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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to

Commission file number: 1-14204

 

FUELCELL ENERGY, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

06-0853042

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

3 Great Pasture Road

Danbury, Connecticut

 

06810

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (203) 825-6000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes       No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      No  

Number of shares of common stock, par value $0.0001 per share, outstanding as of March 2, 2018:  81,632,865

 


 

FUELCELL ENERGY, INC.

FORM 10-Q

Table of Contents

 

 

 

 

 

Page

 

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Consolidated Financial Statements (unaudited).

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of January 31, 2018 and October 31, 2017.

 

3

 

 

 

 

 

 

 

Consolidated Statements of Operations and Comprehensive Loss for the three months ended January 31, 2018 and 2017.

 

4

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended January 31, 2018 and 2017.

 

5

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements.

 

6

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

18

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk.

 

30

 

 

 

 

 

Item 4.

 

Controls and Procedures.

 

30

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings.

 

32

 

 

 

 

 

Item 1A.

 

Risk Factors.

 

32

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds.

 

32

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities.

 

32

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures.

 

32

 

 

 

 

 

Item 5.

 

Other Information.

 

32

 

 

 

 

 

Item 6.

 

Exhibits.

 

33

 

 

 

 

 

Signatures

 

 

 

34

 

 

2


FUELCELL ENERGY, INC.

Consolidated Balance Sheets

(Unaudited)

(Amounts in thousands, except share and per share amounts)

 

 

 

January 31,

 

 

October 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents, unrestricted

 

$

76,776

 

 

$

49,294

 

Restricted cash and cash equivalents - short-term

 

 

5,230

 

 

 

4,628

 

Accounts receivable, net

 

 

44,081

 

 

 

68,521

 

Inventories

 

 

59,868

 

 

 

74,496

 

Other current assets

 

 

7,567

 

 

 

6,571

 

Total current assets

 

 

193,522

 

 

 

203,510

 

Restricted cash and cash equivalents - long-term

 

 

33,425

 

 

 

33,526

 

Project assets

 

 

75,754

 

 

 

73,001

 

Property, plant and equipment, net

 

 

44,093

 

 

 

43,565

 

Goodwill

 

 

4,075

 

 

 

4,075

 

Intangible asset

 

 

9,592

 

 

 

9,592

 

Other assets

 

 

14,413

 

 

 

16,517

 

Total assets

 

$

374,874

 

 

$

383,786

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

23,513

 

 

$

28,281

 

Accounts payable

 

 

37,829

 

 

 

42,616

 

Accrued liabilities

 

 

21,513

 

 

 

18,381

 

Deferred revenue

 

 

10,429

 

 

 

7,964

 

Preferred stock obligation of subsidiary

 

 

865

 

 

 

836

 

Total current liabilities

 

 

94,149

 

 

 

98,078

 

Long-term deferred revenue

 

 

18,364

 

 

 

18,915

 

Long-term preferred stock obligation of subsidiary

 

 

15,012

 

 

 

14,221

 

Long-term debt and other liabilities

 

 

60,297

 

 

 

63,759

 

Total liabilities

 

 

187,822

 

 

 

194,973

 

Redeemable Series B preferred stock (liquidation preference of $64,020 as of

   January 31, 2018 and October 31, 2017)

 

 

59,857

 

 

 

59,857

 

Redeemable Series C preferred stock (liquidation preference of $24,201 and $33,300

   as of January 31, 2018 and October 31, 2017, respectively)

 

 

20,131

 

 

 

27,700

 

Total equity:

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock ($0.0001 par value); 225,000,000 and 125,000,000 shares

   authorized as of January 31, 2018 and October 31, 2017, respectively;

   77,602,110 and 69,492,816 shares issued and outstanding as of January 31, 2018

   and October 31, 2017, respectively

 

 

8

 

 

 

7

 

Additional paid-in capital

 

 

1,055,154

 

 

 

1,045,197

 

Accumulated deficit

 

 

(947,716

)

 

 

(943,533

)

Accumulated other comprehensive loss

 

 

(382

)

 

 

(415

)

Treasury stock, Common, at cost (88,861 shares as of January 31, 2018

   and October 31, 2017)

 

 

(280

)

 

 

(280

)

Deferred compensation

 

 

280

 

 

 

280

 

Total stockholders’ equity

 

 

107,064

 

 

 

101,256

 

Total liabilities and stockholders' equity

 

$

374,874

 

 

$

383,786

 

 

See accompanying notes to consolidated financial statements.

3


FUELCELL ENERGY, INC.

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(Amounts in thousands, except share, per share and related party revenue amounts)

 

 

 

Three Months Ended January 31,

 

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

Product (including $0.4 million and $0.1 million of related party revenues)

 

$

29,530

 

 

$

1,807

 

Service and license (including $1.2 million and $1.6 million of related party revenues)

 

 

4,104

 

 

 

6,936

 

Generation

 

 

1,892

 

 

 

2,085

 

Advanced Technologies

 

 

3,087

 

 

 

6,174

 

Total revenues

 

 

38,613

 

 

 

17,002

 

Costs of revenues:

 

 

 

 

 

 

 

 

Product

 

 

26,137

 

 

 

4,055

 

Service and license

 

 

3,406

 

 

 

6,266

 

Generation

 

 

1,609

 

 

 

1,115

 

Advanced technologies

 

 

2,826

 

 

 

3,753

 

Total costs of revenues

 

 

33,978

 

 

 

15,189

 

Gross profit

 

 

4,635

 

 

 

1,813

 

Operating expenses:

 

 

 

 

 

 

 

 

Administrative and selling expenses

 

 

6,142

 

 

 

6,004

 

Research and development expenses

 

 

4,046

 

 

 

5,392

 

Restructuring expense

 

 

-

 

 

 

1,345

 

Total costs and expenses

 

 

10,188

 

 

 

12,741

 

Loss from operations

 

 

(5,553

)

 

 

(10,928

)

Interest expense

 

 

(2,141

)

 

 

(2,267

)

Other income (expense), net

 

 

476

 

 

 

(409

)

Loss before benefit (provision) for income taxes

 

 

(7,218

)

 

 

(13,604

)

Benefit (provision) for income taxes

 

 

3,035

 

 

 

(81

)

Net loss

 

 

(4,183

)

 

 

(13,685

)

      Series C preferred stock deemed dividends

 

 

(3,463

)

 

 

-

 

Series B preferred stock dividends

 

 

(800

)

 

 

(800

)

Net loss attributable to common stockholders

 

$

(8,446

)

 

$

(14,485

)

Loss per share basic and diluted:

 

 

 

 

 

 

 

 

Net loss per share attributable to common stockholders

 

$

(0.12

)

 

$

(0.39

)

Basic and diluted weighted average shares outstanding

 

 

72,024,811

 

 

 

37,613,216

 

 

 

 

Three Months Ended January 31,

 

 

 

2018

 

 

2017

 

Net loss

 

$

(4,183

)

 

$

(13,685

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

33

 

 

 

(70

)

Total comprehensive loss

 

$

(4,150

)

 

$

(13,755

)

 

See accompanying notes to consolidated financial statements.

 

 

 

 

4


FUELCELL ENERGY, INC.

Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

 

 

 

Three Months Ended January 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(4,183

)

 

$

(13,685

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Share-based compensation

 

 

617

 

 

 

1,013

 

Loss from change in fair value of embedded derivatives

 

 

55

 

 

 

42

 

Depreciation

 

 

2,128

 

 

 

2,057

 

Non-cash interest expense on preferred stock and debt obligations

 

 

1,491

 

 

 

1,470

 

Unrealized foreign exchange losses

 

 

534

 

 

 

340

 

Deferred income taxes

 

 

(3,035

)

 

 

-

 

Other non-cash transactions, net

 

 

-

 

 

 

127

 

Decrease (increase) in operating assets:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

26,624

 

 

 

(2,575

)

Inventories

 

 

14,784

 

 

 

(8,462

)

Other assets

 

 

(1,108

)

 

 

1,261

 

(Decrease) increase in operating liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

(2,898

)

 

 

(5,060

)

Accrued liabilities

 

 

3,074

 

 

 

(2,150

)

Deferred revenue

 

 

1,914

 

 

 

775

 

Net cash provided by (used in) operating activities

 

 

39,997

 

 

 

(24,847

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(2,816

)

 

 

(6,377

)

Project asset expenditures

 

 

(4,577

)

 

 

(3,053

)

Cash acquired from asset acquisition

 

 

-

 

 

 

633

 

Net cash used in investing activities

 

 

(7,393

)

 

 

(8,797

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayment of debt

 

 

(6,253

)

 

 

(5,071

)

Proceeds from debt

 

 

-

 

 

 

17,891

 

Payment of deferred financing costs

 

 

-

 

 

 

(119

)

Payment of preferred dividends and return of capital

 

 

(1,048

)

 

 

(1,033

)

Cash received for common stock issued for stock plans

 

 

-

 

 

 

49

 

Proceeds from sale of common stock, prefunded warrants and warrant exercises, net

 

 

2,647

 

 

 

4,977

 

Net cash (used in) provided by financing activities

 

 

(4,654

)

 

 

16,694

 

Effects on cash from changes in foreign currency rates

 

 

33

 

 

 

(70

)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

27,983

 

 

 

(17,020

)

Cash, cash equivalents and restricted cash-beginning of period

 

 

87,448

 

 

 

118,316

 

Cash, cash equivalents and restricted cash-end of period

 

$

115,431

 

 

$

101,296

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

 

Cash interest paid

 

$

651

 

 

$

756

 

Noncash financing and investing activity:

 

 

 

 

 

 

 

 

Common stock issued for Employee Stock Purchase Plan in settlement of prior

   year accrued employee contributions

 

 

-

 

 

 

50

 

Accrued sale of common stock, cash received in a subsequent period

 

 

-

 

 

 

159

 

Assumption of debt in conjunction with asset acquisition

 

 

-

 

 

 

2,289

 

Acquisition of project assets

 

 

-

 

 

 

2,386

 

Series C preferred share conversions

 

 

7,569

 

 

 

-

 

Accrued purchase of fixed assets, cash paid in subsequent period

 

 

1,231

 

 

 

1,101

 

Accrued purchase of project assets, cash paid in subsequent period

 

 

1,750

 

 

 

741

 

 

See accompanying notes to consolidated financial statements.

 

 

 

5


FUELCELL ENERGY, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(Tabular amounts in thousands, except share and per share amounts)

Note 1.  Nature of Business and Basis of Presentation

FuelCell Energy, Inc. together with its subsidiaries (the “Company”, “FuelCell Energy”, “we”, “us”, or “our”) is a leading integrated fuel cell company with a growing global presence.  We design, manufacture, install, operate and service ultra-clean, efficient and reliable stationary fuel cell power plants.  Our SureSource power plants generate electricity and usable high quality heat for commercial, industrial, government and utility customers.  We have commercialized our stationary carbonate fuel cells and are also pursuing the complementary development of planar solid oxide fuel cells and other fuel cell technologies.  Our operations are funded primarily through sales of equity instruments to strategic investors or in public markets, corporate and project level debt financing and local or state government loans or grants.  In order to produce positive cash flow from operations, we need to be successful at increasing annual order volume and production and in our cost reduction efforts.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial information.  Accordingly, they do not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements.  In the opinion of management, all normal and recurring adjustments necessary to fairly present our financial position and results of operations as of and for the three months ended January 31, 2018 have been included.  All intercompany accounts and transactions have been eliminated.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted.  The balance sheet as of October 31, 2017 has been derived from the audited financial statements at that date, but it does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with our financial statements and notes thereto for the year ended October 31, 2017, which are contained in our Annual Report on Form 10-K previously filed with the SEC.  The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.

Use of Estimates

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Estimates are used in accounting for, among other things, revenue recognition, excess and obsolete inventories, product warranty costs, accruals for service agreements, allowance for uncollectible receivables, depreciation and amortization, impairment of goodwill, indefinite-lived intangible assets and long-lived assets, income taxes, and contingencies. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.  Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates.

Related Parties

POSCO Energy Co., Ltd. (“POSCO Energy”) is a related party and owned approximately 3.0% of the outstanding common shares of the Company as of January 31, 2018.  Revenues from POSCO Energy for the three months ended January 31, 2018 and 2017 represent 4% and 10%, respectively, of consolidated revenues.

NRG Energy, Inc. (“NRG”) is a related party and owned approximately 2.0% of the outstanding common shares of the Company as of January 31, 2018.  NRG Yield is a dividend growth-oriented company formed by NRG that owns, operates and acquires a diversified portfolio of contracted renewable and conventional generation and thermal infrastructure assets in the United States.  Revenues from NRG and NRG Yield for the three months ended January 31, 2018 and 2017 represent 0.0% and 0.4%, respectively, of consolidated revenues.

 

6


FUELCELL ENERGY, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(Tabular amounts in thousands, except share and per share amounts)

 

Note 2.  Recent Accounting Pronouncements

Recent Accounting Guidance Not Yet Effective

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This topic provides for five principles which should be followed to determine the appropriate amount and timing of revenue recognition for the transfer of goods and services to customers. The principles in this ASU should be applied to all contracts with customers regardless of industry. The amendments in this ASU are effective for fiscal years, and interim periods within those years beginning after December 15, 2016, with two transition methods of adoption allowed. Early adoption for reporting periods prior to December 15, 2016 is not permitted. In March 2015, the FASB voted to defer the effective date by one year to fiscal years, and interim periods within those fiscal years beginning after December 15, 2017 (first quarter of fiscal year 2019 for the Company), but allow adoption as of the original adoption date.  The Company has numerous different revenue sources including the sale and installation of fuel cell power plants, site engineering and construction services, sale of modules and spare parts, extended warranty service agreements, sale of electricity under power purchase agreements, license fees and royalty income from manufacturing and technology transfer agreements and customer-sponsored Advanced Technologies projects.  This requires application of various revenue recognition methods under current accounting guidance.  Although we anticipate that, upon adoption of this new ASU the timing of revenue recognition for certain of our revenue sources might change, we are still evaluating the financial statement impacts of the guidance in this ASU and determining which transition method we will utilize. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606).”  This topic provides narrow-scope improvements and practical expedients regarding collectability, presentation of sales tax collected from customers, non-cash consideration, contract modifications at transition, completed contracts at transition and other technical corrections.  We have initiated a review of the contracts for our significant revenue streams to understand the impact of the adoption of this ASU.

In February 2016, the FASB issued ASU 2016-02, “Leases” which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. This ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (first quarter of fiscal year 2020 for the Company). Early adoption is permitted. The Company has both operating and capital leases (refer to Note 16. Commitments and Contingencies) as well as sale-leasebacks accounted for under the finance method and may have other arrangements that contain embedded leases as characterized in this ASU.  We expect that adoption of this ASU will result in the recognition of right-of-use assets and lease liabilities not currently recorded in our consolidated financial statements under existing accounting guidance. However, we are still evaluating all of the Company’s contractual arrangements and the impact that adoption of ASU 2016-02 will have on the Company’s consolidated financial statements.

Note 3.  Accounts Receivable, Net

Accounts receivable as of January 31, 2018 and October 31, 2017 consisted of the following:

 

 

 

January 31,

 

 

October 31,

 

 

 

2018

 

 

2017

 

Commercial Revenue:

 

 

 

 

 

 

 

 

Amount billed

 

$

16,153

 

 

$

41,073

 

Unbilled recoverable costs (1)

 

 

22,153

 

 

 

18,162

 

 

 

 

38,306

 

 

 

59,235

 

Advanced Technologies (including U.S. government(2)):

 

 

 

 

 

 

 

 

Amount billed

 

 

574

 

 

 

1,934

 

Unbilled recoverable costs

 

 

5,201

 

 

 

7,352

 

 

 

 

5,775

 

 

 

9,286

 

Accounts receivable, net

 

$

44,081

 

 

$

68,521

 

 

(1)

Additional long-term unbilled recoverable costs of $10.6 million and $12.8 million are included within “Other assets” as of January 31, 2018 and October 31, 2017, respectively. 

(2)

Total U.S. government accounts receivable outstanding as of January 31, 2018 and October 31, 2017 were $3.3 million and $3.2 million, respectively.

7


FUELCELL ENERGY, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(Tabular amounts in thousands, except share and per share amounts)

 

We bill customers for power plant and power plant component sales based on certain contractual milestones being reached.  We bill service agreements based on the contract price and billing terms of the contracts. Generally, our Advanced Technologies contracts are billed based on actual recoverable costs incurred, typically in the month subsequent to incurring costs.  Some Advanced Technologies contracts are billed based on contractual milestones or costs incurred.  Unbilled recoverable costs relate to revenue recognized on customer contracts that have not been billed.  Accounts receivable are presented net of an allowance for doubtful accounts of $0.1 million as of January 31, 2018 and October 31, 2017.  Uncollectible accounts receivable are charged against the allowance for doubtful accounts when all collection efforts have failed and it is deemed unlikely that the amount will be recovered.

Accounts receivable from commercial customers (including unbilled recoverable costs) included amounts due from POSCO Energy of $12.9 million and $6.2 million as of January 31, 2018 and October 31, 2017, respectively and amounts due from NRG and NRG Yield of $0.0 million and $0.1 million as of January 31, 2018 and October 31, 2017, respectively. 

Note 4.  Inventories

Inventories as of January 31, 2018 and October 31, 2017 consisted of the following:

 

 

 

January 31,

 

 

October 31,

 

 

 

2018

 

 

2017

 

Raw materials

 

$

23,616

 

 

$

20,065

 

Work-in-process (1)

 

 

36,252

 

 

 

54,431

 

Inventories

 

$

59,868

 

 

$

74,496

 

 

(1)

Work-in-process includes the standard components of inventory used to build the typical modules or module components that are intended to be used in future power plant orders or to service our service agreements.  Included in work-in-process as of January 31, 2018 and October 31, 2017 was $29.9 million and $46.3 million, respectively, of completed standard components.

Raw materials consist mainly of various nickel powders and steels, various other components used in producing cell stacks and purchased components for balance of plant.  Work-in-process inventory is comprised of material, labor, and overhead costs incurred to build balance of plant components, fuel cell stacks and modules, which are subcomponents of a power plant.

Note 5.  Project Assets

Project assets as of January 31, 2018 and October 31, 2017 were $75.8 million and $73.0 million, respectively.  Project assets as of January 31, 2018 and October 31, 2017 included five completed, commissioned installations generating power with respect to which we have a power purchase agreement (“PPA”) with the end-user of power and site host with an aggregate value of $33.1 million and $32.1 million as of January 31, 2018 and October 31, 2017, respectively.  Certain of these assets are the subject of sale-leaseback arrangements with PNC Energy Capital, LLC (“PNC”), which are recorded under the financing method of accounting for a sale-leaseback.  Under the financing method, the Company does not recognize the proceeds received from the lessor as a sale of such assets.  

The Project assets balance as of January 31, 2018 and October 31, 2017 also includes assets with an aggregate value of $42.7 million and $40.9 million, respectively, which are being developed and constructed by the Company and have not been placed in service.

Project construction costs incurred for the long-term project assets are reported as investing activities in the Consolidated Statements of Cash Flows.  The proceeds received from the sale and subsequent leaseback of project assets are classified as “Cash flows from financing activities” within the Consolidated Statements of Cash Flows and are classified as a financing obligation within “Current portion of long-term debt” and “Long-term debt and other liabilities” on the Consolidated Balance Sheets (refer to Note 14 for more information).

8


FUELCELL ENERGY, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(Tabular amounts in thousands, except share and per share amounts)

 

Note 6.  Other Current Assets

Other current assets as of January 31, 2018 and October 31, 2017 consisted of the following:

 

 

January 31,

 

 

October 31,

 

 

2018

 

 

2017

 

Advance payments to vendors (1)

$

2,133

 

 

$

1,035

 

Deferred finance costs (2)

 

129

 

 

 

129

 

Prepaid expenses and other (3)

 

5,305

 

 

 

5,407

 

Other current assets

$

7,567

 

 

$

6,571

 

 

(1)

Advance payments to vendors relate to payments for inventory purchases ahead of receipt.

(2)

Represents the current portion of direct deferred finance costs that relate primarily to securing the $40.0 million loan facility with NRG which is being amortized over the five-year life of the facility.

(3)

Primarily relates to other prepaid vendor expenses including insurance, rent and lease payments.

Note 7.  Other Assets

Other assets as of January 31, 2018 and October 31, 2017 consisted of the following:

 

  

 

January 31,

 

 

October 31,

 

 

 

2018

 

 

2017

 

Long-term stack residual value (1)

 

$

1,096

 

 

$

987

 

Deferred finance costs (2)

 

 

64

 

 

 

97

 

Long-term unbilled recoverable costs (3)

 

 

10,623

 

 

 

12,806

 

Other (4)

 

 

2,630

 

 

 

2,627

 

Other assets

 

$

14,413

 

 

$

16,517

 

 

(1)

Relates to estimated residual value for module exchanges performed under the Company’s service agreements where the useful life extends beyond the contractual term of the service agreement and the Company obtains title to the module from the customer upon expiration or termination of the service agreement.  If the Company does not obtain rights to title from the customer, the full cost of the module is expensed at the time of the module exchange.

(2)

Represents the long-term portion of direct deferred finance costs relating to the Company’s loan facility with NRG which is being amortized over the five-year life of the facility.

(3)

Represents unbilled recoverable costs that relate to revenue recognized on customer contracts that will be billed in future periods in excess of twelve months from the balance sheet date.

(4)

The Company entered into an agreement with one of its customers on June 29, 2016 which includes a fee for the purchase of the plants at the end of the term of the agreement.  The fee is payable in installments over the term of the agreement and the total paid as of January 31, 2018 was $1.6 million.  Also included within other are long-term security deposits.

Note 8.  Accounts Payable

 

Accounts payable as of January 31, 2018 and October 31, 2017 was $37.8 million and $42.6 million, respectively.  Included in the balance were amounts due to POSCO Energy of $32.7 million as of January 31, 2018 and October 31, 2017, for the purchase of inventory.

9


FUELCELL ENERGY, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(Tabular amounts in thousands, except share and per share amounts)

 

Note 9.  Accrued Liabilities

Accrued liabilities as of January 31, 2018 and October 31, 2017 consisted of the following:

 

 

 

January 31,

 

 

October 31,

 

 

 

2018

 

 

2017

 

Accrued payroll and employee benefits

 

$

2,548

 

 

$

5,315

 

Accrued contract loss

 

 

19

 

 

 

37

 

Accrued product warranty cost (1)

 

 

446

 

 

 

348

 

Accrued material purchases (2)

 

 

1,312

 

 

 

2,396

 

Accrued service agreement costs (3)

 

 

3,777

 

 

 

3,319

 

Contractual milestone billings for inventory (4)

 

 

10,855

 

 

 

4,440

 

Accrued legal, taxes, professional and other

 

 

2,556

 

 

 

2,526

 

Accrued liabilities

 

$

21,513

 

 

$

18,381

 

 

(1)

Activity in the accrued product warranty costs for the three months ended January 31, 2018 included additions for estimates of future warranty obligations of $0.3 million on contracts in the warranty period and reductions related to actual warranty spend of $0.2 million as contracts progress through the warranty period or are beyond the warranty period.

(2)

The Company acts as a procurement agent for POSCO Energy under an Integrated Global Supply Chain Agreement whereby the Company procures materials on POSCO Energy’s behalf for its Korean production facility.  This liability represents amounts received for the purchase of materials on behalf of POSCO Energy.  Amounts due to vendors is recorded as “Accounts payable.”

(3)

Activity in service agreement costs remains unchanged for loss accruals on service contracts which was $1.1 million as of October 31, 2017 and January 31, 2018.  The accruals for performance guarantees increased from $2.2 million as of October 31, 2017 to $2.6 million as of January 31, 2018 resulting from additional accruals for the minimum output falling below the contract requirements for certain service agreements.

(4)

Amounts represent contractual milestone billings for inventory that will be provided to POSCO Energy within the next twelve months under a transaction that will not result in revenue recognition.  An additional $3.9 million as of January 31, 2018 will be billed and collected under this arrangement.

Note 10.  Stockholders’ Equity

Changes in stockholders’ equity

Changes in stockholders’ equity were as follows for the three months ended January 31, 2018:

 

 

 

Total

Stockholders’

Equity

 

Balance as of October 31, 2017

 

$

101,256

 

Share-based compensation

 

 

617

 

Warrant exercises

 

 

2,647

 

Taxes paid upon vesting of restricted stock awards, net of stock issued under benefit plans

 

 

(75

)

Preferred dividends – Series B

 

 

(800

)

Series C convertible preferred stock conversions

 

 

7,569

 

Other comprehensive income -  foreign currency translation adjustments

 

 

33

 

Net loss

 

 

(4,183

)

Balance as of January 31, 2018

 

$

107,064

 

 

10


FUELCELL ENERGY, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(Tabular amounts in thousands, except share and per share amounts)

 

Authorized Common Stock

On December 14, 2017, the number of authorized shares of the Company’s common stock was increased from 125,000,000 to 225,000,000, by a vote of the holders of a majority of the outstanding shares of the Company’s common stock.

NASDAQ Marketplace Rule 5635(d)

On December 14, 2017, in accordance with NASDAQ Marketplace Rule 5635(d), the Company’s common stockholders approved the issuance of shares of the Company’s common stock exceeding 19.9% of the number of shares outstanding on September 5, 2017, upon the conversion and/or redemption of the Series C Convertible Preferred Stock issued in an underwritten offering in September 2017.

Public Offerings and Outstanding Warrants

On May 3, 2017, the Company completed an underwritten public offering of (i) 12,000,000 shares of its common stock, (ii) Series C warrants to purchase 12,000,000 shares of its common stock and (iii) Series D warrants to purchase 12,000,000 shares of its common stock.  The Series C warrants have an exercise price of $1.60 per share and a term of five years.  A total of 7,536 shares of common stock were issued during the first quarter of fiscal year 2018 upon exercise of Series C warrants and the Company received total proceeds of $0.01 million in connection with such exercises.  The Series D warrants have an exercise price of $1.28 per share and a term of one year.  A total of 2,058,866 shares of common stock were issued during the first quarter of fiscal year 2018 upon the exercise of Series D warrants and the Company received total proceeds of $2.6 million in connection with such exercises.

On July 12, 2016, the Company closed on a registered public offering of securities to a single institutional investor pursuant to a placement agent agreement with J.P. Morgan Securities LLC.  In conjunction with the offering, the Company issued 7,680,000 Series A Warrants, all of which remained outstanding as of January 31, 2018, at an exercise price of $5.83 per share.

The following table summarizes outstanding warrant activity during the three months ended January 31, 2018:

 

 

 

Series A

Warrants

 

 

Series C

Warrants

 

 

Series D

Warrants

 

Balance as of October 31, 2017

 

 

7,680,000

 

 

 

11,580,900

 

 

 

2,584,174

 

Warrants exercised

 

 

 

 

 

(7,536

)

 

 

(2,058,866

)

Warrants expired

 

 

 

 

 

 

 

 

 

Balance as of January 31, 2018

 

 

7,680,000

 

 

 

11,573,364

 

 

 

525,308

 

 

Note 11.  Redeemable Preferred Stock

The Company is authorized to issue up to 250,000 shares of preferred stock, par value $0.01 per share, issuable in one or more series, of which shares to date have been issued and designated as Series C Convertible Preferred Stock and 5% Series B Cumulative Convertible Perpetual Preferred Stock.

Series C Preferred Stock

The Company issued an aggregate of 33,500 shares of its Series C Convertible Preferred Stock (“Series C Preferred Stock” and such shares, the “Series C Preferred Shares”), $0.01 par value and $1,000 stated value per share, during the fiscal year ended October 31, 2017.  As of January 31, 2018 and October 31, 2017, there were 24,201 and 33,300 shares of Series C Preferred Stock issued and outstanding with a carrying value of $20.1 million and $27.7 million, respectively.

During the quarter ended January 31, 2018, 9,099 shares of the Series C Preferred Stock were converted to common shares as a result of installment conversions resulting in a reduction of $7.6 million to the carrying value being recorded to equity.  Installment conversions where the conversion price is below the fixed conversion price of $1.84 per share result in a variable number of shares being issued to settle the installment amount and are treated as a partial redemption of the Series C Preferred Shares.  Installment conversions during the three months ended January 31, 2018 that were settled in a variable number of shares and treated as redemptions resulted in deemed dividends of $3.5 million.  The deemed dividend represents the difference between the fair value of the common shares issued to settle the installment amounts and the carrying value of the Series C Preferred Shares.

11


FUELCELL ENERGY, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(Tabular amounts in thousands, except share and per share amounts)

 

Based on review of pertinent accounting literature including Accounting Standards Codification (“ASC”) 470 Debt, ASC 480 - Distinguishing Liabilities from Equity and ASC 815 - Derivative and Hedging, the Series C Preferred Shares are classified outside of permanent equity on the Consolidated Balance Sheets and were recorded at fair value on the issuance date (proceeds from the issuance, net of direct issuance cost).  An assessment of the probability of the exercise of the potential redemption features in the Certificate of Designations (as defined below) for the Series C Preferred Stock is performed at each reporting date to determine whether any changes in classification are required.  As of October 31, 2017 and January 31, 2018, the Company determined that none of the contingent redemption features were probable.  As Series C Preferred Shares are converted to common shares, a proportional reduction in the carrying value will be recorded to equity.  

A summary of certain terms of the Series C Preferred Stock are described as follows:

Conversion Rights. The Series C Preferred Shares are convertible into shares of common stock subject to the beneficial ownership limitations provided in the Certificate of Designations for Series C Preferred Stock (the “Certificate of Designations”), at a conversion price equal to $1.84 per share of common stock (“Conversion Price”), subject to adjustment as provided in the Certificate of Designations, at any time at the option of the holder.  In the event of a triggering event, as defined in the Certificate of Designations, the Series C Preferred Shares are convertible into shares of common stock at a conversion price of the lower of $1.84 per share and 85% of the lowest volume weighted average price (“VWAP”) of the common stock of the five trading days immediately prior to delivery of the applicable conversion notice.  The holders will be prohibited from converting Series C Preferred Shares into shares of common stock if, as a result of such conversion, such holder, together with its affiliates, would own more than 8.99% of the total number of shares of common stock then issued and outstanding. Each holder has the right to increase its maximum percentage up to 9.99% upon 60 days’ notice to the Company.

Installment Payments. On November 1, 2017 and on the sixteenth day and first day of each calendar month thereafter until March 1, 2019, subject to extension in certain circumstances (the “Maturity Date”), inclusive, the Company will redeem the stated value of Series C Preferred Shares in thirty-three equal installments of $1.0 million (each bimonthly amount, an “Installment Amount” and the date of each such payment, an “Installment Date”). The holders will have the ability to defer installment payments, but not beyond the Maturity Date. In addition, during each period commencing on the 11th trading day prior to an Installment Date and prior to the immediately subsequent Installment Date, the holders may elect to accelerate the conversion of Series C Preferred Shares at the then applicable installment conversion price, provided that the holders may not elect to effect any such acceleration during such installment period if either (x) in the aggregate, all the accelerations in such installment period exceed the sum of three other Installment Amounts, or (y) the number of Series C Preferred Shares subject to prior accelerations exceeds in the aggregate twelve Installment Amounts.

Subject to certain conditions as provided in the Certificate of Designations, the Company may elect to pay the Installment Amounts in cash or shares of common stock or in a combination of cash and shares of common stock.

Installment Amounts paid in shares will be that number of shares of common stock equal to (a) the applicable Installment Amount, to be paid in common stock divided by (b) the least of (i) the then existing conversion price, (ii) 87.5% of the VWAP of the common stock on the trading day immediately prior to the applicable Installment Date, and (iii) 87.5% of the arithmetic average of the two lowest VWAPs of the common stock during the ten consecutive trading day period ending and including the trading day immediately prior to the applicable Installment Date as applicable, provided that the Company meets standard equity conditions. The Company shall make such election no later than the eleventh trading day immediately prior to the applicable Installment Date.

If the Company elects or is required to effect an Installment Amount in whole or in part in cash, the amount paid will be equal to 108% of the applicable Installment Amount.

Dividends. Each holder of the Series C Preferred Shares shall be entitled to receive dividends (i) if no triggering event, as defined in the Certificate of Designations, has occurred and is continuing when and as declared by the Board of Directors, in its sole and absolute discretion or (ii) if a triggering event has occurred and until such triggering event has been cured, a dividend of 15% per annum based on the holder’s outstanding number of Series C Preferred Shares multiplied by the stated value.  There were no triggering events or dividends declared in fiscal year 2017 or during the three months ended January 31, 2018.

Redemption. In the event of a triggering event, as defined in the Certificate of Designations, the holders of the Series C Preferred Shares can force redemption at a price equal to the greater of (i) the conversion amount to be redeemed multiplied by 125% and (ii) the product of (a) the conversion rate with respect to the conversion amount in effect at such time as such holder delivers a triggering event redemption notice multiplied by (b) the greatest closing sale price of the common stock on any trading day during the period

12


FUELCELL ENERGY, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(Tabular amounts in thousands, except share and per share amounts)

 

commencing on the date immediately preceding such triggering event and ending on the date the Company makes the entire payment required.

Liquidation. In the event of the Company’s liquidation, dissolution, or winding up, prior to distribution to holders of securities ranking junior to the Series C Preferred Shares, holders of Series C Preferred Shares will be entitled to receive the amount of cash, securities or other property equal to the greater of (i) the stated value thereof on the date of such payment plus accrued dividends, if any and (ii) the amount per share such holder would receive if such holder converted such Series C Preferred Shares into common stock immediately prior to the date of such payment.

Ranking and Voting Rights. Shares of Series C Preferred Stock rank with respect to dividend rights and rights upon the Company’s liquidation, winding up or dissolution:

 

senior to shares of our common stock;

 

junior to our debt obligations;

 

junior to our outstanding Series B Preferred Stock; and

 

effectively junior to our subsidiaries’ (i) existing and future liabilities and (ii) capital stock held by others.

The holders of the Series C Preferred Shares have no voting rights, except as required by law. Any amendment to the Company’s certificate of incorporation or bylaws or the Certificate of Designations that adversely affects the powers, preferences and rights of the Series C Preferred Shares requires the approval of the holders of a majority of the Series C Preferred Shares then outstanding.

Redeemable Series B Preferred Stock

We have 105,875 shares of our 5% Series B Cumulative Convertible Perpetual Preferred Stock (Liquidation Preference $1,000.00 per share) (“Series B Preferred Stock”) authorized for issuance. As of January 31, 2018 and October 31, 2017, there were 64,020 shares of Series B Preferred Stock issued and outstanding, with a carrying value of $59.9 million.  Dividends of $0.8 million were paid in cash for each of the three month periods ending January 31, 2018 and January 31, 2017, respectively.

Class A Cumulative Redeemable Exchangeable Preferred Shares (the “Series 1 Preferred Shares”)

FCE FuelCell Energy Ltd. (“FCE Ltd”), the Company's wholly owned subsidiary, has 1,000,000 Class A Cumulative Redeemable Exchangeable Preferred Shares (the “Series 1 Preferred Shares”) outstanding, which are held by Enbridge, Inc. ("Enbridge"), which is a related party.  The Company made its scheduled payments of Cdn. $0.3 million during each of the three month periods ending January 31, 2018 and 2017 under the terms of the Company’s agreement with Enbridge.  The Company also recorded interest expense, which reflects the amortization of the fair value discount of approximately Cdn. $0.7 million and Cdn. $0.5 million for the three months ended January 31, 2018 and 2017, respectively.  As of January 31, 2018 and October 31, 2017, the carrying value of the Series 1 Preferred Shares was Cdn. $19.7 million ($15.9 million) and Cdn. $19.4 million ($15.1 million), respectively, and is classified as preferred stock obligation of subsidiary on the Consolidated Balance Sheets.

13


FUELCELL ENERGY, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(Tabular amounts in thousands, except share and per share amounts)

 

Note 12.  Loss Per Share

The calculation of basic and diluted loss per share was as follows:

 

 

 

Three Months Ended January 31,

 

 

 

2018

 

 

2017

 

Numerator

 

 

 

 

 

 

 

 

Net loss

 

$

(4,183

)

 

$

(13,685

)

Series C preferred stock deemed dividends

 

 

(3,463

)

 

 

-

 

Series B preferred stock dividends

 

 

(800

)

 

 

(800

)

Net loss attributable to common stockholders

 

$

(8,446

)

 

$

(14,485

)

Denominator

 

 

 

 

 

 

 

 

Weighted average basic common shares

 

 

72,024,811

 

 

 

37,613,216

 

Effect of dilutive securities (1)

 

 

 

 

 

 

Weighted average diluted common shares

 

 

72,024,811

 

 

 

37,613,216

 

Basic loss per share

 

$

(0.12

)

 

$

(0.39

)

Diluted loss per share (1)

 

$

(0.12

)

 

$

(0.39

)

 

(1)

Due to the net loss to common stockholders in each of the periods presented above, diluted loss per share was computed without consideration to potentially dilutive instruments as their inclusion would have been antidilutive.  As of January 31, 2018 and 2017, potentially dilutive securities excluded from the diluted loss per share calculation are as follows:

 

 

 

January 31,

 

 

January 31,

 

 

 

2018

 

 

2017

 

May 2017 Offering - Series C Warrants

 

 

11,573,364

 

 

 

 

May 2017 Offering - Series D Warrants

 

 

525,308

 

 

 

 

July 2016 Offering - Series A Warrants

 

 

7,680,000

 

 

 

7,680,000

 

July 2014 Offering - NRG Warrant

 

 

 

 

 

166,666

 

Outstanding options to purchase common stock

 

 

281,175

 

 

 

245,820

 

Unvested Restricted Stock Awards

 

 

1,789,581

 

 

 

904,041

 

Series C Preferred Shares to satisfy conversion requirements (1)

 

 

13,512,717

 

 

 

 

5% Series B Cumulative Convertible Preferred Stock

 

 

454,043

 

 

 

454,043

 

Series 1 Preferred Shares to satisfy conversion requirements

 

 

15,166

 

 

 

15,166

 

Total potentially dilutive securities

 

 

35,831,354

 

 

 

9,465,736

 

 

(1)

The number of shares of common stock issuable upon conversion of the Series C Preferred Stock was calculated using the stated value outstanding on January 31, 2018 of $24.2 million (original stated value of $33.5 million less the stated value of conversions to date through January 31, 2018 totaling $9.3 million) divided by the conversion price of $1.84.  The actual number of shares issued could vary depending on the actual market price of the Company’s common shares on the date of such conversions.

Note 13.  Restricted Cash

As of January 31, 2018, there was $38.7 million of restricted cash and cash equivalents pledged as collateral for letters of credit for certain banking requirements and contractual commitments, compared to $38.2 million of restricted cash and cash equivalents pledged as of October 31, 2017. The restricted cash balance for both periods presented includes $15.0 million which has been placed in a Grantor’s Trust account to secure certain obligations under a 15-year service agreement and has been classified as long-term.  The restricted cash balance as of January 31, 2018 also includes $17.5 million to support obligations related to PNC sale-leaseback transactions.  As of January 31, 2018 and October 31, 2017, outstanding letters of credit totaled $3.2 million and $2.9 million, respectively.  These expire on various dates through April 2019.

14


FUELCELL ENERGY, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(Tabular amounts in thousands, except share and per share amounts)

 

Note 14.  Debt and Financing Obligation

Debt as of January 31, 2018 and October 31, 2017, consisted of the following:

 

 

 

January 31,

 

 

October 31,

 

 

 

2018

 

 

2017

 

Connecticut Development Authority Note

 

$

2,287

 

 

$

2,349

 

Connecticut Green Bank Note

 

 

6,052

 

 

 

6,052

 

Financing obligation for sale-leaseback transactions

 

 

46,550

 

 

 

46,937

 

State of Connecticut Loan

 

 

10,000

 

 

 

10,000

 

Hercules Loan and Security Agreement

 

 

16,764

 

 

 

21,468

 

New Britain Renewable Energy Term Loan

 

 

1,550

 

 

 

1,697

 

Equipment financing and capital lease obligations

 

 

594

 

 

 

632

 

Deferred finance costs

 

 

(1,272

)

 

 

(1,344

)

Total debt

 

$

82,525

 

 

$

87,791

 

Current portion of long-term debt and financing obligation

 

 

(23,513

)

 

 

(28,281

)

Long-term debt

 

$

59,012

 

 

$

59,510

 

 

The Company has a loan agreement with the Connecticut Development Authority that was used to finance equipment purchases associated with our prior manufacturing capacity expansion. The interest rate is 5.0 percent and the loan is collateralized by the assets procured under this loan as well as $4.0 million of additional machinery and equipment. Repayment terms require monthly interest and principal payments through May 2018.

The Company has a long-term loan agreement with the Clean Energy Finance and Investment Authority, now known as the Connecticut Green Bank, totaling $5.9 million in support of the Bridgeport Fuel Cell Park project. The loan agreement carries an interest rate of 5.0 percent.  Interest only payments commenced in January 2014 and principal payments will commence on the eighth anniversary of the project’s provisional acceptance date, which is December 20, 2021, payable in forty-eight equal monthly installments.  Outstanding amounts are secured by future cash flows from the Bridgeport Fuel Cell Park service agreement.

In 2015, the Company entered into the first of a series of agreements with PNC, whereby the Company’s project finance subsidiaries entered into sale-leaseback agreements for commissioned projects where we had entered into a PPA with the site host/end-user of produced power.  Under the financing method of accounting for a sale-leaseback, the Company does not recognize as income any of the sale proceeds received from the lessor that contractually constitute payment to acquire the assets subject to these arrangements. Instead, the sale proceeds received are accounted for as financing obligations.  The outstanding financing obligation balance as of January 31, 2018 was $46.6 million and the decrease from October 31, 2017 includes lease payments offset by the recognition of interest expense. The sale-leaseback transactions include a fair value purchase option at the end of the lease term.

In November 2015, the Company closed on a definitive Assistance Agreement with the State of Connecticut and received a disbursement of $10.0 million for the first phase of an expansion project to expand the existing 65,000 square foot manufacturing facility in Torrington, Connecticut by approximately 102,000 square feet for a total size of 167,000 square feet. In conjunction with this financing, the Company entered into a $10.0 million Promissory Note and related security agreement securing the loan with equipment liens and a mortgage on its Danbury, Connecticut location.  Pursuant to the terms of the loan, principal payments were deferred for the first four years and will begin in November 2019. Monthly interest payments at a fixed rate of 2.0 percent began in December 2015.  The financing is payable over 15 years, and is predicated on certain terms and conditions, including the forgiveness of up to half of the loan principal if certain job retention and job creation targets are reached.  On April 17, 2017, the Company entered into an amendment to the Assistance Agreement extending certain job creation target dates until October 28, 2019.

In April 2016, the Company entered into a loan and security agreement (the “Hercules Agreement”) with Hercules Capital, Inc. (“Hercules”) subject to certain terms and conditions of which the Company drew down $20.0 million during fiscal year 2016.  The loan is a 30 month secured facility and the term loan interest rate was 9.75 percent as of October 31, 2017 and increased to 10.0 percent as of January 31, 2018 resulting from the increase in the prime rate.  Interest is paid on a monthly basis.  In addition to interest, principal payments commenced on November 1, 2017 in equal monthly installments.  The loan balance and all accrued and unpaid interest is due and payable by October 1, 2018.  Per the terms of the Hercules Agreement, there is an end of term charge of $1.7 million also due on October 31, 2018, which is being accreted over the 30 month term using the effective interest rate method.

15


FUELCELL ENERGY, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(Tabular amounts in thousands, except share and per share amounts)

 

As collateral for obligations under the Hercules Agreement, the Company granted Hercules a security interest in FuelCell Energy, Inc.’s existing and thereafter-acquired assets except for intellectual property and certain other excluded assets. Collateral does not include assets held by FuelCell Energy Finance, LLC (“FuelCell Finance”) or any project subsidiary thereof. The Company may continue to collateralize and finance its project subsidiaries through other lenders and partners.  Under the Hercules Agreement, as amended, there is a minimum cash covenant which requires the Company to maintain an unrestricted cash balance in accounts subject to an account control agreement in favor of Hercules of at least the greater of (x) (a) 75% of the outstanding loan balance plus (b) the amount of accounts payable (as defined under GAAP) not paid within 90 days of the invoice date and (y) $10.0 million.

In November 2016, we assumed debt with Webster Bank in the amount of $2.3 million as a part of an asset acquisition transaction.  The term loan interest rate is 5.0 percent and payments, which commenced in January 2017, are due on a quarterly basis.  The balance outstanding as of January 31, 2018 was $1.6 million.

The Company leases computer equipment under master lease agreements. Lease payment terms are generally thirty-six months from the date of acceptance for leased equipment.

Deferred finance costs relate primarily to sale-leaseback transactions entered into with PNC which are being amortized over the ten-year term and direct deferred finance costs relating to the Hercules Agreement which is being amortized over the 30 month life of the loan.

In July 2014, the Company, through its wholly-owned subsidiary, FuelCell Finance, entered into a Loan Agreement (the “Loan Agreement”) with NRG.  Pursuant to the Loan Agreement, NRG has extended a $40.0 million revolving construction and term financing facility for the purpose of accelerating project development by the Company and its subsidiaries.  We may draw on the facility to finance the construction of projects through the commercial operating date of the power plants so financed.  The interest rate is 8.5 percent per annum for construction-period financing and 8.0 percent thereafter.  Fees that were paid by FuelCell Finance to NRG for making the loan facility available and related legal fees incurred were capitalized and are being amortized straight-line over the life of the related loan agreement, which is five years. The term of the loans are up to five years but may be repaid early should the projects be sold or refinanced at the option of the Company.  There were no drawdowns or outstanding balances on the Loan Agreement as of January 31, 2018 and October 31, 2017, respectively.

Note 15.  Income Taxes

The Company recorded an income tax benefit totaling $3.0 million for the three months ended January 31, 2018 compared to income tax expense of $0.1 million for the three months ended January 31, 2017.  The income tax benefit for the three months ended January 31, 2018 related to the Tax Cuts and Jobs Act (the “Act”) that was enacted on December 22, 2017. The Act reduced the U.S. federal tax rate from 34% to 21% effective January 1, 2018 which resulted in a deferred tax benefit of $1.0 million related to a reduction of the Company’s deferred tax liability for in process research and development (“IPR&D”).  The Act also established an unlimited carryforward period for the net operating loss (“NOL”) the Company anticipates generating in fiscal year 2018.  This provision of the Act resulted in a reduction of the valuation allowance attributable to deferred tax assets at the enactment date by $2.0 million based on the indefinite life of the resulting NOL as well as the deferred tax liability for IPR&D.

Note 16.  Commitments and Contingencies

Lease Agreements

As of January 31, 2018 and October 31, 2017, the Company had equipment financing and capital lease obligations of $0.6 million.  Payment terms are generally thirty-six months from the date of acceptance for leased equipment.

The Company also leases certain computer and office equipment and manufacturing facilities in Torrington and Danbury, Connecticut under operating leases expiring on various dates through 2030.

16


FUELCELL ENERGY, INC.

Notes to Consolidated Financial Statements

(Unaudited)

(Tabular amounts in thousands, except share and per share amounts)

 

Non-cancelable minimum payments applicable to operating and capital leases as of January 31, 2018 were as follows:

 

 

 

Operating

Leases

 

 

Capital

Leases

 

Due Year 1

 

$

764

 

 

$

344

 

Due Year 2

 

 

561

 

 

 

182

 

Due Year 3

 

 

353

 

 

 

60

 

Due Year 4

 

 

373

 

 

 

5

 

Due Year 5

 

 

376

 

 

 

3

 

Thereafter

 

 

3,269

 

 

 

 

Total

 

$

5,696

 

 

$

594

 

 

Service Agreements

Under the provisions of our service agreements, we provide services to maintain, monitor, and repair customer power plants to meet minimum operating levels. Under the terms of our service agreements, the particular power plant must meet a minimum operating output during defined periods of the term. If minimum output falls below the contract requirement, we may be subject to performance penalties and/or may be required to repair or replace the customer’s fuel cell module(s). An estimate is not recorded for a potential performance guarantee liability until a performance issue has occurred at a particular power plant. At that point, the actual power plant’s output is compared against the minimum output guarantee and an accrual is recorded. The review of power plant performance is updated for each reporting period to incorporate the most recent performance of the power plant and minimum output guarantee payments made to customers, if any. The Company has provided for an accrual for performance guarantees, based on actual fleet performance, which totaled $2.6 million and $2.2 million as of January 31, 2018 and October 31, 2017, respectively, and is recorded in “Accrued liabilities.”

Our loss accrual on service agreements totaled $1.1 million as of January 31, 2018 and October 31, 2017 and is recorded in “Accrued liabilities.” Our accrual estimates are performed on a contract by contract basis and include cost assumptions based on what we anticipate the service requirements will be to fulfill obligations under each contract.

Power Purchase Agreements

Under the terms of our PPAs, customers agree to purchase power from our fuel cell power plants at negotiated rates. Electricity rates are generally a function of the customers’ current and future electricity pricing available from the grid. As owner or lessee 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, generally natural gas or biogas, to run the power plants.  

Other

As of January 31, 2018, the Company had unconditional purchase commitments aggregating $48.9 million, for materials, supplies and services in the normal course of business.

Under certain sales and financing agreements, the Company is contractually committed to provide compensation for any losses that our customers and finance partners may suffer in certain limited circumstances resulting from reductions in realization of the U.S. Investment Tax Credit. Such obligations would arise as a result of reductions to the value of the underlying fuel cell projects as assessed by the U.S. Internal Revenue Service (the “IRS”). The Company does not believe that any payments under these contracts are probable based on the facts known at the reporting date. The maximum potential future payments that the Company could have to make with respect to these obligations would depend on the difference between the fair values of the fuel cell projects sold or financed and the values the IRS would determine as the fair value for the systems for purposes of claiming the Investment Tax Credit. The value of the Investment Tax Credit in the Company’s agreements is based on guidelines provided by the regulations from the IRS. The Company and its customers use fair values determined with the assistance of independent third-party appraisals.

We are involved in legal proceedings, claims and litigation arising out of the ordinary conduct of our business. Although we cannot assure the outcome, management presently believes that the result of such legal proceedings, either individually, or in the aggregate, will not have a material adverse effect on our consolidated financial statements, and no material amounts have been accrued in our consolidated financial statements with respect to these matters.

 

 

17


 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (including exhibits and any information incorporated by reference herein) contains both historical and forward-looking statements that involve risks, uncertainties and assumptions. The statements contained in this report that are not purely historical are forward-looking statements that are subject to the safe harbors created under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions and strategies for the future.  When used in this report, the words “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “believes,” “predicts,” “should,” “will”, “could”, “would”, “may”, “forecast”, and similar expressions and variations of such words are intended to identify forward-looking statements.  Such statements relate to, among other things, the following: (i) the development and commercialization by FuelCell Energy, Inc. and its subsidiaries (“FuelCell Energy”, “Company”, “we”, “us”, and “our”) of fuel cell technology and products and the market for such products; (ii) expected operating results such as revenue growth and earnings; (iii) our belief that we have sufficient liquidity to fund our business operations for the next 12 months; (iv) future funding under Advanced Technologies contracts; (v) future financing for projects including publicly issued bonds, equity and debt investments by investors and commercial bank financing; (vi) the expected cost competitiveness of our technology; and (vii) our ability to achieve our sales plans and cost reduction targets.

The 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 the risks contained in our Annual Report on Form 10-K for the fiscal year ended October 31, 2017 in the section entitled “Item 1A. Risk Factors,” and the following:  general risks associated with product development and manufacturing; general economic conditions; changes in the utility regulatory environment; changes in the utility industry and the markets for distributed generation, distributed hydrogen, and carbon capture configured fuel cell power plants for coal and gas-fired central generation; potential volatility of energy prices; availability of government subsidies and economic incentives for alternative energy technologies; rapid technological change; competition; market acceptance of our products; changes in accounting policies or practices adopted voluntarily or as required by accounting principles generally accepted in the United States; factors affecting our liquidity position and financial condition; government appropriations; the ability of the government to terminate its development contracts at any time; the ability of the government to exercise “march-in” rights with respect to certain of our patents; our changing relationship with POSCO Energy, which may affect our ability to develop the market in Asia and deploy SureSource power plants; our ability to implement our strategy; our ability to reduce our levelized cost of energy and cost reduction strategy generally; our ability to protect our intellectual property; the risk that commercialization of our products will not occur when anticipated; our ability to generate positive cash flow from operations; our ability to service our long-term debt; our ability to increase the output and longevity of our power plants; and our ability to expand our customer base and maintain relationships with our largest customers and strategic business allies.

We cannot assure you that we will be able to meet any of our development or commercialization schedules; any of our new products or technology, once developed, will be commercially successful; our existing SureSource power plants will remain commercially successful; the government will appropriate the funds anticipated by us under our government contracts; the government will not exercise its right to terminate any or all of our government contracts; or we will be able to achieve any other result anticipated in any other forward-looking statement contained herein.

Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond our ability to control, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors discussed herein.

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 preparation of financial statements and related disclosures requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Estimates are used in accounting for, among other things, revenue recognition, contract loss accruals, excess, slow-moving and obsolete inventories, product warranty accruals, loss accruals on service agreements, share-based compensation expense, allowance for doubtful accounts, depreciation and amortization, impairment of goodwill and in-process research and development intangible assets, impairment of long-lived assets (including project assets) and contingencies. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates. The following discussion should be read in conjunction with information included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2017 filed with the SEC. Unless otherwise indicated, the terms “Company”, “FuelCell Energy”, “we”, “us”, and “our” refer to FuelCell Energy, Inc. and its subsidiaries. All tabular dollar amounts are in thousands.  

18


 

OVERVIEW AND RECENT DEVELOPMENTS

Overview

FuelCell Energy delivers efficient, affordable and clean solutions for the supply, recovery and storage of energy.  We design, manufacture, undertake project development of, install, operate and maintain megawatt-scale fuel cell systems, serving utilities and industrial and large municipal power users with solutions that include both utility-scale and on-site power generation, carbon capture, local hydrogen production for transportation and industrial users, and long duration energy storage.  Our plants are operating in more than 50 locations on three continents and have generated more than 7.0 million megawatt hours (MWh) of electricity.

We provide comprehensive turn-key power generation solutions to our customers, including installation of the power plants as well as operating and maintaining the plants under multi-year service agreements. We target large-scale power users with our megawatt-class installations.  As a reference, one megawatt is adequate to continually power approximately 1,000 average sized U.S. homes.  Our customer base includes utility companies, municipalities, universities, government entities and businesses in a variety of industrial and commercial enterprises. Our leading geographic markets are South Korea and the United States, and we are pursuing expanding opportunities in other countries in Asia and Europe.

Our value proposition is to enable economic value with clean and affordable fuel cell power plants that supply power where consumed. Our solutions are easy-to-site in populated areas as they are clean, operate quietly and without vibrations, and have only modest space requirements.  Fuel cells use an electrochemical process to convert a fuel source into electricity and heat in a highly efficient process that emits virtually no pollutants as the fuel is not burned, generating power that is almost wholly absent of criteria pollutants such as nitrogen oxides that cause smog, sulfur oxides that contribute to acid rain, and particulate matter that can aggravate asthma.  Locating power generation near the point of use reduces reliance on the transmission grid, leading to enhanced energy security and power reliability.  Utilities can minimize or even avoid the cost of transmission or other infrastructure by adopting distributed generation, which saves their customers the cost of installing and maintaining transmission and also avoids the losses associated with transmitting electricity over great distances.  Our power plants provide electricity priced competitively to grid-delivered electricity in certain high cost regions and our strategy is to continue to reduce costs, which we believe will lead to wider adoption.

Our products can also be configured for recovery and storage applications.  We are developing Advanced Technologies which leverage our commercial platform and expertise. Our SureSource power plants utilize carbonate fuel cell technology, which is a very versatile type of fuel cell technology.  Utilizing our core SureSource plants, we have developed and are commercializing both a tri-generation distributed hydrogen configuration that generates electricity, heat and hydrogen for industrial or transportation uses, and a carbon capture application for coal or gas-fired power plants.  We also are developing and working to commercialize solid oxide fuel cells for adjacent sub-megawatt applications to the markets for our megawatt-class SureSource power plants as well as energy storage applications.  These applications are complementary to our core products, leverage our existing customer base, project development, sales and service expertise, and are large markets.

Recent Developments

Reinstatement of Investment Tax Credit.  The U.S. federal investment tax credit (the “ITC”) has been reinstated for fuel cells and other technologies pursuant to the Bipartisan Budget Act of 2018 which was signed into law on February 9, 2018. Fuel cells were excluded from the 2015 ITC extension in favor of wind and solar. The reinstatement of the ITC is expected to facilitate the Company’s U.S. market development activities while enhancing the economic and financing profile of FuelCell Energy’s projects. The ITC provides for a tax credit equal to 30 percent of qualified expenditures for fuel cell projects placed in service through 2019. The ITC is recognized as projects are placed into service. The ITC phases down to 26 percent for projects which commence construction in 2020 and to 22 percent for projects which commence construction in 2021. The in-service deadline for projects which commence construction in 2021 to be eligible for the ITC is January 1, 2024.

 

U.S. Market Development.  In February, the Company executed a 20-year PPA with Wm. Bolthouse Farms, Inc., a subsidiary of existing customer Campbell Soup Company, to install two SureSource 3000™ fuel cells that will generate 5 MW of power at its Bakersfield, California manufacturing site, which is home of Bolthouse Farms brand beverages, carrots and dressings.  The Company will provide a comprehensive turn-key project solution that includes engineering, procurement, construction, and maintenance services under the 20-year PPA.  The combined heat and power fuel cell system will provide reliable and low carbon electricity and steam that is expected to lead to a reduction in energy costs while enhancing power reliability from on-site power generation. Generating both power and thermal energy from the same unit of natural gas fuel reduces heating costs and the associated pollutants and carbon emissions from more traditional combustion-based boiler systems. Upon completion of this project, Campbell Soup Company subsidiaries will generate a total of 7.6 MW of energy using FuelCell power plants.

19


 

RESULTS OF OPERATIONS

Management evaluates the results of operations and cash flows using a variety of key performance indicators, including revenues compared to prior periods and internal forecasts, costs of our products and results of our cost reduction initiatives, and operating cash use. These are discussed throughout the “Results of Operations” and “Liquidity and Capital Resources” sections. Results of Operations are presented in accordance with accounting principles generally accepted in the United States (“GAAP”).

Comparison of Three Months Ended January 31, 2018 and 2017

Revenues and Costs of revenues

Our revenues and cost of revenues for the three months ended January 31, 2018 and 2017 were as follows:

 

 

 

Three Months Ended January 31,

 

 

Change

 

(dollars in thousands)

 

2018

 

 

2017

 

 

$

 

 

%

 

Total revenues

 

$

38,613

 

 

$

17,002

 

 

$

21,611

 

 

 

127

%

Total costs of revenues

 

$

33,978

 

 

$

15,189

 

 

$

18,789

 

 

 

124

%

Gross profit

 

$