FCEL

Business Context and Reporting Period

Company: FuelCell Energy, Inc. (formerly Energy Research Corporation)
Filing Type: Form 10-K (Annual Report)
Period Ended: October 31, 1999
Business Overview: The Company is a developer of electrochemical technologies for electric power generation, specifically focusing on the commercialization of its patented Direct FuelCell (DFC) technology. Revenues are primarily derived from U.S. government research and development contracts (approx. 87% in 1999) and license fees. In February 1999, the Company spun off its battery operations into a separate entity, Evercel, Inc.

Key Financial Metrics

Per Share Data: Basic and Diluted Earnings Per Share were $(0.16) for 1999 compared to $(0.06) for 1998. A 3-for-2 stock dividend was paid on November 16, 1999, and all per share data has been retroactively adjusted.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 18% to $19.97 million, primarily due to reduced funding from the U.S. Department of Energy (DOE) Cooperative Agreement. This was partially offset by increased revenue from commercial customers and the U.S. Navy.
• Cost Reductions: Cost of revenues decreased 15% to $12.42 million. Administrative and selling expenses dropped 5% to $6.62 million, reflecting the spin-off of Evercel, Inc., though partially offset by commercialization costs.
• License Fee Surge: License fee income increased 125% to $1.53 million, driven by the recognition of $1.3 million in previously deferred income related to Evercel's battery technology testing.
• Profitability: The Company reported a net loss of $985,000, widening from a $382,000 loss in 1998. The effective tax rate increased to 41.9% due to valuation allowances on tax credits.
• Liquidity: Cash and cash equivalents decreased by $4.14 million, largely due to the deconsolidation of the Evercel joint venture ($3.02 million) and capital expenditures of $1.24 million.

Guidance, Outlook, and Risks

Outlook and Guidance:

• Cost Reduction Goals: The Company expects to reduce the total installed cost of its DFC technology to less than $1,200 per kW within five years, targeting an electricity cost of approximately 5 cents per kWh.
• DOE Funding: The Company expects DOE funding for 2000 to be approximately the same level as 1999 and is seeking an extension of the cooperative agreement through 2003.
• Manufacturing Expansion: The Company plans to raise approximately $16 million to expand manufacturing capacity from 5 MW to 50 MW per year.
• Commercialization: Plans include a 1 MW commercial stack demonstration in 2001 and field trials of 250 kW "Hot Module" units in the U.S. and Germany.

Risks and Contingencies:

• Government Dependence: Approximately 87% of revenue comes from government contracts, which are subject to annual appropriations and termination at the government's convenience.
• Capital Constraints: The Company believes current cash reserves are adequate for the next 12 months but will require additional funding for manufacturing expansion. There is no assurance such funds will be available.
• Market Acceptance: The distributed generation market is evolving; failure of the market to develop as anticipated could materially affect future profitability.
• Competition: The Company faces competition from other fuel cell developers and established combustion equipment manufacturers (e.g., gas turbines).

Investor Verification Checklist

• DOE Contract Status: Verify the specific funding levels and term extensions for the DOE Cooperative Agreement beyond 2000.
• Capital Raise Progress: Confirm the status of the $16 million financing required to expand manufacturing capacity to 50 MW/year.
• Commercial Orders: Monitor the conversion of field trials (e.g., Bielefeld, Germany; Los Angeles) into firm commercial orders.
• Cost Targets: Track progress against the $1,200/kW installed cost target and the 5 cents/kWh electricity cost goal.
• Licensee Performance: Review the performance and royalty payments from key licensees, specifically MTU (DaimlerChrysler) and Mitsubishi Electric.