost of sales and gross margin

Consolidated cost of sales for the years ended December 31, 2018 and 2017 were $36,471 and $27,144, respectively.

Consolidated gross margin percentages for the years ended December 31, 2018 and 2017 were 35% and 40%, respectively.

The gross margins for the APC technology segment decreased to 29% in 2018 from 34% in 2017.

The overall decrease in gross margin in the APC technology segment from 2017 to 2018 is primarily due to project mix, timing of project execution and margin erosion on lower-margin projects being executed in foreign geographies, which will not recur.

Gross margin percentage for the FUEL CHEM technology segment remained consistent at 50% for the years ended December 31, 2018 and 2017.

Selling, general and administrative

Selling, general and administrative (SG&A) expenses for the years ended December 31, 2018 and 2017 were $18,564 and $20,933, respectively.

The decrease of $2,369 or 11%, is primarily attributed to the following:

A decrease in employee related costs of $1,004

A decrease in professional fees and consulting services of $438

A decrease in office and administrative costs relating to our foreign subsidiaries of $809

A decrease in other administrative costs, including depreciation and amortization of $118

Restructuring charge

Restructuring costs were $0 and $119 in connection with the workforce reduction for the years ended December 31, 2018 and 2017.

See Note 15, Restructuring Activities, for further discussion.

Research and development

Research and development (“R&D”) expenses were $1,073 and $1,070 for the years ended December 31, 2018 and 2017, respectively.

Intangible assets abandonment and building impairment

In the second quarter of 2018, Fuel Tech recorded an abandonment charge of $317 associated with certain international patent assets which the Company elected to not maintain and abandon in certain international locations 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.

Interest income

Interest income for the year ended December 31, 2018 decreased by $4 to $6 versus $10 in 2017.

Interest expense was $0 in both 2018 and 2017.

Finally, the decrease in net other expenses to $2 from $60 in the prior year is due primarily to the impact of foreign exchange rates as it relates to settlement of balances denominated in foreign currencies, and certain other bank fees related to Letter of Credits.

Income tax benefit (expense)

For the year ended December 31, 2018, we recorded an income tax expense of $33 on pre-tax income of $118.

Our effective tax rates were 676.3% and 4.5% for the years ended December 31, 2018 and 2017, respectively.

The effective tax rate for the year-ended December 31, 2018, differed from the federal statutory rate of 21% as a result of establishing a deferred tax liability associated with a certain book-to-tax timing difference.

For the year ended December 31, 2017, we recorded an income tax benefit of $580 on pre-tax loss of $7,115.

The effective tax rate for the year-ended December 31, 2017 differed from the federal statutory rate of 34% as a result of net operating losses generated in the United States, China, and Italy, which were offset by establishment of full valuation allowances.

The full valuation allowances previously established apply for the year ended December 31, 2019 as well.

Loss from discontinued operations

During the second quarter of 2017, the Company suspended all operations associated with the Fuel Conversion business segment.

The activity of the Fuel Conversion discontinued operations consisted of Research and Development, severance and other costs for the for the year ended December 31, 2018 and 2017 of $113 and $3,914, respectively.

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 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 Fuel Conversion business segment had no revenues associated with it.

The overall decline in the discontinued operations for the year ended December 31, 2018 in comparison to the same periods in 2017 is due to the overall wind-down of operations for the Fuel Conversion discontinued operations.

Liquidity and Sources of Capital

At December 31, 2020 , we had cash and cash equivalents of $10,640 (excluding restricted cash of $1,966) and working capital of $15,542 versus cash and cash equivalents of $10,914 (excluding restricted cash of $2,587) and working capital of $16,816 at December 31, 2019 .

Operating activities used $3,387 of cash for the year ended December 31, 2019 , primarily due to the add back of non-cash items from our net loss from continuing operations of $7,851 including stock compensation expense of $574 , depreciation and amortization of $996, intangible assets abandonment charge of $127 , a decrease in our accrued liabilities and other non-current

liabilities of $5,010 , a decrease in our accounts payable balance of $7,331 offset by a decrease in prepaid expenses and other current and non-current assets of $2,239 , a decrease in our inventory balance of $818 and a decrease in our accounts receivable balance of $11,415 .

Cash used by operating activities also included cash used of $21 associated with the remaining storage fees prior to the sale of the Assets Held for Sale associated with the Fuel Conversion discontinued operations.

Operating activities provided $4,927 of cash for the year ended December 31, 2018, primarily due to the add back of non-cash items from our net income from continuing operations of $85 including stock compensation expense of $233, depreciation and amortization of $847, intangible assets abandonment charge of $317, excess and obsolete inventory reserve of $78, a loss on sale of equipment of $142, a decrease in our accounts receivable balance of $848, an increase in our inventory balance of $108, a decrease in prepaid expenses and other current and non-current assets of $251, an increase in our accrued liabilities and other non-current liabilities of $1,897, and an increase in our accounts payable balance of $521.

Cash provided by operating activities also included cash used of $122 associated with the activity of the Fuel Conversion discontinued operations.

Operating activities used $2,707 of cash for the year ended December 31, 2020 , primarily due to the add back of non-cash items from our net loss from continuing operations of $266 including stock compensation expense of $290, depreciation and amortization of $848, intangible assets abandonment charge of $197, an increase in our accrued liabilities and other non-current liabilities of $2, and an increase in our accounts payable balance of $198 offset by a decrease in prepaid expenses and other current and non-current assets of $161, a decrease in our inventory balance of $171 and a decrease in our accounts receivable balance of $1,095.

Operating activities used $3,387 of cash for the year ended December 31, 2019 , primarily due to the add back of non-cash items from our net income from continuing operations of $7,851 including stock compensation expense of $574, depreciation and amortization of $996, intangible assets abandonment charge of $127, a reduction of the excess and obsolete inventory reserve of $131, a decrease in our accounts receivable balance of $11,415, a decrease in our inventory balance of $818, a decrease in prepaid expenses and other current and non-current assets of $2,239, an decrease in our accrued liabilities and other non-current liabilities of $5,010, and a decrease in our accounts payable balance of $7,331.

Cash used in operating activities also included cash used of $21 associated with the activity of the Fuel Conversion discontinued operations.

Investing activities used cash of $247 and $45 for the years ended December 31, 2020 and 2019 , respectively.

Investing activities for the year ended December 31, 2019 consisted of principally of purchases of equipment of $550 offset by the proceeds from the sale of the remaining Assets Held for Sale for Fuel Conversion of $505 .

Investing activities for the year ended December 31, 2020 consisted principally of purchases of equipment of $247.

Investing activities for the year ended December 31, 2019 consisted of purchases of equipment, patents, and other intangibles of $550 and proceeds from sale of equipment of $505.

Financing activities used $128 and $12 of cash for the years ended December 31, 2019 and 2018 as a result of $128 and $12 in cash used for the acquisition of common shares held in treasury that were withheld for taxes due by employees upon lapsing of restricted stock units.

Financing activities provided $1,282 and used $128 of cash for the years ended December 31, 2020 and 2019 .

In 2020, the Company received a Paycheck Protection Plan loan of $1,556 but used a net $276 for stock compensation related transactions.

The cash used in 2019 was a result of $128 used for the acquisition of common shares held in treasury that were withheld for taxes due by employees upon lapsing of restricted stock units during 2019 .

On June 19, 2019, the Company entered into a Cash Collateral Security agreement with BMO Harris Bank, N.A.

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Fuel Tech is committed to reimbursing the issuing bank for any payments made by the bank under these instruments.

The excess in restricted cash collateral at year-end is related to timing of the release of several standby letters of credit which expired just after year-end.

In connection with the transition to BMO Harris Bank N.A., the Company canceled its U.S.

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(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 beared 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 are 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.

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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 0 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.

For the year ended December 31, 2019 , we have sustained loss before discontinued operations totaling $7,851 .

For the year ended December 31, 2020 we have sustained a loss before discontinued operations totaling $4,278.

Our cash used by continuing operations for this same period totaled $2,707.

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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.

Our cash balance as of December 31, 2020 totaled $12,606 (including our restricted cash balance), and our working capital totaled $15,542.

We do not have any outstanding debt obligations other than for our letters of credit.

We currently have the BMO Harris agreement which we use to issue letters of credit to our customers, which is a fully cash collateralized requiring us to deposit funds in a restricted cash account.

We do not have any outstanding debt obligations other than for our letters of credit and our PPP loan which was forgiven on January 8, 2021.

We currently have the BMO Harris agreement which we use to issue letters of credit to our customers, which is fully cash collateralized requiring us to deposit funds in a restricted cash account.

We expect to continue operating under this arrangement for the foreseeable future.

Our liquidity may be adversely affected to the extent we are required to collateralize further letters of credit by additional cash deposits.

Contractual Obligations and Commitments

In our normal course of business, we enter into agreements obligating us to make future payments.

The contractual cash obligations noted below are primarily related to supporting the ongoing operations of the business.

Payments due by period in thousands of dollars

Contractual Cash Obligations

Operating lease obligations

In the normal course of our business, we use bank performance guarantees and letters of credit in support of construction contracts with customers as follows:

in support of the warranty period defined in the contract;

in support of the system performance criteria that are defined in the contract.

In addition, we use bank performance guarantees with standby letters of credit and performance surety bonds as security for contract performance and other obligations as needed in the normal course of business.

As of December 31, 2019 , we had outstanding bank performance obligations that may or may not result in cash obligations as follows:

On February 17, 2021 we consummated the sale of 5,000,000 shares of Fuel Tech common stock sold to certain investors in a private placement transaction.

The Company received gross proceeds of $25.8 million.

The Company intends to use for the proceeds for general corporate purposes.

See Note 9B "Subsequent Events."

Commercial Commitments

Commitment expiration by period in thousands of dollars

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis