STOCK-BASED COMPENSATION

Under our stock-based employee compensation plan, referred to as the Fuel Tech, Inc. 2014 Long-Term Incentive Plan (Incentive Plan), awards may be granted to participants in the form of Non-Qualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units (“RSUs”), Performance Awards, Bonuses or other forms of share-based or non-share-based awards or combinations thereof. Participants in the Incentive Plan may be our directors, officers, employees, consultants or advisors (except consultants or advisors in capital-raising transactions) as the directors determine are key to the success of our business. There are a maximum of 5,600,676 shares that may be issued or reserved for awards to participants under the Incentive Plan which includes 1,200,000 additional shares as a result of an amendment to the Incentive Plan approved by our stockholders in May 2018. At December 31, 2018, we had approximately 2,133,733 equity awards available for issuance under the Incentive Plan.

Stock-based compensation is included in selling, general and administrative costs in our consolidated statements of operations.

The components of stock-based compensation from continuing operations for the years ended December 31, 2018, 2017 and 2016 were as follows:



	For the Year Ended December 31,
	2018		2017		2016
Stock options	$	—	$	120	$	90
Restricted stock units	233		1,269		1,901
Total stock-based compensation expense	233		1,389		1,991
Tax benefit of stock-based compensation expense	—		—
After-tax effect of stock based compensation	$	233	$	1,389	$	1,991

As of December 31, 2018, there was $509 of total unrecognized compensation cost related to all non-vested share-based compensation arrangements granted under the Incentive Plan. That cost is expected to be recognized over the remaining requisite service period of 1.5 years.

Stock Options

The stock options granted to employees under the Incentive Plan have a 10-year life and they vest as follows: 50% after the second anniversary of the award date, 25% after the third anniversary, and the final 25% after the fourth anniversary of the award date. Fuel Tech calculates stock compensation expense for employee option awards based on the grant date fair value of the award, less expected annual forfeitures, and recognizes expense on a straight-line basis over the four-year service period of the award. Stock options granted to members of our Board of Directors vest immediately. Stock compensation for these awards is based on the grant date fair value of the award and is recognized in expense immediately.

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.

Based on the results of the model, the weighted-average fair value of the stock options granted during the 12-month periods ended December 31, 2017 and 2016, respectively, were $0.68 and $1.11 per share using the following weighted average assumptions:



	2017		2016
Expected dividend yield	—	%	—	%
Risk-free interest rate	2.33	%	1.85	%
Expected volatility	61.2	%	62.3	%
Expected life of option	10 years		8.8 years

There were no stock options granted during the year ended December 31, 2018.

The following table presents a summary of our stock option activity and related information for the years ended December 31:



	2018				2017				2016
	Number of Options		Weighted- Average Exercise Price		Number of Options		Weighted- Average Exercise Price		Number of Options		Weighted- Average Exercise Price
Outstanding at beginning of year	1,116,750		$	6.34	1,039,750		$	8.39	1,191,125		$	10.48
Granted	—		—		176,000		0.96		81,000		1.58
Expired or forfeited	(184,250	)	14.72		(99,000	)	18.32		(232,375	)	16.72
Outstanding at end of year	932,500		$	4.68	1,116,750		$	6.34	1,039,750		$	8.39
Exercisable at end of year	932,500		$	4.68	1,116,750		$	6.34	1,039,750		$	8.39
Weighted-average fair value of options granted during the year			$	—			$	0.68			$	1.11

The following table provides additional information regarding our stock option activity for the 12 months ended December 31, 2018:



	Number of Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding on January 1, 2018	1,116,750		$	6.34
Expired or forfeited	(184,250	)	14.72
Outstanding on December 31, 2018	932,500		$	4.68	4.67 years	$	40
Exercisable on December 31, 2018	932,500		$	4.68	4.67 years	$	40

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on our closing stock price of $1.19 as of December 31, 2018, which would have been received by the option holders had those options holders exercised their stock options as of that date.

The following table summarizes information about stock options outstanding at December 31, 2018:



Options Outstanding					Options Exercisable
Range of Exercise Prices	Number of Options	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number of Options	Weighted- Average Exercise Price
$0.96 - $1.27	176,000	8.9 years	$	0.97	176,000	$	0.97
$1.28 - $3.00	207,000	6.8 years	2.10		207,000	2.10
$3.01 - $4.54	140,000	4.0 years	3.72		140,000	3.72
$4.55 - $9.06	224,500	3.4 years	6.08		224,500	6.08
$9.07 - $10.20	185,000	0.4 years	10.14		185,000	10.14
$0.96 - $10.20	932,500	4.7 years	$	4.68	932,500	$	4.68

For the 12 months ended December 31, 2018, there was no non-vested stock option activity and as of December 31, 2018, there was $0 of total unrecognized compensation cost related to non-vested stock options granted under the Incentive Plan. Fuel Tech received no proceeds from the exercise of stock options in the years ended December 31, 2018, 2017 and 2016, respectively. It is our policy to issue new shares upon option exercises, loan conversions, and vesting of restricted stock units. We have not used cash and do not anticipate any future use of cash to settle equity instruments granted under share-based payment arrangements.

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.

We recorded expense of approximately $233, $1,269 and $1,901 associated with our restricted stock unit awards in 2018, 2017 and 2016, respectively. During the years ended December 31, 2018 and 2017, there were 48,890 and 981,633 restricted stock units that vested with a grant date fair value of $77 and $2,794, respectively.

A summary of restricted stock unit activity for the years ended December 31, 2018, 2017 and 2016 is as follows:



	Shares		Weighted Average Grant Date Fair Value
Unvested restricted units at January 1, 2016	1,204,883		4.21
Granted	845,862		1.88
Forfeited	(205,033	)	4.25
Vested	(381,916	)	4.36
Unvested restricted stock units at December 31, 2016	1,463,796		2.82
Granted	1,090,000		0.97
Forfeited	(213,001	)	2.99
Vested (1)	(981,633	)	2.85
Unvested restricted stock units at December 31, 2017	1,359,162		1.28
Forfeited	(199,995	)	1.59
Vested	(48,890	)	1.59
Unvested restricted stock units at December 31, 2018	1,110,277		1.21

(1) The increase in shares vested in 2017 is due to the accelerated time vesting of outstanding remaining restricted stock units approved by the Company's Board of Directors on June 28, 2017.

Deferred Directors Fees

In addition to the Incentive Plan, Fuel Tech has a Deferred Compensation Plan for Directors (Deferred Plan). Under the terms of the Deferred Plan, Directors can elect to defer Directors’ fees for shares of Fuel Tech Common Stock that are issuable at a future date as defined in the agreement. In accordance with ASC 718, Fuel Tech accounts for these awards as equity awards as opposed to liability awards. In 2018, 2017 and 2016, there was no stock-based compensation expense under the Deferred Plan.