Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 31, 2011
OR
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o |
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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: 1-14204
FUELCELL ENERGY, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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06-0853042 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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3 Great Pasture Road |
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Danbury, Connecticut
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06813 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (203) 825-6000
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Number of shares of common stock, par value $.0001 per share, outstanding at March 11, 2011:
124,235,713
FUELCELL ENERGY, INC.
FORM 10-Q
Table of Contents
2
FUELCELL ENERGY, INC.
Consolidated Balance Sheets
(Unaudited)
(Amounts in thousands, except share and per share amounts)
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January 31, |
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October 31, |
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2011 |
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2010 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
26,085 |
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$ |
20,467 |
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Investments U.S. treasury securities |
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39,537 |
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25,019 |
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Accounts receivable, net |
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23,288 |
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18,066 |
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Inventories, net |
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32,352 |
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33,404 |
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Other current assets |
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6,343 |
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5,253 |
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Total current assets |
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127,605 |
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102,209 |
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Property, plant and equipment, net |
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25,391 |
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26,679 |
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Investments U.S. treasury securities |
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4,529 |
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9,071 |
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Investment in and loans to affiliate |
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9,653 |
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9,837 |
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Other assets, net |
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3,494 |
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2,733 |
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Total assets |
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$ |
170,672 |
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$ |
150,529 |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Current portion of long-term debt and other liabilities |
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$ |
1,998 |
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$ |
976 |
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Accounts payable |
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10,065 |
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10,267 |
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Accounts payable due to affiliate |
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407 |
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575 |
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Accrued liabilities |
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15,819 |
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16,721 |
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Deferred revenue |
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37,902 |
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25,499 |
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Total current liabilities |
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66,191 |
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54,038 |
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Long-term deferred revenue |
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7,750 |
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8,042 |
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Long-term debt and other liabilities |
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4,112 |
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4,056 |
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Total liabilities |
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78,053 |
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66,136 |
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Redeemable preferred stock of subsidiary |
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17,374 |
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16,849 |
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Redeemable preferred stock (liquidation preference of
$64,020 at January 31, 2011 and October 31, 2010) |
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59,857 |
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59,857 |
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Total Equity: |
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Shareholders equity |
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Common stock ($.0001 par value); 150,000,000
shares authorized; 123,633,555 and 112,965,725
shares issued and outstanding at January 31,
2011 and October 31, 2010, respectively. |
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12 |
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11 |
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Additional paid-in capital |
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682,656 |
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663,951 |
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Accumulated deficit |
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(666,561 |
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(655,623 |
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Accumulated other comprehensive income |
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13 |
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11 |
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Treasury stock, Common, at cost (5,679 shares at
January 31, 2011 and October 31, 2010) |
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(53 |
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(53 |
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Deferred compensation |
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53 |
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53 |
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Total shareholders equity |
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16,120 |
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8,350 |
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Noncontrolling interest in subsidiaries |
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(732 |
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(663 |
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Total equity |
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15,388 |
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7,687 |
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Total liabilities and equity |
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$ |
170,672 |
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$ |
150,529 |
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See accompanying notes to consolidated financial statements.
3
FUELCELL ENERGY, INC.
Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands, except share and per share amounts)
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Three Months Ended |
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January 31, |
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2011 |
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2010 |
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Revenues: |
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Product sales and revenues |
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$ |
25,760 |
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$ |
12,808 |
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Research and development contracts |
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2,320 |
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1,808 |
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Total revenues |
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28,080 |
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14,616 |
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Costs and expenses: |
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Cost of product sales and revenues |
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28,059 |
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18,013 |
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Cost of research and development contracts |
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2,337 |
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2,096 |
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Administrative and selling expenses |
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4,050 |
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4,156 |
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Research and development expenses |
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4,246 |
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4,620 |
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Total costs and expenses |
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38,692 |
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28,885 |
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Loss from operations |
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(10,612 |
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(14,269 |
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Interest expense |
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(54 |
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(63 |
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Loss from equity investment |
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(198 |
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(148 |
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Interest and other income, net |
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400 |
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319 |
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Loss before redeemable preferred stock of subsidiary |
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(10,464 |
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(14,161 |
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Accretion of redeemable preferred stock of subsidiary |
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(525 |
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(557 |
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Loss before provision for income taxes |
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(10,989 |
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(14,718 |
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Provision for income taxes |
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(18 |
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Net loss |
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(11,007 |
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(14,718 |
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Net loss attributable to noncontrolling interest |
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69 |
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86 |
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Net loss attributable to FuelCell Energy, Inc. |
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(10,938 |
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(14,632 |
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Preferred stock dividends |
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(800 |
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(802 |
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Net loss to common shareholders |
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$ |
(11,738 |
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$ |
(15,434 |
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Loss per share basic and diluted: |
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Net loss per share to common shareholders |
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$ |
(0.10 |
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$ |
(0.18 |
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Basic and diluted weighted average shares outstanding |
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115,086,014 |
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84,401,558 |
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See accompanying notes to consolidated financial statements.
4
FUELCELL ENERGY, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
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Three Months Ended |
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January 31, |
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2011 |
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2010 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(11,007 |
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$ |
(14,718 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Share-based compensation |
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780 |
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642 |
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Loss from equity investment |
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198 |
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148 |
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Accretion of redeemable preferred stock of subsidiary |
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525 |
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557 |
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Interest receivable on loan to affiliate |
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(43 |
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(34 |
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Loss on derivatives |
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28 |
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8 |
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Depreciation |
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1,634 |
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1,923 |
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Amortization of bond premium |
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20 |
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13 |
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Provision for doubtful accounts |
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26 |
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12 |
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(Increase) decrease in operating assets: |
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Accounts receivable |
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(5,248 |
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(1,105 |
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Inventories |
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1,052 |
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(5,989 |
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Other assets |
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(1,610 |
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2,543 |
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Increase (decrease) in operating liabilities: |
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Accounts payable |
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(370 |
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(2,095 |
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Accrued liabilities |
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(249 |
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1,742 |
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Deferred revenue |
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12,111 |
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10,707 |
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Net cash used in operating activities |
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(2,153 |
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(5,646 |
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Cash flows from investing activities: |
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Capital expenditures |
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(251 |
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(660 |
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Treasury notes matured |
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12,000 |
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5,000 |
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Treasury notes purchased |
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(21,996 |
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(10,074 |
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Net cash used in investing activities |
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(10,247 |
) |
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(5,734 |
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Cash flows from financing activities: |
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Repayment of debt |
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(64 |
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(106 |
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Proceeds from revolving line of credit |
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1,000 |
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Payment of preferred dividends |
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(800 |
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(802 |
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Proceeds from sale of common stock, net of registration fees |
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17,880 |
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Net cash provided by (used in) financing activities |
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18,016 |
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(908 |
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Effects on cash from changes in foreign currency rates |
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2 |
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8 |
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Net increase (decrease) in cash and cash equivalents |
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5,618 |
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(12,280 |
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Cash and cash equivalents-beginning of period |
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20,467 |
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57,823 |
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Cash and cash equivalents-end of period |
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$ |
26,085 |
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$ |
45,543 |
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Supplemental cash flow disclosures: |
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Cash interest paid |
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$ |
54 |
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$ |
63 |
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Noncash financing and investing activity: |
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Common stock issued in settlement of prior year bonus obligation |
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$ |
707 |
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$ |
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Common stock issued for Employee Stock Purchase Plan in settlement of
prior year accrued employee contributions |
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$ |
58 |
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$ |
109 |
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Accrued sale of common stock, cash received in subsequent period |
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$ |
193 |
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$ |
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Accrued fees related to sale of common stock |
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$ |
112 |
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$ |
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See accompanying notes to consolidated financial statements.
5
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 1. Nature of Business and Basis of Presentation
FuelCell Energy, Inc. and subsidiaries (the Company, we, us, or our) is a Delaware
corporation engaged in the development and manufacture of high temperature fuel cells for clean
electric power generation. Our Direct FuelCell power plants produce reliable, secure and
environmentally friendly 24/7 base load electricity for commercial, industrial, government and
utility customers. We have commercialized our stationary fuel cells and are beginning the
development of planar solid oxide fuel cell and other fuel cell technology. We expect to incur
losses as we continue to participate in government cost share programs, sell certain products at
prices lower than current production costs, and invest in cost reduction initiatives.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with
the rules and regulations of the Securities and Exchange Commission (SEC) regarding interim
financial information. Accordingly, they do not contain all of the information and footnotes
required by accounting principles generally accepted in the United States of America (GAAP) for
complete financial statements. In the opinion of management, all normal and recurring adjustments
necessary to fairly present our financial position as of January 31, 2011 have been included. All
intercompany accounts and transactions have been eliminated.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been
condensed or omitted. The balance sheet at October 31, 2010 has been derived from the audited
financial statements at that date, but it does not include all of the information and footnotes
required by generally accepted accounting principles for complete financial statements. These
financial statements should be read in conjunction with our financial statements and notes thereto
for the year ended October 31, 2010, which are contained in our Annual Report on Form 10-K
previously filed with the Securities and Exchange Commission. The results of operations for the
interim periods presented are not necessarily indicative of results that may be expected for any
other interim period or for the full fiscal year.
Use of Estimates
The preparation of financial statements and related disclosures in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure
of contingent assets and liabilities. Estimates are used in accounting for, among other things,
revenue recognition, excess, slow-moving and obsolete inventories, product warranty costs, reserves
on long-term service agreements, allowance for uncollectible receivables, depreciation and
amortization, impairment of assets, taxes, and contingencies. Estimates and assumptions are
reviewed periodically, and the effects of revisions are reflected in the consolidated financial
statements in the period they are determined to be necessary. Due to the inherent uncertainty
involved in making estimates, actual results in future periods may differ from those estimates.
Concentrations
We contract with a small number of customers for the sale of products and for research and
development contracts. For the three months ended January 31, 2011 and 2010 respectively, our top
three customers, POSCO Power (POSCO), the U.S. government (primarily the Department of Energy)
and Pacific Gas & Electric in the aggregate accounted for 83 percent and 75 percent of our
consolidated revenues. Our largest strategic partner, POSCO, accounted for 62 percent and 63
percent of total revenues, the U.S. government accounted for 8 percent and 12 percent of total
revenues, and Pacific Gas & Electric accounted for 13 percent and 0 percent of total revenues for
the three months ended January 31, 2011 and 2010, respectively.
6
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Subsequent Events
We have evaluated subsequent events and transactions for potential recognition or disclosure in the
financial statements. See Note 12.
Comprehensive Loss
Comprehensive loss for the periods presented was as follows:
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Three Months Ended |
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January 31, |
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2011 |
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2010 |
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Net loss |
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$ |
(11,007 |
) |
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$ |
(14,718 |
) |
Foreign currency translation adjustments |
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2 |
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8 |
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Comprehensive loss |
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$ |
(11,005 |
) |
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$ |
(14,710 |
) |
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Note 2. Recent Accounting Pronouncements
Recently Adopted Accounting Guidance
In April 2010, the FASB provided guidance on defining a milestone and determining when it may be
appropriate to apply the milestone method of revenue recognition for research or development
transactions. Research or development arrangements frequently include payment provisions whereby a
portion or all of the consideration is contingent upon the achievement of milestone events. An
entity may only recognize consideration that is contingent upon the achievement of a milestone in
its entirety in the period the milestone is achieved only if the milestone meets certain criteria.
We adopted this guidance effective November 1, 2010 and it did not impact our financial statements.
In December 2009, the FASB issued revised guidance related to the consolidation of variable
interest entities (VIE). The revised guidance requires reporting entities to evaluate former
qualified special purpose entities for consolidation, changes the approach to determining a VIEs
primary beneficiary from a quantitative assessment to a qualitative assessment designed to identify
a controlling financial interest, and increases the frequency of required reassessments to
determine whether a company is the primary beneficiary of a VIE. It also clarifies, but does not
significantly change, the characteristics that identify a VIE. We adopted this guidance effective
November 1, 2010 and it did not impact our financial statements.
In October 2009, the FASB issued guidance updating accounting standards for revenue recognition for
multiple-deliverable arrangements. The stated objective of the update was to address the
accounting for multiple-deliverable arrangements to enable vendors to account for products or
services separately rather than as a
combined unit. The guidance provides amended methodologies for separating consideration in
multiple-deliverable arrangements and expands disclosure requirements. We adopted this guidance
for revenue arrangements entered into or materially modified after November 1, 2010 and it did not
have an impact on our financial statements or disclosures.
In June 2009, the FASB issued accounting guidance which requires a company to perform ongoing
reassessment of whether it is the primary beneficiary of a variable interest entity (VIE).
Specifically, the guidance modifies how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be consolidated. The
guidance clarifies that the determination of whether a company is required to consolidate a VIE is
based on, among other things, an entitys purpose and design and a companys ability to direct the
activities of the VIE that most significantly impact the VIEs economic performance. The guidance
requires an ongoing reassessment of whether a company is the primary beneficiary of a VIE and
enhanced disclosures of the companys involvement in VIEs and any significant changes in risk
exposure due to that involvement. We adopted this guidance effective November 1, 2010 and it did
not have an impact on our financial statements.
7
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Recent Accounting Guidance Not Yet Effective
In January 2010, the FASB issued guidance that requires new disclosures for fair value measurements
and provides clarification for existing disclosure requirements. This amended guidance require
disclosures about inputs and valuation techniques used to measure fair value as well as disclosures
about significant transfers in and out of Levels 1 and Levels 2 fair value measurements and
disclosures about the purchase, sale, issuance and settlement activity of Level 3 fair value
measurements. This guidance is effective for interim and annual reporting periods beginning after
December 15, 2009, except for disclosures about the purchase, sale, issuance and settlement
activity of Level 3 fair value measurements, which is effective for fiscal years beginning after
December 15, 2010. The Company was not impacted by the disclosures effective for interim periods
beginning after December 15, 2009 and we do not expect the remaining disclosures required after
December 15, 2010 upon adoption of this guidance will have a material impact on our financial
statements or disclosures
Note 3. Equity investments
Versa Power Systems, Inc. (Versa) is one of our sub-contractors under the Department of Energys
(DOE) large-scale hybrid project to develop a coal-based, multi-megawatt solid oxide fuel cell
(SOFC) based hybrid system. Versa is a private company founded in 2001 that is developing
advanced SOFC systems for various stationary and mobile applications. We have a 39 percent
ownership interest and account for Versa under the equity method of accounting. We recognize our
share of the losses as loss from equity investments on the consolidated statements of operations.
In 2007, we loaned Versa $2.0 million in the form of a convertible note (the 2007 Convertible
Note). In 2009 and 2010, we loaned Versa $0.6 million in each year in the form of convertible
notes (the 2009 Convertible Note and the 2010 Convertible Note, respectively). The 2007
Convertible Note matures May 2017, the 2009 Convertible Note matures November 2018 and the 2010
Convertible Note matures April 2020, unless certain prepayment events occur. In conjunction with
the Convertible Notes, we received warrants for the right to purchase 3,969 shares of Versa common
stock at a weighted average exercise price of $165 per share. Our ownership percentage would
increase to 45 percent if the Convertible Notes and warrants are converted into common stock.
We have determined that the above warrants represent derivatives subject to fair value accounting.
The fair value is determined based on the Black-Scholes valuation model using historical stock
price, volatility (based on a peer
group since Versas common stock is not publicly traded) and risk-free interest rate assumptions.
The fair value of the warrants is included within investment and loan to affiliate on the
consolidated balance sheets and changes in the fair value of the warrants are included in interest
and other income on the consolidated statements of operations. The fair value of the warrants as of
January 31, 2011 and October 31, 2010 was $0.2 million. The change in the fair value of the
warrants was not material to the consolidated financial statements for the three months ended
January 31, 2011 and 2010. The carrying value of our investment in and loans to Versa was $9.7
million and $9.8 million as of January 31, 2011 and October 31, 2010, respectively.
8
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 4. Investments in U.S. Treasury Securities
We classify our investments as held-to-maturity and record them at amortized cost. These
investments consist entirely of U.S. treasury securities. The following table summarizes the
amortized cost basis and fair value (based on quoted market prices) at January 31, 2011 and October
31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
unrealized |
|
|
unrealized |
|
|
|
|
|
|
cost |
|
|
gains |
|
|
(losses) |
|
|
Fair value |
|
U.S. government obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 31, 2011 |
|
$ |
44,066 |
|
|
$ |
51 |
|
|
$ |
|
|
|
$ |
44,117 |
|
As of October 31, 2010 |
|
$ |
34,090 |
|
|
$ |
74 |
|
|
$ |
|
|
|
$ |
34,164 |
|
The following table summarizes the contractual maturities of investments at amortized cost and
fair value as of January 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
average |
|
|
|
Amortized |
|
|
|
|
|
|
yield to |
|
|
|
cost |
|
|
Fair value |
|
|
maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year |
|
$ |
39,537 |
|
|
$ |
39,566 |
|
|
|
0.4 |
% |
Due after one year |
|
|
4,529 |
|
|
|
4,551 |
|
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
44,066 |
|
|
$ |
44,117 |
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
Note 5. Inventories
The components of inventory at January 31, 2011 and October 31, 2010 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
October 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
15,648 |
|
|
$ |
15,509 |
|
Work-in-process |
|
|
19,754 |
|
|
|
22,786 |
|
|
|
|
|
|
|
|
Gross Inventory |
|
$ |
35,402 |
|
|
$ |
38,295 |
|
Less amount to reduce certain inventories to lower of cost or market |
|
|
(3,050 |
) |
|
|
(4,891 |
) |
|
|
|
|
|
|
|
Net inventory |
|
$ |
32,352 |
|
|
$ |
33,404 |
|
|
|
|
|
|
|
|
Raw materials consist mainly of various nickel powders and steels, various other components
used in producing cell stacks and purchased components for balance of plant. Work-in-process
inventory is comprised of material, labor, and overhead costs incurred to build fuel cell stacks,
which are subcomponents of a power plant. Work in process also includes costs related to power
plants in inventory which have not yet been dedicated to a particular commercial customer contract.
The above inventory amounts include a lower of cost or market adjustment to write down the
carrying value of inventory to its estimated market value.
9
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 6. Accounts Receivable
Accounts receivable at January 31, 2011 and October 31, 2010 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
October 31, |
|
|
|
2011 |
|
|
2010 |
|
U.S. Government: |
|
|
|
|
|
|
|
|
Amount billed |
|
$ |
374 |
|
|
$ |
223 |
|
Unbilled recoverable costs |
|
|
640 |
|
|
|
605 |
|
|
|
|
|
|
|
|
|
|
|
1,014 |
|
|
|
828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Customers: |
|
|
|
|
|
|
|
|
Amount billed |
|
|
10,714 |
|
|
|
9,718 |
|
Unbilled recoverable costs |
|
|
11,560 |
|
|
|
7,520 |
|
|
|
|
|
|
|
|
|
|
|
22,274 |
|
|
|
17,238 |
|
|
|
|
|
|
|
|
|
|
$ |
23,288 |
|
|
$ |
18,066 |
|
|
|
|
|
|
|
|
We bill customers for power plant and module sales based on certain milestones being reached.
We bill the U.S. government for research and development contracts based on actual recoverable
costs incurred, typically in the month subsequent to incurring costs. Unbilled recoverable costs
relate to revenue recognized on customer contracts that have not been billed. Accounts receivable
are presented net of an allowance for doubtful accounts of $0.4 million at January 31, 2011 and
October 31, 2010.
Note 7. Revolving Credit Facility
In January 2011, the Company entered into a $5.0 million revolving credit facility with JPMorgan
Chase Bank, N.A. and the Export-Import Bank of the United States. The credit facility is to be
used for working capital to finance the manufacture and production and subsequent export sale of
the Companys products or services. The agreement has a one year term with renewal provisions. The
outstanding principal balance of the facility will bear interest, at the option of the Company of
either the one-month LIBOR plus 1.5 percent or the prime rate of JP Morgan Chase. The facility is
secured by certain working capital assets and general intangibles, up to the amount of the
outstanding facility balance. Aside from certain negative covenants limiting the Companys ability
to merge or acquire another company, sell non-inventory assets, create liens against collateral or
change the organizational structure or identity, the facility does not require compliance with any
financial covenants. At January 31, 2011, the outstanding amount owed under this facility was $1.0
million and is classified as current portion of long-term debt and other liabilities
on the Consolidated Balance Sheet.
10
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 8. Share-Based Compensation Plans
We have shareholder approved equity incentive plans and a shareholder approved Section 423 Stock
Purchase Plan (the ESPP). We account for stock awards to employees and non-employee directors
under the fair value method. We determine the fair value of stock options at the grant date using
the Black-Scholes valuation model. The model requires us to make estimates and assumptions
regarding the expected life of the award, the risk-free interest rate, the expected volatility of
our common stock price and the expected dividend yield. The fair value of restricted stock awards
(RSA) is based on the common stock price on the date of grant. The fair value of stock awards is
amortized to expense over the vesting period, generally four years.
Share-based compensation reflected in the consolidated statements of operations for the three
months ended January 31, 2011 and 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
January 31, |
|
|
|
2011 |
|
|
2010 |
|
Cost of product sales and revenues |
|
$ |
143 |
|
|
$ |
224 |
|
Cost of research and development contracts |
|
|
19 |
|
|
|
39 |
|
General and administrative expense |
|
|
406 |
|
|
|
194 |
|
Research and development expense |
|
|
212 |
|
|
|
185 |
|
|
|
|
|
|
|
|
Total share-based compensation |
|
$ |
780 |
|
|
$ |
642 |
|
|
|
|
|
|
|
|
The following table summarizes stock option activity for the three months ended January 31,
2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Number of |
|
|
average |
|
|
|
options |
|
|
option price ($) |
|
Outstanding at October 31, 2010 |
|
|
5,118,201 |
|
|
|
10.15 |
|
Cancelled |
|
|
(178,325 |
) |
|
|
25.27 |
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2011 |
|
|
4,939,876 |
|
|
|
9.61 |
|
|
|
|
|
|
|
|
|
As of January 31, 2011, there were 1,190,111 RSAs outstanding with a weighted average per
share fair value of $2.73. There were 4,000 RSAs granted during the three months ended
January 31, 2011 and forfeitures totaled 12,423 during this period.
For the three months ended January 31, 2011, 60,082 shares were issued under the ESPP at a per
share cost of $0.97. There were 67,621 shares of common stock reserved for issuance under the
ESPP as of January 31, 2011.
Note 9. Shareholders Equity
Registered Direct Offering
On January 13, 2011 we sold an aggregate of 10,160,428 units at a negotiated price of $1.87 per
unit, with each unit consisting of (i) one share of FuelCell Energy, Inc. common stock, par value
$0.0001 per share (Common Stock) and (ii) one warrant to purchase 1.0 share of Common Stock, in a
registered direct offering for gross proceeds of $19.0 million. The net proceeds from the sale of
the units, after deducting the placement agent fees and other estimated offering expenses, was
approximately $17.8 million. We intend to use the proceeds from this offering for product
development, project financing, expansion of manufacturing capacity, and general corporate
purposes.
The warrants have an exercise price of $2.29 per share and are exercisable beginning on the date
that is six months and one day after the closing date and will expire twenty one months after
issuance. Additionally, FuelCell Energy has the right, subject to certain conditions, to require
the investor to purchase up to 10.0 million additional shares approximately nine months after the
initial closing date of the transaction. The sale price for the additional shares will be based on
a fixed ten percent discount to a volume weighted average price (VWAP) measurement at the time
FuelCell Energy exercises the option. FuelCell Energy cannot require the investor to purchase more
than $20 million of additional shares.
11
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Changes in shareholders equity
Changes in shareholders equity were as follows for the three months ended January 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
Shareholders |
|
|
Noncontrolling |
|
|
|
|
|
|
Equity |
|
|
interest |
|
|
Total Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2010 |
|
$ |
8,350 |
|
|
$ |
(663 |
) |
|
$ |
7,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Common Stock and related fees |
|
|
17,768 |
|
|
|
|
|
|
|
17,768 |
|
Accrued sale of common stock (1) |
|
|
193 |
|
|
|
|
|
|
|
193 |
|
Share-based compensation |
|
|
780 |
|
|
|
|
|
|
|
780 |
|
Common stock issued in settlement of prior
year bonus obligation |
|
|
707 |
|
|
|
|
|
|
|
707 |
|
Common stock issued for Employee Stock
Purchase Plan in settlement of prior year
accrued employee contributions |
|
|
58 |
|
|
|
|
|
|
|
58 |
|
Preferred dividends Series B |
|
|
(800 |
) |
|
|
|
|
|
|
(800 |
) |
Effect of foreign currency translation |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Net loss |
|
|
(10,938 |
) |
|
|
(69 |
) |
|
|
(11,007 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2011 |
|
$ |
16,120 |
|
|
$ |
(732 |
) |
|
$ |
15,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company sells common stock on the open market from time to time to raise
cash for preferred stock dividends. In January 2011, the Company had confirmed sales of
common stock that did not settle until the subsequent period. |
Note 10. Loss Per Share
The calculation of basic and diluted loss per share was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
January 31, |
|
|
|
2011 |
|
|
2010 |
|
Numerator |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(11,007 |
) |
|
$ |
(14,718 |
) |
Net loss attributable to noncontrolling interest |
|
|
69 |
|
|
|
86 |
|
Preferred stock dividend |
|
|
(800 |
) |
|
|
(802 |
) |
|
|
|
|
|
|
|
Net loss to common shareholders |
|
$ |
(11,738 |
) |
|
$ |
(15,434 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
Weighted average basic common shares |
|
|
115,086,014 |
|
|
|
84,401,558 |
|
Effect of dilutive securities (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares |
|
|
115,086,014 |
|
|
|
84,401,558 |
|
|
|
|
|
|
|
|
Basic loss per share |
|
$ |
(0.10 |
) |
|
$ |
(0.18 |
) |
|
|
|
|
|
|
|
Diluted loss per share (1) |
|
$ |
(0.10 |
) |
|
$ |
(0.18 |
) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Diluted loss per share was computed without consideration to potentially dilutive
instruments as their inclusion would have been antidilutive. Potentially dilutive
instruments include stock options, warrants and convertible preferred stock. At January
31, 2011 and 2010, there were options to purchase 4.9 million and 5.3 million shares of
common stock, respectively. There were outstanding warrants of 10.2 million as of
January 31, 2011 and there were no warrants outstanding as of January 31, 2010. Refer
to our Annual Report on Form 10-K for the year ended October 31, 2010 for information
on our convertible preferred stock. |
12
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 11. Commitments and Contingencies
We have pledged approximately $9.0 million of our cash and cash equivalents as collateral and
letters of credit for certain banking requirements and contracts. As of January 31, 2011,
outstanding letters of credit totaled $7.3 million. These expire on various dates through May
2012.
Note 12. Subsequent Events
Series 1 Preferred Share Obligation
The Company and Enbridge, Inc. (Enbridge) have been in negotiations to modify certain terms of the
Series 1 preferred share agreement, and have agreed to extend the payment deadline to March 18,
2011 to continue these negotiations. Under the existing terms, FuelCell Energy, Ltd. (a wholly
subsidiary of the Company) has the option of meeting this obligation through a cash payment or with
unregistered shares of FuelCell Energy, Inc. common stock. The Company is a guarantor of FuelCell
Energy, Ltd.s obligations to Enbridge. Enbridge is currently negotiating new terms that, as
proposed, may require payments in excess of those we believe we are obligated to pay. While the
Company intends to achieve the most favorable outcome in light of its obligations under the Series
1 preferred shares, it can not presently predict the final terms of any agreement with Enbridge.
13
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (including exhibits and any information incorporated by
reference herein) contains both historical and forward-looking statements that involve risks,
uncertainties and assumptions. The statements contained in this report that are not purely
historical are forward-looking statements that are subject to the safe harbors created under the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, including
statements regarding our expectations, beliefs, intentions and strategies for the future. These
statements appear in a number of places in this Report and include all statements that are not
historical statements of fact regarding our intent, belief or current expectations with respect to,
among other things: (i) our ability to achieve our sales plans and cost reduction targets; (ii)
trends affecting our financial condition or results of operations; (iii) our growth and operating
strategy; (iv) our product development strategy; (v) our financing plans; (vi) the timing and
magnitude of future contracts; (vii) changes in the regulatory environment; (viii) potential
volatility of energy prices; and (ix) rapid technological change or competition. The words may,
would, could, should, will, expect, estimate, anticipate, believe, intend,
plans and similar expressions and variations thereof are intended to identify forward-looking
statements. Investors are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risk and uncertainties, many of which are beyond our ability to
control, and that actual results may differ materially from those projected in the forward-looking
statements as a result of various factors discussed herein, including those discussed in detail in
our filings with the Securities and Exchange Commission (SEC), including in our Annual Report on
Form 10-K for the fiscal year ended October 31, 2010 in the section entitled Item 1A. Risk
Factors.
Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is
provided as a supplement to the accompanying financial statements and footnotes to help provide an
understanding of our financial condition, changes in our financial condition and results of
operations. The preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the U.S. requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the
disclosure of contingent assets and liabilities. Estimates are used in accounting for, among other
things, revenue recognition, excess, slow-moving and obsolete inventories, product warranty costs,
reserves on long-term service agreements, allowance for uncollectible receivables, depreciation and
amortization, impairment of assets, taxes, and contingencies. Estimates and assumptions are
reviewed periodically, and the effects of revisions are reflected in the consolidated financial
statements in the period they are determined to be necessary. Due to the inherent uncertainty
involved in making estimates, actual results in future periods may differ from those estimates. The
following discussion should be read in conjunction with information included in our Annual Report
on Form 10-K for the year ended October 31, 2010 filed with the SEC. Unless otherwise indicated,
the terms Company, FuelCell Energy, we, us, and our refer to FuelCell Energy Inc. and its
subsidiaries. All tabular dollar amounts are in thousands.
14
OVERVIEW AND RECENT DEVELOPMENTS
Overview
We are a world leader in the development and production of stationary fuel cells for commercial,
industrial, government and utility customers. Our ultra-clean, high efficiency Direct
FuelCell® (DFC®) power plants are generating power at over 50 locations worldwide. Our
products have generated over 700 million kWh of power using a variety of fuels including renewable
wastewater gas, food and beverage waste, natural gas and other hydrocarbon fuels.
Our vision is to provide ultra-clean, highly efficient, reliable distributed generation baseload
power at a cost per kilowatt hour that is less than the cost of grid-delivered electricity. Our
power plants provide electricity that is priced competitively to grid-delivered electricity in
certain high cost regions of the United States.
Our Company was founded in Connecticut in 1969 and reincorporated in Delaware in 1999. Our core
fuel cell products (Direct FuelCell® or DFC® Power Plants) offer highly
efficient stationary power generation for customers. In addition to our commercial products, we
continue to develop our carbonate fuel cells, planar solid oxide fuel cell (SOFC) technology and
other fuel cell technology with our own and government research and development funds.
Our proprietary carbonate DFC Power Plants electrochemically (without combustion) produce
electricity directly from readily available hydrocarbon fuels such as natural gas and biogas in a
highly efficient process. The primary byproducts of the fuel cell process are heat and water. Due
to the lack of combustion, our fuel cells emit virtually zero pollutants such as NOx, SOx or
particulate matter.
Our fuel cells operate 24 hours per day seven days per week providing reliable power to both
on-site customers and grid-support applications. Our DFC Power Plants can be part of a total
on-site power generation solution with our high efficiency products providing base load power. Our
power plants can also work in conjunction with intermittent power, such as solar or wind, or less
efficient combustion-based equipment that provide peaking and load following energy. Our products
are also well suited for meeting the needs of utility grid-support applications.
Higher fuel efficiency results in lower emissions of carbon dioxide (CO2), a major greenhouse
gas, and also results in less fuel needed per kWh of electricity generated and Btu of heat
produced. The high efficiency of the DFC Power Plant results in significantly less CO2 per unit of
power production compared to the average U.S. fossil fuel power plant. Greater efficiency reduces
customers exposure to volatile fuel costs, minimizes operating costs, and provides maximum
electrical output from a finite fuel source. DFC Power Plants achieve electrical efficiencies of
47 percent to 60 percent or higher depending on configuration, location, and application, and up to
90 percent total efficiency in combined heat and power applications.
A fuel cell power plant includes the fuel cell stack module that produces the electricity, and
balance-of-plant (BOP). The mechanical balance-of-plant processes the incoming fuel such as
natural gas or renewable biogas and includes various fuel handling and processing equipment such as
pipes and blowers. The electrical balance-of-plant processes the power generated for use by the
customer and includes electrical interface equipment such as inverters.
Our fuel cells operate on a variety of hydrocarbon fuels, including natural gas, renewable biogas,
propane, methanol, coal gas, and coal mine methane.
Compared to other power generation technologies, our products offer significant advantages
including:
|
|
|
Near-zero pollutants; |
|
|
|
|
High efficiency; |
|
|
|
|
Ability to site units locally as distributed power generation; |
15
|
|
|
Potentially lower cost power generation; |
|
|
|
|
High quality heat ideal for cogeneration applications; |
|
|
|
|
High efficiency and cogeneration reduce carbon emissions |
|
|
|
|
Reliable around-the-clock base load power; |
|
|
|
|
Quiet operation; and |
|
|
|
|
Fuel flexibility. |
Typical customers for our products include utilities, universities, manufacturers, mission critical
institutions such as correction facilities and government installations, hotels, natural gas
letdown stations and customers who can use renewable biogas for fuel such as municipal water
treatment facilities, breweries, and food processors. With increasing demand for renewable and
ultra-clean power options and increased volatility in electric markets, our products offer our
customers greater control over power generation economics, reliability, and emissions.
Our DFC Power Plants are protected by 61 U.S. and 66 international patents. We currently have 30
U.S. and 130 international patents under application.
Recent Developments
Series 1 Preferred Share Obligation
The Company and Enbridge, Inc. (Enbridge) have been in negotiations to modify certain terms of the
Series 1 preferred share agreement, and have agreed to extend the payment deadline to March 18,
2011 to continue these negotiations. Under the existing terms, FuelCell Energy, Ltd. (a wholly
subsidiary of the Company) has the option of meeting this obligation through a cash payment or with
unregistered shares of FuelCell Energy, Inc. common stock. The Company is a guarantor of FuelCell
Energy, Ltd.s obligations to Enbridge. Enbridge is currently negotiating new terms that, as
proposed, may require payments in excess of those we believe we are obligated to pay. While the
Company intends to achieve the most favorable outcome in light of its obligations under the Series
1 preferred shares, it can not presently predict the final terms of any agreement with Enbridge.
16
RESULTS OF OPERATIONS
Management evaluates the results of operations and cash flows using a variety of key performance
indicators including revenues compared to prior periods and internal forecasts, costs of our
products and results of our cost-out initiatives, and operating cash use. These are discussed
throughout the Results of Operations and Liquidity and Capital Resources sections.
Comparison of Three Months Ended January 31, 2011 and January 31, 2010
Revenues and Costs of revenues
Our revenues and cost of revenues for the three months ended January 31, 2011 and 2010 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
January 31, |
|
|
Change |
|
|
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales and revenues |
|
$ |
25,760 |
|
|
$ |
12,808 |
|
|
$ |
12,952 |
|
|
|
101 |
|
Research and development contracts |
|
|
2,320 |
|
|
|
1,808 |
|
|
|
512 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
28,080 |
|
|
$ |
14,616 |
|
|
$ |
13,464 |
|
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales and revenues |
|
$ |
28,059 |
|
|
$ |
18,013 |
|
|
$ |
10,046 |
|
|
|
56 |
|
Research and development contracts |
|
|
2,337 |
|
|
|
2,096 |
|
|
|
241 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30,396 |
|
|
$ |
20,109 |
|
|
$ |
10,287 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin from product sales and revenues |
|
$ |
(2,299 |
) |
|
$ |
(5,205 |
) |
|
$ |
2,906 |
|
|
|
(56 |
) |
Gross margin from research and development
contracts |
|
|
(17 |
) |
|
|
(288 |
) |
|
|
271 |
|
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(2,316 |
) |
|
$ |
(5,493 |
) |
|
$ |
3,177 |
|
|
|
(58 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Sales Cost-to-revenue ratio (1) |
|
|
1.09 |
|
|
|
1.41 |
|
|
|
N/M |
|
|
|
(23 |
) |
|
|
|
(1) |
|
Cost-to-revenue ratio is calculated as cost of product sales and revenues divided
by product sales and revenues. |
Total revenues for the three months ended January 31, 2011 increased $13.5 million, or 92
percent to $28.1 million from $14.6 million during the same period last year. Total cost of
revenues for the three months ended January 31, 2011 increased $10.3 million, or 51 percent to
$30.4 million from $20.1 million during the same period last year. A discussion of the changes
product sales and revenues and research and development contracts follows.
Product sales and revenues
Product sales and revenues increased $13.0 million, or 101 percent in the first quarter 2011 to
$25.8 million compared to $12.8 million for the prior year period. Product sales and revenues for
the first quarter of 2011 included $20.4 of power plants, fuel cell modules, and fuel cell power
plant components, $2.5 million of revenue primarily from the design and delivery of capital
equipment to POSCO Power for their fuel cell module assembly facility as well as construction and
installation services, and $2.9 million of revenue from service and power purchase agreements.
Cost of product sales and revenues increased $10.0 million, or 56 percent in the first quarter 2011
to $28.1 million compared to $18.0 million in the same period the prior year. This increase is
primarily due to the doubling of revenues in the first quarter fiscal 2011 as compared to the first
quarter of fiscal 2010. Margins for product sales
and revenues improved by $2.9 million over the prior year quarter. Margin improvement is the
result of improved product margins combined with lower commissioning and warranty costs. The
product cost-to-revenue ratio was 1.09-to-1.00 in the first quarter of 2011 compared to
1.41-to-1.00 in the first quarter of 2010.
17
Cost of product sales and revenues includes costs to manufacture and ship our power plants and
power plant components to customers, site engineering and construction costs where we are
responsible for power plant system installation, costs for stack module assembly and conditioning
equipment sold to POSCO, warranty expense, liquidated damages and costs to service power plants for
customers with long-term service agreements (including maintenance and stack replacement costs
incurred during the period), PPA operating costs and lower of cost of market inventory adjustments.
Total product sales and service backlog as of January 31, 2011 was $156.9 million compared to $84.1
million as of January 31, 2010. Product order backlog was $78.9 million and $58.3 million as of
January 31, 2011 and 2010, respectively. Product backlog at the end of the quarter includes 26.5
megawatts (MW) of power plants and fuel cell component kits as well as orders for parts and work
associated with a commercial joint development agreement with POSCO Power for a small scale DFC
power plant for the commercial building market. Backlog for long-term service agreements was $78.0
million and $25.8 million as of January 31, 2011 and 2010, respectively.
We contract with a small number of customers for the sale of products and for research and
development contracts. For the three months ended January 31, 2011 and 2010 respectively, our top
three customers, POSCO Power (POSCO) and the U.S. government (primarily the Department of Energy)
and Pacific Gas & Electric in the aggregate accounted for 83 percent and 75 percent of our
consolidated revenues. Our largest strategic partner, POSCO, accounted for 62 percent and 63
percent of total revenues, the U.S. government accounted for 8 percent and 12 percent of total
revenues, and Pacific Gas & Electric accounted for 13 percent and 0 percent of total revenues for
the three months ended January 31, 2011 and 2010.
There can be no assurance that we will continue to achieve historical levels of sales of our
products to our largest customers. Even though our customer base is expected to increase and our
revenue streams to diversify, a substantial portion of net revenues could continue to depend on
sales to a limited number of customers. Our agreements with these customers may be cancelled if we
fail to meet certain product specifications or materially breach the agreement, and our customers
may seek to renegotiate the terms of current agreements or renewals. The loss of, or reduction in
sales to, one or more of our larger customers, could have a material adverse affect on our
business, financial condition and results of operations.
Research and development contracts
Research and development contract revenue increased $0.5 million to $2.3 million for the three
months ended January 31, 2011 compared to $1.8 million for the same period in 2010. Cost of
research and development contracts increased $0.2 million to $2.3 million for the three months
ended January 31, 2011 compared to $2.1 million during the first quarter of 2010. The increase in
revenue was due to increased research activities over the prior period primarily related to the
solid oxide fuel cell development program with the U.S. Department of Energy (DOE).
The
Companys research and development backlog totaled $7.9 million ($3.3 million funded) as of
January 31, 2011 compared to $11.9 million ($4.9 million funded) as of January 31, 2010. The
decrease is due to phase II of the solid oxide fuel cell development contract with the DOE nearing
conclusion. The Company submitted a proposal to the DOE to participate in the multi-year third
phase of the solid oxide fuel cell development program.
18
Administrative and selling expenses
Administrative and selling expenses were $4.1 million for the three months ended January 31, 2011,
a decrease of $0.1 million compared to last years period as a result lower bid and proposal
activities partially offset by higher stock based compensation compared to the prior period.
Research and development expenses
Research and development expenses were $4.2 million for the three months ended January 31, 2011 a
decrease of $0.4 million compared to last years period as a result of lower overall headcount and
increased support of commercial projects during the period which are classified as cost of sales.
Loss from operations
Loss from operations decreased to $10.6 million for the three months ended January 31, 2011
compared to $14.3 million for same period last year. Higher product margins drove this
improvement.
Loss from equity investment
Our share of equity losses in Versa increased to $0.2 million for the three months ended January
31, 2011 compared to $0.1 million for the three months ended January 31, 2010.
Interest and other income, net
Interest and other income, net, increased to $0.4 million for the three months ended January 31,
2011 compared to $0.3 million for the same period in 2010. The increase is due to higher royalty
income related to our agreements in the Korea market as minimum annual royalties escalate over the
term of the contract.
Accretion of Preferred Stock of Subsidiary
The Series 1 Preferred Shares issued by our subsidiary, FuelCell Energy, Ltd. to Enbridge were
originally recorded at a substantial discount to par value (fair value discount). On a quarterly
basis, the carrying value of the Series 1 Preferred Shares is increased to reflect the passage of
time with a corresponding non-cash charge (accretion). The accretion of the fair value discount
was $0.5 million and $0.6 million for the three months ended January 31, 2011 and 2010,
respectively.
The Company and Enbridge have been in negotiations to modify certain terms of the Series 1
preferred share agreement, and have agreed to extend the payment deadline to March 18, 2011 to
continue these negotiations. Under the existing terms, FuelCell Energy, Ltd. has the option of
meeting this obligation through a cash payment or with unregistered shares of FuelCell Energy, Inc.
common stock. The Company is a guarantor of FuelCell Energy Ltds obligations to Enbridge.
Enbridge is currently negotiating new terms that, as proposed, may require payments in excess of
those we believe we are obligated to pay. While the Company intends to achieve the most favorable
outcome in light of its obligations under the Series 1 preferred shares, it can not presently
predict the final terms of any Agreement with Enbridge.
19
Provision for income taxes
We have not paid federal or state income taxes in several years due to our history of net operating
losses, although we have paid foreign taxes in South Korea. In fiscal 2011 our provision for
income taxes was $.02 million, which related to South Korean tax obligations. During 2009, we
began manufacturing products that are gross margin profitable on a per unit basis; however, we
cannot estimate when production volumes will be sufficient to generate taxable income.
Accordingly, no tax benefit has been recognized for these net operating losses or other deferred
tax assets as significant uncertainty exists surrounding the recoverability of these deferred tax
assets.
Net loss attributable to noncontrolling interest
The net loss attributed to the noncontrolling interest for the quarters ended January 31, 2011 and
January 31, 2010 was $0.1 million.
Preferred Stock dividends
Dividends paid on the Series B Preferred Stock were $0.8 million in each of the quarters ended
January 31, 2011 and 2010.
Net loss to common shareholders and loss per common share
Net loss to common shareholders represents the net loss for the period less the net loss
attributable to noncontrolling interest less the preferred stock dividends on the Series B
Preferred Stock. For the quarters ended January 31, 2011 and 2010, net loss to common shareholders
was $11.7 million and $15.4 million, respectively and loss per common share was $(0.10) and
$(0.18), respectively.
LIQUIDITY AND CAPITAL RESOURCES
Our future liquidity will be dependent on obtaining the order volumes and cost reductions necessary
to achieve profitable operations. As a result of product cost reductions, we believe sales volume
of 75 MW to 125 MW will drive the Company to profitability with the lower end of the range
reflecting a sales mix oriented towards complete power plants and the upper end of the range
oriented towards fuel cell components. Actual results will depend on product mix, volume, future
service costs, and market pricing.
We have been engaged in a formal commercial cost-out program since 2003 to reduce the total life
cycle costs of our power plants and have made significant progress primarily through value
engineering our products, manufacturing process improvements, higher production levels, technology
improvements and global sourcing. During fiscal 2009, we began production of our newest
megawatt-class power plants. These power plants incorporate fuel cell stacks with outputs of 350
kilowatts (kW) compared to 300 kW previously, along with lower component and raw material costs.
As a result, we have experienced significant improvement in our margins and cost ratios as these
product sales are gross margin positive on a per unit basis.
During fiscal 2010, our manufacturing run-rate was an annualized 22 MW. In response to the
increased level of domestic orders received in 2010 and anticipating additional orders from POSCO
Power, we increased our production run rate to 35 megawatts per year during the fourth quarter of
fiscal year 2010 and will continue to ramp production as order volume dictates.
Our current manufacturing capacity is up to 90 MW, depending on product mix and other factors. We
expect to invest approximately $5 million to $7 million over the next year for upgrades and
maintenance of production assets. With increasing order flow, our plan has been to expand
production capacity to 150 MW within our existing Torrington facility. This expansion would
require the addition of equipment (e.g. furnaces, tape casting and other equipment) to increase the
capacity of certain operations. Due to the economies of scale and equipment
required, we believe it is more cost effective to add capacity in large blocks. We estimate that
the expansion to 150 MW will require additional capital investments of $35 to $45 million although,
this expansion may occur in stages depending on the level of market demand.
20
In addition to increasing annual order volume and reducing product costs, we may also raise capital
through debt or equity offerings; however, there can be no assurance that we will be able to obtain
additional capital in the future. The timing and size of any financing will depend on multiple
factors including market conditions, future order flow and the need to adjust production capacity.
If we are unable to raise additional capital, our growth potential may be adversely affected and we
may have to modify our plans. We anticipate that our existing capital resources, together with
anticipated revenues and cash flows, will be adequate to satisfy our financial requirements and
agreements through at least the next twelve months.
Cash Flows
Cash, cash equivalents, and investments in U.S. treasuries totaled $70.2 million as of January 31,
2011 compared to $54.6 million as of October 31, 2010. Net use of cash, cash equivalents and
investments for the first quarter was $3.2 million compared to net use of $7.2 million in the first
quarter of 2010, excluding the net proceeds of $17.8 million from the registered direct offering of
common stock and revolver borrowings of $1.0 million. Strong cash receipts from progress payments
for U.S. orders combined with the favorable impact of improved product margins resulted in lower
cash utilization during the first quarter of 2011 compared to the prior year quarter total of $7.2
million.
Cash and cash equivalents as of January 31, 2011 was $26.1 million compared to $20.5 million as of
October 31, 2010. The key components of our cash inflows and outflows were as follows:
Operating Activities Cash used for operating activities was $2.2 million during the first
quarter of 2011 compared to $5.6 million used during the first quarter of 2010. The improvement
over the prior year period was driven primarily by lower net loss of $3.6 million. The lower
net loss was driven by a doubling of revenues in the first quarter of fiscal 2011 as compared to
the first quarter of fiscal 2010 and the decrease in commissioning and warranty costs.
Investing Activities Cash used in investing activities was $10.2 million during the first
quarter of 2011 compared to net cash used in investing activities of $5.7 million during the
first quarter of 2010. The increase of $4.5 million was mainly due to the net purchase of U.S
treasuries during the first quarter 2011 of $10.0 million compared to a net purchase of U.S.
treasuries of $5.1 million during the first quarter 2010.
Financing Activities Cash provided in financing activities was $18.0 million during the first
quarter of 2011 compared to net cash used by financing activities of $0.9 million in the prior
year period. The increase in cash in the first quarter 2011 compared to the first quarter 2010
was primarily due to cash received from a registered direct stock offering which raised $17.8
million.
The Company also closed on a $5.0 million revolving credit facility with JPMorgan Chase Bank,
N.A. and the Export-Import Bank of the United States during the first quarter of 2011 and
borrowed $1.0 million during the period. The credit facility is to be used for working capital
to finance the manufacture and production and subsequent export sale of the Companys products
or services.
Sources and Uses of Cash and Investments
We continue to invest in new product and market development and, as such, we are not currently
generating positive cash flow from our operations. Our operations are funded primarily through
cash generated from product sales and research and development contracts, license fee income and
sales of equity and debt securities. In order
to produce positive cash flow from operations, we need to be successful at increasing annual order
volume and implementing our cost reduction efforts. The status of these activities is described
below.
21
Increasing annual order volume
We need to increase annual order volume to achieve profitability. Increased production volumes
lower costs by leveraging supplier/purchasing opportunities, creating opportunities for
incorporating manufacturing process improvements, and spreading fixed costs over more units. Our
overall manufacturing process has a production capacity of up to 90 MW, depending on product mix
and other factors. Updates on our key markets are as follows:
United Kingdom: The Crown Estates ordered a DFC power plant during the first quarter of
2011 for installation in central London, England. The ultra-clean emission profile of the
DFC plant combined with reduced greenhouse gas emissions support the sustainability goals of
The Crown Estates and were the primary drivers for the order. This order represents the
first DFC power plant sold by the Company in the United Kingdom.
The British government recently issued a series of proposals to address aggressive climate
targets while balancing the need for replacing a significant portion of existing power
generation that is nearing the end of its functional lifespan. Estimates are that about a
quarter of the existing power generation capacity in the UK will need to be replaced by
2020. Fuel cells operating on natural gas or renewable biogas are a compelling solution for
the needs of the British power market as they provide ultra-clean and efficient baseload
power.
South Korea: During the first quarter of 2011, the South Korean Ministry of Knowledge
Economy confirmed the Renewable Portfolio Standard (RPS) and established the pricing
mechanism for new & renewable (NRE) power under the mandates of the RPS. Utilities and
independent power producers in South Korea are expected to purchase NRE power generation
plants now that the pricing mechanics of the RPS have been confirmed. Penalties for
non-compliance are expected to encourage conformance with the RPS. Fuel cells operating on
natural gas and renewable biogas earned a prominent position within the pricing mechanism
and are expected to represent a significant portion of NRE purchasing as the clean,
efficient and distributed generation attributes of fuel cells meet the needs of utilities
and the requirements of the RPS.
Responding to this market opportunity, POSCO Power continues to expand its clean power
generation business using the Companys fuel cell technology. POSCO Power has begun
production at their 100 MW fuel cell module assembly facility using fuel cell components
manufactured at FuelCell Energys production facility and will provide balance-of-plant
(BOP) for the South Korean market from their existing 100 MW BOP facility. Announcement of
the RPS pricing mechanism, combined with the recent completion of local capacity for fuel
cell module assembly, is expected to drive their next order for fuel cell components.
California: Our products address the need by utilities for ultra-clean baseload
distributed generation. During the first quarter of 2011, Southern California Edison
ordered a 1.4 MW DFC1500 to be installed at California State University, San Bernardino.
This order follows previous authorization by the California Public Utilities Commission
(CPUC) for Southern California Edison and Pacific Gas & Electric to pursue utility owned
fuel cell installations. The CPUC recognizes fuel cells as preferred distributed generation
resources due to clean natural gas and renewable baseload power generation that lessens
reliance on the electrical transmission grid and represents incremental capacity that avoids
or reduces investment in the transmission and distribution system.
22
Universities represent an attractive market for DFC power plants due to the virtual
lack of pollutants that helps universities reach their sustainability goals combined with
on-site power generation that enhances energy security. California State University, San
Bernardino will be the fifth California university with a DFC power plant, representing
eight megawatts in total power generation capacity.
Connecticut: The Company continues active discussions with private and government financing
sources for the 43.5 MW of fuel cell projects selected and approved by the Connecticut
Department of Utility Control (CDUC).
Cost reduction efforts
Product cost reductions are essential for us to more fully penetrate the market for our fuel cell
products and attain profitability. Cost reductions will also reduce or eliminate the need for
incentive funding programs which currently allow us to price our products to compete with
grid-delivered power and other distributed generation technologies. Product cost reductions come
from several areas including:
|
|
|
engineering improvements; |
|
|
|
|
technology advances; |
|
|
|
|
supply chain management; |
|
|
|
|
production volume; and |
|
|
|
|
manufacturing process improvements. |
Commitments and Significant Contractual Obligations
A summary of our significant future commitments and contractual obligations as of January 31, 2011
and the related payments by fiscal year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
|
than |
|
|
13 |
|
|
35 |
|
|
than |
|
|
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Purchase commitments(1) |
|
$ |
52,870 |
|
|
$ |
46,173 |
|
|
$ |
6,697 |
|
|
$ |
|
|
|
$ |
|
|
Series 1 Preferred dividends payable (2) |
|
|
23,875 |
|
|
|
12,635 |
|
|
|
2,498 |
|
|
|
2,498 |
|
|
|
6.244 |
|
Term loans (principal and interest) |
|
|
4,513 |
|
|
|
890 |
|
|
|
386 |
|
|
|
427 |
|
|
|
2,810 |
|
Capital and operating lease commitments
(3) |
|
|
3,548 |
|
|
|
894 |
|
|
|
1,552 |
|
|
|
1,102 |
|
|
|
|
|
Revolving Credit Facility (4) |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred dividends payable (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
85,806 |
|
|
$ |
61,592 |
|
|
$ |
11,133 |
|
|
$ |
4,027 |
|
|
$ |
9,054 |
|
|
|
|
(1) |
|
Purchase commitments with suppliers for materials, supplies and services incurred in
the normal course of business. |
|
(2) |
|
Annual dividends of Cdn.$1.25 million (U.S.$1.25 million) accrue on the Series 1
Preferred Stock. We have made minimum cash payments of Cdn.$500,000 (U.S.$499,550) in
annually through December 31, 2010. Additional dividends accrue on unpaid dividends at an
annual rate of 9 percent. Cumulative unpaid dividends and accrued interest on January 31,
2011 was $12.6 million. The Company and Enbridge have been in negotiations to
modify certain terms of the Series 1 preferred share agreement, and have agreed to extend
the payment deadline to March 18, 2011 to continue these negotiations. Under the existing
terms, FCE Ltd. has the option of meeting this obligation through a cash payment or with
unregistered shares of FuelCell Energy, Inc. common stock. The Company is a guarantor of
FCE Ltds obligations to Enbridge. Enbridge is currently negotiating new terms that, as
proposed, may require payments in excess of those we believe we are obligated to pay.
While the Company intends to achieve the most favorable outcome in light of its obligations
under the Series 1 preferred shares, it can not presently predict the final terms of any
agreement with Enbridge. |
|
(3) |
|
Future minimum lease payments on capital and operating leases. |
|
(4) |
|
In January 2011, the Company entered into a $5.0 million revolving credit facility with
JPMorgan Chase Bank, N.A. and the Export-Import Bank of the United States. The credit
facility is to be used for working capital to finance the manufacture and production and
subsequent export sale of the Companys products or services. The agreement has a one year
term with renewal provisions. The outstanding principal balance of the facility will bear
interest, at the option of the Company of either the one-month LIBOR plus 1.5 percent or
the prime rate of JP Morgan Chase. The facility is secured by certain working capital
assets and general intangibles, up to the amount of the outstanding facility balance. At
January 31, 2011, the outstanding amount owed under this facility was $1.0 million. |
23
|
|
|
(5) |
|
We are currently paying $3.2 million in annual dividends on our Series B Preferred
Stock. The $3.2 million annual dividend payment has not been included in this table as we
cannot reasonably determine the period when or if we will be able to convert the Series B
Preferred Stock into shares of our common stock. We may, at our option, convert these
shares into that number of shares of our common stock that are issuable at the then
prevailing conversion rate if the closing price of our common stock exceeds 150 percent of
the then prevailing conversion price ($11.75) for 20 trading days during any consecutive 30
trading day period. |
In April 2008, we entered into a new 10-year loan agreement with the Connecticut Development
Authority allowing for a maximum amount borrowed of $4.0 million. At January 31, 2011, we had an
outstanding balance of $3.8 million on this loan. The interest rate is 5 percent and the loan is
collateralized by the assets procured under this loan as well as $4.0 million of additional
machinery and equipment. Repayment terms require (i) interest only payments on outstanding
balances through November 2009 and (ii) interest and principal payments commencing in December 2009
through May 2018.
Bridgeport FuelCell Park, LLC (BFCP), one of our wholly-owned subsidiaries, has an outstanding
loan with the Connecticut Clean Energy Fund, secured by assets of BFCP. Interest accrues monthly
at an annual rate of 8.75 percent and repayment of principal and accrued interest is not required
until the occurrence of certain events. As of January 31, 2011, no repayments of principal and
interest have been made and we cannot reasonably determine when such repayments will begin. The
outstanding balance on this loan, including accrued interest, is $0.7 million as of January 31,
2011.
We have pledged approximately $9.0 million of our cash and cash equivalents as collateral and
letters of credit for certain banking requirements and contracts. As of January 31, 2011,
outstanding letters of credit totaled $7.3 million. These expire on various dates through May
2012.
As of October 31, 2010, we have identified uncertain tax positions aggregating $15.7 million and
reduced our net operating loss carryforwards by this amount. Because of the level of net operating
losses and valuation allowances, unrecognized tax benefits, even if not resolved in our favor,
would not result in any cash payment or obligation and therefore have not been included in the
contractual obligation table above.
In addition to the commitments listed in the table above, we have the following outstanding
obligations:
Power purchase agreements
In California, we have 2.5 MW of power plant installations under power purchase agreements ranging
in duration from five to ten years. As owner of the power plants, we are responsible for all
operating costs necessary to maintain, monitor and repair the power plants. Under certain
agreements, we are also responsible for procuring fuel to run the power plants.
We qualified for incentive funding for these projects under Californias SGIP and from other
government programs. Funds are payable upon commercial installation and demonstration of the plant
and may require return of the funds for failure of certain performance requirements during the
period specified by the government program. Revenue related to these incentive funds is recognized
ratably over the performance period. As of January 31, 2011, we had deferred incentive funding
revenue totaling $0.7 million.
Service and warranty agreements
We warranty our products for a specific period of time against manufacturing or performance
defects. Our standard warranty period is generally 15 months after shipment or 12 months after
installation of the product. In addition to the standard product warranty, we have contracted with
certain customers to provide services to ensure the power plants meet minimum operating levels for
terms ranging from one to 20 years. Our standard LTSA term is five years. Pricing for service
contracts is based upon estimates of future costs, which given our products early stage of
development, could be materially different from actual expenses. Also see Critical Accounting
Policies and Estimates for additional details.
24
Research and development cost-share contracts
We have contracted with various government agencies to conduct research and development as either a
prime contractor or sub-contractor under multi-year, cost-reimbursement and/or cost-share type
contracts or cooperative agreements. Cost-share terms require that participating contractors share
the total cost of the project based on an agreed upon ratio. In many cases, we are reimbursed only
a portion of the costs incurred or to be incurred on the contract. While government research and
development contracts may extend for many years, funding is often provided incrementally on a
year-by-year basis if contract terms are met and Congress authorizes the funds. As of January 31,
2011, research and development sales backlog totaled $7.9 million, of which $3.3 million is funded.
Should funding be delayed or if business initiatives change, we may choose to devote resources to
other activities, including internally funded research and development.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and
expenses and the disclosure of contingent assets and liabilities. Actual results could differ from
those estimates. Estimates are used in accounting for, among other things, revenue recognition,
contract loss reserves, excess, slow-moving and obsolete inventories, product warranty costs,
reserves on long-term service agreements, share-based compensation expense, allowance for doubtful
accounts, depreciation and amortization, impairment of long-lived assets, income taxes and
contingencies. Estimates and assumptions are reviewed periodically, and the effects of revisions
are reflected in the consolidated financial statements in the period they are determined to be
necessary.
Our critical accounting policies are those that are both most important to our financial condition
and results of operations and require the most difficult, subjective or complex judgments on the
part of management in their application, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain. Our accounting policies are set-forth below.
Revenue Recognition
We earn revenue from (i) the sale and installation of fuel cell power plants and modules (ii) the
sale of component part kits and spare parts to customers, (iii) site engineering and construction
services (iv) providing services under long-term service agreements (LTSA), (v) the sale of
electricity under power purchase agreements (PPA) as well as incentive revenue from the sale of
electricity under PPAs, and (vi) customer-sponsored research and development projects. Our revenue
is primarily generated from customers located throughout the U.S. and Asia and from agencies of the
U.S. government. Revenue from customer-sponsored research and development projects is recorded as
research and development contracts revenue and all other revenues are recorded as product sales and
revenues in the consolidated statements of operations.
Revenue from sales of our power plants and modules are recognized under the percentage of
completion method of accounting. Revenues are recognized proportionally as costs are incurred and
assigned to a customer contract by
comparing total expected costs for each contract to the total contract value. We have recorded an
estimated contract loss reserve of $0.5 million and $0.6 million as of January 31, 2011 and October
31, 2010, respectively. Actual results could vary from initial estimates and reserve estimates
will be updated as we gain further manufacturing and operating experience. For component and spare
parts sales, revenue is recognized upon shipment under the terms of the customer contract.
25
Revenue from component part kits and spare parts sales is recognized upon shipment and title
transfer under the terms of the customer contract. Terms for certain contracts provide for a
transfer of title and risk of loss to our customers at our factory locations upon completion of our
contractual requirement to produce and products prepare the products for shipment. A shipment in
place may occur in the event that the customer is unready to take delivery of the products on the
contractually required delivery dates.
Site engineering and construction services revenue is recognized on percentage of completion as
costs are incurred.
Revenue from LTSA contracts for power plants with our 5-year stack design is earned ratably over
the term of the contract by performing routine monitoring and maintenance and by meeting a certain
level of power output. For our legacy LTSA contracts on power plants with our older 3-year stack
design, a portion of the contract value related to the stack replacement had been deferred. Upon
stack replacement, revenue is recognized ratably over the remaining contract term. Revenue related
to routine monitoring and maintenance under legacy contracts is recognized ratably over the full
term of the contract.
Revenue from the sale of electricity is recognized as electricity is provided to the customer.
Incentive revenue is recognized ratably over the term of the PPA.
Revenue from research and development contracts is recognized proportionally as costs are incurred
and compared to the estimated total research and development costs for each contract. Revenue from
government funded research and development programs are generally multi-year, cost-reimbursement
and/or cost-shared type contracts or cooperative agreements. We are reimbursed for reasonable and
allocable costs up to the reimbursement limits set by the contract or cooperative agreement, and on
certain contracts we are reimbursed only a portion of the costs incurred. While government
research and development contracts may extend for many years, funding is often provided
incrementally on a year-by-year basis if contract terms are met and Congress has authorized the
funds.
Inventories and Advance Payments to Vendors
Inventories consist principally of raw materials and work-in-process and are stated at the lower of
cost or market. In certain circumstances, we will make advance payments to vendors for future
inventory deliveries. These advance payments (net of related reserves) are recorded as other
current assets on the consolidated balance sheets.
As of January 31, 2011 and October 31, 2010, the LCM reserve to the cost basis of inventory and
advance payments to vendors was $3.1 million and $5.0 million, respectively, which equates to a
reduction of 8 percent and 12 percent, respectively, of the gross inventory and advance payments to
vendors value. As of January 31, 2011 the LCM reserve is primarily applied against inventory that
is expected to be used to satisfy terms of long-term service agreements.
Prior to November 1, 2009, we provided for a lower of cost or market (LCM) reserve to the cost
basis of inventory at the time of purchase as our products were historically sold below cost. In
the first quarter of fiscal 2010, we changed our method of estimation and currently reserve for
losses on new contracts if estimated costs are expected to exceed revenue on the contract. As a
result, we no longer provide for an LCM reserve on new inventory purchased. During the second half
of 2009, we began production of our newest megawatt-class power plants and modules. The
manufactured cost per kilowatt of these products is lower than previous models due to a
17 percent power increase and lower component and raw materials cost and are expected to be gross
margin positive on a unit by unit basis.
26
Warranty and Service Expense Recognition
We warranty our products for a specific period of time against manufacturing or performance
defects. Our warranty is limited to a term generally 15 months after shipment or 12 months after
installation of our products. We reserve for estimated future warranty costs based on historical
experience. We also provide for a specific reserve if there is a known issue requiring repair
during the warranty period. Given our limited operating experience, particularly for newer product
designs, actual results could vary from initial estimates. Estimates used to record warranty
reserves are updated as we gain further operating experience. As of January 31, 2011 and October
31, 2010, the warranty reserve, which is classified in accrued liabilities on the consolidated
balance sheet totaled $0.9 million and $0.7 million, respectively.
In addition to the standard product warranty, we have entered into LTSA contracts with certain
customers to provide monitoring, maintenance and repair services for fuel cell power plants ranging
from one to 20 years. Our standard service agreement term is five years. Under the terms of our
LTSA, the power plant must meet a minimum operating output during the term. If minimum output
falls below the contract requirement, we may be subject to performance penalties or may be required
to repair or replace the customers fuel cell stack. The Company has provided for a reserve for
performance guarantees which based on historical fleet performance totaled $1.5 million and $1.2
million as of January 31, 2011 and October 31, 2010, respectively. The increase during the three
months ended January 31, 2011 related to operational issues on certain plants.
For our legacy LTSA contracts on power plants with our older 3-year stack design, the Company has
accrued a reserve based on estimated future stack replacement and service costs in excess of the
contract value. We expect the replacement of older stacks produced prior to the five-year stack
design will continue into mid 2012. Reserve estimates for future costs associated with maintaining
legacy service agreements are determined based on a number of factors including the estimated life
of the stack, used replacement stacks available, our limit of liability on service agreements and
the customers future operating plans for the power plant. Our reserve estimates include cost
assumptions based on what we anticipate the service requirements will be to fulfill obligations on
a contract by contract basis, which in many cases is in excess of our contractual limit of
liability under LTSAs which is limited to the amount of remaining service fees payable under the
contract. As of January 31, 2011, our reserve on LTSA contracts totaled $7.3 million compared to
$6.6 million as of October 31, 2010. The increase during the three months ended January 31, 2011
related to one contract entered into with costs in excess of revenue, partially offset by decreases
in obligations for certain contracts included in the October 31,
2010 reserve. Prior to February 1, 2010, we provided for a
pricing reserve if the agreement was sold below our standard pricing.
As a result of our experience with these contracts and production
rates of stacks and related costing, effective February 1, 2010,
contract losses have been estimated as described above. The result of
this change in estimate was not material to the consolidated
financial statements.
LTSAs for power plants that have our five-year stack design are not expected to require a stack
change to continue to meet minimum operating levels during the initial five-year term of the
contract, although we have limited operating experience with these products. Stack replacements for
five-year agreements which include the five-year stack design are expected to only be required upon
renewal of the initial service agreement by the customer.
At the end of our LTSA contracts, customers are expected to either renew the contract or we
anticipate that the stack module will be returned to the Company as the plant is no longer being
monitored or having routine service performed. In situations where the customer agrees at the time
of a restack to return the stack to the Company at the end of the LTSA term, the cost of the stack
is recorded as a long-term asset and depreciated over its expected life. If the Company does not
obtain rights to title from the customer, the cost of the stack which is not recoverable is
expensed. As of January 31, 2011, the total remaining stack value was $2.8 million compared to $2.0
million as of October 31, 2010. This balance is expected to increase over time as stack
replacements occur. During the first quarter of fiscal 2011, depreciation on this asset category
totaled approximately $0.2 million compared to zero in the prior year period.
Share-Based Compensation
We account for restricted stock awards (RSAs) based on the closing market price of the Companys
common stock on the date of grant. We account for stock options awarded to employees and
non-employee directors under the fair value method of accounting using the Black-Scholes valuation
model to estimate fair value at the grant date. The model requires us to make estimates and
assumptions regarding the expected life of the option, the risk-free interest rate, the expected
volatility of our common stock price and the expected dividend yield. The fair value of equity
awards is amortized to expense over the vesting period, generally four years. Share-based
compensation was $0.8 million and $0.6 million for the for the quarters ended January 31, 2011 and
2010, respectively.
27
Income Taxes
Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are
determined based on net operating loss (NOL) carryforwards, research and development credit
carryforwards, and differences between financial reporting and income tax bases of assets and
liabilities. Deferred tax assets and liabilities are measured using enacted tax rates and laws
expected to be in effect when the differences are expected to reverse. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date. A valuation allowance is recorded against deferred tax assets if it is
unlikely that some or all of the deferred tax assets will be realized.
As of November 1, 2007, we adopted guidance for how a company should recognize, measure, present,
and disclose in its financial statements uncertain tax positions that the company has taken or
expects to take on a tax return (including a decision whether to file or not file a return in a
particular jurisdiction). The companys financial statements should reflect expected future tax
consequences of such positions presuming the taxing authorities full knowledge of the position and
all relevant facts.
The evaluation of a tax position is a two-step process. The first step is recognition: the company
determines whether it is more likely than not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation processes, based on the
technical merits of the position. The second step is measurement: a tax position that meets the
more likely than not recognition threshold is measured to determine the amount of benefit to
recognize in the financial statements. The tax position is measured at the largest amount of
benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
Certain transactions involving the Companys beneficial ownership occurred in fiscal 2010 and prior
years, which could have resulted in a stock ownership change for purposes of Section 382 of the
Internal Revenue Code of 1986, as amended. We have completed a detailed Section 382 study in
fiscal 2010 to determine if any of our NOL and credit carryovers will be subject to limitation.
Based on that study we have determined that there was no ownership change as of the end of our 2010
fiscal year under Section 382. In January 2011, the Company completed a registered direct offering
to a single investor for 10.2 million shares of stock (approximately 8 percent of our outstanding
common shares). While we have not performed an update to the 382 study, we estimate that, based on
results of the prior study, there was no ownership change which would limit our NOL and credit
carryovers as of the end of our quarter ended January 31, 2011 fiscal year under Section 382.
ACCOUNTING GUIDANCE UPDATE
Recently Adopted Accounting Guidance
In April 2010, the FASB provided guidance on defining a milestone and determining when it may be
appropriate to apply the milestone method of revenue recognition for research or development
transactions. Research or development arrangements frequently include payment provisions whereby a
portion or all of the consideration is contingent upon the achievement of milestone events. An
entity may only recognize consideration that is
contingent upon the achievement of a milestone in its entirety in the period the milestone is
achieved only if the milestone meets certain criteria. We adopted this guidance effective November
1, 2010 and it did not impact our financial statements.
28
In December 2009, the FASB issued revised guidance related to the consolidation of variable
interest entities (VIE). The revised guidance requires reporting entities to evaluate former
qualified special purpose entities for consolidation, changes the approach to determining a VIEs
primary beneficiary from a quantitative assessment to a qualitative assessment designed to identify
a controlling financial interest, and increases the frequency of required reassessments to
determine whether a company is the primary beneficiary of a VIE. It also clarifies, but does not
significantly change, the characteristics that identify a VIE. We adopted this guidance effective
November 1, 2010 and it did not impact our financial statements.
In October 2009, the FASB issued guidance updating accounting standards for revenue recognition for
multiple-deliverable arrangements. The stated objective of the update was to address the
accounting for multiple-deliverable arrangements to enable vendors to account for products or
services separately rather than as a combined unit. The guidance provides amended methodologies
for separating consideration in multiple-deliverable arrangements and expands disclosure
requirements. We adopted this guidance for revenue arrangements entered into or materially
modified after November 1, 2010 and it did not have an impact on our financial statements or
disclosures.
In June 2009, the FASB issued accounting guidance which requires a company to perform ongoing
reassessment of whether it is the primary beneficiary of a variable interest entity (VIE).
Specifically, the guidance modifies how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be consolidated. The
guidance clarifies that the determination of whether a company is required to consolidate a VIE is
based on, among other things, an entitys purpose and design and a companys ability to direct the
activities of the VIE that most significantly impact the VIEs economic performance. The guidance
requires an ongoing reassessment of whether a company is the primary beneficiary of a VIE and
enhanced disclosures of the companys involvement in VIEs and any significant changes in risk
exposure due to that involvement. We adopted this guidance effective November 1, 2010 and it did
not have an impact on our financial statements.
Recent Accounting Guidance Not Yet Effective
In January 2010, the FASB issued guidance that requires new disclosures for fair value measurements
and provides clarification for existing disclosure requirements. This amended guidance require
disclosures about inputs and valuation techniques used to measure fair value as well as disclosures
about significant transfers in and out of Levels 1 and Levels 2 fair value measurements and
disclosures about the purchase, sale, issuance and settlement activity of Level 3 fair value
measurements. This guidance is effective for interim and annual reporting periods beginning after
December 15, 2009, except for disclosures about the purchase, sale, issuance and settlement
activity of Level 3 fair value measurements, which is effective for fiscal years beginning after
December 15, 2010. The Company was not impacted by the disclosures effective for interim periods
beginning after December 15, 2009 and we do not expect the remaining disclosures required after
December 15, 2010 upon adoption of this guidance will have a material impact on our financial
statements or disclosures
29
|
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Item 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Exposure
We typically invest in U.S. treasury securities with maturities ranging from less than three months
to one year or more. We expect to hold these investments until maturity and accordingly, these
investments are carried at cost and not subject to mark-to-market accounting. At January 31, 2011,
U.S. treasury investments had a carrying value of $44.1 million, which approximated fair value.
These investments have maturity dates ranging from February 2011 to March 2012 and a weighted
average yield to maturity of 0.5%. Cash is invested overnight with high credit quality financial
institutions and therefore we are not exposed to market risk from changing interest rates. Based
on our overall interest rate exposure at January 31, 2011, including all interest rate sensitive
instruments, a change in interest rates of one percent would not have a material impact on our
results of operations.
Foreign Currency Exchange Risk
As of January 31, 2011, less than one percent of our total cash, cash equivalents and investments
were in currencies other than U.S. dollars (primarily Canadian dollars and South Korean Won). We
make purchases from certain vendors in currencies other than U.S. dollars. Although we have not
experienced significant foreign exchange rate losses to date, we may in the future, especially to
the extent that we do not engage in currency hedging activities. The economic impact of currency
exchange rate movements on our operating results is complex because such changes are often linked
to variability in real growth, inflation, interest rates, governmental actions and other factors.
These changes, if material, may cause us to adjust our financing and operating strategies.
Derivative Fair Value Exposure
Series 1 Preferred Stock
The conversion feature and the variable dividend obligation of our Series 1 Preferred shares are
embedded derivatives that require bifurcation from the host contract. The aggregate fair value of
these derivatives included within long-term debt and other liabilities as of January 31, 2011 was
$0.5 million. The fair value was based on valuation models using various assumptions including
historical stock price volatility, risk-free interest rate and a credit spread based on the yield
indexes of technology high yield bonds, foreign exchange volatility as the Series 1 Preferred
security is denominated in Canadian dollars, and the closing price of our common stock. Changes in
any of these assumptions would change the underlying fair value with a corresponding charge or
credit to earnings. However, any changes to these assumptions would not have a material impact on
our results of operations.
Warrants
We hold warrants for the right to purchase an additional 3,969 shares of Versas common stock. The
fair value of the warrants at January 31, 2011 was $0.2 million. The fair value was determined
based on the Black-Scholes valuation model using historical stock price, volatility (based on a
peer group since Versas common stock is not publicly traded) and risk-free interest rate
assumptions. Changes in any of these assumptions would change the fair value of the warrants with
a corresponding charge or credit to earnings. However, any changes to these assumptions would not
have a material impact on our results of operations.
30
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Item 4. |
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CONTROLS AND PROCEDURES |
The Company maintains disclosure controls and procedures, which are designed to provide reasonable
assurance that information required to be disclosed in the Companys periodic SEC reports is
recorded, processed, summarized and reported within the time periods specified in the SECs rules
and forms, and that such information is accumulated and communicated to its principal executive
officer and principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
We carried out an evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the design and operation
of our disclosure controls and procedures as of the end of the period covered by this report.
Based on that evaluation, the Companys principal executive officer and principal financial officer
have concluded that the Companys disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed in the Companys periodic SEC
reports is recorded, processed, summarized, and reported within the time periods specified in the
SECs rules and forms, and that such information is accumulated and communicated to its principal
executive officer and principal financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
There has been no change in our internal controls over financial reporting that occurred during the
last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
31
PART II. OTHER INFORMATION
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Item 1. |
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LEGAL PROCEEDINGS |
We are involved in legal proceedings, claims and litigation arising out of the ordinary conduct of
our business. Although we cannot assure the outcome, management presently believes that the result
of such legal proceedings, either individually, or in the aggregate, will not have a material
adverse effect on our consolidated financial statements, and no material amounts have been accrued
in our consolidated financial statements with respect to these matters.
There have been no material changes with respect to the risk factors disclosed in our Annual Report
on Form 10-K for the fiscal year ended October 31, 2010.
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Exhibit No. |
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Description |
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31.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
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Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 |
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Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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 on March 14, 2011.
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FUELCELL ENERGY, INC. |
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(Registrant) |
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/s/ Joseph G. Mahler
Joseph G. Mahler
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Senior Vice President, Chief Financial |
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Officer, Treasurer and Corporate Secretary |
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(Principal Financial Officer and Principal Accounting
Officer) |
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33
INDEX OF EXHIBITS
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Exhibit No. |
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Description |
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31.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 |
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Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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32.2 |
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Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |