Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended: October 31,
2008
¨ 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
(Exact
name of registrant as specified in its charter)
Delaware
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06-0853042
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification Number)
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3 Great Pasture Road
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Danbury, Connecticut
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06813
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s
telephone number, including area code (203) 825-6000
Securities
registered pursuant to Section 12(b) of the Act.
None.
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.0001 Par Value
Name of
each exchange on which registered: NASDAQ
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes ¨ No x
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 ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K ¨
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 (Check one):
Large Accelerated Filer ¨ Accelerated Filer x Non-accelerated Filer ¨
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes ¨ No x
The
aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant known to us as of April 30, 2008 was
approximately $605.9 million, which is based on the closing price of $8.83 on
April 30, 2008.
On
January 12, 2009 there were 68,816,261 shares of common stock
of the registrant issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the registrant’s definitive proxy
statement relating to its forthcoming 2009 Annual Meeting of Shareholders to be
filed not later than 120 days after the end of registrant’s fiscal year ended
October 31, 2008 is incorporated by reference in Part III of this Annual Report
on Form 10-K.
FUELCELL
ENERGY, INC.
INDEX
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Description
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Page
Number
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Part I
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Item
1
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Business
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6
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Item
1A
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Risk
Factors
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25
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Item
1B
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Unresolved
Staff Comments
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38
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Item
2
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Properties
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38
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Item
3
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Legal
Proceedings
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38
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Item
4
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Submission
of Matters to a Vote of Security Holders
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38
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Part II
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Item
5
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Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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39
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Item
6
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Selected
Financial Data
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47
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Item
7
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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49
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Item
7A
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Quantitative
and Qualitative Disclosures about Market Risk
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67
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Item
8
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Consolidated
Financial Statements and Supplementary Data
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69
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Item
9
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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103
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Item
9A
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Controls
and Procedures
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103
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Item
9B
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Other
Information
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105
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Part III
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Item
10
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Directors,
Executive Officers and Corporate Governance
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105
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Item
11
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Executive
Compensation
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105
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Item
12
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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105
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Item
13
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Certain
Relationships and Related Transactions, and Director
Independence
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105
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Item
14
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Principal
Accountant Fees and Services
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105
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Part IV
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Item
15
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Exhibits
and Financial Statement Schedules
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106
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Signatures
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109
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Forward-looking
Statement Disclaimer
When used
in this Report, the words “expects”, “anticipates”, “estimates”, “should”,
“will”, “could”, “would”, “may”, and similar expressions are intended to
identify forward-looking statements. Such statements relate to the
development and commercialization of our fuel cell technology and products,
future funding under government research and development contracts, the expected
cost competitiveness of our technology, and our ability to achieve our sales
plans and cost reduction targets. These and other forward looking
statements contained in this report are subject to risks and uncertainties,
known and unknown, that could cause actual results to differ materially from
those forward-looking statements, including, without limitation, general risks
associated with product development and introduction, changes in the utility
regulatory environment, potential volatility of energy prices, government
appropriations, the ability of the government to terminate its development
contracts at any time, rapid technological change, and competition, as well as
other risks contained under Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Factors That May Affect Future
Results” of this Report. We cannot assure you that we will be able to meet any
of our development or commercialization schedules, that the government will
appropriate the funds anticipated by us under our government contracts, that the
government will not exercise its right to terminate any or all of our government
contracts, that any of our products or technology, once developed, will be
commercially successful, or that we will be able to achieve any other result
anticipated in any other forward-looking statement contained
herein. The forward-looking statements contained herein speak only as
of the date of this report. Except for ongoing obligations to
disclose material information under the federal securities laws, we expressly
disclaim any obligation or undertaking to release publicly any updates or
revisions to any such statement to reflect any change in our expectations or any
change in events, conditions or circumstances on which any such statement is
based.
Background
Information
contained in this report concerning the electric power supply industry and the
distributed generation market, our general expectations concerning this industry
and this market, and our position within this industry are based on market
research, industry publications, other publicly available information and on
assumptions made by us based on this information and our knowledge of this
industry and this market, which we believe to be reasonable. Although
we believe that the market research, industry publications and other publicly
available information are reliable, including the sources that we cite in this
report, they have not been independently verified by us and, accordingly, we
cannot assure you that such information is accurate in all material
respects. Our estimates, particularly as they relate to our general
expectations concerning the electric power supply industry and the distributed
generation market, involve risks and uncertainties and are subject to change
based on various factors, including those discussed under “Risk Factors” in Item
1A of this report.
We define
distributed generation as small (typically 50 megawatts or less) electric
generation plants (combustion-based such as engines and turbines as well as
non-combustion-based such as fuel cells) located at or near the end
user. This is contrasted with central generation that we define as
large power plants (typically hundreds of megawatts to 1,000 megawatts or
larger) that deliver electricity to end users through a comprehensive
transmission and distribution system.
As used
in this report, all degrees refer to Fahrenheit (“F”) and kilowatt and megawatt
numbers designate nominal or rated capacity of the referenced power
plant. As used in this Annual Report, “efficiency” or “electrical
efficiency” means the ratio of the electrical energy (“AC”) generated in the
conversion of a fuel to the total energy contained in the fuel. Lower
heating value, the standard for power plant generation assumes the water in the
product is in vapor form; as opposed to higher heating value, which assumes the
water in the product is in the liquid form, net of parasitic load; “overall
energy efficiency” refers to efficiency based on the electrical output plus
useful heat output of the power plant; “kilowatt” (“kW”) means 1,000 watts;
“megawatt” (“MW”) means 1,000,000 watts; “kilowatt hour” (“kWh”) is equal to 1kW
of power supplied to or taken from an electric circuit steadily for one hour,
and “Btu” is equal to one British Thermal Unit (the amount of heat necessary to
raise one pound of pure water from 59oF to
60oF
at a specified constant pressure).
All
dollar amounts are in U.S. dollars unless otherwise noted.
Additional technical terms
and definitions:
Alternating
Current (“AC”) — Electric current where the magnitude and direction of
the current varies cyclically, as opposed to Direct Current
(“DC”), where the direction of the current stays constant. The
usual waveform in an AC power circuit is a sine wave, as this results in the
most efficient transmission of energy. AC refers to the form in which
energy is delivered to businesses and residences.
Anaerobic
Digester Gas – Fuel gas produced in biomass digesters employing bacterial
and controlled oxygen environment from municipal, industrial or commercial water
treatment facilities.
Anode –An
active fuel cell component functioning as a negative electrode, where oxidation
of fuel occurs. Also referred to as “fuel electrode.”
Availability –
An industry standard (IEEE (The Institute of Electrical and Electronics
Engineers) 762, “Definitions for Use in Reporting Electric Generating Unit
Reliability, Availability and Productivity”) used to compute total operating
period hours less the amount of time a power plant is not producing electricity
due to planned or unplanned maintenance. “Availability percentage” is
calculated as total operating hours since commercial acceptance date (mutually
agreed upon time period when our DFC power plants have operated at a specific
output level for a specified period of time) less hours not producing
electricity due to planned and unplanned maintenance divided by total period
hours. Grid disturbances, force majeure events and site specific
issues such as a lack of available fuel supply or customer infrastructure repair
do not penalize the calculation of availability according to this
standard.
Balance of Plant
(“BOP”) – Balance of plant consists of the remaining systems, components,
and structures that comprise a complete power plant or energy system that
are not included in the fuel cell stack module. We manufacture the
fuel cell stack module and procure the balance of plant (items such as fuel
handling, processing equipment and electrical interface equipment such as
inverters to convert the fuel cell stack module’s DC electricity output to AC)
from third parties.
Cathode –
An active fuel cell component functioning as a positive (electrically)
electrode, where reduction of oxidant occurs. Also referred to as
“oxidant electrode.”
Co-generation
Configuration – A power plant configuration featuring simultaneous onsite
generation of electricity and recovery of waste heat to produce process steam or
hot water, or to use heat for space heating.
Humid Flue Gas –
Exhaust gas from fuel cell and other power plants or a
furnace. The gas typically contains humidity (moisture).
Metallic Bipolar
Plates – The conductive plates used in a fuel cell stack to provide
electrical continuity from active components of one cell to those in an adjacent
cell. The plates also provide isolation of fuel and air fed to the
fuel cell.
Microturbine –
A gas turbine with typical power output ranges of 30 kW to 350
kW. Microturbines are characterized by low-pressure ratios (less than
5) and high-speed alternators.
Nitrogen Oxides
(“NOX”) — Generic term for a group of highly reactive gases, all of which
contain nitrogen and oxygen in varying amounts. Many of the NOX are
colorless and odorless. However, one common pollutant, Nitrogen Dioxide
(“NO2”), along with particles in the air, can often be seen as a
reddish-brown layer over many urban areas. NOX form when fuel is
burned at high temperatures, as in a combustion process. The primary
manmade sources of NOX are motor vehicles, electric utilities, and other
industrial, commercial and residential sources that burn fuels.
Reforming –
Catalytic conversion of hydrocarbon fuel (such as pipeline natural gas or
digester gas) to hydrogen-rich gas. The hydrogen-rich gas serves as a
fuel for the electrochemical reaction.
Renewable
Portfolio Standards (“RPS”) – States seeking to secure
cleaner energy sources are setting standards that require utilities provide a
certain amount of their electricity from renewable sources such as solar, wind
or other biomass-fueled technologies, including fuel cells. These standards
are referred to as Renewable Portfolio Standards. There are currently 28 states
and the District of Columbia that have instituted RPS mandates. These markets
represent a potential for an estimated 88,000 MW by 2025. Fuel cells using
biogas fuels qualify as renewable power generation technology in all of the RPS
states, with several states specifying that fuel cells operating on natural gas
are eligible for these initiatives.
Sulfur Oxide
(“SOX”) – Sulfur oxide refers to any one of the following: sulfur
monoxide, sulfur dioxide (“SO2”) and sulfur trioxide. SO2 is a
byproduct of various industrial processes. Coal and petroleum contain
sulfur compounds, and generate SO2 when burned.
Synthesis Gas –
A gas mixture of hydrogen and carbon monoxide generally derived from
gasification of coal or other biomass. It can serve as a fuel for the
fuel cell after any required fuel clean up.
Item
1. BUSINESS
OVERVIEW
FuelCell
Energy, Inc. (“FuelCell Energy” or “Company”) is a world leader in the
development and manufacture of fuel cell power plants for ultra-clean, efficient
and reliable electric power generation. Our power plants are designed to
meet the 24/7 baseload power needs of commercial, industrial, government and
utility customers. Our products have generated over 260 million kilowatt hours
(kWh) of electricity and are operating at over 50 locations around the
world.
Our
Company was founded in 1969. Our core fuel cell products (“Direct
FuelCell®” or
“DFC® Power
Plants”) offer stationary power generation applications for customers. In
addition to our commercial products, we continue to develop our next generation
of carbonate fuel cells and planar solid oxide fuel cell (“SOFC”) technology
with our own and government research and development funds.
Our
proprietary DFC power plants electrochemically (without combustion) produce
electricity directly from readily available hydrocarbon fuels such as natural
gas and biogas. Customers buy fuel cells to reduce power costs and pollution,
and improve power reliability. Electric generation without combustion
significantly reduces harmful pollutants such as NOX and particulates.
Higher fuel efficiency results in lower emissions of carbon dioxide (“CO2”), a
major component of harmful greenhouse gases, and also results in less fuel
needed per kWh of electricity generated and Btu of heat produced. Greater
efficiency reduces customers’ exposure to volatile fuel costs and minimizes
operating costs. Our fuel cells operate 24/7 providing reliable power
to both on-site customers and for grid-support applications.
Compared
to other power generation technologies, our products offer significant
advantages:
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Virtually
zero emissions, quiet operation
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Reliable,
24/7 baseload power
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Ability
to site units locally
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Potentially
lower cost power generation
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Byproduct
heat ideal for cogeneration
applications.
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Typical
customers for our products include manufacturers, mission critical institutions
such as correction facilities and government installations, hotels, and
customers that can use renewable gas for fuel such as breweries, food
processors, and wastewater treatment facilities. Our megawatt (MW)
class products are also used as grid support applications for utility
customers. With increasing demand for renewable and ultra-clean power
options and increased volatility in electric markets, our customers gain control
of power generation economics, reliability, and emissions. Our fuel
cells also offer flexible siting, easy permitting, and the ability to use
multiple fuels.
Our DFC
power plants are protected by 56 U.S. and 97 international patents and we have
submitted 38 U.S. and 168 international patent applications.
2008
Update
We
achieved significant milestones during 2008. We closed record orders, doubled
sales and revenues, and reduced the cost of our products compared to the prior
year.
In fiscal
2008, customers ordered 32.3 MW of fuel cells compared to 14.8 MW in the prior
year. We ended fiscal 2008 with 32.5 MW in backlog with over 90 percent for
MW-class products (1.2 MW and larger).
We also
completed our design of the newest MW-class power plants that we anticipate will
go into production in the third fiscal quarter of 2009. The new design
incorporates new stacks with outputs of 350 kW each compared to 300 kW
previously, along with lower component and raw material costs derived from
process improvements, volume manufacturing and global sourcing. With production
of these new models, we expect all future MW-class orders to be gross margin
positive.
In
mid-2008, we ramped to an annualized production rate of approximately 30 MW in
response to worldwide demand for the Company’s MW-class power plants. Actual
production in fiscal 2008 was approximately 22 MW compared to approximately 11
MW in 2007.
Markets
The
market for alternative energy power generation is growing both in the U.S. and
abroad and we expect to continue to benefit from this momentum. Driving this
growth are concerns about the limited supply and rising cost of fossil fuels and
environmental concerns. More than 66 percent of the world’s electric
power is generated from carbon-based fossil fuels, and this is forecasted to
continue to increase for some time. Countries, states, provinces,
cities, and towns are looking for better solutions that use these fuels more
efficiently, economically and at the same time, cleanly. With the primary source
of electric generation still driven by fossil fuels, markets need new power
generation products like DFC fuel cells that are not only more efficient and
environmentally superior, but also cost effective and reliable.
On-Site Power.
Stationary fuel cell power plants can be an economical alternative to
utility-provided power and other distributed generation
products. Wastewater treatment facilities and brewery companies, for
instance, can use methane, a byproduct of their own processes, to operate their
fuel cell power plants. This allows them to eliminate gas flaring and
the use of conventional combustion-based power generation equipment, both of
which add to pollution. These facilities also reduce their costs of operation
because our fuel cell power plants can be up to 80 percent efficient when
operated in combined heat and power (CHP) mode, producing significantly more
high-value electricity than competing technologies. Customers gain the added
benefits of quiet operation, and improved power reliability.
As we
reduce our product costs, we are able to price our products competitively in our
markets. In California, for instance, factoring in the value of the heat used
for cogeneration, government incentives, and possible offsets due to emissions
credits, the net cost to the end user of our products is approximately $0.10 to
$0.12/kWh, depending on location and application - a level competitive with
grid-delivered electricity and other distributed generation products in our
target markets. Tougher emission standards increase the cost of
competing products and as our costs continue to come down, we become
increasingly more competitive in more markets.
Utility or
RPS. States seeking to secure cleaner energy sources and
greater energy independence are setting standards that require utilities to
provide a certain amount of their electricity from renewable sources such as
solar, wind, biomass-fueled technologies, and fuel cells.
There are
currently 28 states and the District of Columbia that have instituted RPS
mandates. These markets represent a potential for an estimated 88,000 MW by
2025. Fuel cells using biogas fuels qualify as renewable power generation
technology in all the RPS states, with several states specifying that fuel cells
operating on natural gas are also eligible for these initiatives.
Fuel
cells can play a critical role in meeting RPS clean power mandates by generating
highly efficient, 24/7 electric power that also balances other forms of
intermittent power generation such as wind and solar as they are incorporated
into the electric grid infrastructure. Increased use of wind, solar
and traditional generation requires upgrades to the transmission and
distribution system, whereas our fuel cells fit into the existing grid,
augmenting power where needed. By producing power locally in the
distribution system, our fuel cells can ease grid constraints, making room for
additional central wind or solar in the system.
DFC fuel
cells offer utilities and end-users economical, 24/7, reliable ultra-clean power
that is easily sited in grid-constrained areas, avoiding substantial
transmission and distribution equipment upgrades.
We have
established a leading position in the sale of fuel cell power plants and
strengthened our position by continuing to improve our product performance and
availability, reducing costs for our products, and expanding repeatable markets
for our DFC products. Our cumulative fleet availability remains at approximately
90 percent and our newer units are at approximately 95 percent
availability.
Business
Strategy
Our
business strategy is to expand our leadership position in key markets, build
multi-MW markets and continue to reduce the cost of our products. A
production mix more heavily weighted with MW-class products is our fastest
path to achieve profitability. In 2009, our focus will
be:
Build
on our leadership position in vertical and geographic markets
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South Korea
- Our South Korean partner, POSCO Power, ordered 30.4 MW of our DFC
power plants during fiscal 2008 and all of these orders were for MW-class
power plants. POSCO Power’s total orders to date amount to 38.2
MW. In early 2007, we signed a 10-year manufacturing and
distribution agreement with POSCO Power. Under the agreement, POSCO Power
made a significant investment in a 50 MW fuel cell BOP manufacturing
facility, which opened in September 2008. In the second half of
2009, we will begin shipping fuel cell stack modules to POSCO Power which
will be integrated with BOP manufactured in South
Korea.
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In
September 2008, South Korea, as part of President Lee’s “green growth” vision
declared fuel cells a key economic driver for the country. This vision refers to
the creation of sustainable growth that reduces greenhouse gas emissions and
creates new growth engines and jobs with green technology and clean energy. We
expect this public policy will foster a favorable environment for fuel cell
power plant sales and for POSCO Power’s aggressive penetration of its market
with our DFC power plants.
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California
- California is a strong proponent of clean energy in the U.S. and
an excellent market from which we expect continued growth. Eastern
Municipal Wastewater District ordered a 750 kW power plant in fiscal 2008
and we shipped 4.45 MW of fuel cells to customers including Eastern
Municipal Wastewater District, the City of Riverside’s Water Quality
Control Plant, Gills Onions, Turlock Irrigation District, Camp Pendleton,
and M&L Commodities. By comparison, we shipped 3.15 MW of
orders to California customers in fiscal
2007.
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In 2008,
the California Public Utilities Commission raised the cap on monetary incentives
for funds under the state’s Self-Generation Incentive Program (SGIP) for clean
energy projects to 3 MW. The SGIP provides $4,500 per kW for power plants
operating on biofuel and $2,500 per kW for power plants operating on natural
gas. Under the revised SGIP, the first 1 MW of a project is entitled to 100
percent of the incentive; the second MW of power is eligible for 50 percent of
the incentive; and the third MW receives 25 percent of the incentive. To fund
the existing program’s expansion, the SGIP will be supplemented in 2008 and 2009
with an additional $96 million of unspent SGIP funds from prior
years. All of these positive developments lead us to believe we will
experience strong order flow in California.
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Wastewater
Treatment / Biofuels – The wastewater treatment market continues to
be among our strongest because our fuel cells are particularly economical
and efficient for these customers. For example, in California, the SGIP
provides incentive funding of up to $4,500 per kW for fuel cells running
on biogas. Since our fuel cells operate on the biogas produced by the
wastewater treatment process and their byproduct heat is used in the
treatment process the efficiency of these installations can be as much as
80 percent. Fuel cells operating on biogas qualify for
incentives in all 28 RPS states and Washington
D.C.
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There are
currently 9 MW of our DFC fuel cell power plants installed or in backlog for
wastewater treatment / biogas applications. We believe the domestic market
opportunity is approximately 500 MW. Based on our installed base,
market support for our products, and our marketing focus in this area, we expect
wastewater treatment facilities to continue to be a strong market for our
products.
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Natural Gas
Pipeline Letdown Stations - Natural Gas Pipeline
Applications - FuelCell Energy recently completed installation of a
1.2 MW fuel cell power plant for Enbridge, Inc. for inclusion in a Direct
FuelCell-Energy Recovery Generation™ (DFC-ERG™) system in Toronto,
Ontario, Canada. This system combines our fuel cells with a turbo expander
to achieve up to 65 percent efficiency in power generation. The system
generates ultra-clean electricity while recovering energy normally lost
during natural gas pipeline operations. A second 9 MW DFC-ERG system is
part of the 16.2 MW of projects in final negotiations under Round 2 of
Connecticut’s Project 150. This system will be the largest fuel
cell installation anywhere in the world upon completion. Three additional
DFC-ERG systems are included in the 27 MW under consideration by the
Connecticut Department of Public Utility Control (DPUC) in Round
3.
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This
DFC-ERG distributed generation technology is unique in that it converts
more than 60 percent of the input energy into electricity. Natural gas
transmission networks utilize long-distance pipelines operating at very
high pressures. These pressures are required to maintain a high volume of
flow in the system. Gas distribution lines to homes and businesses,
however, use a much lower pressure for safety and to accommodate end use
equipment. Pressure is reduced at local utility letdown stations to
accommodate the distribution network. As pressure is reduced, the gas
naturally cools because of the refrigerant effect of gas expansion. To
prevent the gas systems and pipeline from freezing, the gas must be heated
before it flows through the expansion process, usually with gas-fired
boilers that produce CO2 and other pollutants. Additionally, the energy
available in this letdown process is lost. With the DFC-ERG, the energy
normally lost is harnessed by a turbo expander to drive an
electric generator to produce additional electric power. Waste
heat from the DFC-ERG provides the heat required by the expansion process,
replacing gas-fired boilers. The utility grade electric power
produced by the DFC-ERG system is used to service on-site power
requirements or the power grid. The market in Toronto, the Northeastern
U.S. and California represents an opportunity of 250-350 MW for DFC-ERG
systems.
|
Build
Renewable Portfolio Standards Markets
RPS
programs mandate a certain percentage of electricity be generated from renewable
and ultra-clean resources. Our multi-MW products in installations from 2 to 50
MW and our natural gas pipeline applications are well suited to address these
markets. We are focusing on several near term opportunities:
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·
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Connecticut – We and
our partners submitted multi-MW bids to the Connecticut Clean Energy Fund
(CCEF) in December 2006 under Round 2 of Connecticut’s Project 150. The
DPUC awarded 16.2 MW of these projects using six of our DFC3000 power
plants, including a 9 MW DFC-ERG project slated for Milford, Connecticut,
that will be the largest fuel cell project in the world upon installation.
During 2008, the Federal Investment Tax Credit (ITC) eight-year extension
and increase to $3,000 per kW or 30 percent, whichever is less, passed in
October, enabling the Round 2 project developers to enter into final
negotiations for financing and
equipment.
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Under
Round 3 of Connecticut’s Project 150, the CCEF recommended 27.3 MW of projects
that use our power plants, including three DFC-ERG™ plants, a fuel cell/turbine
hybrid power plant (DFC/T) and a DFC3000 project. A final decision is expected
by the DPUC by January 28, 2009.
Continue
to Reduce Product Costs –
Reducing
product cost is essential to our ability to further penetrate markets with our
fuel cell power plants. Cost reductions are critical to attaining profitability
and will reduce and eventually eliminate the need for incentive funding
programs. Examples of product cost reduction are:
·
|
We
have reduced the cost of our MW-class power plants by approximately 85
percent since our ‘proof-of-concept’ 2 MW Santa Clara project in
1996-1997. In 2003, we implemented our commercial cost-out
program, hiring additional engineers who focused on reducing the total
life cycle costs of our power plants. We have made significant
progress primarily through value engineering our products, manufacturing
process improvements, technology improvements, and global
sourcing.
|
·
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In
fiscal 2008, we completed the design of our newest MW-class power plants
that will go into production in the fourth fiscal quarter of 2009. With
these new models, all future MW-class orders are expected to be gross
margin positive. The cost reduction improvements are primarily driven by
increasing the power output from 300 to 350 kW per fuel cell stack,
combined with better component and raw materials pricing derived from
volume manufacturing.
|
·
|
In
2008 we began manufacturing our first five-year fuel cell stacks,
representing a service cost reduction. Previously, estimated stack life
was approximately three years.
|
·
|
Continued
increases in our production volume over our current rate will also result
in additional cost reduction.
|
We sell
both completed power plants and fuel cell modules (the part of a fuel cell that
produces the power). Of the current product backlog, over 90 percent
is for MW-class complete power plants and fuel cell modules. Based on
the current backlog, we expect the mix of production to move primarily to
DFC3000 power plants and fuel cell modules in fiscal 2009 and
beyond. We believe we can reach gross margin breakeven at a sustained
annual order and production volume of approximately 35 to 70 MW, that net
income breakeven can be achieved at a sustained annual order and volume
production of approximately 75 to 125 MW depending on product mix, volume mix of
full power plants vs. modules only, future service costs, and other variables
that may affect sales pricing.
PRODUCTS
Direct FuelCell® (DFC®)
Power Plants
Our core
products, the DFC300, DFC1500 and DFC3000, are currently rated in capacity at
300 kW, 1.4 MW and 2.8 MW, respectively and are designed for applications up to
50 MW. During fiscal 2008, we completed new designs for our MW-class
power plants that increased power output of the MW-class plants from their
earlier ratings of 1.2 MW and 2.4 MW, respectively.
Our fuel
cells operate on a variety of hydrocarbon fuels, including biogas, methanol,
diesel, coal gas, coal mine methane and propane. DFC power
plants are designed to achieve electrical efficiencies of 47 to 65 percent
depending on configuration, location, and application, and up to 80 percent when
used in a CHP system. They are designed for distributed generation
applications to 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, manufacturing facilities, universities, hospitals, government
facilities, as well as grid support applications for utility customers.
Our DFC power plants can be part of a total on-site power generation solution
with our high efficiency products providing baseload power along with
grid-delivered electricity. Our power plants can also work in
conjunction with intermittent power, such as solar, or less efficient
combustion-based equipment, providing peaking and load following
energy. Our products are also ideal to meet the needs of utilities
and RPS mandates.
A fuel
cell electrochemically converts a hydrocarbon fuel into electricity without
combustion. The primary byproducts of the fuel cell process are heat
and water. CO2 is an additional byproduct although the high efficiency results
in less CO2 per unit of power produced compared to other distributed
generation. A fuel cell power plant can be thought of as having two
basic segments: the fuel cell stack module, the part that actually produces the
electricity, and the balance of plant (BOP), which includes various fuel
handling and processing equipment such as pipes and
blowers, and electrical interface equipment such as inverters to convert the
fuel cell stack module’s DC electricity output to AC. Our fuel cells produce
virtually no SOX, NOX, or particulate matter emissions.
Conventional
fossil fuel power plants generate electricity by combusting hydrocarbon fuels,
such as coal, oil, or natural gas. With reciprocating engines, fuel
combustion takes place within the engine that drives a generator that produces
electricity. In a gas turbine combined cycle plant, fuels such as natural
gas, are burned in the gas turbine, which drives a generator. The
exhaust heat from the gas turbine is used to boil water, which converts to
high-pressure steam, which is used to rotate a steam turbine generating
additional electricity. The combustion process typically creates
emissions of SOX, NOX, CO2, carbon monoxide, particulates and other air
pollutants.
The
following table shows industry estimates of the electrical efficiency, operating
temperature, expected capacity range and certain other operating characteristics
of the principal types of fuel cells being developed for commercial
applications:
Fuel Cell
Type
|
|
Electrolyte
|
|
Electrical
Efficiency
Percentage
|
|
Electrical
Efficiency
With Bottom
Cycle
Percentage
|
|
Operating
Temperature
oF
|
|
Expected
Capacity
Range
|
|
By-Product
Heat Use
|
PEM
|
|
Polymer
Membrane
|
|
30-35
|
|
NA
|
|
180
|
|
5 kW
to
250
kW
|
|
Warm
Water
|
Phosphoric
Acid
|
|
Phosphoric
Acid
|
|
35-40
|
|
NA
|
|
400
|
|
50
kW to
200
kW
|
|
Hot
Water
|
Carbonate
(Direct
FuelCell®)
|
|
Potassium/Lithium
Carbonate
|
|
45-50
|
|
58 – 65
|
|
1,200
|
|
300
kW to
2.8
MW
and
larger
|
|
Hot
Water or
High
Pressure
Steam
|
Solid
Oxide
|
|
Stabilized
Zirconium
Dioxide
Ceramic
|
|
45-50
|
|
58 - 65
|
|
1,400-1,800
|
|
3 kW
to 1 MW and larger
|
|
Hot
Water or
High
Pressure
Steam
|
Our
carbonate fuel cell, known as the Direct FuelCell, operates at approximately
1200°F. This temperature avoids the use of precious metal electrodes required by
lower temperature fuel cells, such as proton exchange membrane (“PEM”) and
phosphoric acid, and the more expensive metals and ceramic materials required by
higher temperature fuel cells, such as tubular solid oxide. As a
result, we are able to use less expensive catalysts and readily available metals
in our designs. In addition, our fuel cell produces high quality byproduct
heat energy (700°F) that can be harnessed for CHP applications using hot water,
steam, or chiller water to heat or cool buildings.
Our
Direct FuelCell is so named because of its ability to generate electricity
directly from a hydrocarbon fuel, such as natural gas or wastewater treatment
gas, by reforming the fuel inside the fuel cell to produce hydrogen. We believe
that this “one-step” reforming process results in a simpler, more efficient, and
cost-effective energy conversion system compared with external reforming fuel
cells. External reforming fuel cells, such as PEM and phosphoric acid, generally
use complex, external fuel processing equipment to convert the fuel into
hydrogen. This external equipment increases capital cost and reduces electrical
efficiency. Additionally, natural gas and wastewater treatment gas
have infrastructures that are already established. Consequently, our
DFC products do not need to wait for the development of the hydrogen
infrastructure for continued commercialization.
MARKETS
AND APPLICATIONS
The
worldwide market for alternative energy power generation is growing and we
expect to continue to benefit from this momentum. Governments around
the world, including the U.S. and South Korean governments, have tied the
support of green energy programs to economic growth.
In
October 2008, the U.S. Congress extended the Federal ITC for eight years and
increased it to $3,000 per kW or 30 percent, whichever is less, for fuel cells.
President-elect Barack Obama has called for the creation of up to 5 million jobs
through investments in efforts to build a clean energy future. His clean energy
proposals include the federal RPS, a Cap-and-Trade program, and ensuring that
the government itself (the biggest energy user in the world) is energy
efficient.
In South
Korea, the Ministry of Knowledge Economy designated fuel cells as a key economic
driver for the country under President Lee Myung-bak's green growth plan. The
efficient production of electricity has important economic benefits for South
Korea since it imports its fossil fuels. Additionally, the country’s clean
energy program requires clean electricity to first be put on the utility grid,
encouraging the deployment of MW-class systems.
Distributed Generation
Markets and Applications
We
compete in the distributed generation marketplace. We believe distributed
generation can be a more cost-effective solution than traditional grid-delivered
electricity:
|
·
|
Provides
better economics. Distributed generation avoids transmission
and distribution system investment by using the existing infrastructure
close to the end user. Customers can use the heat byproduct from on-site
power generation (combined heat and power) boosting efficiency and
lowering energy costs. Distributed generation also offers the ability to
control energy costs through fuel flexibility and
efficiency.
|
|
·
|
Increases
reliability by locating power closer to the end user. On-site power
generation bypasses the congested transmission and distribution system,
increasing electrical reliability.
|
|
·
|
Eases
congestion in the transmission and distribution system. Each kW of
on-site power generation removes the need for the same amount from the
centralized transmission and distribution system, easing congestion that
can cause power outages and hastening the grid recovery after electrical
infrastructure problems have been resolved. In addition,
distributed generation provides added strength to the grid by opening up
distribution capacity for central wind or solar
generation.
|
|
·
|
Reduces the
need for new large generation and associated transmission and distribution
line investments and provides greater capacity utilization in less
time. On-site, distributed generation can be added in
increments that more closely match expected demand in a shorter time frame
(weeks to months) compared with traditional central power generation
plants and transmission and distribution systems (often 36 months or
longer) that require more extensive siting and right of way
approvals. Siting distributed generation can defer or avoid
massive transmission and distribution investment such as unpopular above
ground high voltage lines or expensive underground high voltage
lines.
|
|
·
|
Enables the
use of more renewable fuel for power generation. Distributed
generation enables end-users to use renewable biogas to generate highly
efficient, clean power, and reduces the need for fossil
fuels.
|
|
·
|
Promotes
greater energy independence. Distributed generation reduces
dependence on foreign oil and on centralized power generators, giving
customers more control over their power costs and
supply.
|
|
·
|
Enhances
security. By locating smaller, incremental power plants in
dispersed locations closer to energy consumers, distributed generation can
reduce dependence on a vulnerable centralized electrical
infrastructure.
|
Our fuel
cell products are competitive in the marketplace because of superior product
attributes including higher operational efficiency, lower emissions and the
ability to utilize multiple fuels. Our fuel cells are unique among power
generation technologies (including other fuel cells) in that they provide these
attributes at a scale suitable to distributed generation. The only
other commercial power generation technology with fuel efficiency comparable to
our products – combined cycle power plants – achieves that efficiency only in
systems rated at hundreds of MWs. The fact that fuel cells provide their high
efficiency at small sizes, combined with the ultra-clean and quiet operating
characteristics, makes them an ideal power generation technology for distributed
generation. While most small-scale technologies have high emissions
or low efficiency, our direct fuel cells provide the efficiency of a large
combined cycle power plant in a size small enough to be located near the end
user. This avoids the need to add transmission or distribution
capacity, and provides a mechanism to strengthen the existing distribution
system.
When
power generation is installed near the end user, it becomes possible to provide
additional value to local customers by using the fuel cell waste heat to provide
hot water or steam. This thermal energy offsets other means of heat
production, generally burning oil or gas, which further reduces CO2 and other
emissions. Reduced transmission and distribution constraints and
lower emissions are key benefits of distributed generation, which become
feasible with a technology like the fuel cell.
Target
applications include those where customers can use renewable fuels such as
wastewater treatment facilities, breweries, and food
processors. Other on-site applications include those facilities that
require reliable, baseload power, ultra-clean distributed generation including
manufacturers, mission critical institutions such as correction facilities and
government installations, hotels, and hospitals.
As a
result of the high efficiency and flexible siting of our fuel cell power plants,
fuel cells in grid support can provide economical, baseload power in
grid-constrained areas to avoid substantial transmission and distribution
equipment upgrades. Our fuel cells produce clean power that meet RPS
requirements, operate quietly, and can be installed in a third the time required
for new central generation. For utilities, distributed generation can be a
superior choice to new central generation and other forms of distributed
generation.
Strategic Alliances and
Market Development Agreements
Our
original equipment manufacturer (“OEM”) and energy service company (“ESCO”)
partners have extensive experience in designing, manufacturing, distributing
selling and servicing energy products worldwide. We believe our strength
in the development of fuel cell products coupled with their understanding of
sophisticated commercial and industrial customers, products, and services will
enhance the sales, service, and product development of our power
plants.
POSCO Power.
In February 2007, we signed a 10-year manufacturing and distribution
agreement with POSCO, one of the world’s largest producers of steel. Our
agreements include the rights to distribute and package DFC power plants in
South Korea. POSCO Power, a POSCO subsidiary, has extensive
experience in power plant project development, having built over 2,400 MW of
power plants, equivalent to 3.7 percent of South Korea’s national
capacity. POSCO Power made a substantial investment in its 50 MW fuel
cell BOP manufacturing facility in Pohang, which opened in September 2008. In
late 2009, POSCO Power will begin manufacturing the BOP, the non power producing
portion of a DFC power plant.
To date
POSCO Power has ordered 38.2 MW of our DFC power plants, 30.4 MW during fiscal
2008.
Enbridge,
Inc. Enbridge is a global leader in energy
transportation and distribution. We have a market development agreement for
North America that includes current DFC product distribution and the new
DFC-ERG™ power plant that they co-developed with us. A 1.2 MW DFC-ERG
unit was installed at Enbridge’s headquarters in Toronto during the fiscal
fourth quarter of 2008. We have also been selected for a 9 MW DFC-ERG
installation at a natural gas let-down station in Milford, CT. under the
Connecticut Project 150 Round 2 projects which are in final negotiations. Three
additional DFC-ERG systems are included in the 27 MW under consideration in
Round 3 by the DPUC.
Marubeni
Corporation. Working with Marubeni, we have installed 4.75 MW and
currently have 1.5 MW in order backlog from Marubeni. Four DFC300
units sold by Marubeni totaling 1 MW in output are operating at the Sharp Ltd.
“super-green” factory in Kameyama Prefecture, where Sharp manufactures LCD
screens for its flat-panel television displays. The 1 MW fuel cell
installation provides baseload power to the facility, while 5 MW of Sharp’s own
photovoltaic modules provide peaking power. Altogether, the system
provides 30 percent of the plant’s energy needs.
MTU Onsite Energy
GmbH. MTU Onsite Energy, a Tognum Group Company headquartered
in Ottobrunn, Germany, was a co-developer of our DFC technology. Our
first sub-MW power plant was a collaborative effort using our DFC technology and
the Hot Module® BOP
designed by MTU Friedrichschafen GmbH now known as MTU Onsite Energy (previously
CFC Solutions). As an OEM developer of stationary fuel cell power
plants, MTU Onsite Energy assembles and stacks the DFC components that we sell
it and MTU Onsite Energy adds its mechanical and electrical BOP for
ultimate sale to their customers. There are twelve installations for a
total of 3.0 MW operating in Europe.
Caterpillar,
Inc. DFC units have been shipped to several commercial Caterpillar
customers including a municipal wastewater treatment application for the
Sanitation Districts of Los Angeles County in Palmdale, California and the State
University of New York College of Environmental Science and
Forestry.
Energy Service
Company Distribution Partners. We also partner with energy service
companies that have expertise in the markets where we compete. These
partners include: Alliance Power, Inc., Chevron Energy Solutions, LOGANEnergy
Corp., The Linde Group and PPL Energy Plus.
COMPETITION
We
compete on the basis of our products’ reliability, fuel efficiency,
environmental considerations, and cost. We believe that our DFC carbonate
fuel cell offers competitive and environmental advantages over other fuel cell
designs and combustion-based technologies for stationary baseload power
generation.
Our DFC
power plants specifically provide the following attributes that provide an
advantage over other distributed technologies of similar size:
|
·
|
Higher
operational efficiency. Our DFC power
plants are designed to achieve electrical efficiencies of up 47 percent
and an overall energy efficiency of up to 80 percent for CHP applications.
Our newest products, the DFC-ERG for natural gas letdown stations, and the
DFC/T targeted for large load users, and achieve efficiencies of
approximately 65 percent. This is significantly greater than the fuel
efficiency of competing combustion-based technologies (25-35 percent) and
the average U.S. fossil fuel power plant (33 percent), and results in a
lower cost per kWh over the life of the power
plant.
|
|
·
|
Lower
emissions. Our DFC power
plant installations emit less carbon dioxide, and near zero SOX, NOX and
particulate matter. They have been designated ultra-clean by
the California Air Resources Board (“CARB”), and our DFC products are
certified to CARB 2007 emissions
standards.
|
Emissions
of fuel cell power plants versus traditional combustion-based power plants are
as follows:
|
|
Emissions (Lbs. Per MWh)
|
|
|
|
NOX
|
|
|
SO2
|
|
|
PM10
|
|
|
CO2
|
|
|
CO2 with
CHP
|
|
Average
U.S. Fossil Fuel Plant
|
|
|
5.06 |
|
|
|
11.6 |
|
|
|
0.27 |
|
|
|
2,031 |
|
|
NA
|
|
Microturbine
(60 kW)
|
|
|
0.44 |
|
|
|
.008 |
|
|
|
0.09 |
|
|
|
1,596 |
|
|
|
520 – 680
|
|
Small
Gas Turbine
|
|
|
1.15 |
|
|
|
.008 |
|
|
|
0.08 |
|
|
|
1,494 |
|
|
|
520 – 680
|
|
Direct
Fuel Cell
|
|
|
0.01 |
|
|
|
0.0001 |
|
|
|
0.00002 |
|
|
|
980 |
|
|
|
520 – 680
|
|
|
·
|
Fuel
flexibility. Our DFC power
plants can use many fuel sources, such as natural gas, biogas from
wastewater treatment facilities, food processors and breweries, and coal
gas (escaping gas from active and abandoned coal mines as well as
synthesis gas processed from coal). This enhances independence from
imported oil and gives customers fuel flexibility, allowing them to choose
the least expensive
alternative.
|
|
·
|
Provide end
users with greater control of their energy costs. The
high efficiency of our DFC power plants and 24/7 operation gives customers
predictability and savings on energy costs. The cost of utility-provided
power continues to rise and is subject to significant
volatility. Generating on-site power with known generating
costs from a DFC power plant gives customers a predictable component of
their operations that can be budgeted and
controlled.
|
Several
companies in the U.S. are involved in fuel cell development, although we believe
we are the only domestic company engaged in significant manufacturing and
commercialization of carbonate fuel cells. Emerging fuel cell technologies (and
companies developing them) include PEM fuel cells (Ballard Power Systems, Inc.,
UTC Power, Samsung Everland, and Plug Power), phosphoric acid fuel cells (UTC
Power and HydroGen) and solid oxide fuel cells (Siemens Power Generation,
Cummins, General Electric, Delphi, Rolls Royce, Bloom Energy, and
Acumentrics). Each of these competitors has the potential to capture
market share in our target markets.
There are
other potential carbonate fuel cell competitors internationally. In Asia,
Doosan Corporation and IHI Corporation have been involved in carbonate
development. Fuji Electric has been involved with both PEM and phosphoric
acid fuel cells. In Europe, a company in Italy, Ansaldo Fuel Cells,
is engaged in the development of a 100 kW carbonate fuel cell, although we
believe MTU Onsite Energy has been the most active fuel cell company in
Europe.
Other
than fuel cell developers, we also compete with electricity provided by the
electric grid and manufacturers of more mature combustion-based equipment,
including various engines and turbines that have more established
manufacturing, distribution, operating, and cost features. These manufacturers
include: Caterpillar, General Electric, Cummins Inc., and Detroit Diesel
Corporation (a subsidiary of DaimlerChrysler AG).
Significant
competition may also come from gas turbine companies like General Electric,
Ingersoll-Rand Company Limited, Solar Turbines Incorporated and Kawasaki, which
have recently made progress in improving fuel efficiency and reducing pollution
in large-size combined cycle natural gas fueled generators. These companies have
made efforts to extend these advantages to smaller sizes. We believe,
however, that these smaller gas turbines will not be able to match our fuel
efficiency or favorable environmental characteristics.
MANUFACTURING
AND COST REDUCTION
Manufacturing
Process
We have a
65,000 square foot manufacturing facility in Torrington, Connecticut where we
produce our repeating fuel cell components: the anode and cathode electrodes,
metallic bipolar plates and the electrolyte matrix. These stack
components are combined and assembled into modules that are currently delivered
to our test and conditioning facilities in Danbury, Connecticut and then shipped
to customer sites for installation with an assembled BOP.
Capacity and Production
Ramp-up
Our
overall manufacturing process (module manufacturing, final assembly, and test
and conditioning) has a production capacity of 50 MW per year. We
recently invested approximately $3.5 million to double our MW-class conditioning
capacity to 50 MW and expect to continue to invest in those processes required
to increase the overall production capacity to 60 MW. The timing of
this additional investment will be based on future order volume. We
believe manufacturing capacity can be increased to 125-150 MW within our
existing Torrington facility through the addition of parallel production lines
and additional machinery. We also have additional land surrounding
our Torrington facility, on which we may be able to expand to 400 MW of annual
production of our repeating fuel cell components.
Expansion
of our manufacturing facilities beyond 60 MW may require new facilities for the
fuel cell stack and module assembly, and testing and conditioning, which
could be deployed regionally. These regional assembly, test and
conditioning facilities are expected to provide additional cost
savings from reductions in shipping costs, enhanced delivery times, and
improved customer service.
During
2008, we ramped to an annualized production rate of approximately 30 MW in
response to worldwide demand for our MW-class power
plants. Actual production in fiscal 2008 was approximately 22 MW
compared to approximately 11 MW in 2007. Future production volumes will be
adjusted depending on customer demand.
Raw Materials and Supplier
Relationships
We use
various raw materials and components to construct a fuel cell module, including
nickel and stainless steel, which are critical to our manufacturing
process. In addition to manufacturing the fuel cell module in our
Torrington facility, the electrical BOP and mechanical BOP are assembled by and
procured from several key suppliers. All of our suppliers must
undergo a qualification process, which takes four to twelve
months. We continually evaluate new suppliers and are currently
qualifying several new suppliers.
Cost
Reduction
Reducing
product cost is essential to our ability to further penetrate the market with
our fuel cell power plants. Cost reductions will reduce and/or eliminate the
need for incentive funding programs, allow our product pricing to compete with
grid-delivered power and other distributed generation technologies, and are
critical to attaining profitability.
We have
reduced the cost of our MW-class power plants by approximately 85 percent since
our ‘proof-of-concept’ 2 MW Santa Clara project in 1996-1997. In
2003, 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, technology improvements, and global
sourcing.
In fiscal
2008, we completed the design of our newest multi-MW power plants that
incorporate our second power increase for our MW-class products, increasing the
output of our 300 kW fuel cell stack to 350 kW. We further reduced cost through
improved component sourcing and raw materials pricing due to volume ordering and
global sourcing. When these designs go into production in the fourth
quarter of fiscal 2009, we expect them to be our first gross margin profitable
units. We estimate continued increases in volume could result in an additional
10-20 percent cost reduction.
In 2008,
we began manufacturing our first five-year stacks, representing a service cost
reduction. Previously, estimated stack life was approximately three
years.
SERVICE,
CUSTOMER SATISFACTION AND LONG TERM SERVICE AGREEMENTS
Our
service organization offers comprehensive service and maintenance programs
including total fleet management, refurbishment and recycling services, and
complete product support including spare parts inventory. The service
organization’s primary task is to maintain a high level of service for our end
user customers during the warranty and service agreement periods of the original
DFC equipment. To provide a wide range of services to support the fleet
during the warranty period, we have developed a service infrastructure for those
customers who enter into long-term service agreements (typically five years),
which has allowed us to capture revenue as the units in the field increase and
enter the period past the standard one-year warranty period.
Our
services include a 24/7 call center and a web-based information system network
that allows remote access to plant performance data. We have also
established parts warehouses that include a rotable pool of spare stacks in
Connecticut and Asia. We have fully equipped regional field service teams, a
stack repair/refurbishment center, and testing and conditioning facilities
located in Connecticut. All personnel complete an operator and
maintenance technician training program and work closely with the engineering
and technology support organizations to service our products in the
field. This infrastructure has enabled us to diagnose issues quickly
and maintain high customer satisfaction.
We offer
service agreements with a standard term of five years with flexible renewal
options. Initial and renewal pricing for service contracts is based on the
markets in which we compete as well as estimates of future costs. Under the
standard provisions of these contracts, we provide services to maintain,
monitor, and repair customer power plants to meet minimum operating levels.
Should the power plant not meet the minimum operating levels, we may be required
to replace the fuel cell stack with a new or used replacement. Our contractual
liability under service agreements is limited to the amount of service fees
payable under the contract.
POWER
PURCHASE AGREEMENTS
Power
purchase agreements (PPAs) are a common arrangement in the energy industry,
whereby a customer purchases energy from an owner and operator of the power
generation equipment. A number of our partners enter into PPAs with
end users such as Marubeni in Japan and Alliance Power in the U.S. After
purchasing DFC power plants from us, they own and operate the units, and
recognize revenue as energy is sold to the end user.
We have
seeded the market with a few Company-funded PPAs to penetrate key target markets
and develop operational and transactional experience. To date, we
have funded the development and construction of certain fuel cell power plants
sited near customers in California, and own and operate 3 MW of assets through
PPA entities in which we have an 80 percent ownership interest. As we
enter into multi-MW projects in the RPS markets with the benefit of the federal
Investment Tax Credit and accelerated depreciation in the Energy Policy Act of
2005, we believe future PPAs will attract third party financing or
ownership.
RESEARCH
AND DEVELOPMENT
The goal
of our research and development efforts is to improve our core DFC products and
expand our technology portfolio in complementary high temperature fuel cell
systems. In addition, we are also conducting development work on advanced
applications for other fuel cell technologies, such as SOFC and
PEM.
A portion
of our research and development has been funded by government contracts and is
classified as cost of research and development contracts in our consolidated
financial statements. We also fund our own research and development projects
including extending module life, increasing the power output of our modules and
reducing the cost of our products. Research and development that is
not funded under a government contract is included in research and development
expenses in our consolidated financial statements. For the fiscal
years ended 2008, 2007, and 2006, total research and development expenses,
including amounts received from the Department of Energy (“DOE”), other
government departments and agencies and our customers, and amounts that have
been self-funded, were $39.5 million, $40.9 million, and $35.0 million,
respectively.
Government Research &
Development Contracts
Since
1975, we have worked on the development of our DFC technology with various U.S.
government departments and agencies, including the DOE, the Navy, Coast Guard,
the Department of Defense, Environmental Protection Agency, Defense Advance
Research Projects Agency and National Aeronautics and Space
Administration. Government funding, principally from the DOE, provided
approximately 18 percent, 33 percent, and 35 percent of our revenue for the
fiscal years ended 2008, 2007, and 2006, respectively. From the inception
of our carbonate fuel cell development program in the mid-1970s to date, more
than $536 million has been
invested relating to government programs in support of the development of our
DFC and related technologies.
Significant
research and development programs we are currently working on
include:
Direct
FuelCell/Turbine. The DOE’s Office of Fossil Energy established its
Vision 21 Program in 1999 with the objective of developing a “21st Century
Energy Plant” that can generate electricity, heat, and hydrogen from a variety
of feedstocks such as fossil fuels and biomass with high efficiency and low
environmental impact. Under this program, we were awarded a $19.4 million
cost-shared contract to develop a fuel cell/turbine hybrid power plant (DFC/T).
In 2006 and 2007, we successfully demonstrated a sub-MW DFC/T power plant for
8,000 hours and achieved a 56 percent electrical efficiency. The conceptual
design of a MW class DFC3000/T was completed in 2008.
The
Connecticut Clean Energy Fund has recommended a project to the Department of
Public Utility Control under Round 3 of Connecticut Project 150 that includes a
DFC3000/T power plant. The final decision is scheduled for January 28,
2009.
Co-production of
Hydrogen and Electricity using DFC Power Plants. Our high temperature DFC
power plant produces hydrogen internally from hydrocarbon fuels, and then
converts it to electricity. These DFC products are capable of
co-production of electricity and hydrogen at potentially attractive
costs. This value-added proposition is attractive for industrial
users of hydrogen. It also provides a technology bridge to the hydrogen
infrastructure being developed by DOE in our nation’s bid for greater energy
independence. A DOE-sponsored study performed by Air Products and
Chemicals, Inc. (APCI), showed that a DFC300 power plant installed at a hydrogen
refueling station for fuel cell vehicles can provide sufficient hydrogen to fuel
a fleet of approximately 200 cars while providing enough electricity to power a
community of 200 homes.
During
2005, we were selected by APCI to develop and demonstrate the next generation
hydrogen energy station. The $10 million cost-shared project,
co-sponsored by DOE, APCI, and ourselves, integrates our ultra-clean DFC power
plant and APCI’s advanced gas separation technology to co-produce hydrogen and
electricity at a vehicle refueling station from one single system, the
“DFC/H2” operating
on pipeline natural gas and renewable fuels such as biogas. Air
Products estimates that the DFC/H2 system has
the potential to be highly efficient and cost competitive with other
conventional hydrogen production technologies. We are currently
constructing a test system in advance of a field demonstration.
We are
also developing an electrochemical hydrogen separator (EHS). Under
sponsorship from Connecticut Clean Energy Fund, we designed and built a
sub-scale (2 kW) EHS stack, and delivered it to the University of Connecticut
for demonstration in February 2006 where it accumulated over six months of
stable operation. Following this successful demonstration, we were
awarded a $1.2 million contract by U.S. Department of Defense to scale-up the
EHS stack to the appropriate size for co-production of high purity hydrogen from
our DFC300 power plants. In 2007 we were awarded an additional $1.2
million to continue this program through in-house system testing. EHS provides
an attractive alternative to mechanical separation technologies. Because it has
no moving parts, it promises lower cost and the enhanced reliability needed for
the hydrogen infrastructure.
SECA and Large
Scale Hybrid Programs In 2008, we successfully completed the milestones
for Phase I of the DOE’s Solid State Energy Conversion Alliance (“SECA”) Large
Scale Hybrid Program. The goal of the program is to develop a multi-MW, highly
efficient, central generation SOFC power plant operating on coal
syngas. Phase I of the program was a two-year, $32.3 million
cost-shared program.
In
December of 2008, the DOE accepted our $21 million proposal for Phase II. The
total program cost is $30.2 million of which $21 million will be funded by SECA.
The program begins January 2009 and extends through September of 2010, and seeks
to build a minimum 25 kW solid oxide fuel cell (SOFC) stack that meets certain
performance requirements and cost targets as a manufactured product. The new
stack will be integrated into a 250 kW to 1 MW fuel cell power module and a 5 MW
proof-of-concept system operating on coal-based syngas (gas created from
reacting coal with steam and oxygen). The module and proof-of-concept system
will be designed, fabricated and tested in subsequent phases.
The
advanced fuel cell-hybrid system is expected to have an overall efficiency of at
least 50 percent in converting energy contained in coal to ultra-clean grid
electrical power. In contrast, today’s average U.S. coal-based power plant has
an electrical efficiency of approximately 33 percent. In addition,
the envisioned SOFC-hybrid system is expected to separate 90 percent or more of
the system’s carbon dioxide emissions for capture and environmentally safe
disposal while being cost competitive with other baseload power generating
technologies. The DOE anticipates commissioning multi-MW,
proof-of-concept, coal-based power plant systems in the 2012 time
frame.
We
utilize the cell and stack design of our technology team partner, Versa Power
Systems Inc. (VPS), for all our SOFC development programs. VPS has been engaged
in SOFC development since 1997 and is considered a world leader in SOFC cell and
stack technology. We have been a prime contractor in the SECA program since
2003. WorleyParsons Group Inc. is another team member, providing engineering
support for design of the solid oxide fuel cell power plants that run on syngas
from coal.
GOVERNMENT
REGULATION
We
presently are, and our fuel cell power plants will be, subject to various
federal, state and local laws and regulations relating to, among other things,
land use, safe working conditions, handling and disposal of hazardous and
potentially hazardous substances and emissions of pollutants into the
atmosphere. Emissions of SOX and NOX from our fuel cell power plants are much
lower than conventional combustion-based generating stations, and are well
within existing and proposed regulatory limits. The primary emissions from our
DFC power plants, assuming no cogeneration application, are humid flue gas that
is discharged at a temperature of approximately 700-800° F, water that is
discharged at a temperature of approximately 10-20° F above ambient air
temperatures, and carbon dioxide in per kWh amounts much less than conventional,
fossil fuel, central generation power plants. In light of the high temperature
of the gas emissions, we are required by regulatory authorities to site or
configure our power plants in a way that will allow the gas to be vented at
acceptable and safe distances. The discharge of water from our power plants
requires permits that depend on whether the water is permitted to be discharged
into a storm drain or into the local wastewater system. Lastly, as with any use
of hydrocarbon fuel, the discharge of emissions must meet emissions standards.
While our products have very low carbon monoxide emissions, there could be
additional permitting requirements in smog non-attainment areas with respect to
carbon monoxide if a number of our units are aggregated together.
We are
also subject to federal, state, provincial or local regulation with respect to,
among other things, emissions and siting. In addition, utility
companies and several states have created and adopted or are in the process of
creating interconnection regulations covering both technical and financial
requirements for interconnection of fuel cell power plants to utility
grids.
PROPRIETARY
RIGHTS AND LICENSED TECHNOLOGY
To
compete in the marketplace, align effectively with business partners and protect
our proprietary rights, we rely primarily on a combination of trade secrets,
patents, confidentiality procedures and agreements and patent assignment
agreements. In this regard, we have 57 current U.S. patents and 97 international
patents covering our fuel cell technology (in certain cases covering the same
technology in multiple jurisdictions). Fifty-six of the 57 U.S. patents relate
to our Direct FuelCell technology. The remaining patent relates to PEM fuel cell
technology. We also have submitted 38 U.S. and 168 international patent
applications.
Our
patents will expire between 2009 and 2027, and the current average remaining
life of our patents is approximately 11.1 years. In 2008, seven new U.S patents
were issued or allowed (one more patent was allowed in November of 2008). In
fiscal 2008, two U.S. patents expired and one was abandoned. The
expiration of these patents has no material impact on our current or anticipated
operations. We also have approximately 28 invention disclosures in
process with our patent counsel that may result in additional patent
applications.
Many of
our U.S. patents are the result of government-funded research and development
programs, including a DOE cooperative agreement. One of our patents which
resulted from government-funded research before January 1988 is owned by the
U.S. government and has been licensed to us.
U.S.
patents we own that resulted from government-funded research are subject to the
government exercising “march-in” rights. We believe, however, that the
likelihood of the U.S. government exercising these rights is remote and would
only occur if we ceased our commercialization efforts and there was a compelling
national need to use the patents.
We have
also entered into certain license agreements through which we have obtained the
rights to use technology developed under joint projects. Through these
agreements we must make certain royalty payments on the sales of products that
contain the licensed technology, subject to certain milestones and
limitations.
We have
two agreements with MTU Onsite Energy; a Cell License Agreement and a BOP
License Agreement. Under our current Cell License Agreement, which extends
through December 2009, we license our DFC technology to MTU Onsite Energy for
use exclusively in Europe and the Middle East and non-exclusively in Africa and
South America. We also sell our DFC components and stacks to MTU Onsite
Energy under this agreement. Under the Cell License Agreement, MTU Onsite
Energy also granted us an exclusive, royalty-free license to use any of their
existing improvements to our Direct FuelCell that MTU Onsite Energy developed as
of December 1999 under a previous license agreement. In addition, MTU
Onsite Energy agreed to negotiate a license grant of any separate carbonate fuel
cell know-how it developed during the term of the current Cell License once it
was ready for commercialization. Under our BOP Cross Licensing and
Cross-Selling Agreement, we sold MTU Onsite Energy MW-class modules and MTU
Onsite Energy could sell their sub-MW class modules to us. Our BOP Cross
Licensing and Cross-Selling Agreement with MTU Onsite Energy expired in July
2008.
REVENUE
AND BACKLOG
Our
consolidated revenues for the years ended October 31, 2008, 2007 and 2006 were
$100.7 million, $48.2 million and $33.3 million, respectively. These
consolidated revenues included product sales and revenues of $82.7 million,
$32.5 million and $21.5 million, respectively, and revenues from research and
development contracts of $18.0 million, $15.7 million and $11.8 million,
respectively. Consolidated revenues from foreign locations were $50.0
million, $16.5 million and $6.7 million, respectively, based on customer
location.
Backlog
refers to the aggregate revenues remaining to be earned at a specified date
under contracts we have entered into. Revenue backlog is as
follows:
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Product
order backlog was approximately $67.1 million and $42.5 million as of
October 31, 2008 and 2007, respectively, representing 32.5 MW and 15.6 MW
as of October 31, 2008 and October 31, 2007,
respectively. Product orders represent approximately 74 percent
of our total funded backlog as of October 31, 2008. Backlog for
long-term service agreements was approximately $20.5 million and $15.3
million as of October 31, 2008 and 2007, respectively. Although
backlog reflects business that is considered firm, cancellations or scope
adjustments may occur and will be reflected in our backlog when
known.
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For
research and development contracts, we include the total contract value
including any unfunded portion of the total contract value in
backlog. Research and development contract backlog was
approximately $4.8 million and $18.5 million as of October 31, 2008 and
2007, respectively. The unfunded portion of our research and
development contracts amounted to approximately $1.1 million and $9.2
million as of October 31, 2008 and 2007, respectively. Due to
the long-term nature of these contracts, fluctuations from year to year
are not an indication of any future
trend.
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As of
October 31, 2008 we had contracts for power plants totaling 3 MW under power
purchase agreements ranging from 5-10 years. Revenue under these agreements is
recognized as electricity is produced. This revenue is not included in
backlog.
EMPLOYEES
As of
October 31, 2008 we had 534 full-time employees, of whom 225 were located at the
Torrington, Connecticut manufacturing plant, and 309 were located at the
Danbury, Connecticut facility or various field offices. None of our
employees are represented by labor unions or covered by a collective bargaining
agreement.
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.
The
public may also read and copy any materials that we file with the SEC at the
SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website
that contains reports and other information regarding issuers that file
electronically with the SEC located at http://www.sec.gov.
EXECUTIVE
OFFICERS OF THE REGISTRANT
Our
executive officers and their ages and positions are as follows:
NAME
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AGE
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PRINCIPAL OCCUPATION
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R.
Daniel Brdar
President,
Chief Executive Officer and Chairman of the Board of
Directors
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49
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Mr.
Brdar has been Chairman of the Board of Directors since January 2007,
Chief Executive Officer since January 2006 and President since August
2005. Mr. Brdar, previously FuelCell Energy's Executive Vice President and
Chief Operating Officer, joined the Company in 2000. Mr. Brdar held
management positions at General Electric Power Systems from 1997 to 2000
where he focused on new product introduction programs and was product
manager for its gas turbine technology. Mr. Brdar was Associate Director,
Office of Power Systems Product Management at the U.S. Department of
Energy where he held a variety of positions from 1988 to 1997 including
directing the research, development and demonstration of advanced power
systems including gas turbines, gasification systems and fuel cells. Mr.
Brdar received a B.S. in Engineering from the University of Pittsburgh in
1981.
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Christopher R. Bentley
Executive
Vice President, Government R&D Operations, Strategic Manufacturing
Development
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66
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Mr.
Bentley has been responsible for Government Research and Development
Operations and Strategic Manufacturing Development since January of 2005.
He joined the Company in 1990 to develop manufacturing and operations
capability in support of the DFC commercialization initiative. He served
on the Board of Directors from 1993 to 2004. Prior to joining the Company,
he was Director of Manufacturing (1985), Vice-President and General
Manager (1985-1988) and President (1989) of the Turbine Airfoils Division
of Chromalloy Gas Turbine Corporation, a major manufacturer of gas turbine
hardware. From 1960 to 1985 he was with the General Electric Company where
he served a four-year apprenticeship and completed the GE Manufacturing
Management Program prior to a series of increasingly responsible
manufacturing positions. Mr. Bentley received a B.S. in Mechanical
Engineering from Tufts University in 1966.
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Bruce
A. Ludemann
Senior
Vice President of Sales & Marketing
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49
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Mr.
Ludemann joined the Company in April 2006. His responsibilities
encompass all our business development activities across global
markets. Prior to joining the Company, Mr. Ludemann had been a senior
marketing and sales executive with Siemens for eight
years, overseeing sales and marketing efforts for the firm’s Power
Generation and Transmission & Distribution business units. Earlier,
he was with ABB Power Transmission & Distribution Inc. for 13
years; the industrial control firm Square D; and Swiss electrical
equipment manufacturer BBC Brown Boveri. He also served four years in the
U.S. Navy specializing in electric power generation and distribution
systems. Mr. Ludemann holds an Executive MBA from the University of
Pittsburgh.
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NAME
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AGE
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PRINCIPAL OCCUPATION
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Joseph
G. Mahler
Senior
Vice President, Chief Financial Officer, Corporate Secretary, Treasurer,
Corporate Strategy
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56
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Mr.
Mahler joined the Company in October 1998 as Vice President, Chief
Financial Officer, Corporate Secretary, and Treasurer. Mr. Mahler’s
responsibilities include finance, accounting, corporate governance,
strategy, treasury, information systems and human resources. Mr. Mahler
was Vice President-Chief Financial Officer at Earthgro, Inc. from 1993 to
1998 and worked at Ernst & Young in the New York and Hartford offices
from 1974 to 1992. He was a partner in the Hartford office’s
Entrepreneurial Services Group. Mr. Mahler received a B.S. in
Accounting from Boston College in
1974.
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Item
1A. RISK FACTORS
You
should carefully consider the following risk factors before making an investment
decision. If any of the following risks actually occur, our business,
financial condition, or results of operations could be materially and adversely
affected. In such cases, the trading price of our common stock could
decline, and you may lose all or part of your investment.
We
have incurred losses and anticipate continued losses and negative cash
flow.
We have
been transitioning from a contract research and development company to a
commercial products developer and manufacturer. As such, we have not been
profitable since our fiscal year ended October 31, 1997. We expect to continue
to incur net losses and generate negative cash flow until we can produce
sufficient revenues to cover our costs. We may never become profitable. Even if
we do achieve profitability, we may be unable to sustain or increase our
profitability in the future. For the reasons discussed in more detail below,
there are substantial uncertainties associated with our achieving and sustaining
profitability. We have, from time to time, sought financing in the public
markets in order to fund operations. Our future ability to obtain such
financing, if required, could be impaired by a variety of factors including the
price of our common stock, the current global economic crisis and general market
conditions.
Our
cost reduction strategy may not succeed or may be significantly delayed, which
may result in our inability to offer our products at competitive prices and may
adversely affect our sales.
Our cost
reduction strategy is based on the assumption that a significant increase in
production will result in economies of scale. In addition, our cost reduction
strategy relies on advancements in our manufacturing process, global competitive
sourcing, engineering design and technology (including stack life and projected
power output). Failure to achieve our cost reduction targets would have a
material adverse effect on our commercialization plans and, therefore, our
business, prospects, results of operations and financial condition.
Our
products will compete with products using other energy sources, and if the
prices of the alternative sources are lower than energy sources used by our
products, sales of our products will be adversely affected. Volatility of
electricity prices may impact sales of our products in the markets in which we
compete.
Our
Direct FuelCell® has been
operated using a variety of hydrocarbon fuels, including natural gas, methanol,
diesel, biogas, coal gas, coal mine methane, and propane. If these fuels are not
readily available or if their prices increase such that electricity produced by
our products costs more than electricity provided by other generation sources,
our products would be less economically attractive to potential customers. In
addition, we have no control over the prices of several types of competitive
energy sources such as oil, gas or coal as well as local utility electricity
costs. Significant decreases (or short term increases) in the price of these
fuels or grid delivered prices for electricity could also have a material
adverse effect on our business because other generation sources could be more
economically attractive to consumers than our products.
The reduction or
elimination of government subsidies and economic incentives for alternative
energy technologies, including our fuel cell power plants, could reduce demand
for our products, lead to a reduction in our revenues and adversely impact our
operating results.
We
believe that the near-term growth of alternative energy technologies, including
our fuel cells, relies on the availability and size of government and economic
incentives (including, but not limited to, the U.S. federal Investment Tax
Credit and the incentive programs in South Korea and the state of California and
state renewable portfolio standards programs). Many of these
government incentives expire, phase out over time, exhaust the allocated
funding, or require renewal by the applicable authority. In addition,
these incentive programs could be challenged by utility companies, or for other
reasons found to be unconstitutional, and/or could be reduced or discontinued
for other reasons. The reduction, elimination, or expiration of
government subsidies and economic incentives may result in the diminished
economic competitiveness of our power plants to our customers and could
materially and adversely affect the growth of alternative energy technologies,
including our fuel cells, as well as our future operating
results.
Financial
markets worldwide are currently in the midst of an unprecedented crisis which
may have a material adverse impact on the Company, our customers and our
suppliers.
Financial
markets are in an unprecedented financial crisis worldwide, affecting both debt
and equity markets, which has substantially limited the amount of financing
available to all companies, including companies with substantially greater
resources, better credit ratings and more successful operating histories than
ours. It is impossible to predict how long this crisis will last or
how it will be resolved and it may have a materially adverse affect on the
Company for a number of reasons, such as:
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The
long term nature of our sales cycle often requires long lead times between
order booking and product fulfillment. For this, we often
require substantial cash down payments in advance of
delivery. Our growth strategy assumes that financing will be
available for our customers to provide for such down payments and to pay
for our products. The worldwide credit crisis may delay, cancel
or restrict the construction budgets and funds available to our customers
that we expect to be the ultimate purchasers of our products and
services.
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Projects
using our products are, in part, financed by equity investors interested
in tax benefits as well as by the commercial and governmental debt
markets. The recent significant declines in the US and
international stock markets, coupled with the failure of several large
financial institutions, has caused significant uncertainty and resulted in
an increase in the return required by investors in relation to the risk of
such projects. This in turn has increased the cost of
capital to the point where new projects or projects in the early or
planning stages may not receive funding or may have project delays or
cancellations.
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If we, or our customers and suppliers,
cannot obtain financing under favorable terms during the current financial
crisis or should the financial crisis worsen our business may be negatively
impacted.
We
have signed long-term service contracts and power purchase agreements with
customers subject to market conditions and operating risks that may affect our
operating results.
We have
contracted with certain customers to provide service to fuel cell power plants
over terms ranging from one to thirteen years. Under the provisions of these
contracts, we provide services to maintain, monitor, and repair customer power
plants to meet minimum operating levels. Pricing for service contracts is based
upon estimates of future costs, which given the early stage of development could
be materially different from actual expenses. While we have conducted
tests to determine the overall life of our products, we have not run our
products over their projected useful life prior to large-scale
commercialization. As a result, we cannot be sure that our products will last to
their expected useful life, which could result in warranty claims and further
losses on service contracts.
Under the
terms of our power purchase agreements, 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. Should electricity rates decrease or operating costs increase from our
original estimates, our results of operations could be negatively impacted. We
have qualified for incentive funding for these projects in California under the
states’ Self-Generation Incentive Funding Program (SGIP) and from other
government programs. Funds are payable upon commercial installation and
demonstration of the plant and may require return of the funds for failure of
certain performance requirements. Revenue related to these incentive funds is
recognized ratably over the performance period. 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
extend product warranties which could affect our operating results.
We
warranty our products for a specific period of time against manufacturing or
performance defects. As we have limited operating experience, warranty costs are
currently expensed as incurred. As a result operating results could be
negatively impacted should there be product manufacturing or performance
defects.
We
currently face and will continue to face significant competition.
Our
Direct FuelCell®
currently faces, and will continue to face, significant competition. We compete
on the basis of our products’ reliability, fuel efficiency, environmental
considerations and cost. Technological advances in alternative energy products
or improvements in the electric grid or other sources of power generation, or
other fuel cell technologies may negatively affect the development or sale of
some or all of our products or make our products non-competitive or obsolete
prior to commercialization or afterwards. Other companies, some of which have
substantially greater resources than ours, are currently engaged in the
development of products and technologies that are similar to, or may be
competitive with, our products and technologies.
Several
companies in the U.S. are involved in fuel cell development, although we believe
we are the only domestic company engaged in significant manufacturing and
commercialization of carbonate fuel cells. Emerging fuel cell technologies (and
companies developing them) include proton exchange membrane fuel cells (Ballard
Power Systems, Inc.; United Technologies Corp. or UTC Power; and Plug Power),
phosphoric acid fuel cells (UTC Power and Samsung Everland) and solid oxide fuel
cells (Siemens Westinghouse Electric Company, General Electric, Delphi, Rolls
Royce, Bloom Energy, and Acumentrics). Each of these competitors has the
potential to capture market share in our target markets.
There are
other potential carbonate fuel cell competitors internationally. In Europe, a
company in Italy, Ansaldo Fuel Cells, is actively engaged in carbonate fuel cell
development and is a potential competitor. Fuji Electric has been involved with
both PEM and phosphoric acid fuel cells. In Korea, Doosan Corporation is engaged
in carbonate fuel cell development.
Other
than fuel cell developers, we must also compete with such companies as
Caterpillar, Cummins, and Detroit Diesel, which manufacture more mature
combustion-based equipment, including various engines and turbines, and have
well-established manufacturing, distribution, and operating and cost features.
Significant competition may also come from gas turbine companies like General
Electric, Ingersoll Rand, Solar Turbines and Kawasaki, which have recently made
progress in improving fuel efficiency and reducing pollution in large-size
combined cycle natural gas fueled generators. These companies have also made
efforts to extend these advantages to smaller sizes.
MTU
Onsite Energy may develop competing technologies.
MTU
Onsite Energy (formerly CFC Solutions Gmbh) is currently developing carbonate
fuel cell technology. If this technology does not use DFC know-how, MTU Onsite
Energy must use good faith efforts to license the technology to us. If MTU
Onsite Energy is successful but does not grant us a license, it may be directly
competing with us while having a significant ownership interest in us, and a
seat on our board of directors. We have agreed with MTU Onsite Energy to
continue developing products with as much commonality as possible. However, the
license agreement between us and MTU Onsite Energy provides that each of us
retains the right to independently pursue the development of carbonate fuel cell
technologies.
We have limited
experience manufacturing our Direct FuelCell® products on a
commercial basis, which may adversely affect our planned increases in production
capacity and our ability to satisfy customer requirements.
We have
limited experience manufacturing our Direct FuelCell® products
on a commercial basis. Our overall manufacturing process (module manufacturing,
final assembly, and test and conditioning) has a production capacity of 50 MW
per year. We expect that we will further increase our manufacturing
capacity based on market demand. We cannot be sure that we will be able to
achieve any planned increases in production capacity. Also, as we scale up our
production capacity, we cannot be sure that unplanned failures or other
technical problems relating to the manufacturing process will not
occur.
Even if
we are successful in achieving our planned increases in production capacity, we
cannot be sure that we will do so in time to meet our product commercialization
schedule or to satisfy the requirements of our customers. Additionally, we
cannot be sure that we will be able to develop efficient, low-cost manufacturing
capabilities and processes (including automation) that will enable us to meet
our cost goals and profitability projections. Our failure to develop advanced
manufacturing capabilities and processes, or meet our cost goals, could have a
material adverse effect on our business, prospects, results of operations and
financial condition.
Unanticipated
increases or decreases in business growth may result in adverse financial
consequences for us.
If our
business grows more quickly than we anticipate, our existing and planned
manufacturing facilities may become inadequate and we may need to seek out new
or additional space, at considerable cost to us. If our business does not grow
as quickly as we expect, our existing and planned manufacturing facilities
would, in part, represent excess capacity for which we may not recover the cost;
in that circumstance, our revenues may be inadequate to support our committed
costs and our planned growth, and our gross margins, and business strategy would
be adversely affected.
Our plans are
dependent on market acceptance of our Direct FuelCell®
products.
Our plans
are dependent upon market acceptance of, as well as enhancements to, those
products. Fuel cell systems represent an emerging market, and we cannot be sure
that potential customers will accept fuel cells as a replacement for traditional
power sources. As is typical in a rapidly evolving industry, demand and market
acceptance for recently introduced products and services are subject to a high
level of uncertainty and risk. Since the distributed generation market is still
evolving, it is difficult to predict with certainty the size of the market and
its growth rate. The development of a market for our Direct FuelCell® products
may be affected by many factors that are out of our control,
including:
· the
cost competitiveness of our fuel cell products;
·
the future costs of natural gas and other fuels used by our fuel cell
products;
·
customer reluctance to try a new product;
·
perceptions of the safety of our fuel cell products;
·
the market for distributed generation;
·
local permitting and environmental requirements; and
·
the emergence of newer, more competitive technologies and
products.
If a
sufficient market fails to develop or develops more slowly than we anticipate,
we may be unable to recover the losses we will have incurred in the development
of Direct FuelCell® products
and may never achieve profitability.
As we
continue to commercialize our Direct FuelCell®
products, we intend to continue to develop warranties, production guarantees and
other terms and conditions relating to our products that will be acceptable to
the marketplace, and continue to develop a service organization that will aid in
servicing our products and obtain self-regulatory certifications, if available,
with respect to our products. Failure to achieve any of these objectives may
also slow the development of a sufficient market for our products and,
therefore, have a material adverse effect on our financial results.
We
are substantially dependent on a small number of customers and the loss of any
one of these customers could adversely affect our business, financial condition
and results of operations.
In fiscal
2008, 2007, and 2006, our top two customers accounted for 62%, 45%, and 47%,
respectively of our total annual consolidated revenue. There can be
no assurance that we will continue to achieve historical levels of sales of our
products to our largest customers. Even though our customer base is
expected to increase and our revenue streams to diversify, a substantial portion
of net revenues could continue to depend on sales to a limited number of
customers. Our agreements with these customers may be cancelled if we fail
to meet certain product specifications or materially breach the agreement, and
our customers may seek to renegotiate the terms of current agreements or
renewals. The loss of, or a reduction in sales to, one or more of our
larger customers could have a material adverse affect on our business, financial
condition and results of operations.
Our
government research and development contracts are subject to the risk of
termination by the contracting party and we may not realize the
full amounts allocated under the contracts due to the lack of Congressional
appropriations.
A portion
of our fuel cell revenues have been derived from long-term cooperative
agreements and other contracts with the U.S. Department of Energy, the U.S.
Department of Defense, the U.S. Navy, and other U.S. government agencies. These
agreements are important to the continued development of our technology and our
products.
Generally,
our U.S. government research and development contracts are subject to the risk
of termination at the convenience of the contracting agency. Furthermore, these
contracts, irrespective of the amounts allocated by the contracting agency, are
subject to annual Congressional appropriations and the results of government or
agency sponsored reviews and audits of our cost reduction projections and
efforts. We can only receive funds under these contracts ultimately made
available to us annually by Congress as a result of the appropriations process.
Accordingly, we cannot be sure whether we will receive the full amounts awarded
under our government research and development or other contracts. Failure to
receive the full amounts under any of our government research and development
contracts could materially and adversely affect our business prospects, results
of operations, and financial condition.
A
negative government audit could result in an adverse adjustment of our revenue
and costs and could result in civil and criminal penalties
Government
agencies, such as the Defense Contract Audit Agency, routinely audit and
investigate government contractors. These agencies review a contractor’s
performance under its contracts, cost structure, and compliance with applicable
laws, regulations, and standards. If the agencies determine through these audits
or reviews that we improperly allocated costs to specific contracts, they will
not reimburse us for these costs. Therefore, an audit could result in
adjustments to our revenue and costs.
Further,
although we have internal controls in place to oversee our government contracts,
no assurance can be given that these controls are sufficient to prevent isolated
violations of applicable laws, regulations and standards. If the agencies
determine that we or one of our subcontractors engaged in improper conduct, we
may be subject to civil or criminal penalties and administrative sanctions,
payments, fines, and suspension or prohibition from doing business with the
government, any of which could materially affect our financial
condition.
The
U.S. government has certain rights relating to our intellectual property,
including restricting or taking title to certain patents.
Many of
our U.S. patents relating to our fuel cell technology are the result of
government-funded research and development programs. One of our patents that was
the result of DOE-funded research prior to January 1988 (the date that we
qualified as a “small business”) is owned by the U.S. government and has been
licensed to us. This license is revocable only in the limited circumstances
where it has been demonstrated that we are not making an effort to commercialize
the invention. We own all patents resulting from research funded by our DOE
contracts awarded after January 1988 to date, based on our “small business”
status when each contract was awarded. Under current regulations, patents
resulting from research funded by government agencies other than the DOE are
owned by us, whether or not we are a “small business.”
Ten U.S.
patents that we own have resulted from government-funded research and are
subject to the risk of exercise of “march-in” rights by the government. March-in
rights refer to the right of the U.S. government or a government agency to
exercise its non-exclusive, royalty-free, irrevocable worldwide license to any
technology developed under contracts funded by the government if the contractor
fails to continue to develop the technology. These “march-in” rights permit the
U.S. government to take title to these patents and license the patented
technology to third parties if the contractor fails to utilize the patents. In
addition, our DOE-funded research and development agreements also require us to
agree that we will not provide to a foreign entity any fuel cell technology
subject to that agreement unless the fuel cell technology will be substantially
manufactured in the U.S. Accordingly, we could lose some or all of
the value of these patents.
A
failure to qualify as a “small business” could adversely affect our rights to
own future patents under DOE-funded contracts.
Qualifying
as a “small business” under DOE contracts allows us to own the patents that we
develop under DOE contracts. A “small business” under applicable government
regulations generally consists of no more than 500 employees averaged over a one
year period. If we continue to grow, we will no longer qualify as a “small
business” and no longer own future patents we develop under future contracts,
grants or cooperative agreements funded by the DOE based on such certification,
unless we obtain a patent waiver from the DOE. Should we not obtain a patent
waiver and outright ownership, we would nevertheless retain exclusive rights to
any such patents, so long as we continue to commercialize the technology covered
by the patents. As a result of our acquisition of Global Thermoelectric Inc. in
November 2003, the number of our employees increased and therefore, we
temporarily did not qualify as a “small business.” Following the sale of Global
Thermoelectric Inc. and its TEG product line on May 27, 2004, we again qualified
as a “small business”; however, we cannot assure you that we will continue to
qualify as a “small business” in the future. We ended fiscal 2008 with a total
of 534 full-time employees.
Our
future success and growth is dependent on our distribution
strategy.
We cannot
assure you that we will enter into distributor relationships that are consistent
with, or sufficient to support, our commercialization plans, and our growth
strategy or that these relationships will be on terms favorable to us. Even if
we enter into these types of relationships, we cannot assure you that the
distributors with which we form relationships will focus adequate resources on
selling our products or will be successful in selling them. Some of these
distributor arrangements have or will require that we grant exclusive
distribution rights to companies in defined territories. These exclusive
arrangements could result in our being unable to enter into other arrangements
at a time when the distributor with which we form a relationship is not
successful in selling our products or has reduced its commitment to marketing
our products. In addition, certain distributor arrangements include, and some
future distributor arrangements may also include, the issuance of equity and
warrants to purchase our equity, which may have an adverse affect on our stock
price. To the extent we enter into distributor relationships, the failure of
these distributors to assist us with the marketing and distribution of our
products may adversely affect our results of operations and financial
condition.
We cannot
be sure that our original equipment manufacturers (“OEMs”) will manufacture or
package products using our Direct FuelCell®
components. Our success will largely depend upon our ability to make our
products compatible with the power plant products of OEMs and the ability of
these OEMs to sell their products containing our products. In addition, some
OEMs may need to redesign or modify their existing power plant products to fully
incorporate our products. Accordingly, any integration, design, manufacturing or
marketing problems encountered by OEMs could adversely affect the market for our
Direct FuelCell® products
and, therefore, our business prospects, results of operations and financial
condition.
We depend on
third party suppliers for the development and supply of key raw materials and
components for Direct FuelCell®
products.
We use
various raw materials and components to construct a fuel cell module, including
nickel and stainless steel which are critical to our manufacturing
process. We also rely on third-party suppliers for the
balance-of-plant components in our Direct FuelCell®
products. Suppliers must undergo a qualification process, which takes
four to twelve months. We continually evaluate new suppliers and we
are currently qualifying several new suppliers. There are a limited
number of suppliers for some of the key components of Direct FuelCell®
products. A supplier’s failure to develop and supply components in a
timely manner, supply components that meet our quality, quantity or cost
requirements, technical specifications, or our inability to obtain alternative
sources of these components on a timely basis or on terms acceptable to us could
harm our ability to manufacture our Direct FuelCell®
products. In addition, to the extent the processes that our suppliers
use to manufacture components are proprietary; we may be unable to obtain
comparable components from alternative suppliers.
We do not
know when or whether we will secure long-term supply relationships with any of
our suppliers or whether such relationships will be on terms that will allow us
to achieve our objectives. Our business, prospects, results of
operations and financial condition could be harmed if we fail to secure
long-term relationships with entities that will supply the required components
for our Direct FuelCell®
products.
We
depend on our intellectual property, and our failure to protect that
intellectual property could adversely affect our future growth and
success.
Failure
to protect our existing intellectual property rights may result in the loss of
our exclusivity or the right to use our technologies. If we do not adequately
ensure our freedom to use certain technology, we may have to pay others for
rights to use their intellectual property, pay damages for infringement or
misappropriation, or be enjoined from using such intellectual property. We rely
on patent, trade secret, trademark and copyright law to protect our intellectual
property. The patents that we have obtained will expire between 2009 and 2027
and the average remaining life of our U.S. patents is approximately 11.1
years.
Some of
our intellectual property is not covered by any patent or patent application and
includes trade secrets and other know-how that is not patentable, particularly
as it relates to our manufacturing processes and engineering design. In
addition, some of our intellectual property includes technologies and processes
that may be similar to the patented technologies and processes of third parties.
If we are found to be infringing third-party patents, we do not know whether we
will be able to obtain licenses to use such patents on acceptable terms, if at
all. Our patent position is subject to complex factual and legal issues that may
give rise to uncertainty as to the validity, scope, and enforceability of a
particular patent. Accordingly, we cannot assure you that:
· any
of the U.S., Canadian or foreign patents owned by us or other patents that third
parties license to us will not be invalidated, circumvented, challenged,
rendered unenforceable or licensed to others; or
· any of our pending or future patent
applications will be issued with the breadth of claim coverage sought by us, if
issued at all.
In
addition, effective patent, trademark, copyright and trade secret protection may
be unavailable, limited or not applied for in certain foreign
countries.
We also
seek to protect our proprietary intellectual property, including intellectual
property that may not be patented or patentable, in part by confidentiality
agreements and, if applicable, inventors’ rights agreements with our
subcontractors, vendors, suppliers, consultants, strategic partners and
employees. We cannot assure you that these agreements will not be breached, that
we will have adequate remedies for any breach or that such persons or
institutions will not assert rights to intellectual property arising out of
these relationships. Certain of our intellectual property have been licensed to
us on a non-exclusive basis from third parties that may also license such
intellectual property to others, including our competitors. If our licensors are
found to be infringing third-party patents, we do not know whether we will be
able to obtain licenses to use the intellectual property licensed to us on
acceptable terms, if at all.
If
necessary or desirable, we may seek extensions of existing licenses or further
licenses under the patents or other intellectual property rights of others.
However, we can give no assurances that we will obtain such extensions or
further licenses or that the terms of any offered licenses will be acceptable to
us. The failure to obtain a license from a third party for intellectual property
that we use at present could cause us to incur substantial liabilities, and to
suspend the manufacture or shipment of products or our use of processes
requiring the use of that intellectual property.
While we
are not currently engaged in any intellectual property litigation, we could
become subject to lawsuits in which it is alleged that we have infringed the
intellectual property rights of others or commence lawsuits against others who
we believe are infringing upon our rights. Our involvement in intellectual
property litigation could result in significant expense to us, adversely
affecting the development of sales of the challenged product or intellectual
property and diverting the efforts of our technical and management personnel,
whether or not that litigation is resolved in our favor.
Our
future success will depend on our ability to attract and retain qualified
management and technical personnel.
Our
future success is substantially dependent on the continued services and on the
performance of our executive officers and other key management, engineering,
scientific, manufacturing and operating personnel, particularly R. Daniel Brdar,
our Chief Executive Officer and Chairman of the Board of Directors. The loss of
the services of any executive officer, including Mr. Brdar, or other key
management, engineering, scientific, manufacturing and operating personnel,
could materially adversely affect our business. Our ability to achieve our
development and commercialization plans will also depend on our ability to
attract and retain additional qualified management and technical personnel.
Recruiting personnel for the fuel cell industry is competitive. We do not know
whether we will be able to attract or retain additional qualified management and
technical personnel. Our inability to attract and retain additional qualified
management and technical personnel, or the departure of key employees, could
materially and adversely affect our development and commercialization plans and,
therefore, our business prospects, results of operations and financial
condition.
Our
management may be unable to manage rapid growth effectively.
We may
rapidly expand our manufacturing capabilities, accelerate the commercialization
of our products and enter a period of rapid growth, which will place a
significant strain on our senior management team and our financial and other
resources. Any expansion may expose us to increased competition, greater
overhead, marketing and support costs and other risks associated with the
commercialization of a new product. Our ability to manage rapid growth
effectively will require us to continue to improve our operations, to improve
our financial and management information systems and to train, motivate and
manage our employees. Difficulties in effectively managing the budgeting,
forecasting and other process control issues presented by such a rapid expansion
could harm our business prospects, results of operations and financial
condition.
We
may be affected by environmental and other governmental regulation.
We are
subject to federal, state, provincial, and local regulation with respect to,
among other things, emissions and siting. Assuming no co-generation applications
are used in conjunction with our Direct FuelCell® plants,
they will discharge humid flue gas at temperatures of up to 800o F, water
at temperatures of approximately 10-20 o F above
surrounding air temperatures, and carbon dioxide.
In
addition, it is possible that industry-specific laws and regulations will be
adopted covering matters such as transmission scheduling, distribution, and the
characteristics and quality of our products, including installation and
servicing. These regulations could limit the growth in the use of carbonate fuel
cell products, decrease the acceptance of fuel cells as a commercial product and
increase our costs and, therefore, the price of our Direct FuelCell®
products. Accordingly, compliance with existing or future laws and regulations
could have a material adverse effect on our business prospects, results of
operations and financial condition.
Utility
companies could impose customer fees or interconnection requirements on our
customers that could make our products less desirable.
Utility
companies commonly charge fees to larger, industrial customers for disconnecting
from the electric grid or for having the capacity to use power from the electric
grid for back up purposes. These fees could increase the cost to our customers
of using our Direct FuelCell® products
and could make our products less desirable, thereby harming our business
prospects, results of operations and financial condition.
Several
states have created and adopted, or are in the process of creating, their own
interconnection regulations covering both technical and financial requirements
for interconnection to utility grids. Depending on the complexities of the
requirements, installation of our systems may become burdened with additional
costs that might have a negative impact on our ability to sell systems. The
Institute of Electrical and Electronics Engineers has been working to create an
interconnection standard addressing the technical requirements for distributed
generation to interconnect to utility grids. Many parties are hopeful that this
standard will be adopted nationally to help reduce the barriers to deployment of
distributed generation such as fuel cells; however this standard may not be
adopted nationally thereby limiting the commercial prospects and profitability
of our fuel cell systems.
We
could be liable for environmental damages resulting from our research,
development or manufacturing operations.
Our
business exposes us to the risk of harmful substances escaping into the
environment, resulting in personal injury or loss of life, damage to or
destruction of property, and natural resource damage. Depending on the nature of
the claim, our current insurance policies may not adequately reimburse us for
costs incurred in settling environmental damage claims, and in some instances,
we may not be reimbursed at all. Our business is subject to numerous federal,
state, and local laws and regulations that govern environmental protection and
human health and safety. We believe that our businesses are operating in
compliance in all material respects with applicable environmental laws, however
these laws and regulations have changed frequently in the past and it is
reasonable to expect additional and more stringent changes in the
future.
Our
operations may not comply with future laws and regulations and we may be
required to make significant unanticipated capital and operating expenditures.
If we fail to comply with applicable environmental laws and regulations,
governmental authorities may seek to impose fines and penalties on us or to
revoke or deny the issuance or renewal of operating permits and private parties
may seek damages from us. Under those circumstances, we might be required to
curtail or cease operations, conduct site remediation or other corrective
action, or pay substantial damage claims.
We may be
required to conduct environmental remediation activities, which could be
expensive.
We are
subject to a number of environmental laws and regulations, including those
concerning the handling, treatment, storage and disposal of hazardous materials.
These environmental laws generally impose liability on present and former owners
and operators, transporters and generators for remediation of contaminated
properties. We believe that our businesses are operating in compliance in all
material respects with applicable environmental laws, many of which provide for
substantial penalties for violations. We cannot assure you that future changes
in such laws, interpretations of existing regulations or the discovery of
currently unknown problems or conditions will not require substantial additional
expenditures. Any noncompliance with these laws and regulations could subject us
to material administrative, civil, or criminal penalties or other liabilities.
In addition, we may be required to incur substantial costs to comply with
current or future environmental and safety laws and regulations.
Our
products use inherently dangerous, flammable fuels, operate at high temperatures
and use corrosive carbonate material, each of which could subject our business
to product liability claims.
Our
business exposes us to potential product liability claims that are inherent in
products that use hydrogen. Our products utilize fuels such as natural gas and
convert these fuels internally to hydrogen that is used by our products to
generate electricity. The fuels we use are combustible and may be toxic. In
addition, our Direct FuelCell® products
operate at high temperatures and our Direct FuelCell® products
use corrosive carbonate material, which could expose us to potential liability
claims. Although we have comprehensive safety, maintenance, and training
programs in place and follow third party certification protocols, codes and
standards, we cannot guarantee there will not be accidents. Any accidents
involving our products or other hydrogen-using products could materially impede
widespread market acceptance and demand for our Direct FuelCell®
products. In addition, we might be held responsible for damages beyond the scope
of our insurance coverage. We also cannot predict whether we will be able to
maintain our insurance coverage on acceptable terms.
We
are subject to risks inherent in international operations.
Since we
market our Direct FuelCell® products
both inside and outside the U.S. and Canada, our success depends, in part, on
our ability to secure international customers and our ability to manufacture
products that meet foreign regulatory and commercial requirements in target
markets. Sales to customers located outside the U.S. accounted for approximately
50% of our consolidated revenue in fiscal 2008, 34% of our revenue in fiscal
2007, and 20% of our revenue in fiscal 2006. Sales to customers in Asia
represent the majority of our international sales. We have limited experience
developing and manufacturing our products to comply with the commercial and
legal requirements of international markets. In addition, we are subject to
tariff regulations and requirements for export licenses, particularly with
respect to the export of some of our technologies. We face numerous challenges
in our international expansion, including unexpected changes in regulatory
requirements, fluctuations in currency exchange rates, longer accounts
receivable requirements and collections, difficulties in managing international
operations, potentially adverse tax consequences, restrictions on repatriation
of earnings and the burdens of complying with a wide variety of international
laws. Any of these factors could adversely affect our operations and
revenues.
Our
stock price has been and could remain volatile.
The
market price for our common stock has been and may continue to be volatile and
subject to extreme price and volume fluctuations in response to market and other
factors, including the following, some of which are beyond our
control:
· failure
to meet our product development and commercialization milestones;
· variations
in our quarterly operating results from the expectations of securities analysts
or investors;
· downward
revisions in securities analysts’ estimates or changes in general market
conditions;
· announcements
of technological innovations or new products or services by us or our
competitors;
· announcements
by us or our competitors of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
· additions
or departures of key personnel;
· investor
perception of our industry or our prospects;
· insider
selling or buying;
· demand
for our common stock; and
· general
technological or economic trends.
In the
past, following periods of volatility in the market price of their stock, many
companies have been the subjects of securities class action litigation. If we
became involved in securities class action litigation in the future, it could
result in substantial costs and diversion of management’s attention and
resources and could harm our stock price, business, prospects, results of
operations and financial condition.
Provisions
of Delaware and Connecticut law and of our charter and by-laws may make a
takeover more difficult.
Provisions
in our certificate of incorporation and by-laws and in Delaware and Connecticut
corporate law may make it difficult and expensive for a third party to pursue a
tender offer, change in control or takeover attempt that is opposed by our
management and board of directors. Public stockholders who might desire to
participate in such a transaction may not have an opportunity to do so. These
anti-takeover provisions could substantially impede the ability of public
stockholders to benefit from a change in control or change in our management and
board of directors.
We
depend on relationships with strategic partners, and the terms and
enforceability of many of these relationships are not certain.
We have
entered into relationships with strategic partners for design, product
development and distribution of our existing products, and products under
development, some of which may not have been documented by a definitive
agreement. The terms and conditions of many of these agreements allow for
termination by the partners. Termination of any of these agreements could
adversely affect our ability to design, develop and distribute these products to
the marketplace. We cannot assure you that we will be able to successfully
negotiate and execute definitive agreements with any of these partners, and
failure to do so may effectively terminate the relevant
relationship.
Future
sales of substantial amounts of our common stock could affect the market price
of our common stock.
Future
sales of substantial amounts of our common stock, or securities convertible or
exchangeable into shares of our common stock, into the public market, including
shares of our common stock issued upon exercise of options and warrants, or
perceptions that those sales could occur, could adversely affect the prevailing
market price of our common stock and our ability to raise capital in the
future.
The
rights of the Series 1 preferred shares and Series B preferred stock could
negatively impact FuelCell.
The terms
of the Series 1 preferred shares issued by FuelCell Energy, Ltd., our
wholly-owned, indirect subsidiary, provide rights to the holder, Enbridge Inc.
(“Enbridge”), including dividend and conversion rights among others that could
negatively impact us. For example, the terms of the Series 1 preferred shares
provide that the holders are entitled to receive cumulative dividends for each
calendar quarter for so long as such shares are outstanding. Assuming
the exchange rate for Canadian dollars is Cdn.$.84 to U.S.$1.00 (exchange rate
on January 9, 2009) at the time of the applicable dividend payment date, we are
required to pay a preferred dividend of approximately $262,500 per calendar
quarter, subject to reduction in accordance with the terms of the Series 1
preferred shares. The terms of the Series 1 preferred shares also require that
the holder be paid any accrued and unpaid dividends on December 31,
2010. To the extent that there is a significant amount of accrued
dividends that is unpaid as of December 31, 2010 and we do not have sufficient
working capital at that time to pay the accrued dividends, our financial
condition could be adversely affected. As of October 31, 2008,
cumulative unpaid dividends and accrued interest totaled approximately $7.4
million on the Series 1 preferred shares. We have guaranteed these
dividend obligations, including paying a minimum dividend of Cdn.$500,000 in
cash annually to Enbridge for so long as Enbridge holds the Series 1 preferred
shares. We have also guaranteed the liquidation obligations of FuelCell Energy,
Ltd. under the Series 1 preferred shares.
We are also required to issue common
stock to the holder of the Series 1 preferred shares if and when the holder
exercises its conversion rights. The number of shares of common stock that we
may issue upon conversion could be significant and dilutive to our existing
stockholders. For example, assuming the holder of the Series 1
preferred shares exercises its conversion rights after July 31, 2020 and
assuming our common stock price is U.S. $4.41 (our common stock closing price on
January 9, 2009) and the exchange rate for Canadian dollars is Cdn. $.84 to U.S.
$1.00 (exchange rate on January 9, 2009) at the time of conversion, we would be
required to issue approximately 5,012,531 shares of our common
stock.
The terms
of the Series B preferred stock also provide rights to their holders that could
negatively impact us. Holders of the Series B preferred stock are
entitled to receive cumulative dividends at the rate of $50 per share per year,
payable either in cash or in shares of our common stock. To the
extent the dividend is paid in shares, additional issuances could be dilutive to
our existing stockholders and the sale of those shares could have a negative
impact on the price of our common stock. A share of our Series B preferred
stock may be converted at any time, at the option of the holder, into 85.1064
shares of our common stock (which is equivalent to an initial conversion price
of $11.75 per share), plus cash in lieu of fractional shares.
Furthermore, the conversion rate applicable to the Series B preferred stock is
subject to adjustment upon the occurrence of certain events.
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud, which could harm
our brand and operating results.
Effective
internal controls are necessary for us to provide reliable and accurate
financial reports and effectively prevent fraud. We have devoted
significant resources and time to comply with the internal control over
financial reporting requirements of the Sarbanes-Oxley Act of
2002. In addition, Section 404 under the Sarbanes-Oxley Act of 2002
requires that we assess, and that our auditors attest to, the design and
operating effectiveness of our controls over financial reporting. Our
compliance with the annual internal control report requirement for each fiscal
year will depend on the effectiveness of our financial reporting and data
systems and controls. Inferior internal controls could cause
investors to lose confidence in our reported financial information, which could
have a negative effect on the trading price of our stock and our access to
capital.
Our
results of operations could vary as a result of methods, estimates and judgments
we use in applying our accounting policies.
The
methods, estimates and judgments we use in applying our accounting policies have
a significant impact on our results of operations (see “Critical Accounting
Policies and Estimates” in Part II, Item 7 of this Form 10-K). Such
methods, estimates and judgments are, by their nature, subject to substantial
risks, uncertainties and assumptions, and factors may arise over time that leads
us to change our methods, estimates and judgments. Changes in those
methods, estimates and judgments could significantly affect our results of
operations. Examples include:
The
calculation of share-based compensation under SFAS 123R, requires us to use
valuation methodologies that include a number of assumptions, estimates and
conclusions regarding matters such as expected forfeitures, expected volatility
of our share price, the expected dividend rate with respect to our common stock
and the exercise behavior of our employees. Furthermore, there are no
means, under applicable accounting principles, to compare and adjust our expense
if and when we learn about additional information that may affect the estimates
that we previously made with the exception of changes in expected forfeitures of
share-based awards. Factors may arise over time that lead us to
change our estimates and assumptions with respect to future share-based
compensation arrangements, resulting in variability in our share-based
compensation over time.
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 order backlog is comparable to our
production capacity and future costs can be reasonably estimated, then estimated
costs to complete an individual contract, in excess of revenue, will be accrued
immediately upon identification.
Item
1B. UNRESOLVED STAFF COMMENTS
None.
Item
2. PROPERTIES
Our
headquarters are located in Danbury, Connecticut. The following is a summary of
our offices and locations:
Location
|
|
Business Use
|
|
Square
Footage
|
|
Lease
Expiration Dates
|
Danbury, Connecticut
|
|
Corporation
Headquarters, Research and Development, Sales, Marketing, Purchasing and
Administration
|
|
72,000
|
|
Company owned
|
|
|
|
|
|
|
|
Torrington, Connecticut
|
|
Manufacturing
|
|
65,000
|
|
December 2015
|
|
|
|
|
|
|
|
Danbury, Connecticut
|
|
Manufacturing
and Operations
|
|
38,000
|
|
October 2009
|
Item
3. LEGAL PROCEEDINGS
None.
Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART
II
Item
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
FUELCELL COMMON
STOCK
Our
common stock has been publicly traded since June 25, 1992. From
September 21, 1994 through February 25, 1997, it was quoted on the NASDAQ
National Market, and from February 26, 1997 through June 6, 2000 it was traded
on the American Stock Exchange. Our common stock has traded under the
symbol “FCEL” on the Nasdaq Stock Market since June 7, 2000. The following table
sets forth the high and low sale prices for our common stock for the fiscal
periods indicated as reported by the Nasdaq Stock Market during the indicated
quarters.
|
|
Common Stock
Price
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
Year
Ended October 31, 2006
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
10.90 |
|
|
$ |
7.90 |
|
Second
Quarter
|
|
$ |
15.00 |
|
|
$ |
9.22 |
|
Third
Quarter
|
|
$ |
13.97 |
|
|
$ |
8.29 |
|
Fourth
Quarter
|
|
$ |
9.90 |
|
|
$ |
6.59 |
|
|
|
|
|
|
|
|
|
|
Year
Ended October 31, 2007
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
7.37 |
|
|
$ |
5.84 |
|
Second
Quarter
|
|
$ |
9.30 |
|
|
$ |
6.15 |
|
Third
Quarter
|
|
$ |
8.40 |
|
|
$ |
6.30 |
|
Fourth
Quarter
|
|
$ |
10.57 |
|
|
$ |
7.22 |
|
|
|
|
|
|
|
|
|
|
Year
Ended October 31, 2008
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
13.14 |
|
|
$ |
7.08 |
|
Second
Quarter
|
|
$ |
9.24 |
|
|
$ |
5.43 |
|
Third
Quarter
|
|
$ |
10.30 |
|
|
$ |
6.50 |
|
Fourth
Quarter
|
|
$ |
8.83 |
|
|
$ |
3.10 |
|
On
January 9, 2009, the closing price of our common stock on the Nasdaq Stock
Market was $4.41 per share. As of January 9, 2009, there were 666
holders of record of our common stock.
We have
never paid a cash dividend on our common stock and do not anticipate paying any
cash dividends on common stock in the foreseeable future. In
addition, the terms of our Series B preferred shares prohibit the payment of
dividends on our common stock unless all dividends on the Series B preferred
stock have been paid in full.
PERFORMANCE
GRAPH
The
following graph compares the annual change in the Company’s cumulative total
shareholder return on its Common Stock for the five fiscal years ended October
31, 2008 with the cumulative total return on the Russell 2000 and a peer group
consisting of Standard Industry Classification (“SIC”) Group Code 369 companies
listed on The American Stock Exchange, Nasdaq Global Market and New York Stock
Exchange for that period. It assumes $100 invested on November 1,
2003 with dividends reinvested.
SERIES 1 PREFERRED
SHARES
On August
4, 2003, we entered into a combination agreement with Global
Thermoelectric Inc. (“Global”) to combine Global with us in a share-for-share
exchange pursuant to a Plan of Arrangement subject to approval by the Court of
Queen’s Bench of Alberta, Canada. On October 31, 2003, our shareholders and the
shareholders of Global approved the combination. On October 31, 2003, the Court
of Queen’s Bench of Alberta issued an order approving the combination. On
November 3, 2003, the combination transaction was consummated. In the aggregate,
we issued approximately 8.2 million shares of our common stock and exchangeable
shares in the acquisition. Following our acquisition of Global, Global’s Series
2 preferred shares remained outstanding in Global. At the time of the sale of
our thermoelectric generator business, the holder of the Series 2 preferred
shares exchanged them for Series 1 Class A cumulative redeemable exchangeable
preferred shares (which were referred to as the Series 1 preferred shares)
issued by FuelCell Energy, Ltd., one of our wholly-owned subsidiaries. We have
guaranteed the obligations of FuelCell Energy, Ltd. under the Series 1 preferred
shares.
The
Series 1 preferred shares may be converted into shares of our common stock at
the following conversion prices:
|
|
Cdn.$120.22
per share of our common stock until July 31,
2010;
|
|
|
Cdn.$129.46
per share of our common stock after July 31, 2010 until July 31,
2015;
|
|
|
Cdn.$138.71
per share of our common stock after July 31, 2015 until July 31, 2020;
and
|
|
|
at
any time after July 31, 2020, the price equal to 95% of the then current
market price (converted to Cdn.$ at the time of such calculation) of
shares of our common stock at the time of
conversion.
|
The
foregoing conversion prices are subject to adjustment for certain subsequent
events. As illustrated below, the number of shares of our common stock issuable
upon conversion of the Series 1 preferred shares after July 31, 2020 may be
significantly greater than the number of shares issuable prior to that
time.
The
following examples illustrate the number of shares of our common stock that we
will be required to issue to the holder(s) of the Series 1 preferred shares if
and when the holder(s) exercise their conversion rights pursuant to the terms of
the Series 1 preferred shares. The following examples are based upon Cdn.$25.0
million of Series 1 preferred shares outstanding (which is the amount currently
outstanding) and assume that all accrued dividends on the Series 1 preferred
shares have been paid through the time of the conversion and, in the case of
conversions occurring after July 31, 2020, that the exchange rate for Canadian
dollars is Cdn.$.84 to U.S.$1.00 (exchange rate on January 9, 2009) at the time
of the conversion:
|
|
if
the Series 1 preferred shares convert prior to July 31, 2010, we would be
required to issue approximately 207,952 shares of our common
stock;
|
|
|
if
the Series 1 preferred shares convert after July 31, 2010, but prior to
July 31, 2015, we would be required to issue approximately 193,110 shares
of our common stock;
|
|
|
if
the Series 1 preferred shares convert after July 31, 2015, but prior to
July 31, 2020, we would be required to issue approximately 180,232 shares
of our common stock; and
|
|
|
if
the Series 1 preferred shares convert any time after July 31, 2020,
assuming our common stock price is U.S. $4.41 (our common stock closing
price on January 9, 2009) at the time of conversion, we would be required
to issue approximately 5,012,531 shares of our common
stock.
|
Subject
to the Business Corporations Act (Alberta), the holder of the Series 1 preferred
shares is not entitled to receive notice of or to attend or vote at any meeting
of the FuelCell Energy, Ltd. common shareholders. At present, we own all of the
FuelCell Energy, Ltd. common stock.
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, the sole
current holder of the Series 1 preferred shares, as long as Enbridge holds the
shares. Interest accrues on cumulative unpaid dividends at a 2.45% quarterly
rate, compounded quarterly, until payment thereof. All cumulative unpaid
dividends must be paid by December 31, 2010. Subsequent to 2010,
FuelCell Energy, Ltd. would be required to pay annual dividend amounts totaling
Cdn.$1.25 million so long as the Series 1 Preferred shares remain
outstanding. Using an exchange rate of Cdn.$0.83 to U.S.$1.00
(exchange rate on October 31, 2008), cumulative unpaid dividends and accrued
interest of approximately $7.4 million on the Series 1 preferred shares were
outstanding as of October 31, 2008. We have guaranteed the dividend
obligations of FuelCell Energy, Ltd. to the Series 1 preferred
shareholders.
Subject
to the Business Corporations Act (Alberta), we may redeem the Series 1 preferred
shares, in whole or part, at any time, if on the day that the notice of
redemption is first given, the volume-weighted average price at which our common
stock is traded on the applicable stock exchange during the 20 consecutive
trading days ending on a date not earlier than the fifth preceding day on which
the notice of redemption is given was not less than a 20% premium to the current
conversion price on payment of Cdn.$25.00 per Series 1 Preferred Share to be
redeemed, together with an amount equal to all accrued and unpaid dividends to
the date fixed for redemption. On or after July 31, 2010, the Series 1 preferred
shares are redeemable by us at any time on payment of Cdn.$25.00 per Series 1
preferred share to be redeemed together with an amount equal to all accrued and
unpaid dividends to the date fixed for redemption. Holders of the Series 1
preferred shares do not have any mandatory or conditional redemption rights.
There are currently 1,000,000 Series 1 preferred shares
outstanding.
In the
event of the liquidation, dissolution or winding up of FuelCell Energy, Ltd.,
whether voluntary or involuntary, or any other distribution of its assets among
its shareholders for the purpose of winding up its affairs, the holder of the
Series 1 preferred shares will be entitled to receive the amount paid on such
Series 1 preferred shares (currently Cdn.$25.0 million) together with an amount
equal to all accrued and unpaid dividends thereon, before any amount will be
paid or any of FuelCell Energy, Ltd.’s property or assets will be distributed to
the holders of FuelCell Energy, Ltd.’s common stock. After payment to the holder
of the Series 1 preferred shares of the amounts payable to them, the holder of
the Series 1 preferred shares will not be entitled to share in any other
distribution of FuelCell Energy, Ltd.’s property or assets. We have guaranteed
the liquidation obligations of FuelCell Energy, Ltd. under the Series 1
preferred shares.
SERIES B PREFERRED
SHARES
On
November 11, 2004, we entered into a purchase agreement with Citigroup Global
Markets Inc., RBC Capital Markets Corporation, Adams Harkness, Inc., and Lazard
Freres & Co., LLC (the “Initial Purchasers”) for the private placement under
Rule 144A of up to 135,000 shares of our 5% Series B Cumulative Convertible
Perpetual Preferred Stock (Liquidation Preference $1,000) (“Series B Preferred
Stock”). On November 17, 2004 and January 25, 2005, we closed on the
sale of 100,000 shares and 5,875 shares, respectively, of Series B Preferred
Stock to the Initial Purchasers.
At
October 31, 2008 and 2007, there were 250,000 authorized of which 64,120 were
outstanding. The carrying value of the Series B Preferred Stock as of
October 31, 2008 and 2007 represents the net proceeds to us of approximately
$60.0 million. During fiscal 2006, we converted 41,755 shares of
Series B Preferred Stock (the "Shares") into 3,553,615 shares of our common
stock. The conversion occurred pursuant to the terms of the
Certificate of Designation for the Series B Preferred Stock, whereby upon
conversion, the holders received 85.1064 shares of our common stock per share of
Series B Preferred Stock. In addition, pursuant to this conversion,
we paid a conversion premium of $4.3 million.
The
following is a summary of certain provisions of our Series B Preferred Stock.
The resale of the shares of our Series B Preferred Stock and the resale of the
shares of our common stock issuable upon conversion of the shares of our Series
B Preferred Stock are covered by a registration rights agreement.
Ranking
Shares of
our Series B Preferred Stock rank with respect to dividend rights and rights
upon our liquidation, winding up or dissolution:
|
·
|
senior
to shares of our common stock;
|
|
·
|
junior
to our debt obligations; and
|
|
·
|
effectively
junior to our subsidiaries’ (i) existing and future liabilities and (ii)
capital stock held by others.
|
Dividends
The
Series B Preferred Stock pays cumulative annual dividends of $50 per share which
are payable quarterly in arrears on February 15, May 15, August 15 and November
15, which commenced on February 15, 2005, when, as and if declared by the board
of directors. Dividends will be paid on the basis of a 360-day year consisting
of twelve 30-day months. Dividends on the shares of our Series B Preferred Stock
will accumulate and be cumulative from the date of original issuance.
Accumulated dividends on the shares of our Series B preferred stock will not
bear any interest.
The
dividend rate on the Series B Preferred Stock is subject to upward adjustment as
set forth in the certificate of designation of the Series B Preferred Stock if
we fail to pay, or to set apart funds to pay, dividends on the shares of our
Series B Preferred Stock for any quarterly dividend period. The dividend rate on
the Series B Preferred Stock is also subject to upward adjustment as set forth
in the registration rights agreement entered into with the Initial Purchasers if
we fail to satisfy our registration obligations with respect to the Series B
Preferred Shares (or the underlying common shares) set forth in the registration
rights agreement.
No
dividends or other distributions may be paid or set apart for payment upon our
common shares (other than a dividend payable solely in shares of a like or
junior ranking) unless all accumulated and unpaid dividends have been paid or
funds or shares of common stock therefore have been set apart on our Series B
Preferred Stock.
We may
pay dividends on the Series B Preferred Stock:
|
·
|
at
the option of the holder, in shares of our common stock, which will be
registered pursuant to a registration statement to allow for
the immediate sale of these common shares in the public
market.
|
Liquidation
The
Series B Preferred Stock has a liquidation preference of $1,000 per share. Upon
any voluntary or involuntary liquidation, dissolution or winding up of our
company resulting in a distribution of assets to the holders of any class or
series of our capital stock, each holder of shares of our Series B preferred
stock will be entitled to payment out of our assets available for distribution
of an amount equal to the liquidation preference per share of Series B Preferred
Stock held by that holder, plus all accumulated and unpaid dividends on those
shares to the date of that liquidation, dissolution, or winding up, before any
distribution is made on any junior shares, including shares of our common stock,
but after any distributions on any of our indebtedness or senior shares (if
any). After payment in full of the liquidation preference and all accumulated
and unpaid dividends to which holders of shares of our Series B preferred stock
are entitled, holders of shares of our Series B preferred stock will not be
entitled to any further participation in any distribution of our
assets.
Conversion
A share
of our Series B Preferred Stock may be converted at any time, at the option of
the holder, into 85.1064 shares of our common stock (which is equivalent to an
initial conversion price of $11.75 per share) plus cash in lieu of fractional
shares. The conversion rate is subject to adjustment upon the occurrence of
certain events, as described below, but will not be adjusted for accumulated and
unpaid dividends. Upon conversion, holders of Series B preferred stock will not
receive a cash payment for any accumulated dividends. Instead accumulated
dividends, if any, will be cancelled.
On or
after November 20, 2009 we may, at our option, cause shares of our Series B
Preferred Stock to be automatically converted into that number of shares of our
common stock that are issuable at the then prevailing conversion rate. We may
exercise our conversion right only if the closing price of our common stock
exceeds 150% of the then prevailing conversion price for 20 trading days during
any consecutive 30 trading day period, as described in the certificate of
designation for the Series B preferred stock.
If
holders of shares of our Series B Preferred Stock elect to convert their shares
in connection with certain fundamental changes (as described below and in the
certificate of designation), we will in certain circumstances discussed below
increase the conversion rate by a number of additional shares of common stock
upon conversion or, in lieu thereof, we may in certain circumstances elect to
adjust the conversion rate and related conversion obligation so that shares of
our Series B preferred stock are converted into shares of the acquiring or
surviving company, in each case as described in the certificate of
designation.
The
adjustment of the conversion price of the Series B Preferred Stock is to prevent
dilution of the interests of the holders of the Series B Preferred Shares,
including on account of the following:
|
·
|
Issuances
of common stock as a dividend or distribution to holders of our common
stock;
|
|
·
|
Common
stock share splits or share
combinations;
|
|
·
|
Issuances
to holders of our common stock of any rights, warrants or options to
purchase our common stock for a period of less than 60 days;
and
|
|
·
|
Distributions
of assets, evidences of indebtedness or other property to holders of our
common stock.
|
Shares of
our Series B Preferred Stock will not be redeemable by us, except in the case of
a fundamental change (as described below and in the certificate of designation)
whereby holders may require us to purchase all or part of their shares at a
redemption price equal to 100% of the liquidation preference of the shares of
Series B Preferred Stock to be repurchased, plus accrued and unpaid dividends,
if any. We may, at our option, elect to pay the redemption price in
cash or, in shares of our common stock valued at a discount of 5% from the
market price of shares of our common stock, or any combination
thereof. Notwithstanding the foregoing, we may only pay such
redemption price in shares of our common stock that are registered under the
Securities Act of 1933 and eligible for immediate sale in the public market by
non-affiliates of the Company.
Redemption
by holders of the Series B Preferred Stock can only occur upon a fundamental
change, which the Company does not consider to be probable at this
time. Accordingly, future adjustments of the redemption price will
only be made if and when a fundamental change is considered
probable.
A
“fundamental change” will be deemed to have occurred if any of the following
occurs:
(1) any
"person" or "group" is or becomes the beneficial owner, directly or indirectly,
of 50% or more of the total voting power of all classes of our capital stock
then outstanding and normally entitled to vote in the election of
directors;
(2)
during any period of two consecutive years, individuals who at the beginning of
such period constituted the Board of Directors (together with any new directors
whose election by our Board of Directors or whose nomination for election by our
shareholders was approved by a vote of two-thirds of our directors then still in
office who were either directors at the beginning of such period or whose
election of nomination for election was previously so approved) cease for any
reason to constitute a majority of our directors then in office;
(3) the
termination of trading of our common stock on the Nasdaq Stock Market and such
shares are not approved for trading or quoted on any other U.S. securities
exchange; or
(4) we
consolidate with or merge with or into another person or another person merges
with or into us or the sale, assignment, transfer, lease, conveyance or other
disposition of all or substantially all of our assets and certain of our
subsidiaries, taken as a whole, to another person and, in the case of any such
merger or consolidation, our securities that are outstanding immediately prior
to such transaction and which represent 100% of the aggregate voting power of
our voting stock are changed into or exchanged for cash, securities or property,
unless pursuant to the transaction such securities are changed into securities
of the surviving person that represent, immediately after such transaction, at
least a majority of the aggregate voting power of the voting stock of the
surviving person.
Notwithstanding
the foregoing, holders of shares of Series B Preferred Stock will not have the
right to require us to repurchase their shares if either:
|
·
|
the
last reported sale price of shares of our common stock for any five
trading days within the 10 consecutive trading days ending immediately
before the later of the fundamental change or its announcement equaled or
exceeded 105% of the conversion price of the shares of Series B Preferred
Stock immediately before the fundamental change or
announcement;
|
|
·
|
at
least 90% of the consideration, excluding cash payments for fractional
shares and in respect of dissenters' appraisal rights, in the transaction
constituting the fundamental change consists of shares of capital stock
traded on a U.S. national securities exchange or which will be so traded
or quoted when issued or exchanged in connection with a fundamental change
and as a result of the transaction, shares of Series B Preferred Stock
become convertible into such publicly traded securities;
or
|
|
·
|
in
the case of number 4 above of a fundamental change event, the transaction
is effected solely to change our jurisdiction of
incorporation.
|
Voting
Holders
of shares of our Series B Preferred Stock have no voting rights unless (1)
dividends on any shares of our Series B Preferred Stock or any other class or
series of stock ranking on a parity with the shares of our Series B Preferred
Stock with respect to the payment of dividends shall be in arrears for dividend
periods, whether or not consecutive, containing in the aggregate a number of
days equivalent to six calendar quarters or (2) we fail to pay the repurchase
price, plus accrued and unpaid dividends, if any, on the fundamental change
repurchase date for shares of our Series B Preferred Stock following a
fundamental change (as described in the certificate of designation for the
Series B Preferred Stock). In each such case, the holders of shares of our
Series B Preferred Stock (voting separately as a class with all other series of
other Preferred Stock on parity with our Series B Preferred Stock upon which
like voting rights have been conferred and are exercisable, if any) will be
entitled to vote for the election of two directors in addition to those
directors on the board of directors at such time at the next annual meeting of
shareholders and each subsequent meeting until the repurchase price or all
dividends accumulated on the shares of our Series B Preferred Stock have been
fully paid or set aside for payment. The term of office of all directors elected
by the holders of shares of our Series B Preferred Stock will terminate
immediately upon the termination of the right of holders of shares of our Series
B Preferred Stock to vote for directors.
So long
as any shares of our Series B Preferred Stock remain outstanding, we will not,
without the consent of the holders of at least two-thirds of the shares of our
Series B Preferred Stock outstanding at the time (voting separately as a class
with all other series of Preferred Stock, if any, on parity with our Series B
Preferred Stock upon which like voting rights have been conferred and are
exercisable) issue or increase the authorized amount of any class or series of
shares ranking senior to the outstanding shares of our Series B Preferred Stock
as to dividends or upon liquidation. In addition, we will not, subject to
certain conditions, amend, alter or repeal provisions of our certificate of
incorporation, including the certificate of designation relating to our Series B
Preferred Stock, whether by merger, consolidation or otherwise, so as to
adversely amend, alter or affect any power, preference or special right of the
outstanding shares of our Series B Preferred Stock or the holders thereof
without the affirmative vote of not less than two-thirds of the issued and
outstanding shares of our Series B Preferred Stock.
UNREGISTERED
SECURITIES
There
were no unregistered securities issued during the twelve months ended October
31, 2008.
Item
6. SELECTED FINANCIAL DATA
The
selected consolidated financial data presented below as of the end of each of
the years in the five-year period ended October 31, 2008 have been derived from
our audited consolidated financial statements together with the notes thereto
included elsewhere in this Report (the “Financial Statements”). The data set
forth below is qualified by reference to, and should be read in conjunction
with, the Financial Statements and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included elsewhere in this
Report.
(Amounts
presented in thousands, except for per share amounts)
Consolidated
Statement of Operations Data:
|
|
Year Ended October 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales and revenue
|
|
$ |
82,748 |
|
|
$ |
32,517 |
|
|
$ |
21,514 |
|
|
$ |
17,398 |
|
|
$ |
12,636 |
|
Research
and development contracts
|
|
|
17,987 |
|
|
|
15,717 |
|
|
|
11,774 |
|
|
|
12,972 |
|
|
|
18,750 |
|
Total
revenues
|
|
|
100,735 |
|
|
|
48,234 |
|
|
|
33,288 |
|
|
|
30,370 |
|
|
|
31,386 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of product sales and revenues
|
|
|
134,038 |
|
|
|
61,827 |
|
|
|
61,526 |
|
|
|
52,067 |
|
|
|
39,961 |
|
Cost
of research and development contracts
|
|
|
16,059 |
|
|
|
13,438 |
|
|
|
10,330 |
|
|
|
13,183 |
|
|
|
27,290 |
|
Administrative
and selling expenses
|
|
|
19,968 |
|
|
|
18,625 |
|
|
|
17,759 |
|
|
|
14,154 |
|
|
|
14,901 |
|
Research
and development expenses
|
|
|
23,471 |
|
|
|
27,489 |
|
|
|
24,714 |
|
|
|
21,840 |
|
|
|
26,677 |
|
Purchased
in-process research and development
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12,200 |
|
Total
costs and expenses
|
|
|
193,536 |
|
|
|
121,379 |
|
|
|
114,329 |
|
|
|
101,244 |
|
|
|
121,029 |
|
Loss
from operations
|
|
|
(92,801 |
) |
|
|
(73,145 |
) |
|
|
(81,041 |
) |
|
|
(70,874 |
) |
|
|
(89,643 |
) |
License
fee income, net
|
|
|
— |
|
|
|
34 |
|
|
|
42 |
|
|
|
70 |
|
|
|
19 |
|
Interest
expense
|
|
|
(100 |
) |
|
|
(84 |
) |
|
|
(103 |
) |
|
|
(103 |
) |
|
|
(137 |
) |
Loss
from equity investments
|
|
|
(1,867 |
) |
|
|
(1,263 |
) |
|
|
(828 |
) |
|
|
(1,553 |
) |
|
|
— |
|
Interest
and other income, net
|
|
|
3,268 |
|
|
|
7,437 |
|
|
|
5,718 |
|
|
|
5,526 |
|
|
|
2,472 |
|
Redeemable
minority interest
|
|
|
(1,857 |
) |
|
|
(1,653 |
) |
|
|
107 |
|
|
|
— |
|
|
|
— |
|
Provision
for taxes
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Loss
from continuing operations
|
|
|
(93,357 |
) |
|
|
(68,674 |
) |
|
|
(76,105 |
) |
|
|
(66,934 |
) |
|
|
(87,289 |
) |
Discontinued
operations, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,252 |
) |
|
|
846 |
|
Net
loss
|
|
|
(93,357 |
) |
|
|
(68,674 |
) |
|
|
(76,105 |
) |
|
|
(68,186 |
) |
|
|
(86,443 |
) |
Preferred
stock dividends
|
|
|
(3,208 |
) |
|
|
(3,208 |
) |
|
|
(8,117 |
) |
|
|
(6,077 |
) |
|
|
(964 |
) |
Net
loss to common shareholders
|
|
$ |
(96,565 |
) |
|
$ |
(71,882 |
) |
|
$ |
(84,222 |
) |
|
$ |
(74,263 |
) |
|
$ |
(87,407 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(1.41 |
) |
|
$ |
(1.16 |
) |
|
$ |
(1.65 |
) |
|
$ |
(1.51 |
) |
|
$ |
(1.84 |
) |
Discontinued
operations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(.03 |
) |
|
|
0.01 |
|
Net
loss to common shareholders
|
|
$ |
(1.41 |
) |
|
$ |
(1.16 |
) |
|
$ |
(1.65 |
) |
|
$ |
(1.54 |
) |
|
$ |
(1.83 |
) |
Basic
and diluted weighted average shares Outstanding
|
|
|
68,571 |
|
|
|
61,991 |
|
|
|
51,047 |
|
|
|
48,261 |
|
|
|
47,875 |
|
Consolidated
Balance Sheet Data:
|
|
As of October 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Cash,
cash equivalents and short term investments (U.S. treasury
securities)
|
|
$ |
68,449 |
|
|
$ |
153,631 |
|
|
$ |
107,533 |
|
|
$ |
136,032 |
|
|
$ |
152,395 |
|
Working
capital
|
|
|
59,606 |
|
|
|
158,687 |
|
|
|
104,307 |
|
|
|
140,736 |
|
|
|
156,798 |
|
Total
current assets
|
|
|
118,020 |
|
|
|
201,005 |
|
|
|
133,709 |
|
|
|
161,894 |
|
|
|
178,866 |
|
Long-term
investments (U.S. treasury securities)
|
|
|
18,434 |
|
|
|
— |
|
|
|
13,054 |
|
|
|
43,928 |
|
|
|
— |
|
Total
assets
|
|
|
185,476 |
|
|
|
253,188 |
|
|
|
206,652 |
|
|
|
265,520 |
|
|
|
236,510 |
|
Total
current liabilities
|
|
|
58,414 |
|
|
|
42,318 |
|
|
|
29,402 |
|
|
|
21,158 |
|
|
|
22,070 |
|
Total
non-current liabilities
|
|
|
6,747 |
|
|
|
5,014 |
|
|
|
5,840 |
|
|
|
2,892 |
|
|
|
1,476 |
|
Redeemable
minority interest
|
|
|
13,307 |
|
|
|
11,884 |
|
|
|
10,665 |
|
|
|
11,517 |
|
|
|
10,259 |
|
Redeemable
preferred stock
|
|
|
59,950 |
|
|
|
59,950 |
|
|
|
59,950 |
|
|
|
98,989 |
|
|
|
— |
|
Total
shareholders’ equity
|
|
|
47,058 |
|
|
|
134,022 |
|
|
|
100,795 |
|
|
|
130,964 |
|
|
|
202,705 |
|
Book
value per share(1)
|
|
$ |
0.68 |
|
|
$ |
1.97 |
|
|
$ |
1.90 |
|
|
$ |
2.70 |
|
|
$ |
4.21 |
|
(1) Calculated
as total shareholders’ equity divided by common shares issued and outstanding as
of the balance sheet date.
Item
7. 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 years ended October 31, 2008, 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 this
report. In addition to historical information, this Form 10-K,
including the following discussion, contains 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, the risk that commercial field trials of the Company’s
products will not occur when anticipated, general risks associated with product
development, manufacturing, changes in the utility regulatory environment,
potential volatility of energy prices, rapid technological change, competition,
and the Company’s ability to achieve its sales plans and cost reduction targets,
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
AND RECENT DEVELOPMENTS
Overview
FuelCell
Energy, Inc. (“FuelCell Energy” or “Company”) is a world leader in the
development and manufacture of fuel cell power plants for ultra-clean, efficient
and reliable electric power generation. Our products are designed to meet
the 24/7 baseload power needs of commercial, industrial, government and utility
customers. Our products have generated over 260 million kWh of electricity and
are operating at over 50 locations around the world.
Our
Company was founded in 1969. Our core fuel cell products (“Direct
FuelCell®” or
“DFC® Power
Plants”) offer stationary power generation applications for customers. In
addition to our commercial products, we continue to develop our next generation
of carbonate fuel cells and planar solid oxide fuel cell (“SOFC”) technology
with our own and government research and development funds.
Our
proprietary carbonate DFC power plants electrochemically (without combustion)
produce electricity directly from readily available hydrocarbon fuels such as
natural gas and biogas. Customers buy fuel cells to reduce cost and pollution,
and improve power reliability. Electric generation without combustion
significantly reduces harmful pollutants such as NOX and
particulates. Higher fuel efficiency results in lower emissions of
carbon dioxide (“CO2”), a major component of harmful greenhouse gases, and also
results in less fuel needed per kWh of electricity generated and Btu of heat
produced. Greater efficiency reduces customers’ exposure to volatile fuel costs
and minimizes operating costs. Our fuel cells operate 24/7 providing
reliable power to both on-site customers and for grid-support
applications.
Compared
to other power generation technologies, our products offer significant
advantages including:
|
·
|
Virtually
zero emissions, quiet operation
|
|
·
|
Reliable,
24/7 baseload power
|
|
·
|
Ability
to site units locally as distributed power
generation
|
|
·
|
Potentially
lower cost power generation
|
|
·
|
Byproduct
heat ideal for cogeneration
applications.
|
Typical
customers for our products include manufacturers, mission critical institutions
such as correction facilities and government installations, hotels, and
customers who can use renewable gas for fuel such as breweries, food processors
and wastewater treatment facilities. Our MW-class products are also
used as grid support applications for utility customers. With
increasing demand for renewable and ultra-clean power options and increased
volatility in electric markets, our customers gain control of power generation
economics, reliability, and emissions. Our fuel cells also offer
flexible siting, easy permitting, and the ability to use multiple
fuels.
Our DFC
power plants are protected by 56 U.S. and 97 international patents and we have
also submitted 38 U.S. and 168 international patent applications.
Recent
Developments
Fiscal 2008 Commercial Power
Plant Orders
During
the fiscal year, the following product sales orders were received by the
Company:
|
·
|
In
April 2008, POSCO Power ordered 25.6 MW of MW-class power plants and fuel
cell modules, valued at approximately $70.0 million, for delivery in
2009. Initially we will ship complete power plants to POSCO
Power. In 2009, we will begin to ship fuel cell modules,
together with complete sets of BOP components. POSCON (a POSCO
affiliated company) will do the BOP assembly with our technical
support. In the second half of 2009, we will begin to ship fuel
cell modules only, and POSCO will be responsible for procurement and
manufacturing of all BOP
components.
|
|
·
|
In
February 2008, MTU Onsite
Energy ordered stack components totaling approximately 0.8
MW.
|
|
·
|
In
December 2007, Eastern Municipal Water District (EMWD) in southern
California ordered three DFC300 power plants (0.75 MW) to provide power
for its wastewater operations.
|
|
·
|
In
December 2007, POSCO Power ordered two DFC3000 power plants (4.8
MW).
|
|
·
|
In
December 2007, we entered into a contract with the The Linde Group (Linde)
for a 3.9 MW power plant project in San Diego, CA. In July of 2008, the
Company entered into a contract change order with Linde which adjusted
scheduled power plant deliveries beyond 2008. At that time this project
was removed from the Company's reported backlog. In January 2009, due to
changes in business conditions, Linde cancelled this contract. Linde has
been engaged in discussions with several third parties who have expressed
interest in moving this project forward independent of
Linde.
|
Government Research and
Development Contracts
In
December 2008, subsequent to the Company’s fiscal year end, FuelCell Energy was
awarded a contract for Phase II of the U.S. Department of Energy’s (DOE) Office
of Fossil Energy Solid State Energy Conversion Alliance (SECA) Coal-Based
Systems Cooperative Agreement. The total cost of this phase of the program is
$30.2 million of which $21 million will be funded by the DOE. The first $5
million of the program has been funded and will be paid as expenses are billed
to the government.
Phase II
extends from January 2009 through September 2010 and seeks to build a minimum 25
kW solid oxide fuel cell (SOFC) stack that meets certain cost and performance
requirements. The new stack must be suitable for integration into a 250 kW - 1
MW fuel cell power module and a 5 MW proof-of-concept system operating on
coal-based syngas (gas created from reacting coal with high temperature coal or
steam). The module and proof-of-concept system will be designed, fabricated, and
tested in subsequent phases.
Connecticut Project 150
Program
Under
Connecticut’s Project 150 Round 2, the Department of Public Utility Control
(“DPUC”) finalized the selection of three projects that will use 16.2 MW of
FuelCell Energy power plants. Energy purchase agreements between the
project developers and the utilities have been completed. With the extension of
the U.S. Investment Tax Credit (“ITC”) to 2016, we are in the process of
finalizing power plant sales contracts for these projects, which
include:
|
·
|
A
9.0 MW DFC-ERG system will be located at a natural gas letdown station in
Milford, Conn. The system will generate heat and electricity required for
the station’s management of the natural gas pipeline resulting in an
electrical efficiency of approximately 60
percent.
|
|
·
|
Two
projects at Connecticut hospitals, a 4.8 MW DFC power plant for Stamford
Hospital and a 2.4 MW power plant at Waterbury Hospital. The
hospitals will use the byproduct heat generated by our power plants for
heating, air conditioning, laundries and sterilization, and achieve system
efficiencies of approximately 60
percent.
|
Under
Round 3 of the Project 150 Program, Connecticut’s Clean Energy Fund recommended
five projects totaling 27.3 MW that utilize FuelCell Energy power plants for
selection to receive long-term energy purchase agreements from the state’s
utilities. The projects included three DFC-ERG power plants, a Direct
FuelCell/Turbine (DFC/T), and a large-scale 15 MW project. The
DFC-ERG and DFC/T products can achieve electrical efficiencies of up to 60
percent, approximately twice that of the average U.S. fossil fuel plant and most
other distributed energy generation. A final decision is expected
from the DPUC in January 2009.
Manufacturing Production and
Capacity Expansion
In mid
2008, we ramped to an annualized production rate of approximately 30MW in
response to worldwide demand for the Company’s MW-class power
plants. Actual production in fiscal 2008 was approximately 22 MW and
in was approximately 11 MW in 2007.
In order
to satisfy the growing demand for our MW-class products, we recently invested
approximately $3.5 million to double our MW-class conditioning capacity to 50
MW. The additional conditioning equipment is now installed at our Danbury, CT
facility and ready for production. This was part of our planned expenditures to
bring our total production capacity up to 60 MW per year. Through continued
process improvements in our manufacturing, we are also able to reduce the total
capital needed for our first capacity expansion by several million dollars. To
ensure our production capacity is aligned with our backlog, expansion beyond our
current capacity will be paced by order flow. In connection with our expansion,
the Connecticut Development Authority approved a $4.0 million loan to expand the
Company’s Torrington, Connecticut manufacturing facility, expand its workforce,
and extend its Torrington facility lease through 2015. This loan
closed in April 2008. At October 31, 2008, we had an outstanding
balance of $3.6 million.
Federal Investment Tax
Credit
In
October 2008, the U.S. Congress extended the ITC for eight years to 2016 and
increased it to $3,000 per kW or 30 percent, whichever is less, for fuel cells.
This is expected to have a favorable impact by allowing developers to move
forward on fuel cell projects knowing that the ITC will be
available.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Revenue
Recognition and Cost of Sales
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 October 31, 2008
research and development sales backlog totaled $4.8 million, of which 78 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”), incentive funding
and power plant site engineering and construction related costs for certain
contracts. 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. Revenues from service contracts
are generally recognized ratably over the contract. 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. 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. Revenues related to site engineering and construction are
recognized as costs are incurred.
As our
fuel cell products are in their initial stages of development and market
acceptance, we have not historically provided for a loss reserve estimate on
product or service contracts. As of October 31, 2008, our order
backlog was approximately 32.5 MW ($67.1 million) and our current production
capacity is approximately 50 MW. Our service agreement backlog
totaled $20.5 million as of October 31, 2008. Once we have established that our
fuel cell products have achieved commercial market acceptance and order backlog
is comparable to our production capacity and future costs and product life can
be reasonably estimated, then estimated costs to complete an individual
contract, in excess of revenue, will be accrued immediately upon
identification.
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 price. As we currently sell products at or below cost, we
provide for a lower of cost or market (“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
October 31, 2008 and October 31, 2007, the LCM adjustment to the cost basis of
inventory and advance payments to vendors was approximately $12.4 million and
$16.8 million, respectively, which equates to a reduction of approximately 30
and 33 percent, respectively, of the gross inventory and advance payments to
vendors value. As of October 31, 2008, our gross inventory and
advances to vendors’ balances decreased from the October 31, 2007 balances which
resulted in lower gross 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 are classified as research and development
expenses on our Consolidated Statements of Operations.
Share-Based
Compensation
Share-based
payment transactions with employees, which primarily consist of stock options
and third parties, are accounted for in accordance with Statement of Financial
Accounting Standard No. 123R, “Share-Based Payments”, which 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 $5.5 million and $5.2 million
were recognized in the Consolidated Statement of Operations for the fiscal years
ended October 31, 2008 and 2007, respectively. Refer to Note 13 of
the consolidated financial statements for additional
information.
Income
Taxes
The
liability method of SFAS No. 109, Accounting for Income Taxes,
is used to account for income taxes. Deferred tax assets and
liabilities are determined based on net operating loss carryforwards, research
and development credit carryforwards, and differences between financial
reporting and income tax bases of assets and liabilities. Deferred items are
measured using the enacted tax rates and laws that are expected to be in effect
when the differences reverse. Deferred tax assets are reduced by a valuation
allowance to reflect the uncertainty associated with their ultimate realization.
Any subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets would be recorded as an income tax benefit in the Statement
of Operations or a credit to Additional Paid-In Capital.
As of
November 1, 2007, we adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN
48”). 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 (including a decision whether to file or not file a return in a
particular jurisdiction).
The
evaluation of a tax position in accordance with FIN 48 is a two-step process.
The first step is recognition: The enterprise determines whether it
is more likely than not that a tax position will be sustained upon examination,
including resolution of any related appeals or litigation processes, based on
the technical merits of the position. The second step is measurement: A tax
position that meets the more-likely-than-not recognition threshold is measured
to determine the amount of benefit to recognize in the financial statements. The
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement.
We have
not paid federal or state income taxes in several years due to our history of
net operating losses.
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, 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 the Years
Ended October 31, 2008 and October 31, 2007
Revenues
and costs of revenues
The
following tables summarize our revenue and cost of revenues for the years ended
October 31, 2008 and 2007 (dollar amounts in thousands),
respectively:
|
|
Year Ended
October 31, 2008
|
|
|
Year Ended
October 31, 2007
|
|
|
Percentage
|
|
|
|
Revenues
|
|
|
Percent of
Revenues
|
|
|
Revenues
|
|
|
Percent of
Revenues
|
|
|
Increase in
Revenues
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales and revenues
|
|
$ |
82,748 |
|
|
|
82 |
% |
|
$ |
32,517 |
|
|
|
67 |
% |
|
|
154 |
% |
Research
and development contracts
|
|
|
17,987 |
|
|
|
18 |
% |
|
|
15,717 |
|
|
|
33 |
% |
|
|
14 |
% |
Total
|
|
$ |
100,735 |
|
|
|
100 |
% |
|
$ |
48,234 |
|
|
|
100 |
% |
|
|
109 |
% |
|
|
Year Ended
October 31, 2008
|
|
|
Year Ended
October 31, 2007
|
|
|
Percentage
|
|
|
|
Costs of
Revenues
|
|
|
Percent of
Costs of
Revenues
|
|
|
Cost of
Revenues
|
|
|
Percent of
Costs of
Revenues
|
|
|
Increase
in Cost of
Revenues
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales and revenues
|
|
$ |
134,038 |
|
|
|
89 |
% |
|
$ |
61,827 |
|
|
|
82 |
% |
|
|
117 |
% |
Research
and development contracts
|
|
|
16,059 |
|
|
|
11 |
% |
|
|
13,438 |
|
|
|
18 |
% |
|
|
20 |
% |
Total
|
|
$ |
150,097 |
|
|
|
100 |
% |
|
$ |
75,265 |
|
|
|
100 |
% |
|
|
99 |
% |
Total
revenues for the year ended October 31, 2008 increased by $52.5 million, or 109%
percent, to $100.7 million from $48.2 million during the same period last
year. Components of revenues and costs of revenues are as
follows:
Product sales and
revenues
|
|
Year Ended
October 31,
2008
|
|
|
Year Ended
October 31,
2007
|
|
|
Percentage
Change
|
|
Product
sales and revenues
|
|
$
|
82,748
|
|
|
$
|
32,517
|
|
|
|
154
|
%
|
Cost
of Product sales and revenues
|
|
|
134,038
|
|
|
|
61,827
|
|
|
|
117
|
%
|
Net
loss on product sales and revenues
|
|
$
|
(51,290
|
)
|
|
$
|
(29,310
|
)
|
|
|
75
|
%
|
Cost-to-revenue
ratio
|
|
|
1.62
|
|
|
|
1.90
|
|
|
|
(15
|
)%
|
Product
sales and revenue increased $50.2 million to $82.7 million for fiscal 2008,
compared to $32.5 million for fiscal 2007. Revenue in fiscal 2008
included approximately $64.3 million of power plant sales, $8.7 million related
to site engineering and construction work for projects where the Company is
responsible for complete power plant system installation, $6.8 million related
to service agreements and component sales and approximately $2.9 million of
revenue related to PPAs. Revenues are higher due to increased orders
for our fuel cell power plants. Actual production in fiscal 2008 was
approximately 22 MW of fuel cell products compared to approximately 11 MW in
2007.
Cost of
product sales and revenues increased to $134.0 million for fiscal 2008, compared
to $61.8 million during 2007. The ratio of product cost to sales was
1.62 to 1 during fiscal 2008, compared to 1.90 to 1 during the same period a
year ago. The cost ratio has been favorably impacted in fiscal 2008
by the shift to MW production and lower unit costs across all product
lines.
Service
agreement and aftermarket costs which are a component of costs of sales have
increased due to a larger installed fleet and stack replacement costs related to
early sub-MW product designs. Costs and margin are negatively impacted by
replacement of our last generation three year stack within our standard
five-year LTSA contract. Products produced prior to this fiscal year had an
expected stack life of approximately three years which is less than the term of
our standard service agreement. Under the terms of our service agreements, the
power plant must meet a minimum operating output during the term. If
minimum output falls below the contract requirement, we may replace the
customer’s fuel cell stack with either a new or used unit. The Company’s
contractual liability under service agreements is limited to amount of service
fees payable under the contract. This can often times be less than the cost of a
new stack replacement. In order to continue to meet customer expectations on
early product designs, the Company has incurred costs in excess of its
contractual liabilities. Service agreements and aftermarket costs,
net of revenues totaled approximately $19.9 million in fiscal 2008 compared to
$10.0 million in fiscal 2007. Excluding this impact, the ratio of product cost
to sales would have been 1.40 to 1 during fiscal 2008, compared to 1.66 to 1
during the same period a year ago.
We expect
replacement of older stacks will continue over the next several years. As a
result, we expect to continue to incur losses in order to maintain power
plants. Future costs for maintaining legacy service agreements will
be determined by a number of factors including life of the stack, used
replacement stacks available, the Company’s limit of liability on service
agreements and future operating plans for the power plant. Given these
considerations, the Company expects a similar impact in 2009 as was reported in
2008 and then expects the impact to decline in 2010 and 2011.
In 2008,
our new five-year fuel cell stack went into production, extending the expected
life by two years. Standard service agreements for power plants that
have our new five-year stack design are not expected to require a stack change
to continue to meet minimum operating levels during the initial five year term
of the contract, although the Company has limited operating experience with
these products. Stack replacements for these agreements will only be performed
upon renewal of the service agreement if the parties mutually
agree.
Cost of
product sales and revenues includes costs to manufacture and ship our power
plants or power plant components to customer locations, site engineering and
construction costs where the Company is responsible for complete power plant
system installation, warranty, and aftermarket costs required to service power
plants for customers with long-term service agreements (including maintenance
and stack replacement costs incurred during the period). Cost of
sales also includes PPA operating costs and adjustments required to value our
inventory at the lower of cost or market. As our fuel cell products are in their
initial stages of development and market acceptance, we have not historically
provided for a loss reserve estimate on product or service
contracts.
Research and development
contracts
Research
and development revenue increased $2.3 million to $18.0 million for fiscal 2008,
compared to $15.7 million for 2007. Cost of research and development
contracts increased to $16.1 million during fiscal 2008, compared to $13.4
million for 2007. Margin from research and development contracts for 2008 was
approximately $1.9 million or 11 percent, compared to 15 percent in
2007. Margin percentage on research and development contracts will
vary with the level of cost share the Company is required to
contribute. Research and development contract revenue and costs were
primarily related to the DOE’s large-scale SOFC hybrid and Vision 21
programs.
Administrative
and selling expenses
Administrative
and selling expenses increased $1.3 million to $20.0 million during fiscal 2008,
compared to $18.6 million in 2007. This was primarily driven by
higher bid and proposal and other marketing activities over the prior
year. Other increases included higher stock based compensation,
business insurance and professional fees as a result of the growth in the
business.
Research
and development expenses
Research
and development expenses decreased to $23.5 million during fiscal 2008, compared
to a $27.5 million recorded in 2007. The decrease is due to a shift
of engineering resources to commercial activities, including planning for our
production and capacity ramp, increased research contract activities, and
supporting the installed power plant base.
Loss
from operations
Loss from
operations increased by approximately $19.7 million to $92.8 million during
fiscal 2008, compared to $73.1 million recorded in 2007. The primary
drivers to the increased loss were a higher loss on product sales of $22.0
million due to higher production volumes and higher selling, general, and
administrative expenses of approximately $1.3 million. These
increases were partially offset by lower internal research and development of
approximately $4.0 million. Net results benefited from a favorable
product mix and lower per unit production costs compared to the comparable prior
year period.
Loss
from equity investments
Our
ownership interest in Versa at October 31, 2008 was 39 percent and we account
for the investment under the equity method of accounting. Our share
of equity losses for fiscal 2008 and 2007 were $1.9 million and $1.3 million,
respectively. The increase in equity losses is attributable to higher
losses at Versa.
Interest
and other income, net
Interest
and other income, net, was $3.3 million for fiscal 2008, compared to $7.4
million for 2007. We recognized state research and development tax
credits totaling $0.5 million in fiscal 2008, compared to $1.2 million for 2007
on lower allowable research and development activity. Interest income
also decreased during 2008 by $3.1 million due to lower average invested
balances and lower interest rates.
Connecticut
tax law allows certain companies to obtain cash refunds at an exchange rate of
65% of their research and development credits, in exchange for foregoing the
carryforward of these credits into future tax years. We record Connecticut
research and development tax credits in the period in which the return is filed,
which is when management believes the amount of the credits are probable of
collection.
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.
As of
October 31, 2008, we had approximately $448 million of federal net operating
loss carryforwards which expire in the years 2020 through 2028. We
also had approximately $343 million in state tax net operating loss
carryforwards, which expire in the years 2011 through 2028 and approximately $7
million of Connecticut state tax credit carryforwards, which expire at various
times beginning in 2009.
Comparison of the Years
Ended October 31, 2007 and October 31, 2006
Revenues
and costs of revenues
The
following tables summarize our revenue and cost of revenues for the years ended
October 31, 2007 and 2006 (dollar amounts in thousands),
respectively:
|
|
Year Ended
October 31, 2007
|
|
|
Year Ended
October 31, 2006
|
|
|
Percentage
Increase /
|
|
|
|
Revenues
|
|
|
Percent of
Revenues
|
|
|
Revenues
|
|
|
Percent of
Revenues
|
|
|
(Decrease) in
Revenues
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales and revenues
|
|
$ |
32,517 |
|
|
|
67 |
% |
|
$ |
21,514 |
|
|
|
65 |
% |
|
|
51 |
% |
Research
and development contracts
|
|
|
15,717 |
|
|
|
33 |
% |
|
|
11,774 |
|
|
|
35 |
% |
|
|
33 |
% |
Total
|
|
$ |
48,234 |
|
|
|
100 |
% |
|
$ |
33,288 |
|
|
|
100 |
% |
|
|
45 |
% |
|
|
Year Ended
October 31, 2007
|
|
|
Year Ended
October 31, 2006
|
|
|
Percentage
Increase /
|
|
|
|
Costs of
Revenues
|
|
|
Percent of
Costs of
Revenues
|
|
|
Cost of
Revenues
|
|
|
Percent of
Costs of
Revenues
|
|
|
(Decrease)
in Cost of
Revenues
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales and revenues
|
|
$ |
61,827 |
|
|
|
82 |
% |
|
$ |
61,526 |
|
|
|
86 |
% |
|
|
1 |
% |
Research
and development contracts
|
|
|
13,438 |
|
|
|
18 |
% |
|
|
10,330 |
|
|
|
14 |
% |
|
|
30 |
% |
Total
|
|
$ |
75,265 |
|
|
|
100 |
% |
|
$ |
71,856 |
|
|
|
100 |
% |
|
|
6 |
% |
Total
revenues for the year ended October 31, 2007 increased by $14.9 million, or 45%
percent, to $48.2 million from
$33.3 million during the same period last year. Components of revenues and costs
of revenues are as follows:
Product sales and
revenues
Product
sales and revenue increased $11.0 million to $32.5 million for fiscal 2007,
compared to $21.5 million for fiscal 2006. Revenue during fiscal 2007
included approximately $24.9 million of power plant and component sales, $3.3
million related to service agreements and approximately $4.3 million of revenue
related to power purchase agreements. Higher product sales and
revenues were primarily due to an increase in power plant sales, including
production of MW-class units, as well as increases in service agreement revenue,
component sales and revenues from power purchase agreements, and site
engineering construction revenue.
Cost of
product sales and revenues increased to $61.8 million for fiscal 2007, compared
to $61.5 million during fiscal 2006. The ratio of product cost to
sales improved to 1.9 to 1 during 2007, compared to 2.9 to 1 during the same
period a year ago. The improved margin is partially attributable to a
shift to sales of MW-class power plants, which have a lower cost per kW compared
to the sub-MW units produced in prior year. Product costs are lower
on a per kW basis across all product lines as result of the Company’s cost out
program with continued reduction of product costs through value engineering,
manufacturing improvements and supply chain enhancements. In addition, the
Company introduced a 20 percent uprate in 2006, which effectively lowered
product costs on a per kW basis compared to the prior year. The cost
ratio was also favorably impacted in the period by higher revenue and margins on
component sales and service agreements related to the growing installed
fleet.
Research and development
contracts
Research
and development revenue increased $3.9 million to $15.7 million for fiscal 2007,
compared to $11.8 million for 2006. Cost of research and development
contracts increased to $13.4 million during fiscal 2007, compared to $10.3
million for 2006. Margin for fiscal 2007 was $2.3 million compared to $1.4
million on higher revenues compared to the prior year. 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 $0.9 million to $18.6 million during fiscal 2007,
compared to $17.8 million in 2006. This increase is primarily due to
higher sales and marketing activities related to a growing order pipeline and
higher stock-based compensation.
Research
and development expenses
Research
and development expenses increased to $27.5 million during fiscal 2007, compared
to $24.7 million recorded in the prior year. The increase is due to
development costs for MW-class cost reduction and technology development to
extend stack life and increase power output of our power plants, and higher
stock-based compensation.
Loss
from operations
Loss from
operations for fiscal 2007 totaled $73.1 million, compared to $81.0 million
recorded in 2006. The decrease in the loss from operations is
primarily due to a favorable change in product margin resulting from the shift
to production of more MW-class power plants and lower-cost sub-MW units, and
improved margins on power purchase agreements. This improvement in the loss from
operations was partially offset by higher administrative and selling and
research and development expenses as discussed above.
Loss
from equity investments
Our
equity investment in Versa totaled approximately $10.2 million and $11.5 million
as of October 31, 2007 and 2006, respectively. Our ownership interest
at October 31, 2007 was 39 percent and we account for Versa under the equity
method of accounting. Our share of equity losses for fiscal 2007 and
2006 were $1.3 million and $0.8 million, respectively.
During
2007, the Company invested $2.0 million in Versa in the form of a convertible
note. Should this note be converted into common stock, this
investment would bring the Company’s ownership percentage in Versa to
approximately 43 percent. If not converted, the note and all accrued
interest thereon is due May 2017. 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 October 31, 2007 and is included within Investment and loan to affiliate
on the consolidated balance sheet. Changes in the fair value of the
warrants are included in the Consolidated Statement of Operations each
period.
Interest
and other income, net
Interest
and other income, net, was $7.4 million for fiscal 2007, compared to $5.7
million for 2006. Interest and other income increased due to higher
state research and development tax credits which totaled $1.2 million in 2007,
compared to $0.2 million for 2006, as well as higher interest income on higher
average invested balances.
Connecticut
tax law allows certain companies to obtain cash refunds at an exchange rate of
65% of their research and development credits, in exchange for foregoing the
carryforward of these credits into future tax years. We record Connecticut
research and development tax credits in the period in which the return is filed,
which is when management believes the amount of the credits are probable of
collection.
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. Approximately $4.6 million of our valuation allowance would reduce
additional paid in capital upon subsequent recognition of any related tax
benefits.
LIQUIDITY
AND CAPITAL RESOURCES
Cash,
cash equivalents, and investments in U.S. treasuries totaled approximately $86.9
million as of October 31, 2008, compared to $153.6 million as of October 31,
2007. Net cash and investments used during fiscal 2008 was $66.7
million.
Cash
Inflows and Outflows
Cash and
cash equivalents as of October 31, 2008 totaled $38.0 million, reflecting a
decrease of $55.0 million from the balance reported as of October 31,
2007. The key components of our cash inflows and outflows from
continuing operations were as follows:
Operating Activities: During
fiscal 2008, we used $61.4 million in cash for operating activities, compared to
operating cash usage of $56.0 million during 2007. Cash used in
operating activities during fiscal 2008 consisted of a net loss for the period
of approximately $93.4 million, offset by non-cash amounts totaling $18.6
million, including $5.5 million of share-based compensation and depreciation
expense of $8.8 million.
The
change in cash related to net working capital totaled approximately $13.4
million. Changes favorable to working capital included an increase in accounts
payable and accrued expenses of $8.4 million related to higher procurement for
increased production volumes. Inventories were lower by $5.1 million
as we settled into our current production volume of 30 MW by the end of fiscal
2008 and worked down higher inventory levels at the end of fiscal 2007 which
were built in anticipation of ramping production. Deferred revenue
and customer deposits also increased by $7.4 million due to increased customer
orders in the period. Customers make milestone payments during the
production cycle for their power plants. Offsetting these increases
were higher accounts receivable and other assets totaling $7.5
million.
Investing
Activities: During fiscal 2008, net cash provided by investing
activities totaled $3.8 million. During fiscal 2008, approximately $79.1 million
of investments in U.S. treasury securities matured and new U.S. treasury
purchases totaled $67.9 million for a net increase of investing activities of
approximately $11.2 million. Partially offsetting this increase were capital
expenditures in fiscal 2008 totaling $7.4 million partially related to expanding
our manufacturing capacity to an annual minimum of 60 MW of
production. We have recently slowed the purchasing of certain capital
equipment for this expansion to be paced by expected future order
flow. The total cost of the capacity expansion to 60 MW of production
is expected to be approximately $12.0 to $15.0 million.
During
fiscal 2007, net cash provided by investing activities totaled $28.0 million.
During fiscal 2007, approximately $312.1 million of investments in U.S. treasury
securities matured and new U.S. treasury purchases totaled $277.7 million for a
net increase of investing activities of approximately $34.4 million. Partially
offsetting this increase were capital expenditures in fiscal 2007 totaling $4.4
million.
Financing
Activities: During fiscal 2008, net cash provided by financing
activities was approximately $2.6 million, compared to $94.7 million in
2007. Activity in fiscal 2008 included $3.6 million for the payment
of dividends on preferred stock and repayment of debt of $0.4
million. These cash outflows in fiscal 2008 were offset by receipts
of $3.2 million from the sale of common stock and common stock issued for stock
plans and $3.6 million of cash borrowed from the Connecticut Development
Authority on a $4.0 million debt line established in the second quarter of
fiscal 2008 for equipment purchases associated with manufacturing capacity
expansion.
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
product sales, service and PPAs, incentive funding, government research and
development contracts, and interest earned on investments. 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.
Our
future cash requirements depend on numerous factors including; implementing our
cost reduction efforts, increasing annual order volume and future involvement in
research and development contracts as follows:
Implementing cost reduction
efforts on our fuel cell products
Reducing
product cost is essential for us to further penetrate the market for our fuel
cell products. Cost reductions will reduce and may eliminate the need
for incentive funding programs and are critical to our attaining
profitability. Currently available incentives allow our product pricing to
compete with grid-delivered power and other distributed generation
technologies. Product cost reductions come from several
areas:
|
·
|
engineering
improvements;
|
|
·
|
supply
chain management;
|
|
·
|
manufacturing
process improvements
|
We have
reduced the cost of our MW-class power plants by approximately 85 percent since
our ‘proof-of-concept’ 2 MW Santa Clara project in 1996-1997. In
2003, we implemented our commercial cost-out program, hiring additional
engineers who focused on reducing the total life cycle costs of our power
plants. We have made significant progress primarily through value
engineering our products, manufacturing process improvements, technology
improvements, and global sourcing.
In 2008,
we also completed our design of the newest MW-class power plants that we
anticipate will go into production in the fourth fiscal quarter of 2009. The new
design incorporates new stacks with outputs of 350 kW each compared to 300 kW
previously, along with lower component and raw material costs derived from
process improvements, volume manufacturing and global sourcing. With these new models, we expect all
future MW-class orders are expected to be gross margin
positive.
In 2008,
we also began manufacturing our first five-year stacks, representing a service
cost reduction for the Company. Previously our stacks had a life of
approximately three years.
Increasing annual order
volume
In
addition to the cost reduction initiatives discussed above, we need to increase
annual order volume. Increased production volumes lower costs by
leveraging supplier/purchasing opportunities, creating opportunities for
incorporating manufacturing process improvements, and spreading fixed costs over
higher units of production. Our overall manufacturing process (module
manufacturing, final assembly, and test and conditioning) has a production
capacity of 50 MW per year. Based upon existing backlog, we ramped our
production volumes to an annualized rate of 30 MW during 2008. Our
current product sales backlog is 32.5 MW and totals approximately $67.1
million. This compares to a product sales backlog of 15.6 MW as of
October 31, 2007, which totaled approximately $42.5 million. We see
continued opportunities for increased order volume in our key markets, including
Asia, California and Connecticut.
We sell
both completed power plants and fuel cell modules. Of the current
product backlog, over 90 percent is for MW-class complete power plants and fuel
cell modules. Based on the current backlog, we expect the mix of
production to move primarily to DFC3000 power plants and fuel cell modules in
fiscal 2009 and beyond. We believe we can reach gross margin
breakeven at a sustained annual order and production volume of approximately 35
to 70 MW and that net income breakeven can be achieved at a sustained
annual order and volume production of approximately 75 to 125 MW depending on
product mix, volume mix of full power plants vs. modules only, future service
costs, and other variables that may affect sales pricing.
Future involvement in
research and development contracts
Our
research and development contracts are generally multi-year, cost reimbursement
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.
Commitments
and Significant Contractual Obligations
A summary
of our significant future commitments and contractual obligations as of October
31, 2008 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
and operating lease commitments
(1)
|
|
$ |
4,279 |
|
|
$ |
1,184 |
|
|
$ |
1,228 |
|
|
$ |
896 |
|
|
$ |
971 |
|
Term
loans (principal and interest)
|
|
|
5,182 |
|
|
|
787 |
|
|
|
1,001 |
|
|
|
1,031 |
|
|
|
2,363 |
|
Purchase
commitments(2)
|
|
|
40,378 |
|
|
|
39,213 |
|
|
|
1,165 |
|
|
|
— |
|
|
|
— |
|
Series
I Preferred dividends payable
(3)
|
|
|
20,640 |
|
|
|
415 |
|
|
|
10,887 |
|
|
|
2,075 |
|
|
|
7,263 |
|
Series
B Preferred dividends payable
(4)
|
|
|
4,052 |
|
|
|
3,206 |
|
|
|
846 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
74,531 |
|
|
$ |
44,805 |
|
|
$ |
15,127 |
|
|
$ |
4,002 |
|
|
$ |
10,597 |
|
|
(1)
|
Future minimum lease payments on
capital and operating
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.$500,000 in cash or common stock annually to
Enbridge, Inc., the holder of the Series 1 preferred shares, so long as
Enbridge holds the shares. Interest accrues on cumulative
unpaid dividends at a 2.45 percent quarterly rate, compounded quarterly,
until payment thereof. Using an exchange rate of Cdn.$.83 to
U.S.$1.00 (exchange rate on October 31, 2008), cumulative unpaid dividends
and accrued interest of approximately $7.4 million on the Series 1
preferred shares were outstanding as of October 31, 2008. For the purposes of this
disclosure, we have assumed an exchange rate of Cdn.$.83 to U.S.$1.00
(exchange rate on October 31, 2008) and 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.
|
In April
2008, we received approval from the Connecticut Department of Public Utility
Control on the financing commitment for the 9.0 MW Milford, Connecticut DFC-ERG
project under Connecticut’s Clean Energy Fund Project 150. Under the
financial commitment, we will provide 20 percent or $7.1 million toward
financing the construction of this project. Our development partner,
Energy East Corporation, will provide the remaining 80 percent of the
construction phase financing. The commitment is contingent on
entering into final contracts with Energy East for the DFC-ERG
project.
In April
2008, we entered into a new 10-year loan agreement with the CDA allowing for a
maximum amount borrowed of $4.0 million. At October 31, 2008, we had
an outstanding balance of $3.6 million on this loan. The stated
interest rate is 5 percent and the loan will be collateralized by the assets
procured under this loan as well as $4.0 million of additional machinery and
equipment. Repayment terms require (i) interest only payments on
outstanding balances through November 2009 and (ii) interest and principal
payments commencing in December 2009 through May 2018.
In April
2006, Bridgeport FuelCell Park, LLC (“BFCP”), one of our wholly-owned
subsidiaries, entered into a loan agreement for $0.5 million, secured by assets
of BFCP. Loan proceeds were designated for pre-development expenses
associated with the development, construction, and operation of a fuel cell
generation facility in Bridgeport, Connecticut (the “Project”). The
outstanding balance on this loan was $0.6 million, including accrued interest,
as of October 31, 2008.
In
December 2006, we entered into a master equipment lease agreement for $2.5
million of equipment. As of October 31, 2008, capital lease
obligations under this lease agreement were $0.4 million. Lease
payment terms are thirty-six months.
We have
pledged approximately $10.9 million of our cash and cash equivalents as
collateral and letters of credit for certain banking relationships and customer
contracts, of which approximately $9.1 million supported letters of credit that
expired on various dates through December 31, 2008.
Product sales
contracts
Through
2008, the costs to manufacture and install our products exceeded market prices.
As of October 31, 2008, we had product sales backlog of approximately $67.1
million. Included in backlog are orders for the Company’s newest 2.8
MW product design which is expected to be gross margin profitable and produced
in the Company’s fourth fiscal quarter of 2009. Due to product mix,
service and warranty costs, we do not expect the Company to achieve gross margin
profitability until we achieve sustained annual production volume of
approximately 35 MW to 50 MW, depending on product mix, geographic location,
incentives and credits and other variables such as fuel
prices. Actual production in fiscal 2007 was approximately 11 MW and
was approximately 22 MW in 2008. In mid 2008, we ramped to an
annualized production rate of approximately 30MW in response to worldwide demand
for the Company’s MW-class power plants. Future production volume
will be adjusted to match order backlog.
Long-term service
agreements
We have
contracted with certain customers to provide long-term service for fuel cell
power plants ranging from one to 13 years. Our standard service agreement term
is five years and may be renewed if the parties mutually agree on future
pricing. Pricing for service contracts is based upon the markets in
which we compete as well as estimates of future costs. Given our products’ early
stage of development, actual expenses could be materially different than the
contract price resulting in a loss.
Under the
provisions of these contracts, we provide services to maintain, monitor, and
repair customer power plants to meet minimum operating levels. Should the power
plant not meet the minimum operating levels, the Company may be required to
replace the fuel cell stack with a new or used replacement. Our contractual
liability under service agreements is limited to amount of service fees payable
under the contract. We have incurred and expect to continue to incur costs in
excess of revenues in order to maintain customer power plants under its service
agreements. Service agreement and aftermarket costs, net of revenues
totaled approximately $19.9 million in fiscal 2008 compared to $10.0 million in
fiscal 2007.
We expect
replacement of older stacks will continue over the next several years. As a
result, we expect to continue to incur losses in order to maintain power
plants. Future costs for maintaining legacy service agreements will
be determined by a number of factors including life of the stack, used
replacement stacks available, the Company’s limit of liability on service
agreements and future operating plans for the power plant. Given these
considerations, the Company expects a similar impact in 2009 as was reported in
2008 and then expects the impact to decline in 2010 and 2011.
In fiscal
2008, our new five-year fuel cell stack went into production, extending the
expected life by two years. Service agreements related to power
plants that have our new five-year stack design are not expected to require a
stack change to continue to meet minimum operating levels although the Company
has limited operating experience with these products. Power plants
that do not have our new design may require a stack replacement and we expect to
continue to incur costs for stack changes as the older three-year stacks reach
end of life.
Power purchase
agreements
As of
October 31, 2008, we had 3 MW of power plant installations under PPAs ranging in
duration from 5 – 10 years. PPAs are a common arrangement in the
energy industry whereby a customer purchases energy from an owner and operator
of the power generation equipment.
We
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 of
certain performance requirements. Revenue related to these incentive funds is
recognized ratably over the performance period. As of October 31,
2008 we had deferred revenue totaling $4.4 million on the consolidated balance
sheet related to incentive funding received on PPAs.
Under the
terms of our PPAs, customers agree to purchase power from our fuel cell power
plants at negotiated rates, generally for periods of 5 to 10
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, 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, natural gas, to run the power plants. The assets,
including fuel cell power plants, are carried at the lower of cost or fair value
on the Consolidated Balance Sheets based on our estimates of future revenues and
expenses. We are not required to produce minimum amounts of power
under our PPAs and we have the right to terminate PPAs by giving written notice
to the customer, subject to certain exit costs.
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
October 31, 2008, our research and development sales backlog totaled $4.8
million. We will incur additional research and development cost-share
related to this backlog totaling approximately $1.5 million which will not be
reimbursed by the government.
In the
fourth quarter of 2008, we successfully completed the first phase of the DOE’s
three-phase program to develop multi-MW coal-based SOFC power
plants. Phase I was focused on SOFC cell and stack technology
scale-up, as well as developing a baseline and proof-of-concept system
engineering design and analysis. In December of 2008, the DOE
accepted our $21 million proposal for Phase II. The total program
cost is $30.2 million of which $21 million will be funded by the
DOE. The program will begin January 2009 and end in September of 2010
and seeks to build a minimum 25 kW solid oxide fuel cell (SOFC) stack that meets
certain performance requirements and cost targets as a manufactured product. The
new stack will be integrated into a 250 kW to 1 MW fuel cell power module and a
5 MW proof-of-concept system operating on coal-based syngas (gas created from
reacting coal with high temperature coal or steam). The module and
proof-of-concept system will be designed, fabricated and tested in subsequent
phases.
In the
fourth quarter of 2008, we also completed the eight-year Ship Service Fuel Cell
Program which resulted in successfully demonstrating electricity production from
a military logistic fuel for the U.S. Navy. Additionally, we met the
objectives of the six-year Vision 21 Program for the DOE with the demonstration
of a 280 kW DFC/T system with 56 percent efficiency and development of the
initial designs for a MW-class DFC/T.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2007, the FASB issued Statement No. 141 (revised 2007), Business
Combinations (“SFAS No. 141R”), and Statement No. 160, Noncontrolling Interests
in Consolidated Financial Statements (“SFAS No. 160”). SFAS No. 141R
requires an acquirer to measure the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree at their
fair values on the acquisition date, with goodwill being the excess value over
the net identifiable assets acquired. This Statement also requires
the fair value measurement of certain other assets and liabilities related to
the acquisition such as contingencies and research and
development. SFAS No. 160 clarifies that a noncontrolling interest in
a subsidiary should be reported as equity in the consolidated financial
statements. Consolidated net income should include the net income for
both the parent and the noncontrolling interest with disclosure of both amounts
on the consolidated statement income. The calculation of earnings per
share will continue to be based on income amounts attributable to the
parent. The effective date for both Statements is the beginning of
fiscal year 2010. We have not yet determined the impact, if any, that
the adoption of SFAS No. 141R and SFAS No. 160 could have on our consolidated
financial statements.
In
April 2008, the FASB issued Financial Staff Position (“FSP”) No. FAS
142-3, Determination of the Useful Life of Intangible Assets. FSP
No. FAS 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, “Goodwill and Other
Intangible Assets.” The intent of the position is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
No. 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141R, and other U.S. generally accepted
accounting principles. The provisions of FSP No. FAS 142-3 are effective
for fiscal years beginning after December 15, 2008. FSP
No. FAS142-3 is effective for the Company’s fiscal year beginning November
1, 2009. We have not yet determined the impact, if any, that the adoption
of FSP No. FAS 142-3 could have on our consolidated financial
statements.
In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements
(“SFAS No. 157”). This Statement defines fair value and expands
disclosures about fair value measurements. These methods will apply
to other accounting standards that use fair value measurements and may change
the application of certain measurements used in current
practice. This Statement is effective for the beginning of fiscal
year 2009, November 1, 2008 for the Company. In February 2008, the
FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157,
which delays the effective date of SFAS No. 157 for all nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least
annually). FSP FAS 157-2 partially defers the effective date of
SFAS 157 to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years for items within the scope of this
FSP. FSP FAS 157-2 is effective for us beginning November 1,
2009. We do not anticipate SFAS No. 157 will have a material impact
on our consolidated financial statements upon adoption and we have not yet
determined the impact, if any, that the adoption of FSP FAS 157-2 could have on
our consolidated financial statements upon adoption in fiscal 2010.
In
February 2007, the FASB issued Statement No. 159, the Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS No. 159”). This
Statement permits entities to measure most financial instruments at fair value
if desired. It may be applied on a contract by contract basis and is
irrevocable once applied to those contracts. The Statement may be
applied at the time of adoption for existing eligible items, or at initial
recognition of eligible items. After election of this option, changes
in fair value are reported in earnings. The items measured at fair
value must be shown separately on the balance sheet. This Statement
is effective for the beginning of fiscal year 2009. The cumulative
effect of adoption, if any, would be reported as an adjustment to beginning
retained earnings. We do not anticipate SFAS No. 159 will have a
material impact on our consolidated financial statements upon
adoption.
In
March 2008, the FASB issued Statement No. 161, Disclosures about
Derivative Instruments and Hedging Activities – an amendment of FASB Statement
No. 133 (“SFAS No. 161”). SFAS No. 161 amends and expands the
disclosure requirements of FASB Statement No. 133 “Accounting for
Derivative Instruments and Hedging Activities” by establishing, among other
things, the disclosure requirements for derivative instruments and hedging
activities. This Statement requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. The provisions of SFAS No. 161 are effective for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. SFAS No. 161 is effective for the Company’s
second quarter of fiscal year ending October 31, 2009. We have not yet
determined the impact, if any, that the adoption of SFAS No. 161 could have on
our consolidated financial statements.
Item
7A. 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 as of October 31, 2008 includes short-term U.S. Treasury instruments
with maturities averaging three months or less, as well as long-term U.S.
Treasury notes with fixed interest rates with maturities through April
2010. Cash is invested overnight with high credit quality financial
institutions. Based on our overall interest exposure at October 31,
2008, 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 $0.4 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 October 31, 2008, approximately $0.07 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. We also make purchases from
certain vendors in currencies other than U.S. dollars. Although we
have not experienced significant foreign exchange rate losses to date, we may in
the future, especially to the extent that we do not engage in currency hedging
activities. The economic impact of currency exchange rate movements
on our operating results is complex because such changes are often linked to
variability in real growth, inflation, interest rates, governmental actions and
other factors. These changes, if material, may cause us to adjust our
financing and operating strategies. 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 October 31, 2008 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
percent increase from the closing price of our common stock at October 31, 2008
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.
We have
determined that the 2,286 warrants received in conjunction with our investment
in Versa during the third fiscal quarter of 2007 represent
derivatives. The fair value of the warrants is based on the
Black-Scholes valuation model using historical stock price, volatility (based on
a peer group since Versa’s common stock is not publicly traded) and risk-free
interest rate assumptions. The fair value of this derivative included
within Investment and loan to affiliate on our Consolidated Balance Sheet as of
October 31, 2008 was $0.3 million. 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 10 percent
increase in the volatility assumption used at October 31, 2008 would result in
an increase in the fair value of this derivative and a charge to the
Consolidated Statement of Operations of approximately $18 thousand, assuming all
other assumptions remain the same.
Item
8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Index
to the Consolidated Financial Statements
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
70
|
|
|
Consolidated
Balance Sheets – October 31, 2008 and 2007
|
71
|
|
|
Consolidated
Statements of Operations for the Years ended October 31, 2008, 2007 and
2006
|
72
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity for the Years ended October
31, 2008, 2007 and 2006
|
73
|
|
|
Consolidated
Statements of Cash Flows for the Years ended October 31, 2008, 2007 and
2006
|
75
|
|
|
Notes
to Consolidated Financial Statements
|
76
|
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
FuelCell
Energy, Inc.:
We have
audited the accompanying consolidated balance sheets of
FuelCell Energy, Inc. as of October 31, 2008 and 2007, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended October 31, 2008. We
also have audited FuelCell Energy, Inc.’s internal control over financial
reporting as of October 31, 2008, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). FuelCell Energy, Inc.’s management is responsible
for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
management report on internal controls over financial reporting. Our
responsibility is to express an opinion on these consolidated financial
statements and an opinion on the Company's internal control over financial
reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of FuelCell Energy, Inc. as of
October 31, 2008 and 2007, and the results of its operations and its cash flows
for each of the years in the three-year period ended October 31, 2008, in
conformity with U.S. generally accepted accounting principles. Also in our
opinion, FuelCell Energy, Inc. maintained, in all material respects, effective
internal control over financial reporting as of October 31, 2008, based on
criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
As
discussed in Note 13 to the consolidated financial statements, the Company
changed its method of accounting for share-based payments as of November 1,
2005.
/s/ KPMG LLP
Hartford,
Connecticut
January
14, 2009
FUELCELL
ENERGY, INC.
Consolidated
Balance Sheets
(Dollars
in thousands, except share and per share amounts)
|
|
October 31,
2008
|
|
|
October 31,
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
38,043 |
|
|
$ |
92,997 |
|
Investments:
U.S. treasury securities
|
|
|
30,406 |
|
|
|
60,634 |
|
Accounts
receivable, net of allowance for doubtful accounts of $51 and $63,
respectively
|
|
|
16,096 |
|
|
|
10,063 |
|
Inventories,
net
|
|
|
24,523 |
|
|
|
29,581 |
|
Other
current assets
|
|
|
8,952 |
|
|
|
7,730 |
|
Total
current assets
|
|
|
118,020 |
|
|
|
201,005 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
38,259 |
|
|
|
39,612 |
|
Investments:
U.S. treasury securities
|
|
|
18,434 |
|
|
|
— |
|
Investment
and loan to affiliate
|
|
|
10,405 |
|
|
|
12,216 |
|
Other
assets, net
|
|
|
358 |
|
|
|
355 |
|
Total
assets
|
|
$ |
185,476 |
|
|
$ |
253,188 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt and other liabilities
|
|
$ |
795 |
|
|
$ |
924 |
|
Accounts
payable
|
|
|
16,287 |
|
|
|
9,516 |
|
Accounts
payable due to affiliate
|
|
|
724 |
|
|
|
2,881 |
|
Accrued
liabilities
|
|
|
11,023 |
|
|
|
8,511 |
|
Deferred
revenue and customer deposits
|
|
|
29,585 |
|
|
|
20,486 |
|
Total
current liabilities
|
|
|
58,414 |
|
|
|
42,318 |
|
|
|
|
|
|
|
|
|
|
Long-term
deferred revenue
|
|
|
2,672 |
|
|
|
4,401 |
|
Long-term
debt and other liabilities
|
|
|
4,075 |
|
|
|
613 |
|
Total
liabilities
|
|
|
65,161 |
|
|
|
47,332 |
|
Redeemable
minority interest
|
|
|
13,307 |
|
|
|
11,884 |
|
Redeemable
preferred stock ($0.01 par value, liquidation preference of $64,120 at
October 31, 2008 and 2007.)
|
|
|
59,950 |
|
|
|
59,950 |
|
Commitments
and Contingencies (Note 16)
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|