Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
|
x |
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
for
the quarterly period ended July 31, 2007
or
|
o |
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)
Delaware
|
|
06-0853042
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer Identification Number)
|
3
Great Pasture Road
|
|
|
Danbury,
Connecticut
|
|
06813
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
(203)
825-6000
(Registrant’s
telephone number, including area code)
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 x
No o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o No
x
Common
Stock, par value $.0001 per share, outstanding at September 6, 2007:
67,996,271
FUELCELL
ENERGY, INC.
FORM
10-Q
As
of and
For the Three and Nine Month Periods Ended July 31, 2007
|
|
Page
|
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
Item
1.
|
|
Consolidated
Financial Statements (unaudited)
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets as of July 31, 2007 and October 31, 2006
|
|
3
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations for the three months ended July 31, 2007
and
2006
|
|
4
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations for the nine months ended July 31, 2007
and
2006
|
|
5
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the nine months ended July 31, 2007
and
2006
|
|
6
|
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
7
|
|
|
|
|
|
Item
2.
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
16
|
|
|
|
|
|
Item
3.
|
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
29
|
|
|
|
|
|
Item
4.
|
|
Controls
and Procedures
|
|
30
|
|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
|
|
|
Item 6.
|
|
Exhibits
|
|
31
|
|
|
|
|
|
|
|
Signature
|
|
32
|
FUELCELL
ENERGY, INC.
Consolidated
Balance Sheets
(Unaudited)
(Dollars
in thousands, except share and per share amounts)
|
|
July 31,
2007
|
|
October
31, 2006
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
106,100
|
|
$
|
26,247
|
|
Investments:
U.S. treasury securities
|
|
|
61,442
|
|
|
81,286
|
|
Accounts
receivable, net of allowance for doubtful accounts of $96 and $43,
respectively
|
|
|
10,161
|
|
|
9,402
|
|
Inventories,
net
|
|
|
23,911
|
|
|
14,121
|
|
Other
current assets
|
|
|
7,664
|
|
|
2,653
|
|
Total
current assets
|
|
|
209,278
|
|
|
133,709
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
40,860
|
|
|
48,136
|
|
Investments:
U.S. treasury securities
|
|
|
—
|
|
|
13,054
|
|
Investment
and loan to affiliate
|
|
|
12,438
|
|
|
11,483
|
|
Other
assets, net
|
|
|
287
|
|
|
270
|
|
Total
assets
|
|
$
|
262,863
|
|
$
|
206,652
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of long-term debt and other liabilities
|
|
$
|
1,005
|
|
$
|
653
|
|
Accounts
payable
|
|
|
8,022
|
|
|
12,508
|
|
Accrued
liabilities
|
|
|
7,790
|
|
|
6,418
|
|
Deferred
license fee income
|
|
|
—
|
|
|
38
|
|
Deferred
revenue and customer deposits
|
|
|
20,995
|
|
|
9,785
|
|
Total
current liabilities
|
|
|
37,812
|
|
|
29,402
|
|
|
|
|
|
|
|
|
|
Long-term
deferred revenue
|
|
|
4,844
|
|
|
5,162
|
|
Long-term
debt and other liabilities
|
|
|
611
|
|
|
678
|
|
Total
liabilities
|
|
|
43,267
|
|
|
35,242
|
|
Redeemable
minority interest
|
|
|
11,464
|
|
|
10,665
|
|
Redeemable
preferred stock ($0.01 par value, liquidation preference of $64,120
at
July 31, 2007 and October 31, 2006.)
|
|
|
59,950
|
|
|
59,950
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
Common
stock ($.0001 par value); 150,000,000 shares authorized at July 31,
2007
and October 31, 2006; 67,931,459
and 53,130,901 shares issued and outstanding at July 31, 2007 and
October
31, 2006, respectively.
|
|
|
7
|
|
|
5
|
|
Additional
paid-in capital
|
|
|
570,110
|
|
|
470,045
|
|
Accumulated
deficit
|
|
|
(421,935
|
)
|
|
(369,255
|
)
|
Treasury
stock, Common, at cost (12,282 and 15,583 shares in 2007 and 2006,
respectively.)
|
|
|
(126
|
)
|
|
(158
|
)
|
Deferred
compensation
|
|
|
126
|
|
|
158
|
|
Total
shareholders’ equity
|
|
|
148,182
|
|
|
100,795
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
262,863
|
|
$
|
206,652
|
|
See
accompanying notes to consolidated financial statements.
FUELCELL
ENERGY, INC.
Consolidated
Statements of Operations
(Unaudited)
(Dollars
in thousands, except share and per share amounts)
|
|
Three
Months Ended
July
31,
|
|
|
|
2007
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
Product
sales and revenues
|
|
$
|
7,807
|
|
$
|
5,376
|
|
Research
and development contracts
|
|
|
5,737
|
|
|
3,307
|
|
Total
revenues
|
|
|
13,544
|
|
|
8,683
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
Cost
of product sales and revenues
|
|
|
14,903
|
|
|
15,240
|
|
Cost
of research and development contracts
|
|
|
4,718
|
|
|
2,647
|
|
Administrative
and selling expenses
|
|
|
4,676
|
|
|
4,320
|
|
Research
and development expenses
|
|
|
6,980
|
|
|
6,621
|
|
Total
costs and expenses
|
|
|
31,277
|
|
|
28,828
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(17,733
|
)
|
|
(20,145
|
)
|
|
|
|
|
|
|
|
|
License
fee expense, net
|
|
|
—
|
|
|
(7
|
)
|
Interest
expense
|
|
|
(24
|
)
|
|
(22
|
)
|
Loss
from equity investments
|
|
|
(414
|
)
|
|
(275
|
)
|
Interest
and other income, net
|
|
|
3,152
|
|
|
1,737
|
|
|
|
|
|
|
|
|
|
Loss
before redeemable minority interest
|
|
|
(15,019
|
)
|
|
(18,712
|
)
|
|
|
|
|
|
|
|
|
Redeemable
minority interest
|
|
|
(421
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
Loss
before provision for income taxes
|
|
|
(15,440
|
)
|
|
(18,712
|
)
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(15,440
|
)
|
|
(18,712
|
)
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
(802
|
)
|
|
(1,082
|
)
|
|
|
|
|
|
|
|
|
Net
loss to common shareholders
|
|
$
|
(16,242
|
)
|
$
|
(19,794
|
)
|
|
|
|
|
|
|
|
|
Loss
per share basic and diluted:
|
|
|
|
|
|
|
|
Net
loss per share to common shareholders
|
|
$
|
(0.24
|
)
|
$
|
(0.37
|
)
|
Basic
and diluted weighted average shares outstanding
|
|
|
67,939,527
|
|
|
53,116,670
|
|
See
accompanying notes to consolidated financial statements.
FUELCELL
ENERGY, INC.
Consolidated
Statements of Operations
(Unaudited)
(Dollars
in thousands, except share and per share amounts)
|
|
Nine
Months Ended
July
31,
|
|
|
|
2007
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
Product
sales and revenues
|
|
$
|
21,567
|
|
$
|
14,863
|
|
Research
and development contracts
|
|
|
10,194
|
|
|
9,298
|
|
Total
revenues
|
|
|
31,761
|
|
|
24,161
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
Cost
of product sales and revenues
|
|
|
44,679
|
|
|
40,332
|
|
Cost
of research and development contracts
|
|
|
8,758
|
|
|
8,283
|
|
Administrative
and selling expenses
|
|
|
13,866
|
|
|
13,238
|
|
Research
and development expenses
|
|
|
20,489
|
|
|
17,898
|
|
Total
costs and expenses
|
|
|
87,792
|
|
|
79,751
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(56,031
|
)
|
|
(55,590
|
)
|
|
|
|
|
|
|
|
|
License
fee income, net
|
|
|
34
|
|
|
45
|
|
Interest
expense
|
|
|
(72
|
)
|
|
(76
|
)
|
Loss
from equity investments
|
|
|
(1,032
|
)
|
|
(715
|
)
|
Interest
and other income, net
|
|
|
5,654
|
|
|
4,491
|
|
|
|
|
|
|
|
|
|
Loss
before redeemable minority interest
|
|
|
(51,447
|
)
|
|
(51,845
|
)
|
|
|
|
|
|
|
|
|
Redeemable
minority interest
|
|
|
(1,233
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
Loss
before provision for income taxes
|
|
|
(52,680
|
)
|
|
(51,845
|
)
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(52,680
|
)
|
|
(51,845
|
)
|
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
(2,406
|
)
|
|
(8,139
|
)
|
|
|
|
|
|
|
|
|
Net
loss to common shareholders
|
|
$
|
(55,086
|
)
|
$
|
(59,984
|
)
|
|
|
|
|
|
|
|
|
Loss
per share basic and diluted:
|
|
|
|
|
|
|
|
Net
loss per share to common shareholders
|
|
$
|
(0.92
|
)
|
$
|
(1.19
|
)
|
Basic
and diluted weighted average shares outstanding
|
|
|
59,967,137
|
|
|
50,341,771
|
|
See
accompanying notes to consolidated financial statements.
FUELCELL
ENERGY, INC.
Consolidated
Statements of Cash Flows
(Unaudited)
(Dollars
in thousands)
|
|
Nine
Months Ended
July
31,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(52,680
|
)
|
$
|
(51,845
|
)
|
Adjustments
to reconcile net loss to net cash used in
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
3,939
|
|
|
3,211
|
|
Loss
in equity investments
|
|
|
1,032
|
|
|
715
|
|
Interest
receivable from loan to affiliate
|
|
|
(23
|
)
|
|
—
|
|
Loss
on redeemable minority interest
|
|
|
1,233
|
|
|
—
|
|
Gain
on derivative
|
|
|
65
|
|
|
—
|
|
Depreciation
and amortization
|
|
|
7,004
|
|
|
6,820
|
|
Amortization
(accretion) of bond premium (discount)
|
|
|
(574
|
)
|
|
97
|
|
Provision
for doubtful accounts
|
|
|
53
|
|
|
34
|
|
(Increase)
decrease in operating assets:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(812
|
)
|
|
317
|
|
Inventories
|
|
|
(5,847
|
)
|
|
(2,547
|
)
|
Other
assets
|
|
|
(4,981
|
)
|
|
(550
|
)
|
Increase
(decrease) in operating liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(4,486
|
)
|
|
3,289
|
|
Accrued
liabilities
|
|
|
2,497
|
|
|
1,057
|
|
Deferred
revenue and customer deposits
|
|
|
10,892
|
|
|
1,919
|
|
Deferred
license fee income and other
|
|
|
(38
|
)
|
|
74
|
|
Net
cash used in operating activities
|
|
|
(42,726
|
)
|
|
(37,409
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(3,487
|
)
|
|
(9,469
|
)
|
Loan
to affiliate
|
|
|
(2,000
|
)
|
|
—
|
|
Treasury
notes matured
|
|
|
270,609
|
|
|
149,900
|
|
Treasury
notes purchased
|
|
|
(237,137
|
)
|
|
(106,844
|
)
|
Net
cash provided by investing activities
|
|
|
27,985
|
|
|
33,587
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Repayment
of debt
|
|
|
(318
|
)
|
|
(458
|
)
|
Proceeds
from debt
|
|
|
354
|
|
|
—
|
|
Payment
of preferred dividends
|
|
|
(2,840
|
)
|
|
(8,129
|
)
|
Net
proceeds from sale of common stock
|
|
|
95,457
|
|
|
7,812
|
|
Common
stock issued for option and stock purchase plans
|
|
|
1,941
|
|
|
1,375
|
|
Net
cash provided by financing activities
|
|
|
94,594
|
|
|
600
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
79,853
|
|
|
(3,222
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents-beginning of period
|
|
|
26,247
|
|
|
22,702
|
|
Cash
and cash equivalents-end of period
|
|
$
|
106,100
|
|
$
|
19,480
|
|
See
accompanying notes to consolidated financial statements.
FUELCELL
ENERGY, INC.
Notes
to Consolidated Financial
Statements
As
of and for the three and nine months ended
July 31, 2007 and 2006
(Unaudited)
(Tabular
amounts in thousands, except share and per
share amounts)
Note
1. Summary of Significant Accounting Policies
Nature
of Business
FuelCell
Energy Inc. (“FuelCell” or the “Company”) develops, manufactures and markets
ultra-clean power plants that generate electricity 24/7 with up to twice the
efficiency of conventional fossil fuel plants with virtually no air pollution
and reduced greenhouse gas emissions. Our DFC power plants use a variety of
fuels including renewable biogas and readily-available fuels such as natural
gas
and have generated more than 180 million kilowatt hours of power for commercial,
industrial, municipal and utility customers. FuelCell Energy’s fuel cells are
generating power at over 50 locations worldwide.
We
have
been developing fuel cell technology since our founding in 1969. Our core
carbonate fuel cell products (“Direct FuelCell®”
or
“DFC®
Power
Plants”), offer stationary applications for customers. In addition to our
current commercial products, we continue to develop our next generation of
carbonate fuel cell and hybrid products as well as planar solid oxide fuel
cell
(“SOFC”) technology with our own and government research and development funds.
Basis
of Presentation - Interim Consolidated Financial Statements
The
accompanying unaudited consolidated financial statements have been prepared
in
accordance with accounting principles generally accepted in the United States
of
America (“GAAP”), for interim financial information, and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain
all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary to present fairly our financial position as
of
July 31, 2007 have been included. The balance sheet as of October 31, 2006
has
been derived from the audited financial statements at that date.
The
preparation of financial statements and related disclosures in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and
revenues and expenses during the period reported. Actual results could differ
from those estimates.
The
results of operations and cash flows for the three and nine months ended July
31, 2007 are not necessarily indicative of the results to be expected for the
full year. The reader should supplement the information in this document with
prior disclosures in our 2006 Annual Report on Form 10-K.
Consolidation
The
consolidated financial statements include our accounts and those of our
subsidiaries, including our Canadian subsidiary, FuelCell Energy, Ltd., and
a
subsidiary formed in April 2006, Bridgeport Fuel Cell Park, LLC, for the purpose
of developing a 10 MW fuel cell park to be located in Bridgeport, Connecticut.
Alliance Monterrey, LLC; Alliance Star Energy, LLC; and Alliance TST Energy,
LLC
are joint ventures with Alliance Power, Inc. to construct fuel cell power plants
and sell power under power purchase agreements to the following customers:
the
City of Santa Barbara, the Sheraton San Diego Hotel & Marina, the Westin San
Francisco Airport Hotel and TST, Inc., respectively. Alliance Chico, LLC is
another joint venture with Alliance Power, Inc for the development and sale
of
power plants for California customers. The financial results of the joint
ventures are consolidated with those of the Company, which owns 80 percent
of
each entity. Cumulative minority interest in these Alliance entities is not
material to the consolidated financial statements. Intercompany accounts and
transactions have been eliminated. In January 2007, we formed a new subsidiary,
Long Beach Clean Energy, LLC, for bids in New York state. We also formed an
entity called DFC-ERG Milford, LLC for project activity under the Connecticut
Clean Energy Fund’s Project 100. No significant activity was recorded in either
of these entities during the nine months ended July 31, 2007.
FUELCELL
ENERGY, INC.
Notes
to Consolidated Financial
Statements
As
of and for the three and nine months ended
July 31, 2007 and 2006
(Unaudited)
(Tabular
amounts in thousands, except share and per
share amounts)
Certain
reclassifications have been made to our prior year amounts to conform to the
2007 presentation.
Foreign
Currency Translation
Our
Canadian subsidiary, FuelCell Energy, Ltd., is financially and operationally
integrated and therefore the temporal method of translation of foreign
currencies is followed. The functional currency is U.S. dollars. Foreign
currency gains and losses are classified in interest and other income on our
consolidated statement of operations.
There
was
not a material amount of foreign currency gains or losses during the three
and
nine months ended July 31, 2007 and 2006.
Comprehensive
Loss
Our
comprehensive loss equals net loss (as reported before preferred dividends)
on
our consolidated statement of operations of $15.4 million and $52.7 million
for
the three and nine months ended July 31, 2007, respectively, and $18.7 million
and $51.8 million for the three and nine months ended July 31, 2006,
respectively. Comprehensive income (loss) is defined as the increase or decrease
in equity from sources other than owners.
Recent
Accounting Pronouncements
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertain
Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an entity’s financial statements.
FIN 48 prescribes a comprehensive model 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.
FIN 48 is effective for fiscal years beginning after December 16, 2006
(beginning of our fiscal 2008 on November 1, 2007). The Company is currently
evaluating FIN 48 and we do not anticipate that it will have a material impact
on our financial statements upon adoption due to the Company’s current income
tax position.
Note
2. Equity investments
Versa
Power Systems, Inc. (“Versa”) is one of our sub-contractors under the Department
of Energy (“DOE”) large-scale hybrid project to develop a coal-based,
multi-megawatt solid oxide fuel cell-based hybrid system. Our equity investment
in Versa totaled approximately $10.4 million and $11.5 million as of July 31,
2007 and October 31, 2006, respectively. Our ownership interest at July 31,
2007
was 39 percent and we account for Versa under the equity method of accounting.
During
the three months ended July 31, 2007, the Company invested $2.0 million in
Versa
in the form of a convertible note. This investment would bring the Company’s
ownership percentage in Versa to approximately 43% should this note be converted
into common stock. In conjunction with this investment the Company also received
warrants for the right to purchase an additional 2,286 shares of common stock
with an exercise price of $175 per share. The fair value of the warrants was
approximately $0.2 million as of July 31, 2007 and is included within Investment
and loan to affiliate on the consolidated balance sheet. Changes in the fair
value of the warrants will be included in the consolidated statement of
operations each period.
FUELCELL
ENERGY, INC.
Notes
to Consolidated Financial
Statements
As
of and for the three and nine months ended
July 31, 2007 and 2006
(Unaudited)
(Tabular
amounts in thousands, except share and per
share amounts)
Note
3. Investments
Our
short-term investments are in U.S. treasury securities, which are held to
maturity. The following table summarizes the amortized cost basis and fair
value
at July 31, 2007 and October 31, 2006:
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
(Losses)
|
|
Fair
Value
|
|
At
July 31, 2007
|
|
|
|
|
|
|
|
|
|
U.S.
government obligations
|
|
$
|
61,442
|
|
$
|
13
|
|
$
|
(37
|
)
|
$
|
61,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
October 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government obligations
|
|
$
|
94,340
|
|
$
|
24
|
|
$
|
(345
|
)
|
$
|
94,019
|
|
Reported
as: |
|
July
31,
|
|
October
31,
|
|
|
|
2007
|
|
2006
|
|
Short-term
investments
|
|
$
|
61,442
|
|
$
|
81,286
|
|
Long-term
investments
|
|
|
—
|
|
|
13,054
|
|
Total
|
|
$
|
61,442
|
|
$
|
94,340
|
|
As
of
July 31, 2007, short-term investment securities have maturity dates ranging
from
August 15, 2007 to May 15, 2008, and estimated yields ranging from 3.02 percent
to 5.59 percent. There were no long-term investment securities as of July 31,
2007. Our weighted average yield on our short-term investments was 4.37 percent
as of July 31, 2007.
Note
4. Inventories
The
components of inventory at July 31, 2007 and October 31, 2006 consisted of
the
following:
|
|
July
31,
|
|
October
31,
|
|
|
|
2007
|
|
2006
|
|
Raw
materials
|
|
$
|
10,814
|
|
$
|
5,571
|
|
Work-in-process
|
|
|
13,097
|
|
|
8,550
|
|
Total
|
|
$
|
23,911
|
|
$
|
14,121
|
|
Our
inventories are stated at the lower of recoverable cost or market price. We
provide for a lower of cost or market adjustment against gross inventory values.
Our lower of cost or market adjustment, reducing gross inventory values to
the
reported amounts, was approximately $14.2 million and $10.8 million at July
31,
2007 and October 31, 2006, respectively.
FUELCELL
ENERGY, INC.
Notes
to Consolidated Financial
Statements
As
of and for the three and nine months ended
July 31, 2007 and 2006
(Unaudited)
(Tabular
amounts in thousands, except share and per
share amounts)
Note
5. Property, Plant and Equipment
Property,
plant and equipment at July 31, 2007 and October 31, 2006 consisted of the
following:
|
|
July
31,
2007
|
|
October
31,
2006
|
|
Estimated
Useful
Life
|
|
Land
|
|
$
|
524
|
|
$
|
524
|
|
|
—
|
|
Building
and improvements
|
|
|
6,453
|
|
|
5,996
|
|
|
10-30
years
|
|
Machinery,
equipment and software
|
|
|
52,892
|
|
|
50,645
|
|
|
3-8
years
|
|
Furniture
and fixtures
|
|
|
2,466
|
|
|
2,456
|
|
|
6-10
years
|
|
Equipment
leased to others
|
|
|
2,063
|
|
|
2,063
|
|
|
3
years
|
|
Power
plants for use under power purchase agreements
|
|
|
17,743
|
|
|
20,576
|
|
|
10
years
|
|
Construction
in progress(1)
|
|
|
4,636
|
|
|
6,316
|
|
|
|
|
|
|
$
|
86,777
|
|
$
|
88,576
|
|
|
|
|
Less
accumulated depreciation
|
|
|
(45,917
|
)
|
|
(40,440
|
)
|
|
|
|
Total
|
|
$
|
40,860
|
|
$
|
48,136
|
|
|
|
|
|
(1)
|
Included
in construction in progress are costs of approximately $0.6 million
and
$3.0 million at July 31, 2007 and October 31, 2006, respectively,
to build
power plants for servicing power purchase agreement contracts.
|
Depreciation
expense was approximately $7.0 million and $6.6 million for the nine months
ended July 31, 2007 and 2006, respectively.
In
December 2006, we completed the sale of the 1 MW power plant that had been
operating under a power purchase agreement to the Sierra Nevada Brewing Co.
This
resulted in a $5.5 million decrease in gross property, plant and equipment,
a
$1.5 million decrease in accumulated depreciation and a $2.2 million decrease
in
liabilities related to the California Self-Generation Incentive Program which
were assumed by the Sierra Nevada Brewing Co. Net cash proceeds from this
transaction were $1.8 million.
Note
6. Share-Based Compensation
The
Company has shareholder approved equity incentive plans and a shareholder
approved Section 423 Stock Purchase Plan (the “ESPP”), which are described in
more detail below.
The
compensation cost that has been charged against income for Share-Based Plans
was
$1.2 million and $1.1 million for the three months ended July 31, 2007 and
2006,
respectively, and $3.9 million and $3.2 million for the nine months ended July
31, 2007 and 2006, respectively. Share-based compensation included in the
consolidated statements of operations for the three and nine months ended July
31, 2007 and 2006 was as follows:
|
|
Three
Months Ended
July
31,
|
|
Nine
Months Ended
July
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Cost
of product sales and revenues
|
|
$
|
160
|
|
$
|
162
|
|
$
|
539
|
|
$
|
472
|
|
Cost
of research and development contracts
|
|
|
78
|
|
|
47
|
|
|
216
|
|
|
139
|
|
General
and administrative expense
|
|
|
737
|
|
|
680
|
|
|
2,334
|
|
|
2,063
|
|
Research
and development expense
|
|
|
264
|
|
|
201
|
|
|
821
|
|
|
530
|
|
Total
share-based compensation
|
|
$
|
1,239
|
|
$
|
1,090
|
|
$
|
3,910
|
|
$
|
3,204
|
|
FUELCELL
ENERGY, INC.
Notes
to Consolidated Financial
Statements
As
of and for the three and nine months ended
July 31, 2007 and 2006
(Unaudited)
(Tabular
amounts in thousands, except share and per
share amounts)
Equity
Incentive Plans
The
Board
adopted the 1998 and 2006 Equity Incentive Plans (collectively, “the Plans”).
Under the terms of the Plans, 8.5 million shares of common stock may be granted
as options or stock to our officers, key employees and directors. As of July
31,
2007, 2.1 million shares were available for grant. Pursuant to the Plans, the
Board is authorized to grant incentive stock options or nonqualified options
and
stock appreciation rights to our officers and key employees and may grant
nonqualified options and stock appreciation rights to our directors. Stock
options and stock appreciation rights have restrictions as to transferability.
The option exercise price shall be fixed by the Board but in the case of
incentive stock options, shall not be less than 100 percent of the fair market
value of the shares subject to the option on the date the option is granted.
Stock appreciation rights may be granted in conjunction with options granted
under the Plans. Stock options that have been granted are generally exercisable
commencing one year after grant at the rate of 25 percent of such shares in
each
succeeding year and have a ten-year maximum term. There were no stock
appreciation rights outstanding at July 31, 2007 or October 31,
2006.
The
fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model that uses the assumptions noted in the
following table. Expected volatility is based on a combination of the historical
volatility of the Company’s stock and the implied volatility from traded
options. We use historical data to estimate the expected term of options
granted.
|
|
Three
Months Ended
July
31,
|
|
Nine
Months Ended
July
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Expected
life (in years)
|
|
|
6.62
|
|
|
6.27
|
|
|
6.53
|
|
|
6.31
|
|
Risk-free
interest rate
|
|
|
4.81
|
%
|
|
4.91
|
%
|
|
4.55
|
%
|
|
4.57
|
%
|
Volatility
|
|
|
57.1
|
%
|
|
58.1
|
%
|
|
61.3
|
%
|
|
56.6
|
%
|
Dividend
yield
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
The
following table summarizes the Plans’ stock option activity for the nine months
ended July 31, 2007:
|
|
Number
of options
|
|
Weighted
average
option
price
|
|
Outstanding
at October 31, 2006
|
|
|
6,453,404
|
|
$
|
10.33
|
|
Granted
|
|
|
897,712
|
|
|
7.00
|
|
Exercised
|
|
|
(1,260,500
|
)
|
|
1.69
|
|
Forfeited/Cancelled
|
|
|
(791,350
|
)
|
|
15.25
|
|
Outstanding
at July 31, 2007
|
|
|
5,299,266
|
|
|
11.12
|
|
The
weighted average grant-date fair value of options granted during the three
and
nine months ended July 31, 2007 was $4.60 and $4.44, respectively, and was
$5.47
and $5.92, respectively, for the three and nine months ended July 31, 2006.
The
total intrinsic value of options outstanding and options exercisable at July
31,
2007 was $3.0 million and $2.6 million, respectively. The total intrinsic value
of options exercised during the three and nine months ended July 31, 2007 was
$0.01 million and $7.2 million, respectively, and was $0.2 million and $2.1
million, respectively, for the three and nine months ended July 31, 2006,
respectively.
FUELCELL
ENERGY, INC.
Notes
to Consolidated Financial
Statements
As
of and for the three and nine months ended
July 31, 2007 and 2006
(Unaudited)
(Tabular
amounts in thousands, except share and per
share amounts)
The
following table summarizes information about stock options outstanding and
exercisable at July 31, 2007:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
Range
of exercise prices
|
|
Number
outstanding
|
|
Weighted
average remaining contractual life
|
|
Weighted
average exercise price
|
|
Number
exercisable
|
|
Weighted
average exercise price
|
$0.28
|
-
|
$5.10
|
|
343,800
|
|
1.4
|
|
$
|
1.72
|
|
343,800
|
|
$
|
1.72
|
$5.11
|
-
|
$9.92
|
|
2,453,192
|
|
7.8
|
|
|
7.60
|
|
1,010,344
|
|
|
7.40
|
$9.93
|
-
|
$14.74
|
|
1,677,656
|
|
6.6
|
|
|
12.21
|
|
1,108,350
|
|
|
12.79
|
$14.75
|
-
|
$19.56
|
|
328,618
|
|
3.6
|
|
|
16.82
|
|
324,743
|
|
|
16.83
|
$19.57
|
-
|
$24.39
|
|
237,000
|
|
3.7
|
|
|
23.00
|
|
237,000
|
|
|
23.00
|
$24.40
|
-
|
$29.21
|
|
27,000
|
|
3.5
|
|
|
26.15
|
|
27,000
|
|
|
26.15
|
$29.22
|
-
|
$34.03
|
|
168,000
|
|
3.4
|
|
|
29.91
|
|
168,000
|
|
|
29.91
|
$34.04
|
-
|
$48.49
|
|
64,000
|
|
3.2
|
|
|
38.50
|
|
64,000
|
|
|
38.50
|
|
|
|
|
5,299,266
|
|
6.3
|
|
$
|
11.12
|
|
3,283,237
|
|
$
|
12.60
|
As
of
July 31, 2007, total compensation cost related to nonvested stock options not
yet recognized was $9.1 million, which is expected to be recognized over the
next 1.2 years on a weighted-average basis.
During
the nine months ended July 31, 2007, we issued 8,391 shares of common stock
with
a value of $0.07 million to directors as compensation in lieu of cash. During
the nine months ended July 31, 2006, we issued 6,965 shares of common stock
with
a value of $0.06 million to directors as compensation in lieu of cash. These
2006 shares were fully vested at the date of grant.
Employee
Stock Purchase Plan
Our
shareholders adopted the Employee Stock Purchase Plan (“ESPP”) on July
31, 1993, which has been amended from time to time by the Board. The total
shares allocated to the ESPP are 900,000. Under the ESPP, eligible employees
have the right to subscribe to purchase shares of common stock at the lesser
of
85 percent of the high and low market prices on the first day of the purchase
period or the last day of the purchase period and such purchased shares have
a
six month vesting period. As of July 31, 2007, there were 308,270 shares of
Common Stock reserved for issuance under the ESPP.
Activity
in the ESPP for the nine months ended July 31, 2007 was as follows:
|
|
Number
of
Shares
|
|
Balance
at October 31, 2006
|
|
|
355,587
|
|
Issued
at $5.63
|
|
|
(22,750
|
)
|
Issued
at $5.61
|
|
|
(24,567
|
)
|
Balance
at July 31, 2007
|
|
|
308,270
|
|
The
weighted-average grant date fair value of shares issued under the ESPP during
the nine months ended July 31, 2007 was $1.94.
FUELCELL
ENERGY, INC.
Notes
to Consolidated Financial
Statements
As
of and for the three and nine months ended
July 31, 2007 and 2006
(Unaudited)
(Tabular
amounts in thousands, except share and per
share amounts)
The
fair
value of shares under the ESPP are determined at the grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
|
|
Nine
months ended
July
31, 2007
|
|
Expected
life (in years)
|
|
|
0.5
|
|
Risk-free
interest rate
|
|
|
5.06
|
%
|
Volatility
|
|
|
46.7
|
%
|
Dividend
yield
|
|
|
—
|
|
Incentive
Compensation
Stock
may
be issued to employees as part of FuelCell’s annual incentive bonus. During the
nine months ended July 31, 2007, 133,419 shares of common stock with a value
of
$0.9 million were issued as incentive bonus (in lieu of cash). During the nine
months ended July 31, 2006, we issued 75,585 shares of common stock with a
value
of $0.7 million as incentive bonus (in lieu of cash).
Note
7. Shareholders' Equity
Changes
in shareholders’ equity were as follows for the nine months ended July 31,
2007:
Balance
at October 31, 2006
|
|
$
|
100,795
|
|
Sale
of common stock
|
|
|
95,512
|
|
Increase
in additional paid-in-capital for stock-based compensation
|
|
|
3,939
|
|
Increase
in additional paid-in-capital for stock issued under employee benefit
plans
|
|
|
3,010
|
|
Increase
in additional paid-in-capital for issuance of warrants
|
|
|
10
|
|
Series
B preferred dividends
|
|
|
(2,406
|
)
|
Change
in common stock, par
|
|
|
2
|
|
Net
loss
|
|
|
(52,680
|
)
|
Balance
at July 31, 2007
|
|
$
|
148,182
|
|
Sale
of Common Stock
In
April
2007, we completed a public offering of 9.4 million shares of our common stock
for net proceeds of $65.4 million. In February 2007, POSCO Power purchased
approximately 3.8 million shares of our common stock, which was restricted
for
six months, for $29.0 million. Additionally, we have sold 160,000 shares of
our
common stock on the open market during the nine months ended July 31, 2007
resulting in net proceeds of approximately $1.1 million.
Note
8. Segment Information and Major Customers
Under
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related
Information,” we use the “management” approach to reporting segments. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas, and major customers. Under SFAS No.
131, we have identified one business segment: fuel cell power plant production
and research.
FUELCELL
ENERGY, INC.
Notes
to Consolidated Financial
Statements
As
of and for the three and nine months ended
July 31, 2007 and 2006
(Unaudited)
(Tabular
amounts in thousands, except share and per
share amounts)
Enterprise-wide
Information
Enterprise-wide
information provided on geographic revenues is based on the customer’s ordering
location. The following table presents revenues (greater than ten percent of
our
total revenues) for geographic areas:
|
|
Three
months ended
July
31,
|
|
Nine
months ended
July
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
9,429
|
|
$
|
6,606
|
|
$
|
21,591
|
|
$
|
18,686
|
|
Canada
|
|
|
*
|
|
|
*
|
|
|
3,562
|
|
|
*
|
|
Korea
|
|
|
1,643
|
|
|
*
|
|
|
*
|
|
|
*
|
|
Germany
|
|
|
2,316
|
|
|
1,215
|
|
|
4,033
|
|
|
4,084
|
|
Information
about Major Customers
We
contract with a small number of customers for the sales of our products or
research and development contracts. Those customers that accounted for greater
than ten percent of our total revenues during the three and nine months ended
July 31, 2007 and 2006 are as follows:
|
|
Three
months ended
July
31,
|
|
Nine
months ended
July
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
U.S.
Government (1)
|
|
|
42
|
%
|
|
37
|
%
|
|
31
|
%
|
|
37
|
%
|
Enbridge,
Inc.
|
|
|
*
|
%
|
|
*
|
%
|
|
11
|
%
|
|
*
|
%
|
MTU
CFC Solutions, GmbH
|
|
|
17
|
%
|
|
14
|
%
|
|
13
|
%
|
|
17
|
%
|
Chevron
Energy Solutions
|
|
|
11
|
%
|
|
*
|
%
|
|
*
|
%
|
|
*
|
%
|
POSCO
Power
|
|
|
12
|
%
|
|
*
|
%
|
|
*
|
%
|
|
*
|
%
|
Alliance
Power, Inc.
|
|
|
*
|
%
|
|
18
|
%
|
|
*
|
%
|
|
*
|
%
|
Logan
Energy
|
|
|
*
|
%
|
|
11
|
%
|
|
*
|
%
|
|
11
|
%
|
*
Less
than 10 percent of total revenues in period.
(1)
-
Includes government agencies such as the U.S. Department of Energy and the
U.S.
Navy either directly or through prime contractors.
Note
9. Earnings Per Share
Basic
and
diluted earnings per share are calculated using the following
data:
|
|
Three
months ended
July
31,
|
|
Nine
months ended
July
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Weighted
average basic common
shares
|
|
|
67,939,527
|
|
|
53,116,670
|
|
|
59,967,137
|
|
|
50,341,771
|
|
Effect
of dilutive securities(1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted
average basic common shares adjusted for diluted calculations
|
|
|
67,939,527
|
|
|
53,116,670
|
|
|
59,967,137
|
|
|
50,341,771
|
|
(1) |
We
computed earnings per share without consideration to potentially
dilutive
instruments because losses incurred would make them antidilutive.
Future
potentially dilutive stock options that were in-the-money at July
31, 2007
and 2006 totaled 1.6 and 2.8 million,
respectively. Future potentially dilutive stock options that were
not
in-the-money at July 31, 2007 and 2006 totaled 3.7 million for
each
period.
We also have future potentially dilutive warrants issued, which
vest and
expire over time.
As of July 31, 2007, 37,500 warrants were vested with an exercise
price of
$9.89 and we also had 867,500 unvested warrants.
|
FUELCELL
ENERGY, INC.
Notes
to Consolidated Financial
Statements
As
of and for the three and nine months ended
July 31, 2007 and 2006
(Unaudited)
(Tabular
amounts in thousands, except share and per
share amounts)
Note
10. Supplemental Cash Flow Information
The
following represents supplemental cash flow
information:
|
|
Nine
Months Ended July
31,
|
|
|
|
2007
|
|
2006
|
|
Cash
paid during the period for:
|
|
|
|
|
|
Interest
|
|
$
|
72
|
|
$
|
75
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
Accrued
Employee Stock Purchase Plan
|
|
$
|
128
|
|
$
|
140
|
|
Accrued
Common Stock Issued for Bonus Incentive
|
|
$
|
942
|
|
$
|
718
|
|
Impact
on investing activities resulting from the sale of a power plant
to Sierra
Nevada Brewing Co.(1)
|
|
$
|
(3,943
|
)
|
$
|
—
|
|
(1) |
In
December 2006, we completed the sale of the 1 MW power plant that
had been
operating under a power purchase agreement to the Sierra Nevada Brewing
Co. The net book value of the asset of approximately $3.9 million,
which
was recorded in property, plant and equipment as of October 31, 2006,
was
recorded in cost of product sales and revenues upon the sale of the
asset.
In addition, this sale resulted in the assumption by the buyer of
certain
of our incentive fund liabilities resulting in a $2.2 million decrease
in
deferred revenue liabilities, which was recorded in cost of product
sales
and revenues. Net cash proceeds from this transaction were $1.8 million,
which is included within operating activities on the consolidated
statement of cash flows. Refer also to Note 5 - Property, Plant and
Equipment.
|
Note
11. Commitments and Contingencies
Legal
proceedings
On
November 14, 2005, Zoot Properties, LLC and Zoot Enterprises, Inc. (“Zoot”)
commenced an action in the U.S. District Court for the District of Montana,
Butte Division against the Company and one of our distribution partners, PPL
Energy Services Holding, LLC. The lawsuit alleged that the plaintiffs purchased
fuel cells from PPL that were manufactured by the Company, and that these fuel
cells failed to perform as represented and warranted. Zoot sought rescission
of
the contract with PPL, totaling approximately $2.5 million. We reached a
settlement agreement on this lawsuit resulting in payments by the Company during
the third quarter of 2007, net of insurance, of $0.8 million in exchange for
the
power plants. There was no impact on the Company’s consolidated statement of
operations as a result of this settlement.
Restricted
cash and cash equivalents
Approximately
$2.4 million of our cash and cash equivalents have been pledged as collateral
and letters of credit for certain banking relationships and customer contracts.
Approximately $1.9 million of this collateral supports letters of credit, which
have expiration dates on or before December 31, 2007.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
Management’s
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
MD&A is organized as follows:
Caution
concerning forward-looking statements. This
section discusses how certain forward-looking statements made by us throughout
the MD&A are based on management’s present expectations about future events
and are inherently susceptible to uncertainty and changes in
circumstances.
Overview
and recent developments.
This
section provides a general description of our business. We also briefly
summarize any significant events occurring subsequent to the close of the
reporting period.
Critical
accounting policies and estimates.
This
section discusses those accounting policies and estimates that are both
considered important to our financial condition and operating results and
require significant judgment and estimates on the part of management in their
application.
Results
of operations.
This
section provides an analysis of our results of operations for the three and
nine
months ended July 31, 2007 and 2006. In addition, a description is provided
of
transactions and events that impact the comparability of the results being
analyzed.
Liquidity
and capital resources.
This
section provides an analysis of our cash position and cash flows.
Recent
accounting pronouncements.
This
section summarizes recent accounting pronouncements and their impact on the
Company.
CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS
The
following discussion should be read in conjunction with the accompanying
Consolidated Financial Statements and Notes thereto included within our 2006
Form 10-K. In addition to historical information, this Form 10-Q and the
following discussion contain forward-looking statements. All forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Factors that could cause
such
a difference include, without limitation, general risks associated with product
development, manufacturing, changes in the utility regulatory environment,
potential volatility of energy prices, rapid technological change, ability
to
reach product cost objectives, and competition, as well as other risks set
forth
in our filings with the Securities and Exchange Commission including those
set
forth under the caption “Risk Factors” in this report.
OVERVIEW
FuelCell
Energy develops, manufactures and markets ultra-clean power plants that generate
electricity 24/7 with up to twice the efficiency of conventional fossil fuel
plants with virtually no air pollution and reduced greenhouse gas emissions.
Our
DFC power plants use a variety of fuels including renewable biogas and
readily-available fuels such as natural gas and have generated more than 180
million kilowatt hours of power for commercial, industrial, municipal and
utility customers. FuelCell Energy’s fuel cells are generating power at over 50
locations worldwide.
We
have
been developing fuel cell technology since our founding in 1969. Our core
carbonate fuel cell products (“Direct FuelCell®”
or
“DFC®
Power
Plants”), offer stationary applications for customers. In addition to our
current commercial products, we continue to develop our next generation of
carbonate fuel cell and hybrid products as well as planar solid oxide fuel
cell
(“SOFC”) technology with our own and government research and development funds.
Our
proprietary carbonate DFC power plants electrochemically (meaning without
combustion) produce electricity directly from readily available hydrocarbon
fuels, such as natural gas and biomass fuels. Customers buy fuel cells to
improve reliability, reduce costs and reduce emissions.
We
believe our products offer significant advantages compared to other power
generation technologies:
|
·
|
Reliable
24/7 baseload power,
|
|
·
|
Ultra-clean
(e.g. virtually zero emissions) and quiet
operation,
|
|
·
|
Lower
cost to generate electricity,
|
|
·
|
The
ability to site units locally, and
|
|
·
|
provide
high temperature heat for cogeneration
applications.
|
Our
core
products, the DFC300MA, DFC1500MA and DFC3000, are currently rated in capacity
at 300 kW, 1.2 MW and 2.4 MW, respectively and are designed for applications
up
to 50 MW. Our products meet the baseload power requirements of a wide range
of
customers, including wastewater treatment plants (municipal, such as sewage
treatment facilities, and industrial, such as breweries and food processors),
hotels and manufacturing facilities, universities, hospitals,
telecommunications/data centers, government facilities, as well as grid support
applications for utility customers. Our DFC power plants can be part of a
total onsite power generation solution for customers with our high efficiency
products providing the baseload power with grid-delivered electricity and
intermittent power, such as solar, or less efficient combustion-based equipment
providing peaking and load following energy needs. Our fuel cells offer flexible
siting and easy permitting. Our
products are also ideal for meeting the needs of utilities and the Renewable
Portfolio Standards (“RPS”) clean energy mandates now in 25 states and
Washington D.C.
The
market is beginning to recognize the advantages of stationary fuel cell power.
Volatile fuel and energy prices, the ratification of the Kyoto Protocol by
over
160 countries since 2005, and worldwide efforts to minimize greenhouse gases
like CO2 and other harmful emissions with mandates for significant increases
in
clean electric power generation, are placing greater emphasis on ultra-clean,
high efficiency distributed generation power. Electric generation without
combustion significantly reduces harmful pollutants such as NOX, SOX and
particulates. Higher fuel efficiency results in lower emissions of carbon
dioxide, a major contributor of harmful greenhouse gases, and also results
in
less fuel needed per kWh of electricity generated and Btu of heat produced,
thereby reducing exposure to volatile natural gas costs and minimizing operating
costs. With increasing demand for renewable and ultra-clean power options,
and
increased volatility and uncertainty in electric markets, our customers gain
control of power generation economics, reliability and emissions.
Our
business strategy is to expand our leadership position in key markets, build
multi-megawatt markets and continue to reduce the costs of our products. We
believe that with the emergence of the RPS markets, the growth of the California
and Asian markets and continuing product cost reduction, we are well positioned
to move to profitability. We are currently ramping our annual production rate
from 11 MW to 25 MW. At a sustained annual order and production volume of
approximately 35 MW to 50 MW, depending on product mix, geographic location
and
other variables such as fuel prices, we can reach gross margin breakeven. Our
net income break-even can be achieved at a sustained annual order and volume
production of approximately 75-100 MW assuming a mix of sub-MW and MW sales.
With the multi-MW order potential of Asia, Connecticut and California, our
2.4
MW DFC 3000 is expected to become gross margin profitable with volume. Thus,
if
product mix trends more toward MW and multi-MW orders, we believe that
profitability can be achieved at annual volumes lower than 75 MW.
Customers
buy our fuel cells for reliability, cost and environmental demands. There are
currently strong incentive programs in our target markets including California
and the Northeast in the U.S., South Korea and Japan in Asia and Germany in
Europe that make the cost of clean power solutions including fuel cells, wind
and solar, competitive. We believe that with continued cost reduction of our
products and increased volume, our products will be cost competitive on an
unsubsidized basis against the grid and other distributed generation products,
such as engines.
Recent
Developments
Versa
Investment
In
June
2007, we invested $2.0 million in Versa Power Systems, Inc. (“Versa”) in the
form of a convertible note. This investment would bring the Company’s ownership
percentage in Versa to approximately 43% should this note be converted into
common stock. In conjunction with this investment we also received warrants
for
the right to purchase an additional 2,286 shares of Versa common stock with
an
exercise price of $175 per share. Versa is a leading planar solid-oxide
technology developer and is a subcontractor on the Company’s DOE large-scale
project to develop a coal-based, multi-megawatt solid oxide fuel cell-based
hybrid system.
Increase
in Production Rate
The
Company is currently ramping its annual production rate from 11 MW to 25 MW
and
increasing physical plant capacity for MW class products in response to the
current and anticipated demand from Asia and California. We expect to invest
approximately $10 - 15 million over the next fifteen months to increase the
physical plant capacity to approximately 60 MW of annual production
volume.
Available
Information
Our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on
Form 8-K, and all amendments to those reports will be made available free of
charge through the Investor Relations section of our Internet website
(http://www.fuelcellenergy.com) as soon as practicable after such material
is
electronically filed with, or furnished to, the Securities and Exchange
Commission. Material contained on our website is not incorporated by reference
in this report. Our executive offices are located at 3 Great Pasture Road,
Danbury, CT 06813.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Revenue
Recognition
We
contract with our customers to perform research and development, manufacture
and
install fuel cell components and power plants under long-term contracts, and
provide services under contract. We recognize revenue on a method similar to
the
percentage-of-completion method.
Revenues
on fuel cell research and development contracts are recognized proportionally
as
costs are incurred and compared to the estimated total research and development
costs for each contract. In many cases, we are reimbursed only a portion of
the
costs incurred or to be incurred on the contract. Revenues from government
funded research, development and demonstration 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.
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. As of July 31, 2007, research and
development sales backlog totaled $22.1 million, of which 47 percent is funded.
Should funding be temporarily delayed or if business initiatives change, we
may
choose to devote resources to other activities, including internally funded
research and development.
Product
sales and revenues include revenues from power plant sales, service contracts,
electricity sales under power purchase agreements (“PPAs”) and incentive
funding. Revenues from power plant sales are recognized proportionally as costs
are incurred and assigned to a customer contract by comparing the estimated
total manufacture and installation costs for each contract to the total contract
value. For contracts under which there are contractual contingencies (e.g.
receipt of incentive funding), revenue is deferred until such contingencies
are
cleared. Revenues from service contracts are generally recognized ratably over
the contract term. For service contracts that include a fuel cell stack
replacement, a portion of the total contract value is recognized as revenue
at
the time of the stack replacement and the remainder of the contract value is
recognized ratably over the contract term. Revenues from electricity sales
under
power purchase agreements are recognized as power is produced. Revenues from
incentive funding are recognized ratably over the term of the incentive funding
agreement.
As
our
fuel cell products are in their initial stages of development and market
acceptance, actual costs incurred could differ materially from those previously
estimated. Once we have established that our fuel cell products have achieved
commercial market acceptance and future costs can be reasonably estimated,
then
estimated costs to complete an individual contract, in excess of revenue, will
be accrued immediately.
Warrant
Value Recognition
Warrants
have been issued as sales incentives to certain of our distribution partners.
These warrants vest as orders from our business partners exceed stipulated
levels. Should warrants vest, or when management estimates that it is probable
that warrants will vest, we will record a proportional amount of the fair value
of the warrants against related revenue as a sales discount.
Inventories
During
the procurement and manufacturing process of a fuel cell power plant, costs
for
material, labor and overhead are accumulated in raw materials and
work-in-process inventory until they are transferred to a customer contract,
at
which time they are recorded in cost of sales.
Our
inventories and advance payments to vendors are stated at the lower of cost
or
market (“LCM”) price. As we currently sell products at or below cost, we provide
for an LCM adjustment to the cost basis of inventory and advances to vendors.
This adjustment is computed by comparing the current sales prices of our power
plants to estimated costs of completed power plants. In certain circumstances,
for long-lead time items, we will make advance payments to vendors for future
inventory deliveries, which are recorded as a component of other current assets
on the consolidated balance sheet.
As
of
July 31, 2007 and October 31, 2006, the LCM adjustment to the cost basis of
inventory and advance payments to vendors was approximately $15.9 million and
$11.3 million, respectively, which equates to a reduction of approximately
36
and 43 percent, respectively, of the gross inventory and advanced payments
to
vendors value. The decline in this LCM percentage is due to a shift in inventory
mix to MW-class products, which have a lower cost. As of July 31, 2007, our
gross inventory and advances to vendors’ balances increased from the October 31,
2006 balances, which resulted in higher reserve balances. As inventory levels
increase or decrease, appropriate adjustments to the cost basis are
made.
Internal
Research and Development Expenses
We
conduct internally funded research and development activities to improve current
or anticipated product performance and reduce product life-cycle costs. These
costs include improving manufacturing processes, cost reduction, technology
improvement and technology development, as we work to develop new products
to
meet the needs of customers. These costs are classified as research and
development expenses on our consolidated statements of operations.
Share-Based
Compensation
On
November 1, 2005, we adopted Statement of Financial Accounting Standard No.
123R, “Share-Based Payments” (SFAS 123R). Share-based payment transactions with
employees, which primarily consist of stock options, and third parties requires
the application of a fair value methodology that involves various assumptions.
The fair value of our options awarded to employees is estimated on the date
of
grant using the Black-Scholes option valuation model that uses the following
assumptions: expected life of the option, risk-free interest rate, expected
volatility of our common stock price and expected dividend yield. We estimate
the expected life of the options using historical data and the volatility of
our
common stock is estimated based on a combination of the historical volatility
and the implied volatility from traded options. Share-based compensation of
$1.2
million and $3.9 million was recognized in the consolidated statement of
operations for the three and nine months ended July 31, 2007, respectively,
compared to $1.1 million and $3.2 million for the three and nine months ended
July 31, 2006, respectively. Refer to Note 6 of the consolidated financial
statements for additional information.
RESULTS
OF OPERATIONS
Management
evaluates the results of operations and cash flows using a variety of key
performance indicators. Indicators that management uses include 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 July 31, 2007 and July 31, 2006
Revenues
and costs of revenues
The
following tables summarize the components of our revenues and cost of revenues
for the three months ended July 31, 2007 and 2006 (dollar amounts in thousands),
respectively:
|
|
Three
Months Ended
July
31, 2007
|
|
Three
Months Ended
July
31, 2006
|
|
Percentage
Increase /
|
|
|
|
Revenues
|
|
Percent of
Revenues
|
|
Revenues
|
|
Percent of
Revenues
|
|
(Decrease) in
Revenues
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales and revenues
|
|
$
|
7,807
|
|
|
58
|
%
|
$ |
5,376 |
|
|
62
|
%
|
|
45
|
%
|
Research
and development contracts
|
|
|
5,737
|
|
|
42
|
%
|
|
3,307 |
|
|
38
|
%
|
|
73
|
%
|
Total
|
|
$
|
13,544
|
|
|
100
|
%
|
$ |
8,683 |
|
|
100
|
%
|
|
56
|
%
|
|
|
Three
Months Ended
July
31, 2007
|
|
Three
Months Ended
July
31, 2006
|
|
Percentage
Increase /
|
|
|
|
Cost
of
Revenues
|
|
Percent of
Cost of
Revenues
|
|
Cost
of
Revenues
|
|
Percent of
Cost of
Revenues
|
|
(Decrease)
in
Cost of Revenues
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales and revenues
|
|
$
|
14,903
|
|
|
76
|
%
|
$ |
15,240 |
|
|
85
|
%
|
|
(2
|
)%
|
Research
and development contracts
|
|
|
4,718
|
|
|
24
|
%
|
|
2,647 |
|
|
15
|
%
|
|
78
|
%
|
Total
|
|
$
|
19,621
|
|
|
100
|
%
|
$ |
17,887 |
|
|
100
|
%
|
|
10
|
%
|
Total
revenues for the three months ended July 31, 2007 increased by $4.9 million,
or
56 percent, to $13.5 million from $8.7 million during the same period last
year.
Product
sales and revenues
Product
sales and revenue
increased
$2.4 million to $7.8 million for the three months ended July 31, 2007, compared
to $5.4 million for the same period in 2006. Revenue
during the quarter included approximately $6.3 million of power plant and
component sales, $0.5 million related to service agreements and approximately
$1.0 million of revenue related to power purchase agreements. Higher product
sales and revenues was due to an increase in component sales and power plant
sales, including production of MW-class units for POSCO, an increase in service
agreement revenue and higher revenues from power purchase agreements.
Cost
of
product sales and revenues decreased to $14.9 million for the three months
ended
July 31, 2007, compared to $15.2 million during the same period in
2006.
The
ratio of product cost to sales improved to 1.9-to-1 in the third quarter of
2007, compared to 2.8-to-1 in the third quarter of 2006. The decrease in the
cost ratio is due to higher product and component revenue and lower product
unit
costs, more favorable results from power purchase and service agreements, and
a
decrease in the lower of cost or market on our inventory due to lower inventory
build during the third quarter of 2007, compared to 2006, and the shift to
lower
cost MW and sub-MW production.
As
of
July 31, 2007, product sales backlog totaled approximately $49.6 million
including approximately $12.5 million related to long-term service agreements.
This compares to a product sales backlog of $20.0 million that included $6.5
million related to long-term service agreements as of July 31, 2006. The
increase in product backlog is related to orders from South Korean and
California customers.
Our
products do not ship on an even production schedule. The shipment date to
customers depends on a number of factors that are outside of our control,
including siting requirements, timing of construction and permits. We do not
have the sales or order history to quantify trends as of yet. We expect to
continue to sell our DFC products at prices lower than our production costs
until such time as we are able to reduce product costs through our engineering
and manufacturing efforts and production volumes increase.
Research
and development contracts
Research
and development revenue increased
$2.4 million to $5.7 million for the three months ended July 31, 2007, compared
to $3.3 million for the same period in 2006.
Cost of
research and development contracts increased to $4.7 million during the third
quarter of 2007, compared to $2.6 million for 2006, and the cost ratio was
essentially the same at 0.8-to-1 in both quarters. Research and development
contract revenue and costs were primarily related to the DOE’s large-scale SOFC
hybrid program, the Electrochemical Hydrogen Separation contract with the U.S.
Army and the U.S. Navy contract for high temperature ship service fuel cell
development.
As
of
July 31, 2007, research and development sales backlog totaled approximately
$22.1 million of which Congress has authorized funding of $10.5 million,
compared to $9.8 million ($7.2 million funded) as of July 31, 2006. The increase
in research and development sales backlog is primarily related to a 10-year
U.S.
Department of Energy project to develop a solid oxide fuel cell-based, large
scale hybrid system which we entered into in 2006.
Administrative
and selling expenses
Administrative
and selling expenses increased $0.4 million to $4.7 million during the three
months ended July 31, 2007, compared to $4.3 million in the same period of
the
prior year. This increase is primarily due to higher bid and proposal and other
marketing activities and higher stock-based compensation.
Research
and development expenses
Research
and development expenses increased to $7.0 million during the three months
ended
July 31, 2007, compared to $6.6 million recorded in the same period of the
prior
year. The
increase in the quarter is
due
primarily to development costs for MW-class cost reduction, costs related to
continuing technology development including increasing stack life and power
output and higher stock-based compensation.
Loss
from operations
Loss
from
operations for the three months ended July 31, 2007 totaling $17.7 million,
compared to $20.1 million recorded in the comparable period last year. The
decrease in the loss from operations is due primarily to improving margins
on
product sales, partially offset by higher administrative and selling and
research and development expenses discussed above.
Loss
from equity investments
Our
equity investment in Versa totaled approximately $10.4 million and $11.5 million
as of July 31, 2007 and October 31, 2006, respectively. Our ownership interest
at July 31, 2007 was 39%. We account for Versa under the equity method. Our
share of equity losses for the three months ended July 31, 2007 and 2006 were
$0.4 million and $0.3 million, respectively.
During
the three months ended July 31, 2007, the Company invested $2.0 million in
Versa
in the form of a convertible note. This investment would bring the Company’s
ownership percentage in Versa to approximately 43% should this note be converted
into common stock. In conjunction with this investment the Company also received
warrants for the right to purchase an additional 2,286 shares of common stock.
The fair value of the warrants was approximately $0.2 million as of July 31,
2007 and is included within Investment and loan to affiliate on the consolidated
balance sheet. Changes in the fair value of the warrants will be included in
the
consolidated statement of operations each period.
Interest
and other income, net
Interest
and other income, net, was $3.2 million for the three months ended July 31,
2007, compared
to $1.7 million for the same period in 2006.
Interest
and other income increased due to higher state research and development tax
credits which totaled $1.2 million for the three months ended July 31, 2007,
compared to $0.2 million for the three months ended July 31, 2006, respectively,
as well as an increase in interest income on higher average invested balances.
The Company records
state research and development tax credits in the period in which the return
is
filed.
Provision
for income taxes
We
believe that due to our efforts to commercialize our DFC products, we will
continue to incur losses. Based on projections for future taxable income over
the period in which the deferred tax assets are realizable, management believes
that significant uncertainty exists surrounding the recoverability of the
deferred tax assets. Therefore, no tax benefit has been recognized related
to
current or prior year losses and other deferred tax assets.
Comparison
of Nine Months ended July 31, 2007 and July 31,
2006
Revenues
and costs of revenues
The
following tables summarize the components of our revenues and cost of revenues
for the nine months ended July 31, 2007 and 2006 (dollar amounts in thousands),
respectively:
|
|
Nine
Months Ended
July
31, 2007
|
|
Nine
Months Ended
July
31, 2006
|
|
Percentage
Increase /
|
|
|
|
Revenues
|
|
Percent of
Revenues
|
|
Revenues
|
|
Percent of
Revenues
|
|
(Decrease) in
Revenues
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales and revenues
|
|
$
|
21,567
|
|
|
68
|
%
|
$ |
14,863 |
|
|
62
|
%
|
|
45
|
%
|
Research
and development contracts
|
|
|
10,194
|
|
|
32
|
%
|
|
9,298 |
|
|
38
|
%
|
|
10
|
%
|
Total
|
|
$
|
31,761
|
|
|
100
|
%
|
$ |
24,161 |
|
|
100
|
%
|
|
31
|
%
|
|
|
Nine
Months Ended
July
31, 2007
|
|
Nine
Months Ended
July
31, 2006
|
|
Percentage
Increase /
|
|
|
|
Cost
of
Revenues
|
|
Percent of
Cost of
Revenues
|
|
Cost
of
Revenues
|
|
Percent of
Cost of
Revenues
|
|
(Decrease)
in
Cost of Revenues
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales and revenues
|
|
$
|
44,679
|
|
|
84
|
%
|
$ |
40,332 |
|
|
83
|
%
|
|
11
|
%
|
Research
and development contracts
|
|
|
8,758
|
|
|
16
|
%
|
|
8,283 |
|
|
17
|
%
|
|
6
|
%
|
Total
|
|
$
|
53,437
|
|
|
100
|
%
|
$ |
48,615 |
|
|
100
|
%
|
|
10
|
%
|
Total
revenues for the nine months ended July 31, 2007 increased by $7.6 million,
or
31 percent, to $31.8 million from $24.2 million during the same period last
year.
Product
sales and revenues
Product
sales and revenue
increased
$6.7 million to $21.6 million for the nine months ended July 31, 2007, compared
to $14.9 million for the same period in 2006. Revenue
during the nine months ended July 31, 2007 included approximately $15.9 million
of power plant and component sales, $2.3 million related to service agreements
and approximately $3.3 million of revenue related to power purchase agreements.
Higher product sales and revenues were due to an increase in power plant sales,
including production of MW-class units, an increase in service agreement revenue
and higher revenues from power purchase agreements.
Cost
of
product sales and revenues increased to $44.7 million for the nine months ended
July 31, 2007, compared to $40.3 million during the same period in
2006.
The
ratio of product cost to sales improved to 2.1-to-1 during the nine months
ended
July 31, 2007, compared to 2.7-to-1 during the same period a year ago. The
cost
ratio was favorably impacted in the period by the shift to MW production and
lower cost sub-MW units, as well as a lower cost ratio on service agreements
and
power purchase agreements. The cost ratio was unfavorably impacted by an
increase in inventory resulting in a higher lower of cost or market adjustment
in the nine month period ended July 31, 2007, compared to the same period in
2006.
Research
and development contracts
Research
and development revenue increased
$0.9 million to $10.2 million for the nine months ended July 31, 2007, compared
to $9.3 million for the same period in 2006.
Cost of
research and development contracts increased to $8.8 million during the nine
months ended July 31, 2007, compared to $8.3 million for 2006, and the cost
ratio was essentially the same at 0.9-to-1 in both periods. Research and
development contract revenue and costs were primarily related to the DOE’s
large-scale SOFC hybrid program, the U.S. Navy contract for high temperature
ship service fuel cell development and the Electrochemical Hydrogen Separation
contract with the U.S. Army.
Administrative
and selling expenses
Administrative
and selling expenses increased $0.7 million to $13.9 million during the nine
months ended July 31, 2007, compared to $13.2 million in the same period of
the
prior year. This increase is primarily due to higher bid and proposal and other
marketing activities and higher stock-based compensation.
Research
and development expenses
Research
and development expenses increased to $20.5 million during the nine months
ended
July 31, 2007, compared to $17.9 million recorded in the same period of the
prior year. The
increase in the period is
due to
development costs for MW-class cost reduction efforts, costs related to our
technology development to extend stack life and increase the power output of
our
power plants and higher stock-based compensation.
Loss
from operations
Loss
from
operations for the nine months ended July 31, 2007 totaled $56.0 million,
compared to $55.6 million recorded in the comparable period last year. The
increase in the loss from operations is primarily due to higher research and
development and administrative and selling expenses discussed above. This was
almost entirely offset by a favorable change in product margin resulting from
the shift
to
MW production and lower cost sub-MW units, as well as a lower cost ratio on
service agreements and power purchase agreements.
Loss
from equity investments
Our
equity investment in Versa totaled approximately $10.4 million and $11.5 million
as of July 31, 2007 and October 31, 2006, respectively. Our ownership interest
at July 31, 2007 was 39% and we account for Versa under the equity method of
accounting. Our share of equity losses for the nine months ended July 31, 2007
and 2006 were $1.0 million and $0.7 million, respectively.
During
the nine months ended July 31, 2007, the Company invested $2.0 million in Versa
in the form of a convertible note. This investment would bring the Company’s
ownership percentage in Versa to approximately 43% should this note be converted
into common stock. In conjunction with this investment the Company also received
warrants for the right to purchase an additional 2,286 shares of common stock
with an exercise price of $175 per share. The fair value of the warrants was
approximately $0.2 million as of July 31, 2007 and is included within Investment
and loan to affiliate on the consolidated balance sheet. Changes in the fair
value of the warrants will be included in the consolidated statement of
operations each period.
Interest
and other income, net
Interest
and other income, net, was $5.7 million for the nine months ended July 31,
2007,
compared
to $4.5 million for the same period in 2006.
Interest
and other income increased due to higher state research and development tax
credits which totaled $1.2 million, compared to $0.2 million for the nine months
ended July 31, 2007 and 2006, respectively. The Company records state research
and development tax credits in the period in which the return is
filed.
Provision
for income taxes
We
believe that due to our efforts to commercialize our DFC products, we will
continue to incur losses. Based on projections for future taxable income over
the period in which the deferred tax assets are realizable, management believes
that significant uncertainty exists surrounding the recoverability of the
deferred tax assets. Therefore, no tax benefit has been recognized related
to
current or prior year losses and other deferred tax assets.
LIQUIDITY
AND CAPITAL RESOURCES
We
had
approximately $167.5 million of cash, cash equivalents and investments as of
July 31, 2007, compared to $120.6 million as of October 31, 2006. During the
nine months ended July 31, 2007, we sold shares of our common stock to POSCO
for
$29.0 million, completed a public offering with net proceeds of $65.4 million
and sold shares on the open market for $1.1 million. Excluding these stock
sales, cash
and
investments used during the nine months ended July 31, 2007 totaled $48.6
million and include dividend payments on our preferred stock of $2.8 million
and
$2.0 million in the form of a convertible note made to Versa, partially offset
by proceeds of $2.2 million from the sale of a power plant being used to service
a power purchase agreement (includes $0.4 million from the sale of a long-term
service agreement on this power plant), receipt of incentive funds related
to
our power purchase agreements of $1.5 million and proceeds from common stock
issued for benefit plans of $1.9 million.
Cash
Inflows and Outflows
Cash
and
cash equivalents as of July 31, 2007 totaled $106.1 million, reflecting an
increase of $79.9 million from the balance reported as of October 31, 2006.
The
key components of our cash inflows and outflows from continuing operations
were
as follows:
Operating
Activities:
During
the nine months ended July 31, 2007, we used $42.7 million in cash for operating
activities, compared to operating cash usage of $37.4 million during the
comparable period of 2006. Cash used in operating activities during the first
nine months of fiscal 2007 consists of a net loss for the period of
approximately $52.7 million, offset by non-cash adjustments totaling $12.7
million, including $3.9 million of share-based compensation and depreciation
expense of $7.0 million.
In
addition, cash used in working capital totaled approximately $2.8 million,
including higher net inventories of approximately $5.8 million due to higher
production levels and lower accounts payable and accrued liabilities of $2.0
million due to timing of production and vendor payments during the quarter.
These amounts were partially offset by higher accounts receivable of $0.8
million due to the timing of production and shipping milestones and higher
deferred revenue and customer deposits of $10.9 million.
Investing
Activities: During
the nine months ended July 31, 2007, net cash provided by investing activities
totaled $28.0 million, compared with approximately $33.6 million in the
comparable period of 2006. Capital expenditures totaled $3.5 million for 2007
and approximately $270.6 million of investments in U.S. Treasury Securities
matured and new treasury purchases totaled $237.1 million during the first
nine
months of fiscal 2007. The Company also invested $2.0 million in the form of
a
convertible note made to Versa.
Financing
Activities: During
the nine months ended July 31, 2007, net cash provided by financing activities
was approximately $94.6 million, compared to $0.6 million in 2006. The first
nine months of fiscal 2007 included $95.5 million from the sale of common stock
and $1.9 million from common stock issued for benefit plans. This was partially
offset by $2.8 million for the payment of dividends on preferred
stock.
Sources
and Uses of Cash and Investments
We
continue to invest in new product development and market development and, as
such, we are not currently generating positive cash flow from our
operations. Our operations are funded primarily through sales of equity
securities and cash generated from customer contracts, including cash from
government research and development contracts, product sales, power purchase
agreements, incentive funding and interest earned on investments. Our future
cash requirements depend on numerous factors including future involvement in
research and development contracts, implementing our cost reduction efforts
and
increasing annual order volume.
Future
involvement in research and development contracts
Our
research and development contracts are generally multi-year, cost reimbursement
type contracts. The majority of these are U.S. Government contracts that
are dependent upon the government’s continued allocation of funds and may be
terminated in whole or in part at the convenience of the government. We will
continue to seek research and development contracts. To obtain these contracts,
we must continue to prove the benefits of our technologies and be successful
in
our competitive bidding.
Implementing
cost reduction efforts on our fuel cell products
Cost
reduction is critical to attaining profitability in future periods and is
essential for us to penetrate the market for our fuel cell products. Cost
reductions will reduce and/or eliminate the need for incentive funding programs
and allow our product pricing to better compete with grid-delivered power and
other distributed generation products. Our multi-disciplined cost reduction
program focuses on value engineering, manufacturing process improvements, and
technology improvements to increase power plant output and stack life.
Our
2 MW
Santa Clara ‘proof-of-concept’ project in 1996-1997 cost more than $20,000/kW to
produce. In 2003, we shipped our first commercial product, a DFC300 to the
Kirin
Brewery which cost approximately $10,000/kW. At that time, we implemented our
commercial cost-out program hiring additional engineers who focused on reducing
the total life cycle costs of our power plants. Since 2003, we have made
significant progress primarily through value engineering our products and
increasing the power output by 20%. We entered fiscal 2007 with a current
manufactured cost of approximately $3,250 /kW for our multi-MW power plant,
$4,300/kW for our MW plant and $4,800/kW for the sub-MW product. Our cost out
program has resulted in lower cost-to-revenue ratios with a third quarter 2007
product cost-to-revenue ratio of 1.91, compared with 2.83 in the same period
a
year ago. To date, the primary drivers have been value engineering and
technology development.
With
the
multi-MW order potential of Asia, Connecticut and California, our 2.4 MW DFC
3000 product is expected to become gross margin profitable with volume. This
will come through supply chain efficiencies, purchasing power and process
improvements. To drive costs lower, our 2007 cost out program is focused on
global sourcing, technology development, continued value engineering and
manufacturing efficiencies.
Increasing
annual order volume
In
addition to the cost reduction initiatives discussed above, we need to increase
annual order volume. Increased production volumes are necessary to lower costs
by leveraging supplier/purchasing opportunities, incorporating manufacturing
process improvements and spreading fixed costs over higher units of production.
Our manufacturing and conditioning facilities have the equipment in place to
accommodate 50 MW of annual production volume, but the higher production volume
will require increasing the manufacturing workforce.
As
of
July 31, 2007, we had 13.4 MW in backlog. We see near term opportunities for
increased order volume in our key markets, including California, Connecticut
and
Asia. California is a leading market for our ultra-clean products with
approximately 40% of our installed capacity at July 31, 2007. In Connecticut,
our fuel cells are incorporated into 68 MW of large-scale multi-MW projects
that
have been recommended by the Connecticut Clean Energy Fund for development
under
Connecticut’s RPS Program, Project 100. These projects are currently being
evaluated by the Department of Utility Control, which is expected to announce
its decision in December. In Asia, the South Korean government has initiated
a
subsidy program with initial subsidies ranging from $0.23 to 0.28/kilowatt
hour
(kWh). This program was put in place to encourage utilities to buy highly
efficient, ultra-clean, low-emission, fuel cell-produced electricity, thus
helping the country to meet its carbon dioxide (CO2) reduction and clean air
goals. In February, we signed a 10-year manufacturing and distribution agreement
with POSCO Power. We expect that this partnership will allow us to capture
significant opportunities in the South Korean market.
Combined
with historical cost out achievements and successful completion of our new
targets, we believe we can reach gross margin breakeven on product sales at
a
sustained annual order and production volume of approximately 35 MW to 50 MW,
depending on product mix, geographic location and other variables such as fuel
prices. We believe that the Company net income breakeven can be achieved at
a
sustained annual order and volume production of approximately 75 to 100 MW
assuming a favorable mix of sub-MW and MW sales. If this mix trends more toward
MW and multi-MW orders, we believe that the gross margin and net income
breakeven volumes can be lower.
The
Company is currently ramping its annual production rate from 11 MW to 25 MW
and
increasing physical plant capacity for MW class products in response to the
current and anticipated demand from Asia and California,. We expect to invest
approximately $10 - 15 million over the next fifteen months to increase the
physical plant capacity to approximately 60 MW of annual production
volume.
We
anticipate that our existing capital resources, together with anticipated
revenues will be adequate to satisfy our financial requirements and agreements
through at least the next twelve months.
Commitments
and Significant Contractual Obligations
A
summary
of our significant future commitments and contractual obligations as of July
31,
2007 and the related payments by fiscal year is summarized as follows (in
thousands):
|
|
Payments
Due by Period
|
|
|
|
Total
|
|
Less
than
1
Year
|
|
1
- 3
Years
|
|
3
- 5
Years
|
|
More
than
5
Years
|
|
Contractual
Obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
commitments
(1)
|
|
$
|
2,729
|
|
$
|
934
|
|
$
|
1,581
|
|
$
|
214
|
|
$
|
—
|
|
Term
loans (principal and interest)
|
|
|
951
|
|
|
932
|
|
|
19
|
|
|
—
|
|
|
—
|
|
Purchase
commitments(2)
|
|
|
37,273
|
|
|
34,393
|
|
|
2,880
|
|
|
—
|
|
|
—
|
|
Series
I Preferred dividends payable
(3)
|
|
|
19,392
|
|
|
379
|
|
|
9,543
|
|
|
1,894
|
|
|
7,576
|
|
Series
B Preferred dividends payable
(4)
|
|
|
8,060
|
|
|
3,206
|
|
|
4,854
|
|
|
—
|
|
|
—
|
|
Totals
|
|
$
|
68,405
|
|
$
|
39,844
|
|
$
|
18,877
|
|
$
|
2,108
|
|
$
|
7,576
|
|
|
(1)
|
Future
minimum lease payments on operating and capital
leases.
|
|
(2)
|
Purchase
commitments with suppliers for materials, supplies, and services
incurred
in the normal course of business.
|
|
(3)
|
Quarterly
dividends of Cdn.$312,500 accrue on the Series 1 preferred shares
(subject
to possible reduction pursuant to the terms of the Series 1 preferred
shares on account of increases in the price of our common stock).
We have
agreed to pay a minimum of Cdn.$500,000 in cash or common stock annually
to Enbridge, Inc., the holder of the Series 1 preferred shares, so
long as
Enbridge holds the shares. Interest accrues on cumulative unpaid
dividends
at a 2.45 percent quarterly rate, compounded quarterly, until payment
thereof. Cumulative unpaid dividends and interest at July 31, 2007
were
approximately $5.7 million. For the purposes of this disclosure,
we have
assumed that the minimum dividend payments would be made through
2010. In
2010, we would be required to pay any unpaid and accrued dividends.
Subsequent to 2010, we would be required to pay annual dividend amounts
totaling Cdn.$1.25 million. We have the option of paying these dividends
in stock or cash.
|
|
(4)
|
Dividends
on Series B Preferred Stock accrue at an annual rate of 5% paid quarterly.
The obligations schedule assumes we will pay preferred dividends
on these
shares through November 20, 2009, at which time the preferred shares
may
be subject to mandatory conversion at the option of the Company.
|
Approximately
$2.4 million of our cash and cash equivalents have been pledged as collateral
and letters of credit for certain banking relationships and customer contracts
in which we participate. Approximately $1.9 million of this collateral supports
letters of credit, which have expiration dates on or before December 31,
2007.
Research
and development cost-share contracts
We
have
contracted with various government agencies as either a prime contractor or
sub-contractor on cost-share contracts and agreements. Cost-share terms require
that participating contractors share the total cost of the project based on
an
agreed upon ratio with the government agency. As of July 31, 2007, our research
and development sales backlog totaled $22.1 million. As this backlog is funded
in future periods, we will incur additional research and development cost-share
totaling approximately $14.6 million for which we would not be reimbursed by
the
government.
Product
sales contracts
Our
fuel
cell power plant products are in the initial stages of development and market
acceptance. As such, costs to manufacture and install our products exceed
current market prices. As of July 31, 2007, we had product sales backlog of
approximately $37.1 million. We do not expect sales from this backlog to be
profitable.
Long-term
service agreements
We
have
contracted with certain customers to provide service for fuel cell power plants
ranging from one to thirteen years. Under the provisions of these contracts,
we
provide services to maintain, monitor and repair customer power plants. In
some
contracts we will provide for replacement of fuel cell stacks. 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. As of July 31, 2007, we had a service agreement sales backlog of
approximately $12.5 million.
Power
purchase agreements
Under
the
terms of our PPAs, customers agree to purchase power from our fuel cell power
plants at negotiated rates, generally for periods of five to ten years.
Electricity rates are generally a function of the customer’s current and future
electricity pricing available from the grid. Revenues are earned and collected
under these PPAs as power is produced. As owner of the power plants in these
PPA
entities, 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, generally natural gas, to run the power plants.
We believe that the assets, including fuel cell power plants in these PPA
entities, are carried at the lower of cost or fair value on the consolidated
balance sheets based on our estimates of future revenues and expenses. Should
actual results differ from our estimates, our results of operations could be
negatively impacted. We are not required to produce minimum amounts of power
under our PPA agreements and we have the right to terminate PPA agreements
by
giving written notice to the customer, subject to certain exit
costs.
We
have
qualified for incentive funding for these projects in California under the
state’s Self-Generation Incentive Funding Program 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 to meet certain
performance requirements. Revenue related to these incentive funds is recognized
ratably over the performance period. As of July 31, 2007 we had deferred revenue
totaling $6.7 million on the consolidated balance sheet related to incentive
funding received on PPAs.
In
December 2006, we completed the sale of the 1 MW power plant that had been
operating under a power purchase agreement to Sierra Nevada Brewing Co. As
of
July 31, 2007, we were operating 3 MW of power plants under power purchase
agreements ranging from 5 to 10 years.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertain
Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an entity’s financial statements.
FIN 48 prescribes a comprehensive model 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.
FIN 48 is effective for fiscal years beginning after December 16, 2006
(beginning of our fiscal 2008 or November 1, 2007). The Company is currently
evaluating FIN 48 and we do not anticipate that it will have a material impact
on our financial statements upon adoption due to the Company’s current income
tax position.
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Interest
Rate Exposure
Our
exposures to market risk for changes in interest rates relate primarily to
our
investment portfolio and long term debt obligations. Our investment portfolio
includes short-term United States treasury instruments with maturities through
May 15, 2008. Cash is invested overnight with high credit quality financial
institutions. Based on our overall interest exposure at July 31, 2007, including
all interest rate sensitive instruments, a near-term change in interest rate
movements of 1 percent would affect our results of operations by approximately
$1.1 million annually.
Foreign
Currency Exchange Risk
With
our
Canadian business entity, FuelCell Energy, Ltd., we are subject to foreign
exchange risk, although we have taken steps to mitigate those risks where
possible. As of July 31, 2007, approximately $0.4 million (less than one
percent) of our total cash, cash equivalents and investments was in currencies
other than U.S. dollars. The functional currency of FuelCell Energy, Ltd. is
the
U.S. dollar.
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. Consequently, isolating the effect of changes in
currency does not incorporate these other important economic
factors.
Derivative
Fair Value Exposure
We
have
determined that our Series 1 Preferred shares include embedded derivatives
that
require bifurcation from the host contract and separate accounting in accordance
with SFAS 133, Accounting
for Derivative Instruments and Hedging Activities.
Specifically, the embedded derivatives requiring bifurcation from the host
contract are the conversion feature of the security and the variable dividend
obligation. The aggregate fair value of these derivatives included within
Long-term debt and other liabilities on our consolidated balance sheet as of
July 31, 2007 was $0.3 million. The fair value of these derivatives is 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 will result
in
fluctuations in the derivative value and will impact the consolidated statement
of operations. For example, a 25% increase from the closing price of our common
stock at July 31, 2007 would result in an increase in the fair value of these
derivatives and a charge to the consolidated statement of operations of
approximately $0.1 million, assuming all other assumptions remain the
same.
During
the three months ended July 31, 2007, the Company invested $2.0 million in
Versa
in the form of a convertible note. In conjunction with this investment the
Company also received warrants for the right to purchase an additional 2,286
shares of common stock with an exercise price of $175 per share. The fair value
of the warrants was approximately $0.2 million as of July 31, 2007 and is
included within Investment and loan to affiliate on the consolidated balance
sheet. The fair value of these warrants was based on the Black-Scholes valuation
model using Versa’s stock price on the grant date, which equaled the Company’s
exercise price of $175 per share, and certain assumptions including the expected
future volatility of Versa’s stock price and risk-free interest rate. Changes in
any of these valuation inputs will result in fluctuations in the warrant value
and will impact the consolidated statement of operations. For example, a 15%
increase in the expected future volatility of Versa’s stock price would result
in an increase in the fair value of these derivatives and a charge to the
consolidated statement of operations of approximately $0.02 million, assuming
all other assumptions remain the same.
Item
4. 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
Company’s periodic SEC reports is recorded, processed, summarized and reported
within the time periods specified in the SEC’s 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 Company’s principal executive officer and principal financial
officer have concluded that the Company’s disclosure controls and procedures
were effective to provide reasonable assurance that information required to
be
disclosed in the Company’s periodic SEC reports is recorded, processed,
summarized and reported within the time periods specified in the SEC’s 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 control 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.
PART
II - OTHER INFORMATION
Item
6. Exhibits
Exhibit
No.
|
|
Description
|
31.1
|
|
CEO
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
31.2
|
|
CFO
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
32.1
|
|
CEO
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
32.2
|
|
CFO
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
SIGNATURES
Pursuant
to the requirements 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.
|
|
|
|
|
FUELCELL
ENERGY, INC.
(Registrant)
|
September
10, 2007
|
|
/s/
Joseph G. Mahler
|
Date
|
Joseph
G. Mahler
Senior
Vice President, Chief Financial Officer,
Treasurer and Corporate Secretary
(Principal
Financial Officer and Principal Accounting
Officer)
|
INDEX
OF EXHIBITS
Exhibit
No.
|
|
Description
|
31.1
|
|
CEO
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
31.2
|
|
CFO
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
32.1
|
|
CEO
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
32.2
|
|
CFO
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|