We have audited the accompanying consolidated balance sheets of FuelCell Energy, Inc. and subsidiaries as of October 31, 2017 and 2016, and the related consolidated statements of operations and comprehensive loss, changes in equity, and cash flows for each of the years in the three‑year period ended October 31, 2017. We also have audited FuelCell Energy, Inc.’s internal control over financial reporting as of October 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). FuelCell Energy, Inc.’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FuelCell Energy, Inc. and subsidiaries as of October 31, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the three‑year period ended October 31, 2017, in conformity with U.S. generally accepted accounting principles. Also in our opinion, FuelCell Energy, Inc. maintained, in all material respects, effective internal control over financial reporting as of October 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Note 1. Nature of Business, Basis of Prese
ntation and Sign
ificant Accounting Policies
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.
The consolidated financial statements include our accounts and those of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. In October 2016, the Company purchased the noncontrolling interest in FuelCell Energy Services, GmbH.
Certain reclassifications have been made to conform to the fiscal year 2017 presentation. The Company has adopted Accounting Standards Update (“ASU”) 2015-03, Interest – Imputation of Interest effective January 31, 2017, and retrospective application is required which resulted in a reclassification in our Consolidated Balance Sheet as of October 31, 2016 of $0.3 million of debt issuance costs from Current assets to be a direct deduction from Current portion of long-term debt and a reclassification of $1.1 million of debt issuance costs from Other assets, net to be a direct deduction from Long-term debt and other liabilities. The Company has also included an additional line item, “Generation,” in the “Revenues” and “Cost of revenues” sections of the Statements of Operations to include revenues generated from the Company’s project assets (refer to the Revenue Recognition section below for more information). The prior year amounts associated with power purchase agreements have been reclassified to the new “Generation” line item.
Significant Accounting Policies
Cash and Cash Equivalents and Restricted Cash
All cash equivalents consist of investments in money market funds with original maturities of three months or less at date of acquisition. We place our temporary cash investments with high credit quality financial institutions. As of October 31, 2017, $38.2 million of cash and cash equivalents was pledged as collateral for letters of credit and for certain banking requirements and contractual commitments, compared to $34.1 million pledged as of October 31, 2016. The restricted cash balance includes $15.0 million as of October 31, 2017 and 2016, which has been placed in a Grantor's Trust account to secure certain obligations of the Company under a 15-year service agreement for the Bridgeport Fuel Cell Park project and has been classified as Restricted cash and cash equivalents - long-term. As of October 31, 2017 and 2016, we had outstanding letters of credit of $2.9 million and $7.9 million, respectively, which expire on various dates through April 2019. Cash and cash equivalents as of October 31, 2017 and 2016 also included $3.0 million and $5.3 million, respectively, of cash advanced by POSCO Energy for raw material purchases made on its behalf by FuelCell Energy. Under an inventory procurement agreement that ensures coordinated purchasing from the global supply chain, FuelCell Energy provides procurement services for POSCO Energy and receives compensation for services rendered. While POSCO Energy makes payments to us in advance of supplier requirements, quarterly receipts may not match disbursements.
Inventories and Advance Payments to Vendors
Inventories consist principally of raw materials and work-in-process. Cost is determined using the first-in, first-out cost method. In certain circumstances, we will make advance payments to vendors for future inventory deliveries. These advance payments are recorded as Other current assets on the consolidated balance sheets.
Inventories are reviewed to determine if valuation allowances are required for obsolescence (excess and obsolete). This review includes analyzing inventory levels of individual parts considering the current design of our products
87
a
nd production requirements as well as the expected inventory requirements for maintenance on installed power plants.
Project Assets
Project assets consist of capitalized costs for fuel cell projects in various stages of development, whereby we have entered into power purchase agreements prior to entering into a definitive sales or long-term financing agreement for the project, or of capitalized costs for fuel cell projects which are the subject of a sale-leaseback transaction with PNC or projects in development for which we expect to secure long-term contracts. These projects are actively being marketed and intended to be sold, although we may choose to retain ownership of one or more of these projects after they become operational if we determine it would be of economic and strategic benefit. Additionally, Project assets include capitalized costs for fuel cell projects which are the subject of a sale-leaseback transaction (see "Sale-Leaseback Facility" below). Project asset costs include costs for developing and constructing a complete turn-key fuel cell project. Development costs can include legal, consulting, permitting, interconnect, and other similar costs. Once we enter into a definitive sales agreement we expense project assets to cost of sales after the respective project asset is sold to a customer and all revenue recognition criteria have been met. We classify project assets as current if the expected commercial operation date is less than twelve months and long-term if it is greater than twelve months from the balance sheet date. There were no short-term project assets as of October 31, 2017. We review project assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation provided on the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized on the straight-line method over the shorter of the estimated useful lives of the assets or the term of the lease. When property is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations for the period.
Intellectual Property
Intellectual property, including internally generated patents and know-how, is carried at no value.
Goodwill and Intangible Assets
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination and is reviewed for impairment at least annually.
Accounting Standards Codification Topic 350, "Intangibles - Goodwill and Other", (“ASC 350”) permits the assessment of qualitative factors to determine whether events and circumstances lead to the conclusion that it is necessary to perform the two-step goodwill impairment test required under ASC 350.
The Company completed its annual impairment analysis of goodwill and the in-process research & development assets (IPR&D) as of July 31, 2017. The goodwill and IPR&D asset are both held by the Company’s Versa reporting unit. Goodwill and the IPR&D asset are also reviewed for possible impairment whenever changes in conditions indicate that the fair value of a reporting unit or IPR&D asset are more likely than not below its carrying value. No impairment charges were recorded during any of the years presented.
Impairment of Long Lived Assets (including Project Assets)
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. If events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable, we compare the carrying amount of an asset group to future undiscounted net cash flows, excluding interest costs, expected to be generated by the asset group and their ultimate disposition. If the sum of the undiscounted cash flows is less than the carrying value, the impairment to be
88
recognized is measured by the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs t
o sell. No impairment charges were recorded during any of the years presented.
Revenue Recognition
We earn revenue from (i) the sale and installation of fuel cell power plants including site engineering and construction services, (ii) equipment only sales (modules, balance of plants (“BOP”), component part kits and spare parts to customers), (iii) performance under long-term service agreements, (iv) the sale of electricity and other value streams under power purchase agreements (“PPAs”) and utility tariffs from project assets retained by the Company, (v) license fees and royalty income from manufacturing and technology transfer agreements, and (vi) government and customer-sponsored Advanced Technologies projects.
Given the growing revenue related to PPAs and project assets retained by the Company, beginning in the first quarter of 2017, the Company began classifying such revenues in a separate line item called Generation, and prior period amounts have been reclassified. As further clarification, revenue elements are classified as follows:
Product.
Includes the sale and installation of fuel cell power plants and site engineering and construction services, and, the sale of component part kits, modules, BOPs and spare parts to customers.
Service and license.
Includes performance under long-term service agreements for power plants owned by third parties and 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 and renewable energy credits.
Advanced Technologies.
Includes revenue from customer-sponsored and government-sponsored Advanced Technologies projects.
Our revenue is generated from customers located throughout the U.S., Europe and Asia and from agencies of the U.S. government.
For customer contracts where the Company is responsible for supply of equipment and site construction (full turn-key construction project) and has adequate cost history and estimating experience, and with respect to which management believes it can reasonably estimate total contract costs, revenue is recognized under the percentage of completion method of accounting. The use of percentage of completion accounting requires significant judgment relative to estimating total contract costs, including assumptions relative to the length of time to complete the contract, the nature and complexity of the work to be performed and total project costs. Our estimates are based upon the professional knowledge and experience of our engineers, project managers and other personnel, who review each long-term contract on a quarterly basis to assess the contract’s schedule, performance, technical matters and estimated cost at completion. When changes in estimated contract costs are identified, such revisions may result in current period adjustments to operations applicable to performance in prior periods. Revenues are recognized based on the percentage of the contract value that incurred costs to date bear to estimated total contract costs, after giving effect to estimates of costs to complete based on most recent information. For customer contracts for new or significantly customized products, where management does not believe it has the ability to reasonably estimate total contract costs, revenue is recognized using the completed contract method and therefore all revenue and costs for the contract are deferred and not recognized until installation and acceptance of the power plant is complete. We recognize anticipated contract losses as soon as they become known and estimable. Actual results could vary from initial estimates and estimates will be updated as conditions change.
Revenue from equipment only sales where the Company does not have the obligations associated with overall construction of the project (modules, BOPs, fuel cell kits and spare parts sales) is recognized upon shipment or title transfer under the terms of the customer contract. Terms for certain contracts provide for a transfer of title and risk of loss to our customers at our factory locations and certain key suppliers upon completion of our contractual requirement to produce products and prepare the products for shipment. A shipment in place may occur in the event that the customer is not ready to take delivery of the products on the contractually specified delivery dates.
89
In June 2017, an
EPC contractor, Hanyang Industrial Development Co., Ltd (“HYD”), was awarded a 20
MW
project
by a utility in South Korea (Korea Southern Power Company) utilizing the Company’s SureSource technology. On August 29, 2017, the Company entered into a contract
with HYD pursuant to which the Company will provide equipment to HYD for this 20
MW fuel cell project as well as ancillary services including plant commissioning
. Construction began in fall 2017 and the installation is expected to be operational in the s
ummer of 2018. The value of the contract to the Company is in excess of $60 million. The Company assessed the contract using the multi-element revenue recognition guidance and determined that
each of the modules and BOPs as well as the ancillary services
each represent separate deliverables with stand-alone value
. The full contract value was allocated to each element based on estimated selling prices using
cost plus
expected margins and revenue recognition will occur upon completion of shipping and custo
mer acceptance of each piece of equipment and the
proportional performance
method is being used for ancillary services as provided. Approximately $39 million of revenue was recognized in the fourth quarter of fiscal 2017 related to this contract. The con
tract includes performance penalties and partial termination rights if certain delivery dates are not met or if individual equipment deliverables do not pass final acceptance tests after three tries due to issues solely attributable to the Company.
Revenue from service agreements is generally recorded ratably over the term of the service agreement, as our performance of routine monitoring and maintenance under these service agreements is generally expected to be incurred on a straight-line basis. For service agreements where we expect to have module exchanges at some point during the term (generally service agreements in excess of five years), the costs of performance are not expected to be incurred on a straight-line basis, and therefore, a portion of the initial contract value related to the module exchange(s) is deferred and is recognized upon such module replacement event(s).
We generally recognize license fees and other revenue over the term of the associated agreement. License fees and royalty income have been included within revenues on the consolidated statement of operations. The Company receives license fees and royalty income from POSCO Energy as a result of manufacturing and technology transfer agreements entered into in 2007, 2009 and 2012. The Cell Technology Transfer Agreement we entered into on October 31, 2012 provides POSCO Energy with the technology rights to manufacture SureSource power plants in South Korea. On March 17, 2017, the Company entered into a Memorandum of Understanding (“2017 MOU”) with POSCO Energy to permit us to directly develop the Asian fuel cell business, including the right for us to sell SureSource solutions in South Korea and the broader Asian market. We and POSCO Energy also agreed to undertake to amend certain technology transfer and other agreements by a target date of September 30, 2017 to reflect our new relationship. Although these agreements have not yet been amended, we continue to engage in discussions with POSCO Energy regarding our relationship and the direction of the fuel cell business in the South Korean and Asian markets.
Pursuant to the 2017 MOU, the Company commenced marketing the entire suite of SureSource solutions in South Korea as well as the broader Asian markets for the supply, recovery and storage of energy.
Under PPAs and project assets retained by the Company, revenue from the sale of electricity and other value streams is recognized as electricity is provided to the customer. These revenues are classified as a component of generation revenues.
Advanced Technologies contracts include both private industry and government entities. 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 from fixed price Advanced Technologies projects is recognized using percentage of completion accounting. Advanced Technologies programs are often multi-year projects or structured in phases with subsequent phases dependent on reaching certain milestones prior to additional funding being authorized. Government contracts are typically structured with cost-reimbursement and/or cost-shared type contracts or cooperative agreements. We are reimbursed for reasonable and allocable costs up to the reimbursement limits set by the contract or cooperative agreement, and on certain contracts we are reimbursed only a portion of the costs incurred.
Sale-Leaseback Accounting
From time to time, the Company, through a wholly-owned subsidiary, enters into sale-leaseback transactions for commissioned projects where we have entered into a PPA with a customer who is both the site host and end user of
90
the pow
er (the "Customer"). Due to the Company's continuing involvement with the project and because the projects are considered integral equipment, sale accounting is precluded by ASC 840-40. Accordingly, the Company uses the financing method to account for th
ese transactions.
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 constitutes payment to acquire the assets subject to these arrangements. Instead, the sale proceeds received are accounted for as financing obligations and leaseback payments made by the Company are allocated between interest expense and a reduction to the financing obligation. Interest on the financing obligation is calculated using the Company’s incremental borrowing rate at the inception of the arrangement on the outstanding financing obligation. Judgment is required to determine the appropriate borrowing rate for the arrangement and in determining any gain or loss on the transaction that would be recorded at the end of the lease term. While we receive financing for the full value of the related power plant asset, we have not recognized revenue on the sale leaseback transaction. Instead, revenue is recognized through the sale of electricity and energy credits which are generated as energy is produced.
Warranty and Service Expense Recognition
We warranty our products for a specific period of time against manufacturing or performance defects. Our U.S. warranty is limited to a term generally 15 months after shipment or 12 months after acceptance of our products. We accrue for estimated future warranty costs based on historical experience. We also provide for a specific accrual if there is a known issue requiring repair during the warranty period. Estimates used to record warranty accruals are updated as we gain further operating experience. As of October 31, 2017 and 2016, the warranty accrual, which is classified in accrued liabilities on the consolidated balance sheet, totaled $0.3 million and $0.5 million, respectively.
In addition to the standard product warranty, we have entered into service agreements with certain customers to provide monitoring, maintenance and repair services for fuel cell power plants. Under the terms of these service agreements, the power plant must meet a minimum operating output during the term. If minimum output falls below the contract requirement, we may be subject to performance penalties or may be required to repair and/or replace the customer's fuel cell module. The Company has accrued for performance guarantees of $2.2 million and $3.3 million as of October 31, 2017 and 2016, respectively.
The Company provides for loss accruals for all service agreements when the estimated cost of future module exchanges and maintenance and monitoring activities exceeds the remaining contract value. Estimates for future costs on service agreements are determined by a number of factors including the estimated remaining life of the module, used replacement modules available, our limit of liability on service agreements and future operating plans for the power plant. Our estimates are performed on a contract by contract basis and include cost assumptions based on what we anticipate the service requirements will be to fulfill obligations for each contract. As of October 31, 2017, our loss accruals on service agreements totaled $1.1 million compared to $2.7 million as of October 31, 2016.
At the end of our service agreements, customers are expected to either renew the service agreement or based on the Company's rights to title of the module, the module will be returned to the Company as the plant is no longer being monitored or having routine service performed. As of October 31, 2016, the Company did not have an asset related to the residual value of replacement modules in power plants under service agreements compared to $1.0 million as of October 31, 2017.
License Agreements and Royalty Income
The Cell Technology Transfer and License Agreement dated October 31, 2012 by and between the Company and POSCO Energy, Co., (the "CTTA") provides POSCO Energy with the technology to manufacture SureSource power plants in South Korea and the exclusive market access to sell power plants throughout Asia. In connection with the CTTA, fees totaling $18.0 million were paid between fiscal year 2012 and 2015 and are being amortized over the term of the CTTA.
The Company also receives royalties from POSCO Energy under the 2007 Technology Transfer, Distribution and Licensing Agreement ("TTA") and the 2009 Stack Technology Transfer and License Agreement ("STTA") at the rate
91
of 3.0% of POSCO Energy net sales. Additionally, under the STTA certain license fee income aggregating $7.0 million is being recognized ratably over fifteen
years beginning November 1, 2012. Under the terms of the TTA, POSCO Energy manufactures BOP in South Korea using its design, procurement and manufacturing expertise. The STTA allows POSCO Energy to produce fuel cell modules which will be combined with BOP
manufactured in South Korea to complete electricity-producing fuel cell power plants for sale in South Korea.
The Company has a Master Service Agreement with POSCO Energy, whereby POSCO Energy has more responsibility for servicing installations in Asia that utilize power plants manufactured by POSCO Energy. The Company performs engineering and support services for each unit in the installed fleet and receives quarterly fees as well as a 3.0% royalty on each fuel cell module replacement under service agreements that were built by POSCO Energy and installed at any plant in Asia.
In April 2014, the Company entered into an Integrated Global Supply Chain Plan Agreement ("IGSCP") with POSCO Energy. FuelCell Energy provides procurement services for POSCO Energy and receives fixed compensation for services rendered.
The Company recorded revenue of $2.7 million, $6.2 million and $3.9 million for the years ended October 31, 2017, 2016 and 2015, respectively, relating to the above agreements.
Deferred Revenue and Customer Deposits
We receive payments from customers upon the acceptance of a purchase order and when contractual milestones are reached. These payments may be deferred based on the nature of the payment and status of the specific project. Deferred revenue is recognized as revenue in accordance with our revenue recognition policies summarized above.
Research and Development Costs
We perform both customer-sponsored research and development projects based on contractual agreement with customers and company-sponsored research and development projects. Costs incurred for customer-sponsored projects include manufacturing and engineering labor, applicable overhead expenses, materials to build and test prototype units and other costs associated with customer-sponsored research and development contracts. These costs are recorded as Advanced Technologies contract revenues in the consolidated statements of operations.
Costs incurred for company-sponsored research and development projects consist primarily of labor, overhead, materials to build and test prototype units and consulting fees. These costs are recorded as research and development expenses in the consolidated statements of operations.
Concentrations
We contract with a concentrated number of customers for the sale of our products, for service agreement contracts and for Advanced Technologies contracts. For the years ended October 31, 2017, 2016 and 2015, our top customers accounted for 78%, 75% and 90%, respectively, of our total annual consolidated revenue.
The percent of consolidated revenues from each customer for the years ended October 31, 2017, 2016 and 2015, respectively, are presented below.
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Hanyang Industrial Development Co., LTD
|
|
|
40
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
Dominion Bridgeport Fuel Cell, LLC
|
|
|
11
|
%
|
|
|
6
|
%
|
|
|
3
|
%
|
Department of Energy
|
|
|
9
|
%
|
|
|
8
|
%
|
|
|
5
|
%
|
ExxonMobil
|
|
|
9
|
%
|
|
|
3
|
%
|
|
|
1
|
%
|
POSCO Energy
|
|
|
6
|
%
|
|
|
48
|
%
|
|
|
67
|
%
|
Avangrid Holdings (through its various subsidiaries)
|
|
|
3
|
%
|
|
|
10
|
%
|
|
|
14
|
%
|
Total
|
|
|
78
|
%
|
|
|
75
|
%
|
|
|
90
|
%
|
92
Derivatives
We do not use derivatives for speculative purposes and through fiscal year end 2017, have not used derivatives for hedging or trading purposes. Our derivative instruments consist of embedded derivatives in our Series 1 Preferred Shares. We account for these derivatives using the fair-value method with changes in fair value recorded to operations. Refer to Note 13 for additional information.
Use of Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Estimates are used in accounting for, among other things, revenue recognition, excess and obsolete inventories, product warranty costs, accruals for service agreements, allowance for uncollectible receivables, depreciation and amortization, impairment of goodwill, indefinite-lived intangible assets and long-lived assets, income taxes, and contingencies. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates.
Foreign Currency Translation
The translation of the financial statements of FuelCell Korea Ltd’s, FCES GmbH's and Versa Power Systems Ltd’s. results in translation gains or losses, which are recorded in accumulated other comprehensive loss within stockholders’ equity.
Our Canadian subsidiary, FCE Ltd., is financially and operationally integrated and the functional currency is the U.S. dollar. We are subject to foreign currency transaction gains and losses as certain transactions are denominated in foreign currencies. We recognized (losses) gains of $(0.7) million, $0.3 million and $1.7 million for the years ended October 31, 2017, 2016 and 2015, respectively. These amounts have been classified as other income, net in the consolidated statements of operations.
Recently Adopted Accounting Guidance
In August 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which requires an entity to evaluate at each reporting period whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year from the date the financial statements are issued and to provide related footnote disclosures in certain circumstances. The Company adopted the provisions of this ASU for the annual reporting period ended October 31, 2017. The adoption of this update did not have a significant impact on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” This ASU simplifies the presentation of debt issuance costs by requiring that such costs be presented in the balance sheet as a direct deduction from the carrying value of the associated debt instrument, consistent with debt discounts. The Company has adopted ASU 2015-03 effective January 31, 2017 and retrospective application is required which resulted in a reclassification in our Consolidated Balance Sheet as of October 31, 2016 of $0.3 million of debt issuance costs from Current assets to be a direct deduction from “Current portion of long-term debt” and a reclassification of $1.1 million of debt issuance costs from “Other assets” to be a direct deduction from Long-term debt and other liabilities.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations.” ASU 2017-01 was issued to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company has elected to early adopt ASU 2017-01 effective November 1, 2016 which did not have a significant impact on the Company’s consolidated financial statements.
93
Recent Accounting Guidance Not Yet Effective
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This topic provides for five principles which should be followed to determine the appropriate amount and timing of revenue recognition for the transfer of goods and services to customers. The principles in this ASU should be applied to all contracts with customers regardless of industry. The amendments in this ASU are effective for fiscal years, and interim periods within those years beginning after December 15, 2016, with two transition methods of adoption allowed. Early adoption for reporting periods prior to December 15, 2016 is not permitted. In March 2015, the FASB voted to defer the effective date by one year to fiscal years, and interim periods within those fiscal years beginning after December 15, 2017 (first quarter of fiscal year 2019 for the Company), but allow adoption as of the original adoption date. The Company has numerous different revenue sources including the sale and installation of fuel cell power plants, site engineering and construction services, sale of modules, BOPs and spare parts, extended warranty service agreements, sale of electricity under power purchase agreements, license fees and royalty income from manufacturing and technology transfer agreements and customer-sponsored Advanced Technologies projects. This requires application of various revenue recognition methods under current accounting guidance. Although we anticipate that, upon adoption of this new ASU the timing of revenue recognition for certain of our revenue sources might change, we are still evaluating the financial statement impacts of the guidance in this ASU and determining which transition method we will utilize. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606).” This topic provides narrow-scope improvements and practical expedients regarding collectability, presentation of sales tax collected from customers, non-cash consideration, contract modifications at transition, completed contracts at transition and other technical corrections. We have initiated a review of the contracts for our significant revenue streams to understand the impact of the adoption of this ASU.
In February 2016, the FASB issued ASU 2016-02, “Leases” which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. This ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (first quarter of fiscal year 2020 for the Company). Early adoption is permitted. The Company has both operating and capital leases (refer to Note 18. Commitments and contingences) as well as sale-leasebacks accounted for under the finance method and may have other arrangements that contain embedded leases as characterized in this ASU. We expect that adoption of this ASU will result in the recognition of right-of-use assets and lease liabilities not currently recorded in our consolidated financial statements under existing accounting guidance. However we are still evaluating all of the Company’s contractual arrangements and the impact that adoption of ASU 2016-02 will have on the Company’s consolidated financial statements.
Note 2. Restructuring
On November 30, 2016, a business restructuring was announced to reduce costs and align production levels with current levels of demand in a manner that is consistent with the Company’s long-term strategic plan.
The Company reduced materials spend as well as implemented various cost control initiatives. The workforce was reduced at both the North American production facility in Torrington, Connecticut, as well as at the corporate offices in Danbury, Connecticut and remote locations. A total of 96 positions, or approximately 17% of the Company’s global workforce, were eliminated. The production rate was reduced to twenty-five MW annually, from the prior rate of fifty MW annually, in order to position for delays in anticipated order flow. This production level is anticipated to be temporary and will be reevaluated as order flow dictates. Restructuring expense relating to eliminated positions of $1.4 million has been recorded and paid for the year ended October 31, 2017, which has been presented on a separate caption in the Consolidated Statement of Operations.
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Note 3. Accounts Receivable
Accounts receivable as of October 31, 2017 and 2016 consisted of the following (in thousands):
|
|
2017
|
|
|
2016
|
|
Advanced Technologies (including U.S.
Government
(1)
):
|
|
|
|
|
|
|
|
|
Amount billed
|
|
$
|
1,934
|
|
|
$
|
2,463
|
|
Unbilled recoverable costs
|
|
|
7,352
|
|
|
|
3,068
|
|
|
|
|
9,286
|
|
|
|
5,531
|
|
Commercial customers:
|
|
|
|
|
|
|
|
|
Amount billed
|
|
|
41,073
|
|
|
|
5,411
|
|
Unbilled recoverable costs
|
|
|
18,162
|
|
|
|
13,651
|
|
|
|
|
59,235
|
|
|
|
19,062
|
|
|
|
$
|
68,521
|
|
|
$
|
24,593
|
|
(1)
|
Total U.S. government accounts receivable outstanding as of October 31, 2017 and 2016 is $3.2 million and $2.2 million, respectively.
|
We bill customers for power plant and power plant component sales based on certain contractual milestones being reached. We bill service agreements based on the contract price and billing terms of the contracts. Generally, our Advanced Technologies contracts are billed based on actual recoverable costs incurred, typically in the month subsequent to incurring costs. Some Advanced Technologies contracts are billed based on contractual milestones or costs incurred. Unbilled recoverable costs relate to revenue recognized on customer contracts that has not been billed. Accounts receivable are presented net of an allowance for doubtful accounts of $0.1 million and $0.2 million as of October 31, 2017 and 2016, respectively. Uncollectible accounts receivable are charged against the allowance for doubtful accounts when all collection efforts have failed and it is deemed unlikely that the amount will be recovered.
Accounts receivable from commercial customers (including unbilled recoverable costs) include amounts due from POSCO Energy of $6.2 million and $5.0 million, and amounts due from NRG of $0.1 million as of each of October 31, 2017 and 2016. The Company also had amounts due to POSCO Energy of $32.7 million and $0 as of October 31, 2017 and 2016, respectively, for the purchase of inventory.
Note 4. Inventories
Inventories as of October 31, 2017 and 2016 consisted of the following (in thousands):
|
|
2017
|
|
|
2016
|
|
Raw materials
|
|
$
|
20,065
|
|
|
$
|
25,286
|
|
Work-in-process
(1)
|
|
|
54,431
|
|
|
|
48,520
|
|
Inventories
|
|
$
|
74,496
|
|
|
$
|
73,806
|
|
(1)
|
Work-in-process includes the standard components of inventory used to build the typical modules or module components that are intended to be used in future power plant orders or to service our service agreements. Included in Work-in-process as of October 31, 2017 and 2016 is $46.3 million and $40.6 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 fuel cell stacks and modules, which are subcomponents of a power plant.
Raw materials and work in process are net of a valuation allowance of approximately $0.2 million and $0.8 million as of October 31, 2017 and 2016, respectively.
95
Note 5. Project Assets
Project assets as of October 31, 2017 and 2016 were $73.0 million and $47.1 million, respectively. Project assets as of October 31, 2017 include $30.2 million which represents four completed, commissioned installations where we have a PPA with the end-user of power and site host. Project assets as of October 31, 2016 include $6.2 million which represents one completed, commissioned installation where we have a PPA with the end-user of power and site host. These assets are the subject of sale-leaseback arrangements with PNC Energy Capital, LLC (“PNC”), which are recorded under the financing method of accounting for a sale-leaseback. Under the finance method, the Company does not recognize the proceeds received from the lessor as a sale of such assets. The Project assets balance as of October 31, 2017 also includes assets aggregating $40.9 million which are being constructed by the Company under PPAs which have been executed or are expected to be executed in fiscal year 2018.
Depreciation expense for project assets was $4.1 million and $0.7 million for the years ended October 31, 2017 and 2016, respectively. There was no depreciation expense recorded for the year ended October 31, 2015 since there were no project assets in service.
In November 2016, the Company’s wholly-owned subsidiary, FuelCell Energy Finance, LLC (“FuelCell Finance”) entered into a membership interest purchase agreement with GW Power LLC (“Seller”) whereby FuelCell Finance purchased all of the outstanding membership interests in New Britain Renewable Energy, LLC (“NBRE”) from Seller. Seller assigned the NBRE interest to FuelCell Finance free and clear of all liens other than a pledge in favor of Webster Bank, National Association. The Company adopted ASU 2017-01 which resulted in the transaction being accounted for as an asset acquisition of a power plant for a relative fair value of $2.3 million (carrying amount of $1.9 million as of October 31, 2017) which has been classified as a long-term project asset in support of an Energy Purchase Agreement.
Project construction costs incurred for the long-term project assets are reported as investing activities in the Consolidated Statements of Cash Flows. The proceeds received from the sale and subsequent leaseback of project assets are classified as “Cash flows from financing activities” within the Consolidated Statements of Cash Flows and are classified as a financing obligation within “Current portion of long-term debt” and “Long-term debt and other liabilities” on the Consolidated Balance Sheets (refer to Note 11 for more information).
Note 6. Property, Plant
and Equipment
Property, plant and equipment as of October 31, 2017 and 2016 consisted of the following (in thousands):
|
|
2017
|
|
|
2016
|
|
|
Estimated
Useful Life
|
|
Land
|
|
$
|
524
|
|
|
$
|
524
|
|
|
|
—
|
|
Building and improvements
|
|
|
9,331
|
|
|
|
9,218
|
|
|
10-26 years
|
|
Machinery, equipment and software
|
|
|
91,680
|
|
|
|
87,350
|
|
|
3-8 years
|
|
Furniture and fixtures
|
|
|
3,576
|
|
|
|
3,509
|
|
|
10 years
|
|
Construction in progress
|
|
|
23,163
|
|
|
|
16,388
|
|
|
|
—
|
|
|
|
|
128,274
|
|
|
|
116,989
|
|
|
|
|
|
Accumulated depreciation
|
|
|
(84,709
|
)
|
|
|
(80,349
|
)
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
43,565
|
|
|
$
|
36,640
|
|
|
|
|
|
The Company substantially completed the first phase of its project to expand the existing 65,000 square foot manufacturing facility in Torrington, Connecticut by approximately 102,000 square feet for a total size of 167,000 square feet during the year ended October 31, 2017.
Depreciation expense for property, plant and equipment was $4.4 million, $4.3 million and $4.1 million for the years ended October 31, 2017, 2016 and 2015, respectively.
96
Note 7. Goodwill and Intangible Assets
As of October 31, 2017 and 2016, the Company had goodwill of $4.1 million and intangible assets of $9.6 million associated with the 2012 Versa acquisition. The intangible asset represents indefinite lived in-process research and development for cumulative research and development efforts associated with the development of solid oxide fuel cells stationary power generation.
The Company completed its annual impairment analysis of goodwill and in-process research and development assets as of July 31, 2017. The Company performed a quantitative assessment in the prior year and determined that the estimated fair value of the reporting unit and in-process research and development intangible asset exceeded the respective carrying value and therefore no impairment was recognized as of July 31, 2016. The Company performed a qualitative assessment for fiscal year 2017 and determined that it was more likely than not that there was no impairment of goodwill or the indefinite lived intangible asset.
Note 8. Other Current Assets
Other current assets as of October 31, 2017 and 2016 consisted of the following (in thousands):
|
|
2017
|
|
|
2016
|
|
Advance payments to vendors
(1)
|
|
$
|
1,035
|
|
|
$
|
1,247
|
|
Deferred finance costs
(2)
|
|
|
129
|
|
|
|
152
|
|
Notes receivable
(3)
|
|
|
—
|
|
|
|
1,007
|
|
Prepaid expenses and other
(4)
|
|
|
5,407
|
|
|
|
7,775
|
|
|
|
$
|
6,571
|
|
|
$
|
10,181
|
|
(1)
|
Advance payments to vendors relate to payments for inventory purchases ahead of receipt.
|
(2)
|
Represents the current portion of direct deferred finance costs that relate primarily to securing a $40.0 million loan facility with NRG which is being amortized over the five-year life of the facility.
|
(3)
|
Represents a note receivable from NBRE prior to the acquisition in November 2016 discussed in Note 5.
|
(4)
|
Primarily relates to other prepaid vendor expenses including insurance, rent and lease payments.
|
Note 9. Other Assets, net
Other assets, net as of October 31, 2017 and 2016 consisted of the following (in thousands):
|
|
2017
|
|
|
2016
|
|
Long-term accounts receivable
(1)
|
|
$
|
—
|
|
|
$
|
8,353
|
|
Long-term unbilled recoverable costs
(2)
|
|
|
12,806
|
|
|
|
5,714
|
|
Deferred finance costs
(3)
|
|
|
97
|
|
|
|
225
|
|
Long-term stack residual value
(4)
|
|
|
987
|
|
|
|
—
|
|
Other
(5)
|
|
|
2,627
|
|
|
|
2,123
|
|
Other assets, net
|
|
$
|
16,517
|
|
|
$
|
16,415
|
|
(1)
|
The balance as of October 31, 2016 represents receivables which were subsequently collected and relate to project and stack replacement reserve accounts for a sale-leaseback transaction. As of October 31, 2017, the funds were recorded as long-term restricted cash.
|
(2)
|
Represents unbilled recoverable costs that relate to revenue recognized on customer contracts that will be billed in future periods in excess of twelve months from the balance sheet date.
|
(3)
|
Represents the long-term portion of direct deferred finance costs relating to the Company’s loan facility with NRG which is being amortized over the five-year life of the facility.
|
(4)
|
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
|
97
|
of the module exchange. The increase from October 31, 2016 represents residual value for two module replacements performed during the year ended October 3
1, 2017.
|
(5)
|
The Company entered into an agreement with one of its customers on June 29, 2016 which includes a fee for the purchase of the plants at the end of the term of the agreement. The option fee is payable in installments over the term of the agreement and the total paid as of October 31, 2017 was $1.6 million. Also included within other are long-term security deposits.
|
Note 10. Accrued Liabilities
Accrued liabilities as of October 31, 2017 and 2016 consisted of the following (in thousands):
|
|
2017
|
|
|
2016
|
|
Accrued payroll and employee benefits
|
|
$
|
5,315
|
|
|
$
|
4,183
|
|
Accrued contract loss
|
|
|
37
|
|
|
|
—
|
|
Accrued product warranty costs
(1)
|
|
|
348
|
|
|
|
516
|
|
Accrued material purchases
(2)
|
|
|
2,396
|
|
|
|
6,908
|
|
Accrued service agreement costs
(3)
|
|
|
3,319
|
|
|
|
6,030
|
|
Accrued legal, taxes, professional and other
(4)
|
|
|
6,966
|
|
|
|
3,263
|
|
|
|
$
|
18,381
|
|
|
$
|
20,900
|
|
(1)
|
Activity in the accrued product warranty costs for the years ended October 31, 2017 and 2016 included additions for estimates of future warranty obligations of $0.6 million and $0.3 million, respectively, on contracts in the warranty period and reductions related to actual warranty spend of $0.8 million and $0.7 million, respectively, as contracts progress through the warranty period or are beyond the warranty period.
|
(2)
|
The Company acts as a procurement agent for POSCO Energy under an Integrated Global Supply Chain Agreement whereby the Company procures materials on POSCO Energy’s behalf for its Asian production facility. This liability represents amounts received for the purchase of materials on behalf of POSCO Energy. Amounts due to vendors is recorded as “Accounts payable.”
|
(3)
|
Activity in service agreement costs represents a decrease in loss accruals on service contracts of $1.6 million from $2.7 million as of October 31, 2016 to $1.1 million as of October 31, 2017. The decrease primarily relates to module exchanges performed during the year ended October 31, 2017. The accruals for performance guarantees also decreased from $3.3 million as of October 31, 2016 to $2.2 million as of October 31, 2017 resulting from guarantee payments to customers partially offset by additional accruals for the minimum output falling below the contract requirements for certain service agreements.
|
(4)
|
Other includes $4.4 million which represents contractual milestone billings for inventory that will be provided to POSCO Energy within the next twelve months and will not result in revenue recognition. An additional $10.4 million will be billed and collected under this arrangement.
|
98
Note 11. Debt
Debt as of October 31, 2017 and 2016 consisted of the following (in thousands):
|
|
2017
|
|
|
2016
|
|
Hercules Loan and Security Agreement
|
|
$
|
21,468
|
|
|
$
|
20,521
|
|
State of Connecticut Loan
|
|
|
10,000
|
|
|
|
10,000
|
|
Finance obligation for sale-leaseback transactions
|
|
|
46,937
|
|
|
|
41,603
|
|
NRG loan agreement
|
|
|
-
|
|
|
|
1,755
|
|
Connecticut Green Bank Note
|
|
|
6,052
|
|
|
|
6,050
|
|
Connecticut Development Authority Note
|
|
|
2,349
|
|
|
|
2,589
|
|
New Britain Renewable Energy Term Loan
|
|
|
1,697
|
|
|
|
—
|
|
Capitalized lease obligations
|
|
|
632
|
|
|
|
660
|
|
Deferred finance costs
|
|
|
(1,344
|
)
|
|
|
(1,408
|
)
|
Total debt
|
|
$
|
87,791
|
|
|
$
|
81,770
|
|
Current portion of long-term debt
|
|
|
(28,281
|
)
|
|
|
(5,010
|
)
|
Long-term debt
|
|
$
|
59,510
|
|
|
$
|
76,760
|
|
Aggregate annual principal payments under our loan agreements and capital lease obligations for the years subsequent to October 31, 2017 are as follows (in thousands):
Year 1
|
|
$
|
28,583
|
|
Year 2
|
|
|
4,518
|
|
Year 3
|
|
|
4,863
|
|
Year 4
|
|
|
4,057
|
|
Year 5
|
|
|
4,089
|
|
Thereafter
|
|
|
43,025
|
|
|
|
$
|
89,135
|
|
In April 2016, the Company entered into a loan and security agreement with Hercules Capital, Inc. (“Hercules”) subject to certain terms and conditions of which the Company drew down $20.0 million during fiscal year 2016. The loan is a 30 month secured facility and the term loan interest was previously 9.5 percent and increased to 9.75 percent resulting from the increase in the prime rate. Interest is paid on a monthly basis. Interest only payments were to be made for the first 18 months as a result of the Company achieving certain milestones. In addition to interest, principal payments commenced on November 1, 2017 in equal monthly installments. The loan balance and all accrued and unpaid interest is due and payable by October 1, 2018. Per the terms of the loan and security agreement, there is an end of term payment of $1.7 million which is being accreted over the 30 month term using the effective interest rate method.
As collateral for obligations under Hercules Agreement, the Company granted Hercules a security interest in FuelCell Energy, Inc.’s existing and hereafter-acquired assets except for intellectual property and certain other excluded assets. Collateral does not include assets held by FuelCell Finance or any project subsidiary thereof. The Company may continue to collateralize and finance its project subsidiaries through other lenders and partners. Under the Hercules Agreement, as amended, there is a minimum cash covenant which requires the Company to maintain an unrestricted cash balance in accounts subject to an account control agreement in favor of Hercules of at least the greater of (x) (a) 75% of the outstanding loan balance plus (b) the amount of accounts payable (as defined under GAAP) not paid within 90 days of the invoice date and (y) (a) at all times prior to the Stockholder Approval Date (as defined in the Certificate of Designations for the Series C Preferred Stock), $20.0 million and (b) at all times on and after the Stockholder Approval Date, $10.0 million (the Stockholder Approval Date was December 14, 2017, which was the date on which stockholder approval of the issuance of certain shares upon the conversion and/or redemption of the Company’s Series C Preferred Stock was obtained).
In November 2015, the Company closed on a definitive Assistance Agreement with the State of Connecticut and received a disbursement of $10.0 million for the first phase of the expansion project to expand the existing 65,000
99
square foot manufacturing facility in Torrington, Connecticut by approximately 102,000 square feet for a total size of 167,000 square feet. In conjunction with this financing, the Company entered into a
$10.0 million Promissory Note and related security agreement securing the loan with equipment liens and a mortgage on its Danbury, Connecticut location. Pursuant to the terms of the loan, payment of principal is deferred for the first four years. Interest
at a fixed rate of 2.0 percent is payable beginning in December 2015. The financing is payable over 15 years, and is predicated on certain terms and conditions, including the forgiveness of up to half of the loan principal if certain job retention and jo
b creation targets are reached. On April 17, 2017, the Company entered into an amendment to the Assistance Agreement extending certain of the job creation target dates by two years to October 28, 2019.
In 2015, the Company entered into an agreement with PNC, whereby the Company’s project finance subsidiaries may enter into sale-leaseback agreements for commissioned projects where we have entered into a PPA with the site host/end-user of produced power. Under the financing method of accounting for a sale-leaseback, the Company does not recognize as income any of the sale proceeds received from the lessor that contractually constitute payment to acquire the assets subject to these arrangements. Instead, the sale proceeds received are accounted for as financing obligations. The outstanding finance obligation balance as of October 31, 2017 was $46.9 million and the increase from the October 31, 2016 balance of $41.6 million includes a sale-leaseback transaction of $5.4 million which was completed in December 2016 and the recognition of imputed interest expense offset by lease payments. New sale-leaseback transactions of $41.5 million were entered into during the year ended October 31, 2016. The sale-leaseback transactions include a fair value purchase option at the end of the lease term.
In July 2014, the Company, through its wholly-owned subsidiary, FuelCell Finance, entered into a Loan Agreement with NRG. Pursuant to the Loan Agreement, NRG has extended a $40.0 million revolving construction and term financing facility for the purpose of accelerating project development by the Company and its subsidiaries. We may draw on the facility to finance the construction of projects through the commercial operating date of the power plants. The interest rate is 8.5 percent per annum for construction-period financing and 8.0 percent thereafter. Fees that were paid by FuelCell Finance to NRG for making the loan facility available and related legal fees incurred were capitalized and are being amortized straight-line over the life of the related loan agreement, which is five years. The term of the loans are up to five years but may be repaid early should the projects be sold or refinanced at the option of the Company.
The Company has a long-term loan agreement with the Connecticut Green Bank totaling $5.9 million in support of the Bridgeport Fuel Cell Park project. The loan agreement carries an interest rate of 5.0 percent. Interest only payments commenced in January 2014 and principal payments will commence on the eighth anniversary of the project’s provisional acceptance date, which is December 20, 2021, payable in forty-eight equal monthly installments. Outstanding amounts are secured by future cash flows from the Bridgeport Fuel Cell Park service agreement.
The Company has a loan agreement with the Connecticut Development Authority to finance equipment purchases associated with manufacturing capacity expansion allowing for a maximum amount borrowed of $4.0 million. The interest rate is 5.0 percent and the loan is collateralized by the assets procured under this loan as well as $4.0 million of additional machinery and equipment. Repayment terms require monthly interest and principal payments through May 2018.
In November 2016, in connection with the acquisition of NBRE, debt with Webster Bank was assumed as a part of the transaction in the amount of $2.3 million. The term loan interest rate is 5.0 percent and payments are due on a quarterly basis commencing in January 2017. The balance outstanding as of October 31, 2017 was $1.7 million.
The Company leases computer equipment under master lease agreements. Lease payment terms are generally thirty-six months from the date of acceptance for leased equipment.
Direct 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 loan and security agreement entered into in April 2016 is being amortized over the 30 month life of the loan.
100
Note 12.
Stockholder
s’ Equity
Authorized Common Stock
In April 2017, the number of authorized shares of the Company's common stock was increased from 75,000,000 to 125,000,000, by vote of the holders of a majority of the outstanding shares of the Company's common stock.
Public Offerings and Outstanding Warrants
On May 3, 2017, the Company completed an underwritten public offering of (i) 12,000,000 shares of its common stock, (ii) Series C warrants to purchase 12,000,000 shares of its common stock and (iii) Series D warrants to purchase 12,000,000 shares of its common stock, for gross proceeds of approximately $15.4 million, at a public offering price of $1.28 per share and accompanying warrants. Total net proceeds to the Company were approximately $13.9 million. The Series C warrants have an exercise price of $1.60 per share and a term of five years. A total of 419,100 shares of common stock were issued during the fourth quarter of fiscal year 2017 upon the exercise of Series C warrants and the Company received total proceeds of $0.7 million. The Series D warrants have an exercise price of $1.28 per share and a term of one year. A total of 9,415,826 shares of common stock were issued during the third and fourth quarters of fiscal year 2017 upon the exercise of Series D warrants and the Company received total proceeds of $12.1 million.
On July 12, 2016, the Company closed on a registered public offering of securities to a single institutional investor pursuant to a placement agent agreement with J.P. Morgan Securities LLC. In conjunction with the offering the Company issued 7,680,000 Series A Warrants, all of which remained outstanding as of October 31, 2017, at an exercise price of $5.83 per share. They are initially exercisable beginning on the date that is six months and one day after the issue date and will expire on the fifth anniversary of the initial exercisability date. The Company also issued 4,926,000 prefunded Series B Warrants which are immediately exercisable. They have an exercise price of $0.0001 per share and will expire on the fifth anniversary of the issue date. There were 3,826,000 prefunded Series B Warrants outstanding as of October 31, 2016, all of which were exercised during the year ended October 31, 2017.
On July 30, 2014, the Company issued a warrant to NRG in conjunction with the entry into a Securities Purchase Agreement for the sale of common stock. Pursuant to the warrant agreement, NRG had the right to purchase up to 0.2 million shares of the Company’s common stock at an exercise price of $40.20 per share. The warrants expired on July 30, 2017.
The following table outlines the warrant activity during the year ended October 31, 2017:
|
|
Series A
Warrants
|
|
|
Series B
Warrants
|
|
|
Series C
Warrants
|
|
|
Series D
Warrants
|
|
|
NRG
Warrants
|
|
Balance as of October 31, 2016
|
|
|
7,680,000
|
|
|
|
3,826,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
166,000
|
|
Warrants issued on May 3, 2017
|
|
|
|
|
|
|
|
|
|
|
12,000,000
|
|
|
|
12,000,000
|
|
|
|
—
|
|
Warrants exercised
|
|
|
—
|
|
|
|
(3,826,000
|
)
|
|
|
(419,100
|
)
|
|
|
(9,415,826
|
)
|
|
|
—
|
|
Warrants expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(166,000
|
)
|
Balance as of October 31, 2017
|
|
|
7,680,000
|
|
|
|
-
|
|
|
|
11,580,900
|
|
|
|
2,584,174
|
|
|
|
-
|
|
Other Common Stock Sales
The Company may sell common stock on the open market from time to time. The proceeds of these sales may be used for general corporate purposes or to pay obligations related to the Company's outstanding Series 1 and Series B preferred shares. During the years ended October 31, 2017 and 2016, respectively, the Company sold 7.2 million shares and 6.0 million shares of the Company's common stock at prevailing market prices through periodic trades on the open market and raised approximately $12.6 million and $36.1 million, net of aggregate selling commissions of $0.1 million and $0.1 million, respectively.
101
Note 13. Redeemable Preferred Stock
The Company is authorized to issue up to 250,000 shares of preferred stock, par value $0.01 per share, issuable in one or more series of which shares to date have been issued and designated as Series C Convertible Preferred Stock and 5% Series B Cumulative Convertible Perpetual Preferred Stock.
Series C Preferred Shares
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, for net proceeds of $27.9 million on September 5, 2017. Each share of Series C Preferred Stock was sold at a price of $895.52 for gross proceeds of approximately $30.0 million. As of October 31, 2017, there were 33,300 shares of Series C Preferred Stock issued and outstanding with a carrying value of $27.7 million.
The Series C Preferred Shares are convertible into shares of common stock subject to the beneficial ownership limitations provided in the Certificate of Designations for Series C Preferred Stock (the “Certificate of Designations”), at a conversion price equal to $1.84 per share of common stock (“Conversion Price”), subject to adjustment as provided in the Certificate of Designations, at any time at the option of the holder. In the event of a triggering event, as defined in the Certificate of Designations, the Series C Preferred Shares are convertible into shares of common stock at a conversion price of the lower of $1.84 per share and 85% of the lowest volume weighted average price (“VWAP”) of the common stock of the five Trading Days (as such term is defined in the Certificate of Designations) immediately prior to delivery of the applicable conversion notice. The holders will be prohibited from converting Series C Preferred Shares into shares of common stock if, as a result of such conversion, such holder, together with its affiliates, would own more than 8.99% of the total number of shares of common stock then issued and outstanding. Each holder has the right to increase its maximum percentage up to 9.99% upon 60 days’ notice to the Company.
On November 1, 2017 and on the sixteenth day and first day of each calendar month thereafter until March 1, 2019, subject to extension in certain circumstances (the “Maturity Date”), inclusive, the Company will redeem the stated value of Series C Preferred Shares in thirty-three equal installments of $1.0 million (each bimonthly amount, an “Installment Amount” and the date of each such payment, an “Installment Date”). The holders will have the ability to defer Installment payments, but not beyond the Maturity Date. In addition, during each period commencing on the 11th trading day prior to an Installment Date and prior to the immediately subsequent Installment Date, the holders may elect to accelerate the conversion of Series C Preferred Shares at then applicable installment conversion price, provided that the holders may not elect to effect any such acceleration during such installment period if either (x) in the aggregate, all the accelerations in such installment period exceeds the sum of three other Installment Amounts, or (y) the number of Series C Preferred Shares subject to prior accelerations exceeds in the aggregate twelve Installment Amounts.
Subject to certain conditions as provided in the Certificate of Designations, the Company may elect to pay the Installment Amounts in cash or shares of common stock or in a combination of cash and shares of common stock.
Installment Amounts paid in shares will be that number of shares of common stock equal to (a) the applicable Installment Amount, to be paid in common stock divided by (b) the least of (i) the then existing conversion price, (ii) 87.5% of the VWAP of the common stock on the trading day immediately prior to the applicable Installment Date, and (iii) 87.5% of the arithmetic average of the two lowest VWAPs of the common stock during the ten consecutive Trading Day period ending and including the Trading Day immediately prior to the applicable Installment Date as applicable, provided that the Company meets standard equity conditions. The Company shall make such election no later than the eleventh trading day immediately prior to the applicable Installment Date.
If the Company elects or is required to effect an Installment Amount in whole or in part in cash, the amount paid will be equal to the 108% of the applicable Installment Amount.
Each holder of the Series C Preferred Shares shall be entitled to receive dividends (i) if no triggering event, as defined in the Certificate of Designations, has occurred and is continuing when and as declared by the Board of Directors, in its sole and absolute discretion or (ii) if a triggering event has occurred and until such triggering event
102
has been cured, a dividend of 15% per annum based on the holder’s outstanding number of
Series C
Preferred Shares
multiplied by the stated value. There were no triggering events or dividends declared in fiscal year 2017.
In the event of a triggering event, as defined in the Certificate of Designations, the holders of the Series C Preferred Shares can force redemption at a price equal to the greater of (i) the conversion amount to be redeemed multiplied by 125% and (ii) the product of (X) 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 (Y) 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.
In the event of the Company’s liquidation, dissolution, or winding up, prior to distribution to holders of securities ranking junior to the Series C Preferred Shares, holders of Series C Preferred Shares will be entitled to receive the amount of cash, securities or other property equal to the greater of (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 C Preferred Shares into common stock immediately prior to the date of such payment.
Shares of Series C Preferred Stock rank with respect to dividend rights and rights upon our liquidation, winding up or dissolution:
|
•
|
senior to shares of our common stock;
|
|
•
|
junior to our debt obligations;
|
|
•
|
junior to our outstanding Series B Preferred Stock; and
|
|
•
|
effectively junior to our subsidiaries’ (i) existing and future liabilities and (ii) capital stock held by others.
|
The holders of the Series C Preferred Shares have no voting rights, except as required by law. Any amendment to the Company’s certificate of incorporation, bylaws or certificate of designation that adversely affects the powers, preferences and rights of the Series C Preferred Shares requires the approval of the holders of a majority of the Series C Preferred Shares then outstanding.
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 C Preferred Shares are classified as temporary equity on the consolidated balance sheets and recorded at fair value on the issuance date (proceeds from the issuance, net of direct issuance cost). An assessment of the probability of the potential redemption features in the Series C Preferred instrument is performed at each reporting date to determine whether any changes in classification are required. As of October 31, 2017, the Company determined that none of the contingent redemption features were probable. As Series C Preferred Shares are converted to common shares, a proportional reduction in the carrying value will be recorded to equity. For the year ended October 31, 2017, 200 shares of the Series C Preferred Shares were converted to common shares resulting in a reduction of $0.2 million to the carrying value recorded in temporary equity.
Redeemable Series B Preferred Stock
We have 105,875 shares of our 5% Series B Cumulative Convertible Perpetual Preferred Stock (Liquidation Preference $1,000.00 per share) (“Series B Preferred Stock”) authorized for issuance. As of October 31, 2017 and 2016, there were 64,020 shares of Series B Preferred Stock issued and outstanding, with a carrying value of $59.9 million. The following is a summary of certain provisions of our Series B Preferred Stock.
|
•
|
Ranking —
Shares of Series B Preferred Stock rank with respect to dividend rights and rights upon our liquidation, winding up or dissolution:
|
|
•
|
senior to shares of our common stock;
|
|
•
|
junior to our debt obligations; and
|
|
•
|
effectively junior to our subsidiaries’ (i) existing and future liabilities and (ii) capital stock held by others.
|
103
|
•
|
Dividends -
The Series B
Preferred Stock pays cumulative annual dividends of $50.00 per share which are payable quarterly in arrears on February 15, May 15, August 15 and November 15, and if declared by the board of directors. Dividends accumulate and are cumulative from the date
of original issuance. Accumulated dividends on the Series B Preferred Stock do not bear interest. The terms of our Series B preferred shares prohibit the payment of dividends on our common stock unless
all dividends on the Series B Preferred S
tock have be
en paid in full.
|
The dividend rate is subject to upward adjustment as set forth in the Certificate of Designation if we fail to pay, or to set apart funds to pay, any quarterly dividend. The dividend rate is also subject to upward adjustment as set forth in the Registration Rights Agreement entered into with the Initial Purchasers if we fail to satisfy our registration obligations with respect to the Series B Preferred Stock (or the underlying common shares) under the Registration Rights Agreement.
The dividend on the Series B Preferred Stock may be paid in cash; or at the option of the Company, in shares of our common stock, which will be registered pursuant to a registration statement to allow for the immediate sale of these common shares in the public market. Dividends of $3.2 million were paid in cash in each of the years ended October 31, 2017, 2016 and 2015. There were no cumulative unpaid dividends as of October 31, 2017 and 2016.
|
•
|
Liquidation -
The Series B Preferred Stock stockholders are entitled to receive, in the event that we are liquidated, dissolved or wound up, whether voluntary or involuntary, $1,000.00 per share plus all accumulated and unpaid dividends to the date of that liquidation, dissolution, or winding up (“Liquidation Preference”). Until the holders of Series B Preferred Stock receive their Liquidation Preference in full, no payment will be made on any junior shares, including shares of our common stock. After the Liquidation Preference is paid in full, holders of the Series B Preferred Stock will not be entitled to receive any further distribution of our assets. As of October 31, 2017 and 2016, the Series B Preferred Stock had a Liquidation Preference of $64.0 million.
|
|
•
|
Conversion Rights -
Each Series B Preferred Stock share may be converted at any time, at the option of the holder, into 7.0922 shares of our common stock (which is equivalent to an initial conversion price of $141.00 per share) plus cash in lieu of fractional shares. The conversion rate is subject to adjustment upon the occurrence of certain events, as described below, but will not be adjusted for accumulated and unpaid dividends. If converted, holders of Series B Preferred Stock do not receive a cash payment for all accumulated and unpaid dividends; rather, all accumulated and unpaid dividends are canceled.
|
We may, at our option, cause shares of Series B Preferred Stock to be automatically converted into that number of shares of our common stock that are issuable at the then prevailing conversion rate. We may exercise our conversion right only if the closing price of our common stock exceeds 150% of the then prevailing conversion price ($141.00 per share as of October 31, 2017) for 20 trading days during any consecutive 30 trading day period, as described in the Certificate of Designation.
If holders of Series B Preferred Stock elect to convert their shares in connection with certain fundamental changes, as defined, we will in certain circumstances increase the conversion rate by a number of additional shares of common stock upon conversion or, in lieu thereof, we may in certain circumstances elect to adjust the conversion rate and related conversion obligation so that shares of our Series B Preferred Stock are converted into shares of the acquiring or surviving company, in each case as described in the Certificate of Designation.
The adjustment of the conversion price is to prevent dilution of the interests of the holders of the Series B Preferred Stock from certain dilutive transactions with holders of common stock.
|
•
|
Redemption —
We do not have the option to redeem the shares of Series B Preferred Stock. However, holders of the Series B Preferred Stock can require us to redeem all or part of their shares at a redemption price equal to the Liquidation Preference of the shares to be redeemed in the case of a fundamental change, as defined.
|
We may, at our option, elect to pay the redemption price in cash or in shares of our common stock, valued at a discount of 5% from the market price of shares of our common stock, or any combination thereof. Notwithstanding the foregoing, we may only pay such redemption price in shares of our
104
common stock that are registered under the Securities Act of 1933 and eligible for immediate sale in the public market by non-affiliates of the Company.
|
•
|
Voting Rights -
Holders of Series B Preferred Stock currently have no voting rights.
|
Class A Cumulative Redeemable Exchangeable Preferred Shares (the “Series 1 Preferred Shares”)
FuelCell Energy Ltd. (“FCE Ltd”), the Company's wholly owned subsidiary, has 1,000,000 Class A Cumulative Redeemable Exchangeable Preferred Shares (the “Series 1 Preferred Shares”) outstanding, which are held by Enbridge, Inc. ("Enbridge"). FuelCell guarantees the return of principal and dividend obligations of FCE Ltd. to the holders of Series 1 Preferred Shares.
The terms of the Series 1 Preferred Shares includes payments of (i) annual dividend payments of Cdn. $500,000 and (ii) annual return of capital payments of Cdn. $750,000. These payments commenced on March 31, 2011 and will end on December 31, 2020. On December 31, 2020, the amount of all accrued and unpaid dividends on the Series 1 Preferred Shares of Cdn. $21.1 million and the balance of the principal redemption price of Cdn. $4.4 million shall be paid to the holders of the Series 1 Preferred Shares. FCE Ltd. has the option of making dividend payments in the form of common stock or cash under the terms of the Series 1 Preferred Shares.
Because the Series 1 Preferred Shares are classified as a mandatorily redeemable financial instrument, they are presented as a liability on the consolidated balance sheet.
The Company made its scheduled payments of Cdn. $1.3 million during each of fiscal year 2017, 2016 and 2015, under the terms of the agreement. The Company also recorded interest expense, which reflects the amortization of the fair value discount of approximately Cdn. $2.6 million, Cdn. $2.4 million and Cdn. $2.3 million, respectively. As of October 31, 2017 and 2016, the carrying value of the Series 1 Preferred shares was Cdn. $19.4 million ($15.1 million) and Cdn. $18.0 million ($13.5 million), respectively and is classified as preferred stock obligation of subsidiary on the consolidated balance sheets.
In addition to the above, the significant terms of the Series 1 Preferred Shares include the following:
|
•
|
Voting Rights —
The holders of the Series 1 Preferred Shares are not entitled to any voting rights.
|
|
•
|
Dividends
— Dividend payments can be made in cash or common stock of the Company, at the option of FCE Ltd., and if common stock is issued it may be unregistered. If FCE Ltd. elects to make such payments by issuing common stock of the Company, the number of common shares is determined by dividing the cash dividend obligation by 95% of the volume weighted average price in U.S. dollars at which board lots of the common shares have been traded on NASDAQ during the 20 consecutive trading days preceding the end of the calendar quarter for which such dividend in common shares is to be paid converted into Canadian dollars using the Bank of Canada’s noon rate of exchange on the day of determination.
|
|
•
|
Redemption —
The Series 1 Preferred Shares are redeemable by FCE Ltd. for Cdn. $25.00 per share less any amounts paid as a return of capital in respect of such share plus all unpaid dividends and accrued interest.
|
|
•
|
Liquidation or Dissolution —
In the event of the liquidation or dissolution of FCE Ltd., the holders of Series 1 Preferred Shares will be entitled to receive Cdn. $25.00 per share less any amounts paid as a return of capital in respect of such share plus all unpaid dividends and accrued interest. The Company has guaranteed any liquidation obligations of FCE Ltd.
|
|
•
|
Exchange Rights —
A holder of Series 1 Preferred Shares has the right to exchange such shares for fully paid and non-assessable common stock of the Company at the following exchange prices:
|
|
•
|
Cdn. $1,664.52 per share of common stock after July 31, 2015 until July 31, 2020; and
|
|
•
|
at any time after July 31, 2020, at a price equal to 95% of the then current market price (in Cdn. $) of the Company’s common stock at the time of conversion.
|
105
The exchange rates set forth above shall be adjusted if the Company: (i) subdivides or consoli
dates the common stock; (ii) pays a stock dividend; (iii) issues rights, options or other convertible securities to the Company's common stockholders enabling them to acquire common stock at a price less than 95% of the then-current price; or (iv) fixes a
record date to distribute to the Company's common stockholders shares of any other class of securities, indebtedness or assets.
Derivative liability related to Series 1 Preferred Shares
The conversion feature and variable dividend contained in the terms of the Series 1 Preferred Shares are not clearly and closely related to the characteristics of the Series 1 Preferred Shares. Accordingly, these features qualify as embedded derivative instruments and are required to be bifurcated and recorded as derivative financial instruments at fair value.
The conversion feature is valued using a lattice model. Based on the pay-off profiles of the Series 1 Preferred Shares, it is assumed that we will exercise the call option to force conversion in 2020. Conversion after 2020 delivers a fixed pay-off to the investor, and is modeled as a fixed payment in 2020. The cumulative dividend is modeled as a quarterly cash dividend component (to satisfy minimum dividend payment requirement), and a one-time cumulative dividend payment in 2020.
The variable dividend is valued using a Monte Carlo simulation model.
The assumptions used in these valuation models include historical stock price volatility, risk-free interest rate and a credit spread based on the yield indexes of technology high yield bonds, foreign exchange volatility as the security is denominated in Canadian dollars, and the closing price of our common stock. The aggregate fair value of these derivatives included within long-term debt and other liabilities on the consolidated balance sheets as of October 31, 2017 and 2016 was $0.8 million and $0.7 million, respectively.
Note 14. Segment Information
We are engaged in the development, design, production, construction and servicing of high temperature fuel cells for clean electric power generation. Critical to the success of our business is, among other things, our research and development efforts, both through customer-sponsored projects and Company-sponsored projects. The research and development activities are viewed as another product line that contributes to the development, design, production and sale of fuel cell products, however, it is not considered a separate operating segment. The chief operating decision maker does not review and assess financial information at a discrete enough level to be able to assess performance of research and development activities as if it operated as a standalone business segment, we have identified one business segment: fuel cell power plant production and research.
Revenues, by geographic location (based on the customer’s ordering location) for the years ended October 31, 2017, 2016 and 2015 were as follows (in thousands):
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
47,539
|
|
|
$
|
48,697
|
|
|
$
|
52,109
|
|
South Korea
|
|
|
44,217
|
|
|
|
52,007
|
|
|
|
109,953
|
|
England
|
|
|
368
|
|
|
|
277
|
|
|
|
142
|
|
Germany
|
|
|
2,740
|
|
|
|
7,147
|
|
|
|
764
|
|
Canada
|
|
|
729
|
|
|
|
124
|
|
|
|
—
|
|
Spain
|
|
|
73
|
|
|
|
—
|
|
|
|
109
|
|
Total
|
|
$
|
95,666
|
|
|
$
|
108,252
|
|
|
$
|
163,077
|
|
Service agreement revenue which is included within Service agreements and license revenues on the consolidated statement of operations was $24.4 million, $26.6 million and $16.3 million, for the years ended October 31, 2017, 2016 and 2015, respectively.
106
Long-lived assets located outside of the United States as of October 31, 2017 and 2016 are not significant individually or in the aggregate.
Note 15. Benefit Plans
We have stockholder approved equity incentive plans, a stockholder approved Section 423 Stock Purchase Plan (the “ESPP”) and an employee tax-deferred savings plan, which are described in more detail below.
Equity Incentive Plans
The Company has a 2010 Equity Incentive Plan. In April 2017, the number of shares of common stock reserved for issuance under the 2010 Equity Incentive Plan was increased to 4.5 million shares. The Board is authorized to grant incentive stock options, nonstatutory stock options, stock appreciation rights (“SARs”), restricted stock awards (“RSAs”), restricted stock units ("RSUs"), performance units, performance shares, dividend equivalent rights and other stock based awards to our officers, key employees and non-employee directors. Stock options, RSAs and SARs have restrictions as to transferability. Stock option exercise prices are fixed by the Board but shall not be less than the fair market value of our common stock on the date of the grant. SARs may be granted in conjunction with stock options. Stock options generally vest ratably over 4 years and expire 10 years from the date of grant. The Company also has an international award program to provide RSUs for the benefit of certain employees outside the United States. As of October 31, 2017, there were 0.2 million shares available for grant. At October 31, 2017, equity awards outstanding consisted of incentive stock options, nonstatutory stock options, RSAs and RSUs.
The Company's 1998 and 2006 Equity Incentive Plans remain in effect only to the extent of awards outstanding under the plan as of October 31, 2017.
Share-based compensation was reflected in the consolidated statements of operations as follows (in thousands):
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cost of revenues
|
|
$
|
1,050
|
|
|
$
|
745
|
|
|
$
|
769
|
|
General and administrative expense
|
|
|
2,721
|
|
|
|
2,110
|
|
|
|
1,990
|
|
Research and development expense
|
|
|
679
|
|
|
|
504
|
|
|
|
360
|
|
|
|
$
|
4,450
|
|
|
$
|
3,359
|
|
|
$
|
3,119
|
|
Stock Options
We account for stock options awarded to employees and non-employee directors under the fair value method. The fair value of stock options is estimated on the grant date using the Black-Scholes option valuation model and the following weighted-average assumptions:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Expected life (in years)
|
|
|
7.0
|
|
|
|
7.0
|
|
|
|
7.0
|
|
Risk free interest rate
|
|
|
2.2
|
%
|
|
|
1.5
|
%
|
|
|
1.7
|
%
|
Volatility
|
|
|
79.5
|
%
|
|
|
80.1
|
%
|
|
|
80.3
|
%
|
Dividend yield
|
|
|
—
|
%
|
|
|
—
|
%
|
|
|
—
|
%
|
The expected life is the period over which our employees are expected to hold the options and is based on historical data for similar grants. The risk free interest rate is based on the expected U.S. Treasury rate over the expected life. Expected volatility is based on the historical volatility of our stock. Dividend yield is based on our expected dividend payments over the expected life.
107
The following table summarizes our stock option activity for the year ended October 31, 2017:
|
|
|
|
|
|
Weighted-
Average
Option
|
|
Options
|
|
Shares
|
|
|
Price
|
|
Outstanding as of October 31, 2016
|
|
|
246,923
|
|
|
$
|
44.88
|
|
Granted
|
|
|
103,819
|
|
|
$
|
1.50
|
|
Canceled
|
|
|
(40,792
|
)
|
|
$
|
94.63
|
|
Outstanding as of October 31, 2017
|
|
|
309,950
|
|
|
$
|
23.81
|
|
The weighted average grant-date fair value per share for options granted during the years ended October 31, 2017, 2016 and 2015 was $1.50, $6.44 and $13.24, respectively. There were no options exercised in fiscal year 2017, 2016 or 2015.
The following table summarizes information about stock options outstanding and exercisable as of October 31, 2017:
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Range of
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Exercise Prices
|
|
outstanding
|
|
|
Life
|
|
|
Price
|
|
|
exercisable
|
|
|
Price
|
|
$0.00 — $3.23
|
|
|
103,819
|
|
|
|
9.4
|
|
|
$
|
1.50
|
|
|
|
77,865
|
|
|
$
|
1.50
|
|
$3.24 — $61.20
|
|
|
165,164
|
|
|
|
5.2
|
|
|
$
|
18.72
|
|
|
|
161,832
|
|
|
$
|
18.86
|
|
$61.21 — $119.04
|
|
|
40,833
|
|
|
|
0.3
|
|
|
$
|
100.78
|
|
|
|
40,833
|
|
|
$
|
100.78
|
|
$119.05 — $176.88
|
|
|
134
|
|
|
|
0.6
|
|
|
$
|
121.56
|
|
|
|
134
|
|
|
$
|
121.56
|
|
|
|
|
309,950
|
|
|
|
6.0
|
|
|
$
|
23.81
|
|
|
|
280,664
|
|
|
$
|
26.00
|
|
The intrinsic value for options outstanding and exercisable at October 31, 2017 was $0.07 million and $0.05 million, respectively.
Restricted Stock Awards and Units
The following table summarizes our RSA and RSU activity for the year ended October 31, 2017:
|
|
|
|
|
|
Weighted-
Average
|
|
Restricted Stock Awards and Units
|
|
Shares
|
|
|
Fair Value
|
|
Outstanding as of October 31, 2016
|
|
|
990,035
|
|
|
|
9.52
|
|
Granted
|
|
|
2,510,216
|
|
|
|
1.48
|
|
Vested
|
|
|
392,458
|
|
|
|
12.39
|
|
Forfeited
|
|
|
99,107
|
|
|
|
6.62
|
|
Outstanding as of October 31, 2017
|
|
|
3,008,686
|
|
|
|
2.52
|
|
RSA and RSU expense is based on the fair value of the award at the date of grant and is amortized over the vesting period, which is generally over 3 or 4 years. As of October 31, 2017, the 3.0 million outstanding RSAs and RSUs had an average remaining life of 2.5 years and an aggregate intrinsic value of $6.1 million.
As of October 31, 2017, total unrecognized compensation cost related to RSAs including RSUs was $6.0 million which is expected to be recognized over the next 2.5 years on a weighted-average basis.
108
Stock Awards
During the years ended October 31, 2017, 2016 and 2015, we awarded 86,001, 24,379 and 2,399 shares, respectively, of fully vested, unrestricted common stock to the independent members of our board of directors as a component of board of director compensation which resulted in recognizing $0.1 million, $0.2 million and $0.1 million of expense for each of the respective years.
Employee Stock Purchase Plan
Under the ESPP, eligible employees have the right to purchase shares of common stock at the lesser of (i) 85% of the last reported sale price of our common stock on the first business day of the offering period, or (ii) 85% of the last reported sale price of the common stock on the last business day of the offering period, in either case rounded up to avoid impermissible trading fractions. Shares issued pursuant to the ESPP contain a legend restricting the transfer or sale of such common stock for a period of 0.5 years after the date of purchase.
ESPP activity for the year ended October 31, 2017 was as follows:
|
|
Number of
|
|
ESPP
|
|
Shares
|
|
Balance as of October 31, 2016
|
|
|
62,226
|
|
Issued at $2.85 per share
|
|
|
(25,988
|
)
|
Issued at $0.98 per share
|
|
|
(36,168
|
)
|
Available for issuance as of October 31, 2017
|
|
|
70
|
|
The fair value of shares under the ESPP was determined at the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Expected life (in years)
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Risk free interest rate
|
|
|
0.46
|
%
|
|
|
0.30
|
%
|
|
|
0.07
|
%
|
Volatility
|
|
|
75.0
|
%
|
|
|
37.0
|
%
|
|
|
72.0
|
%
|
Dividends yield
|
|
—%
|
|
|
—%
|
|
|
—%
|
|
The weighted-average fair value of shares issued under the ESPP during fiscal year 2017 and 2016 was $1.76 and $6.86 per share, respectively.
The ESPP was suspended as of May 1, 2017 because we did not have sufficient shares of common stock available for issuance.
Employee Tax-Deferred Savings Plans
We offer a 401(k) plan (the “Plan”) to all full time employees that provides for tax-deferred salary deductions for eligible employees (beginning the first month following an employee’s hire date). Employees may choose to make voluntary contributions of their annual compensation to the Plan, limited to an annual maximum amount as set periodically by the Internal Revenue Service. Employee contributions are fully vested when made. Under the Plan, there is no option available to the employee to receive or purchase our common stock. Matching contributions of 2% under the Plan aggregated $0.5 million, $0.6 million and $0.4 million for the years ended October 31, 2017, 2016, and 2015, respectively.
109
Note 16. Income Taxes
The components of loss before income taxes for the years ended October 31, 2017, 2016, and 2015 were as follows (in thousands):
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
U.S.
|
|
$
|
(49,723
|
)
|
|
$
|
(46,708
|
)
|
|
$
|
(26,459
|
)
|
Foreign
|
|
|
(4,136
|
)
|
|
|
(3,981
|
)
|
|
|
(2,951
|
)
|
Loss before income taxes
|
|
$
|
(53,859
|
)
|
|
$
|
(50,689
|
)
|
|
$
|
(29,410
|
)
|
There was current income tax expense of $0.04 million, $0.5 million and $0.3 million related to foreign withholding taxes and income taxes in South Korea and no deferred federal income tax expense (benefit) for the years ended October 31, 2017, 2016 and 2015. Franchise tax expense, which is included in administrative and selling expenses, was $0.5 million, $0.4 million and $0.2 million for the years ended October 31, 2017, 2016 and 2015, respectively.
The reconciliation of the federal statutory income tax rate to our effective income tax rate for the years ended October 31, 2017, 2016 and 2015 was as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Statutory federal income tax rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
Increase (decrease) in income taxes resulting
from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of Federal benefits
|
|
|
(1.3
|
)%
|
|
|
(0.2
|
)%
|
|
|
(0.1
|
)%
|
Foreign withholding tax
|
|
|
0.1
|
%
|
|
|
1.1
|
%
|
|
|
0.9
|
%
|
Net operating loss adjustment and true-ups
|
|
|
(4.6
|
)%
|
|
|
3.3
|
%
|
|
|
4.7
|
%
|
Nondeductible expenditures
|
|
|
1.9
|
%
|
|
|
0.9
|
%
|
|
|
0.1
|
%
|
Change in state tax rate
|
|
|
(0.8
|
)%
|
|
|
(0.3
|
)%
|
|
|
1.6
|
%
|
Other, net
|
|
|
0.6
|
%
|
|
|
0.2
|
%
|
|
|
0.4
|
%
|
Valuation allowance
|
|
|
38.2
|
%
|
|
|
30.1
|
%
|
|
|
27.3
|
%
|
Effective income tax rate
|
|
|
0.1
|
%
|
|
|
1.1
|
%
|
|
|
0.9
|
%
|
Our deferred tax assets and liabilities consisted of the following at October 31, 2017 and 2016 (in thousands):
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Compensation and benefit accruals
|
|
$
|
11,158
|
|
|
$
|
9,625
|
|
Bad debt and other allowances
|
|
|
605
|
|
|
|
1,276
|
|
Capital loss and tax credit carry-forwards
|
|
|
13,398
|
|
|
|
12,772
|
|
Net operating losses (domestic and foreign)
|
|
|
282,022
|
|
|
|
265,799
|
|
Deferred license revenue
|
|
|
7,850
|
|
|
|
8,616
|
|
Inventory valuation allowances
|
|
|
111
|
|
|
|
278
|
|
Accumulated depreciation
|
|
|
5,095
|
|
|
|
4,653
|
|
Grant revenue
|
|
|
1,522
|
|
|
|
1,327
|
|
Gross deferred tax assets:
|
|
|
321,761
|
|
|
|
304,346
|
|
Valuation allowance
|
|
|
(321,761
|
)
|
|
|
(304,346
|
)
|
Deferred tax assets after valuation allowance
|
|
|
—
|
|
|
|
—
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
In process research and development
|
|
|
(3,377
|
)
|
|
|
(3,377
|
)
|
Net deferred tax liability
|
|
$
|
(3,377
|
)
|
|
$
|
(3,377
|
)
|
We continually evaluate our deferred tax assets as to whether it is “more likely than not” that the deferred tax assets will be realized. In assessing the realizability of our deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Based on the projections for future taxable income over the periods in which the deferred tax assets are realizable, management
110
believes that significant uncertainty exists surrounding the recoverability of the deferred ta
x assets. As a result, we recorded a full valuation allowance against our deferred tax assets. None of the valuation allowance will reduce additional paid in capital upon subsequent recognition of any related tax benefits. In connection with our fiscal ye
ar 2013 acquisition of Versa we recorded a deferred tax liability for IPR&D, which has an indefinite life. Accordingly, we do not consider it to be a source of taxable income in evaluating the recoverability of our deferred tax assets.
As of October 31, 2017, we had federal and state NOL carryforwards of $752.7 million and $414.7 million, respectively, a portion of which ($7.4 million and $6.3 million of federal and state NOL carryforwards, respectively) have not been recognized as they relate to windfall benefits arising from share-based compensation. The federal NOL carryforwards expire in varying amounts from 2019 through 2037 while state NOL carryforwards expire in varying amounts from fiscal year 2018 through 2037. Additionally, we had $11.6 million of state tax credits available, of which $0.6 million expires in fiscal year 2018. The remaining credits do not expire.
Certain transactions involving the Company’s beneficial ownership occurred in fiscal year 2014 and prior years, which could have resulted in a stock ownership change for purposes of Section 382 of the Internal Revenue Code of 1986, as amended. We completed a detailed Section 382 study in fiscal year 2017 to determine if any of our NOL and credit carryovers will be subject to limitation. Based on that study we have determined that there was no ownership change as of the end of our fiscal year 2017 under Section 382. The acquisition of Versa in fiscal year 2013 triggered a Section 382 ownership change which will limit the future usage of some of the federal and state NOLs. The federal and state NOLs that are non 382-limited are included in the NOL deferred tax assets as disclosed.
As discussed in Note 1, the Company’s financial statements reflect expected future tax consequences of uncertain tax positions that the Company has taken or expects to take on a tax return (including a decision whether to file or not file a return in a particular jurisdiction) presuming the taxing authorities’ full knowledge of the position and all relevant facts.
The liability for unrecognized tax benefits as of October 31, 2017 and 2016 was $15.7 million. This amount is directly associated with a tax position taken in a year in which federal and state NOL carryforwards were generated. Accordingly, the amount of unrecognized tax benefit has been presented as a reduction in the reported amounts of our federal and state NOL carryforwards. It is our policy to record interest and penalties on unrecognized tax benefits as income taxes; however, because of our significant NOLs, no provision for interest or penalties has been recorded.
We file income tax returns in the U.S. and certain states, primarily Connecticut and California, as well as income tax returns required internationally for South Korea and Germany. We are open to examination by the Internal Revenue Service and various states in which we file for fiscal year 2000 to the present. Our 2016 U.S. federal tax return is currently under examination by the Internal Revenue Service.
Note 17. Earnings Per Share
Basic earnings (loss) per common share (“EPS”) are generally calculated as income (loss) available to common stockholders divided by the weighted average number of common shares outstanding. Diluted EPS is generally calculated as income (loss) available to common stockholders divided by the weighted average number of common shares outstanding plus the dilutive effect of common share equivalents.
111
The calculation of basic and diluted EPS for the years ended October 31, 2017, 2016 and 2015 was as follows
(amounts in th
ousands, except share and per share amounts)
:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(53,903
|
)
|
|
$
|
(51,208
|
)
|
|
$
|
(29,684
|
)
|
Net loss attributable to noncontrolling interest
|
|
|
—
|
|
|
|
251
|
|
|
|
325
|
|
Preferred stock dividend
|
|
|
(3,200
|
)
|
|
|
(3,200
|
)
|
|
|
(3,200
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(57,103
|
)
|
|
$
|
(54,157
|
)
|
|
$
|
(32,559
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares
|
|
|
49,914,904
|
|
|
|
29,773,700
|
|
|
|
24,513,731
|
|
Effect of dilutive securities
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average diluted common shares
|
|
|
49,914,904
|
|
|
|
29,773,700
|
|
|
|
24,513,731
|
|
Basic loss per share
|
|
$
|
(1.14
|
)
|
|
$
|
(1.82
|
)
|
|
$
|
(1.33
|
)
|
Diluted loss per share
(1)
|
|
$
|
(1.14
|
)
|
|
$
|
(1.82
|
)
|
|
$
|
(1.33
|
)
|
(1)
|
Due to the net loss to common stockholders in each of the years presented above, diluted earnings per share was computed without consideration to potentially dilutive instruments as their inclusion would have been antidilutive. As of October 31, 2017, 2016 and 2015, potentially dilutive securities excluded from the diluted loss per share calculation are as follows:
|
|
|
October
31, 2017
|
|
|
October 31, 2016
|
|
|
October 31, 2015
|
|
May 2017 Offering –
Series C Warrants
|
|
|
11,580,900
|
|
|
|
—
|
|
|
|
—
|
|
May 2017 Offering –
Series D Warrants
|
|
|
2,584,174
|
|
|
|
—
|
|
|
|
—
|
|
July 2016 Offering -
Series A Warrants
|
|
|
7,680,000
|
|
|
|
7,680,000
|
|
|
|
—
|
|
July 2016 Offering -
Series B Warrants
|
|
|
—
|
|
|
|
3,826,000
|
|
|
|
—
|
|
July 2014 Offering - NRG Warrants
|
|
|
—
|
|
|
|
166,666
|
|
|
|
166,666
|
|
Outstanding options to
purchase common stock
|
|
|
309,950
|
|
|
|
246,923
|
|
|
|
257,769
|
|
Unvested RSAs
|
|
|
1,898,692
|
|
|
|
915,831
|
|
|
|
450,783
|
|
Series C Preferred Shares to satisfy
conversion requirements
(1)
|
|
|
18,097,826
|
|
|
|
—
|
|
|
|
—
|
|
5% Series B Cumulative
Convertible Preferred Stock
(2)
|
|
|
454,043
|
|
|
|
454,043
|
|
|
|
454,043
|
|
Series 1 Preferred Shares to satisfy
conversion requirements
(2)
|
|
|
15,167
|
|
|
|
15,167
|
|
|
|
15,167
|
|
Total potentially dilutive securities
|
|
|
42,620,752
|
|
|
|
13,304,630
|
|
|
|
1,344,428
|
|
(1)
|
The number of shares of common stock issuable upon conversion of the Series C Preferred Stock was calculated using the stated value outstanding on October 31, 2017 of $33,300,000 (original total stated value of $33,500,000 less conversion through October 31, 2017 totaling $200,000) divided by the conversion price of $1.84.
|
(2)
|
Refer to Note 13, Redeemable Preferred Stock, for information on the calculation of the common shares upon conversion.
|
112
Note 18. Commitments and Contingencies
Lease agreements
As of October 31, 2017 and 2016, we had capital lease obligations of $0.6 million and $0.7 million, respectively. Lease payment terms are thirty-six months from the date of lease.
We also lease certain computer and office equipment and manufacturing facilities in Torrington and Danbury, Connecticut under operating leases expiring on various dates through 2030. Rent expense was $1.6 million, $1.8 million and $1.7 million for the years ended October 2017, 2016 and 2015, respectively.
Non-cancelable minimum payments applicable to operating and capital leases at October 31, 2017 were as follows (in thousands):
|
|
Operating
Leases
|
|
|
Capital
Leases
|
|
2018
|
|
$
|
1,181
|
|
|
$
|
353
|
|
2019
|
|
|
910
|
|
|
|
211
|
|
2020
|
|
|
403
|
|
|
|
54
|
|
2021
|
|
|
381
|
|
|
|
10
|
|
2022
|
|
|
377
|
|
|
|
4
|
|
Thereafter
|
|
|
3,289
|
|
|
|
—
|
|
Total
|
|
$
|
6,541
|
|
|
$
|
632
|
|
Service Agreements
Under the provisions of our service agreements, we provide services to maintain, monitor, and repair customer power plants to meet minimum operating levels. Under the terms of our service agreements, the power plant must meet a minimum operating output during the term. If minimum output falls below the contract requirement, we may be subject to performance penalties and/or may be required to repair or replace the customer’s fuel cell module(s). An estimate is not recorded for a potential performance guarantee liability until a performance issue has occurred at a particular power plant. At that point, the actual power plant’s output is compared against the minimum output guarantee and an accrual is recorded. The review of power plant performance is updated for each reporting period to incorporate the most recent performance of the power plant and minimum output guarantee payments made to customers, if any. The Company has provided for an accrual for performance guarantees, based on actual fleet performance, which totaled $2.2 million and $3.3 million as of October 31, 2017 and 2016, respectively, and is recorded in “Accrued liabilities.”
Our loss accrual on service agreements, excluding the accrual for performance guarantees, totaled $1.1 million and $2.7 million as of October 31, 2017 and 2016, respectively, and is recorded in “Accrued liabilities.” Our accrual estimates are performed on a contract by contract basis and include cost assumptions based on what we anticipate the service requirements will be to fulfill obligations under each contract. The decrease primarily relates to module exchanges performed during the year ended October 31, 2017.
Power Purchase Agreements
Under the terms of our PPAs, customers agree to purchase power from our fuel cell power plants at negotiated rates. Electricity rates are generally a function of the customers’ current and future electricity pricing available from the grid. As lessee of the power plants, we are responsible for all operating costs necessary to maintain, monitor and repair the power plants. Under certain agreements, we are also responsible for procuring fuel, generally natural gas, to run the power plants.
Expansion of Torrington Facility and Related Low-Cost Financing
In December 2015, the Company commenced the first phase of its project to expand the existing 65,000 square foot manufacturing facility in Torrington, Connecticut by approximately 102,000 square feet for a total size of 167,000
113
square feet. Initially, this additional space will be used to enhance and streamline logistics functions through consolidation
of satellite warehouse locations and will provide the space needed to reconfigure the existing production process to improve manufacturing efficiencies.
The company has substantially completed the first phase of the expansion during the fourth quarter of
fiscal year 2017.
On November 9, 2015, the Company closed on a definitive Assistance Agreement with the State of Connecticut and received a disbursement of $10.0 million that was used for the first phase of the expansion project. In conjunction with this financing, the Company entered into a $10.0 million Promissory Note and related security agreements. The second phase of our manufacturing expansion, for which we will be eligible, subject to certain conditions to receive an additional $10.0 million in low-cost financing from the State of Connecticut, will commence as demand supports.
Other
At October 31, 2017, the Company has unconditional purchase commitments aggregating $29.1 million, for materials, supplies and services in the normal course of business.
Under certain sales and financing agreements the Company is contractually committed to provide compensation for any losses that our customers and finance partners may suffer in certain limited circumstances resulting from reductions in the U.S. Investment Tax Credit. Such obligations would arise as a result of reductions to the value of the underlying fuel cell projects as assessed by the U.S. Internal Revenue Service (the “IRS”). The Company does not believe that any payments under these contracts are probable based on the facts known at the reporting date. The maximum potential future payments that the Company could have to make under this obligation would depend on the difference between the fair values of the fuel cell projects sold or financed and the values the IRS would determine as the fair value for the systems for purposes of claiming the Investment Tax Credit. The value of the Investment Tax Credit in the Company’s agreements is based on guidelines provided by the statutory regulations from the IRS. The Company and its customers use fair values determined with the assistance of independent third-party appraisals.
We are involved in legal proceedings, claims and litigation arising out of the ordinary conduct of our business. Although we cannot assure the outcome, management presently believes that the result of such legal proceedings, either individually, or in the aggregate, will not have a material adverse effect on our consolidated financial statements, and no material amounts have been accrued in our consolidated financial statements with respect to these matters.
114
Note 19. Supplemental Cash Flow Information
The following represents supplemental cash flow information (dollars in thousands):
|
|
Year Ended October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cash interest paid
|
|
$
|
2,715
|
|
|
$
|
1,941
|
|
|
$
|
677
|
|
Income taxes paid
|
|
$
|
2
|
|
|
$
|
80
|
|
|
$
|
8
|
|
Noncash financing and investing activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for Employee Stock Purchase
Plan in settlement of prior year accrued employee
contributions
|
|
$
|
50
|
|
|
$
|
105
|
|
|
$
|
169
|
|
Noncash reclass from inventory to project assets
|
|
$
|
7,282
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Assumption of debt in conjunction with asset
acquisition
|
|
$
|
2,289
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Acquisition of project assets
|
|
$
|
2,386
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accrued sale of common stock, cash received in a
subsequent period
|
|
$
|
—
|
|
|
$
|
357
|
|
|
$
|
494
|
|
Accrued purchase of fixed assets, cash paid in
subsequent period
|
|
$
|
2,490
|
|
|
$
|
3,952
|
|
|
$
|
—
|
|
Accrued purchase of project assets, cash paid in
subsequent period
|
|
$
|
2,380
|
|
|
$
|
1,797
|
|
|
$
|
—
|
|
Note 20. Quarterly Information (Unaudited)
Selected unaudited financial data for each quarter of fiscal year 2017 and 2016 is presented below. We believe that the information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented.
(in thousands)
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Full
Year
|
|
Year ended October 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
17,002
|
|
|
$
|
20,417
|
|
|
$
|
10,358
|
|
|
$
|
47,889
|
|
|
|
95,666
|
|
Gross profit (loss)
|
|
|
1,813
|
|
|
|
383
|
|
|
|
(2,626
|
)
|
|
|
3,164
|
|
|
|
2,734
|
|
Loss on operations
|
|
|
(10,928
|
)
|
|
|
(11,496
|
)
|
|
|
(14,330
|
)
|
|
|
(8,181
|
)
|
|
|
(44,935
|
)
|
Net loss
|
|
|
(13,685
|
)
|
|
|
(13,238
|
)
|
|
|
(17,001
|
)
|
|
|
(9,979
|
)
|
|
|
(53,903
|
)
|
Preferred stock dividends
|
|
|
(800
|
)
|
|
|
(800
|
)
|
|
|
(800
|
)
|
|
|
(800
|
)
|
|
|
(3,200
|
)
|
Net loss to common stockholders
|
|
|
(14,485
|
)
|
|
|
(14,038
|
)
|
|
|
(17,801
|
)
|
|
|
(10,779
|
)
|
|
|
(57,103
|
)
|
Net loss to common stockholders per basic
and diluted common share
(1)
|
|
$
|
(0.39
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.17
|
)
|
|
|
(1.14
|
)
|
Year ended October 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
33,482
|
|
|
$
|
28,581
|
|
|
$
|
21,716
|
|
|
$
|
24,473
|
|
|
$
|
108,252
|
|
Gross (loss) profit
|
|
|
(166
|
)
|
|
|
(157
|
)
|
|
|
434
|
|
|
|
(468
|
)
|
|
|
(357
|
)
|
Loss on operations
|
|
|
(11,517
|
)
|
|
|
(12,708
|
)
|
|
|
(10,323
|
)
|
|
|
(11,805
|
)
|
|
|
(46,353
|
)
|
Net loss
|
|
|
(11,779
|
)
|
|
|
(15,414
|
)
|
|
|
(11,067
|
)
|
|
|
(12,948
|
)
|
|
|
(51,208
|
)
|
Preferred stock dividends
|
|
|
(800
|
)
|
|
|
(800
|
)
|
|
|
(800
|
)
|
|
|
(800
|
)
|
|
|
(3,200
|
)
|
Net loss to common stockholders
|
|
|
(12,512
|
)
|
|
|
(16,173
|
)
|
|
|
(11,810
|
)
|
|
|
(13,662
|
)
|
|
|
(54,157
|
)
|
Net loss to common stockholders per basic
and diluted common share
(1)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.56
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.41
|
)
|
|
|
(1.82
|
)
|
(1)
|
The full year net loss to common stockholders basic and diluted share may not equal the sum of the quarters due to weighting of outstanding shares.
|
115
Note 21. Subsequen
t Events
Authorized Common Stock
On December 14, 2017, the number of authorized shares of the Company’s common stock was increased from 125,000,000 to 225,000,000, by a vote of the holders of a majority of the outstanding shares of the Company’s common stock.
NASDAQ Marketplace Rule 5635(d)
On December 14, 2017, in accordance with NASDAQ Marketplace Rule 5635(d), the Company’s common stockholders approved the issuance of shares of the Company’s common stock exceeding 19.9% of the number of shares outstanding on September 5, 2017, upon the conversion and/or redemption of the Series C Convertible Preferred Stock issued in an underwritten offering in September 2017.
Tax Cuts and Jobs Act
On December 22, 2017 the Tax Cuts and Jobs Act (the “Act”) was signed into law. While enacted subsequent to this balance sheet date, the Act changes existing United States tax law and includes numerous provisions that will affect the Company. Specifically, the reduction of the U.S. federal tax rate from 34% to 21% effective January 1, 2018 will reduce the Company’s deferred tax liability IPR&D by approximately $1.0 million with the benefit to be reflected in the first quarter of fiscal year 2018. The reduction in the federal tax rate will also reduce the value of the Company’s existing deferred tax assets, though an offsetting decrease to valuation allowance would be recorded.
116