| FUELCELL ENERGY INC Item 1A RISK FACTORS You should carefully consider the following risk factors before making an investment decision |
| If any of the following risks actually occur, our business, financial condition, or results of operations could be materially and adversely affected |
| In such cases, the trading price of our common stock could decline, and you may lose all or part of your investment |
| We have recently incurred losses and anticipate continued losses and negative cash flow |
| We have been transitioning from a contract research and development company to a commercial products developer and manufacturer |
| As such, we have not been profitable since our fiscal year ended October 31, 1997 |
| We expect to continue to incur net losses and generate negative cash flow until we can produce sufficient revenues to cover our costs |
| We may never become profitable |
| Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future |
| For the reasons discussed in more detail below, there are substantial uncertainties associated with our achieving and sustaining profitability |
| Our cost reduction strategy may not succeed or may be significantly delayed, which may result in our inability to offer our products at competitive prices and may adversely affect our sales |
| Our cost reduction strategy is based on the assumption that a significant increase in production will result in economies of scale |
| In addition, our cost reduction strategy relies on advancements in our manufacturing process, engineering design and technology (including projected power output) that, are currently not ascertainable |
| Failure to achieve our cost reduction targets would have a material adverse effect on our commercialization plans and, therefore, our business, prospects, results of operations and financial condition |
| Our products will compete with products using other energy sources, and if the prices of the alternative sources are lower than energy sources used by our products, sales of our products will be adversely affected |
| Our Direct FuelCell has been operated using a variety of hydrocarbon fuels, including natural gas, methanol, diesel, biogas, coal gas, coal mine methane and propane |
| If these fuels are not readily available or if their prices increase such that electricity produced by our products costs more than electricity provided by other generation sources, our products would be less economically attractive to potential customers |
| In addition, we have no control over the prices of several types of competitive energy sources such as oil, gas or coal |
| Significant decreases (or short term increases) in the price of these fuels could also have a material adverse effect on our business because other generation sources could be more economically attractive to consumers than our products |
| Commercialization of our products depends on conducting successful field trials, and any delay, performance failure or perceived problem with our field trials could have a material adverse effect on our business, prospects, results of operations and financial condition |
| We believe that our Direct FuelCell commercialization program depends upon our conducting additional commercial field trials and demonstration projects of our power plants and completing substantial additional research and development |
| Our demonstration, field trial and field follow projects may encounter problems and/or delays for a number of reasons, including the failure of our technology, the failure of the technology of others (including our balance of plant suppliers), the failure to combine these technologies properly (including control system coordination) and the failure to maintain and service the test prototypes properly |
| Any delay, performance failure or perceived problem with our field trials could hurt our reputation in the distributed generation market and, therefore, could have a material adverse effect on our business, prospects, results of operations and financial condition |
| 27 _________________________________________________________________ We have signed long-term power purchase and service agreements with customers which are subject to market conditions and operating risks that may affect our operating results |
| We currently have four MW of PPAs with four customers |
| Under the terms of our power purchase agreements, customers agree to purchase power from our fuel cell power plants at negotiated rates, generally for periods of five to ten years |
| Electricity rates are generally a function of the customer’s current and future electricity pricing available from the grid |
| Revenues are earned and collected under these PPAs as power is produced |
| As owner of the power plants in these PPA entities, we are responsible for all operating costs necessary to maintain, monitor and repair the power plants |
| Under certain agreements, we are also responsible for procuring fuel, generally natural gas, to run the power plants |
| Should electricity rates decrease or operating costs increase from our original estimates, our results of operations could be negatively impacted |
| We have qualified for incentive funding for these projects in California under the states’ Self Generation Incentive Funding Program and from other government programs |
| Funds are payable upon commercial installation and demonstration of the plant and may require return of the funds for failure of certain performance requirements |
| Revenue related to these incentive funds is recognized ratably over the performance period |
| We are not required to produce minimum amounts of power under our PPA agreements and we have the right to terminate PPA agreements by giving written notice to the customer, subject to certain exit costs |
| We have contracted with certain customers to provide service of fuel cell power plants over terms ranging from one to thirteen years |
| Pricing for service contracts is based upon estimates of future costs, which given the early stage of development could be materially different from actual expenses |
| We extend product warranties which could affect our operating results |
| We warranty our products for a specific period of time against manufacturing or performance defects |
| As we have limited operating experience, warranty costs are expensed as incurred |
| As a result operating results could be negatively impacted should there be product manufacturing or performance defects |
| We currently face and will continue to face significant competition |
| Our Direct FuelCell currently faces, and will continue to face, significant competition |
| We compete on the basis of our products’ reliability, fuel efficiency, environmental considerations and cost |
| Technological advances in alternative energy products or improvements in the electric grid or other sources of power generation, or other fuel cell technologies may negatively affect the development or sale of some or all of our products or make our products non-competitive or obsolete prior to commercialization or afterwards |
| Other companies, some of which have substantially greater resources than ours, are currently engaged in the development of products and technologies that are similar to, or may be competitive with, our products and technologies |
| Several companies in the United States are involved in fuel cell development, although we believe we are the only domestic company engaged in significant manufacturing and commercialization of carbonate fuel cells |
| Emerging fuel cell technologies (and companies developing them) include proton exchange membrane fuel cells (Ballard Power Systems, Inc |
| or UTC Fuel Cells; and Plug Power), phosphoric acid fuel cells (UTC Fuel Cells) and solid oxide fuel cells (Siemens Westinghouse Electric Company, Cummins; SOFCo; General Electric; Delphi and Acumentrics) |
| Each of these competitors has the potential to capture market share in our target markets |
| In Asia, Ishikawajima Harima Heavy Industries is active in developing carbonate fuel cells |
| In Europe, a company in Italy, Ansaldo Fuel Cells, is actively engaged in carbonate fuel cell development and is a potential competitor |
| Other than fuel cell developers, we must also compete with such companies as Caterpillar, Cummins, and Detroit Diesel, which manufacture more mature combustion-based equipment, including various engines and turbines, and have well-established manufacturing, distribution, and operating and cost features |
| Significant competition may also come from gas turbine companies like General Electric, Ingersoll Rand, Solar Turbines and Kawasaki, which have recently made progress in improving fuel efficiency and reducing pollution in large-size combined cycle natural gas fueled generators |
| These companies have also made efforts to extend these advantages to smaller sizes |
| We have large and influential stockholders, which may make it difficult for a third party to acquire our common stock |
| MTU Friedrichshafen GmbH currently owns approximately 5dtta7prca of our outstanding common stock (based upon the number of shares of our common stock outstanding as of January 11, 2006) |
| James D Gerson beneficially owns approximately 2dtta5prca of our outstanding common stock |
| Loeb Investors Co |
| LXXV) collectively beneficially own approximately 2dtta2prca of our outstanding common stock (based upon the number of shares of our common stock outstanding as of January 11, 2006) |
| These ownership levels could make it difficult for a third party to acquire our common stock or have input into the decisions made by our board of directors, which include Michael Bode (Chief Executive Officer of MTU CFC Solutions GmbH), James D Gerson, Warren Bagatelle and Thomas L Kempner (Chairman and Chief Executive Officer of an affiliate of Loeb Investors Co |
| MTU CFC is also a licensee of our technology and a purchaser of our Direct FuelCell products |
| Therefore, it may be in MTU CFC’s interest to possess substantial influence over matters concerning our overall strategy and technological and commercial development |
| MTU CFC may develop competing technologies |
| MTU CFC is currently developing carbonate fuel cell technology |
| If this technology does not use DFC know-how, MTU CFC must use good faith efforts to license the technology to us |
| If MTU CFC is successful but does not grant us a license, it may be directly competing with us while having a significant ownership interest in us, and a seat on our board of directors |
| We have agreed with MTU CFC to continue developing products with as much commonality as possible |
| However, the license agreement between us and MTU CFC provides that each of us retains the right to independently pursue the development of carbonate fuel cell technologies |
| We have limited experience manufacturing our Direct FuelCell products on a commercial basis, which may adversely affect our planned increases in production capacity and our ability to satisfy customer requirements |
| We have limited experience manufacturing our Direct FuelCell products on a commercial basis |
| Our manufacturing, testing and conditioning facilities have equipment in place for a production capacity of 50 MW per year |
| We expect that we will then increase our manufacturing capacity based on market demand |
| We cannot be sure that we will be able to achieve any planned increases in production capacity |
| Also, as we scale up our production capacity, we cannot be sure that unplanned failures or other technical problems relating to the manufacturing process will not occur |
| 29 _________________________________________________________________ Even if we are successful in achieving our planned increases in production capacity, we cannot be sure that we will do so in time to meet our product commercialization schedule or to satisfy the requirements of our customers |
| Additionally, we cannot be sure that we will be able to develop efficient, low-cost manufacturing capabilities and processes (including automation) that will enable us to meet our cost goals and profitability projections |
| Our failure to develop advanced manufacturing capabilities and processes, or meet our cost goals, could have a material adverse effect on our business, prospects, results of operations and financial condition |
| Unanticipated increases or decreases in business growth may result in adverse financial consequences for us |
| If our business grows more quickly than we anticipate, our existing and planned manufacturing facilities may become inadequate and we may need to seek out new or additional space, at considerable cost to us |
| If our business does not grow as quickly as we expect, our existing and planned manufacturing facilities would, in part, represent excess capacity for which we may not recover the cost; in that circumstance, our revenues may be inadequate to support our committed costs and our planned growth and our gross margins and business strategy would be adversely affected |
| Our plans are dependent on market acceptance of our Direct FuelCell products |
| Our plans are dependent upon market acceptance of, as well as enhancements to, those products |
| Fuel cell systems represent an emerging market, and we cannot be sure that potential customers will accept fuel cells as a replacement for traditional power sources |
| As is typical in a rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty and risk |
| Since the distributed generation market is still evolving, it is difficult to predict with certainty the size of the market and its growth rate |
| The development of a market for our Direct FuelCell products may be affected by many factors that are out of our control, including: • the cost competitiveness of our fuel cell products; • the future costs of natural gas and other fuels used by our fuel cell products; • consumer reluctance to try a new product; • perceptions of the safety of our fuel cell products; • the market for distributed generation; • local permitting and environmental requirements; and, • the emergence of newer, more competitive technologies and products |
| If a sufficient market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred in the development of Direct FuelCell products and may never achieve profitability |
| As we continue to commercialize our Direct FuelCell products, we will continue to develop warranties, production guarantees and other terms and conditions relating to our products that will be acceptable to the marketplace, and continue to develop a service organization that will aid in servicing our products and obtain self-regulatory certifications, if available, with respect to our products |
| Failure to achieve any of these objectives may also slow the development of a sufficient market for our products and, therefore, have a material adverse effect on our results of operations |
| 30 _________________________________________________________________ Our government research and development contracts are subject to the risk of termination by the contracting party and we may not realize the full amounts allocated under the contracts due to the lack of Congressional appropriations |
| A portion of our fuel cell revenues have been derived from a long-term cooperative agreement and other contracts with the US DOE, the US Department of Defense, the US Navy and the National Aeronautics and Space Administration |
| These agreements are important to the continued development of our technology and our products |
| Generally, our US government research and development contracts, are subject to the risk of termination at the convenience of the contracting agency |
| Furthermore, these contracts, irrespective of the amounts allocated by the contracting agency, are subject to annual congressional appropriations and the results of government or agency sponsored audits of our cost reduction efforts and our cost projections |
| We can only receive funds under these contracts ultimately made available to us annually by Congress as a result of the appropriations process |
| Accordingly, we cannot be sure whether we will receive the full amount allocated by the DOE under our DOE cooperative agreements or the full amounts awarded under our other government research and development contracts |
| Failure to receive the full amounts under any of our government research and development contracts could materially and adversely affect our commercialization plans and, therefore, our business, prospects, results of operations and financial condition |
| A negative government audit could result in an adverse adjustment of our revenue and costs and could result in civil and criminal penalties |
| Government agencies, such as the Defense Contract Audit Agency, routinely audit and investigate government contractors |
| These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards |
| If the agencies determine through these audits or reviews that we improperly allocated costs to specific contracts, they will not reimburse us for these costs |
| Therefore, an audit could result in adjustments to our revenue and costs |
| Further, although we have internal controls in place to oversee our government contracts, no assurance can be given that these controls are sufficient to prevent isolated violations of applicable laws, regulations and standards |
| If the agencies determine that we or one of our subcontractors engaged in improper conduct, we may be subject to civil or criminal penalties and administrative sanctions, payments, fines and suspension or prohibition from doing business with the government, any of which could materially affect our financial condition |
| The United States government has certain rights relating to our intellectual property, including restricting or taking title to certain patents |
| Many of our United States patents relating to our carbonate fuel cell technology are the result of government-funded research and development programs |
| Four of our patents that were the result of DOE-funded research prior to January 1988 (the date that we qualified as a “small business”) are owned by the United States government and have been licensed to us |
| This license is revocable only in the limited circumstances where it has been demonstrated that we are not making an effort to commercialize the invention |
| We own all patents resulting from research funded by our DOE contracts awarded after January 1988 to date, based on our “small business” status when each contract was awarded |
| Under current regulations, patents resulting from research funded by government agencies other than the DOE are owned by us, whether or not we are a “small business |
| ” 31 _________________________________________________________________ Fourteen United States patents that we own have resulted from government-funded research and are subject to the risk of exercise of “march-in” rights by the government |
| March-in rights refer to the right of the United States government or a government agency to exercise its non-exclusive, royalty-free, irrevocable worldwide license to any technology developed under contracts funded by the government if the contractor fails to continue to develop the technology |
| These “march-in” rights permit the United States government to take title to these patents and license the patented technology to third parties if the contractor fails to utilize the patents |
| In addition, our DOE-funded research and development agreements also require us to agree that we will not provide to a foreign entity any fuel cell technology subject to that agreement unless the fuel cell technology will be substantially manufactured in the US Accordingly, we could lose some or all of the value of these patents |
| A failure to qualify as a “small business” could adversely affect our rights to own future patents under DOE-funded contracts |
| Qualifying as a “small business” under DOE contracts allows us to own the patents that we develop under DOE contracts |
| If we continue to grow, we will no longer qualify as a “small business” and no longer own future patents we develop under contracts, grants or cooperative agreements funded by the DOE based on such certification, unless we obtain a patent waiver from the DOE As a result of our acquisition of Global, the number of our employees increased and therefore, we temporarily did not qualify as a “small business |
| ” Following the sale of Global and its TEG product line on May 27, 2004, we again qualify as a “small business”; however, we cannot assure you that we will continue to qualify as a “small business” in the future |
| Our future success and growth is dependent on our distribution strategy |
| We cannot assure you that we will enter into distributor relationships that are consistent with, or sufficient to support, our commercialization plans or our growth strategy or that these relationships will be on terms favorable to us |
| Even if we enter into these types of relationships, we cannot assure you that the distributors with which we form relationships will focus adequate resources on selling our products or will be successful in selling them |
| Some of these distributor arrangements have or will require that we grant exclusive distribution rights to companies in defined territories |
| These exclusive arrangements could result in us being unable to enter into other arrangements at a time when the distributor with which we form a relationship is not successful in selling our products or has reduced its commitment to marketing our products |
| In addition, certain distributor arrangements include, and some future distributor arrangements may also include, the issuance of equity and warrants to purchase our equity, which may have an adverse effect on our stock price |
| To the extent we enter into distributor relationships, the failure of these distributors in assisting us with the marketing and distribution of our products may adversely affect our results of operations and financial condition |
| We cannot be sure that MTU CFC will continue to, or original equipment manufacturers (“OEMs”) will, manufacture or package products using our Direct FuelCell components |
| In this area, our success will largely depend upon our ability to make our products compatible with the power plant products of OEMs and the ability of these OEMs to sell their products containing our products |
| In addition, some OEMs may need to redesign or modify their existing power plant products to fully incorporate our products |
| Accordingly, any integration, design, manufacturing or marketing problems encountered by MTU CFC or other OEMs could adversely affect the market for our Direct FuelCell products and, therefore, our business, prospects, results of operations and financial condition |
| 32 _________________________________________________________________ We depend on third party suppliers for the development and supply of key components for Direct FuelCell products |
| We purchase several key components of our Direct FuelCell products from other companies and rely on third-party suppliers for the balance-of-plant components in our Direct FuelCell products |
| There are a limited number of suppliers for some of the key components of Direct FuelCell products |
| A supplier’s failure to develop and supply components in a timely manner or to supply components that meet our quality, quantity or cost requirements or technical specifications or our inability to obtain alternative sources of these components on a timely basis or on terms acceptable to us could harm our ability to manufacture our Direct FuelCell products |
| In addition, to the extent the processes that our suppliers use to manufacture components are proprietary, we may be unable to obtain comparable components from alternative suppliers |
| We do not know when or whether we will secure long-term supply relationships with any of our suppliers or whether such relationships will be on terms that will allow us to achieve our objectives |
| Our business, prospects, results of operations and financial condition could be harmed if we fail to secure long-term relationships with entities that will supply the required components for our Direct FuelCell products |
| We depend on our intellectual property, and our failure to protect that intellectual property could adversely affect our future growth and success |
| Failure to protect our existing intellectual property rights may result in the loss of our exclusivity or the right to use our technologies |
| If we do not adequately ensure our freedom to use certain technology, we may have to pay others for rights to use their intellectual property, pay damages for infringement or misappropriation or be enjoined from using such intellectual property |
| We rely on patent, trade secret, trademark and copyright law to protect our intellectual property |
| The patents that we have obtained will expire between 2006 and 2024 and the average remaining life of our US patents is approximately 11 years |
| Some of our intellectual property is not covered by any patent or patent application and includes trade secrets and other know-how that is not patentable, particularly as it relates to our manufacturing processes and engineering design |
| In addition, some of our intellectual property includes technologies and processes that may be similar to the patented technologies and processes of third parties |
| If we are found to be infringing third-party patents, we do not know whether we will able to obtain licenses to use such patents on acceptable terms, if at all |
| Our patent position is subject to complex factual and legal issues that may give rise to uncertainty as to the validity, scope and enforceability of a particular patent |
| Accordingly, we cannot assure you that: • any of the US, Canadian or other foreign patents owned by us or other patents that third parties license to us will not be invalidated, circumvented, challenged, rendered unenforceable or licensed to others; or, • any of our pending or future patent applications will be issued with the breadth of claim coverage sought by us, if issued at all |
| In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in certain foreign countries |
| We also seek to protect our proprietary intellectual property, including intellectual property that may not be patented or patentable, in part by confidentiality agreements and, if applicable, inventors’ rights agreements with our subcontractors, vendors, suppliers, consultants, strategic partners and employees |
| We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach or that such persons or institutions will not assert rights to intellectual property arising out of these relationships |
| Certain of our intellectual property has been licensed to us on a non-exclusive basis from third parties that may also license such intellectual property to others, including our competitors |
| If our licensors are found to be infringing third-party patents, we do not know whether we will be able to obtain licenses to use the intellectual property licensed to us on acceptable terms, if at all |
| 33 _________________________________________________________________ If necessary or desirable, we may seek extensions of existing licenses or further licenses under the patents or other intellectual property rights of others |
| However, we can give no assurances that we will obtain such extensions or further licenses or that the terms of any offered licenses will be acceptable to us |
| The failure to obtain a license from a third party for intellectual property that we use at present could cause us to incur substantial liabilities, and to suspend the manufacture or shipment of products or our use of processes requiring the use of that intellectual property |
| While we are not currently engaged in any material intellectual property litigation, we could become subject to lawsuits in which it is alleged that we have infringed the intellectual property rights of others or commence lawsuits against others who we believe are infringing upon our rights |
| Our involvement in intellectual property litigation could result in significant expense to us, adversely affecting the development of sales of the challenged product or intellectual property and diverting the efforts of our technical and management personnel, whether or not that litigation is resolved in our favor |
| Our future success will depend on our ability to attract and retain qualified management and technical personnel |
| Our future success is substantially dependent on the continued services and on the performance of our executive officers and other key management, engineering, scientific, manufacturing and operating personnel, particularly R Daniel Brdar, our Chief Executive Officer |
| Brdar, or other key management, engineering, scientific, manufacturing and operating personnel, could materially adversely affect our business |
| Our ability to achieve our development and commercialization plans will also depend on our ability to attract and retain additional qualified management and technical personnel |
| Recruiting personnel for the fuel cell industry is competitive |
| We do not know whether we will be able to attract or retain additional qualified management and technical personnel |
| Our inability to attract and retain additional qualified management and technical personnel, or the departure of key employees, could materially and adversely affect our development and commercialization plans and, therefore, our business, prospects, results of operations and financial condition |
| Our management may be unable to manage rapid growth effectively |
| We may rapidly expand our manufacturing capabilities, accelerate the commercialization of our products and enter a period of rapid growth, which will place a significant strain on our senior management team and our financial and other resources |
| Any expansion may expose us to increased competition, greater overhead, marketing and support costs and other risks associated with the commercialization of a new product |
| Our ability to manage rapid growth effectively will require us to continue to improve our operations, to improve our financial and management information systems and to train, motivate and manage our employees |
| Difficulties in effectively managing the budgeting, forecasting and other process control issues presented by such a rapid expansion could harm our business, prospects, results of operations and financial condition |
| We may be affected by environmental and other governmental regulation |
| We are subject to federal, state, provincial or local regulation with respect to, among other things, emissions and siting |
| Assuming no co-generation applications are used in conjunction with our larger Direct FuelCell plants, they will discharge humid flue gas at temperatures of approximately 700-800^o F, water at temperatures of approximately 10-20^ o F above surrounding air temperatures and carbon dioxide |
| In addition, it is possible that industry-specific laws and regulations will be adopted covering matters such as transmission scheduling, distribution and the characteristics and quality of our products, including installation and servicing |
| These regulations could limit the growth in the use of carbonate fuel cell products, decrease the acceptance of fuel cells as a commercial product and increase our costs and, therefore, the price of our Direct FuelCell products |
| Accordingly, compliance with existing or future laws and regulations could have a material adverse effect on our business, prospects, results of operations and financial condition |
| 34 _________________________________________________________________ Utility companies could impose customer fees or interconnection requirements on our customers that could make our products less desirable |
| Utility companies commonly charge fees to larger, industrial customers for disconnecting from the electric grid or for having the capacity to use power from the electric grid for back up purposes |
| These fees could increase the cost to our customers of using our Direct FuelCell products and could make our products less desirable, thereby harming our business, prospects, results of operations and financial condition |
| Several states have created and adopted or are in the process of creating their own interconnection regulations covering both technical and financial requirements for interconnection to utility grids |
| Depending on the complexities of the requirements, installation of our systems may become burdened with additional costs that might have a negative impact on our ability to sell systems |
| The Institute of Electrical and Electronics Engineers has been working to create an interconnection standard addressing the technical requirements for distributed generation to interconnect to utility grids |
| Many parties are hopeful that this standard will be adopted nationally when it is completed to help reduce the barriers to deployment of distributed generation such as fuel cells; however this standard may be delayed or never completed thereby limiting the commercial prospects and profitability of our fuel cell systems |
| We could be liable for environmental damages resulting from our research, development or manufacturing operations |
| Our business exposes us to the risk of harmful substances escaping into the environment, resulting in personal injury or loss of life, damage to or destruction of property, and natural resource damage |
| Depending on the nature of the claim, our current insurance policies may not adequately reimburse us for costs incurred in settling environmental damage claims, and in some instances, we may not be reimbursed at all |
| Our business is subject to numerous federal, state and local laws and regulations that govern environmental protection and human health and safety |
| These laws and regulations have changed frequently in the past and it is reasonable to expect additional and more stringent changes in the future |
| Our operations may not comply with future laws and regulations and we may be required to make significant unanticipated capital and operating expenditures |
| If we fail to comply with applicable environmental laws and regulations, governmental authorities may seek to impose fines and penalties on us or to revoke or deny the issuance or renewal of operating permits and private parties may seek damages from us |
| Under those circumstances, we might be required to curtail or cease operations, conduct site remediation or other corrective action, or pay substantial damage claims |
| We may be required to conduct environmental remediation activities, which could be expensive |
| We are subject to a number of environmental laws and regulations, including those concerning the handling, treatment, storage and disposal of hazardous materials |
| These environmental laws generally impose liability on present and former owners and operators, transporters and generators for remediation of contaminated properties |
| We believe that our businesses are operating in compliance in all material respects with applicable environmental laws, many of which provide for substantial penalties for violations |
| We cannot assure you that future changes in such laws, interpretations of existing regulations or the discovery of currently unknown problems or conditions will not require substantial additional expenditures |
| Any noncompliance with these laws and regulations could subject us to material administrative, civil or criminal penalties or other liabilities |
| In addition, we may be required to incur substantial costs to comply with current or future environmental and safety laws and regulations |
| 35 _________________________________________________________________ Our products use inherently dangerous, flammable fuels, operate at high temperatures and use corrosive carbonate material, each of which could subject our business to product liability claims |
| Our business exposes us to potential product liability claims that are inherent in products that use hydrogen |
| Our products utilize fuels such as natural gas and convert these fuels internally to hydrogen that is used by our products to generate electricity |
| The fuels we use are combustible and may be toxic |
| In addition, our Direct FuelCell products operate at high temperatures and our Direct FuelCell products use corrosive carbonate material, which could expose us to potential liability claims |
| Any accidents involving our products or other hydrogen-using products could materially impede widespread market acceptance and demand for our Direct FuelCell products |
| In addition, we might be held responsible for damages beyond the scope of our insurance coverage |
| We also cannot predict whether we will be able to maintain our insurance coverage on acceptable terms |
| We are subject to risks inherent in international operations |
| Since we market our Direct FuelCell products both inside and outside the United States and Canada, our success depends, in part, on our ability to secure international customers and our ability to manufacture products that meet foreign regulatory and commercial requirements in target markets |
| We have limited experience developing and manufacturing our products to comply with the commercial and legal requirements of international markets |
| In addition, we are subject to tariff regulations and requirements for export licenses, particularly with respect to the export of some of our technologies |
| We face numerous challenges in our international expansion, including unexpected changes in regulatory requirements, fluctuations in currency exchange rates, longer accounts receivable requirements and collections, difficulties in managing international operations, potentially adverse tax consequences, restrictions on repatriation of earnings and the burdens of complying with a wide variety of international laws |
| Any of these factors could adversely affect our operations and revenues |
| Our stock price has been and could remain volatile |
| The market price for our common stock has been and may continue to be volatile and subject to extreme price and volume fluctuations in response to market and other factors, including the following, some of which are beyond our control: • failure to meet our product development and commercialization milestones; • variations in our quarterly operating results from the expectations of securities analysts or investors; • downward revisions in securities analysts’ estimates or changes in general market conditions; • announcements of technological innovations or new products or services by us or our competitors; • announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; 36 _________________________________________________________________ • additions or departures of key personnel; • investor perception of our industry or our prospects; • insider selling or buying; • demand for our common stock; and, • general technological or economic trends |
| In the past, following periods of volatility in the market price of their stock, many companies have been the subjects of securities class action litigation |
| If we became involved in securities class action litigation in the future, it could result in substantial costs and diversion of management’s attention and resources and could harm our stock price, business, prospects, results of operations and financial condition |
| Provisions of Delaware and Connecticut law and of our charter and by-laws may make a takeover more difficult |
| Provisions in our certificate of incorporation and by-laws and in Delaware and Connecticut corporate law may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by our management and board of directors |
| Public stockholders who might desire to participate in such a transaction may not have an opportunity to do so |
| These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change in control or change in our management and board of directors |
| We depend on relationships with strategic partners, and the terms and enforceability of many of these relationships are not certain |
| We have entered into relationships with strategic partners for design, product development and distribution of our existing products, and products under development, some of which may not have been documented by a definitive agreement |
| The terms and conditions of many of these agreements allow for termination by the partners |
| Termination of any of these agreements could adversely affect our ability to design, develop and distribute these products to the marketplace |
| We cannot assure you that we will be able to successfully negotiate and execute definitive agreements with any of these partners, and failure to do so may effectively terminate the relevant relationship |
| Future sales of substantial amounts of our common stock could affect the market price of our common stock |
| Future sales of substantial amounts of our common stock, or securities convertible or exchangeable into shares of our common stock, into the public market, including shares of our common stock issued upon exercise of options and warrants, or perceptions that those sales could occur, could adversely affect the prevailing market price of our common stock and our ability to raise capital in the future |
| The rights of the Series 1 preferred shares and Series B preferred shares could negatively impact our company |
| The terms of the Series 1 preferred shares issued by FuelCell Energy, Ltd, our wholly-owned, indirect subsidiary, provide rights to the holder, Enbridge Inc |
| (“Enbridge”), including dividend and conversion rights among others that could negatively impact us |
| For example, the terms of the Series 1 preferred shares provide that the holders are entitled to receive cumulative dividends for each calendar quarter for so long as such shares are outstanding |
| Assuming the exchange rate for Canadian dollars is Cdn |
| dlra1dtta1686 to USdlra1dtta00 (exchange rate on January 11, 2006) at the time of the applicable dividend payment date, we are required to pay a preferred dividend of approximately dlra267cmam414 per calendar quarter, subject to reduction in accordance with the terms of the Series 1 preferred shares |
| The terms of the Series 1 preferred shares also require that the holder be paid any accrued and unpaid dividends on December 31, 2010 |
| To the extent that there is a significant amount of accrued dividends that is unpaid as of December 31, 2010 and we do not have sufficient working capital at that time to pay the accrued dividends, our financial condition could be adversely affected |
| We have guaranteed these dividend obligations, including paying a minimum of Cdn |
| dlra500cmam000 in cash annually to Enbridge for so long as Enbridge holds the Series 1 preferred shares |
| We have also guaranteed the liquidation obligations of FuelCell Energy, Ltd |
| Under the Series 1 preferred shares |
| 37 _________________________________________________________________ We are also required to issue common stock to the holder of the Series 1 preferred shares if and when the holder exercises its conversion rights |
| The number of shares of common stock that we may issue upon conversion could be significant and dilutive to our existing stockholders |
| For example, assuming the holder of the Series 1 preferred shares exercises its conversion rights after July 31, 2020, the exchange rate for Canadian dollars is Cdn |
| dlra1dtta1686 to USdlra1dtta00 (exchange rate on January 11, 2006) at the time of such conversion and our common stock price is dlra8dtta86 (our common stock closing pricing price on January 11, 2006) at the time of such conversion, we would be required to issue approximately 2cmam541cmam656 shares of our common stock |
| The terms of the Series B preferred shares also provide rights to their holders that could negatively impact us |
| Holders of the Series B preferred shares are entitled to receive cumulative dividends at the rate of dlra50 per share per year, payable either in cash or in shares of our common stock |
| To the extent the dividend is paid in shares, additional issuances could be dilutive to our existing stockholders and the sale of those shares could have a negative impact on the price of our common stock |
| The Series B preferred stock is also convertible into common stock at a price of dlra11dtta75 per share |
| Conversion of the Series B preferred stock at a time when the price of our common stock is greater than dlra11dtta75 per share would also have a dilutive impact on our existing stockholders |
| Furthermore, the conversion rate applicable to the preferred stock is subject to adjustment upon the occurrence of certain events |