UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or  
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to______.             
Commission file number: 001-33059
FUEL TECH, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
20-5657551
(State or other jurisdiction of
incorporation of organization)
 
(I.R.S. Employer
Identification Number)
Fuel Tech, Inc.
27601 Bella Vista Parkway
Warrenville, IL 60555-1617
630-845-4500
www.ftek.com
(Address and telephone number of principal executive offices)
  ________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
 
¨
Accelerated filer
 
¨
Non-accelerated filer
 
x
Smaller reporting company
 
x
 
 
 
Emerging growth company

 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
On July 31, 2019 there were outstanding 24,186,824 shares of Common Stock, par value $0.01 per share, of the registrant.
 



FUEL TECH, INC.
Form 10-Q for the six -month period ended June 30, 2019
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2019 and 2018
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I.        FINANCIAL INFORMATION

Item 1.        Financial Statements
FUEL TECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share and per share data)

June 30,
2019
December 31,
2018



ASSETS


Current assets:


Cash and cash equivalents
$
11,664

$
12,039

Restricted cash
2,768

6,020

Accounts receivable, net of allowance for doubtful accounts of $1,216 and $1,411, respectively
14,627

18,399

Inventories, net
317

957

Prepaid expenses and other current assets
2,241

3,184

Income taxes receivable
129

118

Total current assets
31,746

40,717

Property and equipment, net of accumulated depreciation of $26,481 and $26,528, respectively
5,832

5,976

Goodwill
2,116

2,116

Other intangible assets, net of accumulated amortization of $6,601 and $6,608, respectively
1,070

1,164

Restricted cash
487

—

Right-of-use operating lease assets
1,293

—

Assets held for sale
396

485

Other assets
1,041

1,261

Total assets
$
43,981

$
51,719

LIABILITIES AND STOCKHOLDERS' EQUITY


Current liabilities:


Accounts payable
$
3,890

$
9,499

Accrued liabilities:


Operating lease liabilities - current
472

—

Employee compensation
947

1,563

Other accrued liabilities
5,282

6,099

Total current liabilities
10,591

17,161

Operating lease liabilities - non-current
810

—

Deferred income taxes
172

171

Other liabilities
290

335

Total liabilities
11,863

17,667

COMMITMENTS AND CONTINGENCIES (Note 14)


Stockholders’ equity:


Common stock, $.01 par value, 40,000,000 shares authorized, 24,843,668 and 24,825,891 shares issued, and 24,186,824 and 24,170,585 shares outstanding, respectively
248

248

Additional paid-in capital
139,211

138,992

Accumulated deficit
(104,707
)
(102,495
)
Accumulated other comprehensive loss
(1,224
)
(1,285
)
Nil coupon perpetual loan notes
76

76

Treasury stock, at cost
(1,486
)
(1,484
)
Total stockholders’ equity
32,118

34,052

Total liabilities and stockholders’ equity
$
43,981

$
51,719

See notes to condensed consolidated financial statements.

1


FUEL TECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except share and per-share data)
 
 
Three Months Ended 
 June 30,
Six Months Ended 
 June 30,
 
2019
2018
2019
2018
Revenues
$
8,948

$
11,847

$
19,103

$
24,638

Costs and expenses:




Cost of sales
5,050

8,125

11,191

15,891

Selling, general and administrative
4,455

4,763

8,913

9,684

Restructuring charge
30

—

625

—

Research and development
205

261

471

549

Intangible assets abandonment
51

317

51

317


9,791

13,466

21,251

26,441

Operating loss from continuing operations
(843
)
(1,619
)
(2,148
)
(1,803
)
Interest expense
(3
)
—

(4
)
—

Interest income
9

—

11

2

Other expense
(97
)
(59
)
(72
)
(67
)
Loss from continuing operations before income taxes
(934
)
(1,678
)
(2,213
)
(1,868
)
Income tax expense
(2
)
(1
)
(2
)
(2
)
Net loss from continuing operations
(936
)
(1,679
)
(2,215
)
(1,870
)
Loss from discontinued operations (net of income tax benefit of $0 in 2019 and 2018)
(9
)
(74
)
(19
)
(99
)
Net loss
$
(945
)
$
(1,753
)
$
(2,234
)
$
(1,969
)
Net loss per common share:




Basic








Continuing operations
$
(0.04
)
$
(0.07
)
$
(0.09
)
$
(0.08
)
Discontinued operations
$
—

$
—

$
—

$
—

Basic net loss per common share
$
(0.04
)
$
(0.07
)
$
(0.09
)
$
(0.08
)
Diluted




Continuing operations
$
(0.04
)
$
(0.07
)
$
(0.09
)
$
(0.08
)
Discontinued operations
$
—

$
—

$
—

$
—

Diluted net loss per common share
$
(0.04
)
$
(0.07
)
$
(0.09
)
$
(0.08
)
Weighted-average number of common shares outstanding:




Basic
24,187,000

24,170,000

24,182,000

24,158,000

Diluted
24,187,000

24,170,000

24,182,000

24,158,000

See notes to condensed consolidated financial statements.

2


FUEL TECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)
 
 
Three Months Ended 
 June 30,
Six Months Ended 
 June 30,
 
2019
2018
2019
2018
Net loss
$
(945
)
$
(1,753
)
$
(2,234
)
$
(1,969
)
Other comprehensive income (loss):




Foreign currency translation adjustments
(43
)
(594
)
61

(178
)
Unrealized losses from marketable securities, net of tax
—

(2
)
—

(3
)
Total other comprehensive income
(43
)
(596
)
61

(181
)
Comprehensive income (loss)
$
(988
)
$
(2,349
)
$
(2,173
)
$
(2,150
)
See notes to condensed consolidated financial statements.

3


Fuel Tech, Inc.
Consolidated Statements of Stockholders’ Equity
( in thousands of dollars or shares, as appropriate )

The following summarizes the changes in total stockholders' equity for the three and six months ended June 30, 2018:
 
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Nil
Coupon
Perpetual Loan Notes
 
Treasury Stock
 
Total
 
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2017
 
24,133

 
$
248

 
$
138,760

 
$
(102,672
)
 
$
(768
)
 
$
76

 
$
(1,472
)
 
$
34,172

Net loss
 
 
 
 
 
 
 
(216
)
 
 
 
 
 
 
 
(216
)
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
416

 
 
 
 
 
416

Unrealized loss on marketable securities, net of tax
 
 
 
 
 
 
 
 
 
(1
)
 
 
 
 
 
(1
)
Stock compensation expense
 
 
 
 
 
(59
)
 
 
 
 
 
 
 
 
 
(59
)
Common shares issued upon vesting of restricted stock units
 
45

 
 
 
 
 
 
 
 
 
 
 
 
 
—

Treasury shares withheld
 
(10
)
 
 
 
 
 
 
 
 
 
 
 
(10
)
 
(10
)
Adoption of ASC 606
 
 
 
 
 
 
 
205

 
 
 
 
 
 
 
205

Balance at March 31, 2018
 
24,168

 
$
248

 
$
138,701

 
$
(102,683
)
 
$
(353
)
 
$
76

 
$
(1,482
)
 
$
34,507

Net loss
 
 
 
 
 
 
 
(1,753
)
 
 
 
 
 
 
 
(1,753
)
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
(594
)
 
 
 
 
 
(594
)
Unrealized loss on marketable securities, net of tax
 
 
 
 
 
 
 
 
 
(2
)
 
 
 
 
 
(2
)
Stock compensation expense
 
 
 
 
 
97

 
 
 
 
 
 
 
 
 
97

Common shares issued upon vesting of restricted stock units
 
4

 
 
 
(1
)
 
 
 
 
 
 
 
 
 
(1
)
Treasury shares withheld
 
(2
)
 
 
 
 
 
 
 
 
 
 
 
(2
)
 
(2
)
Balance at June 30, 2018
 
24,170

 
$
248

 
$
138,797

 
$
(104,436
)
 
$
(949
)
 
$
76

 
$
(1,484
)
 
$
32,252






























4




Fuel Tech, Inc.
Consolidated Statements of Stockholders’ Equity (Continued)
( in thousands of dollars or shares, as appropriate )

The following summarizes the changes in total stockholders' equity for the three and six months ended June 30, 2019:
 
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Nil
Coupon
Perpetual Loan Notes
 
Treasury Stock
 
Total
 
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2018
 
24,170

 
$
248

 
$
138,992

 
$
(102,495
)
 
$
(1,285
)
 
$
76

 
$
(1,484
)
 
$
34,052

Net loss
 
 
 
 
 
 
 
(1,289
)
 
 
 
 
 
 
 
(1,289
)
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
104

 
 
 
 
 
104

Stock compensation expense
 
 
 
 
 
96

 
 
 
 
 
 
 
 
 
96

Common shares issued upon vesting of restricted stock units
 
18

 

 
 
 
 
 
 
 
 
 
 
 
—

Treasury shares withheld
 
(2
)
 
 
 
 
 
 
 
 
 
 
 
(2
)
 
(2
)
Adoption of ASC 842
 
 
 
 
 
 
 
22

 
 
 
 
 
 
 


Balance at March 31, 2019
 
24,186

 
$
248

 
$
139,088

 
$
(103,762
)
 
$
(1,181
)
 
$
76

 
$
(1,486
)
 
$
32,983

Net loss
 
 
 
 
 
 
 
(945
)
 
 
 
 
 
 
 
(945
)
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
 
(43
)
 
 
 
 
 
(43
)
Stock compensation expense
 
 
 
 
 
123

 
 
 
 
 
 
 
 
 
123

Balance at June 30, 2019
 
24,186

 
$
248

 
$
139,211

 
$
(104,707
)
 
$
(1,224
)
 
$
76

 
$
(1,486
)
 
$
32,118


See notes to condensed consolidated financial statements.


5


FUEL TECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 

Six Months Ended 
 June 30,
 
2019
2018
Operating Activities


Net loss
$
(2,234
)
$
(1,969
)
Loss from discontinued operations
19

99

Net loss from continuing operations
(2,215
)
(1,870
)
Adjustments to reconcile net loss to net cash used in operating activities:


Depreciation
478

355

Amortization
68

106

Loss on disposal of equipment
2

17

Provision for doubtful accounts, net of recoveries
—

(62
)
Intangible assets abandonment
51

317

Stock-based compensation, net of forfeitures
219

38

Changes in operating assets and liabilities:


Accounts receivable
3,870

(1,766
)
Inventories
640

213

Prepaid expenses, other current assets and other non-current assets
1,163

229

Accounts payable
(5,595
)
714

Accrued liabilities and other non-current liabilities
(1,485
)
(1,760
)
Net cash used in operating activities - continuing operations
(2,804
)
(3,469
)
Net cash used in operating activities - discontinued operations
(19
)
(43
)
Net cash used in operating activities
(2,823
)
(3,512
)
Investing Activities


Purchases of equipment and patents
(359
)
(214
)
Proceeds from the sale of equipment
—

2

Net cash used in investing activities
(359
)
(212
)
Financing Activities


Taxes paid on behalf of equity award participants
(2
)
(13
)
Net cash used in financing activities
(2
)
(13
)
Effect of exchange rate fluctuations on cash
44

(217
)
Net decrease in cash, cash equivalents and restricted cash
(3,140
)
(3,954
)
Cash, cash equivalents, and restricted cash at beginning of period (Note 2)
18,059

14,386

Cash, cash equivalents and restricted cash at end of period (Note 2)
$
14,919

$
10,432

See notes to condensed consolidated financial statements.

6


FUEL TECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(Unaudited)
(in thousands, except share and per-share data)
 
1.    General
Organization
Fuel Tech, Inc. and subsidiaries ("Fuel Tech", the "Company", "we", "us" or "our") provides advanced engineered solutions for the optimization of combustion systems in utility and industrial applications. Our primary focus is on the worldwide marketing and sale of NO x reduction technologies as well as our FUEL CHEM program. The Company’s NO x reduction technologies reduce nitrogen oxide emissions from boilers, furnaces and other stationary combustion sources.
Our FUEL CHEM program is based on proprietary TIFI ® Targeted In-Furnace™ Injection technology, in combination with advanced Computational Fluid Dynamics (CFD) and Chemical Kinetics Modeling (CKM) boiler modeling, in the unique application of specialty chemicals to improve the efficiency, reliability and environmental status of combustion units by controlling slagging, fouling, corrosion, opacity and other sulfur trioxide-related issues in the boiler.
Our business is materially dependent on the continued existence and enforcement of air quality regulations, particularly in the United States. We have expended significant resources in the research and development of new technologies in building our proprietary portfolio of air pollution control, fuel and boiler treatment chemicals, computer modeling and advanced visualization technologies.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Exchange Act. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the statements for the periods presented. All significant intercompany transactions and balances have been eliminated. The results of operations for the three and six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019. For further information, refer to the audited consolidated financial statements and footnotes thereto included in Fuel Tech’s Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the Securities and Exchange Commission.

2.    Summary of Significant Accounting Policies
Restricted cash
Restricted cash represents funds that are restricted to satisfy any amount borrowed against the Company's existing revolving credit facility (the Facility) with JPMorgan Chase Bank, N.A and the Cash Collateral Security agreement with BMO Harris Bank N.A. The balance of restricted cash totaling $3,255 of which $2,768 will remain through the Maturity Date of the Facility and $487 will remain through the expiration date of the underlying standby letter of credit (December 28, 2020) with BMO Harris Bank N.A. Refer to Note 10 Debt Financing for further information on the Facility.

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:
 
June 30,
2019
June 30,
2018
Cash and cash equivalents
$
11,664

$
3,912

Restricted cash included in current assets
2,768

6,520

Restricted cash included in long-term assets
487

—

Total cash, cash equivalents, and restricted cash shown in the Consolidated Statements of Cash Flows
$
14,919

$
10,432





7



Leases

On January 1, 2019, we adopted ASC 842 using the modified retrospective method outlined in ASU 2018-11, “Leases (Topic 842) Targeted Improvements.” Refer to Note 12 for further details regarding the effect of adoption. We determine if an arrangement is a lease at inception. Operating leases are included in right-of-use ("ROU") operating lease assets, operating lease liabilities - current, and operating lease liabilities - non-current on our Consolidated Balance Sheets.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components, which we elected the practical expedient to not separate lease and non-lease components for the majority of our leases. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. We also elected the practical expedient to keep leases with an initial term of 12 months or less off of the consolidated balance sheet.

3.    Revenue

The Company recognizes revenue when control of the promised goods or services is transferred to our customers, in amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Fuel Tech’s sales of products to customers represent single performance obligations. 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.

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 Condensed Consolidated Statements of Operations.

FUEL CHEM

Revenues from the sale of chemical products are recognized when control transfers to customer upon shipment or delivery of the product based on the applicable shipping terms. We generally recognize revenue for these arrangements at a point in time based on our evaluation of when the customer obtains control of the promised goods or services.

Air Pollution Control Technology
Fuel Tech’s APC contracts are typically six to eighteen months in length. A typical contract will have three or four critical operational measurements that, when achieved, serve as the basis for us to invoice the customer via progress billings. At a minimum, these measurements will include the generation of engineering drawings, the shipment of equipment and the completion of a system performance test.
As part of most of its contractual APC project agreements, Fuel Tech will agree to customer-specific acceptance criteria that relate to the operational performance of the system that is being sold. These criteria are determined based on modeling that is performed by Fuel Tech personnel, which is based on operational inputs that are provided by the customer. The customer will warrant that these operational inputs are accurate as they are specified in the binding contractual agreement. Further, the customer is solely responsible for the accuracy of the operating condition information; typically all performance guarantees and equipment warranties granted by us are voidable if the operating condition information is inaccurate or is not met.

8


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 1,000 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.
Disaggregated Revenue by Product Technology
The following table presents our revenues disaggregated by product technology:
 
Three Months Ended 
 June 30,
Six Months Ended 
 June 30,
 
2019
2018
2019
2018
Air Pollution Control
 
 
 
 
  Technology solutions
$
3,795

$
7,592

$
8,536

$
15,314

  Spare parts
384

229

533

529

  Ancillary revenue
624

586

1,523

1,147

Total Air Pollution Control Technology revenues
4,803

8,407

10,592

16,990

FUEL CHEM
 
 
 
 
   FUEL CHEM technology solutions
4,145

3,440

8,511

7,648

Total Revenues
$
8,948

$
11,847

$
19,103

$
24,638

Disaggregated Revenue by Geography
The following table presents our revenues disaggregated by geography, based on the billing addresses of our customers:
 
Three Months Ended 
 June 30,
Six Months Ended 
 June 30,
 
2019
2018
2019
2018
United States
$
7,562

$
8,830

$
16,377

$
19,072

Foreign Revenues
 
 
 
 
  South America
17

354

192

626

  Europe
668

1,562

1,285

3,028

  Asia
701

1,101

1,249

1,912

Total Foreign Revenues
1,386

3,017

2,726

5,566

Total Revenues
$
8,948

$
11,847

$
19,103

$
24,638


9


Timing of Revenue Recognition
The following table presents the timing of our revenue recognition:
 
Three Months Ended 
 June 30,
Six Months Ended 
 June 30,
 
2019
2018
2019
2018
Products transferred at a point in time
$
5,153

$
4,255

$
10,567

$
9,324

Products and services transferred over time
3,795

7,592

8,536

15,314

Total Revenues
$
8,948

$
11,847

$
19,103

$
24,638


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 June 30, 2019 and December 31, 2018 , contract assets were approximately $2,338 and $5,540 , respectively, and are included in accounts receivable on the consolidated balance sheets.

However, the Company will periodically bill in advance of costs incurred before revenue is recognized, resulting in contract liabilities. These liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period. Contract liabilities were $1,147 and $1,234 , at June 30, 2019 and December 31, 2018 , respectively, and are included in other accrued liabilities on the consolidated balance sheets.

Changes in the contract asset and liability balances during the six month period ended June 30, 2019 , were not materially impacted by any other items other than amounts billed and revenue recognized as described previously. Revenue recognized that was included in the contract liability balance at the beginning of the period was $707 and $926 for the three and six months ended June 30, 2019 and $216 and $2,158 for three and six months ended June 30, 2018 , respectively, which represented primarily revenue from progress towards completion of our Air Pollution Control technology contracts.
As of June 30, 2019 , we had six construction contracts in progress that were identified as loss contracts and a provision for losses of $73 was recorded in other accrued liabilities on the consolidated balance sheet. Refer to Footnote 14 for an accrual related to certain non-conformance issues with a U.S. customer associated with equipment that requires remedy under the warranty provision of the customer contract. As of December 31, 2018 , we had five construction contracts in progress that were identified as loss contracts and a provision for losses in the amount of $123 was recorded in other accrued liabilities on the consolidated balance sheet.
Remaining Performance Obligations
Remaining performance obligations, represents the transaction price of Air Pollution Control technology booked orders for which work has not been performed. As of June 30, 2019 , the aggregate amount of the transaction price allocated to remaining performance obligations was $7,953 . The Company expects to recognize revenue on approximately $6,257 of the remaining performance obligations over the next 12 months with the remaining recognized thereafter.

Accounts Receivable

The components of accounts receivable are as follows:
 
As of
 
June 30, 2019
 
December 31, 2018
Trade receivables
$
11,403

 
$
14,261

Unbilled receivables
2,338

 
5,540

Insurance proceeds receivable (Note 14)
1,978

 
—

Other short-term receivables
124

 
9

Allowance for doubtful accounts
(1,216
)
 
(1,411
)
Total accounts receivable
$
14,627

 
$
18,399

 

10



4.    Discontinued Operations

During the second quarter of 2017, the Company suspended all operations associated with the Fuel Conversion business segment. The components of the net assets of the Fuel Conversion discontinued operations are Assets held for sale (which consists primarily of certain equipment) on the Consolidated Balance Sheets totaling $396 and $485 as of June 30, 2019 and December 31, 2018 , respectively. The Company sold certain equipment within Assets held for sale for the six month period ended June 30, 2019 of $55 . Additionally, on July 10, 2019 the Company entered into an agreement to sell the remaining Fuel Conversion equipment within Assets held for sale for a purchase price of $500 (less applicable commission of $50 to the third party equipment reseller). The Company incurred storage costs of $13 for holding the equipment at a third-party location for the six month period ended June 30, 2019.  Following the movement of the equipment by the customer during the third quarter from our third-party storage facility, the Company will incur no additional costs associated with the completion of the wind-down activities associated with the Fuel Conversion business segment.

In addition, accrued severance of $5 and $65 is included in the other accrued liabilities line of the Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 , respectively. A total of $30 and $60 was paid for the three and six months ended June 30, 2019 , the remaining $5 will be paid in the third quarter of 2019.

The Fuel Conversion business segment had no other assets or liabilities associated with it.

The activity of the Fuel Conversion discontinued operations consisted primarily of storage costs for the certain equipment held in Assets held for sale of $9 and $19 for the three and six month periods ended June 30, 2019 , respectively, and for the same periods in 2018 of $74 and $99 , respectively. The Fuel Conversion business segment had no revenues associated with it.

5.    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 is underway, and includes staff rationalization, supplier and partner engagement, and the monetization of certain assets. The Company expects to complete the process during the second half of 2019.

The following table presents our revenues and net loss in China for the three and six month periods ended  June 30, 2019 and 2018:
 
Three months ended June 30,
Six months ended June 30,
 
2019
2018
2019
2018
Total revenues
$
(28
)
$
681

$
310

$
1,340

Net loss
(540
)
(620
)
(1,390
)
(1,153
)

The following table presents net assets in China as follows:

 
As of
 
June 30, 2019
 
December 31, 2018
Total assets
$
5,493

 
$
8,546

Total liabilities
(1,199
)
 
(2,953
)
Total net assets
$
4,294

 
$
5,593



Total assets primarily consist of accounts receivable, contract assets, inventory, prepaid expenses and property, plant and equipment. Total liabilities consist of accounts payable and certain accrued liabilities.

The Company has incurred approximately  $562  of severance costs relating to the suspension of the APC business in China, of which $278 and $535 were paid during the three and six months ended June 30, 2019. $90 is expected to be paid in the third quarter of 2019.


11


On January 23, 2019, the Company notified the landlord of our intention to early terminate the lease on July 22, 2019. The Company incurred an early termination penalty of  $63 during the first quarter of 2019, which is included in restructuring expense for the six months ended June 30, 2019 . The Company will incur no additional costs associated with the completion of the wind-down activities associated with the suspension of the APC business in China.

The Company recorded restructuring charges of $30 and $625 for the three and six months ended June 30, 2019 and $0 and $0 in 2018, respectively. The charge consisted primarily of one-time severance costs of $562 and the early termination penalty for our lease associated with the suspension of our APC business in China of $63 . The following is a reconciliation of the accrual for the workforce reduction that is included within the "Accrued Liabilities - Employee Compensation" line of the consolidated balance sheets for the three and six months ending June 30, 2019 and 2018:
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2019
2018
2019
2018
Restructuring liability at beginning of period
$
373

$
282

$
65

$
391

      Amounts expensed
30

—

625

—

      Amounts paid
(248
)
(94
)
(535
)
(203
)
Restructuring liability at end of period
$
155

$
188

$
155

$
188


The restructuring liability for the three and six months ended June 30, 2018 relates to severance costs associated with the suspension of the Fuel Conversion business segment.

6.    Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss by component were as follows:  
 
Three months ended June 30,
Six months ended June 30,
 
2019
2018
2019
2018
Foreign currency translation
 
 
 
 
Balance at beginning of period
$
(1,181
)
$
(353
)
$
(1,285
)
$
(768
)
Other comprehensive loss:
 
 
 
 
Foreign currency translation adjustments (1)
(43
)
(596
)
61

(181
)
Balance at end of period
$
(1,224
)
$
(949
)
$
(1,224
)
$
(949
)
Available-for-sale marketable securities
 
 
 
 
Balance at beginning of period
$
—

$
3

$
—

$
4

Other comprehensive income:
 
 
 
 
Net unrealized holding loss (2)
—

(3
)
—

(4
)
Balance at end of period
$
—

$
—

$
—

$
—

Total accumulated other comprehensive loss
$
(1,224
)
$
(949
)
$
(1,224
)
$
(949
)

(1)
In all periods presented, there were no tax impacts related to rate changes and no amounts were reclassified to earnings.
(2)
In all periods presented, there were no realized holding gains or losses and therefore no amounts were reclassified to earnings.

7.    Treasury Stock
Common stock held in treasury totaled 656,844 and 655,306 with a cost of $1,486 and $1,484 at June 30, 2019 and December 31, 2018 , respectively. These shares were withheld from employees to settle personal tax withholding obligations that arose as a result of restricted stock units that vested in the periods presented.


12


8.    Earnings per Share
Basic earnings per share excludes the dilutive effects of stock options, restricted stock units (RSUs), and the nil coupon non-redeemable convertible unsecured loan notes. 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 anti-dilutive. Out-of-money stock options are excluded from diluted earnings per share because they are anti-dilutive. For the three and six months ended June 30, 2019 and 2018 , basic earnings per share is equal to diluted earnings per share because all outstanding stock awards and convertible loan notes are considered anti-dilutive during periods of net loss. The following table sets forth the weighted-average shares used in calculating the earnings per share for the three and six months ended June 30, 2019 and 2018 .
 
Three Months Ended 
 June 30,
Six Months Ended 
 June 30,
 
2019
2018
2019
2018
Basic weighted-average shares
24,187,000

24,170,000

24,182,000

24,158,000

Conversion of unsecured loan notes
—

—

—

—

Unexercised options and unvested RSUs
—

—

—

—

Diluted weighted-average shares
24,187,000

24,170,000

24,182,000

24,158,000

 
Fuel Tech had 1,515,000 and 1,288,000 weighted average equity awards outstanding at June 30, 2019 and 2018 , respectively, that were not dilutive for the purposes of inclusion in the calculation of diluted earnings per share but could potentially become dilutive in future periods.

9.    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. As of June 30, 2019 , Fuel Tech had 2,092,136 shares available for share-based awards under the 2014 Plan.

We did not record any excess tax benefits within income tax expense for the three and six months ended June 30, 2019 . Given the Company has a full valuation allowance on its deferred tax assets, there were no excess tax benefits to record for the three and six months ended June 30, 2019 . In addition, we account for forfeitures of awards based on an estimate of the number of awards expected to be forfeited and adjusting the estimate when it is no longer probable that the employee will fulfill the service condition.
Stock-based compensation is included in selling, general, and administrative costs in our Consolidated Statements of Operations. The components of stock-based compensation for the three and six months ended June 30, 2019 and 2018 were as follows:
 
Three Months Ended 
 June 30,
Six Months Ended 
 June 30,
 
2019
2018
2019
2018
Stock options and restricted stock units, net of forfeited
$
123

$
97

$
219

$
38

Tax benefit of stock-based compensation expense
—

—

—

—

After-tax effect of stock-based compensation
$
123

$
97

$
219

$
38

Stock Options
Stock options granted to employees under the Incentive Plans 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.

13


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.
Stock option activity for Fuel Tech’s Incentive Plans for the six months ended June 30, 2019 was as follows:
 
Number
of
Options
Weighted-
Average
Exercise Price
Weighted- Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Outstanding on January 1, 2019
932,500

$
4.68

 
 
Granted
—

—

 
 
Exercised
—

—

 
 
Expired or forfeited
(185,000
)
10.14

 
 
Outstanding on June 30, 2019
747,500

$
3.33

5.24
$
77

Exercisable on June 30, 2019
747,500

$
3.33

5.24
$
77

As of June 30, 2019 , there was no unrecognized compensation cost related to non-vested stock options granted under the Incentive Plans.
Restricted Stock Units

Restricted stock units (RSUs) granted to employees vest over time based on continued service (typically vesting over a period between two and four years). Such time-vested RSUs are valued at the date of grant using the intrinsic value method based on the closing price of the Common Shares on the grant date. Compensation cost, adjusted for estimated forfeitures, is amortized on a straight-line basis over the requisite service period.

In addition to the time vested RSUs, the Company entered into a 2019 Executive Performance RSU Award Agreement (the “2019 Agreement”) with certain officers, including its President and Chief Executive Officer and Principal Financial Officer and Controller pursuant to which each 2019 Participating Executive will have the opportunity to earn a specified amount of restricted stock units (RSUs). The amount of RSUs awarded, if any, will be based on the Company’s achievement of varying levels of operating income before the impact of incentive pay (but including adjustments to reflect the payment of sales commissions) in fiscal 2019 (“Operating Income”), as determined by the Company, in its sole discretion. Nevertheless, no Participating Executive will be entitled to any such RSUs unless the Company achieves a minimum of $2 million in Operating Income in 2019. If awarded, such RSUs will vest in equal amounts ( i.e.,  1/3, 1/3 and 1/3) over three years commencing one year after the grant date based on continued service. Such RSUs are valued at the date of grant using the intrinsic value method based on the closing price of the Company’s common stock on the grant date.
At June 30, 2019 , there is $630 of 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  1.66 years.
A summary of restricted stock unit activity for the six months ended June 30, 2019 is as follows:
 
Shares
Weighted Average
Grant Date
Fair Value
Unvested restricted stock units at January 1, 2019
1,110,277

$
1.21

Granted
228,135

1.52

Forfeited
—

—

Vested
(17,777
)
1.59

Unvested restricted stock units at June 30, 2019
1,320,635

$
1.26

The fair value of restricted stock that vested during the six month period ending June 30, 2019 was $22 .
Deferred Directors Fees

14


In addition to the Incentive Plans, Fuel Tech has a Deferred Compensation Plans 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. During the six -month periods ended June 30, 2019 and 2018 , Fuel Tech recorded no stock-based compensation expense under the Deferred Plan.
 
10.    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 June 30, 2019 , the Company had outstanding standby letters of credit totaling approximately $463 under the BMO Harris agreement. As of June 30, 2019 , the Company held $502 in a separate restricted use designated BMO Harris Bank N.A. deposit account.
 
In connection with the transition to BMO Harris Bank N.A., the Company entered into an amendment under its U.S. Domestic credit facility (the Facility) with JPMorgan Chase Bank, N.A. (JPM Chase) to reduce the maximum revolving credit borrowings from  $5,500  to $2,750 and extended the maturity to December 31, 2019. Fuel Tech maintains the use of this Facility for its existing standby letters of credit. The Company intends to transition its existing letters of credit from JPM Chase to BMO Harris Bank, N.A. and not renew the Facility upon its maturity. The Facility is secured by  $2,750 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 bear interest at a rate of LIBOR plus 300 basis points. There are no financial covenants set forth in this amendment to the Facility. As of June 30, 2019 and December 31, 2018 , there were no outstanding borrowings on the credit facility.

At June 30, 2019 and December 31, 2018 , the Company had outstanding standby letters of credit and bank guarantees totaling approximately $2,550 and $5,028 , respectively, under the Facility in connection with contracts in process. Fuel Tech is committed to reimbursing the issuing bank for any payments made by the bank under these instruments. At June 30, 2019 and December 31, 2018 , approximately $200 and $443 was available for future borrowings under the Facility.
In the event of default on the JPM Chase domestic 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 the Company 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 the Company’s cash position to deteriorate or, if cash on hand were insufficient to satisfy the payment due, may require the Company to obtain alternate financing to satisfy the accelerated payment.

11.    Business Segment and Geographic 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 NO x emissions in flue gas from boilers, incinerators, furnaces and other stationary combustion sources. These include Low and Ultra Low NO x Burners (LNB and ULNB), Over-Fire Air (OFA) systems, NO x OUT ® and HERT™ Selective Non-Catalytic Reduction (SNCR) systems, and Advanced Selective Catalytic Reduction (ASCR ™ ) systems. Our ASCR systems include ULNB, OFA, and SNCR components, along with a downsized SCR catalyst, Ammonia Injection Grid (AIG), and Graduated Straightening Grid GSG™ systems to provide high NO x reductions at significantly lower capital and operating costs than conventional SCR systems. The NO x OUT CASCADE ® and NO x OUT-SCR ® processes are more basic, using just SNCR and SCR catalyst components. ULTRA™ technology creates ammonia at a plant site using safe urea for use with any SCR application. Flue Gas Conditioning systems are chemical injection systems offered in markets outside the U.S. and Canada to enhance electrostatic precipitator and fabric filter performance in controlling particulate emissions.
•
The FUEL CHEM ® technology segment, which uses chemical processes in combination with advanced CFD and CKM boiler modeling, for the control of slagging, fouling, corrosion, opacity and other sulfur trioxide-related issues in furnaces and boilers through the addition of chemicals into the furnace using TIFI ® Targeted In-Furnace Injection™ technology.
The “Other” classification includes those profit and loss items not allocated to either reportable segment. There are no inter-segment sales that require elimination.

15


We evaluate performance and allocate resources based on reviewing 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 (Note 1 in our annual report on Form 10-K). 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:
Three months ended June 30, 2019
Air Pollution
Control Segment
FUEL CHEM
Segment
Other
Total
Revenues from external customers
$
4,803

$
4,145

$
—

$
8,948

Cost of sales
(2,975
)
(2,075
)
—

(5,050
)
Gross margin
1,828

2,070

—

3,898

Selling, general and administrative
—

—

(4,455
)
(4,455
)
Restructuring charge
(30
)
—

—

(30
)
Research and development
—

—

(205
)
(205
)
Intangible assets abandonment
—

—

(51
)
(51
)
Operating income (loss) from continuing operations
$
1,798

$
2,070

$
(4,711
)
$
(843
)
 `
Three months ended June 30, 2018
Air Pollution
Control Segment
FUEL CHEM
Segment
Other
Total
Revenues from external customers
$
8,407

$
3,440

$
—

$
11,847

Cost of sales
(6,328
)
(1,797
)
—

(8,125
)
Gross margin
2,079

1,643

—

3,722

Selling, general and administrative
—

—

(4,763
)
(4,763
)
Research and development
—

—

(261
)
(261
)
Intangible assets abandonment
—

—

(317
)
(317
)
Operating income (loss) from continuing operations
$
2,079

$
1,643

$
(5,341
)
$
(1,619
)

Six months ended June 30, 2019
Air Pollution
Control Segment
FUEL CHEM
Segment
Other
Total
Revenues from external customers
$
10,592

$
8,511

$
—

$
19,103

Cost of sales
(6,864
)
(4,327
)
—

(11,191
)
Gross margin
3,728

4,184

—

7,912

Selling, general and administrative
—

—

(8,913
)
(8,913
)
Restructuring charge
(625
)
—

—

(625
)
Research and development
—

—

(471
)
(471
)
Intangible assets abandonment
 
 
(51
)
(51
)
Operating income (loss) from continuing operations
$
3,103

$
4,184

$
(9,435
)
$
(2,148
)


16


Six months ended June 30, 2018
Air Pollution
Control Segment
FUEL CHEM
Segment
Other
Total
Revenues from external customers
$
16,990

$
7,648

$
—

$
24,638

Cost of sales
(11,924
)
(3,967
)
—

(15,891
)
Gross margin
5,066

3,681

—

8,747

Selling, general and administrative
—

—

(9,684
)
(9,684
)
Research and development
—

—

(549
)
(549
)
Intangible assets abandonment
—

—

(317
)
(317
)
Operating income (loss) from continuing operations
$
5,066

$
3,681

$
(10,550
)
$
(1,803
)

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.
 
Three Months Ended 
 June 30,
Six Months Ended 
 June 30,
 
2019
2018
2019
2018
Revenues:




United States
$
7,562

$
8,830

$
16,377

$
19,072

Foreign
1,386

3,017

2,726

5,566


$
8,948

$
11,847

$
19,103

$
24,638

 
June 30,
2019
December 31,
2018
Assets:


United States
$
33,777

$
36,784

Foreign
10,204

14,935


$
43,981

$
51,719

 

17


12.    Leases

Adoption of ASC 842, "Leases"
On January 1, 2019, we adopted ASC 842 using the modified retrospective method outlined in ASU 2018-11 "Leases (Topic 842) Targeted Improvements." Results for reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior period amounts are not adjusted and continue to be reported in accordance with our legacy accounting under Accounting Standards Codification Topic 840: Leases (ASC 840). The Company recorded the transition to ASC 842 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented.

We have elected the package of practical expedients permitted under the transition guidance, which among other things, allow us to carry forward the historical accounting relating to lease identification and classification for existing leases upon adoption. We have also elected the practical expedient to not separate lease and non-lease components for the majority of our leases and the election to keep leases with an initial term of 12 months or less off of the consolidated balance sheet.

The cumulative effect of the changes made to our January 1, 2019 consolidated balance sheet for the adoption of ASC 842 were as follows:
 
Balance at December 31, 2018
Adjustments Upon Adoption of ASC 842
Balance at January 1, 2019
Assets
 
 
 
Right-of-use operating lease assets
$
—

$
1,592

$
1,592

Liabilities
 
 
 
Other accrued liabilities
6,099

(22
)
6,077

Operating lease liabilities - current
—

650

650

Operating lease liabilities - non-current
—

942

942

Equity
 
 
 
Accumulated deficit
(102,495
)
22

(102,473
)

The adjustment made to the January 1, 2019 consolidated balance sheet related to an accrued liability for lease escalation clauses in certain of our leases under ASC 840 which is a cumulative-effect adjustment to the opening balance of accumulated deficit upon the adoption of ASC 842.

Leases
We have operating leases for ten leased office space locations and certain office equipment. Our leases have remaining lease terms of 1 year to 6 years. Our leases do not contain any material residual value guarantees or material restricted covenants and we currently have no material sublease arrangements. We have no financing leases as defined under ASC 842.

Total operating lease expense for the three and six months ended June 30, 2019 is as follows:
 
For the three months ended June 30, 2019
For the six months ended June 30, 2019
Operating lease cost
$
171

$
343

Short-term lease cost
—

68

   Total lease cost
$
171

$
411


The weighted average remaining lease term was 4.35 years as of June 30, 2019 . The weighted average discount rate was 3.61% as of June 30, 2019 .

Remaining maturities of our existing lease liabilities as of June 30, 2019 were as follows:

18


Year Ending December 31,
Operating Leases
2019 (excluding the six months ended June 30, 2019)
$
326

2020
314

2021
222

2022
165

2023
156

Thereafter
212

Total lease payments
$
1,395

Less imputed interest
(113
)
Total
$
1,282


The following is the balance sheet classification of our existing lease liabilities as of June 30, 2019 :

Operating lease liabilities - current
$
472

Operating lease liabilities - non-current
810

Total operating lease liabilities
$
1,282


Supplemental cash flow information related to leases was as follows:
 
For the three months ended June 30, 2019
For the six months ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
$
172

$
343

Leased assets obtained in exchange for new operating lease liabilities
165

328

13.    Accrued Liabilities

The components of other accrued liabilities are as follows:
 
As of
 
June 30, 2019
 
December 31, 2018
Contract liabilities (Note 3)
$
1,147

 
$
1,234

Accrued remediation contingency (Note 14)
2,228

 
—

Other accrued liabilities
1,907

 
4,865

Total other accrued liabilities
$
5,282

 
$
6,099


14.    Contingencies

Fuel Tech is subject to various claims and contingencies related to, among other things, workers compensation, general liability (including product liability), and lawsuits. The Company records liabilities where a contingent loss is probable and can be reasonably estimated. If the reasonable estimate of a probable loss is a range, the Company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. The Company discloses a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that a material loss may have been incurred.

From time to time we are involved in litigation with respect to matters arising from the ordinary conduct of our business. In the opinion of management, based upon presently available information, either adequate provision for anticipated costs have been accrued or the ultimate anticipated costs will not materially affect our consolidated financial position, results of operations, or cash flows.  We do not believe we have any pending loss contingencies that are probable or reasonably possible of having a material impact on our consolidated financial position, results of operations or cash flows.

During the fourth quarter of 2018, the Company was notified of certain non-conformance issues with a U.S. customer associated with equipment that requires remedy under the warranty provision of the contract. Thus far, the Company is working to resolve the non-conformance issues in an amicable manner. During the first quarter of 2019, the Company filed a notice of claim with our

19


insurance carrier and received a confirmation of insurance coverage. As a result, the company recorded $973 as expected insurance proceeds from our insurance carrier and $1,223 (including the insurance policy deductible of $250 ) as an accrued liability associated with the completion of the non-conformance issues identified with our customer for the three months ended March 31, 2019. During the second quarter of 2019, we revised our claim estimate with our insurance carrier and recorded an additional $1,005 as expected insurance proceeds from our insurance carrier and an additional $1,005 as an accrued liability associated with the completion of the non-conformance issues for the three months ended June 30, 2019 . As of June 30, 2019 , we have total receivables from the insurance carrier of $1,978 in the accounts receivable line of the Consolidated Balance Sheets and a total accrued liability associated with the completion of the non-conformance issues of $2,228 in the other accrued liabilities line of the Consolidated Balance Sheets. The Company recorded the proceeds from our insurance carrier as our insurance coverage and the terms are not in dispute and the claim submitted is consistent with the terms of insurance coverage provided. The Company currently has $500 of accounts receivable which is past due associated with this project. Upon satisfactory completion of non-conformance issues identified with the customer, the Company expects to collect the remaining accounts receivable due from the customer.

Fuel Tech issues a standard product warranty with the sale of its products to customers. Our recognition of warranty liability is based primarily on analyses of warranty claims experienced in the preceding years as the nature of our historical product sales for which we offer a warranty are substantially unchanged. This approach provides an aggregate warranty accrual that is historically aligned with actual warranty claims experienced.

There was no change in the warranty liability balance during the six months ended June 30, 2019 and 2018 . The warranty liability balance was $159 at June 30, 2019 and 2018 .
 
15.    Income Taxes

The Company’s effective tax rate is 0% for the three and six month periods ended June 30, 2019 and 2018 , respectively. The Company's effective tax rate differs from the statutory federal tax rate of 21% for the three and six month periods ended June 30, 2019 primarily due to a full valuation allowance recorded on our United States, China and Italy deferred tax assets since we cannot anticipate when or if we will have sufficient taxable income to utilize the deferred tax assets in the future. Further, our effective tax rate differs from the statutory federal tax rate due to state taxes, differences between U.S. and foreign tax rates, foreign losses incurred with no related tax benefit, non-deductible commissions, and non-deductible meals and entertainment expenses for the three and six month periods ended June 30, 2019 and 2018 .

On April 3, 2019, the Company received notice from the Internal Revenue Service that our U.S. income tax return for the year ended December 31, 2016 is currently under audit.
Fuel Tech had no unrecognized tax benefits as of June 30, 2019 and December 31, 2018 .  

16.    Goodwill and Other Intangibles
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. Fuel Tech has 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 segment.  At both June 30, 2019 and December 31, 2018 , our entire goodwill balance of $2,116 was allocated to the FUEL CHEM ® technology segment.
Goodwill is allocated to each of our reporting units 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. There were no indications of goodwill impairment in the six months ended June 30, 2019 and 2018 .
Fuel Tech reviews other intangible assets, which include customer lists and relationships, covenants not to compete, patent assets, tradenames, and acquired technologies, for impairment on a recurring basis or when events or changes in circumstances indicate the carrying amount of an asset 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 is less than the carrying amount of the asset, an impairment loss equal to the excess of the asset’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.
There were no indications of intangible asset impairments for the six month period ended June 30, 2019 .


20


FUEL TECH, INC.

Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations    
Results of Operations
Revenues for the three and six month periods ending June 30, 2019 and 2018 were $8,948 and $11,847 and $19,103 and $24,638 , respectively, representing a decrease of $2,899 or 24% and $5,535 or 22% versus the same periods last year.
The Air Pollution Control (APC) technology segment generated revenues of $4,803 and $10,592 for the three and six month periods ending June 30, 2019 , representing a decrease of $3,604 or 43% and $6,398 or 38% from the prior year amount of $8,407 and $16,990 , respectively. The decrease in APC revenue was principally related to timing of project execution and the decline in backlog of $12.4 million at December 31, 2018 versus $22.1 million at December 31, 2017 , resulting from lower new APC orders announced during 2018 and continuing into the first half of 2019.
Consolidated APC backlog at June 30, 2019 was $7,953 versus backlog at December 31, 2018 of $12,384 . Our current backlog consists of U.S. domestic projects totaling $6,422 and international projects totaling $1,531 .
The FUEL CHEM ® technology segment generated revenues of $4,145 and $8,511 for the three and six months ended June 30, 2019 , representing an increase of $705 or 20% and $863 or 11% from the the prior year amount of $3,440 and $7,648 , respectively. The increase in FUEL CHEM revenue was principally related to the sale of equipment and installation of two new coal-fired units with a U.S. customer. We remain focused on attracting new customers in our FUEL CHEM business, for both coal and noncoal 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 gross margin percentage for the three month periods ended June 30, 2019 and 2018 was 44% and 31% and was 41% and 36% for the six month periods then ended. The overall increase in gross margin is primarily the mix between APC and FUEL CHEM revenues recognized during the quarter and to an improvement in APC gross margin for the three and six month periods ended June 30, 2019 and 2018 to 38% from 25% and 35% from 30% , respectively. The increase in APC gross margin is primarily due to project mix and timing of execution.

For the FUEL CHEM technology segment, the gross margin percentage increased to 50% from 48% and 49% and 48% for the three and six month periods ended June 30, 2019 and 2018 .

Selling, general and administrative expenses (SG&A) were $4,455 and $4,763 for the three month periods ended June 30, 2019 and 2018 and $8,913 and $9,684 for six month periods ending June 30, 2019 and 2018 , respectively. For the three and six month periods ended June 30, 2019 , this represents a decrease of $308 and $771 , respectively. For the three month period ended June 30, 2019 the decrease is the primary result of a reduction of employee related and other administrative costs of $193 , professional and consulting services of $55 and a reduction in administrative costs relating to foreign subsidiaries of $60 . For the six month period ended June 30, 2019 the decrease was primarily the result of a reduction in administrative costs relating to foreign subsidiaries of $583 , largely driven by the suspension of the APC business operation in China, and a reduction in employee related and other administrative costs of $173 . SG&A as a percentage of revenues increased to 50% from 40% and 47% from 39% in the three and six month periods ending June 30, 2019 and 2018 . The increase in SG&A percentage is primarily attributed to the decrease in revenues due to the timing of project execution as well as lower new APC orders announced during 2018 and the first half of 2019.

During the second quarter of 2017, the Company suspended all operations associated with the Fuel Conversion business segment. The activity of the Fuel Conversion discontinued operations consisted primarily of storage costs for the certain equipment held in Assets held for sale for the three and six month periods ended June 30, 2019 and 2018 of $9 and $74 and $19 and $99 , respectively. The Fuel Conversion business segment had no revenues associated with it. The overall decline in the discontinued operations for the three and six month period ending June 30, 2019 in comparison to the same period in 2018 is due to the overall wind-down of operations for the Fuel Conversion discontinued operations.

On January 18, 2019, the Company announced a planned suspension of its APC business operation in China. This action is part of Fuel Tech’s ongoing operational improvement initiatives designed to prioritize resource allocation, reduce costs, and drive profitability for the Company on a global basis. The Company recorded restructuring charges of $30 and $0 and $625 and $0 for the three and six months ended June 30, 2019 and 2018 , respectively. The charge consisted primarily of one-time severance payments and the early termination penalty for our lease associated with the suspension of our APC business in China. For further information related to restructuring, refer to Note 5 - Restructuring Activities.

Research and development expenses for the three and six month periods ended June 30, 2019 was $205 and $471 , respectively, and for the same periods in 2018 were $261 and $549 , respectively. The expenditures in our research and development expenses

21


were focused on new product development efforts in the pursuit of commercial applications for technologies outside of our traditional markets, and in the development and analysis of new technologies that could represent incremental market opportunities. This includes water treatment technologies that include DGI™ Dissolved Gas Infusion Systems, an innovative alternative to current aeration technology. This technology has not yet met the criteria to be a separate operating segment under ASC 280 Segment Reporting. This infusion process has a variety of applications in the water and waste water industries, including remediation, treatment, biological activity and wastewater odor management. DGI technology benefits include reduced energy consumption, installation costs, and operating costs, while improving treatment performance.

Income tax expense for the three and six month periods ended June 30, 2019 and 2018 were $2 and $1 and $2 and $2 , respectively. The Company is projecting a consolidated effective tax rate of 0% for 2019 which was lower than the federal income tax rate of 21% . The Company's effective tax rate differs from the statutory federal tax rate of 21% for the three and six months ended June 30, 2019 primarily due to a full valuation allowance recorded on our United States, China and Italy deferred tax assets since we cannot anticipate when or if we will have sufficient taxable income to utilize the deferred tax assets in the future. Further, our effective tax rate differs from the statutory federal tax rate due to state taxes, differences between U.S. and foreign tax rates, foreign losses incurred with no related tax benefit, non-deductible commissions, and non-deductible meals and entertainment expenses.

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. Refer to Footnote 12 to the Consolidated Financial Statements for the impact of the adoption of ASC 842.

Liquidity and Sources of Capital
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 June 30, 2019 , the Company had outstanding standby letters of credit totaling approximately $463 under the BMO Harris agreement. As of June 30, 2019 , the Company held $502 in a separate restricted use designated BMO Harris Bank N.A. deposit account.
 
In connection with the transition to BMO Harris Bank N.A., the Company entered into an amendment under its U.S. Domestic credit facility (the Facility) with JPMorgan Chase Bank, N.A. (JPM Chase) to reduce the maximum revolving credit borrowings from  $5,500  to $2,750 and extended the maturity to December 31, 2019. Fuel Tech maintains the use of this Facility for its existing standby letters of credit. The Company intends to transition its existing letters of credit from JPM Chase to BMO Harris Bank, N.A. to not renew the Facility upon its maturity. The Facility is secured by $2,750 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 bear interest at a rate of LIBOR plus 300 basis points. There are no financial covenants set forth in this amendment to the Facility. As of June 30, 2019 and December 31, 2018 , there were no outstanding borrowings on the credit facility.

At June 30, 2019 and December 31, 2018 , the Company had outstanding standby letters of credit and bank guarantees totaling approximately $2,550 and $5,028 , respectively, under the Facility in connection with contracts in process. Fuel Tech is committed to reimbursing the issuing bank for any payments made by the bank under these instruments. At June 30, 2019 and December 31, 2018 , approximately $200 and $443 was available for future borrowings under the Facility.

22


In the event of default on the JPM Chase domestic 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 the Company 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 the Company’s cash position to deteriorate or, if cash on hand were insufficient to satisfy the payment due, may require the Company to obtain alternate financing to satisfy the accelerated payment.

We continue to monitor our liquidity needs and in response to our continued losses have taken measures to reduce expenses and restructure operations which we feel are necessary to ensure we maintain sufficient working capital and liquidity to operate the business and invest in our future.
We have sustained losses from continuing operations during the six month period ended June 30, 2019 totaling $2,234 . Our cash used from continuing operations for this same period totaled $2,804 . We have taken measures to reduce our expense infrastructure and our ability to operate our base businesses prospectively is based on our ability to secure new orders in the APC business and our ability to successfully execute existing APC projects in line with our internal budgets.
Our cash balance as of June 30, 2019 totaled $14,919 (including restricted cash of $3,255 ), and our working capital totaled $21,155 . We do not have any outstanding debt obligations other than our letters of credit, and our current credit agreement does not have any financial covenants as we have moved to a cash collateralized line of credit with our lender.
We have evaluated our ongoing business needs, and considered the cash requirements of our base business of Air Pollution Control and Fuel Chem, as well as our efforts to wind-up our Fuel Conversion business and our APC operations in China. 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, and c) the costs of winding up our Fuel Conversion business and APC operations in China as well as other research and development initiatives.
Based on this analysis, management believes that currently we have sufficient cash and working capital to operate our base APC and Fuel Chem businesses.
Contingencies and Contractual Obligations
Fuel Tech issues a standard product warranty with the sale of its products to customers as discussed in Note 14. There was no change in the warranty liability balance during the six months ended June 30, 2019 .
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements,” as defined in Section 21E of the Securities Exchange Act of 1934, as amended, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and reflect Fuel Tech’s current expectations regarding future growth, results of operations, cash flows, performance and business prospects, and opportunities, as well as assumptions made by, and information currently available to, our management. Fuel Tech has tried to identify forward-looking statements by using words such as “anticipate,” “believe,” “plan,” “expect,” “estimate,” “intend,” “will,” and similar expressions, but these words are not the exclusive means of identifying forward-looking statements. These statements are based on information currently available to Fuel Tech and are subject to various risks, uncertainties, and other factors, including, but not limited to, those discussed in Fuel Tech’s Annual Report on Form 10-K for the year ended December 31, 2018 in Item 1A under the caption “Risk Factors,” which could cause Fuel Tech’s actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, these statements. Fuel Tech undertakes no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events, developments, or changed circumstances or for any other reason. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in Fuel Tech’s filings with the Securities and Exchange Commission.

Item 3.        Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Risk Management
Fuel Tech’s earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. We do not enter into foreign currency forward contracts nor into foreign currency option contracts to manage this risk due to the immaterial nature of the transactions involved.
Fuel Tech is also exposed to changes in interest rates primarily due to its debt facilities (refer to Note 10 to the consolidated financial statements). A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not have a materially adverse effect on interest expense during the upcoming year ended December 31, 2019 .

23


 
Item 4.        Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Fuel Tech maintains disclosure controls and procedures and internal controls designed to ensure (a) that information required to be disclosed in Fuel Tech’s filings under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) that such information is accumulated and communicated to management, including the principal executive and financial officer, as appropriate to allow timely decisions regarding required disclosure. Fuel Tech’s Chief Executive Officer and principal financial officer have evaluated the Company’s disclosure controls and procedures, as defined in Rules 13a – 15(e) and 15d -15(e) of the Exchange Act, as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.
Changes in Internal Control over Financial Reporting
Beginning January 1, 2019, we adopted ASC 842 "Leases". It did not have a material impact on our ongoing net income; however, we implemented changes to our processes related to accounting for leases and related internal controls. These changes included the development of new policies related to the new leasing framework, training, ongoing contract review requirements, and gathering of information to comply with disclosure requirements.
There has been no change in the Company's internal control over financial reporting during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.


24


PART II. OTHER INFORMATION

Item 1.    Legal Proceedings
We are from time to time involved in litigation incidental to our business. We are not currently involved in any litigation in which we believe an adverse outcome would have a material effect on our business, financial conditions, results of operations, or prospects.
 
Item 1A.        Risk Factors

The risk factors included in our Annual Report on Form 10-K for fiscal year ended  December 31, 2018  have not materially changed.


Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds

None

25


Item 6.        Exhibits
a.
Exhibits (all filed herewith)
 
10.1
 
31.1
 
31.2
 
32
 
101.1
INSXBRL Instance Document
 
101.2
SCHXBRL Taxonomy Extension Schema Document
 
101.3
CALXBRL Taxonomy Extension Calculation Linkbase Document
 
101.4
DEFXBRL Taxonomy Extension Definition Linkbase Document
 
101.5
LABXBRL Taxonomy Extension Label Linkbase Document
 
101.6
PREXBRL Taxonomy Extension Prevention Linkbase Document


26


FUEL TECH, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date: 8/13/2019
By:
/s/ Vincent J. Arnone
 
 
Vincent J. Arnone
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)

Date: 8/13/2019
By:
/s/ James M. Pach
 
 
James M. Pach
 
 
Vice President, Treasurer and Controller
 
 
(Principal Financial Officer)


27


JPMORGAN CHASE BANK, N.A.
FOURTEENTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTEENTH AMENDMENT TO CREDIT AGREEMENT ( this “Amendment” ) is dated as of June ___, 2019 (the “ Amendment Effective Date ”) and is by and between FUEL TECH INC., a Delaware corporation ( the “Borrower” ), the Loan Parties party hereto, and JPMORGAN CHASE BANK, N.A., a national banking association ( “Lender” ).
WHEREAS, Lender and the Loan Parties are parties to a Credit Agreement dated as of June 30, 2009 ( together with the thirteen amendments as described below, the “Credit Agreement” ). The Credit Agreement evidences certain credit facilities pursuant to which the Lender has made certain revolving loans to the Loan Parties on the terms and conditions set forth therein. The Loan Parties’ obligations under the Credit Agreement were originally evidenced by that certain Promissory Note executed by Borrower in the original principal amount of $25,000,000.00 dated June 30, 2009 ( the “Note” );
WHEREAS, pursuant to the First Amendment to Credit Agreement dated October 5, 2009, the parties corrected a scrivener's error which had occurred in Section 6.14 (b) ( “Leverage Ratio” ) of the Credit Agreement;
WHEREAS , pursuant to the Second Amendment to Credit Agreement dated November 4, 2009, the Lender waived a default of the covenant set forth in Section 6.14(a) of the Agreement, amended the Minimum Net Income covenant, amended the Leverage Ratio, and amended the definitions of “Permitted Acquisitions” and “Applicable Rate”;
WHEREAS , pursuant to the Third Amendment to Credit Agreement dated June 30, 2011, the Lender renewed and reduced the revolving credit facility evidenced by the Note to $15,000,000.00 and adjusted the Tangible Net Worth Covenant;
WHEREAS, pursuant to the Fourth Amendment to Credit Agreement dated June 30, 2013, the Lender extended the Maturity Date of the revolving credit facility evidenced by the Note to June 30, 2015 and also amended the financial covenants set forth at Sections 6.14(b) ( “Leverage Ratio” ) and 6.14(c) ( “Minimum Tangible Net Worth” ) of the Credit Agreement;
WHEREAS, pursuant to the Fifth Amendment to Credit Agreement dated June 20, 2014,, Lender made further adjustments to Section 6.14(c) of the Credit Agreement ( “Minimum Tangible Net Worth” );
WHEREAS, pursuant to the Sixth Amendment to Credit Agreement dated June 30, 2015, Lender, among other things, renewed the Revolving Credit Facility and extended same until June 30, 2016, changed certain pricing on the Revolving Credit Facility, waived certain financial covenant violations, and restated certain financial covenants;
WHEREAS, pursuant to the Seventh Amendment to Credit Agreement dated December 31, 2015, the parties agreed, among other things, that (i) certain covenants ( Minimum EBITDA and Shareholder Equity ) not be tested for the period ending December 31, 2015, with the Shareholder Equity covenant to be deleted in its entirety, (ii) a new Working Capital covenant be established and tested beginning as of December 31, 2015, and (iii) the Minimum EBITDA covenant be revised and tested beginning as of March 31, 2016;
WHEREAS, pursuant to the Eighth Amendment to Credit Agreement dated May 9, 2016, the parties agreed, among other things, that (i) the Revolving Commitment would be reduced to $5,000,000.00 after August 1, 2016, (ii) a Cash Collateral Account satisfactory to the Lender would be in place until the Maturity Date, and (iii) as a result of the creation of the Cash Collateral Account all financial covenants had been deleted;
WHEREAS , pursuant to the Ninth Amendment to Credit Agreement the Maturity Date was extended to June 28, 2019;
WHEREAS , pursuant to the Tenth Amendment to Credit Agreement the commitment amounts were modified;
WHEREAS , pursuant to the Eleventh Amendment to Credit Agreement the commitment amounts and cash holdings were modified as well as the collateralization of the Subsidiary’s Guaranty;
WHEREAS , pursuant to the Twelfth Amendment to Credit Agreement the commitment amounts and the cash holdings were revised;
WHEREAS , pursuant to the Thirteenth Amendment to Credit Agreement the cash holding requirement was revised;
NOW THEREFORE , for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties agree to this further amendment as follows:
1. The parties acknowledge the accuracy of the foregoing recitals. All capitalized terms used herein without specific definitions should be accorded the meanings set forth for such terms in the Credit Agreement.
2.      From and after the Amendment Effective Date, the following definitions shall be amended to hereafter provide as follows:
“ Adjusted One Month LIBOR Rate ” means, for any day, an interest rate per annum equal to the sum of (i) 2.50% per annum plus (ii) the Adjusted LIBO Rate for a one -month interest period on such day (or if such day is not a Business Day, the immediately preceding Business Day); provided that, for the avoidance of doubt, the Adjusted LIBO Rate for any day shall be based on the LIBO Screen Rate at approximately 11:00 a.m. London time on such day.
“ LIBO Rate ” means, with respect to any Eurodollar Borrowing for any applicable Interest Period or for any CBFR Borrowing, the LIBO Screen Rate at approximately 11:00 a.m., London time, two (2) Business Days prior to the commencement of such Interest Period; provided that, if the LIBO Screen Rate shall not be available at such time for a period equal in length to such Interest Period (an “ Impacted Interest Period ”), then the LIBO Rate shall be the Interpolated Rate at such time.
“ Maturity Date ” means December 31, 2019 or any earlier date on which the Commitment is reduced to zero (0) or otherwise terminated pursuant to the terms hereof.
3.      From and after the Amendment Effective Date, clause (j) of the definition of “Permitted Encumbrances” is hereby amended and restated in its entirety to read as follows:
(j)    Liens on cash collateral held by Bank of Montreal or its affiliates as security for the BMO Letters of Credit in an aggregate amount not to exceed 105% of the undrawn face amount and unreimbursed obligations under the BMO Letters of Credit.
4.      From and after the Amendment Effective Date, the following definitions shall be added to the Credit Agreement:
“ Anti-Corruption Laws ” means all laws, rules, and regulations of any jurisdiction applicable to the Borrower or any of its Affiliates from time to time concerning or relating to bribery or corruption.
“ BMO Letters of Credit ” means letters of credit issued by Bank of Montreal or its affiliates in replacement of (and not in addition to) Letters of Credit issued by Lender pursuant to this Agreement.
“ Commodity Exchange Act ” means the Commodity Exchange Act (7 U.S.C. § 1 et seq.), as amended from time to time, and any successor statute.
“ ECP ” means an “eligible contract participant” as defined in Section 1(a)(18) of the Commodity Exchange Act or any regulations promulgated thereunder and the applicable rules issued by the Commodity Futures Trading Commission and/or the SEC.
“ Excluded Swap Obligation ” means, with respect to any Guarantor, any Swap CEA Obligation if, and to the extent that, all or a portion of the Guarantee of such Guarantor of, or the grant by such Guarantor of a security interest to secure, such Swap CEA Obligation (or any Guarantee thereof) is or becomes illegal under the Commodity Exchange Act or any rule, regulation or order of the Commodity Futures Trading Commission (or the application or official interpretation of any thereof) by virtue of such Guarantor’s failure for any reason to constitute an ECP at the time the Guarantee of such Guarantor or the grant of such security interest becomes or would become effective with respect to such Swap CEA Obligation. If a Swap CEA Obligation arises under a master agreement governing more than one swap, such exclusion shall apply only to the portion of such Swap CEA Obligation that is attributable to swaps for which such Guarantee or security interest is or becomes illegal.
“ Interpolated Rate ” means, at any time, for any Interest Period, the rate per annum (rounded to the same number of decimal places as the LIBO Screen Rate) determined by the Lender (which determination shall be conclusive and binding absent manifest error) to be equal to the rate that results from interpolating on a linear basis between: (a) the LIBO Screen Rate for the longest period (for which the LIBO Screen Rate is available) that is shorter than the Impacted Interest Period and (b) the LIBO Screen Rate for the shortest period (for which the LIBO Screen Rate is available) that exceeds the Impacted Interest Period, in each case, at such time.
“ LIBO Screen Rate ” means, for any day and time, with respect to any Eurodollar Borrowing for any Interest Period or for any CBFR Borrowing, the London interbank offered rate as administered by ICE Benchmark Administration (or any other Person that takes over the administration of such rate for Dollars) for a period equal in length to such Interest Period as displayed on such day and time on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate (or, in the event such rate does not appear on a Reuters page or screen, on any successor or substitute page on such screen that displays such rate, or on the appropriate page of such other information service that publishes such rate from time to time as selected by the Administrative Agent in its reasonable discretion); provided that if the LIBO Screen Rate shall be less than zero, such rate shall be deemed to be zero for the purposes of this Agreement.
“ OFAC ” means the Office of Foreign Assets Control of the United States Department of the Treasury.
“ Qualified ECP Guarantor ” means, in respect of any Swap CEA Obligation, each Loan Party that has total assets exceeding $10,000,000 at the time the relevant Loan Guaranty or grant of the relevant security interest becomes or would become effective with respect to such Swap CEA Obligation or such other person as constitutes an “eligible contract participant” under the Commodity Exchange Act or any regulations promulgated thereunder and can cause another person to qualify as an “eligible contract participant” at such time by entering into a keepwell under Section 1a(18)(A)(v)(II) of the Commodity Exchange Act.
“ Sanctioned Country ” means, at any time, a country, region or territory which is the subject or target of any Sanctions (at the time of this Agreement, Crimea, Cuba, Iran, North Korea, Sudan and Syria).
“ Sanctioned Person ” means, at any time, (a) any Person listed in any Sanctions-related list of designated Persons maintained by the Office of Foreign Assets Control of the U.S. Department of the Treasury, the U.S. Department of State, or by the United Nations Security Council, the European Union, any European Union member state, Her Majesty’s Treasury of the United Kingdom or other relevant sanctions authority, (b) any Person operating, organized or resident in a Sanctioned Country or (c) any Person owned or controlled by any such Person or Persons described in the foregoing clauses (a) or (b).
“ Sanctions ” means all economic or financial sanctions or trade embargoes imposed, administered or enforced from time to time by (a) the U.S. government, including those administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury or the U.S. Department of State, or (b) the United Nations Security Council, the European Union, any European Union member state or Her Majesty’s Treasury of the United Kingdom or other relevant sanctions authority.
“ Swap CEA Obligation ” means, with respect to any Guarantor, any obligation to pay or perform under any agreement, contract or transaction that constitutes a "swap" within the meaning of section 1a(47) of the Commodity Exchange Act or any rules or regulations promulgated thereunder.
“ USA PATRIOT Act ” means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001.
5.      The Revolving Commitment is hereby reduced from $5,000,000 to $2,750,000. As a result of this Revolving Commitment, the cash required to be held in the Cash Collateral Account shall be reduced to $2,750,000.
6.      Commencing on the Amendment Effective Date, the commitment fee described in Section 2.11(a) of the Credit Agreement shall cease to accrue; provided, however, that the Borrower shall remain liable for any portion of such commitment fee which accrued and remained outstanding immediately prior to giving effect to this Amendment.
7.      The following Section 3.18 is hereby added to the Credit Agreement in its entirety:
SECTION 3.18. Anti-Corruption Laws and Sanctions . Each Loan Party has implemented and maintains in effect policies and procedures designed to ensure compliance by such Loan Party, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws and applicable Sanctions, and such Loan Party, its Subsidiaries and their respective officers and employees and to the knowledge of such Loan Party its directors and agents, are in compliance with Anti-Corruption Laws and applicable Sanctions in all material respects and are not knowingly engaged in any activity that would reasonably be expected to result in any Loan Party being designated as a Sanctioned Person. None of (a) any Loan Party, any Subsidiary or, to the knowledge of any such Loan Party or Subsidiary, any of their respective directors, officers or employees, or (b) to the knowledge of any such Loan Party or Subsidiary, any agent of such Loan Party or any Subsidiary that will act in any capacity in connection with or benefit from the credit facility established hereby, is a Sanctioned Person. No Borrowing or Letter of Credit, use of proceeds, Transaction or other transaction contemplated by this Agreement or the other Loan Documents will violate Anti-Corruption Laws or applicable Sanctions.
8.      The following sentence is hereby added to the end of Section 5.08 of the Credit Agreement in its entirety:
The Borrower will not request any Borrowing or Letter of Credit, and the Borrower shall not use, and shall procure that its Subsidiaries and its or their respective directors, officers, employees and agents shall not use, the proceeds of any Borrowing or Letter of Credit (a) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Laws, (b) for the purpose of funding, financing or facilitating any activities, business or transaction of or with any Sanctioned Person, or in any Sanctioned Country, to the extent such activities, businesses or transaction would be prohibited by Sanctions if conducted by a corporation incorporated in the United States or the European Union, or (c) in any manner that would result in the violation of any Sanctions applicable to any party hereto.
9.      Section 6.01(x) of the Credit Agreement is hereby amended and restated in its entirety to read as follows:
(x)    Indebtedness under the BMO Letters of Credit.
10.      The definition of “Guaranteed Obligations” set forth in Section 9.01 of the Credit Agreement is hereby amended to expressly exclude any guarantee by any Loan Guarantor of (or grant of security interest by any Loan Guarantor to support, as applicable) any Excluded Swap Obligations of such Loan Guarantor for purposes of determining any obligations of any Loan Guarantor).
11.      The following Section 9.13 is hereby added to the Credit Agreement in its entirety:
SECTION 9.13. Keepwell . Each Qualified ECP Guarantor hereby jointly and severally absolutely, unconditionally and irrevocably undertakes to provide such funds or other support as may be needed from time to time by each other Loan Party to honor all of its obligations under this Guarantee in respect of a Swap CEA Obligation (provided, however, that each Qualified ECP Guarantor shall only be liable under this Section 9.13 for the maximum amount of such liability that can be hereby incurred without rendering its obligations under this Section 9.13 or otherwise under this Loan Guaranty voidable under applicable law relating to fraudulent conveyance or fraudulent transfer, and not for any greater amount). Except as otherwise provided herein, the obligations of each Qualified ECP Guarantor under this Section 9.13 shall remain in full force and effect until the termination of all Swap CEA Obligations. Each Qualified ECP Guarantor intends that this Section 9.13 constitute, and this Section 9.13 shall be deemed to constitute, a “keepwell, support, or other agreement” for the benefit of each other Loan Party for all purposes of Section 1a(18)(A)(v)(II) of the Commodity Exchange Act.
12.      The obligation of the Lender to provide this Amendment and the effectiveness of this Amendment is subject to satisfaction of the following conditions precedent:
(a)
Lender, Borrower and Loan Parties shall have executed and delivered this Amendment;
(b)
Borrower shall have executed and delivered a Third Amended Revolving Loan Note dated as of the Amendment Effective Date;
(c)
Borrower shall be in good standing in the States of Illinois and Delaware;
(d)
Borrower shall pay all costs and fees incurred by Lender in connection with the preparation and performance of this Amendment;
(e)
Immediately prior to giving effect to this Amendment, the aggregate outstanding principal amount of all Revolving Loans shall not exceed $2,750,000;
(f)
There shall be no less than $2,750,000 in the Cash Collateral Account from the date hereof until the Maturity Date.
13.      This Amendment shall be binding upon and inure to the benefit of the successors and assigns of the Borrower, Loan Parties and the Lender.
14.      Except as expressly amended hereby, the Credit Agreement shall remain in full force and effect. The Credit Agreement and its thirteen prior amendments as well as the Cash Collateral Account Pledge Agreement and all rights and powers created thereby are in all respects ratified and confirmed.
15.      This Amendment has been duly authorized, executed and delivered on behalf of the Borrower and Loan Parties pursuant to all requisite corporate authority, and the Credit Agreement as amended hereby constitutes the legal, valid and binding obligation of the Borrower and Loan Parties, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditor’s rights.
16.      Borrower hereby certifies, represents and warrants to Lender that all certifications, representations and warranties made by Borrower to Lender in or in connection with the Credit Agreement and the Cash Collateral Account Pledge Agreement were true in all material respects as of the date of the Credit Agreement and the Cash Collateral Account Pledge Agreement and are true in all material respects on and as of the date hereof as if made on and as of the date hereof.
17.      Borrower and the Loan Parties hereby acknowledge and agree that they have no defenses, offsets or counterclaims to the payment of principal, interest, fees or other liabilities owing under the Credit Agreement and the Cash Collateral Pledge Agreement and they hereby waive and relinquish any such defenses, offsets or counterclaims and Borrower and the Loan Parties hereby release Lender and its respective officers, directors, agents, affiliates, successors and assigns from any claim, demand or cause of action, known or unknown, contingent or liquidated, which may exist or hereafter be known to exist relating to any matter prior to the date hereof.
18.      Except as otherwise specified herein, this Amendment embodies the entire agreement and understanding between Lender and Borrower with respect to the subject matter hereof and supersedes all prior agreements, consents and understandings relating to such subject matter.
19.      This Amendment may be signed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.
20.      This Amendment is governed and controlled by the laws of the state of Illinois.
[Signature Page to Follow]
IN WITNESS WHEREOF, this Amendment has been duly executed as of the date and year specified at the beginning hereof.
BORROWER:
FUEL TECH, INC.,
a Delaware corporation
By:________________________________________
Name:_____________________________________
Title:_______________________________________

LOAN GUARANTOR:
FUEL TECH S.r.l.,
organized under the laws of the Italian Republic
By:________________________________________
Name:_____________________________________
Title:_______________________________________

LENDER:
JPMORGAN CHASE BANK, N.A.,
a national association
By:________________________________________
Name:_____________________________________
Title:_______________________________________


 
71694439v.3


Exhibit 31.1
I, Vincent J. Arnone, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fuel Tech, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: 8/13/2019
By:
/s/ Vincent J. Arnone
 
 
Vincent J. Arnone
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)





Exhibit 31.2

I, James M. Pach, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fuel Tech, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: 8/13/2019
By:
/s/ James M. Pach
 
 
James M. Pach
 
 
Vice President, Treasurer and Controller
 
 
(Principal Financial Officer)





Exhibit 32
The undersigned in their capacities as Chief Executive Officer and Principal Financial Officer of the Registrant do hereby certify that:
(i) this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(ii) information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Registrant as of, and for, the periods presented in the report.
Date: 8/13/2019
By:
/s/ Vincent J. Arnone
 
 
Vincent J. Arnone
 
 
President and Chief Executive Officer
 
 
(Principal Executive Officer)
Date: 8/13/2019
By:
/s/ James M. Pach
 
 
James M. Pach
 
 
Vice President, Treasurer and Controller
 
 
(Principal Financial Officer)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (the “Act”) this certification accompanies the Report and shall not, except to the extent required by the Act, be deemed filed by the Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Fuel Tech, Inc. and will be retained by Fuel Tech, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.