Revenue

Adoption of ASC 606, "Revenue from Contracts with Customers"

On January 1, 2018, we adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our legacy accounting under Accounting Standards Codification Topic 605: Revenue Recognition (ASC 605).

The cumulative effect of the changes made to our January 1, 2018 consolidated balance sheet for the adoption of ASC 606 were as follows:



	Balance at December 31, 2017			Adjustments Upon Adoption of ASC 606		Balance at January 1, 2018
Liabilities
Other accrued liabilities	$	5,098		(205	)	$	4,893
Equity
Accumulated deficit	(102,503		)	205		(102,298		)

The adjustment made to the January 1, 2018 consolidated balance sheet related to deferred revenue under ASC 605 for the license of standalone functional intellectual property to a customer in one of our foreign locations which is recognized at a point in time upon adoption of ASC 606.

Practical Expedients and Exemptions

We generally expense sales commissions on a ratable basis when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses within the Condensed Consolidated Statements of Operations.

Revenue Recognition

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, 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.

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 1,000 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 September 30,				Nine Months Ended September 30,
	2018		2017 (1)		2018		2017 (1)
Air Pollution Control
Technology solutions	$	10,202	$	7,365	$	25,516	$	15,466
Spare parts	334		312		863		848
Ancillary revenue	346		1,122		1,493		2,032
Total Air Pollution Control Technology revenues	10,882		8,799		27,872		18,346
FUEL CHEM
FUEL CHEM technology solutions	5,188		4,749		12,836		13,434
Total Revenues	$	16,070	$	13,548	$	40,708	$	31,780

(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.

Disaggregated Revenue by Geography

The following table presents our revenues disaggregated by geography, based on the billing addresses of our customers:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017 (1)		2018		2017 (1)
United States	$	11,629	$	8,888	$	30,701	$	21,537
Foreign Revenues
South America	278		35		904		260
Europe	1,907		2,532		4,935		4,513
Asia	2,256		2,093		4,168		5,470
Total Foreign Revenues	4,441		4,660		10,007		10,243
Total Revenues	$	16,070	$	13,548	$	40,708	$	31,780

(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.

Timing of Revenue Recognition

The following table presents the timing of our revenue recognition:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2018	2017 (1)	2018	2017 (1)
Products transferred at a point in time	5,868	6,183	15,192	16,314
Products and services transferred over time	10,202	7,365	25,516	15,466
Total Revenues	16,070	13,548	40,708	31,780

(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.

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 September 30, 2018 and December 31, 2017, contract assets were approximately $11,146 and $7,894, 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 $1,208 and $2,403, at September 30, 2018 and December 31, 2017, respectively, and are included in other accrued liabilities on the consolidated balance sheets.

Changes in the contract asset and liability balances during the nine month period ended September 30, 2018, were not materially impacted by any other items other than amounts billed and revenue recognized as described previously. During the three and nine months ended September 30, 2018, revenue recognized that was included in the contract liability balance at the beginning of the period was $7 and $2,165, respectively, which represented primarily revenue from progress towards completion of our Air Pollution Control technology contracts. During the three and nine months ended September 30, 2017, revenue recognized that was included in the contract liability balance at the beginning of the period was $243 and $1,472, respectively, which represented primarily revenue from progress towards completion of our Air Pollution Control technology contracts.

As of September 30, 2018, we had six construction contracts in progress that were identified as loss contracts and a provision for losses of $159 was recorded in other accrued liabilities on the consolidated balance sheet. As of December 31, 2017, we had four construction contracts in progress that were identified as loss contracts and a provision for losses in the amount of $117 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 September 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was $21,299. The Company expects to recognize revenue on approximately $19,536 of the remaining performance obligations over the next 12 months with the remaining recognized thereafter.