Preliminary Final Results - FY12

Friday 31 August 2012

Preliminary Results

12 Months Ended 30 June 2012

Ceramic Fuel Cells Limited (AIM / ASX: CFU), a leading developer of small generators that use fuel cell technology to convert natural gas into electricity and heat for homes and other buildings, today announces its preliminary results for the year ended 30 June 2012.

The full results are available at www.cfcl.com.au.

Operational highlights in the period and year to date:

Sales

·; CFCL has commercialised its technology into products and is selling these products to commercial customers and via distribution partners to retail customers.

·; CFCL's launch markets are Germany, the United Kingdom and The Netherlands. Apart from these markets, BlueGen units have also been sold to customers in France, Switzerland, Italy, Japan, USA and Australia. Integrated power and heating (mCHP) products are being developed and operated with utility customers in Germany, the United Kingdom and France.

·; Continuing strong revenue growth: revenue increased by 82 percent from FY11, up to AUD 6.7 million.

·; Total orders received for more than 600 units - an increase of more than 100 percent in the order book from June 2011 to June 2012.

·; Our focus over the last half year has been to deliver products, to convert these orders into revenue and cashflow. The number of units sold during the year increased by 177 percent from 61 units in FY11 to 169 units this year, including 76 units in the June quarter.

·; We believe the sales outlook for the coming financial year is strong, particularly in Germany. Revenue has grown strongly but needs to increase faster to fund operating costs. We are taking several measures to address this, including more aggressive sales pricing, reducing operating costs and pursuing several options to raise additional working capital.

Product Performance

·; CFCL has the world's most efficient technology for small scale power generation. We believe we have a strong technical advantage over all other mCHP products (micro combined heating and power). Our products' very high electrical efficiency can reduce carbon emissions by up to two-thirds compared to power generated by coal fired power stations, and can deliver more value for customers by reducing the marginal cost of generating electricity.

·; As announced in May, the Company's products have been proven in real world operation, with its products having achieved a combined one million hours of operation. Independent studies by customers have confirmed the products operate reliably with very high electrical efficiency and can be modulated up and down, making them ideal for use in the home as well as integration into Virtual Power Plants.

·; BlueGen units are being operated in Virtual Power Plant projects in The Netherlands and Germany.

Manufacturing

·; CFCL has built and is operating a manufacturing plant in Heinsberg, Germany to make fuel cell stacks, which are the core component of its products, as well as to assemble complete Gennex fuel cell modules and BlueGen products. We are currently making an average of six fuel cell stacks per week in small furnaces and five BlueGen units per week at this plant. This will increase to match forecast sales.

·; The Company and its furnace supplier have continued work to bring a large furnace into production at the plant. During August CFCL and the furnace supplier retrofitted the furnace with specially designed parts. We have tested this equipment and confirmed the furnace is capable of making fuel cell stacks which meet our quality requirements and technical specifications. These stacks are being used in BlueGen products for customers. We are now fine-tuning the furnace to increase yield and consistency. The modifications we have implemented give us a production capacity of approximately 12 stacks per week (in addition to the existing capacity of the small furnaces). During September and October we will use the large furnace to make stacks to meet forecast sales. We will then complete the modification of the furnace, to allow a combined production capacity of approximately 32 stacks per week (or 1,500 stacks per year).

·; During the year we signed a supply agreement with a new supplier of fuel cell components, giving us access to higher volume supply at lower unit costs. Based on the new supplier's strong commitment, investment and performance to date, we are confident they will be able to supply large volumes of quality cells, and potentially assist in supplying other components.

·; We are continuing to reduce unit costs by increasing volumes and by redesigning some high value components. Moving from ordering components in lots of 100 to lots of 1,000 has reduced material costs by an average of 25 percent from 2011 to 2012/13. We are targeting a further cost reduction of 25 percent in 2013/14.

·; In August 2012 the quality management system and operations at our German plant were independently certified as compliant with the international standard ISO 9001 for the production, sales and service of fuel cell generators.

Markets

·; There is a very large global market for the Company's products. Policy settings in our launch markets continue to be supportive. Germany and the United Kingdom have recently announced increased feed in tariffs for mCHP products. Germany's CHP law will stimulate large scale deployment of mCHP by 2020. Several State Governments in Germany have created market introduction programs for mCHP products and more programs are expected. North American product approval, due later this year, opens up another large market.

Financial Results

Year to 30 June 2012 (unaudited FY12 results)

·; Revenue from Operations: AUD 6.7 million (increase of 82 percent from FY11)

·; Net operating cash outflow: AUD 24.6 million (increase of 28 percent from FY11)

·; Net loss: AUD 30.2 million (increase of 43 percent from FY11)

·; Cash balance at 30 June 2012: AUD 8.8 million

Revenue

The Group's total revenue increased during the year by 82 percent to AUD 6,717K. Revenue recognised in relation to the sales of BlueGen and integrated mCHP units was AUD 6,194K. Revenue for unit service and support was AUD 522K. The number of units sold during the year increased by 177 percent from 61 units last year to 169 units this year.

Revenue has increased consistently over the last four years, as shown below:

Cost of sales, service and warranty

The total cost of units sold during the year was AUD 5,358K. The vast majority of units sold during the year were built from components that had been initially purchased in low volumes. During the year the Group commenced purchasing many components in larger volumes and has realised a cost reduction in materials of about 25 percent. The benefit of these cost reductions will flow through into future sales.

Service and support costs totalled AUD 781K. This covers the costs associated with installation, system monitoring and provision of maintenance support. These costs also include the costs of developing training materials and undertaking training of third party installers in Australia and Europe who have already commenced installing units.

The Group adopts a conservative position in relation to potential warranty claims and replacement of parts under service contracts. The warranty expense for the year totalled AUD 1,451K which compares to the prior year charge of AUD 1,247K (when it was included in research and product development operating expenses).

Other Income

Other income has reduced by AUD 3,805K due to the receipt last year of a settlement in relation to legal action taken against the Group's former treasury advisor.

Operating Expenses

Research and Product Development expenses were AUD 11,539K which is AUD 3,588K lower than last year. This reflects the cessation of certain development activities which have been increased in scale and are now appropriately treated as being commercial activities. These activities are now reflected elsewhere in the P&L as either cost of sales or general & administration operating costs. Expenditure on core research and product development activities was AUD 11,175K which was consistent with the prior year. Expenditure in relation to intellectual property was AUD 364K.

General and administration expenses were AUD 13,225K which is AUD 2,944K higher than last year.

During the year certain manufacturing and development related activities were transferred from research and product development and expanded to increase manufacturing capacity. This has added approximately AUD 1.7 million of costs to the general and administrative cost category. As production volume increases in the future these costs will be increasingly absorbed into product costs.

In addition to this, other increases in this operating cost category included:

·; Development of the Group's Enterprise Resource Planning (ERP) system - AUD 508K;

·; Equity based employee compensation - AUD 585K;

·; Increase in public relations and investor relations expenditure in Germany - AUD 164K;

Sales and marketing costs were AUD 2,374K which is AUD 734K higher than last year and includes the establishment of the Netherlands sales office and the expansion of sales resources in Europe.

Impairment Charge

In July 2012 the Group announced that it had terminated its contract for the purchase of fuel cells from its previous supplier and had signed an agreement with a different supplier. At the same time the Group also terminated the reciprocal supply agreement under which the Group's UK powder plant was to supply ceramic powder to be made into cells by the original supplier. Management has redirected the activities of the UK powder plant away from fuel cells towards other markets. As a result of this, the decision was taken to fully write down the value of the fixed assets of the powder plant and an impairment charge of AUD 2,577K was taken as at 30 June 2012.

Net Loss After Tax

The net loss for the year was AUD 30,197K, an increase of AUD 9,021K over the prior year.

The main reasons for the increased loss are outlined above and can be summarised as:

The net loss represents a loss of 2.33 cents per share compared to 1.82 cents last year.

Cashflow and Balance Sheet

The Group's net cash outflow from operations was AUD 24,663K and was up by AUD 5,364K over last year. Again this figure was impacted by the receipt of the legal settlement in the prior year of AUD 3,854K.

As the Group commences the commercial rollout of its BlueGen product and seeks to reduce costs by purchasing inventory at higher volume levels, its level of working capital requirement has increased. Inventory at year end has increased from AUD 5,131K in the prior year to AUD 9,328K this year.

Cash outflow from investing activities was AUD 1,478K, compared to AUD 1,360K in the prior year.

Cash inflow from financing activities amounted to AUD 16,433K. This arose from the issue of equity that raised a net AUD 16,404K.

At 30 June 2012 the Group had cash of AUD 8,846K which was held on deposit with banks. Of this amount AUD 2,224K was pledged as security for bank guarantees and is not available for use by the CFCL Group.

About Ceramic Fuel Cells Limited:

Ceramic Fuel Cells is a world leader in developing fuel cell technology to generate highly efficient and low-emission electricity from widely available natural gas. Ceramic Fuel Cells has sold its BlueGen gas-to-electricity generator to major utilities and other foundation customers in Germany, the United Kingdom, Switzerland, The Netherlands, Italy, Japan, Australia, and the USA. Ceramic Fuel Cells is also developing fully integrated power and heating products with leading energy companies E.ON UK in the United Kingdom, GdF Suez in France and EWE in Germany.

The company is listed on the London Stock Exchange AIM market and the Australian Securities Exchange (code CFU).

www.cfcl.com.au

www.bluegen.info 

Preliminary Consolidated Statement of Comprehensive Income

For the year ended 30 June 2012

The above preliminary consolidated statement of comprehensive income should be read in conjunction with the accompanying notes.

Preliminary Consolidated Balance Sheet

As at 30 June 2012

The above preliminary consolidated balance sheet should be read in conjunction with the accompanying notes.

Preliminary Consolidated Statement of Changes in Equity

For the year ended 30 June 2012

The above preliminary consolidated statement of changes in equity should be read in conjunction with the accompanying notes.

Preliminary Consolidated Statement of Cash Flows

For the year ended 30 June 2012

The above preliminary consolidated statement of cash flows should be read in conjunction with the accompanying notes.

Notes to the Preliminary Consolidated Financial Statements

Year ended 30 June 2012

Contents

1 Summary of significant accounting policies 8

2 Revenue 9

3 Other income 9

4 Expenses 9

5 Cash and cash equivalents 10

6 Borrowings 10

7 Provisions 10

8 Deferred revenue 11

9 Contributed equity 11

10 Reserves and retained profits/(losses) 12

11 Earnings per share 12

Notes to the Preliminary Consolidated Financial Statements

Year ended 30 June 2012

Note 1. Summary of Significant Accounting Policies

There have been no material changes in the company's application of its significant accounting policies as presented in the company's consolidated financial statements for the year ended 30 June 2011. Readers of this report should refer to Note 1, Summary of Significant Accounting Policies, in the afore-mentioned financial statements for details of these accounting policies.

Going Concern

Over the life of the Group it has incurred substantial operating losses and is yet to become cashflow positive at an operational level. The Directors are mindful of this and continue to closely monitor the level of the Company's cash resources.

The Group has commercialised its fuel cell technology into products and has begun to make sales, but it has not yet achieved sales and production levels that allow the Group to generate positive operating cashflow or profits.

These factors represent uncertainty about the ability of the Group to continue as a going concern. The Directors have considered these factors and believe it is appropriate to prepare the financial statements on a going concern basis given the following strategies:

Operational and business strategies

The Company continues to increase the number of sales orders received and has taken initiatives to increase the production capacity and reduce the cost per unit.

Management and the Board's recent focus has been to deliver products and convert these orders into revenue and cashflow. Revenue has increased each year over the last four years. Management and the Board are taking steps to increase sales more quickly, particularly in Germany, including more aggressive marketing and pricing strategies.

In order to achieve profitable sales growth, the Company continued to work on increasing the production capacity by bringing large furnaces into production at its manufacturing plant in Germany.

The Company has also taken measures to reduce the unit cost. These measures include: removing the need to internally produce the Group's fuel cells at its pilot plant facility in Melbourne by outsourcing this to an industrial scale ceramics manufacturer, placing higher volume orders and undertaking cost-down engineering work.

Financing strategies

The Company has been successful in raising funds previously, including in times of difficult market conditions and is currently pursuing the following funding strategies.

On 24 July 2012 the Company announced that it would undertake a rights issue to registered Australian and New Zealand shareholders to raise up to $13.7 million and that it would also be making an offer to shareholders outside Australia and New Zealand (the "Overseas Offer") to raise up to €2.5 million (approximately $3 million). These offers are due to close on Monday 10 September 2012. In parallel with these offers, the Company is pursuing several other funding options to strengthen its balance sheet and to allow it to continue to implement its sales strategies and to increase production levels.

The continuing viability of the company and its ability to continue as a going concern and meet its debts and commitments as they fall due is dependent on the successful conclusion of these fund raising activities and the ability to achieve profitable sales growth. As such, there is material uncertainty as to whether the Company will continue as a going concern and, therefore, whether it will realise its assets and settle its liabilities and commitments in the normal course of business and at the amounts stated in the financial report.

The Directors believe that the Company will be successful in the above matters and, accordingly, have prepared the financial report on a going concern basis.

At this time, the directors are of the opinion that no asset is likely to be realised for an amount less than the amount at which it is recorded in the financial report at 30 June 2012. Accordingly, no adjustments have been made to the financial report relating to the recoverability and classification of the asset carrying amounts or the amounts and classification of liabilities that might be necessary should the Company not continue as a going concern.

Notes to the Preliminary Consolidated Financial Statements

Year ended 30 June 2012 (continued)

Cost Of Sales

Cost of goods sold includes product and installation costs. In the prior year the cost of building units for development and early deployment was an integral part of the research and development activities of the Group.

Impairment Charge

In July 2012 the Group announced that it had terminated its contract for the purchase of fuel cells from its previous supplier and had signed an agreement with a different supplier to manufacture cells to the Group's design. At the same time the Group also terminated the reciprocal supply agreement under which the Group's UK powder plant was to supply ceramic powder to be made into cells by the original supplier. As a result, the Group has decided to fully write down the value of the plant, resulting in an impairment charge of $2,576,718 in the current reporting period.

Notes to the Preliminary Consolidated Financial Statements

Year ended 30 June 2012 (continued)

Note 5. Cash and Cash Equivalents

The amount of cash and cash equivalents at 30 June 2012 includes $2,224,419 (2011 - $3,204,104) which is pledged as security for a bank guarantee and is unavailable for use by the CFCL Group.

Notes to the Preliminary Consolidated Financial Statements

Year ended 30 June 2012 (continued)

Note 8. Deferred Revenue

In December 2009 the Group received a regional development grant of €1,386,000 (A$2,220,798 as at transaction date) from the Government of North Rhine Westphalia in Germany. The funding requires the company to meet certain requirements as to expenditure on construction of the Group's plant in Germany and the creation of jobs. The Group has met the requirement in relation to expenditure on the plant and has until December 2012 to satisfy the job creation criteria. At 30 June 2012 the full amount of the grant (A$1,712,803) has been treated as deferred revenue and will be brought to account in a future period in line with the satisfaction of the obligations.

In January 2012 the Group received a European Union grant of €573,667 ($708,931 as at current reporting date) for the development and field trial of ceramic fuel cell micro-CHP units. At 30 June 2012 the full amount of the grant has been treated as deferred revenue and will be brought to account in future reporting periods in line with the satisfaction of the obligations.

Note 9. Contributed Equity

(a) Share capital

The share capital account of Ceramic Fuel Cells Limited (the company) consists of 1,366,298,863 fully paid up, ordinary shares as at 30 June 2012.

(b) Movements in ordinary share capital

Movements in ordinary share capital of the company during the past two years were as follows:

(c) Ordinary shares

Ordinary shares entitle the holder to participate in dividends, and the proceeds on winding up of the company, in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting of the company, either personally or by duly authorised representative, proxy or attorney, is entitled to one vote, and upon a poll each share is entitled to one vote.

Notes to the Preliminary Consolidated Financial Statements

Year ended 30 June 2012 (continued)

Net tangible asset backing

Consolidated

2012 2011

cents cents

Net tangible asset backing per ordinary share 1.5 2.8

Control over other entities

No control was gained or lost over any entity during the period.

Associates and joint venture entities

The company has no associates, nor has it formed any joint ventures with any other entity/s during the period.

Compliance statement

This report is based on accounts which are in the process of being audited.