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 the Company’s financial position and results of operations as of and for the three and six months ended April 30, 2019 and 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, 2018 has been derived from the audited financial statements at that date, but it does not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the Company’s financial statements and notes thereto for the fiscal year ended October 31, 2018, which are contained in the Company’s 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.
On May 8, 2019 at 5:00 p.m. Eastern time, the Company effected a 1-for-12 reverse stock split, reducing the number of the Company’s common shares outstanding on that date from 183,411,230 shares to 15,284,269 shares. The number of authorized shares of common stock remains unchanged at 225,000,000 shares and the number of authorized shares of preferred stock remains unchanged at 250,000 shares. Additionally, the conversion rate of our Series B Preferred Stock (as defined elsewhere herein), the conversion price of our Series C Preferred Stock and Series D Preferred Stock (each as defined elsewhere herein), the exchange price of our Series 1 Preferred Shares (as defined elsewhere herein), the exercise price of all outstanding options and warrants, and the number of shares reserved for future issuance pursuant to our equity compensation plans were all adjusted proportionately in connection with the reverse stock split. All share and per share amounts and conversion prices presented herein have been adjusted retroactively to reflect these changes.
Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. The Company adopted Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)" effective November 1, 2018 and applied the modified retrospective transition method. As a result of the adoption of this ASU, Unbilled receivables has been reclassified as a separate line item from Accounts receivable, net on the Consolidated Balance Sheets and Unbilled receivables has been classified as a separate item from Accounts receivable, net in the Consolidated Statement of Cash Flows for the prior year period.
Going Concern and Liquidity Considerations
The Company’s consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company has significant short-term debt and other obligations currently due or maturing in less than one year, which are in excess of the Company’s cash and current asset balance, and the Company has been delaying certain payments to conserve cash. The Company has entered into a series of amendments to its senior secured debt facility with its senior lender
Hercules Capital, Inc. (“Hercules”) in order to, among other things, provide for a lower minimum cash covenant and avoid events of default and acceleration of amounts due under the loan agreement. Most recently, Hercules provided an amendment through August 9, 2019. In exchange for this new amendment, the Company has agreed to pay down a portion of the outstanding principal amount in June 2019 as described below. The Company also has entered into amendments of its loan facility with NRG Energy Inc. (“NRG”) in order to extend the maturity date of the loan to July 12, 2019 as described below.
As of April 30, 2019, the Company had an accumulated deficit from recurring net losses for the current and prior years. These factors as
9
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
well as negative
cash flows from operating and investing activities
and negative working capital
raise substantial doubt about the Company’s ability to continue as a going concern.
Management has plans to address the Company’s current liquidity positon. These plans include exploring refinancing alternatives for the Company’s senior secured credit facility
with Hercules. However, the Company may not be able to obtain such refinancing on acceptable terms, or at all. If the Company is not able to consummate such a refinancing transaction by August 9, 2019, and if Hercules is not willing to provide further accommodations, the Company could default on its obligations under its senior secured credit facility with Hercules. The occurrence of an event of default under the Hercules Agreement also constitute or may result in an event of default under, and cause or may cause the acceleration of, a number of material financial obligations including the State of Connecticut loan, the Connecticut Green Bank Loan and the Generate Lending, PNC and Fifth Third project finance facilities.
The occurrence of an event of default under the Hercules Agreement also constitute a triggering event under the Series D Certificate of Designations.
The Company also has obtained an amendment of the loan agreement with NRG that has a maturity date of July 12, 2019. Management plans to continue to pursue project financing for the Company’s generation backlog. If the Company is unable to obtain such project financing, it may have events of default under its project finance agreements, which are further described in Note 15, “Debt and Financing Obligation.”
Other plans include implementing cost reduction measures such as the reduction in force implemented in April, increasing sales activity related to the Company’s products, and negotiating and entering into advanced technology research and development contracts. The Company may also consider licensing certain of its technology, sales of intellectual property and other assets, and/or sales of common stock directly to investors or through the Company’s at-the-market sales plan (which is subject to contractual requirements, trading windows and market conditions) to raise capital in the future. Subsequent to the end of the quarter ended April 30, 2019, the Company entered into a License Agreement (“EMRE License Agreement”) with ExxonMobil Research and Engineering Company (“EMRE”) for which the Company received a one-time payment of $10.0 million (of which $6.0 million was remitted to Hercules and applied as principal under the amendment referenced above).
Refer to Note 18, “Subsequent Events” for further information regarding the EMRE License Agreement.
The terms of any financing and other measures to obtain funds that may be undertaken by the Company may adversely affect the holdings or the rights of the Company’s stockholders. If the Company is unable to obtain funding, the Company could be forced to delay, reduce or eliminate some or all of its research and development efforts and commercialization efforts and sell intellectual property and other assets, which could adversely affect its business prospects, or the Company may be unable to continue operations. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all. If the Company is unable to obtain external financing, it may not be able to sustain future operations. As a result, the Company may be required to delay, reduce and/or cease its operations and/or seek bankruptcy protection. Based on its recurring losses from operations, expectation of continuing operating losses for the foreseeable future, negative working capital, and need to raise additional capital to finance its future operations, the Company has concluded that there is substantial doubt about its ability to continue as a going concern for a period of one year after the date of filing of this Quarterly Report on Form 10-Q.
The Company’s financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accordingly, the financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
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 liabilities. 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), 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.
10
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 2. Recent Accounting Pronouncements
Recently Adopted Accounting Guidance
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The objective of this ASU is to remove inconsistent practices with regard to revenue recognition in and between US GAAP and International Financial Reporting Standards. ASU 2014-09 intends to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The adoption of this ASU on November 1, 2018 resulted in a cumulative effect adjustment that increased Accumulated deficit by $6.7 million.
Recent Accounting Guidance Not Yet Effective
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, generally on a 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 (which, for the Company, will be the first quarter of fiscal year 2020). Early adoption is permitted. The Company has both operating and capital leases (refer to Note 17. “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. The Company expects that adoption of this ASU will result in the recognition of right-of-use assets and lease liabilities not currently recorded in its consolidated financial statements under existing accounting guidance. However, the Company is still evaluating all of its contractual arrangements and the impact that adoption of ASU 2016-02 will have on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” which provides for a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The standard is effective, on a prospective basis for interim and annual periods beginning after December 15, 2019, with early adoption permitted.
The Company adopted this ASU effective November 1, 2018. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements.
Note 3. Revenue Recognition
Under
Accounting Standards Codification (ASC) Topic 606:
Revenue from Contracts with Customer
(“Topic 606”)
, the amount of revenue recognized for any goods or services reflects the consideration that the Company expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, the Company applies the following five-step approach: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as a performance obligation is satisfied.
A contract is accounted for when there has been approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Performance obligations under a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract. In certain instances, the Company has concluded distinct goods or services should be accounted for as a single performance obligation that is a series of distinct goods or services that have the same pattern of transfer to the customer. To the extent a contract includes multiple promised goods or services, the Company must apply judgment to determine whether the customer can benefit from the goods or services either on their own or together with other resources that are readily available to the customer (the goods or services are distinct) and if the promise to transfer the goods or services to the customer is separately identifiable from other promises in the contract (the goods or services are distinct in the context of the contract). If these criteria are not met, the promised services are accounted for as a single performance obligation. The transaction price is determined based on the consideration that the Company will be entitled to in exchange for transferring goods or services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price, generally utilizing the expected value method. Determining the transaction price requires judgment. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. Standalone selling price is determined by the price at which the performance obligation
11
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the
standalone selling price by taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Performance obligations are satisfied either over time or at a point in time
as discussed in further detail below. In addition, the Company's contracts with customers generally do not include significant financing components or non-cash consideration.
Revenue streams are classified as follows:
Product.
Includes the sale of completed project assets, sale and installation of fuel cell power plants including site engineering and construction services, and the sale of modules, balance of plant (“BOP”) components and spare parts to customers.
Service.
Includes performance under long-term service agreements for power plants owned by third parties.
License and royalty.
Includes license fees and royalty income from manufacturing and technology transfer agreements.
Generation.
Includes the sale of electricity under PPAs and utility tariffs from project assets retained by the Company. This also includes revenue received from the sale of other value streams from these assets including the sale of heat, steam, capacity and renewable energy credits.
Advanced Technologies.
Includes revenue from customer-sponsored and government-sponsored Advanced Technologies projects.
See below for discussion of revenue recognition under Topic 606 by disaggregated revenue stream, including a comparison to revenue recognition treatment under ASC 605,
Revenue Recognition
(“ASC 605”).
Completed project assets
Contracts for the sale of completed project assets includes the sale of the project asset, the assignment of the service agreement, and the assignment of the PPA. The relative stand-alone selling price is estimated and is used as the basis for allocation of the contract consideration. Revenue is recognized upon the satisfaction of the performance obligations, which includes the transfer of control of the project asset to the customer, which is when the contract is signed and the PPA is assigned to the customer. See below for further discussion regarding revenue recognition for service agreements. The revenue recognition for completed project assets under Topic 606 is consistent with treatment under ASC 605.
Contractual payments related to the sale of the project asset and assignment of the PPA are generally received up-front. Payment terms for service agreements are generally ratable over the term of the agreement.
Service agreements
Service agreements represent a single performance obligation whereby the Company performs all required maintenance and monitoring functions, including replacement of modules, to ensure the power plant(s) under the service agreement generate a minimum power output. To the extent the power plant(s) under service agreements do not achieve the minimum power output, certain service agreements include a performance guarantee penalty. Performance guarantee penalties represent variable consideration, which is estimated for each service agreement based on past experience, using the expected value method. The net consideration for each service agreement is recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Under ASC 605, revenue for service agreements was generally recorded ratably over the term of the service agreement, as the performance of routine monitoring and maintenance under the service agreements was expected to be incurred on a straight-line basis. If there was an estimated module exchange during the term, the costs of performance were not expected to be incurred on a straight-line basis, and therefore a portion of the initial contract value relating to the module exchange was deferred and recognized upon such module replacement event. Prior to the implementation of Topic 606, an estimate for a performance guarantee was not recorded until a performance issue occurred at a particular power plant. At that point, the actual power plant’s output was compared against the minimum output guarantee and an accrual was recorded. Furthermore, under ASC 605, performance guarantee accruals were recorded based on actual performance and the related expense was recorded to service and license cost of revenues. The review of power plant performance was updated for each reporting period to incorporate the most recent performance of the power plant and minimum output guarantee payments made to customers, if applicable.
12
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
The Company reviews its cost estimates on service agreements on a quarterly basis and records any changes i
n estimates on cumulative catch-up basis.
Loss accruals for service agreements are recognized to the extent that the estimated remaining costs to satisfy the performance obligation exceed the estimated remaining unrecognized net consideration. Estimated losses are recognized in the period in which losses are identified.
The Company records any amounts that are billed to customers in excess of revenue recognized as deferred revenue and revenue recognized in excess of amounts billed to customers as unbilled receivables. Payment terms for service agreements are generally ratable over the term of the agreement.
Advanced Technologies contracts
Advanced Technologies contracts include the promise to perform research and development services and as such this represents one performance obligation. Revenue from most government sponsored Advanced Technologies projects is recognized as direct costs are incurred plus allowable overhead less cost share requirements, if any. Revenue is only recognized to the extent the contracts are funded. Revenue from fixed price Advanced Technologies projects is recognized using the cost to cost input method. There was no impact of adoption of Topic 606 on revenue recognition for Advanced Technologies contracts.
The Company records any amounts that are billed to customers, in excess of revenue recognized as deferred revenue and revenue recognized in excess of amounts billed to customers as unbilled receivables. Payments are based on costs incurred for government sponsored Advanced Technologies projects and upon completion of milestones for all other projects.
License agreements
The Company entered into manufacturing and technology transfer agreements (the “license agreements”) with POSCO Energy Co., Ltd. (“POSCO Energy”) in 2007, 2009 and 2012. Revenue from the license fees received from POSCO Energy were previously recognized over the term of the associated agreements. In connection with the adoption of Topic 606, several performance obligations were identified including previously satisfied performance obligations for the transfer of licensed intellectual property, two performance obligations for specified upgrades of the previously licensed intellectual property, a performance obligation to deliver unspecified upgrades to the previously licensed intellectual property on a when and if available basis, and a performance obligation to provide technical support for previously delivered intellectual property. The performance obligations related to the specified upgrades will be satisfied and related consideration recognized as revenue upon the delivery of the specified upgrades. The performance obligations for unspecified upgrades and technical support are being recognized on a straight-line basis over the license term on the basis this represents the method that best depicts the progress towards completion of the related performance obligations.
All fixed consideration for the license agreement was previously collected.
Generation revenue
For project assets where customers purchase electricity from the Company under PPAs, the Company has determined that these agreements should be accounted for as operating leases pursuant to ASC 840,
Leases
. Revenue is recognized based on the amount of electricity delivered at rates specified under the contracts, assuming all other revenue recognition criteria are met.
Payments for electricity are made after the electricity has been delivered.
13
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
The cumulative effect of the changes made to the Company’s Consolidated Balance Sheets as
of November 1, 2018 as a result of the adoption of Topic 606 was as follows:
|
|
|
October 31,
2018
|
|
|
Adjustments
due to
Topic 606
|
|
|
Balance at
November 1,
2018
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
$
|
13,759
|
|
|
$
|
471
|
|
|
$
|
14,230
|
|
|
Other assets
|
|
|
13,505
|
|
|
|
(132
|
)
|
|
|
13,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
7,632
|
|
|
$
|
995
|
|
|
$
|
8,627
|
|
|
Deferred revenue, current portion
|
|
|
11,347
|
|
|
|
(240
|
)
|
|
|
11,107
|
|
|
Long-term deferred revenue
|
|
|
16,793
|
|
|
|
6,238
|
|
|
|
23,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(990,867
|
)
|
|
$
|
(6,654
|
)
|
|
$
|
(997,521
|
)
|
The increase in long-term deferred revenue primarily pertains to license arrangement consideration previously recognized as revenue under ASC 605 that will be recognized when the specified upgrade performance obligations are satisfied.
The following tables summarize the impacts of Topic 606 on the Company’s consolidated financial statements.
|
|
|
April 30, 2019
|
|
|
|
|
As reported
|
|
|
Adjustments
|
|
|
Balances without
adoption of
Topic 606
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
$
|
11,078
|
|
|
$
|
(342
|
)
|
|
$
|
10,736
|
|
|
Other assets
|
|
|
20,251
|
|
|
|
(626
|
)
|
|
|
19,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
10,954
|
|
|
$
|
(1,509
|
)
|
|
$
|
9,445
|
|
|
Deferred revenue
|
|
|
16,331
|
|
|
|
(886
|
)
|
|
|
15,445
|
|
|
Long-term deferred revenue
|
|
|
22,470
|
|
|
|
(6,696
|
)
|
|
|
15,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(1,034,599
|
)
|
|
$
|
8,123
|
|
|
$
|
(1,026,476
|
)
|
|
|
|
For the Three Months Ended April 30, 2019
|
|
|
|
|
As reported
|
|
|
Adjustments
|
|
|
Balances without
adoption of
Topic 606
|
|
|
Total revenues
|
|
$
|
9,216
|
|
|
$
|
792
|
|
|
$
|
10,008
|
|
|
Total cost of revenues
|
|
|
12,856
|
|
|
|
767
|
|
|
|
13,623
|
|
|
Gross loss
|
|
|
(3,640
|
)
|
|
|
25
|
|
|
|
(3,615
|
)
|
|
Administrative and selling expenses
|
|
|
9,805
|
|
|
|
—
|
|
|
|
9,805
|
|
|
Research and development expenses
|
|
|
4,178
|
|
|
|
—
|
|
|
|
4,178
|
|
|
Loss from operations
|
|
|
(17,623
|
)
|
|
|
25
|
|
|
|
(17,598
|
)
|
|
Interest expense
|
|
|
(1,807
|
)
|
|
|
—
|
|
|
|
(1,807
|
)
|
|
Other expense, net
|
|
|
(31
|
)
|
|
|
—
|
|
|
|
(31
|
)
|
|
Loss before provision for income taxes
|
|
|
(19,461
|
)
|
|
|
25
|
|
|
|
(19,436
|
)
|
|
Provision for income taxes
|
|
|
(69
|
)
|
|
|
—
|
|
|
|
(69
|
)
|
|
Net loss
|
|
$
|
(19,530
|
)
|
|
$
|
25
|
|
|
$
|
(19,505
|
)
|
14
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
|
|
|
For the Six Months Ended April 30, 2019
|
|
|
|
|
As reported
|
|
|
Adjustments
|
|
|
Balances without
adoption of
Topic 606
|
|
|
Total revenues
|
|
$
|
26,999
|
|
|
$
|
2,340
|
|
|
$
|
29,339
|
|
|
Total cost of revenues
|
|
|
32,844
|
|
|
|
1,042
|
|
|
|
33,886
|
|
|
Gross loss
|
|
|
(5,845
|
)
|
|
|
1,298
|
|
|
|
(4,547
|
)
|
|
Administrative and selling expenses
|
|
|
16,564
|
|
|
|
—
|
|
|
|
16,564
|
|
|
Research and development expenses
|
|
|
10,458
|
|
|
|
—
|
|
|
|
10,458
|
|
|
Loss from operations
|
|
|
(32,867
|
)
|
|
|
1,298
|
|
|
|
(31,569
|
)
|
|
Interest expense
|
|
|
(4,271
|
)
|
|
|
—
|
|
|
|
(4,271
|
)
|
|
Other income, net
|
|
|
129
|
|
|
|
—
|
|
|
|
129
|
|
|
Loss before provision for income taxes
|
|
|
(37,009
|
)
|
|
|
1,298
|
|
|
|
(35,711
|
)
|
|
Provision for income taxes
|
|
|
(69
|
)
|
|
|
—
|
|
|
|
(69
|
)
|
|
Net loss
|
|
$
|
(37,078
|
)
|
|
$
|
1,298
|
|
|
$
|
(35,780
|
)
|
For the three and six month periods ended April 30, 2019, the only adjustment to comprehensive loss when comparing the balances with Topic 606 and the balances without Topic 606 included the adjustment to net loss.
For the six month period ended April 30, 2019, the impact of adoption of Topic 606 on the Consolidated Statement of Cash Flows included an adjustment to net loss of $1.3 million and adjustments to changes in operating assets and liabilities consistent with the impact of adoption of Topic 606 on the April 30, 2019 Consolidated Balance Sheet as reflected above.
Contract Balances
Contract assets as of April 30, 2019 and October 31, 2018 were $25.5 million and $23.2 million, respectively. The contract assets relate to the Company’s rights to consideration for work completed but not billed. These amounts are included on a separate line item as Unbilled receivables and balances expected to be billed later than one year from the balance sheet date are included within Other assets on the accompanying consolidated balance sheets. The net change in contract assets represents amounts recorded as revenue offset by customer billings. A total of $4.1 million was
transferred to accounts receivable from contract assets recognized at the beginning of the period.
Contract liabilities as of April 30, 2019 and October 31, 2018 were $38.8 million and $28.1 million, respectively. The contract liabilities relate to the advance billings to customers for services that will be recognized over time and in some instances for deferred revenue relating to license performance obligations that will be recognized at a future point in time. These amounts are included within Deferred revenue and Long-term deferred revenue on the accompanying consolidated balance sheets. The net change in contract liabilities represents customer billings offset by revenue recorded.
Remaining Performance Obligations
Remaining performance obligations are the aggregate amount of total contract transaction price that is unsatisfied or partially unsatisfied. As of April 30, 2019, the Company’s total remaining performance obligations for service agreements, license agreements and Advanced Technologies contracts were $321.6 million. License revenue recognized over time will be recognized over the remaining term of the license agreement. License revenue recognized at a point in time will be recognized when the first specified upgrade that has been developed is delivered and the second specified upgrade when it is developed and delivered. Service revenue in periods where there are no module replacements is expected to be relatively consistent from period to period whereas module replacements will result in an increase in revenue. Advanced Technologies revenue will be recognized as costs are incurred.
Note 4. Restructuring and Impairment
On April 12, 2019, the Company undertook a reorganization, which included a reduction in force of 135 employees, which represented 30% of the Company’s global workforce. The workforce was reduced at the North American production facility in Torrington, Connecticut, as well as at corporate offices in Danbury, Connecticut and at remote locations. There was no restructuring expense recorded because no severance was provided in connection with the reduction in force. The Company has also reduced its materials spend and is implementing various cost control initiatives.
15
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
In connection with the reorganization, the Company also reviewed certain construction in process projects and identified a non-commercial construction in process asset
related to automation equipment for use in manufacturing which has been determined to be impaired due to uncertainty as to whether the asset will be completed as a result of the Company’s liquidity position and continued low level of production rates. The
Company recorded a charge of $2.8 million which is included in
Product cost of revenues on the Consolidated Stateme
nt
s of Operations for the three and six months ended April 30, 2019
.
Note 5. Accounts Receivable, Net and Unbilled Receivables
Accounts receivable, net and Unbilled receivables as of April 30, 2019 and October 31, 2018 consisted of the following:
|
|
|
April 30,
|
|
|
October 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Commercial Customers:
|
|
|
|
|
|
|
|
|
|
Amount billed
|
|
$
|
10,626
|
|
|
$
|
7,415
|
|
|
Unbilled receivables
(1)
|
|
|
10,114
|
|
|
|
10,632
|
|
|
|
|
|
20,740
|
|
|
|
18,047
|
|
|
Advanced Technologies (including U.S. government
(2)
):
|
|
|
|
|
|
|
|
|
|
Amount billed
|
|
|
1,216
|
|
|
|
1,865
|
|
|
Unbilled receivables
|
|
|
964
|
|
|
|
3,127
|
|
|
|
|
|
2,180
|
|
|
|
4,992
|
|
|
Accounts receivable, net and unbilled receivables
|
|
$
|
22,920
|
|
|
$
|
23,039
|
|
|
(1)
|
Additional long-term unbilled receivables of $14.4 million and $9.4 million are included within “Other Assets” as of April 30, 2019 and October 31, 2018, respectively.
|
|
(2)
|
Total U.S. government accounts receivable, including unbilled receivables, outstanding as of April 30, 2019 and October 31, 2018 were $0.8 million and $2.3 million, respectively.
|
Accounts receivable are presented net of an allowance for doubtful accounts of $0.2 million as of October 31, 2018. There was no allowance for doubtful accounts as of April 30, 2019. 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.
Note 6. Inventories
Inventories as of April 30, 2019 and October 31, 2018 consisted of the following:
|
|
|
April 30,
|
|
|
October 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Raw materials
|
|
$
|
25,228
|
|
|
$
|
24,467
|
|
|
Work-in-process
(1)
|
|
|
31,815
|
|
|
|
29,108
|
|
|
Inventories
|
|
$
|
57,043
|
|
|
$
|
53,575
|
|
|
(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 project asset construction, power plant orders or for use under the Company’s service agreements. Included in work-in-process as of April 30, 2019 and October 31, 2018 was $21.2 million and $19.0 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 all subcomponents of a power plant.
The Company incurred excess plant capacity and manufacturing variances of $3.4 million and $3.2 million for the three months ended April 30, 2019 and 2018, respectively, and $6.6 million and $5.5 million for the six months ended April 30, 2019 and 2018, respectively, which were included within product cost of revenues on the consolidated statements of operations.
16
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note
7
. Project Assets
Project assets as of April 30, 2019 and October 31, 2018 were $123.1 million and $99.6 million, respectively. Project assets as of April 30, 2019 and October 31, 2018 included five completed, commissioned installations generating power with respect to which the Company has a PPA with the end-user of power and site host with an aggregate carrying value of $26.1 million and $28.6 million as of April 30, 2019 and October 31, 2018, respectively. Certain of these assets are the subject of sale-leaseback arrangements with PNC Energy Capital, LLC (“PNC”), which are accounted for under the financing method.
The Project assets balance as of April 30, 2019 and October 31, 2018 also includes assets with an aggregate value of $97.0 million and $71.0 million, respectively, which are being developed and constructed by the Company under existing PPAs that 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 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 15, “Debt and Financing Obligation” for more information).
Note 8. Other Current Assets
Other current assets as of April 30, 2019 and October 31, 2018 consisted of the following:
|
|
|
April 30,
|
|
|
October 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Advance payments to vendors
(1)
|
|
$
|
1,565
|
|
|
$
|
2,696
|
|
|
Deferred finance costs
(2)
|
|
|
56
|
|
|
|
97
|
|
|
Prepaid expenses and other
(3)
|
|
|
6,047
|
|
|
|
5,799
|
|
|
Other current assets
|
|
$
|
7,668
|
|
|
$
|
8,592
|
|
|
(1)
|
Advance payments to vendors relate to payments for inventory purchases ahead of receipt.
|
|
(2)
|
The April 30, 2019 balance represents direct deferred finance costs for securing the $100.0 million credit facility with Generate Lending, LLC which are being amortized over a one-year period and the October 31, 2018 balance represents direct deferred finance costs relating to securing the $40.0 million loan facility with NRG, which were being amortized over the five-year life of the facility.
|
|
(3)
|
Primarily relates to other prepaid expenses including insurance, rent and lease payments.
|
Note 9. Other Assets
Other assets as of April 30, 2019 and October 31, 2018 consisted of the following:
|
|
|
April 30,
|
|
|
October 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Long-term stack residual value
(1)
|
|
$
|
987
|
|
|
$
|
1,206
|
|
|
Long-term unbilled receivables
(2)
|
|
|
14,373
|
|
|
|
9,385
|
|
|
Other
(3)
|
|
|
4,891
|
|
|
|
2,914
|
|
|
Other assets
|
|
$
|
20,251
|
|
|
$
|
13,505
|
|
|
(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 for the module from the customer upon expiration or non-renewal 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 unbilled receivables 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.
|
17
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
|
(
3
)
|
The Company entered into an agreement with one of its
customers on June 29, 2016 that
includes a fee for the purchase of the
power
pl
ants 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
April 30, 2019
and October 3
1
, 201
8
was
$2.3 million and
$
2.0
million
, respectively
. Also included within
“O
ther
”
are long-term security deposits
and as of April 30, 2019, prepaid withholding taxes on deferred revenue
.
|
Note 10. Accrued Liabilities
Accrued liabilities as of April 30, 2019 and October 31, 2018 consisted of the following:
|
|
|
April 30,
|
|
|
October 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Accrued payroll and employee benefits
|
|
$
|
2,599
|
|
|
$
|
2,550
|
|
|
Accrued product warranty cost
(1)
|
|
|
65
|
|
|
|
147
|
|
|
Accrued service agreement costs
(2)
|
|
|
4,267
|
|
|
|
2,029
|
|
|
Accrued legal, taxes, professional and other
|
|
|
4,023
|
|
|
|
2,906
|
|
|
Accrued liabilities
|
|
$
|
10,954
|
|
|
$
|
7,632
|
|
|
(1)
|
Activity in the accrued product warranty costs for the six months ended April 30, 2019 represents reductions related to actual warranty spend of $0.08 million as contracts progress through the warranty period or are beyond the warranty period.
|
|
(
2
)
|
The loss accruals on service contracts were $0.9 million as of October 31, 2018 which increased to $1.9 million as of April 30, 2019. The accruals for performance guarantees increased from $1.1 million as of October 31, 2018 to $2.4 million as of April 30, 2019. The changes in the accruals are a result of the impact of the adoption of Topic 606.
|
Note 11. Stockholders’ Equity
At Market Issuance Sales Agreement
On June 13, 2018, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley FBR, Inc. and Oppenheimer & Co. Inc. (together, the “Agents”) to create an at the market equity program under which the Company from time to time may offer and sell shares of its common stock having an aggregate offering price of up to $50.0 million through the Agents. Under the Sales Agreement, the Agent making the sales will be entitled to a commission in an amount equal to 3.0% of the gross proceeds from such sales. There were no sales under the Sales Agreement during the six months ended April 30, 2019. As the Company has only sold $8.0 million of shares of common stock under the Sales Agreement as of April 30, 2019, it may sell up to approximately $42.0 million of shares in the future under the Sales Agreement,
which is subject to contractual requirements, trading windows and market conditions
.
Public Offerings and Outstanding Warrants
On May 3, 2017, the Company completed an underwritten public offering of (i) 1,000,000 shares of its common stock, (ii) Series C warrants to purchase 1,000,000 shares of its common stock and (iii) Series D warrants to purchase 1,000,000 shares of its common stock. The Series C warrants have an exercise price of $19.20 per share and a term of five years. The Series D warrants were all exercised prior to October 31, 2018. No Series C warrants were exercised during the six months ended April 30, 2019.
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 a Series A warrant to purchase 640,000 shares of the Company’s common stock (the “Series A Warrant”) with an exercise price of $69.96 per share.
On February 21, 2019, the Company entered into an Exchange Agreement (the “Exchange Agreement”) with the holder (the “Warrant Holder”) of the Series A Warrant. Pursuant to the Exchange Agreement, the Company agreed to issue to the Warrant Holder 500,000 shares of the Company’s common stock (subject to adjustment for stock dividends, stock splits, stock combinations, and other reclassifications) in exchange for the transfer of the Series A Warrant back to the Company, in reliance on an exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended. Following the transfer of the Series A Warrant back to the Company, the Series A Warrant was cancelled and no further shares are issuable pursuant to the Series A Warrant. For the three and six months ended April 30, 2019, the Company recorded a charge to common stockholders for the difference between the fair value of the Series A Warrant prior to the modification of $0.3 million and the fair value of the common shares issuable at the date of the Exchange Agreement of $3.5 million.
18
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
The following table summarizes outstanding warrant activity during the
six
months ended
April 30
, 201
9
:
|
|
|
Series A
Warrants
|
|
|
Series C
Warrants
|
|
|
Balance as of October 31, 2018
|
|
|
640,000
|
|
|
|
964,114
|
|
|
Warrants exchanged
|
|
|
(640,000
|
)
|
|
|
—
|
|
|
Warrants exercised
|
|
|
—
|
|
|
|
—
|
|
|
Warrants expired
|
|
|
—
|
|
|
|
—
|
|
|
Balance as of April 30, 2019
|
|
|
—
|
|
|
|
964,114
|
|
Note 12. Redeemable Preferred Stock
The Company is authorized to issue up to 250,000 shares of preferred stock, par value $0.01 per share, in one or more series, of which shares are currently issued and designated as Series D Convertible Preferred Stock (referred to herein as “Series D Preferred Stock”), Series C Convertible Preferred Stock (referred to herein as “Series C Preferred Stock”) and 5% Series B Cumulative Convertible Perpetual Preferred Stock (referred to herein as “Series B Preferred Stock”).
Series D Preferred Stock
On August 27, 2018, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Oppenheimer & Co. Inc. (the “Underwriter”), relating to an underwritten offering (the “Offering”) of the Company’s Series D Preferred Stock with a par value of $0.01 per share. Subject to the terms and conditions contained in the Underwriting Agreement, the Underwriter agreed to purchase, and the Company agreed to sell, 30,680 shares of Series D Preferred Stock, which were initially convertible into 1,852,657 shares of the Company’s common stock (without regard to any limitation on conversion set forth in the Certificate of Designations, Preferences and Rights of the Series D Preferred Stock of the Company (the “Series D Certificate of Designation”)), at an initial conversion price of $16.56 per share, subject to certain adjustments (“Series D Conversion Price”).
The Offering closed on August 29, 2018.
The net proceeds to the Company from the sale of the Series D Preferred Stock, after deducting the underwriting discounts and commissions and the offering expenses payable by the Company, were approximately $25.3 million.
In conjunction with the closing of the Offering,
on August 29, 2018, the Company filed the Series D Certificate of Designation with the Secretary of State of the State of Delaware, designating 30,680 shares of the Company’s preferred stock as Series D Convertible Preferred Stock (such shares, the “Series D Preferred Shares”) and establishing the rights, preferences, privileges, qualifications, restrictions, and limitations relating to the Series D Preferred Stock, as described below.
As of April 30, 2019 and October 31, 2018, there were 18,462 and
30,680
shares, respectively, of Series D Preferred Stock issued and outstanding with a carrying value of $20.5 million and $27.4 million, respectively.
During the three and six months ended April 30, 2019, holders of the Series D Preferred Stock converted 6,964 and 12,218 Series D Preferred Shares into 1,994,413 and 2,926,557 shares of common stock, respectively, through installment conversions and acceleration of future installment amounts resulting in a reduction of $6.3 million and $10.6 million, respectively, to the carrying value being recorded to equity. Installment conversions in which the conversion price
was below
$16.56
(the conversion price of the Series D Preferred Stock
as of April 30, 2019 and during the quarter ended April 30, 2019) resulted in a variable number of shares being issued to settle the installment amount and are treated as a partial redemption of the Series D Preferred Shares. Installment conversions during the three and six months ended April 30, 2019 that were settled in a variable number of shares and treated as redemptions resulted in deemed dividends of $1.0 million and $2.9 million, respectively.
The deemed dividends represent the difference between the fair value of the shares of common stock issued to settle the installment amounts and the carrying value of the Series D Preferred Shares.
The Series D Preferred Stock redemption accretion of $3.8 million for the six months ended April 30, 2019 reflects the accretion of the difference between the carrying value and the amount that would have been redeemed if stockholder approval had not been obtained for common stock issuance equal to 20.0% or more of the Company’s outstanding voting stock prior to the issuance of the Series D Preferred Stock.
Additionally, prior to receiving stockholder approval of the issuance of 20.0% or more of the Company’s outstanding voting stock immediately preceding the issuance of the Series D Preferred Stock, the holders were prohibited from converting Series D Preferred Shares into shares of common stock if such conversion would have caused the Company to issue pursuant to the terms of the
19
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Series D Preferred Stock a number of shares in excess of the maximum numb
er of shares permitted to be issued thereunder without breaching the Company’s obligations under the rules or regulations of Nasdaq. The Company received stockholder approval of such issuance at the annual meeting of the Company’s stockholders on April 4,
2019.
Based on review of pertinent accounting literature including ASC 470 –
Debt
, ASC 480
- Distinguishing Liabilities from Equity
and ASC 815 -
Derivative and Hedging
, the Series D 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).
Any failure to pay any amounts due to the holders of the Series D Preferred Shares, as well as certain other “triggering events,” including, without limitation, the Company’s failure to timely deliver shares, the suspension of trading of the Company’s common stock, the Company’s failure to keep reserved for issuance an adequate number of shares of common stock to cover conversion of the Series D Preferred Shares, breaches of certain agreements that permit the other party to such agreement to declare a default or accelerate amounts due, the
existence of a circumstance or event that would result in a default under another agreement that would or is reasonably expected to have a material adverse effect,
and breaches of certain covenants that are not timely cured, where a cure period is permitted, would permit the holders of the Series D Preferred Shares to require the Company to redeem such Series D Preferred Shares, in cash at a price equal to the greater of (i) 125% of the stated value of the Series D Preferred Shares being redeemed, as the case may be, plus accrued dividends, if any, and (ii) the market value of the number of shares issuable on conversion of the Series D Preferred Shares valued at the greatest closing sales price during the period from the date immediately before the triggering event through the date we make the redemption payment. If, for any reason, we are required to repurchase the Series D Preferred Shares in cash prior to maturity, no assurance can be given that we would have the cash or financial resources available to us to make such a payment (or that we would be permitted to make such a payment under the terms of our indebtedness), and such an acceleration could have a material adverse effect on our business, results of operations and financial condition.
Alternatively, in the event of such a triggering event, the holders of Series D Preferred Shares may elect to convert such shares (subject to the beneficial ownership limitations provided in the Series D Certificate of Designation) into shares of common stock at a conversion price equal to the lower of the Series D Conversion Price in effect on the Trading Day (as such term is defined in the Series D Certificate of Designation) immediately preceding the delivery of the conversion notice and 85% of the lowest VWAP of the common stock on any of the five consecutive Trading Days ending on the Trading Day immediately prior to delivery of the applicable conversion notice.
A description of certain terms and provisions of the Series D Preferred Shares is as follows:
Conversion Right.
The Series D Preferred Shares are convertible into shares of the Company’s common stock, subject to the beneficial ownership limitation provided in the Series D Certificate of Designation, at a conversion price equal to $16.56 per share of common stock, subject to adjustment as provided in the Series D Certificate of Designation, including adjustments if the Company sells shares of common stock or equity securities convertible into or exercisable for shares of common stock, at prices below $16.56 per share, in certain types of transactions. The holders are prohibited from converting Series D Preferred Shares into shares of common stock if, as a result of such conversion, such holder, together with its affiliates, would own more than 4.99% 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.
The Series D Conversion Price is subject to adjustment under certain circumstances in accordance with the Series D Certificate of Designation, including the following:
|
|
•
|
The conversion price may be proportionately reduced in the event of a subdivision of the Company’s common stock into a greater number of shares or proportionately increased in the event of a combination of the Company’s common stock into a smaller number of shares.
|
20
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
|
|
•
|
In the event that the Company in any manner issues or sells or enters into any agreement to issue or sell Variable Price Securities (as defined i
n the Series D Certificate of Designation), which generally includes any common stock, options or convertible securities that are issuable at a price which varies or may vary with the market price of the shares of common stock, including by way of one or m
ore reset(s) to a fixed price, but excluding customary anti-dilution provisions (each of the formulations for such variable price being referred to as, the “Variable Price”), each holder of Series D Preferred Shares will have the right (in its sole discret
ion) to substitute the Variable Price for the Conversion Price upon conversion of the Seri
es D Preferred Shares. S
ales of common stock pursuant to
the Company’s
Sales Agreement will be deemed Variable Price Securities with a Variable Price equal to the lo
west price per share at which common stock is sold pursuant to that agreement. Under the Series D Certificate of Designation, the term “options” means any rights, warrants or options to subscribe for or purchase shares of common stock or convertible securi
ties, and the term “convertible securities” means any stock or other security (other than options) that is at any time and under any circumstances, directly or indirectly, convertible into, exercisable or exchangeable for, or which otherwise entitles the h
older thereof to acquire, any shares of common stock.
|
|
|
•
|
At any time any Series D Preferred Shares remain outstanding, the Company may reduce the then current conversion price to any amount for any period of time deemed appropriate by the Company’s board of directors.
|
|
|
•
|
The Series D Conversion Price or redemption amounts paid by the Company may also be adjusted upon the occurrence of certain triggering events as set forth in the Series D Certificate of Designation and summarized below under “Conversion Upon a Triggering Event” and “Redemption Upon a Triggering Event.” Refer to Note 18. “Subsequent Events” for information on the occurrence of triggering events subsequent to April 30, 2019.
|
Conversion Upon a Triggering Event.
Subject to the beneficial ownership limitations provided in the Series D Certificate of Designation, in the event of a triggering event (as defined in the Series D Certificate of Designation and summarized below), the holders of Series D Preferred Shares may elect to convert such shares into shares of common stock at a conversion price equal to the lower of the Series D Conversion Price in effect on the Trading Day (as such term is defined in the Series D Certificate of Designation) immediately preceding the delivery of the conversion notice and 85% of the lowest VWAP of the common stock on any of the five consecutive Trading Days ending on the Trading Day immediately prior to delivery of the applicable conversion notice. This conversion right commences on the date of the triggering event and ends on the later of (i) the date the triggering event is cured and (ii) ten Trading Days after the Company delivers notice of the triggering event.
A triggering event (as defined in the Series D Certificate of Designation) includes, without limitation:
|
|
•
|
any failure to pay any amounts due to the holders of the Series D Preferred Shares;
|
|
|
•
|
the Company’s failure to timely deliver shares;
|
|
|
•
|
the suspension of the Company’s common stock from trading or failure to be trading or listed on The Nasdaq Global Market, without obtaining a listing on another national securities exchange, for a period of five consecutive Trading Days;
|
|
|
•
|
subject to limited exceptions, the Company’s failure for more than ten consecutive days to keep reserved for issuance 150% of the number of shares of common stock issuable upon conversion of the outstanding Series D Preferred Shares;
|
|
|
•
|
certain bankruptcy events;
|
|
|
•
|
the failure to pay certain indebtedness, a breach or violation of an agreement for monies owed in excess of $750,000 that permits the other party to such agreement to declare a default or accelerate amounts due, or the existence of a circumstance or event that would, with or without the passage of time or the giving of notice, result in a default under an agreement that would or is reasonably expected to have a material adverse effect; and
|
|
|
•
|
breaches of certain covenants that are not timely cured, where a cure period is permitted.
|
Redemption.
Commencing on December 1, 2018, and on the sixteenth day and first day of each calendar month thereafter until March 1, 2020, subject to extension in certain circumstances (the “Series D Maturity Date”), the Company will redeem the stated value of Series D Preferred Stock, or $30,680,000, in thirty-one equal installments of approximately $989,677 (each installment amount, a “Series D Installment Amount” and the date of each such payment, a “Series D Installment Date”). The holders will have the ability to defer installment payments, but not beyond the Series D Maturity Date. In addition, during each period commencing on the 11th Trading Day prior to a Series D Installment Date and prior to the immediately subsequent Series D Installment Date, the holders may elect to accelerate the conversion of Series D Preferred Shares at then applicable installment conversion price, provided that the holders may
21
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
not elect to effect any such acceleration during such installment period if either (
a) in the aggregate, all the accelerations in such installment period exceed the sum of three other Series D Installment Amounts, or (b) the number of Series D Preferred Shares subject to prior accelerations exceeds in the aggregate twelve Series D Install
ment Amounts.
Subject to certain beneficial ownership limitations, the Company may elect to pay the Series D Installment Amounts in cash or shares of common stock or in a combination of cash and shares of common stock, except that the Company’s right to make payment in shares of common stock, or an installment conversion, is dependent upon satisfying certain equity conditions set forth in the Series D Certificate of Designation. The failure to satisfy such equity conditions is referred to herein as an equity conditions failure. Among other things, these equity conditions include the Company’s continued listing on The Nasdaq Global Market or another permitted exchange, the Company reserving 150% of the number of shares of common stock necessary to effect the conversion of the Series D Preferred Shares that then remain outstanding (without regard to any limitations on conversions, such as beneficial ownership limitations) during the applicable measurement period, and the Company’s common stock maintaining certain minimum average prices and trading volumes during the applicable measurement period. Upon an equity conditions failure, a holder of Series D Preferred Shares may waive such failure (subject to certain exceptions) and receive the Series D Installment Amount in shares of our common stock based on the installment conversion price (calculated as described in the following paragraph). Alternatively, a holder of Series D Preferred Shares may elect to receive all or part of the Series D Installment Amount due in cash, which shall include an 8% premium to the Series D Installment Amount.
Series D Installment Amounts paid in shares will be that number of shares of common stock equal to (a) the applicable Series D Installment Amount, to be paid in common stock divided by (b) the lesser of (i) the then existing conversion price, (ii) 87.5% of the volume weighted average price (“VWAP”) of the common stock on the Trading Day immediately prior to the applicable Series D 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 Series D 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 Series D Installment Date.
If the Company elects or is required to pay a Series D Installment Amount in whole or in part in cash, the amount paid will be equal to 108% of the applicable Series D Installment Amount.
Redemption Upon a Triggering Event.
In the event of a triggering event (as defined in the Series D Certificate of Designation and summarized above), the holders of Series D Preferred Shares may require the Company to redeem such Series D Preferred Shares in cash at a price equal to the greater of (a) 125% of the stated value of the Series D Preferred Shares being redeemed plus accrued dividends, if any, and (b) the market value of the number of shares issuable on conversion of the Series D Preferred Shares, valued at the greatest closing sales price during the period from the date immediately before the triggering event through the date the Company makes the redemption payment.
22
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Red
emption Upon a Change of Control.
In the event of a change of control, as defined in the Series D Certificate of Designation, the holders of Series D Preferred Shares can force redemption at a price equal to the greater of (a) the conversion amount to be
redeemed multiplied by 125%, (b) the product of (i) the conversion amount being redeemed multiplied by (ii) the quotient determined by dividing (A) the greatest closing sale price of the common stock on any Trading Day during the period commencing immedi
ately preceding the earlier to occur of (1) the consummation of the applicable change of control and (2) the public announcement of such change of control and ending on the date such holder delivers the change of control redemption notice, by (B) the conve
rsion price then in effect and (c) the product of (i) the conversion amount being redeemed multiplied by (ii) the quotient determined by dividing (A) the aggregate value of the cash and non-cash consideration per share of common stock being paid to holder
s of common stock in the change of control transaction by (B) the conversion price then in effect. Redemptions of the Series D Preferred Shares required under the Series D Certificate of Designation in connection with a change of control will have priority
over payments to all other stockholders of the Company in connection with such change of control.
Dividends.
Each holder of Series D Preferred Shares shall be entitled to receive dividends (a) if no triggering event, as defined in the Series D Certificate of Designation, has occurred and is continuing when and as declared by the Company’s board of directors, in its sole and absolute discretion or (b) 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 D Preferred Shares multiplied by the stated value. The holders of Series D Preferred Shares also have the right to participate in any dividend or other distribution made to holders of common stock to the same extent as if they had converted their Series D Preferred Shares.
Liquidation Preference.
In the event of the liquidation, dissolution, or winding up of the Company, prior to distribution to holders of securities ranking junior to the Series D Preferred Stock, holders of Series D Preferred Shares will be entitled to receive the amount of cash, securities or other property equal to the greater of (a) the stated value thereof on the date of such payment plus accrued dividends, if any and (b) the amount per share such holder would receive if such holder converted such Series D Preferred Shares into common stock immediately prior to the date of such payment.
Ranking.
Shares of Series D Preferred Stock rank with respect to dividend rights and rights upon the liquidation, winding up or dissolution of the Company:
|
|
•
|
senior to shares of the Company’s common stock;
|
|
|
•
|
junior to the Company’s debt obligations;
|
|
|
•
|
junior to the Company’s outstanding Series B Preferred Stock;
|
|
|
•
|
pari passu to the Company’s outstanding Series C Preferred Stock; and
|
|
|
•
|
effectively junior to the Company’s subsidiaries’ (i) existing and future liabilities and (ii) capital stock held by others.
|
Limited Voting Rights
. The holders of Series D Preferred Shares have no voting rights, except as required by law; provided, however, that any amendment to the Company’s certificate of incorporation or bylaws or the Series D Certificate of Designation that adversely affects the powers, preferences and rights of the Series D Preferred Stock requires the approval of the holders of a majority of the Series D Preferred Shares then outstanding.
Participation Rights.
Until August 29, 2019, the holders of the Series D Preferred Shares have the right to receive notice of and to participate in any offering, issuance or sale of equity or equity-equivalent securities by the Company or its subsidiaries, other than issuances under certain employee benefit plans, upon the conversion of certain options or other convertible securities, or pursuant to certain acquisitions or strategic transactions. Pursuant to such participation rights, the Company must offer to issue and sell to such holders at least 35% of the offered securities.
Consent and Waiver.
On February 21, 2019, the Company entered into a Consent and Waiver with each of the holders of the Series D Preferred Shares, pursuant to which the
holders of the Series D Preferred Shares
consented to the adjustments to the conversion price of the Series C Preferred Stock set forth in the Waiver Agreement (as defined below) and waived certain anti-dilution rights and conversion price adjustments under the Series D Certificate of Designation that may have resulted from the conversion price adjustments set forth in the Waiver Agreement. The
holders of the Series D Preferred Shares
further acknowledged that no anti-dilution or other adjustments under the Series D Certificate of Designation would result from the exchange of the Series A Warrant for shares of, or the issuance of shares of, the Company’s common stock pursuant to the Exchange Agreement.
23
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
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 April 30, 2019 and October 31, 2018, there were 1,618 and 8,992 shares, respectively, of Series C Preferred Stock issued and outstanding with a carrying value of $3.2 million and $7.5 million, respectively. See Note 18, “Subsequent Events” for information regarding the conversion of all of the remaining shares of Series C Preferred Stock after the end of the quarter.
On February 21, 2019, the Company entered into a waiver agreement (the “Waiver Agreement”) with the holder of the Series C Preferred Stock (such holder, the “Series C Holder”). Under the Waiver Agreement, the Series C Holder waived any equity conditions failures that may have occurred under the Certificate of Designations, Preferences and Rights of the Series C Preferred Stock (the “Series C Certificate of Designations”). The Series C Holder further waived any triggering event occurring after the date of the Waiver Agreement, as well as its right to demand, require or otherwise receive cash payments under the Series C Certificate of Designations, which waiver would have terminated upon the occurrence of certain key triggering events (failure to provide freely tradable shares, suspension from trading on Nasdaq or another eligible market, or failure to convert or deliver shares under certain circumstances), the occurrence of a fundamental transaction, a breach of the Waiver Agreement, or the occurrence of a bankruptcy triggering event. In addition, the Company agreed in the Waiver Agreement, pursuant to Section 8(d) of the Series C Certificate of Designations, to adjust the conversion price of the Series C Preferred Stock in connection with future conversions, such that, when the Series C Holder converted its Series C Preferred Stock into common stock, it would receive approximately 25% more shares than it would have received upon conversion prior to the execution of the Waiver Agreement.
Under the Waiver Agreement, the conversion price of the Series C Preferred Stock is stated to be the lowest of (i) $4.45, (ii) 85% of the lowest closing bid price of the Company’s common stock during the period beginning on and including the fifth trading day prior to the date on which the applicable conversion notice is delivered to the Company and ending on and including the date on which the applicable conversion notice is delivered to the Company, and (iii) 85% of the quotient of (A) the sum of the five lowest VWAPs of the Company’s common stock during the twenty consecutive trading day period ending and including the trading day immediately preceding the applicable conversion date divided by (B) five (5). To determine the number of shares of common stock to be issued upon conversion, 125% of the value of the Series D Preferred Shares being converted is divided by the applicable conversion price.
The parties further agreed to waive the installment payment/conversion provisions in Section 9 of the Series C Certificate of Designations, which required installment conversions or payments to be made on the 1
st
and 16
th
of each month (as described in additional detail below). Under the Waiver Agreement, conversions of Series C Preferred Stock were permitted to occur and did occur after the original March 1, 2019 maturity date, and the Company further agreed to reserve specific numbers of shares for issuance to the Series C Holder and the holders of the Series C Preferred Stock until the Company effected a reverse stock split, which occurred on May 8, 2019, or increased its authorized shares of common stock.
Under the Waiver Agreement, the Company was also deemed to have reduced the conversion price of the Series C Preferred Shares converted between the time of the equity conditions failures and the date of the Waiver Agreement as necessary to cause the number of shares of common stock delivered upon such conversions to equal the number of shares issuable upon conversion at such times.
During the three and six months ended April 30, 2019, holders of the Series C Preferred Stock converted 5,852 and 7,374 Series C Preferred Shares, respectively, into shares of common stock through conversions resulting in a reduction of $10.4 million and $12.3 million, respectively, to the carrying value being recorded to equity.
In order to resolve different interpretations of the provisions of the Series C Certificate of Designations that governed adjustments to the conversion price in connection with sales of common stock under the Company’s at-the-market stock sales plan below the initial conversion price $22.08 and whether such sales constituted sales of variable priced securities under the Series C Certificate of Designations, the Company’s board of directors agreed to reduce the conversion price of the Series C Preferred Shares from $22.08 to $18.00 effective August 27, 2018 in exchange for a waiver of certain anti-dilution and price adjustment rights under the Series C Certificate of Designations for future at-the-market sales of common stock. The conversion price of the Series C Preferred Shares was adjusted again on December 3, 2018 to $6.96, on December 17, 2018 to $6.00 and on January 2, 2019 to $5.16. During the three months ended April 30, 2019, the conversion price was further adjusted on eleven occasions to prices ranging from $4.45 to $2.51, the conversion price as of April 30, 2019.
Conversions
occurring during the three and six months ended April 30, 2019 in which the installment conversion price was below the adjusted conversion prices
in effect on applicable installment conversion dates resulted in a variable number of shares being issued to settle the installment amount and were treated as a partial redemption of the Series C Preferred Shares. Conversions during the three and six months ended April 30, 2019 that were settled in a variable number of shares and treated as partial redemptions resulted in a deemed contribution of $1.1 million and $0.6 million, respectively.
The deemed contributions represent 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
. Additionally, as discussed in more detail below the net loss attributable to common stockholders for the three months ended April 30, 2019 was impacted by a $0.5 million decrease in the loss
24
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
resulting from accounting for the Waiver Agreement in February 2019 and the net loss attributable to common
stockholders
for the six months ended April 30, 2019 also includes the $8.6 million redemption value adjustment recorded during the three
months ended January 31, 2019.
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). The decline in the Company’s stock price during the three months ended January 31, 2019 and between January 31, 2019 and the execution of the Waiver Agreement in February 2019 resulted in equity conditions failures under the Series C Certificate of Designations, which were waived by the Series C Holder in the Waiver Agreement, as described above. Prior to the execution of such Waiver Agreement, the conversion price was adjusted in December 2018 and January 2019 as described in the paragraph above. This contingent beneficial conversion feature resulted in a $6.6 million reduction in the Series C Preferred Shares carrying value.
Because the equity conditions failures were continuing as of January 31, 2019 (prior to the execution of the Waiver Agreement), the Series C Preferred Shares were adjusted to 108% of stated redemption value as of January 31, 2019 with a corresponding charge to common stockholders of $8.6 million.
The Waiver Agreement was treated for accounting purposes to be an extinguishment of the Series C Preferred Stock instrument as of February 21, 2019.
The Series C Preferred Stock remains classified in mezzanine equity, however, the carrying value was adjusted to reflect the estimated fair value of the post-modification Series C Preferred Shares which incorporated the new terms outlined in the Waiver Agreement.
The valuation utilized a Binomial Lattice Model (“Lattice Model”) which is a commonly used methodology to value path-dependent options or stock units in order to capture their potential early conversion. The Lattice Model produces an estimated fair value based on changes in the underlying stock price over successive periods of time. The assumptions used in the model such as stock price, conversion price and conversion ratio were consistent with date of execution and terms in the Waiver Agreement. Other assumptions included the volatility of the Company’s stock which was assumed to be 75% and a discount rate of 20% which was estimated based on various indices consistent with the Company’s profile, venture capital rates of return and the Company’s borrowing rate. The Lattice Model resulted in an estimated fair value as of February 21, 2019 of $13.5 million whereby the Series C Preferred Stock carrying value was adjusted to this amount. As discussed above, a beneficial conversion feature was recorded during the three months ended January 31, 2019 due to reductions in the conversion price. Upon extinguishment during the three months ended April 30, 2019, the Company first allocated $6.6 million to the reacquisition of the embedded conversion option equal to the intrinsic value that was previously recognized during the three months ended January 31, 2019 for the embedded conversion option. Because the remaining estimated fair value of the instrument on February 21, 2019 was less than the carrying amount of the Series C Preferred Stock, the amount of the shortfall resulted in a decrease in loss available to common stockholders for purposes of computing loss per share of $0.5 million.
A summary of certain terms, including terms in effect prior to the date of the Waiver Agreement, of the Series C Preferred Stock is as follows.
Conversion Rights.
As of April 30, 2019, the Series C Preferred Shares were convertible into shares of common stock, subject to the beneficial ownership limitations provided in the Series C Certificate of Designations, at a conversion price equal to
$2.51 per share. The conversion price was subject to adjustment as provided in the Series C Certificate of Designations, including adjustments if the Company sold shares of common stock or equity securities convertible into or exercisable for shares of common stock, at variable prices below the conversion price then in effect. Under the Series C Certificate of Designations, i
n the event of a triggering event, as defined in the Series C Certificate of Designations, the Series C Preferred Shares would have been convertible into shares of common stock at a conversion price equal to the lower of the conversion price then in effect and 85% of the lowest VWAP of the common stock of the five trading days immediately prior to delivery of the applicable conversion notice. The holders were 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 had the right to increase its maximum percentage up to 9.99% upon 60 days’ notice to the Company.
As described above, under the Waiver Agreement, the holder waived any triggering event occurring after the date of the Waiver Agreement, as well as its right to demand, require or otherwise receive cash payments under the Series C Certificate of Designations, which waiver would have terminated upon the occurrence of certain key triggering events, the occurrence of a fundamental transaction, a breach of the Waiver Agreement, or the occurrence of a bankruptcy triggering event.
25
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Installment
Payments Prior to Execution of Waiver Agreement.
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 “Series C Maturity Date”), inclusive, the
Company was required to redeem the stated value of Series C Preferred Shares in thirty-three equal installments of approximately $1.0 million (each bimonthly amount, a “Series C Installment Amount” and the date of each such payment, a “Series C Installmen
t Date”). The holders had the ability to defer installment payments, but not beyond the Series C Maturity Date. In addition, during each period commencing on the 11th trading day prior to a Series C Installment Date and prior to the immediately subsequent
Series C Installment Date, the holders could elect to accelerate the conversion of Series C Preferred Shares at the then applicable installment conversion price, provided that the holders could not elect to effect any such acceleration during such installm
ent period if either (a) in the aggregate, all the accelerations in such installment period would exceed the sum of three other Series C Installment Amounts, or (b) the number of Series C Preferred Shares subject to prior accelerations would exceed in the
aggregate twelve Series C Installment Amounts.
Subject to certain conditions as provided in the Series C Certificate of Designations, the Company could elect to pay the Series C Installment Amounts in cash or shares of common stock or in a combination of cash and shares of common stock.
Series C Installment Amounts paid in shares were to be that number of shares of common stock equal to (a) the applicable Series C 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 Series C 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 Series C Installment Date as applicable, provided that the Company met standard equity conditions. The Company was to make such election no later than the eleventh trading day immediately prior to the applicable Series C Installment Date.
If the Company elected or was required to pay a Series C Installment Amount in whole or in part in cash, the amount paid would be equal to 108% of the applicable Series C Installment Amount.
Under the Waiver Agreement, the Company was no longer obligated to make installment payments under Section 9 of the Series C Certificate of Designations, and the holder was permitted to convert at any time, in its discretion, subject to certain beneficial ownership limitations.
Dividends.
Each holder of the Series C Preferred Shares was entitled to receive dividends (a) if no triggering event, as defined in the Series C Certificate of Designations, had occurred and was continuing when and as declared by the Company’s board of directors, in its sole and absolute discretion or (b) if a triggering event had occurred and until such triggering event had 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, fiscal year 2018 or during the six months ended April 30, 2019.
As described above, under the Waiver Agreement, the holder waived, subject to certain conditions and limitations, all triggering events occurring after the date of the Waiver Agreement.
Redemption.
In the event of a triggering event, as defined in the Series C Certificate of Designations, the holders of the Series C Preferred Shares could force redemption at a price equal to the greater of (a) the conversion amount to be redeemed multiplied by 125% and (b) the product of (i) 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 (ii) the greatest closing sale price of the common stock on any trading day during the period commencing on the date immediately preceding such triggering event and ending on the date the Company makes the entire payment required.
As described above, under the Waiver Agreement, the holder waived, subject to certain conditions and limitations, all triggering events occurring after the date of the Waiver Agreement.
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 would have been entitled to receive the amount of cash, securities or other property equal to the greater of (a) the stated value thereof on the date of such payment plus accrued dividends, if any and (b) the amount per share such holder would have received if such holder had converted such Series C Preferred Shares into common stock immediately prior to the date of such payment.
26
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Ranking and Voting Rights.
Shares of Series C Preferred Stock ranked with respect to dividend rights and rights upon the Company’s liquidation, winding up or dissolution:
|
|
•
|
senior to shares of the Company’s common stock;
|
|
|
•
|
junior to the Company’s debt obligations;
|
|
|
•
|
junior to the Company’s outstanding Series B Preferred Stock;
|
|
|
•
|
pari passu to the Company’s outstanding Series D Preferred Stock; and
|
|
|
•
|
effectively junior to the Company’s subsidiaries’ (i) existing and future liabilities and (ii) capital stock held by others.
|
The holders of the Series C Preferred Shares had no voting rights, except as required by law, provided, however, that any amendment to the Company’s certificate of incorporation or bylaws or the Series C Certificate of Designations that adversely affected the powers, preferences and rights of the Series C Preferred Shares would have required the approval of the holders of a majority of the Series C Preferred Shares then outstanding.
Redeemable Series B Preferred Stock
As of April 30, 2019, the Company had 105,875 shares of 5% Series B Cumulative Convertible Perpetual Preferred Stock (Liquidation Preference $1,000.00 per share) (“Series B Preferred Stock”) authorized for issuance. As of April 30, 2019 and October 31, 2018, 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 and $1.6 million were paid in cash for each of the three and six month periods ended April 30, 2019 and 2018, respectively.
Class A Cumulative Redeemable Exchangeable Preferred Shares
As of April 30, 2019, FCE FuelCell Energy Ltd. had 1,000,000 Class A Cumulative Redeemable Exchangeable Preferred Shares (the “Series 1 Preferred Shares”) issued and outstanding, which are held by Enbridge, Inc. (“Enbridge”), which is a related party. The Company made payments of Cdn. $0.3 million and Cdn. $0.6 million, respectively, for the six month periods ended April 30, 2019 and 2018 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 and $0.7 million for the three months ended April 30, 2019 and 2018, respectively, and Cdn. $0.7 million and Cdn. $1.4 million for the six months ended April 30, 2019 and 2018, respectively. As of April 30, 2019 and October 31, 2018, the carrying value of the Series 1 Preferred Shares was Cdn. $21.3 million (U.S. $15.9 million) and Cdn. $20.9 million (U.S. $15.9 million), respectively, and is classified as a preferred stock obligation of subsidiary on the Consolidated Balance Sheets.
27
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 1
3
. Loss Per Share
The calculation of basic and diluted loss per share was as follows:
|
|
|
Three Months Ended April 30,
|
|
|
Six Months Ended April 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(19,530
|
)
|
|
$
|
(13,174
|
)
|
|
$
|
(37,078
|
)
|
|
$
|
(17,357
|
)
|
|
Series A warrant exchange
|
|
|
(3,169
|
)
|
|
|
—
|
|
|
|
(3,169
|
)
|
|
|
—
|
|
|
Series B preferred stock dividends
|
|
|
(800
|
)
|
|
|
(800
|
)
|
|
|
(1,600
|
)
|
|
|
(1,600
|
)
|
|
Series C preferred stock deemed contributions
(dividends) and redemption value adjustment, net
|
|
|
1,599
|
|
|
|
(4,199
|
)
|
|
|
(7,406
|
)
|
|
|
(7,662
|
)
|
|
Series D Preferred stock deemed dividends and
redemption accretion
|
|
|
(976
|
)
|
|
|
—
|
|
|
|
(6,661
|
)
|
|
|
—
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(22,876
|
)
|
|
$
|
(18,173
|
)
|
|
$
|
(55,914
|
)
|
|
$
|
(26,619
|
)
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares
|
|
|
11,090,698
|
|
|
|
6,630,272
|
|
|
|
9,683,253
|
|
|
|
6,310,964
|
|
|
Effect of dilutive securities
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Weighted average diluted common shares
|
|
|
11,090,698
|
|
|
|
6,630,272
|
|
|
|
9,683,253
|
|
|
|
6,310,964
|
|
|
Basic loss per share
|
|
$
|
(2.06
|
)
|
|
$
|
(2.74
|
)
|
|
$
|
(5.77
|
)
|
|
$
|
(4.22
|
)
|
|
Diluted loss per share
(1)
|
|
$
|
(2.06
|
)
|
|
$
|
(2.74
|
)
|
|
$
|
(5.77
|
)
|
|
$
|
(4.22
|
)
|
|
(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 April 30, 2019 and 2018, potentially dilutive securities excluded from the diluted loss per share calculation are as follows:
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
May 2017 Offering - Series C Warrants
|
|
|
964,114
|
|
|
|
964,114
|
|
|
July 2016 Offering - Series A Warrants
|
|
|
—
|
|
|
|
640,000
|
|
|
Outstanding options to purchase common stock
|
|
|
24,945
|
|
|
|
27,324
|
|
|
Unvested Restricted Stock Awards
|
|
|
32,659
|
|
|
|
98,788
|
|
|
Unvested Restricted Stock Units
|
|
|
212,034
|
|
|
|
258,737
|
|
|
Series C Preferred Shares to satisfy conversion requirements
(1)
|
|
|
313,589
|
|
|
|
658,899
|
|
|
Series D Preferred Shares to satisfy conversion requirements
(2)
|
|
|
1,114,890
|
|
|
|
—
|
|
|
5% Series B Cumulative Convertible Preferred Stock
|
|
|
37,837
|
|
|
|
37,837
|
|
|
Series 1 Preferred Shares to satisfy conversion requirements
|
|
|
1,264
|
|
|
|
1,264
|
|
|
Total potentially dilutive securities
|
|
|
2,701,332
|
|
|
|
2,686,963
|
|
|
(1)
|
The number of shares of common stock issuable upon conversion of the Series C Preferred Stock was calculated using the liquidation preference value outstanding on April 30, 2019 of $1.6 million divided by the reduced conversion price of $5.16 and the liquidation preference of $14.5 million divided by the conversion price of $22.08 as of April 30, 2018. 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.
|
|
(2)
|
The number of shares of common stock issuable upon conversion of the Series D Preferred Stock was calculated using the liquidation preference value outstanding on April 30, 2019 of $18.5 million divided by the conversion price of $16.56. 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.
|
28
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 1
4
. Restricted Cash
As of April 30, 2019 and October 31, 2018, there was $38.1 million and $40.9 million, respectively, of restricted cash and cash equivalents pledged as collateral for letters of credit for certain banking requirements and contractual commitments. The restricted cash balance for both periods presented includes $15.0 million which was placed in a Grantor’s Trust account to secure certain obligations under a 15-year service agreement and has been classified as long-term (refer to Note 18, “Subsequent Events” for further information). The restricted cash balance as of April 30, 2019 and October 31, 2018 also includes $17.6 million and $17.7 million, respectively, to support obligations related to PNC sale-leaseback transactions. As of April 30, 2019 and October 31, 2018, outstanding letters of credit totaled $3.5 million and $3.8 million, respectively. These expire on various dates through August 2028.
Note 15. Debt and Financing Obligation
Debt as of April 30, 2019 and October 31, 2018 consisted of the following:
|
|
|
April 30,
|
|
|
October 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Connecticut Development Authority Note
|
|
$
|
—
|
|
|
$
|
284
|
|
|
Connecticut Green Bank Note
|
|
|
6,051
|
|
|
|
6,052
|
|
|
Finance obligation for sale-leaseback transactions
|
|
|
45,284
|
|
|
|
46,062
|
|
|
State of Connecticut Loan
|
|
|
10,000
|
|
|
|
10,000
|
|
|
Hercules Loan and Security Agreement
|
|
|
23,812
|
|
|
|
25,343
|
|
|
New Britain Renewable Energy Term Loan
|
|
|
792
|
|
|
|
1,107
|
|
|
NRG Loan Facility
|
|
|
5,750
|
|
|
|
—
|
|
|
Generate Lending Construction Loan
|
|
|
10,000
|
|
|
|
—
|
|
|
Enhanced Capital Loan and Security Agreement
|
|
|
1,500
|
|
|
|
—
|
|
|
Fifth Third Bank Loan Agreement
|
|
|
11,072
|
|
|
|
—
|
|
|
Capitalized lease obligations
|
|
|
249
|
|
|
|
341
|
|
|
Deferred finance costs
|
|
|
(1,517
|
)
|
|
|
(1,311
|
)
|
|
Total debt and financing obligations
|
|
$
|
112,993
|
|
|
$
|
87,878
|
|
|
Current portion of long-term debt and financing obligations
|
|
|
(54,815
|
)
|
|
|
(17,596
|
)
|
|
Long-term debt and financing obligations
|
|
$
|
58,178
|
|
|
$
|
70,282
|
|
As of April 30, 2019, the Company had a long-term loan agreement with the Connecticut Green Bank, providing a total of $5.9 million in support of the Bridgeport Fuel Cell Project (as defined below). The loan agreement carries an interest rate of 5.0 percent per annum. Interest only payments commenced in January 2014 and principal payments were to commence on the eighth anniversary of the project’s provisional acceptance date of December 20, 2021. Subsequent to April 30, 2019, this loan was partially repaid with a new project level loan from Connecticut Green Bank in connection with the Company’s acquisition of all of the membership interests in Dominion Bridgeport Fuel Cell, LLC (which is now known as Bridgeport Fuel Cell, LLC). Refer to Note 18, “Subsequent Events” for information regarding the new loan from Connecticut Green Bank.
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 the Company 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 payments 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 April 30, 2019 was $45.3 million and the decrease from $46.1 million on October 31, 2018 includes lease payments offset by the recognition of interest expense. The outstanding financing obligation includes an embedded gain which will be recognized at the end of the lease term.
29
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
In November 2015, the Company entered into a definitive Assistance Agreement with the State of Connecticut and received a disbursement o
f $10
.0
million
, which was
used for the first phase
of the expansion of the Company’s Torrington, Connecticut manufacturing facility.
In conjunction with this financing, the Company entered into a $10
.0
million promissory note and related security agreeme
nts securing the loan with equipment liens and a mortgage on its Danbury, Connecticut location.
Interest
accrues at fixed interest rate of 2.0 percent, repayable over 15 years. Principal payments were deferred for four years from disbursement and begin on
December 1, 2019.
Under the
Assistance
Agreement, the Company was eligible for
for
giveness of
up to
50 percent
of the loan
principal
if the Company created 165 full-time positions and retained 538 full-time positions for two consecutive years (the “Employ
ment Obligation”) as measured on
October 28, 2017 (the “
Target Date”). The
Assistance
Agreement was subsequently amended in April 2017 to extend the Target Date by two years to October 28, 2019.
In January 2019, the Company and the State of Connecticut entered into a Second Amendment to the Assistance Agreement (the “Second Amendment”). The Second Amendment extends the Target Date to October 31, 2022 and amends the Employment Obligation to require the Company to maintain 538 full-time positions for 24 consecutive months. If the Company meets the Employment Obligation, as modified by the Second Amendment, and creates an additional 91 full-time positions, the Company may receive a credit in the amount of $2.0 million to be applied against the outstanding balance of the loan. The Second Amendment deletes and cancels the provisions of the Assistance Agreement related to the second phase of the expansion project and the loans related thereto, but the Company had not drawn any funds or received any disbursements under those provisions. A job audit will be performed within ninety days of the Target Date. If the Company does not meet the Employment Obligation, then a penalty shall be assessed at a rate of $18,587.36 times the number of employees below the Employment Obligation. Such penalty is immediately payable and will be first applied against any outstanding fees or interest due and then against outstanding principal.
In April 2016, the Company entered into a loan and security agreement (as amended from time to time, the “Hercules Agreement”) with Hercules for an aggregate principal amount of up to $25.0 million, subject to certain terms and conditions. The loan was a 30 month secured facility. The term loan interest rate was 9.75 percent per annum as of October 31, 2017 and increased to 10.0 percent per annum as of January 31, 2018 as a result of the increase in the prime rate. In addition to interest, which is paid on a monthly basis, principal payments commenced on November 1, 2017 in equal monthly installments. The loan balance and all accrued and unpaid interest was due and payable by October 1, 2018. Under the terms of the Hercules Agreement, there was an end of term charge of $1.7 million due on October 31, 2018, which was being accreted over the 30-month term using the effective interest rate method.
As discussed in the paragraphs below and in Note 18, “Subsequent Events”, the Company has entered into a series of amendments to the Hercules Agreement
in order to, among other things, provide for a lower minimum cash covenant, adjust certain other covenants and avoid events of default being declared and acceleration of the loan. Refer to Note 18 “Subsequent Events” for information regarding additional amendments to the terms of the Hercules Agreement subsequent to April 30, 2019.
The Hercules Agreement was subsequently amended on September 5, 2017, October 27, 2017, March 28, 2018, August 29, 2018, December 19, 2018, February 28, 2019 and March 29, 2019. The March 28, 2018 amendment allowed the Company to draw a term loan advance of $13.1 million and extended the maturity date to April 1, 2020. Payments for the aggregate amount outstanding are interest-only for the initial 12-month period, followed by equal monthly installments of principal and interest until the term loan maturity date. Principal payments under the Hercules Agreement began on April 1, 2019 and total approximately $1.8 million per month. The term loan interest rate was 10.15% per annum and increased to 10.40% per annum in June 2018, 10.65% per annum in September 2018 and 10.90% per annum in December 2018 as a result of increases in the prime rate. The term loan interest rate is the greater of either (i) 9.90% plus the prime rate minus 4.50%, and (ii) 9.90%. The initial end of term charge of $1.7 million was paid on October 1, 2018. An additional end of term charge of $0.9 million will be due on April 1, 2020. The additional end of term charge is being accreted over a 30-month term.
On August 29, 2018, in connection with the issuance of the Series D Preferred Stock, the Company and Hercules (and various affiliated entities) entered into the fourth amendment to the Hercules Agreement to (i) modify the definition of “Permitted Indebtedness” to include certain redemption and/or conversion rights as set forth in the Series D Certificate of Designation, (ii) permit the Company, so long as no event of default has occurred and is continuing, to repurchase or redeem stock in cash pursuant to the redemption and/or conversion rights set forth in the Series D Certificate of Designation;
provided that, the Company must make any such repurchase, redemption or payment in common stock and not in cash or other consideration unless prohibited pursuant to the terms of the Series D Certificate of Designation or otherwise prohibited by applicable law, (iii) permit the Company, so long as no event of default has occurred and is continuing, to pay cash dividends under the Series D Preferred Shares as required in the Series D Certificate of Designation; provided that, the Company must pay such dividends in common stock and not in cash or other consideration unless prohibited pursuant to the terms of the Series D Certificate of Designation or otherwise prohibited by applicable law, and (iv) add a new
event of default, which
30
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
occurs upon the delivery of a Triggering Event Redemption Notice (as defined under the Series D Certificate of Designation) under the Series D Certificate of Desig
nation
.
On February 28, 2019, the Company and Hercules (and various affiliated entities) entered into the sixth amendment to the Hercules Agreement (such amendment, the “February Amendment”), which was effective as of February 22, 2019. Under the February Amendment, the Company was required, at all times following February 22, 2019 through
March 31, 2019, to maintain an unrestricted cash balance of at least (a) 50% 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, in accounts subject to an account control agreement in favor of Hercules. Further, under the February Amendment, at all times after March 31, 2019, the Company was required to
maintain
an unrestricted cash balance of at least (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, in accounts subject to an account control agreement in favor of
Hercules
.
On March 29, 2019, the Company and Hercules (and various affiliated entities) entered into the seventh amendment to the Hercules Agreement (such amendment, the “March 2019 Amendment”). Under the March 2019 Amendment, the Company was required, at all times following February 22, 2019 through April 30, 2019, to maintain an unrestricted cash balance of at least (a) 50% 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, in accounts subject to an account control agreement in favor of Hercules. Further, under the March 2019 Amendment, at all times after April 30, 2019, the Company was required to maintain an unrestricted cash balance of at least (y) 75% of the outstanding loan balance, plus (z) the amount of accounts payable (as defined under GAAP) not paid within 90 days of the invoice date, in accounts subject to an account control agreement in favor of Hercules.
The Hercules Agreement, as amended, contains certain representations and warranties, affirmative and negative covenants, and events of default, including the occurrence of a circumstance that would reasonably be expected to have a material adverse effect, that entitle Hercules to cause the indebtedness under the agreement to become immediately due and payable. The occurrence of an event of default under the Hercules Agreement also constitute or may result in an event of default under, and cause or may cause the acceleration of a number of material financial obligations including the State of Connecticut loan, the Connecticut Green Bank Loan and the Generate Lending, PNC and Fifth Third project finance facilities.
The occurrence of an event of default under the Hercules Agreement also constitute a triggering event under the Series D Certificate of Designations.
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. The 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.
In November 2016, the Company 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 per annum and payments, which commenced in January 2017, are due on a quarterly basis. The balance outstanding as of April 30, 2019 and October 31, 2018 was $0.8 million and $1.1 million, respectively.
In July 2014, the Company, through its wholly-owned subsidiary, FuelCell Finance, entered into a Loan Agreement with NRG (the “NRG Loan Agreement”). Pursuant to the NRG Loan Agreement, NRG extended a $40.0 million loan facility to FuelCell Finance for the purpose of accelerating project development by the Company and its subsidiaries. Under the NRG Loan Agreement, FuelCell Finance and its subsidiaries were permitted to draw on the loan facility to finance the construction of projects through the commercial operating date of the power plants. Additionally, FuelCell Finance had the option to continue the financing term for each project after the commercial operating date for a minimum term of five years per project. The interest rate is 8.5 percent per annum for construction-period financing and 8.0 percent per annum thereafter.
On December 13, 2018, FuelCell Finance’s wholly owned subsidiary, Central CA Fuel Cell 2, LLC, drew a construction loan advance of $5.8 million under the loan facility. This advance was used to support the completion of construction of the 2.8 MW Tulare BioMAT project in California. This plant is expected to meet its commercial operations date in June 2019.
In conjunction with the December 13, 2018 draw, FuelCell Finance and NRG entered into an amendment to the NRG Loan Agreement to revise the definitions of the terms “Maturity Date” and “Project Draw Period” under the NRG Loan Agreement and to make other related revisions. Pursuant to this amendment, FuelCell Finance and its subsidiaries could only request draws through December 31, 2018 and the Maturity Date of each draw was the earlier of (a) March 31, 2019 and (b) the commercial operation date or substantial completion date, as applicable, with
31
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
re
spect to the fuel cell project owned by the borrower under such note. There are no other drawdowns or outstanding balances under the
l
oan
f
acility.
On March 29, 2019, FuelCell Finance and NRG entered into a third amendment to the NRG Loan Agreement, which amends the definition of “Maturity Date” under the NRG Loan Agreement. Pursuant to the third amendment, the Maturity Date of each note is was revised to be the date that is the earlier of (a) June 17, 2019, (b) the commercial operation date or substantial completion date, as applicable, with respect to the fuel cell project owned by the borrower under such note, and (c) closing of a refinancing of indebtedness.
In connection with the execution of the third amendment, the Company paid a $250,000
non-refundable fee to NRG
and
agreed to make an additional payment of $750,000 at the maturity date. This maturity date was subsequently amended to July 12, 2019.
Refer to Note 18. “Subsequent Events” for information regarding additional amendments to the terms of the NRG Loan Agreement which were agreed to subsequent to April 30, 2019.
On December 21, 2018, the Company, through its indirect wholly-owned subsidiary FuelCell Energy Finance II, LLC (“FCEF II”), entered into a Construction Loan Agreement (the “Generate Agreement”) with Generate Lending, LLC (“Generate Lending”) pursuant to which Generate Lending agreed (the “Commitment”) to make available to FCEF II a credit facility in an aggregate principal amount of up to $100.0 million and, subject to further Generate Lending approval and available capital, up to $300.0 million if requested by the Company (the “Generate Facility”) and approved by Generate Lending to fund the manufacture, construction, installation, commissioning and start-up of stationary fuel cell projects to be developed by the Company on behalf of FCEF II during the Availability Period (as defined below and in the Generate Agreement). Fuel cell projects must meet certain conditions to be determined to be “Approved Projects” under the Generate Facility. The Generate Facility will be comprised of multiple loans to individual Approved Projects (each, a “Working Capital Loan”). Each Working Capital Loan will be sized to the lesser of (i) 100% of the construction budget and (ii) the invested amount that allows Generate Lending to achieve a 10% unlevered, after-tax inefficient internal rate of return. Approved Projects will be funded at milestones on a cost incurred basis. FCEF II and the Company will contribute any additional equity required to construct an Approved Project on a pari-passu basis with the Working Capital Loans. The Commitment to provide Working Capital Loans will remain in place for thirty-six months from the date of the Generate Agreement (the “Availability Period”). Interest will accrue at 9.5% per annum, calculated on a 30/360 basis, on all outstanding principal, paid on the first business day of each month. The initial draw amount under this facility, funded at closing, was $10.0 million.
The maturity date for the outstanding principal amount of each Working Capital Loan will be the earlier of (a) the achievement of the Commercial Operation Date under the Engineering, Procurement and Construction (“EPC”) Agreement for such Approved Project, (b) ninety days prior to the required Commercial Operation Date under the Revenue Contract (as defined in the Generate Agreement), or (c) upon certain defaults by FCEF II. Generate Lending has the right to issue a notice to FCEF II that the Commitment, and that all Working Capital Loans shall be due and payable on September 30, 2019; provided that such notice shall be issued by Generate Lending, if at all, during the ten (10) day period beginning on June 20, 2019 and ending on (and including) June 30, 2019. If Generate Lending delivers such notice, all of the Working Capital Loans, together with all accrued and unpaid interest thereon, shall be due and payable in its entirety, without penalty or premium. If Generate Lending delivers such notice, FCEF II may prepay all then outstanding Working Capital Loans at any time prior to September 30, 2019. Mandatory prepayments are required in the event of (i) material damage or destruction to an Approved Project, (ii) termination or default under an Approved Project’s Revenue Contract, (iii) a change of control, or (iv) failure to achieve Substantial Completion as defined under the EPC Agreement for such Approved Project by the required dates.
Provided that the Approved Project has been completed as of the maturity date and no defaults exist with respect to the Working Capital Loans for such Approved Project, FCEF II, as determined in its sole discretion, will have a 90-day period to either sell the Approved Project or effect a refinancing, in either case proceeds of which will be used to repay the Working Capital Loan for the Approved Project. In the case of a disposition of the Approved Project, Generate Lending will be entitled to a “Disposition Fee,” as described below. In the case where the Working Capital Loan for the Project is refinanced, Generate Lending will have the right to make an equity investment in the Approved Project on terms such that Generate Lending derives an after-tax yield of no less than a 12% internal rate of return on an investment of greater than 10% of the total purchase price. FCEF II and Generate Lending will enter into an arrangement to share any returns realized in excess of the foregoing target return. In the event that FCEF II does not sell or refinance an Approved Project within ninety days following the Working Capital Loan maturity date (or such other date as may be mutually agreed), then the outstanding balance of the Working Capital Loan on such Approved Project shall convert into a 100% equity ownership of the applicable project company owning such Approved Project through execution of a Membership Interest Purchase Agreement (“MIPA”) with Generate Lending. At that time, Generate Lending will own the project and FCEF II will not have any repayment obligations. Included in the applicable MIPA for each Approved Project subject to this provision will be a conditional purchase price adjustment for FCEF II equal to 50% of any distributions to Generate Lending after Generate Lending has achieved a 10% inefficient after-tax, unlevered
32
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
internal rate of return. In the event that
FCEF II
and
Generate Lending
are unable to come to terms on a MIPA for any Approved Project, the Working Capital Loan for such Approved Project will be required to be repaid in full without pena
lty or premium.
FCEF II will pay a draw down fee equal to 3% of the amount of each Working Capital Loan and certain other diligence and administration fees. Upon the sale of any Approved Project to a third party, Generate Lending will be entitled to a disposition fee equal to 3% of the total sale price (“Disposition Fee”). At such time as Generate Lending has made Working Capital Loans in the aggregate amount of greater than $100,000,000 but less than $200,000,000, the Disposition Fee is reduced to 2% and in the aggregate amount of greater than $200,000,000 but less than $300,000,000, the Disposition Fee is reduced to 1%.
The initial draw amount under the Generate Facility, funded at closing, was $10.0 million. The initial draw reflects loan advances for the first Approved Project under the Generate Facility, the Bolthouse Farms 5 MW project in California. Additional drawdowns are expected to take place as the Company completes certain project milestones. Given the Company’s current liquidity position, it is possible that projects may be delayed impacting amounts and timing of future funding. Delays in project execution may also lead to events of default under the Generate Facility.
On January 9, 2019, the Company, through its indirect wholly-owned subsidiary TRS Fuel Cell, LLC, entered into a Loan and Security Agreement (the “Enhanced Capital Loan Agreement”) with Enhanced Capital Connecticut Fund V, LLC in the amount of $1.5 million. Interest will accrue at a rate of 6.0% per annum, calculated on a 30/360 basis, on all outstanding principal, paid on the first business day of each month. The loan maturity date is three years from the date of the Enhanced Capital Loan Agreement upon which the outstanding principal and accrued interest will be payable.
On February 28, 2019, the Company, through its indirect wholly-owned subsidiary, Groton Station Fuel Cell, LLC (“Groton Borrower”), entered into a Construction Loan Agreement (the “Groton Agreement”) with Fifth Third Bank (“Fifth Third”) pursuant to which Fifth Third agreed to make available to Groton Borrower a construction loan facility in an aggregate principal amount of up to $23.0 million (the “Groton Facility”) to fund the manufacture, construction, installation, commissioning and start-up of the
7.4
MW fuel cell power plant for the Connecticut Municipal Electric Energy Cooperative located on the U.S. Navy submarine base in Groton, Connecticut (the “Groton Project”). Groton Borrower made an initial draw under the Groton Facility on the date of closing of $
9.7
million and made a draw of $1.4 million in April 2019. The total outstanding balance as of April 30, 2019 was $11.1 million.
Amounts borrowed under the Groton Facility bear interest at a rate equal to the sum of the one-month LIBOR Rate plus
2.25
%. Regular monthly payments are interest-only. Amounts borrowed under the Groton Facility may be prepaid at any time without penalty. The maturity date of the Groton Facility will be the earlier of (a) October 31, 2019, (b) the commercial operation date of the Groton Project, or (c) one business day after receipt of proceeds of debt financing (i.e., take out financing) in an amount sufficient to repay the outstanding indebtedness under the Groton Facility. Mandatory prepayments are required in the event of material damage or destruction to the Groton Project or a change of control of Groton Borrower.
The Company has agreed to guarantee Groton Borrower’s obligations under the Groton Agreement. In addition, Groton Borrower’s obligations under the Groton Agreement are secured by a first mortgage lien on Groton Borrower’s leasehold interest in the Groton Project site, a security interest in the Groton Project assets, including material Groton Project related contracts such as the power purchase agreement and EPC agreement, and the Company’s equity interest in the Groton Borrower.
The Groton Agreement contains customary representations and warranties, affirmative and negative covenants, and events of default that entitle Fifth Third to cause the indebtedness under the Groton Facility to become immediately due and payable.
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, as amended, which is being amortized over the 30-month life of the loan.
Note 16. Income Taxes
The Company recorded income tax expense of $0.1 million for the three and six months ended April 30, 2019 compared to an income tax benefit totaling $3.0 million for the six months ended April 30, 2018. There was no income tax expense recorded for the three months ended April 30, 2018. The income tax benefit for the six months ended April 30, 2018 primarily related to the Tax Cuts and Jobs Act (the “Act”) that was enacted on December 22, 2017. The Act reduced the U.S. federal corporate tax rate from 34% to 21%
33
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
effective January 1, 2018 which resulted in a deferred tax benefit of $1.0 million
primarily
related to a reduction of the Company’s deferred tax liability for
an
in process research and development
asset
(“IPR
&D”).
The Act also established an unlimited carryforward period for the net operating loss (“NOL”) the Company
generated
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
its
IPR&D
asset
.
Note 17. Commitments and Contingencies
Lease Agreements
As of April 30, 2019 and October 31, 2018, the Company had equipment financing and capital lease obligations of $0.2 million and $0.3 million, respectively. 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.
Non-cancelable minimum payments applicable to operating and capital leases as of April 30, 2019 were as follows:
|
|
|
Operating
Leases
|
|
|
Capital
Leases
|
|
|
Due Year 1
|
|
$
|
814
|
|
|
$
|
171
|
|
|
Due Year 2
|
|
|
470
|
|
|
|
61
|
|
|
Due Year 3
|
|
|
443
|
|
|
|
15
|
|
|
Due Year 4
|
|
|
422
|
|
|
|
2
|
|
|
Due Year 5
|
|
|
374
|
|
|
|
—
|
|
|
Thereafter
|
|
|
2,817
|
|
|
|
—
|
|
|
Total
|
|
$
|
5,340
|
|
|
$
|
249
|
|
Service Agreements
Under the provisions of its service agreements, the Company provides services to maintain, monitor, and repair customer power plants to meet minimum operating levels. Under the terms of such 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, the Company may be subject to performance penalties and/or may be required to repair or replace the customer’s fuel cell module(s).
Power Purchase Agreements
Under the terms of the Company’s PPAs, customers agree to purchase power from the Company’s fuel cell power plants at negotiated rates. Electricity rates are generally a function of the customers’ current and estimated future electricity pricing available from the grid. As owner or lessee of the power plants, the Company is responsible for all operating costs necessary to maintain, monitor and repair the power plants. Under certain agreements, the Company is also responsible for procuring fuel, generally natural gas or biogas, to run the power plants.
Other
As of April 30, 2019, the Company had unconditional purchase commitments aggregating $48.1 million, for materials, supplies and services in the normal course of business.
The Company is involved in legal proceedings, claims and litigation arising out of the ordinary conduct of its business. Although the Company 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 the Company’s consolidated financial statements, and no material amounts have been accrued in the Company’s consolidated financial statements with respect to these matters.
34
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 1
8
. Subsequent Events
Acquisition of Bridgeport Fuel Cell Project and Execution of Related Credit Agreements
On October 31, 2018, FuelCell Finance, entered into a membership interest purchase agreement (the “Purchase Agreement”) with Dominion Generation, Inc., amended on January 15, 2019 and May 9, 2019, pursuant to which FuelCell Finance purchased (on May 9, 2019) all of the outstanding membership interests in Dominion Bridgeport Fuel Cell, LLC
(which is now known as Bridgeport Fuel Cell, LLC) (“BFC”
). BFC owns a 14.9 MW fuel cell park in Bridgeport, Connecticut (the “Bridgeport Fuel Cell Project”), which the Company originally developed and constructed and has been operating for the past five years under a long term services agreement.
On May 9, 2019, FuelCell Finance closed on the purchase of BFC for a total purchase price of approximately $35.5 million, subject to a dollar-for-dollar post-closing adjustment to the extent that the closing working capital is greater or less than $1.0 million (the “Purchase Price”).
Also on May 9, 2019, in connection with the purchase of BFC, FuelCell Finance entered into a Credit Agreement with Liberty Bank, as administrative agent and co-lead arranger and Fifth Third as co-lead arranger and swap hedger (the “Credit Agreement”) whereby (i) Fifth Third provided financing to BFC in the amount of $12.5 million towards the Purchase Price; and (ii) Liberty Bank provided financing to BFC in the amount of $12.5 million towards the Purchase Price. As security for the Credit Agreement, Liberty Bank and Fifth Third were granted a first priority lien in (i) all assets of BFC, including BFC’s cash accounts, fuel cells, and all other personal property, as well as third party contracts including the Energy Purchase Agreement between BFC and Connecticut Light and Power Company dated July 10, 2009, as amended; (ii) certain newly manufactured fuel cell modules located at 3 Great Pasture Road, Danbury, CT that are intended to be used to replace the Bridgeport Fuel Cell Project’s fuel cell modules as part of routine operation and maintenance; and (iii) FuelCell Finance’s ownership interest in BFC.
BFC has the right to make additional principal payments or pay the balance due under the Credit Agreement in full provided that it pays any associated breakage fees with regard to the interest rate swap agreements fixing the interest rate, discussed below. The maturity date is May 9, 2025. The interest rate under the Credit Agreement fluctuates monthly at the 30-day LIBOR rate plus 275 basis points on a total notional value of $25.0 million. An interest rate swap agreement
was required to be entered into with Fifth Third in connection with the Credit Agreement to protect against movements in the floating LIBOR index. Accordingly, on May 16, 2019, BFC entered into the 1992 ISDA Master Agreement, along with the Schedule to such Agreement, with Fifth Third, and executed the related trade confirmations on May 17, 2019. Pursuant to the terms of such Agreement, Fifth Third and BFC will pay a fixed rate of interest of 2.34% multiplied by the notional amount of the swap in exchange for receipt of period payments based on a floating rate index of 2.75% multiplied by the same notional amount upon which the fixed rate payments are derived, with the notional amount in each case being equal to the outstanding principal amount under the loans from Fifth Third and Liberty Bank. The net interest rate across the Credit Agreement and the swap transaction totals a fixed rate of 5.09%.
The obligations of BFC to Fifth Third under the swap agreement are treated as obligations under the Credit Agreement and, accordingly, are secured by the same collateral securing the obligations of BFC under the Credit Agreement.
The Credit Agreement also requires BFC to maintain a debt service reserve at each of Liberty Bank and Fifth Third of $1.25 million, which debt service reserves were funded on May 10, 2019, to be held in deposit accounts at each respective bank, with funds to be disbursed with the consent of or at the request of the required lenders in their sole discretion. Each of Liberty Bank and Fifth Third also has an operation and module replacement reserve (“O&M Reserve”) of $250.0 thousand, both of which were funded at closing, to be held in deposit accounts at each respective bank, and thereafter BFC is required to deposit $100.0 thousand per month into each O&M Reserve for the first five years of the Credit Agreement, with such funds to be released at the sole discretion of Liberty Bank and Fifth Third, as applicable. BFC is also required to maintain excess cash flow reserve accounts at each of Liberty Bank and Fifth Third and to deposit 50% of the excess cash flows from the Bridgeport Fuel Cell Project into these accounts. Excess cash flow consists of cash generated by BFC from the Bridgeport Fuel Cell Project after payment of all expenses (including after payment of service fees to the Company), debt service to Liberty Bank and Fifth Third, the funding of all required reserves, and payments to Connecticut Green Bank for the subordinated facility (as described below). BFC is also required to maintain a debt service coverage ratio of not less than 1.20, measured annually. The Credit Agreement contains customary representations, warranties and covenants.
In addition, on May 9, 2019, in connection with the closing of the purchase of BFC, BFC entered into a subordinated credit agreement with the Connecticut Green Bank whereby Connecticut Green Bank provided financing in the amount of $6.0 million (the “Subordinated
35
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Credit Agreement”), $1.8 million of which was used to collateralize a letter of credit issued by Liberty Bank to satisfy a performance assurance requirement in the Energy Purchase Agreement with Connecticut Light and Power Company and
the balance of which was applied toward outstanding principal on the Company’s existing indebtedness to Connecticut Green Bank. As security for the Subordinated Credit Agreement, Connecticut Green Bank received a perfected lien, subordinated and second i
n priority to the liens securing the
$25.0
million
(senior term loan amount) loaned under the Credit Agreement, in all of the same collateral securing the Credit Agreement. The interest rate under the Subordinated Credit Agreement is 8% per annum. A commi
tment fee of
$60.0
thousand
was earned by Connecticut Green Bank in connection with the closing. The debt service coverage ratio required to be maintained under the Subordinated Credit Agreement may not be less than 1.10 as of the end of each fiscal quarte
r. The term of the Subordinated Credit Agreement expires 7 years from the date of the advance of the loan. Principal and interest are due monthly in amounts sufficient to fully amortize the loan over an 84 month period. However, monthly debt service paymen
ts can accumulate in arrearages in the event that BFC does not have sufficient cash to make any monthly debt service payment. BFC has the right to make additional principal payments or pay the balance in full at any time without additional fees or penalti
es. The Subordinated Credit Agreement also con
tains customary representations
, warranties and covenants.
The balance of the financing for the acquisition was from the $15 million of restricted cash on hand that was tied to the Bridgeport Fuel Cell Project and released at closing.
Hercules Loan and Security Agreement Amendments
On May 8, 2019, the Company and Hercules (and various affiliated entities) entered into the eighth amendment to the Hercules Agreement pursuant to which the Company was required, at all times commencing on May 1, 2019 through 2:00 pm Eastern Time on June 7, 2019, to maintain an unrestricted cash balance of at least 40% of the outstanding loan balance, in accounts subject to an account control agreement in favor of Hercules. After 2:00 pm Eastern Time on June 7, 2019, the Company was required to maintain, at all times, an unrestricted cash balance of at least (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, in accounts subject to an account control agreement in favor of Hercules.
In connection with the execution of this amendment, the Company paid a $250,000 non-refundable fee to Hercules.
On June 11, 2019 (the “Ninth Amendment Effective Date”), the Company and each of its qualified subsidiaries, as borrower, certain banks and other financial institutions, as lender, and Hercules, as administrative agent for itself and lender, entered into the ninth amendment to the Hercules Agreement (the “Ninth Hercules Amendment”). Under the Ninth Hercules Amendment, borrower has agreed, among other things, to: (a) no later than June 11, 2019, pay lender $1.4 million to be applied towards the outstanding balance of the loan; (b) no later than June 26, 2019, direct EMRE (as defined below) to pay lender $6.0 million of the $10.0 million payable under the EMRE License Agreement (as defined below) to be applied towards the outstanding balance of the loan; and (c) on each of July 1, 2019 and August 1, 2019, pay lender interest-only payments on the outstanding principal balance of the loan. Borrower has further agreed that interest at the default rate of five percent per annum (in addition to the current interest rate) will accrue from June 3, 2019; provided, however, that, in the event that all of the secured obligations are paid in full on or prior to the last day of the Amendment Period (as defined below), lender will fully and unconditionally waive its right to payment of accrued and unpaid default interest. In such circumstances, lender will also fully and unconditionally waive payment of the prepayment charge which would have been two percent of the outstanding loan balance. In the Ninth Hercules Amendment, the term “Amendment Period” is defined as the period from and after the Ninth Amendment Effective Date through the earlier of (i) August 9, 2019 and (ii) the occurrence of any event of default under the Ninth Hercules Amendment.
In addition, Hercules has waived borrower’s compliance with certain financial reporting covenants and the minimum unrestricted cash balance covenant set forth in the Hercules Agreement, in each case from June 11, 2019 through the end of the Amendment Period. Hercules further agreed that borrower is permitted to use and maintain one or more deposit accounts that are not subject to any account control agreements for the purpose of borrower’s receipt and use of $4.0 million of the $10.0 million to be received from EMRE under the EMRE License Agreement.
Any failure by borrower to timely perform any of the obligations under the Ninth Hercules Amendment will constitute an event of default under the Hercules Agreement. Upon any failure by borrower to timely perform any of the obligations under the Ninth Hercules Amendment, Hercules will be permitted to issue a notice of default with respect to such an event of default and any other defaults that may exist, whether arising prior to the Ninth Amendment Effective Date or otherwise.
36
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
As of June 11, 2019,
prior t
o the application of the payments made and to be made to Hercules as described above,
the outstanding principal balance under the
Hercules
Agreement was approximately $20.9 million.
Management is exploring refinancing alternatives for the Company’s senior secured credit facility with Hercules. If the Company is not able to consummate such a refinancing transaction by August 9, 2019, and if Hercules is not willing to provide further accommodations, the Company could default on its obligations under its senior secured credit facility with Hercules, which would trigger additional defaults under other agreements.
Advanced Technology License Agreement
Effective as of June 11, 2019, the Company entered into the EMRE License Agreement with EMRE, pursuant to which the Company has agreed, subject to the terms of the EMRE License Agreement, to grant EMRE and its affiliates a non-exclusive, worldwide, fully paid, perpetual, irrevocable, non-transferrable license and right to use the Company’s patents, data, know-how, improvements, equipment designs, methods, processes and the like to the extent it is useful to research, develop, and commercially exploit carbonate fuel cells in applications in which the fuel cells concentrate carbon dioxide from industrial and power sources and for any other purpose attendant thereto or associated therewith. Such right and license is sublicensable to third parties performing work for or with EMRE or its affiliates, but shall not otherwise be sublicensable. Upon the payment by EMRE to the Company of
$10.0 million, which was received by the Company on June 14, 2019, EMRE and its affiliates were fully vested in the rights and licenses granted in the EMRE License Agreement.
Series B Preferred Stock
No dividends were declared or paid by the Company on the Series B Preferred Stock in connection with the May 15, 2019 dividend payment date. Based on the dividend rate in effect on May 15, 2019, the aggregate amount of such dividend payment would have been $0.8 million. Because such dividends were not paid on May 15, under the terms of the Amended Certificate of Designation with respect to the Series B Preferred Stock,
the holders of shares of Series B Preferred Stock will be entitled to receive, when, as and if, declared by the Board of Directors, dividends at the normal dividend rate plus an additional 25% of the unpaid dividend in subsequent dividend periods until the Company has paid or provided for the payment of all dividends on the shares of Series B Preferred Stock for all prior dividend periods. Thus, a total of $1.0 million would be payable with respect to the May 15 dividend period, if and when declared by the Board of Directors.
Series C Preferred Stock
Subsequent to April 30, 2019, the holders of the Series C Preferred Stock converted 1,618 Series C Preferred Shares into 1,658,861shares of common stock resulting in a reduction of $3.2 million, which represents the carrying value of the Series C Preferred Stock at April 30, 2019, to bring the amount of outstanding Series C Preferred Shares to zero and thus retirement of the instrument.
Series D Preferred Stock
As described in
Note 12, “Redeemable Preferred Stock”, the holders of the Series D Preferred Stock have the right,
upon the occurrence of various triggering events, as defined in the Series D Certificate of Designation and described in Note 12, to convert their shares at a reduced conversion price or to require the redemption of their shares, including a redemption premium. During the week of June 10, 2019, the holders of the Series D Preferred Stock asserted that certain triggering events had occurred under the Series D Certificate of Designation and indicated their intent to exercise their rights to convert certain of their shares at a reduced conversion price. While the Company does not agree with the basis for their assertions or their characterization of such events, there are provisions under the Series D Certificate of Designation which may be interpreted as giving them the right to demand such conversion at a reduced conversion price. Accordingly (rather than disputing such right), the Company has effected certain conversions at a reduced conversion prices of $0.4619, which are equal to the lower of the Series D Conversion Price in effect on the Trading Day (as such term is defined in the Series D Certificate of Designation) immediately preceding the delivery of the conversion notice and 85% of the lowest VWAP of the common stock on any of the five consecutive Trading Days ending on the Trading Day immediately prior to delivery of the applicable conversion notice. This conversion right commences on the date of the triggering event and ends on the later of (i) the date the triggering event is cured and (ii) ten Trading Days after the Company delivers notice of the triggering event.
As of June 13, 2019, due to
37
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
conversions,
there were 8,396 shares of Series D Preferred Stock issued and outstanding with a
liquidation
value of $8.
4
million
.
There were approximately
12.
1
million common shares issued subsequent to April 30, 2019 due to conversions of Series D Preferred Shares
.
In the event of a triggering event (as defined in the Series D Certificate of Designation and summarized above), the holders of Series D Preferred Shares may require the Company to redeem such Series D Preferred Shares in cash at a price equal to the greater of (a) 125% of the stated value of the Series D Preferred Shares being redeemed plus accrued dividends, if any, and (b) the market value of the number of shares issuable on conversion of the Series D Preferred Shares, valued at the greatest closing sales price during the period from the date immediately before the triggering event through the date the Company makes the redemption payment.
NRG Loan Agreement
On June 13, 2019, FuelCell Finance and NRG entered into a fourth amendment to the NRG Loan Agreement, which amends the definition of “Maturity Date” under the NRG Loan Agreement. Pursuant to the fourth amendment, the Maturity Date of each note is now the date that is the earlier of (a) July 12, 2019, (b) the commercial operation date or substantial completion date, as applicable, with respect to the fuel cell project owned by the borrower under such note, and (c) closing of a refinancing of indebtedness.
38
first quarter of the following fiscal year. Should the Executive no longer be employed by the Corporation on the date such Discretionary Bonus is paid, such Discretionary Bonus shall be forfeited. As any bonus paid to Executive is discretionary, the payment of any bonus in a year must not be construed as requiring the payment of a bonus in any other year.
plans (including, without limitations, the Corporation's 401(k) plan), and other employee benefit plans which the Corporation may hereafter in its sole and absolute discretion make available generally to its senior executives (other than any incentive compensation or equity ownership plan), but the Corporation shall not be required to establish or maintain any such program or plan.
period beginning on the Executive's date of termination of employment, with payments made to the Executive in equal installments during each of the Corporation's usual pay periods during such six month period.
g.
By Executive Following Change of Control
. Executive may, at his option, upon thirty (30) days written notice to the Corporation, terminate his employment hereunder for Good Reason (as defined in Section 12(f) above) following a Change of Control of the Corporation. Upon any termination by Executive under this Paragraph (g), the Corporation shall be obligated to pay Executive the amounts specified in Section 12(d). Termination by Executive pursuant to this paragraph shall not be deemed a voluntary termination by Executive pursuant to Section 12(j) hereof.
Arbitration: Waiver of Trial by Jury
. Executive and the Corporation shall submit any disputes arising under this Agreement to an arbitration panel conducting a binding arbitration in Hartford, Connecticut or at such other location as may be agreeable to the parties, in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association in effect on the date of such arbitration (the "Rules"), and judgment upon the award rendered by the arbitrator or arbitrators may be entered in any court having jurisdiction thereof; provided, however, that nothing herein shall impair the Corporation's right to seek equitable relief in any court for any breach or threatened breach of Section 8 or Section 9. The award of the arbitrators shall be final and shall be the sole and exclusive remedy between the parties regarding any claims, counterclaims, issues or accountings presented to the arbitration panel. The parties hereto further agree that the arbitration panel shall consist of one (l) person mutually acceptable to the Corporation and Executive, provided that if the parties cannot agree on an arbitrator within thirty (30) days of filing a notice of arbitration, the arbitrator shall be selected by the manager of the principal office of the American Arbitration Association serving Hartford County in the State of Connecticut. Each party will pay for the fees and expenses of its own attorneys, experts, witnesses, and preparation and presentation of proofs and post-hearing briefs (unless (i) the party prevails on a claim for which attorney's fees and expenses are recoverable under the Rules and those amounts are included as part of the award or (ii) Executive prevails on a claim for breach of this Agreement after the Corporation has terminated Executive pursuant to Section 12c hereof, in which case, the Corporation will pay for Executive's above described fees and expenses related to such claim). Any action to enforce or vacate the arbitrator's award shall be governed by the federal Arbitration Act, if applicable, and otherwise by applicable state law. If either the Corporation or Executive pursues any claim, dispute or controversy against the other in a proceeding other than the arbitration provided for herein, the responding party shall be entitled to dismissal or injunctive relief regarding such action and recovery of all costs, losses and attorney's fees related to such action. Executive acknowledges and expressly agrees that this arbitration provision constitutes a knowing and voluntary waiver of trial by jury in any action or proceeding to which Executive and the Corporation may be parties arising out of or pertaining to this Agreement.
