Executive Summary



In 2020, the Company continued to experience a challenging operational
environment resulting from the ongoing substitution of gas-fired and renewable
energy plant for coal-fired installations.  Our cost control efforts reduced
selling, general and administrative expenses from fiscal 2019 by 21% and the net
loss by 46%.  We continue to invest in new technologies to expand our product
offerings into the water pollution control and treatment market.  Our capital
resources are sufficient for our immediate and longer-term needs and we continue
to enjoy the services and support of a dedicated workforce.  We expect that our
cost control efforts will continue to yield reduced losses and the diminishing
effects of the pandemic should lead to an improved market outlook.

Background

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

Air Pollution Control Technologies





The Air Pollution Control technology segment includes technologies to reduce NOx
emissions in flue gas from boilers, incinerators, furnaces and other stationary
combustion sources. These include SCR systems, NOxOUT and HERT SNCR systems, Low
NOx Burners (LNB), and OFA systems, and I-NOx systems. The I-NOx system includes
LNB, OFA, and SNCR components, along with a downsized SCR catalyst, Ammonia
Injection Grid (AIG), and Graduated Straightening Grid GSG™ systems to provide
high NOx reductions at significantly lower capital and operating costs than
conventional SCR systems. ULTRA technology creates ammonia at a plant site using
safe urea for use with any SCR application. Our ESP products and services
include complete turnkey ESP retrofits and related services. Flue Gas
Conditioning systems are chemical injection systems offered in markets outside
the U.S. and Canada to enhance electrostatic precipitator and fabric filter
performance in controlling particulate emissions. We distribute our products
through our direct sales force and third-party sales agents.



FUEL CHEM Technologies



The FUEL CHEM technology segment, which uses chemical processes in combination
with advanced CFD and CKM boiler modeling, for the control of slagging, fouling,
corrosion, opacity and other sulfur trioxide-related issues in furnaces and
boilers through the addition of chemicals into the furnace using TIFI Targeted
In-Furnace Injection technology. Fuel Tech sells its FUEL CHEM program through
its direct sales force and agents to industrial and utility power-generation
facilities. FUEL CHEM programs have been installed on combustion units in North
America, Europe, China, and India, treating a wide variety of solid and liquid
fuels, including coal, heavy oil, biomass and municipal waste. The FUEL CHEM
program improves the efficiency, reliability and environmental status of plants
operating in the electric utility, industrial, pulp and paper, waste-to-energy,
university and district heating markets and offers numerous operational,
financial and environmental benefits to owners of boilers, furnaces and other
combustion units.



The key market dynamic for both technology segments is the continued use of
fossil fuels, especially coal, as the principal fuel source for global
electricity production. Coal currently accounts for approximately 21% of all
U.S. electricity generation and roughly 33% of global electricity generation.
Major coal consumers include China, the United States and India.

Critical Accounting Policies and Estimates





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



Revenue Recognition



The Company recognizes revenue when control of the promised goods or services is
transferred to our customers, in an amount that reflects the consideration we
expect to be entitled to in exchange for those goods or services. Fuel Tech's
sales of products to customers represent single performance obligations, which
are not impacted upon the adoption of ASC 606. The majority of our contracts
have a single performance obligation as the promise to transfer the individual
goods or services is not separately identifiable from other promises in the
contracts and, therefore, not distinct. Revenue is measured as the amount of
consideration we expect to receive in exchange for transferring goods or
providing services. Sales, value add, and other taxes we collect concurrent with
revenue-producing activities are excluded from revenue.



FUEL CHEM



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



On occasion, Fuel Tech will engineer and sell its chemical pumping equipment.
These projects are similar in nature to the APC projects described above and for
those projects where control transfers over time, revenue is recognized based on
the extent of progress towards completion of the single performance obligation.



For projects containing multiple performance obligations, the Company allocates
the transaction price based on the estimated standalone selling price. The
Company must develop assumptions that require judgment to determine the
stand-alone selling price for each performance obligation identified in the
contract. The Company utilizes key assumptions to determine the stand-alone
selling price, which may include other comparable transactions, pricing
considered in negotiating the transaction and the estimated costs. Variable
consideration is allocated specifically to one or more performance obligations
in a contract when the terms of the variable consideration relate to the
satisfaction of the performance obligation and the resulting amounts allocated
are consistent with the amounts the Company would expect to receive for the
satisfaction of each performance obligation.



The consideration allocated to each performance obligation is recognized as
revenue when control is transferred for the related goods or services. For
performance obligations which consist of licenses and other promises, the
Company utilizes judgment to assess the nature of the combined performance
obligation to determine whether the combined performance obligation is satisfied
over time or at a point in time and, if over time, the appropriate method of
measuring progress. The Company evaluates the measure of progress each reporting
period and, if necessary, adjusts the measure of performance and related revenue
recognition.

The Company receives payments from its customers based on billing schedules established in each contract. Up-front payments and fees are recorded as deferred revenue upon receipt or when due until the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable when the Company's right to consideration is unconditional.

Air Pollution Control Technology

Fuel Tech's APC contracts are typically six to eighteen months in length. A
typical contract will have three or four critical operational measurements that,
when achieved, serve as the basis for us to invoice the customer via progress
billings. At a minimum, these measurements will include the generation of
engineering drawings, the shipment of equipment and the completion of a system
performance test.



As part of most of its contractual APC project agreements, Fuel Tech will agree
to customer-specific acceptance criteria that relate to the operational
performance of the system that is being sold. These criteria are determined
based on modeling that is performed by Fuel Tech personnel, which is based on
operational inputs that are provided by the customer. The customer will warrant
that these operational inputs are accurate as they are specified in the binding
contractual agreement. Further, the customer is solely responsible for the
accuracy of the operating condition information; typically all performance
guarantees and equipment warranties granted by us are voidable if the operating
condition information is inaccurate or is not met.



Since control transfers over time, revenue is recognized based on the extent of
progress towards completion of the single performance obligation. Fuel Tech uses
the cost-to-cost input measure of progress for our contracts since it best
depicts the transfer of assets to the customer which occurs as we incur costs on
our contracts. Under the cost-to-cost input measure of progress, the extent of
progress towards completion is measured based on the ratio of costs incurred to
date to the total estimated costs at completion of the performance obligation.
Revenues are recorded proportionally as costs are incurred. Costs to fulfill
include all internal and external engineering costs, equipment charges, inbound
and outbound freight expenses, internal and site transfer costs, installation
charges, purchasing and receiving costs, inspection costs, warehousing costs,
project personnel travel expenses and other direct and indirect expenses
specifically identified as project- or product-line related, as appropriate
(e.g. test equipment depreciation and certain insurance expenses).



Fuel Tech has installed over 1,200 units with APC technology and normally
provides performance guarantees to our customers based on the operating
conditions for the project. As part of the project implementation process, we
perform system start-up and optimization services that effectively serve as a
test of actual project performance. We believe that this test, combined with the
accuracy of the modeling that is performed, enables revenue to be recognized
prior to the receipt of formal customer acceptance.



As of December 31, 2020 we had one construction contract in progress that were
identified as a loss contract and a provision for losses of $176 was recorded in
other accrued liabilities on the consolidated balance sheet. As of December 31,
2019, we had three construction contracts in progress that were identified as
loss contracts and a provision for losses of $26 was recorded in other accrued
liabilities on the consolidated balance sheet.



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The timing of revenue recognition, billings and cash collections results in
billed accounts receivable, unbilled receivables (contract assets), and customer
advances and deposits (contract liabilities) on the consolidated balance sheets.
In our Air Pollution Control Technology segment, amounts are billed as work
progresses in accordance with agreed-upon contractual terms. Generally, billing
occurs subsequent to revenue recognition, resulting in contract assets. These
assets are reported on the consolidated balance sheet on a contract-by-contract
basis at the end of each reporting period. At December 31, 2020 and 2019,
contract assets were approximately $1,127 and $1,857, respectively, and are
included in accounts receivable on the consolidated balance sheets.



However, the Company will periodically bill in advance of costs incurred before
revenue is recognized, resulting in contract liabilities. These liabilities are
reported on the consolidated balance sheet on a contract-by-contract basis at
the end of each reporting period. Contract liabilities were $850 and $712 at
December 31, 2020 and 2019, respectively, and are included in other accrued
liabilities on the consolidated balance sheets.

Allowance for Doubtful Accounts





The allowance for doubtful accounts is management's best estimate of the amount
of credit losses in accounts receivable. In order to control and monitor the
credit risk associated with our customer base, we review the credit worthiness
of customers on a recurring basis. Factors influencing the level of scrutiny
include the level of business the customer has with us, the customer's payment
history and the customer's financial stability. Receivables are considered past
due if payment is not received by the date agreed upon with the customer, which
is normally 30 days. Representatives of our management team review all past due
accounts on a weekly basis to assess collectability. At the end of each
reporting period, the allowance for doubtful accounts balance is reviewed
relative to management's collectability assessment and is adjusted if deemed
necessary through a corresponding charge or credit to bad debt expense, which is
included in selling, general, and administrative expenses in the consolidated
statements of operations. Bad debt write-offs are made when management believes
it is probable a receivable will not be recovered.



Inventories



Inventories consist primarily of spare parts and are stated at the lower of cost
or net realizable value, using the weighted-average cost method. Usage is
recorded in cost of sales in the period that parts were issued to a project or
used to service equipment. Inventories are carried at weighted average cost and
periodically evaluated to identify obsolete or otherwise impaired parts that are
written off when management determines usage is not probable. The Company
estimates the balance of excess and obsolete inventory by analyzing inventory by
age using last used and original purchase date and existing sales pipeline for
which the inventory could be used.

Assessment of Potential Impairments of Goodwill and Intangible Assets

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



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



Our evaluation of goodwill impairment involves first assessing qualitative
factors to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. We may bypass this qualitative
assessment, or determine that based on our qualitative assessment considering
the totality of events and circumstances including macroeconomic factors,
industry and market considerations, current and projected financial performance,
a sustained decrease in our share price, or other factors, that additional
impairment analysis is necessary. This additional analysis involves comparing
the current fair value of a reporting unit to its carrying value. Fuel Tech uses
a discounted cash flow (DCF) model to determine the current fair value of its
FUEL CHEM reporting unit as this methodology was deemed to best quantify the
present values of our expected future cash flows and yield a fair value that
should be in line with the aggregate market value placed on the outstanding
number of Common Shares as reflected by the current stock price multiplied by
the outstanding common shares. A number of significant assumptions and estimates
are involved in the application of the DCF model to forecast operating cash
flows, including markets and market share, sales volumes and prices, costs to
produce and working capital changes. Events outside our control, specifically
market conditions that impact revenue growth assumptions, could significantly
impact the fair value calculated. Management considers historical experience and
all available information at the time the fair values of its reporting units are
estimated. However, actual fair values that could be realized in an actual
transaction may differ from those used to evaluate the impairment of goodwill.



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



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



The Company utilizes ASU 2017-04, Intangibles-Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment for the annual goodwill impairment
test.

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

Impairment of Long-Lived Assets and Amortizable Intangible Assets





Long-lived assets, including property, plant and equipment (PP&E) and intangible
assets, are reviewed for impairment when events and circumstances indicate that
the carrying amount of the assets (or asset group) may not be recoverable. If
impairment indicators exist, we perform a more detailed analysis and an
impairment loss is recognized when estimated future undiscounted cash flows
expected to result from the use of the asset (or asset group) and its eventual
disposition are less than the carrying amount. This process of analyzing
impairment involves examining the operating condition of individual assets (or
asset group) and estimating a fair value based upon current condition, relevant
market factors and remaining estimated operational life compared to the asset's
remaining depreciable life. Quoted market prices and other valuation techniques
are used to determine expected cash flows. Due to the existence of impairment
indicators as more fully described in Note 1 to our consolidated financial
statements, we performed a more detailed analysis of potential long-lived and
intangible asset impairment in the APC technology asset group during the fourth
quarter of 2020 and determined no impairment exists.



During the fourth quarter of 2020, the Company recorded an abandonment charge
of $197 due to the Company's decision to no longer maintain and defend certain
patents and trademarks which are no longer contributing to operations. The
abandonment charge was calculated by determining the net book values of the
abandoned patent assets by deducting the accumulated amortization from the
acquisition cost. The abandonment charge is included in "Intangible assets
abandonment and building impairment" line in the accompanying Consolidated
Statements of Operations for the year then ended December 31, 2020.



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In the second and third quarters of 2019, the Company recorded an abandonment
charge of $127 associated with certain international patent assets which the
Company elected to not maintain and abandon in certain international locations
due to limited business opportunities in those regions. The abandonment charge
was calculated by determining the net book values of the abandoned patent assets
by deducting the accumulated amortization from the acquisition cost. The
abandonment charge of $127 is included in "Intangible assets abandonment and
building impairment" line in the accompanying Consolidated Statements of
Operations for the year ended December 31, 2019.



A significant portion of our property and equipment is comprised of assets
deployed at customer locations relating to our FUEL CHEM technology asset group,
and due to the shorter-term duration over which this equipment is depreciated,
the likelihood of impairment is mitigated. The discontinuation of a FUEL CHEM
program at a customer site would most likely result in the re-deployment of all
or most of the affected assets to another customer location rather than an
impairment.

Valuation Allowance for Deferred Income Taxes





Deferred tax assets represent deductible temporary differences and net operating
loss and tax credit carryforwards. A valuation allowance is recognized if it is
more likely than not that some portion of the deferred tax asset will not be
realized. At the end of each reporting period, management reviews the
realizability of the deferred tax assets. As part of this review, we consider if
there are taxable temporary differences that could generate taxable income in
the future, if there is the ability to carry back the net operating losses or
credits, if there is a projection of future taxable income, and if there are any
tax planning strategies that can be readily implemented. As required by ASC 740
"Income Taxes", a valuation allowance must be established when it is more likely
than not that all or a portion of a deferred tax asset will not be realized.
This assessment resulted in a valuation allowance on our deferred tax assets of
$15,971 and $15,394 at December 31, 2020 and 2019, respectively.



Stock-Based Compensation

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





We utilize the Black-Scholes option-pricing model to estimate the fair value of
stock option awards. Determining the fair value of stock options using the
Black-Scholes model requires judgment, including estimates for (1) risk-free
interest rate - an estimate based on the yield of zero-coupon treasury
securities with a maturity equal to the expected life of the option; (2)
expected volatility - an estimate based on the historical volatility of our
Common Shares for a period equal to the expected life of the option; and (3)
expected life of the option - an estimate based on historical experience
including the effect of employee terminations.

Recently Adopted Accounting Standards





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 10 for further details regarding the effect of adoption. We determine if an
arrangement is a lease at inception. Operating leases are included in
right-of-use ("ROU") operating lease assets, operating lease liabilities -
current, and operating lease liabilities - non-current on our Consolidated
Balance Sheets.



Operating lease ROU assets and operating lease liabilities are recognized based
on the present value of the future minimum lease payments over the lease term at
commencement date. As most of our leases do not provide an implicit rate, we use
our incremental borrowing rate based on the information available at
commencement date in determining the present value of future payments. The
operating lease ROU asset also includes any lease payments made and excludes
lease incentives and initial direct costs incurred. Our lease terms may include
options to extend or terminate the lease when it is reasonably certain that we
will exercise that option. Lease expense for minimum lease payments is
recognized on a straight-line basis over the lease term.



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We have lease agreements with lease and non-lease components, and we elected the
practical expedient to not separate lease and non-lease components for the
majority of our leases. For certain equipment leases, such as vehicles, we
account for the lease and non-lease components as a single lease component. We
also elected the practical expedient to keep leases with an initial term of 12
months or less off of the consolidated balance sheet.

Recently Issued Accounting Pronouncements





In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes." The new rules reduce complexity by
removing specific exceptions to general principles related to intra-period tax
allocations, ownership changes in foreign investments, and interim period income
tax accounting for year-to-date losses that exceed anticipated losses. The new
rules also simplify accounting for franchise taxes that are partially based on
income,  transactions with a government that result in a step up in the tax
basis of goodwill, separate financial statements of legal entities that are not
subject to tax, and enacted changes in tax laws in interim periods. The new
rules will be effective for the Company in the first quarter of 2021, with early
adoption permitted. The ASU permits either a retrospective basis or a modified
retrospective transition approach. The Company is currently in the process of
evaluating the impact of adoption of the new rules on the Company's financial
condition, results of operations, cash flows and disclosures.



In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments, which amends
the current accounting guidance and requires the measurement of all expected
losses based on historical experience, current conditions and reasonable and
supportable forecasts. For trade receivables, loans, and other financial
instruments, we will be required to use a forward-looking expected loss model
rather than the incurred loss model for recognizing credit losses which reflects
losses that are probable. The standard will become effective for interim and
annual periods beginning after December 15, 2022, with early adoption permitted.
Application of the amendments is through a cumulative-effect adjustment to
retained earnings as of the effective date. The Company is currently in the
process of evaluating the impact of adoption, but we do not believe the adoption
of this standard will have a material impact on our financial statements.



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2020 versus 2019

Highlights for the year ended December 31, 2020, compared to 2019:





                                                      For the years ended December 31,
                                                   2020               2019           Change
Revenues                                       $     22,550       $     30,467     $    (7,917 )
Costs and expenses:
Cost of sales                                        11,912             19,637          (7,725 )
Selling, general and administrative                  13,600             17,191          (3,591 )
Restructuring charge                                      -                625            (625 )
Research and development                              1,177              1,127              50
Intangible assets abandonment                           197                127              70
Total Costs and Expenses                             26,886             38,707         (11,821 )
Operating loss from continuing operations            (4,336 )           (8,240 )         3,904
Interest (expense) income                                (4 )               41             (45 )
Foreign exchange gain                                     -                370            (370 )
Other income (expense)                                  119                 (8 )           127
Loss from continuing operations before
income taxes                                         (4,221 )           (7,837 )         3,616
Income tax expense                                      (57 )              (14 )           (43 )
Net loss from continuing operations                  (4,278 )           (7,851 )         3,573
Loss from discontinued operations (net of
income tax benefit of $0 in 2020 and 2019)                -                 (1 )             1
Net loss                                       $     (4,278 )     $     (7,852 )   $     3,574




Revenues



Revenues for the years ended December 31, 2020 and 2019 were $22,550 and
$30,467, respectively. The year-over-year decrease of $7,917 or 26%, was driven
by decreased revenue in both APC and FUEL CHEM technology segments in our United
States (U.S.) operations. Our U.S. revenues decreased by $7,260 or 28% from
$25,882 to $18,622, and our international revenues decreased by $657 or 14% from
$4,585 to $3,928.



Revenues for the APC technology segment were $8,557 for the year ended December
31, 2020, a decrease of $5,525, or 39%, versus fiscal 2019. The decrease in APC
revenue for the twelve month period ending December 31, 2020 in comparison to
prior year amount was principally related to the timing of project execution and
the decline in backlog which was $5.3 million and $9.7 million, for the years
ended December 31, 2020 and 2019, respectively.



Revenues for the FUEL CHEM technology segment for the year ended December 31,
2020 were $13,993, a decrease of $2,392, or 15% versus fiscal 2019. We remain
focused on attracting new customers in our FUEL CHEM business, for both coal and
non-coal applications, but our ability to attract new coal customers continues
to be affected by the soft electric demand market and fuel switching as a result
of low natural gas prices.

Cost of sales and gross margin





Consolidated cost of sales for the years ended December 31, 2020 and 2019 were
$11,912 and $19,637, respectively. Consolidated gross margin percentages for the
years ended December 31, 2020 and 2019 were 47% and 36%, respectively. The gross
margins for the APC technology segment increased to 46% in 2020 from 20% in
2019. The overall increase in gross margin in the APC technology segment from
2019 to 2020 is primarily due to the timing of a large insurance settlement of
$2,589 which was used to fund the recovery plan for the project affected and
project mix, timing of project execution and net of $1,427 of remediation costs
incurred during 2020 to address non-conformance issues under the terms of a
contract with a U.S. customer. Gross margin percentage for the FUEL CHEM
technology segment decreased to 48% from 49% for the years ended December 31,
2020 and 2019.



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Selling, general and administrative

Selling, general and administrative (SG&A) expenses for the years ended December 31, 2020 and 2019 were $13,600 and $17,191, respectively. The decrease of $3,591 or 21%, is primarily attributed to the following:





  • A decrease in employee related costs of $190


  • A decrease in office and administrative costs relating to our foreign

subsidiaries of $1,226 primarily related to the suspension of the APC business


    in Beijing, China


  • A decrease in travel expense of $377
  • A decrease in professional service fees of $165
  • A decrease in bad debt of $997
  • An decrease in other administrative costs of $613

Depreciation and Amortization





Depreciation and amortization are calculated using the straight line method and
included in selling, general and administrative expense. For the years ended
December 31, 2020 and 2019, the Company recorded depreciation of $663 and $810
and amortization of $185 and $186, respectively.



Restructuring charge



Restructuring costs were $0 and $625 for the years ended December 31, 2020 and
2019. On January 18, 2019, the Company announced a planned suspension of the APC
business operation in China. This action is part of Fuel Tech's ongoing
operational improvement initiatives designed to prioritize resource allocation,
reduce costs, and drive profitability for the Company on a global basis. The
transition associated with the suspension of the APC business includes staff
rationalization, supplier and partner engagement, and the monetization of
certain assets. See Note 16, Restructuring Activities, for further discussion.


Research and development

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

Intangible assets abandonment





In the fourth quarter of 2020, the Company recorded an abandonment charge
of $197 due to the Company's decision to no longer maintain and defend certain
patents and trademarks which are no longer contributing to operations.  In the
second quarter of 2019, Fuel Tech recorded an abandonment charge of
$127 associated with certain international patent assets which the Company
elected to not maintain and abandon in certain international locations due to
limited business opportunities in those regions. The abandonment charges
were calculated by determining the net book values of the abandoned patent
assets by deducting the accumulated amortization from the acquisition cost. The
abandonment charges are included in "Intangible assets abandonment" line in the
accompanying Consolidated Statements of Operations for the twelve
months ended December 31, 2020 and 2019, respectively.



Interest (income) / expense

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





Foreign exchange gain

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





Other income

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





Income tax benefit (expense)



For the year ended December 31, 2020, we recorded an income tax expense of
$57 on pre-tax loss of $4,221. Our effective tax rates were (1.4)% and 0.2% for
the years ended December 31, 2020 and 2019, respectively. The effective tax rate
for the year-ended December 31, 2020, differed from the federal statutory rate
of 21% as a result of establishing a deferred tax liability associated with a
certain book-to-tax timing difference. For the year ended December 31, 2019, we
recorded an income tax expense of $14 on pre-tax loss of $7,837. The effective
tax rate for the year-ended December 31, 2020 and 2019 differed from the federal
statutory rate of 34% as a result of net operating losses generated in the
United States, China, and Italy, which were offset by establishment of full
valuation allowances.

Loss from discontinued operations





The activity of the Fuel Conversion discontinued operations consisted of other
costs for the years ended December 31, 2020 and 2019 of $0 and $1, respectively.
The activity of the Fuel Conversion discontinued operations consisted primarily
of storage costs for holding the equipment at a third-party location totaling
$21 for the year ended December 31, 2019 and the gain on sale of $20 from the
sale of the remaining Fuel Conversion Assets Held for Sale recorded in
discontinued operations.



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Liquidity and Sources of Capital





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



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



Operating activities used $3,387 of cash for the year ended December 31, 2019,
primarily due to the add back of non-cash items from our net income from
continuing operations of $7,851 including stock compensation expense of $574,
depreciation and amortization of $996, intangible assets abandonment charge
of $127, a reduction of the excess and obsolete inventory reserve of $131, a
decrease in our accounts receivable balance of $11,415, a decrease in our
inventory balance of $818, a decrease in prepaid expenses and other current and
non-current assets of $2,239, an decrease in our accrued liabilities and other
non-current liabilities of $5,010, and a decrease in our accounts payable
balance of $7,331. Cash used in operating activities also included cash used
of $21 associated with the activity of the Fuel Conversion discontinued
operations.



Investing activities used cash of $247 and $45 for the years ended December 31,
2020 and 2019, respectively. Investing activities for the year ended December
31, 2020 consisted principally of purchases of equipment of $247. Investing
activities for the year ended December 31, 2019 consisted of purchases of
equipment, patents, and other intangibles of $550 and proceeds from sale of
equipment of $505.



Financing activities provided $1,282 and used $128 of cash for the years ended
December 31, 2020 and 2019.  In 2020, the Company received a Paycheck Protection
Plan loan of $1,556 but used a net $276 for stock compensation related
transactions.  The cash used in 2019 was a result of $128 used for the
acquisition of common shares held in treasury that were withheld for taxes due
by employees upon lapsing of restricted stock units during 2019.



On June 19, 2019, the Company entered into a Cash Collateral Security agreement
with BMO Harris Bank, N.A. (the BMO Harris agreement) to use for the sole
purpose of issuing standby letters of credit. The BMO Harris agreement requires
us to pledge as cash collateral 105% of the aggregate face amount of outstanding
standby letters of credit. The Company pays 250 basis points on the face values
of outstanding letters of credit. There are no financial covenants set forth in
the BMO Harris agreement. At December 31, 2020, the Company had outstanding
standby letters of credit totaling approximately $1,873 under the BMO Harris
agreement. As of December 31, 2020, the Company held $1,966 in a separate
restricted use designated BMO Harris Bank N.A. deposit account. Fuel Tech is
committed to reimbursing the issuing bank for any payments made by the bank
under these instruments.  The excess in restricted cash collateral at year-end
is related to timing of the release of several standby letters of credit which
expired just after year-end.



In connection with the transition to BMO Harris Bank N.A., the Company canceled
its U.S. Domestic credit facility (the Facility) with JPMorgan Chase Bank, N.A.
(JPM Chase) effective on September 25, 2019.



Beijing Fuel Tech Environmental Technologies Company, Ltd. (Beijing Fuel Tech),
was previously obligated under a revolving credit facility (the China Facility)
agreement, as most recently amended on October 19, 2018, with JPM Chase which
provided for maximum revolving credit borrowings of RMB 2.625 million
(approximately $382) and matured on June 30, 2019. The Facility was secured by
$520 in cash held by the Company in a separate restricted use designated JPM
Chase deposit account. The China Facility bears interest at a rate of 140% of
the People's Bank of China (PBOC) Base Rate, and is guaranteed by the Company.
Beijing Fuel Tech can use this facility for cash advances and bank guarantees.
As a result of the announcement of the suspension of the Air Pollution Control
business in Beijing, the Company did not renew the China Facility upon its
expiration on June 30, 2019.



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Table of Contents

For the year ended December 31, 2020 we have sustained a loss before discontinued operations totaling $4,278. Our cash used by continuing operations for this same period totaled $2,707. We have taken measures to reduce our expense infrastructure and have eliminated approximately $17.5 million in aggregate selling, general and administrative expenses primarily through headcount and other operating expense cutbacks since 2015.





We have experienced continued declines in revenues and recurring losses.  As a
result, we have evaluated our ongoing business needs, and considered the cash
requirements of our base business of Air Pollution Control (APC) and FUEL CHEM
businesses. This evaluation included consideration of the following: a) customer
and revenue trends in our APC and FUEL CHEM business segments, b) current
operating structure and expenditure levels, c) current availability of working
capital, and d) support for our research and development initiatives.



Our cash balance as of December 31, 2020 totaled $12,606 (including our
restricted cash balance), and our working capital totaled $15,542. We do not
have any outstanding debt obligations other than for our letters of credit and
our PPP loan which was forgiven on January 8, 2021. We currently have the BMO
Harris agreement which we use to issue letters of credit to our customers, which
is fully cash collateralized requiring us to deposit funds in a restricted cash
account. We expect to continue operating under this arrangement for the
foreseeable future.



On February 17, 2021 we consummated the sale of 5,000,000 shares of Fuel Tech
common stock sold to certain investors in a private placement transaction.  The
Company received gross proceeds of $25.8 million.  The Company intends to use
for the proceeds for general corporate purposes.  See Note 9B "Subsequent
Events."



Commercial Commitments

Commitment expiration by period in thousands of dollars





Commercial Commitments              Total         2021           2022          2023         Thereafter
Standby letters of credit and
bank guarantees                   $   1,873     $   1,519     $       96     $     258     $           -
Total                             $   1,873     $   1,519     $       96     $     258     $           -

Off-Balance-Sheet Transactions

There were no other off-balance-sheet transactions other than the obligations and commitments listed above for the year ended December 31, 2020.

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