Item 8. Financial Statements and Supplementary Data
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Fuel Tech, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Fuel Tech, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
22
Impairment of goodwill
As described in Note 1 of the financial statements, goodwill is tested for impairment at least annually as of the first day of the Company’s fourth quarter, or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. The Company’s evaluation of goodwill impairment involves the comparison of the fair value of the Company’s reporting units to their carrying values. The Company uses a discounted cash flow analysis to determine the current fair value of the Company’s FUEL CHEM reporting unit. This requires management to make significant estimates and assumptions including estimates of future growth rates, operating margins and discount rates based on the estimated weighted average cost of capital for the business. Changes in these assumptions could have a significant impact on the fair value, which could have an impact on the conclusion of impairment, if any.
The Company performed its impairment analysis as of October 1, 2020. As part of the impairment assessment, the Company’s management determined that the fair value of the FUEL CHEM reporting unit exceeded its carrying value. As a result, no impairment charge was recorded in the consolidated statement of operations for the year ended December 31, 2020. Key financial assumptions used to determine the discounted cash flows of the reporting unit were developed my management.
We identified the evaluation of goodwill impairment as a critical audit matter because of the significant assumptions and judgments made by management within the discounted cash flow analysis used to determine the fair value of the Company’s FUEL CHEM reporting unit. Auditing the reasonableness of management’s key assumptions, including revenue growth rates, operating margins, and discount rates involved a high degree of auditor judgment and an increased effort, including the use of our valuation specialists.
Our audit procedures related to revenue growth rates, operating margins, and discount rates used to evaluate the Company’s FUEL CHEM reporting unit for impairment included the following, among others:
●
With the assistance of our fair value specialists, we evaluated the reasonableness of the discount rate and tested the relevance and reliability of source information underlying the determination of the rate, tested the mathematical accuracy of the calculation, and developed a range of independent estimates and compared those to the rate selected by management.
●
We evaluated reasonableness of management’s forecasted revenue growth rates and operating margins by comparing to historical results and industry forecasts.
●
We evaluated management’s ability to accurately forecast revenue and operating margins by comparing management’s prior forecasts to actual results.
●
We evaluated the impact of changes to significant assumptions on the determination of whether impairment exists.
Impairment of long-lived assets
As described in Note 1 of the financial statements, the Company’s management reviews long-lived assets for impairment when events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable. The Company’s evaluation of long-lived asset impairment includes determining the fair value of its asset groupings through a discounted cash flow model. In addition, the Company’s evaluation includes determining the fair value of its patents through a relief from royalty model. This requires management to make significant estimates and assumptions including estimates of future growth rates, discount rates, royalty rates and estimation period to perform the analysis. Changes in these assumptions could have a significant impact on the fair value, which could have an impact on the impairment charge, if any.
23
Both the Company’s Air Pollution Control (APC) and FUEL CHEM asset groupings experienced a decline in revenue, and the APC asset grouping experienced an operating loss during the year ended December 31, 2020. Company management determined that the carrying amount of the asset groupings may not be recoverable based on the operating performance. Accordingly, the Company performed an impairment assessment on its asset groups as of December 31, 2020. As part of its analysis, it determined that the fair value of the FUEL CHEM asset group exceeded its carrying value. In addition, the Company determined that the fair value of the APC patents exceeded their carrying value.
We identified the testing of long-lived assets for impairment as a critical audit matter because of the significant assumptions and judgments made by management within the discounted cash flow analysis and the relief from royalty valuation model. Auditing the reasonableness of management’s key assumptions, including revenue growth rates, discount rates, royalty rates and estimation period, involved a high degree of auditor judgment and an increased effort, including the use of our valuation specialists.
Our audit procedures related to revenue growth rates, discount rates, royalty rates and estimation period used to evaluate the FUEL CHEM asset group and the APC patents for impairment included the following, among others:
●
With the assistance of our fair value specialists, we evaluated the reasonableness of the discount and royalty rates and tested the relevance and reliability of source information underlying the determination of the rates, tested the mathematical accuracy of the calculation, and developed a range of independent estimates and compared those to the rates selected by management.
●
We evaluated the reasonableness of management’s forecasted revenue growth rates by comparing the forecasts to historical results, industry forecasts and existing backlog.
●
We evaluated the reasonableness of the estimation period by comparing to the weighted average remaining life of the related patents.
●
We evaluated management’s ability to accurately forecast revenue by comparing management’s prior forecasts to actual results.
●
We evaluated the impact of changes to significant assumptions on the recoverability of the asset group.
Revenue recognition
As described in Note 1 of the financial statements, revenue for the Company’s Air Pollution Control technology contracts is recognized based on the extent of progress towards completion of the contract compared to the estimated effort to complete the contract. The Company uses a cost-to-cost input method of measuring progress on these 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 estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred.
We identified revenue recognition over time for the Company’s Air Pollution Control technology contracts as a critical audit matter because of certain significant assumptions management makes when measuring progress, including assumptions related to expected total costs to complete the contract. Auditing these assumptions involved a high degree of auditor judgment and an increase in audit effort due to the impact these assumptions have on the amount of revenue recognized.
24
Our audit procedures related to the evaluation of management’s estimation of revenue recognized include the following, among others:
●
We evaluated management’s ability to accurately forecast project costs by comparing management’s prior forecasts of estimated costs to actual results.
●
We selected a sample of customer contracts and evaluated management’s calculation of revenue recognized over time by performing the following procedures:
o
Evaluating whether contract terms that may affect revenue recognition were identified and properly considered and performance obligations were appropriately identified
o
Obtaining and reviewing contracts with customers, including change orders to evaluate whether the transaction price was appropriately identified.
o
Testing management’s revenue recognition calculation model for mathematical accuracy.
o
Assessing the validity of data used in the model for completeness and accuracy by agreeing, on a sample basis, key data inputs to source documents, including job costing reports and project budgets.
/s/ RSM US LLP
We have served as the Company's auditor since 2010.
Chicago, Illinois
March 15, 2021
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Fuel Tech, Inc.
Consolidated Balance Sheets
( in thousands of dollars, except share and per-share data )
December 31,
2020
2019
ASSETS
Current assets:
Cash and cash equivalents
$
10,640
$
10,914
Restricted cash
1,595
2,080
Accounts receivable, net
6,548
6,473
Inventories, net
97
264
Prepaid expenses and other current assets
2,193
1,879
Total current assets
21,073
21,610
Property and equipment, net
5,220
5,662
Goodwill
2,116
2,116
Other intangible assets, net
553
906
Restricted cash
371
507
Right-of-use operating lease assets
394
362
Other assets
361
443
Total assets
$
30,088
$
31,606
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
2,353
$
2,117
Accrued liabilities:
Operating lease liabilities - current
149
182
Employee compensation
930
519
Other accrued liabilities
2,099
1,976
Total current liabilities
5,531
4,794
Operating lease liabilities - non-current
237
180
Long-term borrowings
1,556
—
Deferred income taxes
134
171
Other liabilities
309
286
Total liabilities
7,767
5,431
Stockholders’ equity:
Common stock, $.01 par value, 40,000,000 shares authorized, 25,639,702 and 25,053,480 shares issued, and 25,228,951 and 24,592,578 outstanding in 2020 and 2019, respectively
262
254
Additional paid-in capital
140,138
139,560
Accumulated deficit
(114,603
)
(110,325
)
Accumulated other comprehensive loss
(1,370
)
(1,778
)
Nil coupon perpetual loan notes
76
76
Treasury stock, at cost (Note 6)
(2,182
)
(1,612
)
Total stockholders’ equity
22,321
26,175
Total liabilities and stockholders’ equity
$
30,088
$
31,606
See notes to consolidated financial statements.
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Fuel Tech, Inc.
Consolidated Statements of Operations
( in thousands of dollars, except share and per-share data )
For the years ended December 31,
2020
2019
Revenues
$
22,550
$
30,467
Costs and expenses:
Cost of sales
11,912
19,637
Selling, general and administrative
13,600
17,191
Restructuring charge
—
625
Research and development
1,177
1,127
Intangible assets abandonment and impairment
197
127
Total Costs and Expenses
26,886
38,707
Operating loss from continuing operations
(4,336
)
(8,240
)
Interest (expense) income
(4
)
41
Foreign exchange gain
—
370
Other income (loss)
119
(8
)
Loss from continuing operations before income taxes
(4,221
)
(7,837
)
Income tax expense
(57
)
(14
)
Net loss from continuing operations
(4,278
)
(7,851
)
Loss from discontinued operations (net of income tax benefit of $0 in 2020 and 2019)
—
(1
)
Net loss
$
(4,278
)
$
(7,852
)
Net loss per common share:
Basic
Continuing operations
$
(0.17
)
$
(0.32
)
Discontinued operations
$
—
$
(0.00
)
Basic net loss per common share
$
(0.17
)
$
(0.32
)
Diluted
Continuing operations
$
(0.17
)
$
(0.32
)
Discontinued operations
$
—
$
—
Diluted net loss per common share
$
(0.17
)
$
(0.32
)
Weighted-average number of common shares outstanding:
Basic
24,691,000
24,202,000
Diluted
24,691,000
24,202,000
See notes to consolidated financial statements.
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Fuel Tech, Inc.
Consolidated Statements of Comprehensive Loss
( in thousands of dollars )
For the years ended December 31,
2020
2019
Net loss
$
(4,278
)
$
(7,852
)
Other comprehensive income (loss):
Foreign currency translation adjustments
408
(493
)
Total other comprehensive income (loss)
408
(493
)
Comprehensive loss
$
(3,870
)
$
(8,345
)
See notes to consolidated financial statements.
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Fuel Tech, Inc.
Consolidated Statements of Stockholders’ Equity
( in thousands of dollars or shares, as appropriate )
Common Stock
Additional Paid-in
Accumulated
Accumulated Other Comprehensive
Nil Coupon Perpetual Loan
Treasury
Shares
Amount
Capital
Deficit
Loss
Notes
Stock
Total
Balance at December 31, 2018
24,170
$
248
$
138,992
$
(102,495
)
$
(1,285
)
$
76
$
(1,484
)
$
34,052
Net loss
(7,852
)
(7,852
)
Foreign currency translation adjustments
(493
)
(493
)
Stock compensation expense
574
574
Common shares issued upon vesting of restricted stock units
563
6
(6
)
—
Treasury shares withheld
(141
)
(128
)
(128
)
Adoption of ASC 842
22
22
Balance at December 31, 2019
24,592
$
254
$
139,560
$
(110,325
)
$
(1,778
)
$
76
$
(1,612
)
$
26,175
Net loss
(4,278
)
(4,278
)
Foreign currency translation adjustments
408
408
Stock compensation expense
290
290
Exercise of stock Options
183
2
294
296
Common shares issued upon vesting of restricted stock units
606
6
(6
)
-
Treasury shares withheld
(152
)
(570
)
(570
)
Balance at December 31, 2020
25,229
262
140,138
(114,603
)
(1,370
)
76
(2,182
)
$
22,321
See notes to consolidated financial statements.
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Fuel Tech, Inc.
Consolidated Statements of Cash Flows
( in thousands of dollars )
For the years ended December 31,
2020
2019
OPERATING ACTIVITIES
Net loss
$
(4,278
)
$
(7,852
)
Loss from discontinued operations
—
1
Net loss from continuing operations
(4,278
)
(7,851
)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation
663
810
Amortization
185
186
Gain on disposal of equipment
(5
)
(3
)
Provision for doubtful accounts, net of recoveries
(1,026
)
421
Deferred income taxes
(38
)
—
Stock-based compensation, net of forfeitures
290
574
Intangible assets abandonment
197
127
Excess and obsolete inventory provision
—
(131
)
Foreign exchange gain
—
370
Changes in operating assets and liabilities:
Accounts receivable
1,095
11,415
Inventories
171
818
Prepaid expenses, other current assets and other non-current assets
(161
)
2,239
Accounts payable
198
(7,331
)
Accrued liabilities and other non-current liabilities
2
(5,010
)
Net cash used in operating activities - continuing operations
(2,707
)
(3,366
)
Net cash used in operating activities - discontinued operations
—
(21
)
Net cash used in operating activities
(2,707
)
(3,387
)
INVESTING ACTIVITIES
Purchases of equipment and patents
(247
)
(550
)
Net cash used in investing activities - continued operations
(247
)
(550
)
Net cash provided by investing activities - discontinued operations
—
505
Net cash used in investing activities
(247
)
(45
)
FINANCING ACTIVITIES
Proceeds from Borrowings
1,556
—
Proceeds from Option Exercises
296
—
Taxes paid on behalf of equity award participants
(570
)
(128
)
Net cash provided by (used in) financing activities
1,282
(128
)
Effect of exchange rate fluctuations on cash
777
(998
)
Net decrease in cash, cash equivalents and restricted cash
(895
)
(4,558
)
Cash, cash equivalents and restricted cash at beginning of period
13,501
18,059
Cash, cash equivalents and restricted cash at end of period
$
12,606
$
13,501
Supplemental Cash Flow Information:
Cash paid for:
Income taxes
$
95
$
18
See notes to consolidated financial statements.
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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 $3,928 and $4,585 for the years ended December 31, 2020 and 2019 , respectively. These amounts represented 17% and 15% 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. All intercompany transactions have been eliminated.
COVID-19 Pandemic
The emergence of the coronavirus (COVID-19) around the world presents significant risks to the Company, not all of which the Company is able to fully evaluate or even foresee at the current time. The COVID-19 pandemic has affected the Company's operations during the twelve months ended December 31, 2020, although the impact of the pandemic is difficult to quantify, and may continue to be so indefinitely thereafter. The Company has experienced, and may continue to experience, reductions in demand for certain of products as several accounts remained offline due to soft electric demand and unplanned outage activities and due to the delay or abandonment of ongoing or anticipated projects, due to our customers', suppliers' and other third parties' financial distress or concern regarding the volatility of global markets.
Management cannot predict the full impact of the COVID-19 pandemic on the Company's sales and marketing channels and supply chains, and, as a result, the ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and will depend on future developments. Such effects could exist for an extended period of time even after the pandemic comes to an end.
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 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.
On February 11, 2021, Fuel Tech entered into a securities purchase agreement (the “Purchase Agreement”) with certain institutional investors pursuant to which the Company agreed to issue and sell, in a private placement (the “Private Placement”), (i) 5,000,000 shares (the “Shares”) of Common Stock, (ii) and 2,500,000 warrants (the “Warrants”) exercisable for a total of 2,500,000 shares of Common Stock (the “Warrant Shares”) with an exercise price of $5.10 per Warrant Share, at a purchase price of $5.1625 per Share and associated warrant. The gross proceeds to the Company from the Private Placement were approximately $25.8 million, before deducting placement agent fees and offering expenses. The receipt of these funds strengthen our current cash position and in conjunction with our net cash flows expected to be generated from operations are adequate to fund planned operations of the Company for the next 12 months.
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.
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Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable, accounts payable and long-term borrowings 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, 2020 , we had cash on hand of approximately $858 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 $1,111 at December 31, 2020 . Cash on hand at our Chilean subsidiary totaled approximately $314 at December 31, 2020 .
Restricted cash as of December 31, 2020 represents funds that are restricted to satisfy any amount borrowed against the Company's Cash Collateral Security agreement with BMO Harris Bank N.A. The balance of restricted cash totaling $1,966 is comprised of $ 1,595 in current assets relating to existing standby letters of credit with varying maturity dates and expire no later than December 31, 2020 and $ 371 in long-term assets will remain through the expiration dates of the underlying standby letters of credit (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, 2019 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:
December 31, 2020
December 31, 2019
Cash and cash equivalents
$
10,640
$
10,914
Restricted cash included in current assets
1,595
2,080
Restricted cash included in long-term assets
371
507
Total cash, cash equivalents, and restricted cash shown in the Consolidated Statements of Cash Flows
$
12,606
$
13,501
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, 2020 and 2019 , unbilled receivables were approximately $ 2,348 and $ 1,857 , respectively. Refer to Note 3 for further detail.
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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.
Year
Balance at January 1
Provision charged to expense
Write-offs / Recoveries
Balance at December 31
2019
$
1,411
$
573
$
(168
)
$
1,816
2020
$
1,816
$
(498
)
$
(483
)
$
835
Prepaid expenses and other current assets
Prepaid expenses and other current assets includes Chinese banker acceptances of $549 and $43 as of December 31, 2020 and 2019 . These are short-term commitments of typically three to six months 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.
Year
Balance at January 1
Provision charged to expense
Write-offs / Recoveries
Balance at December 31
2019
1,131
—
(131
)
1,000
2020
1,000
—
(93
)
907
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 loss.
During 2020 , the Company recorded a foreign currency adjustment of $408 to accumulated other comprehensive loss .
Accumulated Other Comprehensive Loss
December 31,
2020
2019
Foreign currency translation
Balance at beginning of period
$
(1,778
)
$
(1,285
)
Other comprehensive loss:
Foreign currency translation adjustments (1)
408
(493
)
Balance at end of period
$
(1,370
)
$
(1,778
)
Total accumulated other comprehensive loss
$
(1,370
)
$
(1,778
)
(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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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, 2020 and determined that no impairment of goodwill existed.
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.
The Company utilizes ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment for the annual goodwill impairment test completed during the fourth quarter.
The entire goodwill balance of $2,116 was allocated to the FUEL CHEM technology segment as of December 31, 2020 and 2019 . The Company did not recognize a charge for goodwill impairment for the periods ended December 31, 2020 and 2019 .
Other Intangible Assets
Management reviews other finite-lived intangible assets, patent assets, trade names, and lease assets 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.
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During the year ended December 31, 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 impairment” line in the accompanying Consolidated Statements of Operations for the year then ended December 31, 2020 .
During the year ended December 31, 2019 , Fuel Tech recorded an abandonment charge of $ 127 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 is included in “Intangible assets abandonment and impairment” line in the accompanying Consolidated Statements of Operations for the year ended December 31, 2019 .
Third-party costs related to the development of patents are included within other intangible assets on the consolidated balance sheets. As of December 31, 2020 and 2019 , the net patent asset balance was $ 553 and $ 906 , respectively. The third-party costs capitalized as patent costs during the years ended December 31, 2020 and 2019 were $0 and $56, 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 $185 and $186 for the years ended December 31, 2020 and 2019 , respectively. The table below shows the amortization period and other intangible asset cost by intangible asset as of December 31, 2020 and 2019 , and the accumulated amortization and net intangible asset value in total for all other intangible assets.
2020
2019
Description of Other Intangibles
Amortization Period (years)
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Patent assets
1 - 20
1,310
(757
)
553
1,897
(991
)
906
Total
$
1,310
$
(757
)
$
553
$
1,897
$
(991
)
$
906
The table below shows the estimated future amortization expense for intangible assets:
Year
Estimated Amortization Expense
2021
$
145
2022
52
2023
51
2024
44
2025
43
Thereafter
218
Total
$
553
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Property and Equipment
Property and equipment is stated at historical cost and does not include capital in process expenditures yet to be capitalized. 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 $663 and $810 for the years ended December 31, 2020 and 2019 , respectively. The table below shows the depreciable life and cost by asset class as of December 31, 2020 and 2019 , and the accumulated depreciation and net book value in total for all classes of assets.
Description of Property and Equipment
Depreciable Life (years)
2020
2019
Land
$
1,050
$
1,050
Building
39
3,950
3,950
Building and leasehold improvements
3 - 39
2,886
2,886
Field equipment
3 - 4
19,748
19,507
Computer equipment and software
2 - 3
2,954
2,936
Furniture and fixtures
3 - 10
1,477
1,475
Vehicles
5
32
32
Construction in process
12
—
Total cost
32,109
31,836
Less accumulated depreciation
(26,889
)
(26,174
)
Total net book value
$
5,220
$
5,662
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.
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Revenue Recognition
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. 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.
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 1,200 units with APC technology and normally provides performance guarantees to our customers based on the operating conditions for the project. As part of the project implementation process, we perform system start-up and optimization services that effectively serve as a test of actual project performance. We believe that this test, combined with the accuracy of the modeling that is performed, enables revenue to be recognized prior to the receipt of formal customer acceptance.
FUEL CHEM
Revenues from the sale of chemical products are recognized when control transfers to customer upon shipment or delivery of the product based on the applicable shipping terms. We generally recognize revenue for these arrangements at a point in time based on our evaluation of when the customer obtains control of the promised goods or services.
On occasion, Fuel Tech will engineer and sell its chemical pumping equipment. These projects are similar in nature to the APC projects described above and for those 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.
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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, and we elected the practical expedient to not separate lease and non-lease components for the majority of our leases. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. We also elected the practical expedient to keep leases with an initial term of 12 months or less off of the consolidated balance sheet.
During the quarter ended September 30, 2020, an error was detected in the calculation of the adoption of ASC 842, "Leases" made on January 1, 2019. The calculation included an incorrect lease amount associated with one of our leases. This error did not correctly present the Right of Use asset and related Operating Lease Liability on the Company's balance sheet.
We evaluated the revision in accordance with Accounting Standards Codification (ASC) 250, Accounting Changes and Error Corrections and evaluated the materiality of the revision on prior periods' financial statements in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 108, Quantifying Financial Statement Errors. We concluded that the revision was not material to any prior period and, therefore, amendments of previously filed reports are not required. Periods not presented herein will be revised, as applicable, in future filings. The revision did not have an impact on the net loss or earnings per share for the year ended December 31, 2019.
As Previously Reported Year Ended December 31, 2019
Revision
As Revised Year Ended December 31, 2019
Right of Use Operating Lease Asset
980
(618
)
362
Operating Lease Liability - Current
300
(118
)
182
Operating Lease Liability - Non Current
680
(500
)
180
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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, 2020 . Based on the existing issued or reserved awards in Incentive Plan, there are 2,533,639 shares available to be used for future awards to participants in the Incentive Plan as of December 31, 2020 .
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 unlikely to be exercised and would be anti-dilutive if they were exercised. At December 31, 2020 and 2019 , we had outstanding equity awards of 584,505 and 913,000, respectively, which were antidilutive for the purpose of calculation of the diluted earnings per share. As of December 31, 2020 and 2019 , respectively, we had an additional 547,000 and 728,000 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:
2020
2019
Basic weighted-average shares
24,691,000
24,202,000
Conversion of unsecured loan notes
—
—
Unexercised options and unvested restricted stock units
—
—
Diluted weighted-average shares
24,691,000
24,202,000
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, 2020 , we had two customers which individually represented greater than 10% of revenues. Both customers contributed revenues to both product segments but were primarily concentrated in our FUEL CHEM technology segment and represented 28% of consolidated revenues. We had no customers that accounted for greater than 10% of our current assets as of December 31, 2020 .
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 segment and represented 19% of consolidated revenues. The other two customers contributed to the 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 .
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.
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Treasury Stock
We use the cost method to account for common stock repurchases. During the years ended December 31, 2020 and 2019 , we withheld 152,257 and 140,784 shares of our Common Shares, valued at approximately $570 and $128, 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, 2022, 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 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.
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, 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 recorded in discontinued operations.
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3. REVENUE RECOGNITION
Disaggregated Revenue by Product Technology
The following table presents our revenues disaggregated by product technology:
Twelve Months Ended December 31,
2020
2019
Air Pollution Control
Technology solutions
$
5,668
$
10,640
Spare parts
906
1,031
Ancillary revenue
1,983
2,411
Total Air Pollution Control Technology
8,557
14,082
FUEL CHEM
FUEL CHEM technology solutions
13,993
16,385
Total Revenues
$
22,550
$
30,467
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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,
2020
2019
United States
$
18,622
$
25,882
Foreign Revenues
Americas
549
777
Europe
1,656
2,322
Asia
1,723
1,486
Total Foreign Revenues
3,928
4,585
Total Revenues
$
22,550
$
30,467
Timing of Revenue Recognition
The following table presents the timing of our revenue recognition:
Twelve Months Ended December 31,
2020
2019
Products transferred at a point in time
$
15,787
$
19,827
Products and services transferred over time
6,763
10,640
Total Revenues
$
22,550
$
30,467
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, 2020 and 2019 , contract assets were approximately $2,348 and $1,857, respectively, and are included in accounts receivable on the consolidated balance sheets.
However, the Company will periodically bill in advance of costs incurred before revenue is recognized, resulting in contract liabilities. These liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period. Contract liabilities were $850 and $712 at December 31, 2020 and 2019 , respectively, and are included in other accrued liabilities on the consolidated balance sheets.
As of December 31, 2020 we had one construction contract in progress that was 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.
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, 2020 , the aggregate amount of the transaction price allocated to remaining performance obligations was $5,268. The Company expects to recognize revenue on approximately $2,981 of the remaining performance obligations over the next 12 months with the remaining recognized thereafter.
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.
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Accounts Receivable
The components of accounts receivable are as follows:
As of
December 31, 2020
December 31, 2019
Trade receivables
$
5,015
$
6,425
Unbilled receivables
2,348
1,857
Other short-term receivables
20
7
Allowance for doubtful accounts
(835
)
(1,816
)
Total accounts receivable
$
6,548
$
6,473
4. INCOME TAXES
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 U.S. Tax Act which could have an impact on the annual effective tax rate.
On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted which enacted the following relief among others;
●
Amended federal tax laws to permit 100% bonus depreciation for eligible qualified improvement property placed in service by the taxpayer after December 31, 2017 and before January 1, 2023.
●
Eliminated the 80% of taxable income limitations by allowing corporate entities to fully utilize Net Operating Losses (NOL) carryforwards to offset taxable income in 2018, 2019 or 2020. The 80% limitation is reinstated for tax years after 2020.
●
Increased the net interest expense deduction limit to 50% of adjusted taxable income from 30% for tax years beginning January 1, 2019 and 2020.
●
Allowed taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credit instead of recovering the credit through refunds over a period of years, as originally enacted by the Tax Cuts and Jobs Act in 2017.
●
Allowed taxpayers the carryback of Net Operating Losses (NOL) as a result of tax years beginning after December 31, 2017, but before January 1, 2021 for the five prior years of the generated loss.
The components of loss before taxes for the years ended December 31 are as follows:
Origin of income before taxes
2020
2019
United States
$
(3,411
)
$
(5,803
)
Foreign
(810
)
(2,034
)
Loss before income taxes
$
(4,221
)
$
(7,837
)
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Significant components of income tax benefit (expense) for the years ended December 31 are as follows:
2020
2019
Current:
Federal
$
—
$
—
State
(7
)
(14
)
Foreign
(88
)
—
Total current
(95
)
(14
)
Deferred:
Federal
22
—
State
16
—
Total deferred
38
—
Income tax expense
$
(57
)
$
(14
)
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:
2020
2019
Provision at the U.S. federal statutory rate
21.0
%
21.0
%
State taxes, net of federal benefit
1.5
%
2.7
%
Foreign tax rate differential
0.5
%
—
%
China Enterprise Tax
(2.1
)%
—
%
Valuation allowance
(13.9
)%
(29.2
)%
Share based compensation shortfall
(2.0
)%
—
%
Other true up
(2.7
)%
1.6
%
Intangible assets impairment and other non-deductibles
1.8
%
2.3
%
State rate change
(6.5
)%
—
%
Other
1.0
%
1.8
%
Income tax (expense) benefit effective rate
(1.4
)%
0.2
%
The deferred tax assets and liabilities at December 31 are as follows:
2020
2019
Deferred tax assets:
Stock compensation expense
$
1,240
$
1,882
Goodwill
986
1,490
Royalty accruals
560
560
Bad debt allowance
338
466
Net operating loss carryforwards
10,959
9,146
Credit carry-forwards
841
814
Inventory reserve
206
243
Depreciation
499
502
Other
334
340
Total deferred tax assets
15,963
15,443
Deferred tax liabilities:
Intangible assets
(126
)
(220
)
Total deferred tax liabilities
(126
)
(220
)
Net deferred tax asset before valuation allowance
15,837
15,223
Valuation allowances for deferred tax assets
(15,971
)
(15,394
)
Net deferred tax liability
$
(134
)
$
(171
)
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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
2019
$
13,044
2,350
—
$
15,394
2020
$
15,394
577
$
15,971
For the years ended December 31, 2020 and 2019, there were exercises of stock options of $296 and $0, respectively.
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, 2020 and 2019 . There were no unrecognized tax benefits as of December 31, 2020 and 2019 .
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 2017 through 2019; 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 2012 through 2019 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 was under audit. In May of 2020, the audit was successfully completed with no change required.
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 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 $25,486 of US net operating loss carryforwards available to offset future US taxable income as of December 31, 2020. The net operating loss carry-forwards related to tax losses generated in years ending December 31, 2017 and before in the US totaling $10,733 begin to expire in 2034. Further, we have tax loss carry-forwards of approximately $6,246 available to offset future foreign income in Italy as of December 31, 2020. We have recorded a full valuation allowance against the 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 $12,763 available to offset future foreign income in China as of December 31, 2020. The net operating loss carry-forwards related to tax losses generated in prior years in China expire in 2022.
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 of $155 was recorded. As of December 31, 2020, Fuel Tech S.p.A (Chile) was still included in continuing operations, as a result an additional $15 was recorded, adjusting the total consideration to $170. The deferred income taxes associated with this investment are offset by a valuation allowance of ($170).
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5. COMMON SHARES
At December 31, 2020 and 2019 , respectively, we had 25,639,702 and 25,053,480 Common Shares issued and 25,228,951 and 24,592,578 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, 2020 , we had 5,600,676 shares reserved for issuance upon the exercise or vesting of equity awards, of which 484,500 are stock options that are currently exercisable (see Note 8).
6. TREASURY STOCK
Common shares held in treasury totaled 948,347 and 796,090 with a cost of $2,182 and $1,612 at December 31, 2020 and 2019 , respectively. These shares were withheld from employees to settle personal tax withholding obligations that arose as a result of restricted stock units that vested during the current and prior years.
7. NIL COUPON NON-REDEEMABLE CONVERTIBLE UNSECURED LOAN NOTES
At December 31, 2020 and 2019 , 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, 2020 , the nil coupon loan notes were convertible into 6,715 common shares. Based on our closing stock price of $3.88 at December 31, 2020 , the aggregate fair value of the common shares that the holders would receive if all the loan notes were converted would be approximately $26, 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 sheets. The notes do not hold distribution or voting rights unless and until converted into common shares.
For the years ended December 31, 2020 and 2019 , 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, 2020 , we had 2,533,639 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, 2020 and 2019 were as follows:
For the Year Ended December 31,
2020
2019
Stock options
$
—
$
—
Restricted stock units
290
574
Total stock-based compensation expense
290
574
Tax benefit of stock-based compensation expense
—
—
After-tax effect of stock based compensation
$
290
$
574
As of December 31, 2020 , there was $100 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 1.2 years.
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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. Forfeitures are recognized as they occur.
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.
There were no stock options granted during the years ended December 31, 2020 and 2019 .
The following table presents a summary of our stock option activity and related information for the years ended December 31:
2020
2019
Number of Options
Weighted-Average Exercise Price
Number of Options
Weighted-Average Exercise Price
Outstanding at beginning of year
747,500
$
3.33
932,500
$
4.68
Exercised
(183,000
)
1.61
—
—
Expired or forfeited
(80,000
)
5.79
(185,000
)
10.14
Outstanding at end of year
484,500
$
3.57
747,500
$
3.33
Exercisable at end of year
484,500
$
3.57
747,500
$
3.33
Weighted-average fair value of options granted during the year
$
—
$
—
Weighted-Average Remaining Contractual Life (years)
3.70
4.73
Aggregate Intrinsic Value
$
—
$
—
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on our closing stock price of $3.88 as of December 31, 2020 , 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, 2020 :
Options Outstanding and Exercisable
Range of Exercise Prices
Number of Options
Weighted-Average Remaining Contractual Life (years)
Weighted-Average Exercise Price
$0.96 - $1.27
88,000
6.9
$
0.97
$1.28 - $3.00
132,000
4.6
2.26
$3.01 - $4.54
120,000
2.0
3.72
$4.55 - $8.16
144,500
2.4
6.24
484,500
3.7
$
3.57
As of and for the 12 months ended December 31, 2020 , 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 proceeds of $296 from the exercise of stock options in the years ended December 31, 2020 , and $0 in 2019 , 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. Shares received for exercise of stock options come from newly issued shares.
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.
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During the years ended December 31, 2020 and 2019 , there were 605,630 and 562,777 restricted stock units that vested with a grant date fair value of $658 and $554, respectively.
A summary of restricted stock unit activity for the years ended December 31, 2020 and 2019 is as follows:
Shares
Weighted Average Grant Date Fair Value
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
Forfeited
(70,000
)
1.03
Vested
(605,630
)
1.09
Unvested restricted stock units at December 31, 2020
100,005
4.08
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 2020 and 2019 , 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 third quarter of 2020, the Company was notified of an equipment component failure at a foreign customer location. The failure will be remedied under the warranty provision of the contracts that are in place with the customer and supplier. As of December 31, 2020 a charge of $176 was recorded in the accounts payable line of the Consolidated Balance Sheets. In 2018, the Company was notified of a certain non-conformance issues with a U.S. customer associated with equipment that requires remedy under the warranty provision of the contract. During the second quarter of 2020 a charge of $1,150 to remedy this non-conformance issue was incurred. Offsetting this amount was a reversal of $499 of expense to reduce the allowance of doubtful accounts that had been previously reserved. The Company has completed all work associated with this issue. As of December 31, 2020 and December 31, 2019, we have $176 and $146 of accrued liability associated with the completion of the non-conformance issues in the other accrued liabilities line of the Consolidated Balance Sheets. During the third quarter of 2020, the Company settled an outstanding claim with our insurance provider for these remediation efforts and recorded a receivable in the amount of $2,589. The settlement is recorded in the cost of sales line on the Consolidated Statement of Operations. Collection of the funds was completed in October 2020.
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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, 2020 , we had outstanding bank performance guarantees and letters of credit in the amount of $1,873 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 December 2020 through February 2023. Due to the timing of expiration and the actual release of commitment from our bank, as of December 31, 2020, $1,134 of performance guarantees have expired and are currently reflected in outstanding balance. 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 were no changes in the warranty liability from continuing operations in 2020 and 2019 . The warranty balance was $159 at December 31, 2020 and 2019 .
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
$
—
$
832
$
832
Liabilities
Other accrued liabilities
6,099
(22
)
6,077
Operating lease liabilities - current
—
522
522
Operating lease liabilities - non-current
—
310
310
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.
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Leases
The terms of the Company’s three primary office space lease arrangements are as follows:
•
The Gallarate, Italy building lease, for approximately 1,335 square feet, runs from May 1, 2019 to April 30, 2025. This facility serves as the operating headquarters for our European 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 4 years. Our leases do not contain any material residual value guarantees or material restricted covenants and we currently have no material sublease arrangements. We have no financing leases as defined under ASC 842.
Total operating lease expense for the years ended December 31, 2020 is as follows:
2020
2019
Operating lease cost
$
205
$
555
Short-term lease cost
20
136
Total lease cost
$
225
$
691
The weighted average remaining lease term was 3.04 years as of December 31, 2020 . The weighted average discount rate was 4.68% as of December 31, 2020 . An incremental borrowing rate of 5.25% was used for the properties in the United States and a rate of 2.67% for our lease in Italy.
Remaining maturities of our existing lease liabilities as of December 31, 2020 were as follows:
Year Ending December 31,
Operating Leases
2021
177
2022
123
2023
116
2024
27
Thereafter
10
Total lease payments
$
453
Less imputed interest
(67
)
Total
$
386
The following is the balance sheet classification of our existing lease liabilities:
2020
2019
Operating lease liabilities - current
$
149
$
182
Operating lease liabilities - non-current
237
180
Total operating lease liabilities
$
386
$
362
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Supplemental cash flow information related to leases was as follows:
For the Twelve Months ended
December 31, 2020
For the twelve months ended
December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
$
192
$
541
Leased assets obtained in exchange for operating lease liabilities
179
520
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, 2020 , the Company had outstanding standby letters of credit totaling approximately $1,873 under the BMO Harris agreement. As of December 31, 2020 , the Company held $1,966 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. 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. 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.
On April 17, 2020, the Company received loan proceeds in the amount of approximately $1,556 under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period. The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. The Company used the proceeds for purposes consistent with the PPP. On January 8, 2021, the Small Business Administration informed the Company that its PPP loan had been forgiven in full. The balance of the loan is reflected in the Long-term borrowing line of the balance sheet as of December 31, 2020.
12. RELATED PARTY TRANSACTIONS
There are no material Related Party transactions to disclose. The transaction with American Bailey Corp. reported in the prior year Form 10-K for 2019 ended December 31, 2019.
As of December 31, 2019, persons now or formerly associated with American Bailey Corporation (ABC) owned 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 reimbursed us for its share of lease and lease-related expenses under the sublease agreement. The Stamford facility housed certain administrative functions. The amounts earned from ABC related to the subleases for the year ended December 31, 2019 was $165. The amount due from ABC related to the sublease agreement was $27 at December 31, 2019.
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 $222 and $262 in 2020 and 2019 , respectively.
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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, 2020
Air Pollution Control Segment
FUEL CHEM Segment
Other
Total
Revenues from external customers
$
8,557
$
13,993
$
—
$
22,550
Cost of sales
(4,583
)
(7,329
)
—
(11,912
)
Gross margin
3,974
6,664
—
10,638
Selling, general and administrative
—
—
(13,600
)
(13,600
)
Restructuring charge
—
—
—
—
Research and development
—
—
(1,177
)
(1,177
)
Intangible assets abandonment
—
—
(197
)
(197
)
Operating income (loss) from continuing operations
$
3,974
$
6,664
$
(14,974
)
$
(4,336
)
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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
)
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,
2020
2019
Revenues:
United States
$
18,622
$
25,882
Foreign
3,928
4,585
$
22,550
$
30,467
As of December 31,
2020
2019
Assets:
United States
$
24,524
$
23,460
Foreign
5,564
8,764
$
30,088
$
32,224
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
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•
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, 2020 and 2019 .
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 $24) 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, 2020 and 2019 :
2020
2019
Total revenues
$
25
$
329
Net loss
(281
)
(1,767
)
The following table presents net assets in China for the years ended December 31, 2020 and 2019 :
2020
2019
Total assets
$
2,463
$
4,249
Total liabilities
396
399
Total net assets
2,067
3,850
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 in the amount of $63 associated with the suspension of our APC business in China. 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.
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The Company recorded no restructuring charge for the twelve-months ending December 31, 2020. 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
2020
2019
Restructuring liability at January 1,
$
—
$
65
Amounts expensed
—
625
Amounts expensed - discontinued operations
—
—
Amounts paid
—
(690
)
Restructuring liability at December 31,
$
—
$
—
17. Unaudited Quarterly Financial Data
Set forth below are the unaudited quarterly financial data for the fiscal years ended December 31, 2020 and 2019 .
For the quarters ended
March 31,
June 30,
September 30,
December 31,
2020
Revenues
$
3,778
$
4,401
$
8,155
$
6,216
Cost of sales
2,251
3,799
2,249
3,613
Net (loss) income from continuing operations
(2,567
)
(2,544
)
2,376
(1,543
)
Income (loss) from discontinued operations
—
—
—
—
Net (loss) income
(2,567
)
(2,544
)
2,376
(1,543
)
Basic net (loss) income per common share:
Continuing operations
(0.10
)
(0.10
)
0.10
(0.07
)
Discontinued operations
—
—
—
—
Basic net (loss) income per common share:
$
(0.10
)
$
(0.10
)
$
0.10
$
(0.07
)
Diluted net (loss) income per common share:
Continuing operations
(0.10
)
(0.10
)
0.09
(0.07
)
Discontinued operations
—
—
—
—
Diluted net (loss) income per common share:
$
(0.10
)
$
(0.10
)
$
0.09
$
(0.07
)
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
)
Loss from discontinued operations
(10
)
(9
)
18
—
Net loss
(1,289
)
(945
)
(1,278
)
(4,340
)
Basic net loss per common share:
Continuing operations
(0.05
)
(0.04
)
(0.05
)
(0.18
)
Discontinued operations
—
—
—
—
Basic net loss per common share:
$
(0.05
)
$
(0.04
)
$
(0.05
)
$
(0.18
)
Diluted net loss per common share:
Continuing operations
(0.05
)
(0.04
)
(0.05
)
(0.18
)
Discontinued operations
—
—
—
—
Diluted net loss per common share:
$
(0.05
)
$
(0.04
)
$
(0.05
)
$
(0.18
)
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ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.