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

Background

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

Air Pollution Control Technologies

The Air Pollution Control technology segment includes technologies to reduce NO _x emissions in flue gas from boilers, incinerators, furnaces and other stationary combustion sources. These include Low and Ultra Low NO _x Burners (LNB and ULNB), OFA systems, NO _x OUT and HERT SNCR systems, and ASCR systems.  The ASCR system includes ULNB, OFA, and SNCR components, along with a downsized SCR catalyst, AIG, and GSG systems to provide high NO _x reductions at significantly lower capital and operating costs than conventional SCR systems. The NO _x OUT CASCADE and NO _x OUT-SCR processes are basic types of ASCR systems, using just SNCR and SCR catalyst components. ULTRA technology creates ammonia at a plant site using safe urea for use with any SCR application.  Our ESP products and services include complete turnkey ESP retrofits and related services. 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. We distribute our products through our direct sales force and third-party sales agents.

FUEL CHEM Technologies

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. Fuel Tech sells its FUEL CHEM program through its direct sales force and agents to industrial and utility power-generation facilities. FUEL CHEM programs have been installed on combustion units in North America, Europe, China, and India, treating a wide variety of solid and liquid fuels, including coal, heavy oil, biomass and municipal waste. The FUEL CHEM program improves the efficiency, reliability and environmental status of plants operating in the electric utility, industrial, pulp and paper, waste-to-energy, university and district heating markets and offers numerous operational, financial and environmental benefits to owners of boilers, furnaces and other combustion units.

The key market dynamic for both technology segments is the continued use of fossil fuels, especially coal, as the principal fuel source for global electricity production. Coal currently accounts for approximately 39% of all U.S. electricity generation and roughly 67% of Chinese electricity generation. Major coal consumers include China, the United States and India.

Fuel Conversion

The Fuel Conversion business represents a new business initiative we commenced in 2014. As described in Note 1 to the consolidated financial statements included in this Form 10-K, we acquired intellectual property rights and know-how related to the CARBONITE® fuel conversion process and technology. This process can convert coals of various grades into value-added products that are high in energy content, carbon-rich and contain less pollutants. Our Fuel Conversion technology has a number of potential applications including certain coal replacement, electric arc furnace reductant, ferro-alloy feedstock, and mercury reduced carbon feedstock. During 2015, we have been testing and developing the engineered carbon products for specific markets. We are in the process of evaluating the commercialization of these product offerings with prospective customers and considering alternatives. Refer to Item 1A. RISK FACTORS for further detail regarding the risk factors associated with this segment. We have not yet earned revenue from prospective customers.

Critical Accounting Policies and Estimates

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions. We believe that of our accounting policies (see Note 1 to the consolidated financial statements), the following involve a higher degree of judgment and complexity and are deemed critical. We routinely discuss our critical accounting policies with the Audit Committee of the Board of Directors.

Revenue Recognition

Revenues from the sales of chemical products are recorded when title transfers, either at the point of shipment or at the point of destination, depending on the contract with the customer. We use the percentage of completion method of accounting for equipment

construction, equipment supply and license contracts that are sold within the Air Pollution Control technology segment. Under the percentage of completion method, revenues are recognized as work is performed based on the relationship between actual construction costs incurred and total estimated costs at completion. Construction costs include all direct costs such as materials, labor, and subcontracting costs, and indirect costs allocable to the particular contract such as indirect labor, tools and equipment, and supplies. Revisions in completion estimates and contract values are made in the period in which the facts giving rise to the revisions become known and can influence the timing of when revenues are recognized under the percentage of completion method of accounting. Such revisions have historically not had a material effect on the amount of revenue recognized. Provisions are made for estimated losses on uncompleted contracts in the period in which such losses are determined. As of December 31, 2015 , we had two construction contracts in progress that were identified as loss contracts and a provision for losses in the amount of $3 was recorded in other accrued liabilities on the consolidated balance sheet. As of December 31, 2014 , we had one construction contract in progress that was identified as a loss contract and a provision for losses in the amount of $4 was recorded in other accrued liabilities on the consolidated balance sheet.

Typically, our APC contracts are eight to sixteen 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 our contractual APC project agreements, we contractually commit to customer-specific acceptance criteria that relate to the operational performance of the system that is being sold. These criteria are determined based on mathematical modeling that is performed by our personnel, which is in turn based on operational inputs that are provided by the customer. Our customer is solely responsible for the accuracy of the operating condition information; all performance guarantees and equipment warranties granted by us are void if the operating condition information is inaccurate or is not met.

Accounts receivable includes unbilled receivables, representing revenues recognized in excess of billings on uncompleted contracts under the percentage of completion method of accounting. At December 31, 2015 and December 31, 2014 , unbilled receivables were approximately $7,312 and $9,904 , respectively, and are included in accounts receivable on the consolidated balance sheet. Billings in excess of costs and estimated earnings on uncompleted contracts were $1,858 and $2,994 at December 31, 2015 and December 31, 2014 , respectively, and are included in other accrued liabilities on the consolidated balance sheet.

We have installed over 1000 units with APC technology and normally provide 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.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is 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 us, 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 .

Assessment of Potential Impairments of Goodwill and Intangible Assets

Goodwill is not amortized, but rather is reviewed annually (in the fourth quarter) or more frequently if indicators arise, for impairment. We do not have any indefinite-lived intangible assets other than goodwill. Such indicators include a decline in expected cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, a decrease in our market capitalization to an amount less than the carrying value of our assets, or slower growth rates, among others.

Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. We have three reporting units: the FUEL CHEM segment, the APC technology segment and the Fuel Conversion segment.

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 a reporting unit to its carrying value. Fuel Tech uses a discounted cash flow (DCF) model to determine the current fair value of its two reporting units as this methodology was deemed to best quantify the present values of our expected future cash flows and yield a fair value that should be in line with the aggregate market value placed on the outstanding number of Common Shares as reflected by the current stock price multiplied by the outstanding common shares. 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. Events outside our control, specifically market conditions that impact revenue growth assumptions, could significantly impact the fair value calculated. 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.

The application of our DCF model in estimating the fair value of each reporting segment is based on the ‘income’ approach to business valuation. In using this approach for each reportable segment, we forecast segment revenues and expenses out to perpetuity and then discount the resulting cash flows to their present value using an appropriate discount rate. The forecast considers, among other items, the current and expected business environment, expected changes in the fixed and variable cost structure as the business grows, and a revenue growth rate that we feel is both achievable and sustainable. The discount rate used is composed of a number of identifiable risk factors, including equity risk, company size, and certain company specific risk factors such as our debt-to-equity ratio, among other factors, that when added together, results in a total return that a prudent investor would demand for an investment in our company.

In the event the estimated fair value of a reporting unit per the DCF model is less than the carrying value, additional analysis would be required. The additional analysis would compare the carrying amount of the reporting unit’s goodwill with the implied fair value of that goodwill. The implied fair value of goodwill is the excess of the fair value of the reporting unit over the fair values assigned to all of the assets and liabilities of that unit as if the reporting unit was acquired in a business combination and the fair value of the reporting unit represented the purchase price. If the carrying value of goodwill exceeds its implied fair value, an impairment loss equal to such excess would be recognized.

Fuel Tech performed its annual goodwill impairment analysis for each of its reporting units as of October 1, 2015 and determined that no impairment of goodwill existed within the FUEL CHEM technology segment. Goodwill related to APC technology reporting unit was fully impaired in the fourth quarter of 2014. APC technology segment failed the first step test because the estimated fair value of the reporting unit was less than its carrying value, a result significantly affected by Fuel Tech's market capitalization, and thus requiring additional analysis of the segment. Based on this additional analysis, Fuel Tech determined that the current fair value of the APC technology reporting unit was less than the fair value of the assets and liabilities of the unit, resulting in an implied fair value of goodwill of zero, and accordingly recorded a non-cash goodwill impairment charge of $23.4 million related to this segment.

The APC segment encompasses the integrated operations of the Company's acquisitions of Advanced Combustion Technology, Inc. (ACT) in 2009 and PECO in 2014. While goodwill impairment is tested for the segment as a whole, the changes in estimates that led to the goodwill impairment charge were most significantly related to the ACT acquisition. The impairment primarily resulted from the lower estimates of revenues and margins in the segment in the assessment forecast period. These lower estimates derive from (1) lower natural gas prices that allow utility operators to switch to natural gas from coal and increase the amount of power generated from natural gas plants, (2) slower sales and smaller margins in the China market and (3) continued delays in investment in environmental remediation, particularly with respect to NOx technologies due to the regulatory environment.

Impairment of Long-Lived Assets and Amortizable Intangible Assets

Long-lived assets, including property, plant and equipment (PP&E) and intangible assets, are 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 exist, we perform a more detailed analysis and an impairment loss is recognized when estimated future undiscounted cash flows expected to result from the use of the asset (or asset group) and its eventual disposition are less than the carrying amount. This process of analyzing impairment involves examining the operating condition of individual assets (or asset group) and estimating a fair value based upon current condition, relevant market factors and remaining estimated operational life compared to the asset’s remaining depreciable life. Quoted market prices and other valuation techniques are used to determine expected cash flows. Due to the existence of impairment indicators as more fully described in Note 1 to our consolidated financial statements, we performed

a more detailed analysis of potential long-lived and intangible asset impairment in the APC technology asset group during the fourth quarter of 2015 using the aforementioned undiscounted cash flows analysis.

In the fourth quarter of 2015, the Company performed an impairment test of the carrying value of our intangible assets to determine whether any impairment existed. The Company determined that the sum of the expected undiscounted cash flows attributable to certain intangible assets was less than its carrying value and that an impairment write-down was required. The impairment loss primarily related to the customer lists acquired in the 2009 acquisition of Advanced Combustion Technology and the 2014 acquisition of PECO. The Company calculated the estimated fair value of the intangible asset by summing the present value of the expected cash flows over its life. The impairment was calculated by deducting the present value of the expected cash flows from the carrying value. This assessment resulted in an impairment write-down of $1,425, which was included in “Goodwill and intangible assets impairment” in the accompanying Consolidated Statements of Operations for the year ended December 31, 2015.

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.

Valuation Allowance for Deferred Income Taxes

Deferred tax assets represent deductible temporary differences and net operating loss and tax credit carryforwards. A valuation allowance is recognized if it is more likely than not that some portion of the deferred tax asset will not be realized. At the end of each reporting period, management reviews the realizability of the deferred tax assets. As part of this review, we consider if there are taxable temporary differences that could generate taxable income in the future, if there is the ability to carry back the net operating losses or credits, if there is a projection of future taxable income, and if there are any tax planning strategies that can be readily implemented.

Stock-Based Compensation

We recognize compensation expense for employee equity awards ratably over the requisite service period of the award, adjusted for estimated forfeitures.

We utilize the Black-Scholes option-pricing model to estimate the fair value of stock option awards. Determining the fair value of stock options using the Black-Scholes model requires judgment, including estimates for (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 our Common Shares 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.

In addition, we utilize a Monte Carlo valuation pricing model to determine the fair value of certain restricted stock units (RSUs) that contain market conditions. Determining the fair value of these RSUs requires judgment and involves simulating potential future stock prices based on estimates for the risk-free interest rate, stock volatility, and correlations between our stock price and the stock prices of a peer group of companies. If any of these assumptions differ significantly from actual results, stock-based compensation expense could be impacted.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09 "Revenue from Contracts with Customers" (Topic 606). This new accounting guidance on revenue recognition provides for a single five-step model to be applied to all revenue contracts with customers. The new standard also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. In August 2015, the FASB approved a one-year deferral to January 1, 2018. Early adoption is permitted as of the original effective date. The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. We are currently evaluating the impact of the new guidance on our financial statements and have not yet selected a transition approach to implement the standard.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This new accounting guidance more clearly articulates the requirements for the measurement and disclosure of inventory. Topic 330, Inventory, currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. This new accounting guidance requires the

measurement of inventory at lower of cost and net realizable value. ASU 2015-11 will be effective for the Company beginning on January 1, 2017. The adoption of this guidance in not expected to have a material impact on the Company’s consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in this Update require that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. Current accounting principles require an entity to separate deferred income tax liabilities and assets into current and non-current amounts in a classified statement of financial position. ASU 2015-17 will be effective for the Company beginning on January 1, 2017. We are currently evaluating the impact of the new guidance on our financial statements and have not yet selected a transition approach to implement the standard.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The amendments in this Update increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 will be effective for the Company beginning on January 1, 2019. We are currently evaluating the impact of the new guidance on our financial statements and have not yet selected a transition approach to implement the standard.

2015 versus 2014

Revenues for the years ended December 31, 2015 and 2014 were $73,664 and $79,017, respectively. The year-over-year decrease of $5,353, or 7%, was principally driven by decreased revenue in our FUEL CHEM technology segment in both our United States (U.S.) and foreign operations, while our APC technology segment revenues increased marginally. Our U.S. revenues increased by $584 or 1% from $50,901 to $51,485 , while our international revenues declined by $5,937 or 21% from $28,116 to $22,179 .

Revenues for the APC technology segment were $43,485 for the year ended December 31, 2015 , an increase of $1,454 , or 3% , versus fiscal 2014 . Revenues in our APC technology segment, which had been growing into 2013 largely through international sales, were adversely affected by a number of factors in 2015. First, the U.S. regulatory environment, while remaining favorable for our prospects, has not spurred capital investment in our products by electric power producers. Second, while general economic conditions in the U.S. have improved, energy demand for coal fired power plants has declined as utilities have switched to lower cost natural gas sources. At the same time, these sources have generally allowed utilities to meet their regulatory objectives with existing emissions investments. Sales in foreign locations have not been robust enough to offset reduced demand in the U.S. Foreign sales declined year-over-year by approximately $6.0 million. This is due largely to the completion of several large contracts in China offset by a large contract starting in Italy in 2015. While we expect to see improved order flow in our U.S. APC segment in 2016, any future orders will be dependent on our customers' capital investment decisions to install emissions control technologies in order to meet state or federal regulations. We continue to actively bid projects in our foreign markets during 2016 and will continue to look for growth opportunities within our chosen markets. Backlog for the years ended December 31, 2015 and 2014 was $22.2 million and $18.0 million, respectively.

Revenues for the FUEL CHEM technology segment for the year ended December 31, 2015 were $30,179 , a decrease of $6,807 , or 18% versus fiscal 2014 . This decrease is principally associated with reduced product demand from our largest Fuel Chem customer. This customer's decision to reduce spending was based on a number of factors including cost of coal fire powered generation, energy demand and overall economic conditions affecting the plant. During 2015, our total revenue for this customer decreased from approximately $15 million in 2014 to $9 million in 2015 and we expect to see a further decline in 2016. We remain focused on attracting new customers in our FUEL CHEM business, for both coal and non-coal applications, but our ability to attract new coal customers continues to be affected by the soft electric demand market and fuel switching as a result of low natural gas prices.

Consolidated cost of sales for the years ended December 31, 2015 and 2014 were $45,107 and $43,889 , respectively. Consolidated gross margin percentage for the years ended December 31, 2015 and 2014 were 39% and 44% , respectively. The gross margins for the APC technology segment decreased to 30% in 2015 from 37% in 2014 . Gross margin percentage for the FUEL CHEM technology segment decreased slightly in 2015 to 52% from 53% in 2014.

During 2015 we recognized an impairment charge of $1.4 million for finite-lived APC segment intangible assets, and during 2014

we recognized an impairment charge of $23.4 million for our APC segment goodwill asset. A significant portion, $15.8 million, of our APC segment goodwill impairment recognized in 2014 and $1.1million of our APC segment intangible asset impairment

recognized in 2015 related to the acquisition of Advanced Combustion Technology, Inc. (“ACT”) which was completed on January 1, 2009.

Selling, general and administrative expenses for the years ended December 31, 2015 and 2014 were $31,116 and $35,432 , respectively. The decrease of $4,316 or 12% , is primarily attributed to the following:

Research and development (“R&D”) expenses were $4,273 and $1,459 for the years ended December 31, 2015 and 2014 , respectively. Included in our 2015 and 2014 R&D expense was $2,826 and $277 expense pertaining to the development of our Fuel Conversion business, while the remaining expenditures were focused on new product development for our APC and Fuel Chem businesses. We plan to continue focusing on increased R&D efforts in the pursuit of commercial applications for our technologies outside of our traditional markets, and in the development and analysis of new technologies that could represent incremental market opportunities.

Interest income for the year ended December 31, 2015 decreased by $8 to $21 versus $29 in 2014 . Interest expense of $27 was recorded in 2015 , compared to $125 in the prior year. Finally, the decrease in net other expenses to $360 from $544 in the prior year is due primarily to the impact of foreign exchange rates as it relates to settlement of balances denominated in foreign currencies, particularly in Chile.

For the year ended December 31, 2015 , we recorded an income tax expense of $3,757 on pre-tax loss of $8,623 . Our effective tax rates were 43.6% and ( 31.3% ) for the years ended December 31, 2015 and 2014, respectively. The effective tax rate for the year-ended December 31, 2015 differed from the the federal statutory rate of 34% as a result of establishing a full valuation allowance on our United States deferred tax assets and income from our Italian subsidiary for which we reversed a portion of our deferred income tax valuation allowances as a result of the entity’s previously recorded net operating losses. For the year ended December 31, 2014 , we recorded an income tax benefit of $8,078 on pre-tax loss of $25,803 .

2014 versus 2013

Revenues for the years ended December 31, 2014 and 2013 were $79,017 and $109,338, respectively. The year-over-year decrease of $30,321, or 28%, was principally driven by decreased revenue in our APC technology segment in both our United States (U.S.) and foreign operations, while our FUEL CHEM technology segment revenue remained unchanged. Our U.S. revenues declined $12,374 or 20% from $63,275 to $50,901, while our International revenues declined $17,947 or 39% from $46,063 to $28,116.

Revenues for the APC technology segment were $42,031 for the year ended December 31, 2014, a decrease of $30,521, or 42%, versus fiscal 2013. Revenues in our APC technology segment, which had been growing into 2013 largely through international sales, were adversely affected by a number of factors in 2014. First, the U.S. regulatory environment, while remaining favorable for our prospects, has not spurred capital investment in our products by electric power producers. Second, while general economic conditions in the U.S. have improved, energy demand for coal fired power plants has declined as utilities have switched to lower cost natural gas sources. At the same time, these sources have generally allowed utilities to meet their regulatory objectives with existing emissions investments. Sales in foreign locations have not been robust enough to offset reduced demand in the U.S., as foreign sales have also declined due largely to the completion of a large contract in Chile which yielded a year-over-year decline of $10 million in revenue. During 2014 we completed two U.S. based acquisitions of new technology for particulate control which contributed $4.2 million of revenue and offset declines in our legacy technology offerings. While we do expect to see improved order flow in our U.S. APC segment in 2015, any future orders will be dependent on our customer’s capital investment decisions to install emissions control technologies in order to meet state or federal regulations. We continue to actively bid projects in our foreign markets during 2015 and will continue to look for growth opportunities within our chosen markets. Backlog for the years ended December 31, 2014 and 2013 was $18.0 million and $22.4 million, respectively.

Revenues for the FUEL CHEM technology segment for the year ended December 31, 2014 were $36,986, an increase of $200, or 1% versus fiscal 2013. Our FUEL CHEM technology continues to be affected by the soft electric demand market and fuel switching as a result of low natural gas prices, which have led to unscheduled outages and coal consumption units operating at less than full capacity.

Consolidated cost of sales for the years ended December 31, 2014 and 2013 were $43,889 and $62,521, respectively. Consolidated gross margin percentage for the years ended December 31, 2014 and 2013 were 44% and 43%, respectively. The gross margins for the APC technology segment decreased slightly to 37% in 2014 from 38% in 2013. Gross margin percentage for the FUEL CHEM technology segment remained flat at 53% in 2014 and 2013.

As more fully described in Note 1 to the consolidated financial statements, the Company performs an annual evaluation in the fourth quarter of each year for indications of potential impairment of goodwill and indefinite lived intangible assets. Our APC segment goodwill represented $23.4 million, or 92% of the total goodwill balance carried on our books. Our annual goodwill impairment test for our APC segment concluded that its full balance was impaired, leading to a charge of $23.4 million in the fourth quarter. A significant portion, $15.8 million, of our APC goodwill related to the acquisition of Advanced Combustion Technology, Inc. (“ACT”) which was completed on January 1, 2009. While the Company believes it will continue to benefit from this and other business acquisitions completed in the APC segment, the recent financial performance of the APC segment

and specifically the ACT product line has not met our internal expectations and anticipated future cash flows have greater risks and uncertainties with regard to the timing and rate of growth. We continue to believe that promising long-term global market trends with regard to demand for our APC segment technologies appears to remain intact, but we are unable to ascertain the timing of such demand in the near term, and accordingly the present value of the forecasted future cash flows used in our goodwill impairment test has been reduced compared to prior years. Accordingly, we concluded that our APC segment goodwill balance was impaired during the fourth quarter of 2014 and as a result a $23.4 million charge was recorded in that period.

Selling, general and administrative expenses for the years ended December 31, 2014 and 2013 were $35,432 and $36,375, respectively. The decrease of $943 or 3%, is primarily attributed to the following:

Research and development (“R&D”) expenses were $1,459 and $2,442 for the years ended December 31, 2014 and 2013, respectively. We plan to continue focusing on increased R&D efforts in the pursuit of commercial applications for our technologies outside of our traditional markets, and in the development and analysis of new technologies that could represent incremental market opportunities.

Interest income for the year ended December 31, 2014 decreased by $29 to $29 versus $58 in 2013. Interest expense of $125 was recorded in 2014, compared to $56 in the prior year. Finally, the increase in net other expenses to $544 from $137 in the prior year is due primarily to the impact of foreign exchange rates as it relates to settlement of balances denominated in foreign currencies, particularly in Chile.

For the year ended December 31, 2014, we recorded an income tax benefit of $8,078 on pre-tax loss of $25,803. Our effective tax rate of 31% was lower than the federal statutory rate of 34% as a result of a decrease related to the non-deductible goodwill impairment charge offset by increases from state taxes and losses from our Italian subsidiary for which we were not able to record a tax benefit as a result of the valuation allowance placed on that entity’s net operating losses. For the year ended December 31, 2013, we recorded an income tax expense of $2,764 on pre-tax income of $7,865.

Liquidity and Sources of Capital

At December 31, 2015 , we had cash and cash equivalents of $21,684 and working capital of $35,865 versus cash and cash equivalents of $18,637 and working capital of $39,688 at December 31, 2014 . 

Operating activities provided $6,928 of cash for the year ended December 31, 2015 , primarily due to the add back of non-cash items from our net loss of $12,380 including stock compensation expense of $1,809 , depreciation and amortization of $4,205 , and a decrease in deferred income taxes of $4,916 , as well as a decrease in our accounts receivable balance of $7,880 and an increase in our accounts payable balance of $1,817 . Partially offsetting these items were subtractions of non-cash items from our net loss including gain on sale of equipment of $26 , as well an increase in inventory of $560 , an increase in prepaid expenses and other current and non-current assets of $1,245 , and a decrease in our accrued liabilities and other non-current liabilities of $913 .

 

Operating activities provided $5,435 of cash for the year ended December 31, 2014 , primarily due to the add back of non-cash items from our net loss of $17,725 including a goodwill impairment charge of $23,400, stock compensation expense of $2,322, depreciation and amortization of $4,306, and bad debt expense of $762, as well as a decrease in our accounts receivable balance of $6,117 and an increase in our accrued liabilities and other non-current liabilities of $906. Partially offsetting these items were subtractions of non-cash items from our net loss including deferred income taxes in the amount of $9,524, as well an decrease in our accounts payable balance of $3,600, an increase in inventory of $616, and an increase in prepaid expenses and other current and non-current assets of $913.

Investing activities used cash of $776 and $13,897 for the years ended December 31, 2015 and 2014 , respectively. Investment activities for the year ended December 31, 2015 consisted of purchases of equipment, patents, and other intangibles of $802 and proceeds from sale of equipment of $26. Investment activities for the year ended December 31, 2014 consisted of purchases of equipment,

patents, and other intangibles of $2,808 , including our $3,010 acquisition of intellectual property rights related to the fuel conversion segment, as well as an investment to acquire two businesses located in Ohio in the amount of $8,079, net of cash acquired.

Financing activities used $1,875 of cash for the year ended December 31, 2015 which included a payment of our short-term debt in the amount of $1,623 and payments to repurchase our common stock in the amount of $252 for shares withheld to pay employee payroll taxes upon vesting of equity awards. Financing activities provided $0 of cash for the year ended December 31, 2014 which included proceeds and excess tax benefits from stock option exercises in the amount of $304, offset by payments to repurchase our common stock in the amount of $304 for shares withheld to pay employee payroll taxes upon vesting of equity awards.

On June 30, 2015, we amended our existing revolving credit facility (the Facility) with JPMorgan Chase Bank, N.A (JPM Chase) to extend the maturity date through June 30, 2017 and we again amended the facility on December 31, 2015 to modify certain covenants. Availability under the facility is $15,000 with a provision to increase the facility up to a total principal amount of $25,000 upon approval from JPM Chase. The Facility is unsecured, bears interest at a rate of LIBOR plus 300 basis points, and has the Company’s Italian subsidiary, Fuel Tech S.r.l., as a guarantor. We are allowed to use this Facility for cash advances and standby letters of credit.

The Facility contains several debt covenants tested on a quarterly or annual basis. The Facility requires a minimum trailing twelve-month EBITDA of $500 for quarters ending March 31, 2016 and June 30, 2016; beginning with the fiscal quarter ending September 30, 2016, the Facility requires a minimum EBITDA for the trailing twelve-month period then ended of not less than $1,000. EBITDA includes after tax earnings with add backs for interest expense, income taxes, depreciation and amortization, stock-based compensation expense, and other non-cash items. This covenant was waived by our bank through the period ending December 31, 2015. In addition, the Facility requires a minimum working capital requirement of $35,000, starting as of December 31, 2015. Finally, the Facility has an annual capital expenditure limit of $5,000. At December 31, 2015 we were in compliance with the financial covenants in effect at that date.

At December 31, 2015 and 2014 , we had outstanding standby letters of credit and bank guarantees totaling approximately $7,803 and $8,284 , respectively, on the facility in connection with contracts in process. We are required to reimburse JP Morgan Chase for any payments made by the bank under these instruments. At December 31, 2015 and 2014 , there were no cash borrowings under the facility, approximately $7,197 and $6,716 , respectively, was available for future borrowings. We pay a commitment fee of 0.25%  per year on the unused portion of the revolving credit facility.

On June 26, 2015, our wholly-owned subsidiary, Beijing Fuel Tech Environmental Technologies Company, Ltd. (Beijing Fuel Tech) entered into a new revolving credit facility (the China Facility) agreement with JPM Chase for RMB 35 million (approximately $5,392 ), which expires on June 24, 2016. This new credit facility replaced the previous RMB 35 million facility that expired on June 26, 2015. The facility is unsecured, bears interest at a rate of 125% of the People’s Bank of China (PBOC) Base Rate, and is guaranteed by Fuel Tech, Inc. (the US parent Company). Beijing Fuel Tech can use this facility for cash advances and bank guarantees. As of December 31, 2015, Beijing Fuel Tech had no cash borrowings under the China Facility, and as of December 31, 2014 had borrowings outstanding in the amount of $1,625 . These borrowings were subject to interest rates of approximately 6.8% at December 31, 2015 and 7.0% at December 31, 2014.

At December 31, 2015 and 2014 , we had outstanding standby letters of credit and bank guarantees totaling approximately $57 and $336 , respectively, under the China facility in connection with contracts in process. At December 31, 2015 and 2014 , approximately $5,335 and $3,727 was available for future borrowings.

In the event of default on either the domestic facility or the China facility, the cross default feature in each allows the lending bank to accelerate the payments of any amounts outstanding and may, under certain circumstances, allow the bank to cancel the facility. If we were unable to obtain a waiver for a breach of covenant and the bank accelerated the payment of any outstanding amounts, such acceleration may cause our cash position to deteriorate or, if cash on hand were insufficient to satisfy the payment due, may require us to obtain alternate financing to satisfy the accelerated payment.

Interest payments in the amount of $27 and $125 were made during the years ended December 31, 2015 and 2014 , respectively.

In the opinion of management, expected near-term revenue growth in our core APC and FUEL CHEM business segments will be driven by the timing of penetration of the coal-fired utility marketplace via utilization of our TIFI technology, by utility and industrial entities’ adherence to the regulatory requirements of the various domestic environmental regulations, and by the expansion of both business segments in non-U.S. geographies. Management expects our liquidity requirements of our APC and FUEL CHEM business segments to be met by the operating results generated from these activities. As highlighted in Item 1A - Risk Factors, we will need to seek additional funding sources to commercialize the Fuel Conversion business.

Interest payments in the amount of $27 , $125 , and $56 were made during the years ended December 31, 2015, 2014 and 2013, respectively.

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

In addition, we use bank performance guarantees with standby letters of credit and performance surety bonds as security for contract performance and other obligations as needed in the normal course of business. As of December 31, 2015 , we had outstanding bank performance obligations that may or may not result in cash obligations as follows:

Commitment expiration by period in thousands of dollars

 

Off-Balance-Sheet Transactions

There were no other off-balance-sheet transactions other than the obligations and commitments listed above during the three-year period ended December 31, 2015 .