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 September 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 nine months ended September 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 nine months ended September 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 nine months ended September 30, 2019 and 2018 were as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Stock options and restricted stock units, net of forfeited	$	138	$	97	$	357	$	135
Tax benefit of stock-based compensation expense	—		—		—		—
After-tax effect of stock-based compensation	$	138	$	97	$	357	$	135

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.

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 nine months ended September 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 September 30, 2019	747,500		$	3.33	4.98	$	4
Exercisable on September 30, 2019	747,500		$	3.33	4.98	$	4

As of September 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 September 30, 2019, there is $489 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 1.56 years.

A summary of restricted stock unit activity for the nine months ended September 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 September 30, 2019	1,320,635		$	1.26

The fair value of restricted stock that vested during the nine month period ending September 30, 2019 was $22.

Deferred Directors Fees

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 nine month periods ended September 30, 2019 and 2018, Fuel Tech recorded no stock-based compensation expense under the Deferred Plan.