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Market Announcement
21 September 2012
Ceramic Fuel Cells Limited
2012 Annual Report, including FY 2012 Accounts
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, has released its 2012 Annual Report, including audited statutory accounts and Directors' Report for the year ended 30 June 2012.
The documents are available at the Company’s website - www.cfcl.com.au.
The audited financial results as at 30 June 2012 are the same as the preliminary results released to the market on 31 August 2012.
A notice of the 2012 Annual General Meeting will be sent to shareholders in the coming weeks.
For more information please contact: Ceramic Fuel Cells Limited Brendan Dow Tel.
Email : +61 (3) 9554 2300 : [email protected]
Nomura Code Securities (AIM Nomad) Juliet Thompson
Chris Golden Tel. : +44 (0) 207 776 1200
Australian media enquiries Richard Allen
Oxygen Financial Public Relations Tel.Email
: +61 (0) 3 9915 6341: [email protected]
UK media enquiries Mark Way
MW Research PR Tel.Email
: +44 (0) 7786 116 991: [email protected]
German media enquiries Alex Seiler
Hering Schuppener Consulting Tel.Email
: +49 (0) 69 9218 7454: [email protected]
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
Ceramic Fuel Cells Limited ABN : 82 055 736 671 Website : www.cfcl.com.au
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Ceramic Fuel Cells LimitedABN : 82 055 736 671Website : www.cfcl.com.au
Annual Report 2012
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Annual Report 2012 Page 2
About Ceramic Fuel CellsCeramic Fuel Cells Limited (CFCL) makes generators that use proprietary fuel cell technology to convert natural gasinto electricity and heat for homes and small commercial buildings. We have commercialised our technology intoproducts and we are selling these products to commercial customers and via distribution partners.
Our products have many advantages over other forms of electricity generation, including very high electricalefficiency and the ability to remotely control their power output. CFCL has a broad portfolio of wholly-ownedintellectual property, including 27 patent families that have been granted in key global markets. The CFCL groupemploys approximately 150 staff in Australia and Europe.
Ceramic Fuel Cells Limited shares are quoted on the Australian Securities Exchange and as depository interests onthe London Stock Exchange AIM market. The stock code on both markets is CFU.
Corporate Directory
Board of Directors
Jeff Harding (Chairman)Roy Rose (Deputy Chairman)Brendan Dow (Managing Director)Dr Peter BinksJohn DempseyRobert (Bob) KennettDr Roman DudenhausenJanine Hoey
Company Secretary
Andrew Neilson
Share Registry
Australia
Computershare Investor Services Pty Limited452 Johnston Street, AbbotsfordVictoria, 3067 AustraliaTelephone: +1300 850 505(Outside Australia: +61 3 9415 4000)Facsimile: +61 3 9473 2500Email: [email protected]: www.computershare.com
United Kingdom
Computershare Investor Services PlcPO Box 82, The PavilionsBridgwater Road, Bristol BS99 7NHUnited KingdomTelephone: +44 (0) 8707 020 000
Auditors
PricewaterhouseCoopersFreshwater Place2 Southbank Boulevard, SouthbankVictoria, 3006 Australia
Registered Office
170 Browns Road, Noble ParkVictoria, 3174 AustraliaTelephone: +613 9554 2300Email: [email protected]: www.cfcl.com.au
UK Office
Ceramic Fuel Cells (Europe) LimitedCeramic Fuel Cells (Powder) LimitedUnit 8, Candy ParkHardknott Road, BromboroughWirral, CH62 3QB United KingdomTelephone: +44 (0) 151 334 8880Email: [email protected]
German Office
Ceramic Fuel Cells GmbHBoos-Fremery-Strasse 62D-52525 Heinsberg GermanyTelephone: +49 (0) 2452 15 3752Email: [email protected]
Netherlands Office
Ceramic Fuel Cells B.V.Vogt 216422 RK Heerlen, The NetherlandsTelephone: +31 (0) 88 544 5071Email: [email protected]
AIM Nominated Adviser
Nomura Code Securities Limited1 Carey Lane, London EC2V 8AEUnited KingdomTelephone +44 207 776 1200www.nomuracode.com
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Contents
Page
Corporate Directory 2
Chairman’s Message 4
Review of Operations and Activities 6
Directors’ Report 23
Auditor’s Independence Declaration 38
Corporate Governance Statement 39
Financial Report
Consolidated statement of comprehensive income 46
Consolidated balance sheet 47
Consolidated statement of changes in equity 48
Consolidated statement of cash flows 49
Notes to the consolidated financial statements 51
Directors’ Declaration 82
Independent Auditor’s Report to the Members 83
Shareholder Information 85
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Chairman’s MessageDear Shareholder
I am pleased to introduce the 2012 Annual Report of Ceramic Fuel Cells Limited.
CFCL has commercialised its patented fuel cell technology into highly efficient electricity generation products and we arenow selling these products directly to customers and via distribution partners. Our BlueGen® product provides one to twokilowatts of electricity and heat for hot water for homes and other buildings. Our core Gennex™ fuel cell module is alsobeing integrated by our development partners into products which include a boiler for additional space heating.
Our products convert natural gas into electricity at up to 60 percent electrical efficiency, with up to an additional 25percent of energy being recovered as heat for hot water. We believe this electrical efficiency is higher than any othertechnology in the rapidly expanding market for small scale power and heating products. This very high electricalefficiency 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.
CFCL’s launch markets are Germany, the United Kingdom and The Netherlands. Apart from these markets, BlueGen unitshave also been sold to customers in France, Switzerland, Italy, Japan, USA and Australia. Integrated power and heatingproducts are being developed and operated with utility customers in Germany, the United Kingdom and France.
During the 2012 financial year the Company achieved the following key goals set out in last year’s Annual Report:
Revenue increased by 82 percent, up to $6.7 million. Revenue has increased consistently over the last four years.
We have now received cumulative orders for more than 600 units, an increase of more than 100 percent on the orderbook as at June 2011.
The number of units sold increased by 177 percent from 61 units in FY11 to 169 units this year.
On the manufacturing side, we are reducing the component costs of our products by an average of 25 percent from2011, and during the year we began working closely with a new strategic supplier of fuel cell components, forincreased volumes and lower costs.
Our manufacturing plant in Germany is successfully making Gennex modules and BlueGen products. Weexperienced some delays in commissioning a large furnace at the site however we are confident that this issue is nowresolved, and production volumes will increase over the coming year.
More details of these achievements, and the goals for the year ahead, are set out in Managing Director Brendan Dow’sReview of Operations.
On the financial side, while revenue has grown strongly, it needs to increase faster to fund the Company’s operating costs.To fund the Company’s operations we are taking measures, including reducing operating costs and pursuing severaloptions to raise additional working capital.
In late 2011 the Company raised $16.4 million from a placement to institutional investors and a rights issue and offer toexisting investors. On 11 September 2012 we announced an investment of $6 million by one of our strategic supplypartners, Chaozhou Three-Circle (Group) Co., Ltd (CCTC). CCTC has agreed to subscribe for new shares at an issue price ofsix cents per share, which is the same as the issue price to existing shareholders under the rights issue and the overseasoffer announced in July 2012.
CCTC, based in Guangdong province, China, is a leading manufacturer of electronic components and advanced ceramicsand is one of CFCL’s key suppliers. CFCL has transferred the manufacturing of its fuel cell components - and we plan totransfer other manufacturing processes - from our pilot plant in Melbourne to CCTC’s commercial scale plant. CCTC canalso help us to source components at higher volumes and lower costs.
CFCL Board and Management believe that our relationship with CCTC can substantially reduce costs of key componentssupplied to our manufacturing plant in Heinsberg, Germany. This will enable our German plant to manufacture ourproducts for European markets at highly competitive prices, which will drive increased sales. It also enables us to cut backon high cost manufacturing activities in our Melbourne operation, which can now focus on targeted research anddevelopment and ongoing product improvements.
We also recognise and appreciate the ongoing support given to the Company by our existing shareholders through thesefundraising rounds.
We believe the sales outlook for the coming financial year is strong, particularly in Germany. Policy settings in our launchmarkets continue to be supportive. Germany and the United Kingdom have recently announced increased feed in tariffsfor small scale power and heating products. Several State Governments in Germany have created market introductionprograms for these products and more programs are expected. North American product approval, due later this year, canopen up another large market.
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During the 2012-13 financial year, CFCL’s focus will be to continue to substantially increase sales revenue and reduce unitcosts as we move into volume sales of our products. We will also realign our corporate structure and operational activitiesto reduce overhead costs and operational cash burn.
The Board thanks you for your ongoing support of the Company and looks forward to reporting to you on furtherachievements during the coming year.
Yours faithfully
Jeff Harding
Chairman
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Review of Operations and Activities
For the year ended 30 June 2012
Introduction
Ceramic Fuel Cells Limited (“CFCL”) makes generators that use proprietary fuel cell technology to convert naturalgas into electricity and heat for homes and small commercial buildings. CFCL has commercialised its technologyinto products and is selling these products to commercial customers and via distribution partners.
CFCL’s BlueGen® product provides one to two kilowatts of electricity as well as heat for hot water. Our coreGennex™ fuel cell module is also being integrated by our development partners into integrated power and heatingproducts which include a boiler for additional space heating.
Our products have many advantages over other forms of electricity generation, including very high electricalefficiency and the ability to remotely control their power output. Our products can deliver an electrical efficiency ofup to 60 percent, with an additional 25 percent of energy being recovered as heat. The Directors believe thiselectrical efficiency is higher than any other technology in the rapidly expanding market for small scale power andheating products. This high electrical efficiency has been confirmed by in-house testing and by our customers,including the German Gas Association (DBI).
The BlueGen product’s very high electrical efficiency can reduce carbon emissions by up to two-thirds compared topower generated by coal fired power stations, and can deliver more value for customers by reducing the marginalcost of generating electricity.
CFCL has made sales of BlueGen units directly to early customers, and is now making sales through distributors.The Company’s key launch markets are Germany, the United Kingdom and The Netherlands. Apart from thesemarkets, 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 inGermany, the United Kingdom and France.
CFCL was established in 1992 and listed on the ASX in July 2004 and on the London AIM market in March 2006.CFCL has a broad portfolio of wholly-owned intellectual property, including 27 patent families (i.e. a singleinvention covered in multiple jurisdictions) that have been granted in key global markets. The CFCL group employsapproximately 150 staff in Australia and Europe.
2012 Financial Year
During the 2012 financial year the Company’s focus was to increase sales revenue and reduce unit costs whilemoving into volume sales of its products. CFCL achieved the following key goals set out in last year’s AnnualReport:
Goal in 2011 Annual Report Achievements during FY12
Significantly increase sales revenue
Sales of BlueGen units through commercialdistributors and utility customers
Secure further orders for integrated mCHPproducts
The Company expects most of its sales tocome from Germany, The Netherlands andthe UK
Achieved
The number of units sold during the year increased by177 percent from 61 units last year to 169 units thisyear: 78 percent of sales were in Germany, TheNetherlands and the United Kingdom
82 percent increase in sales revenue, to AUD 6.7million
Cumulative orders received for a total of 639 units(375 BlueGen units plus 264 mCHP units). This is morethan double the order book as at 30 June 2011.
Orders for BlueGen units from utility customers, andfrom distributors in Germany, the United Kingdomand The Netherlands
Order for up to 60 integrated mCHP units and 45BlueGen units from E.ON UK in November 2011
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Customer experience
Complete training for local partners toprovide installation and after-sales services forBlueGen products
Proactively monitor and continuouslyimprove product performance
Robust service and support structure toensure high levels of customer satisfaction
Achieved
Training of local installation, service and supportcompanies in Australia, the United Kingdom andGermany
Expansion of the BlueGen-net remote monitoringservice for CFCL engineers, service partners & end-users, www.bluegen.net
Over one million hours of combined operation acrossthe Company’s products
Reorganised internal service & support structureadding field engineers in the UK and Germany
Marketing & promotion
More BlueGen product marketing materialstailored to key target markets, includingwebsite and case studies
Additional promotion through industryconferences, exhibitions and targetedmainstream media exposure
Achieved
New product website, www.bluegen.info, launched inJuly 2011 with materials prepared in English, Germanand Dutch
Presented and exhibited at conferences in Japan,Germany, UK, USA and Australia
Significant prime-time media exposure on televisionprograms in the UK and Australia
Manufacturing
Secure and implement agreements with allkey component suppliers to increase scaleand further reduce costs
Increase the volume of fuel cell stackmanufacturing and BlueGen assembly at theGerman plant
Continue to reduce the cost of Gennex andBlueGen components
Ongoing
Signed agreement with new supplier of fuel cellcomponents, for increased volumes and lower costs
Ongoing work with other key component suppliers
Ongoing work to fully commission a large furnace andincrease production volumes in Germany
Gennex and BlueGen component costs reduced by anaverage of 25 percent
Technology: longer lifetime through improvedfuel cell stack degradation and more robustsystem operation through improved thermalcycling
Improvements achieved; ongoing technical progresstowards commercial targets
Increasing Sales and Revenue
The Directors believe that CFCL’s products are suited to many global markets. Our approach is to initially focus ourefforts on ‘deep’ markets in Western Europe that have supportive regulatory settings, large volume potential,established infrastructure and a willingness to invest in home energy solutions to avoid the increasing cost ofelectricity – particularly Germany, the United Kingdom and Benelux. We have also invested limited resources indeveloping other markets that in time can grow into ‘deep’ markets – such as Japan, Australia and North America.Once unit costs have come down we can target other large markets such as Asia, Brazil and Russia.
In our launch markets we have made direct sales to early customers as well as appointing local distributors.
At the end of the financial year the Company had received cumulative orders for a total of 639 units (375 BlueGenunits plus 264 integrated mCHP units). This is more than double the order book as at 30 June 2011.
The Company’s focus during the second half of the financial year has been to deliver products from its order book,converting these orders into revenue and cashflow. During the June quarter the Company booked to revenue salesof 76 units, bringing the total sales for the 2012 financial year to 169 units (compared to 61 units in FY11).
Revenue for the year was AUD 6.7 million, which is 82 percent higher than revenue for FY11.
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Management and the Board believe this sales growth is extremely encouraging, particularly in the currenteconomic climate in Europe, however sales revenue needs to increase more quickly. Sales in FY12 were lower thanexpected in part due to the delay in anticipated State Government incentive schemes in Germany. The Companyalso adopted a conservative pricing strategy for market entry. Management and the Board are revising this pricingstrategy in order to drive more sales growth. This requires a balance of risks and Management and the Board willmonitor this position on an ongoing basis and adjust our pricing to meet the market requirements andopportunities.
Focusing on Key Markets
Germany
Currently the most important market for the Company is Germany.
The structure of the energy market in Germany is quite different to Australia and the United Kingdom, where thelarge generators of electricity are also large retailers of energy to end customers: so called ‘gentailers’. In Germanythe large generating companies only have a small share of retail customers. About 85 percent of retail customersbuy their energy (usually gas as well as power, and often other services like heating and water) from their localStadtwerke, or ‘city works’. There are more than 800 Stadtwerke in Germany. They are usually based in one town orregion and often owned by the local municipalities. Typically Stadtwerke do not have large electricity generatingassets, so they have to buy electricity from the large generators to on-sell to their customers. Stadtwerke alsotypically own the local gas network.
Our products provide numerous benefits for Stadtwerke – allowing them to sell more baseload gas (their highermargin product), increasing the utilisation of the gas network, whilst reducing their reliance on the large electricitygenerators. Stadtwerke are beginning to recognise these benefits and some are now offering their customers acapital subsidy or other incentive to purchase a mCHP product, for example the utilities Gasversorgung MainKinzig1 and SW Aalen2. This is in addition to subsidies from the Federal or State governments.
CFCL and our sales partner sanevo have started selling BlueGen units to Stadtwerke. Rather than approaching 800Stadtwerke directly, sanevo can sell to co-operatives such as Trianel and Thūga who provide commercial services to groups of Stadtwerke. In June sanevo sold 23 BlueGen units to Trianel, to be deployed with 17 local Stadtwerkethroughout Germany.
During this financial year sanevo has made significant investments to introduce BlueGen as a new product to theGerman market, building up a sales force of their own staff and sales representatives in five regions in Germany.Sanevo has approximately 130 accredited sub-channels selling Stirling engine mCHP products. A growing numberof these sales agents are now also being accredited to sell BlueGen, for example Volthaus PV3. During 2012 sanevowill publicise BlueGen at more than 40 regional trade fairs in the cleantech and home energy sector.
As at 30 August 2012 the Company had delivered 39 units to sanevo from their first order for 100 units. We arecontinuing to work with sanevo to accelerate sales, including through more aggressive pricing. This will include areference customer program for three market segments (residential, commercial and public buildings) with 100units to be offered to customers in each segment. The customer offer includes a full service contract for three or 10years (where the customer pays a monthly fee in return for all service, maintenance and repairs). Based on thepositive feedback sanevo has received from the market, we expect to deliver the balance of the 100 unit order inthe next few months and for sanevo to place the next order for 500 units shortly after that has been achieved.
During the financial year we also continued our project with leading energy utility EWE, to deploy up to 200integrated mCHP units. Up to 30 June 2012 we had delivered 48 products, which EWE is installing in homes in theOldenburg region in Northern Germany. EWE is offering these units to its customers with a 10 year contract forheating. In May 2012 EWE reported its progress to the Board of NOW, the German Federal Government body that isfunding the project. Among the other positive results EWE reported a fleet availability of 99 percent from the startof operation in customer homes – a very high measure among all mCHP products and the highest for fuel cellmCHP products in this program. In June EWE also ordered 17 BlueGen units.
In early 2012 the Company began a media campaign to position itself and BlueGen to relevant stakeholders inGermany, in particular customer groups and decision makers regarding market introduction schemes. This hasresulted in more than 50 articles in energy trade media and the first article in one of the top three mainstreammedia “FAZ”, with a daily circulation of 900,000 readers.
1http://www.mainkinziggas.de/
2http://www.ostalbpower.de/
3http://www.volthaus.de/brennstoffzelle.html
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The market settings in Germany continue to provide strong support for our products. Through active lobbyingefforts the Company is increasing its profile with policy makers to ensure continued support.
In 2011 Germany embarked on its Energiewende, or energy transition. The scale of this change is immense.Germany, with the 5th largest economy in the world, is revolutionizing its energy supply, moving away from nuclearpower (which provides approximately 25 percent of its electricity) towards renewable and low emission power,including combined heat and power (CHP).
Germany has enacted a range of policies which provide support for low emission electricity generation, and CHP inparticular.
The Federal CHP Law sets a target of 25 percent of Germany’s electricity to come from CHP (large and small scale)by 2020. Importantly, this CHP target is supported by all German political parties. In 2010 the ‘shortfall’ in CHPpower was estimated at approximately 56 TWh. With the large commercial and industrial CHP market segmentsalready well serviced, we believe this target can only be achieved with a significant increase in small scale CHP. Forexample, combining a 1.5 kW mCHP product with the existing 6 million installed small gas heaters (under 25 kWthermal) would result in 9 GW installed capacity, or 72 TWh per year. Looked at another way, if 1.5 kW mCHP unitsprovided only half the ‘gap’ of 56 TWh, this would equal 2.3 million mCHP units.
Other small scale CHP products will have a role in meeting this target, but the high heat output of these unitscompromises another German policy objective, of reducing heating demand in more efficient buildings. BlueGen’slow heat output is ideally suited even for “passive” houses designed for low heat demand.
This general support for high efficiency energy products has led to the following specific policies which we believewill support the Company’s products:
In December 2011 the Federal Government announced its Impulsprogramm, a capital subsidy for mCHPproducts. The program was opened in April 2012. BlueGen is eligible for a subsidy of EUR 1,650 per unit.BlueGen is the first and currently the only fuel cell system eligible.
The Federal Government’s CHP bonus provides a feed in tariff for electricity generated by small scale CHPand exported to the grid. The tariff is equal to the wholesale energy price plus avoided grid fees and abonus of 5.41 Euro cents – a total of about 11.5 Euro cents per kilowatt hour. The CHP bonus increasedfrom 5.11 cents to 5.41 cents from 1 August 2012.
The EEG, or Renewable Energy Act, provides a feed in tariff for power generated from biomass. Severalutilities and energy service companies are considering operating BlueGen on bio-methane in order toreceive this feed in tariff.
Several State Governments including Saxony, Saarland and Hessen have created market introductionprograms for mCHP products while other States are considering similar programs. In late 2011 the State ofNorth Rhine Westphalia – the most populous State in Germany and the location of the Company’smanufacturing plant – announced that it would provide funding of up to EUR 250 million to support CHPdeployment. The Company has been involved in consultations on the nature of the program and isconfident that the final program will provide strong support for sales growth. Unfortunately the delay inimplementing the program has to some degree hurt sales this year however the Company is hopeful thatdetails of this program will be announced by December 2012.
In Germany all new homes must comply with the EnEV standard. Currently a condensing boiler plus solar thermalor heat pump is the most preferred option to comply. During the financial year a leading EneV research institute inDresden calculated that BlueGen delivers a better primary energy factor than these solutions. We are now workingto receive official accreditation and have BlueGen included in software tools for specifiers, planners and architects.Separately, the Federal EEWG regulation requires that new homes must source part of their heating from renewablesources or mCHP. We are also lobbying to have BlueGen accredited for this regulation.
CFCL is now a member of the German Fuel Cell Initiative (Initiative Brennstoffzelle, or IBZ, www.ibz-info.de). IBZ islobbying the Federal Government for a substantial market introduction program for fuel cell mCHP products. Themany benefits of fuel cell products for the German economy are being recognised by policy makers, and in June2012 the Bundesrat (the state chamber of the German Federal parliament) asked the Government to consider such aprogram4.
4http://www.bundesrat.de/cln_235/nn_2291536/DE/presse/pm/2012/085-2012.html?__nnn=true
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United Kingdom
In the United Kingdom we are working with E.ON, one of Europe’s largest energy retailers, as well as pursuing directsales to specific market segments via a network of installer/distributor partners.
In November 2011 E.ON placed an order for 105 units. Of these, 40 BlueGen units are being deployed under theEuropean Union Fuel Cell and Hydrogen Joint Undertaking’s Joint Technology Initiative (“JTI”) fuel celldemonstration program for installation in homes in the UK and Germany. A further five BlueGen units are beingdeployed by E.ON in demonstration and commercial customer sites outside of this programme. CFCL and the UKheating company Ideal Boilers will also develop up to 60 integrated mCHP under the JTI program for installation inhomes in the UK, Germany, Benelux and Italy from early 2013.
As scheduled, all 45 BlueGen units were delivered to E.ON before 30 June 2012. Eleven units are currently installed,with the remainder to be installed by E.ON once they have selected sites. Under the JTI program ten of these unitswill be installed in Hamburg, Germany.
One part of the JTI program is a pathfinder trial, for 15 BlueGen units to be installed with a separate boiler as a “Beta1” mCHP installation. This is the next milestone in the original product development agreement signed with E.ONin 2009. Installations are expected to be finalised by the end of October 2012, before the start of the UK heatingseason. The Beta 1 units have been developed by Ideal in collaboration with CFCL and have been CE accredited forfield trials in occupied family homes. They have been denominated as the “E.ON Storage 160”. The second part ofthe JTI program is a full mCHP trial, under which up to 60 Beta 2 mCHP units will be built and installed, based on theresults of the E.ON Storage 160 trial.
We are continuing discussions with E.ON about transitioning from a product development agreement to firmorders under a product supply agreement. The E.ON Group is headquartered in Germany and its operations havebeen impacted by the earlier closure of the German nuclear plants, therefore part of the context for thesediscussions is a broader strategic review which the E.ON Group is undertaking in response to the GermanEnergiewende process.
The UK Government has introduced several measures to support mCHP products, notably a feed in tariff and adiscounted sales tax (5 percent VAT instead of 20 percent) for domestic installations.
On 20 July 2012 the UK Government announced that to encourage the growth of mCHP sales, it will increase themCHP feed in tariff, from a total of 14.2 pence per kilowatt hour to 17 pence per kWh, comprising:
A generation tariff, increased from 11.0 pence to 12.5 pence for every kilowatt hour of electricity generatedon-site; plus
An increase in the export tariff from 3.2 pence to 4.5 pence for every kilowatt hour of electricity exported tothe grid.5
The first 30,000 mCHP units will be eligible for these new rates. Customers installing BlueGen with a commissioningdate of 1 December 2012 or later will be eligible for the new tariffs.
BlueGen is currently the only fuel cell mCHP product to be eligible for this feed in tariff.
CFCL achieved MCS (Microgeneration Certification Scheme) accreditation for BlueGen in August 2011. MCSaccreditation is essential for access to the UK Government’s feed in tariff and applies not just to the product but alsoto the installer. There are currently two UK installers accredited under the MCS scheme for BlueGen: E.ON for theinstallation of the BlueGen units under the JTI pathfinder trial and Be Green Systems for the commercial installationof units with early UK customers. Be Green Systems is a specialised installer based in West London that is workingclosely with CFCL and its early UK customers in London and the South East. In addition to Be Green Systems afurther two specialist installers have been appointed as installer/distributors for BlueGen: Ace Energy for the SouthCoast and South West and Green Buy Energy for Yorkshire and the North Midlands. CFCL is in the process ofappointing two further specialist installer/distributors and expects to have an installer/distributor appointed formost regions of the UK in the coming months.
5The export tariff is currently calculated on a deemed basis at 50% of the total number of kilowatt hours generated during
the period, regardless of actual export, until the UK’s smart meter roll out has achieved sufficient penetration to allow theexported electricity to be measured cost effectively by the utility companies. Until that point, the export tariff effectivelyconstitutes an additional 2.25p/kWh premium on the generation tariff, taking it to an effective 14.75p/kWh.
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In April 2012 CFCL finalised the installation of the first BlueGen unit in a low energy new build home in the UK. TheBlueGen installation, in a home built by Crest Nicholson to very high efficiency standards, provides the power, hotwater and heating requirements for the property and was specifically designed for low energy homes. CrestNicholson builds approximately 1,500 new homes each year. Over the last 10 years UK developers have typicallybuilt between 100,000 and 200,000 new dwellings each year.
This installation represents a significant step towards achieving the UK Zero Carbon Homes standards. FromJanuary 2013, new homes must meet the energy efficiency levels of the Code for Sustainable Homes Level 4,cutting carbon emissions by 44 percent from 2006 Part L Building Regulations levels. In 2016 this requirement forall homes sent to planning increases to “zero carbon”, meaning the building fabric of the home and onsite powerand heat generation must cut emissions by at least 70 percent from 2006 levels, equivalent to zero net carbonemissions from regulated energy, which is that used for heating, hot water, lighting and building (services)consumption, over the course of a year.
In August 2012 CFCL received an extension to the BlueGen MCS accreditation to cover this type of installation,meaning customers who install a BlueGen to provide power, hot water and space heating can also receive themCHP feed in tariff.
All new homes in the UK must also be assessed under SAP (Standard Assessment Procedure). Assessment underSAP requires all technologies affected by regulated energy usage to be registered in SAP, including BlueGen. Whileit is currently possible to recognise BlueGen within SAP when installed on a shared basis, we are also seekingenhanced recognition of BlueGen within SAP from the UK Government to allow full access to the UK’s new buildhousing market.
In June CFCL sold two BlueGen units to its first RSL (Registered Social Landlord) customer, Housing Solutions basedin Maidenhead. The RSL market in the UK represents more than 2 million dwellings owned by more than 400 RSLs.RSLs are tasked by government with reducing carbon emissions and addressing fuel poverty. During Septemberthe BlueGen units are planned to be installed into care homes belonging to Housing Solutions to demonstrate theproduct’s capabilities to address these two key targets.
The Netherlands and Belgium
The concept of combined heat and power is well known in The Netherlands, with larger scale CHP plants alreadyproviding about 20 percent of the market’s electricity. For smaller scale CHP, there is a feed in tariff (equal to theretail price for electricity, about 23 Euro cents) for the first 5,000 kilowatt hours of electricity exported per year.There are also some tax benefits for investing in small energy equipment. In Belgium there is also a net feed in tariff,of about 21 Euro cents, for up to 10,000 kilowatt hours exported. Belgium is also considering an incentive programfor mCHP products. In these market settings, customers can generate most value from BlueGen and mCHPproducts if they can use all the power on-site, therefore the initial target customers are local councils, Governmentbuildings and small commercial customers.
The Netherlands is an ideal market for new gas appliances, with a very high penetration of natural gas connections.The Netherlands’ Government has an interest in deploying new gas products, through its 50 percent ownership ofthe gas trading company Gasterra (25 percent is owned by Exxon and the other 25 percent is owned by Shell, whichis also testing a BlueGen unit in Germany).
Gasterra began testing a BlueGen unit in October 2010 and has now ordered nine more units.
Our sales partner in The Netherlands, Zestiq, has changed its name to BlueGeneration to reflect its strategiccommitment to the BlueGen product. BlueGeneration brings together sales and marketing staff with experience insustainability consulting to large Dutch companies as well as introducing new environmental technologies to themass market.
In September 2011 BlueGeneration placed an order for 100 BlueGen units. As at 6 July, three BlueGen units hadbeen delivered to BlueGeneration. In August we delivered another nine units, for Gasterra. We continue to workwith BlueGeneration to accelerate sales.
BlueGeneration has contracted with Eneco Installatiebedrijven (EIB) to provide installation and services. EIB is oneof the top three utilities in the Dutch market, with more than 800 installers.
BlueGeneration is building a sales pipeline using its own sales resources and a sales channel, ‘The energy company’,focussing on small commercial customers and public buildings. BlueGeneration intends to implement a ‘bulkpurchasing’ model in order to achieve higher volumes. After initially looking at Dutch farmers as a target market(due to specific tax incentives) BlueGeneration is now targeting a wider market segment with a ‘community energy’model, together with a Virtual Power Plant project.
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Being able to control the output of our products allows them to be operated as part of a Virtual Power Plant (VPP).A VPP is a cluster of distributed electricity generation units, controlled and operated by a central entity usingintegrated software systems. A VPP allows power generation to be modulated up or down to meet peak loads andbalance intermittent power from wind or solar, with higher efficiency and more flexibility than large centralisedpower stations.
During the year CFCL and BlueGeneration began a VPP project with Liander and IBM. BlueGen units are planned tobe installed with customers across The Netherlands to create a new community of distributed energy producers,connected through the internet and operated as a Virtual Power Plant. Liander is a Dutch regional networkoperator, distributing electricity to 3 million customers and gas to 2.3 million customers in a large part of theNetherlands. IBM will provide the necessary system integration to control the BlueGen units remotely.
The first phase of the project began in April 2012, with three BlueGen units installed with energy consultants’ KIWAGastec at their testing facilities in Apeldoorn. KIWA is testing the BlueGen units for modulation. Each of the units isbeing modulated every 30 minutes; one unit from 500W to 1500W, another from 500W to 1750W and a third unitfrom 500W to 2000W.
The test results have been very positive, with KIWA confirming that:
Each unit can modulate every 30 minutes;
The modulation is rapid: from 500W to 1500W in 7.5 minutes; 500W to 1750W in 9.4 minutes; and 500W to2000W in 11 minutes;
Even with this constant modulation, the units maintained high electrical efficiencies (~57 percent for thehigh power level, ~44 percent for the low power level);
During the first two months of testing, with constant modulation the units showed no significant signs ofstack degradation.
The partners are currently developing the VPP design, and intend to scale up the project in the second half of 2012and into 2013. Once the VPP is established, all the BlueGen units BlueGeneration sells to customers in TheNetherlands are intended to be integrated into the VPP.
VPPs are also being developed in Germany. The Company is part of the RegModHarz project, one of eight VPPprojects funded by the Federal Government. Since early April a BlueGen unit has been connected and modulatedas part of this project via a Siemens power control solution. In Germany major industrial companies such asVolkswagen, Deutsche Telekom and Vodafone have entered the VPP market or have announced plans to do so.
In the Netherlands the energy efficiency of a new building is calculated with software, resulting in a factor called theEPC value (Energy Performance Coefficient). The lower the EPC value, the more efficient is the building. During theyear a study by Ecofys on behalf of Gasterra, a major Dutch energy company, concluded that a building with aBlueGen unit installed is not only energy neutral, but can also have an EPC value of less than zero, which wouldalready meet the EPC rating target for 2020. BlueGen delivers a significantly better rating than a standard boilerplus insulation or a heat pump and insulation. EPC ratings apply to new buildings; for existing buildings an energyassessment leads to an energy label, from “A” to “F”. The same Ecofys study concluded that a household with aBlueGen unit gets a “A++” rating because of the large carbon savings.
During the June quarter CFCL hired a Benelux sales manager to pursue direct sales to support our partners in thisregion and build up a key account management function as already established in Germany and the UK. Our salesmanager is in discussions with potential sales partners in Belgium.
Australia
Market settings in Australia show some signs of improving but are still challenging. Most importantly, there hasbeen no feed-in tariff for fuel cell products. The Company has been lobbying to change this, and on 3 September2012 the Victorian Government announced that Victoria’s solar feed-in tariff will be broadened to include all low-emissions and renewable technologies of less than100 kilowatts. From 1 January 2013, the new tariff will initiallyprovide a minimum of eight cents per kilowatt hour of electricity exported to the grid, which is based on theadjusted wholesale price of electricity. The rate will then be updated each year in line with the adjusted wholesaleelectricity rate.
The Victorian Government accepted the recommendations of the Victorian Competition and Efficiency Commission(VCEC), which began a review into feed-in tariffs in January 2012. Ceramic Fuel Cells was involved in theconsultation process with VCEC.
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The new feed-in tariff will be available for all electricity generators of less than 100 kilowatts which produce 50percent or less of the emissions intensity of electricity generation in Australia. Ceramic Fuel Cells’ BlueGen productwill be eligible for this feed-in tariff, making Victoria the first State in Australia to provide a feed-in tariff for fuel cells.We are encouraging other State Governments to follow Victoria’s lead and extend their own feed-in tariffs.
At the Federal Government level, the new Clean Energy Finance Corporation (CEFC) is expected to be operating bymid 2013. The CEFC has a mandate to invest AUD 10 billion over five years into the commercial deployment ofproven renewable and low emissions technologies. The Company believes the CEFC would be an ideal way todeploy its products into the mass market using debt finance rather than equity. Once the CEFC is established theCompany will pursue these opportunities; however we do note there is uncertainty about the CEFC’s long termfuture given that the current Opposition parties have said they will abolish the CEFC should they win the nextFederal election in 2013.
Despite the challenging market settings, the Company has 70 BlueGen units installed with customers in Australia,including:
30 units installed in social housing homes in Melbourne and Shepparton with the Victorian GovernmentOffice of Housing;
25 units installed in Newcastle with Ausgrid as part of the Smart Grid project;
5 units installed in a commercial building redevelopment in Port Adelaide;
Units installed in Government buildings and other showcase sites in Melbourne, Sydney, Canberra, Adelaide,Brisbane and Gosford.
Our sales partners Harvey Norman Commercial and Hills Industries continue to focus on commercial andGovernment customers, including local Councils. Given the structure and policy settings of the Australian energymarket, we expect sales in Australia to be modest. Accordingly we are focusing most of our business developmentand sales resources in Europe.
Other markets
North America
During the year the Southern California Gas Company (SoCalGas) continued to test a BlueGen unit at theirEngineering Analysis Center in Los Angeles, California. The BlueGen unit was installed in November 2010 and is amodified European product allowing operation with the local grid. The objectives for the installation includevalidating the electrical and thermal performance as well as confirming the low-emission characteristics of BlueGen,as California has some of the world’s most stringent regulations around airborne emissions. After a successful first12 months, Southern California Gas extended the field test by another 12 months to continue their evaluation ofthe technology. Also involved in the BlueGen testing is the US based Electric Power Research Institute (EPRI) and aconsortium of energy utilities. EPRI's members represent more than 90 percent of the electricity generated anddelivered in the United States. The SoCalGas and EPRI consortium aim to validate the performance of BlueGenbefore commencing additional field trials.
During the financial year we undertook an extensive evaluation of the US market. The US is a significant, yetfragmented, market for BlueGen. With over 144 million electricity customers serviced by 3,200 electricity utilitiesand 65 to 70 million natural gas customers serviced by 1,200 gas utilities, the US market presents a sizeable butchallenging opportunity. The energy market within the US varies from state to state and we have identified anumber of regions which we believe would be receptive to a BlueGen product offering. California and the North-East States are attractive due to high electricity prices and penetration of natural gas, along with other selectedstates facing rising electricity demand such as Texas.
An essential part of BlueGen sales into the USA and Canada is having the necessary product approvals andcertifications. Whilst most of our product development and support resources have been directed to the Europeanmarkets, during the year we continued to work towards North American approvals, which we aim to complete bythe end of 2012.
With BlueGen product certification pending for North America, we are taking a practical and cost-effectiveapproach to market development. We continue to stimulate early customer interest in selected key states andqualify opportunities through customer visits. At a later point in time and commensurate with market demand, wewill need to assess the market opportunities and invest in resources to effectively manage US customers.
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Japan
During the year our Japanese customers Tokyo Gas and Paloma continued to test and evaluate BlueGen afterextending their test programs. Japan is one of the most developed markets for fuel cell mCHP products in theworld. As such, Japan also has some of the most comprehensive and prescriptive fuel cell standards in the world.These standards and product requirements are very different to European, Australian and even North Americanrequirements. In addition, Japan has a regulated energy market meaning installation and connection of fuel celldevices is a tightly managed process via the natural gas utilities.
For CFCL to progress in the Japanese market, demonstrated long-term performance, reliability and durability arekey entry criteria. In addition, accreditation to Japanese product approvals is necessary. CFCL retains an interest inthe Japanese market however our investment of resources is modest and appropriate to the nature of long-termtesting and evaluation.
Product Marketing
Throughout this financial year, we have undertaken a number of opportunities to market BlueGen in a targeted andcost effective manner. Our communications are now more specific and tailored to regional needs. Productinformation, collateral and technical literature is produced in English, German and Dutch. The BlueGen website(www.bluegen.info) is a global product website and features content targeting specific regions. For example,English content is targeted for the UK market and separate English content is targeted for Australia.
The Company also presents and exhibits at key conferences and industry exhibitions. These marketingopportunities afford a rich ‘one-to-many’ dialogue with prospective customers and industry figures within our keymarkets. Key conferences and exhibitions include:
All Energy (Australia) – Australia’s largest energy products & solutions exhibition
Fuel Cell Seminar & Exposition (USA) – The premier fuel cell technical conference in the US
E-World (Germany) – Germany’s largest utilities trade show
Fuel Cell Expo (Japan) – The world’s largest exhibition for fuel cells
Green Cities (Australia) – Exhibition & conference focussing on sustainable architecture
EcoBuild (UK) – The UK’s largest exhibition on low-carbon building
Cleantech Forum (USA) – The highlight event for clean technologies and financing
Hannover Messe (Germany) – Europe’s largest exhibition for industrial energy technology
European SOFC Forum (Switzerland) – Europe’s premier technical conference for SOFC
Throughout the financial year, the Company has also won a number of prestigious industry awards, includingInnovator of the Year award by Climate Alliance (September 2011), The Governor of Victoria Export Minerals andEnergy Award, and the Banksia Foundation Environmental Award Clean Technology - Harnessing Opportunities (bothin October 2011). In August 2012 the Company won the Australasian Industrial Research Group Medal for small andmedium enterprise technological innovation. These awards provide distinction and recognition that theCompany’s technology is world class.
The Company has also capitalised on marketing and promotion opportunities across the mainstream media tobuild awareness of our products. BlueGen was featured on the Australian current affairs television program TodayTonight in July 2011 and April 2012, and on the ABC TV Catalyst program in August 2012. These segmentshighlighted how BlueGen is transforming the lives of participants in the Ausgrid Smart Grid, Smart City project andtenants within the Victorian Government Office of Housing program. In February 2012, BlueGen was featured onthe UK Channel 4 program Home of the Future. This five-part television series, co-funded by E.ON UK, transformedthe lives of a family, filling their home with the latest gadgets. BlueGen was installed in the home meeting all of thehome’s electricity demands.
The Company is investing significant efforts in joint marketing with our distributors. In Germany the Company’sdistributor Sanevo has developed a promotional website (www.sanevo.de/bluegen) to support their sales efforts. InThe Netherlands, BlueGeneration is extensively promoting BlueGen to the Dutch market (www.bluegeneration.nl).In the UK installer/distributors are promoting BlueGen both online and via direct marketing to their existingcustomers. In Australia Hills Solar and Harvey Norman Commercial are promoting BlueGen as part of their productrange for Government and commercial customers.
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Manufacturing and Supply Chain
German Plant
In late 2009 CFCL opened a plant in Heinsberg, Germany for the volume assembly of its fuel cell stacks. TheCompany has invested approximately EUR 9 million in this facility.
During the financial year CFCL continued to operate this plant to make fuel cell stacks, which are the corecomponent of its products, as well as to assemble complete Gennex fuel cell modules and BlueGen products. Tomatch these increased activities, the number of staff working at the plant increased from 17 in July 2011 to 35 inJune 2012.
An important activity during the year was to work with our furnace supplier to bring a large furnace intoproduction. This work took longer than expected, which constrained our fuel cell stack manufacturing capacity atthe plant. During August CFCL and the furnace supplier retrofitted the furnace with specially designed parts. Wehave tested this equipment and confirmed the furnace is capable of making fuel cell stacks which meet our qualityrequirements and technical specifications. These stacks are being used in BlueGen products for customers. We arenow fine-tuning the furnace to increase yield and consistency. The modifications we have implemented give us aproduction 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 thencomplete the modification of the furnace, to allow a combined production capacity of approximately 32 stacks perweek (or 1,500 stacks per year).
The plant’s production throughput can be increased above 1,500 units per year without additional capitalspending, by operational efficiencies (such as improving processes and production flow, reducing furnace cycletimes, loading and unloading times, robot optimisation), more flexible work practices (the plant is currentlyoperating on a single shift); and by continuing to outsource the manufacturing and assembly of components andsub-assemblies. Modest investments in multiple tooling will also increase production levels.
Apart from operational efficiencies, the next capital investment to increase production would be to upgrade theexisting second large furnace. This would add another 30-40 stacks per week or 1,500-2,000 per year, for a totalcapacity of 3,000-3,500 stacks per year. The capital investment required for this step is approximately EUR 1.2million.
In August 2012 the quality management system and operations at the German plant were independently certifiedas compliant with the international standard ISO 9001 for the production, sales and service of fuel cell generators.
Supply Chain
The Company plans to outsource the supply of many components of its products, whilst continuing to make thecore components such as the fuel cell stack.
One of the critical components is the fuel cell itself – the individual ‘chip’ of ceramic material which forms thebuilding block of the fuel cell stack. In early 2011 we signed an agreement with HC Starck for them to supply ourfuel cells in large volume. As previously reported, we had been working with HC Starck for some time to ensurethey could scale up production volumes whilst maintaining product quality, however during the year they wereunable to supply cells which met our requirements. This forced us to incur additional costs continuing to makecells in-house at our pilot plant in Melbourne.
CFCL accordingly terminated the contract with HC Starck and signed a new supply agreement with a differentsupplier, Chaozhou Three-Circle (Group) Co., Ltd (CCTC), to manufacture cells to our design. We also terminated areciprocal agreement under which CFCL’s UK powder plant was to supply ceramic powder to HC Starck for them tomake into cells. There are no minimum orders required under the new contract and the pricing is significantlylower than the HC Starck contract.
On 11 September 2012 CFCL announced that CCTC had agreed to invest AUD 6 million by subscribing for newshares at an issue price of six cents per share, which is the same as the issue price to existing shareholders under therights issue and the overseas offer announced in July 2012. CCTC, based in Guangdong province, China, is a leadingmanufacturer of electronic components and advanced ceramics. The two companies have worked closely togetherto transfer CFCL’s commercial cell production to CCTC. CFCL is also working with CCTC to outsource othermanufacturing processes and component supply, to increase volume and reduce CFCL’s product costs.
As a result of this change in cell supplier, from July 2012 we have significantly scaled back production of cells inMelbourne and reduced staffing levels accordingly. Cell production in Melbourne will only continue as part ofongoing research and development and product improvements. We also redirected activity at the UK powderplant away from fuel cells towards other markets. As a result, the Company has decided to fully write down thevalue of the plant, which has resulted in an impairment charge in the FY12 accounts of approximately
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AUD 2.6 million. This is an adjustment to the balance sheet and has no cash impact. We have been working with aceramics company to test ceramic powder products for the dental market. The ceramics company has been payingCFCL a fee to cover the operating costs of the UK plant whilst we work with them on technical due diligence andcontinue commercial discussions.
In late 2011 CFCL entered into a memorandum of understanding with Jabil Circuit Inc (Jabil) to assist in moving intohigher volume production and to further reduce unit costs. Jabil is a global electronic manufacturing serviceprovider with 55 factories in 22 countries and annual turnover of USD 16 billion. Jabil has begun to supplycomponent samples for testing and quality assurance and we are in discussions with Jabil towards signing a supplyagreement for these components.
These measures are all designed to reduce the cost of our products. Placing higher volume orders and engineeringchanges have already delivered large cost savings in several components. Moving from ordering components inlots of 100 to lots of 1,000 has reduced costs by an average of 25 percent from 2011. We are targeting a further costreduction of 25 percent in 2013/14.
We are continuing to reduce unit costs by increasing volumes and by redesigning some high value components.We are confident that costs will come down relatively quickly based on well documented learning curves fromother industries (for example solar PV, which has shown a consistent cost reduction of 15-20 percent for everydoubling in volume) as well as continued investment in tooling, product value engineering activities and ongoingoutsourcing to much larger scale component manufacturers. Given the very large size of the market for theCompany’s products – even in Germany alone – modest volumes are required to bring costs down significantly.
Real World Operation
Since 2006 CFCL’s products have achieved an aggregate of more than one million hours of operation at ourfacilities in Melbourne and Germany as well as at customer sites. Our products can tolerate a range of operatingconditions and inputs, such as variations in natural gas composition and water quality.
Our products can also be installed in many sites, broadening our accessible market. BlueGen units can be installed:
Indoors (Europe) or Outdoors (Australia, Japan);
In residential or commercial buildings;
In new buildings or retrofitted into existing buildings;
As a modular system or as part of a co-generation system; BlueGen can be installed with no heat recovery(for example, units in Brisbane and Adelaide), or with a tank for a simple hot water integration (forexample, homes in Melbourne), or integrated with multiple hot water inputs like solar thermal or heatpumps (for example, the unit at Alliander in Heinsberg), or integrated with a thermal store as a full mCHPsolution for low energy homes (for example, the Crest Nicholson home in the UK where no boiler isrequired);
As a single units or in a series (for example, five units installed in a commercial building in Adelaide in early2012).
CFCL continues to invest in technical improvements, particularly to extend the lifetime of its fuel cell stacks whilstmaintaining high electrical efficiency. A number of case studies have also verified the product’s modulation ability.
BlueGen-net
Each BlueGen and integrated mCHP unit is monitored and controlled remotely over the internet, through ourBlueGen-net system (www.bluegen.net). BlueGen-net is a sophisticated online product maintenance system whichhas all been developed in-house. We believe that BlueGen-net is unique amongst our peers in its scope andcapabilities.
Being able to monitor, manage, maintain and control products on-line is important because it:
Reduces our marginal support cost: it is far cheaper to support products on-line than paying for site visits;
Creates customer value, for example through deployment as part of a virtual power plant, or being able tomodulate power remotely or use pre-programmed modes of operation;
Creates positive customer engagement, by providing on-line performance data and historical reports.
Developing such a sophisticated system in-house requires a significant up-front investment however we believe itwill deliver significant benefits by reducing the marginal costs of support, particularly as volumes increase.
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Products Performing in the Field
One of the important benefits of BlueGen-net is that it allows us to record and analyse product performance,including any product failures. This data is valuable because it demonstrates that: we can measure faults in theproducts; we have a baseline; we know the causes of faults (which, following an 80/20 rule, allows us eliminatemany errors by focusing on a few components); the failure rate is reducing; and we can measure improvements.BlueGen products in the field are performing better than expected and performance continues to improve.
Employees
At the end of the financial year the Group had a total of 159 full time equivalent staff: 109 staff based at the headoffice in Melbourne, 8 in the United Kingdom, 35 in Germany and 7 staff members based in The Netherlands.
Management and the Board recognise the importance of attracting and retaining CFCL’s highly skilled staff, and theneed to create appropriate incentives for those staff to deliver value to the shareholders. All staff members haveformal ‘short term incentive’ and ‘long term incentive’ remuneration plans, linked directly to performance againstpersonal and Company key performance indicators (KPIs). A particularly important aspect of the Company’sremuneration policy is to grant equity to staff, under the Directors and Employees Benefits Plan approved by
shareholders in 2009 (Equity Plan).
Most of CFCL’s staff are issued equity under the Equity Plan as part of their annual remuneration review, usually inlieu of a cash bonus or incentive payment. Typically, Australian staff are offered ordinary shares and European staffare offered share options. The issue of equity to staff is discussed further in the Remuneration Report section of theDirectors’ Report.
The Board and Management have agreed that there will be no short term incentive or long term incentivepayments, nor issues of equity, to any staff including the Managing Director in relation to the year ended30 June 2012.
The Company continued to invest in staff learning and development, including through its annual LeadershipForum program for the Executive Management Team, key functional managers and potential future leaders.
During the year CFCL continued to apply its Occupational Health & Safety systems, with advice from localexternal specialists in Australia, Germany and the UK. This allowed an ongoing resource for advice, safetyinspections and other assistance with the safety program. Consistent with this safety system approach, allemployees were reviewed on their contribution to the safety program during their half yearly and annualperformance reviews. With the assistance of the external specialists, staff safety training needs were determinedand relevant training programs were arranged. During the financial year nine safety incidents were reported atCFCL’s Melbourne operations (up from five in FY11). Of the nine incidents, four involved no injuries and fourinvolved minor injuries. One incident involved a major injury with 75 hours of lost work time recorded. Two safetyincidents were reported at the manufacturing plant in Germany, one of which involved minor injuries. There wereno safety incidents reported at the powder plant in the United Kingdom.
Financial Commentary
The summary financial results for the year from 1 July 2011 to 30 June 2012 are as follows:
(All currency figures are shown in thousands)
12 Months to:
30 June 2012 30 June 2011
Income (Expense) AUD 000 GBP 000 AUD 000 GBP 000 Change
Sales Revenue 6,717 4,349 3,681 2,383 82%
Cost of sales, service & warranty (7,591) (4,915) 0
Gross profit/(loss) (874) (566) 2,383
Operating expenses (27,228) (17,630) (27,160) (17,586) 0%
Foreign exchange gain (loss) (88) (57) (2,094) (1,356) -96%
Impairment reversal (charge) (2,577) (1,669) 0 0 0%
EBIT - profit (loss) (30,678) (19,865) (25,462) (16,487) 20%
Other income 569 368 4,396 2,846 -87%
Net Profit (Loss) - after tax (30,198) (19,554) (21,177) (13,712) 43%
Cash Inflow (Outflow) from:
- Operations (24,663) (15,969) (19,300) (12,497) 28%
- Capital expenditure (705) (456) (2,133) (1,381) -67%
- Financing 16,433 10,640 28,962 18,753 -43%
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Revenue
The Group’s total revenue increased during the year by 82 percent to AUD 6,717K. Revenue recognised in relationto the sales of BlueGen and integrated mCHP units was AUD 6,194K. Revenue for unit service and support was AUD522K. The number of units sold during the year increased by 177 percent from 61 units last year to 169 units thisyear.
Revenue has increased consistently over the last four years, as shown below:
AUD (m) GBP (m)
FY09 $ 1.7 £ 1.1
FY10 $ 2.0 £ 1.4
FY11 $ 3.7 £ 2.5
FY12 $ 6.7 £ 4.4
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 werebuilt from components that had been initially purchased in low volumes. During the year the Group commencedpurchasing 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 monitoringand provision of maintenance support. These costs also include the costs of developing training materials andundertaking 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 underservice contracts. The warranty expense for the year totalled AUD 1,451K which compares to the prior year chargeof AUD 1,247K (when it was included in research and product development operating expenses).
Other Income
Other income has reduced by AUD 3,827K due to the receipt last year of a settlement in relation to legal actiontaken 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. Thisreflects the cessation of certain development activities which have been increased in scale and are nowappropriately treated as being commercial activities. These activities are now reflected elsewhere in the P&L aseither cost of sales or general & administration operating costs. Expenditure on core research and productdevelopment activities was AUD 11,175K which was consistent with the prior year. Expenditure in relation tointellectual 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 andproduct development and expanded to increase manufacturing capacity. This has added approximately AUD 1.7million of costs to the general and administrative cost category. As production volume increases in the future thesecosts 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 theestablishment of the Netherlands sales office and the expansion of sales resources in Europe.
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Impairment Charge
In July 2012 the Group announced that it had terminated its contract for the purchase of fuel cells from its previoussupplier and had signed an agreement with a different supplier. At the same time the Group also terminated thereciprocal supply agreement under which the Group’s UK powder plant was to supply ceramic powder to be madeinto cells by the original supplier. Management has redirected the activities of the UK powder plant away from fuelcells towards other markets. As a result of this, the decision was taken to fully write down the value of the fixedassets 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:
Reduced (increased) loss AUD 000
Higher sales revenue 3,036
Cost of sales, service and warranty (7,591)
Reduced other income from legal settlement (3,827)
Increased operating expenses (68)Reduced foreign exchange loss on translation in thecurrent year 2,005Impairment charge - plant and equipment of UK powderplant (2,576)
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. Againthis 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 purchasinginventory at higher volume levels, its level of working capital requirement has increased. Inventory at year end hasincreased from AUD 5,131K in the prior year to AUD 9,328K this year.
Cash outflow on capital expenditure was AUD 1,482K, compared to AUD 1,296K in the prior year.
Cash inflow from financing activities amounted to AUD 16,433K. This arose from the issue of equity that raised a netAUD 16,404K.
At 30 June 2012 the Group had cash of AUD 8,846K which was held on deposit with banks. Of this amount AUD2,224K was pledged as security for bank guarantees and is not available for use by the CFCL Group.
Risk management
The key risks facing CFCL are:
Technical Does the product perform to the customer’s expectations?
Manufacturing Can the product be made reliably at acceptable levels of cost and quality?
Commercial Are there a large number of customers who will buy the product – at an appropriate price?Can the product be delivered, installed and maintained to meet the customer’sexpectations?
In general terms the nature of these risks has not changed significantly over the last few years. What has changed isthe likelihood, the priority and the details of the risks. In simplistic terms, as CFCL has successfully moved fromresearch and development into product development and now sales, the emphasis has evolved from technical riskto commercial and manufacturing risks.
This was apparent during this financial year, when the most critical risks related to manufacturing, sales andfinances, rather than to the performance of the technology. The overriding risk this financial year was the need toraise further funds for the Company to continue as a going concern and to reach the point where cashflow fromsales is sufficient to fund operating costs.
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Technical
As CFCL has stated for several years, the key technical risk for CFCL (and for all fuel cell companies) is to consistentlymake fuel cells that work reliably, in real world conditions, for a long time.
During the year the Company continued to make progress on two key technical risks in order to reduce operatingcosts, improve commercial returns to customers and reduce warranty risk and cost for the Company.
The first objective is to extend the lifetime of the fuel cell stack towards a commercial target of four to five years. Itis currently not possible to conduct accelerated lifetime testing of fuel cell stacks; so, for instance, to prove that afuel cell stack lasts for say two years, the stack must be operated for two years – by which time the stack technologyhas been improved and the testing regime starts again. CFCL is continuing to develop predictive lifetime modelsthrough statistical data evaluation and extrapolation which will allow it to shorten the testing process. During theyear the Company made substantial progress in the understanding of stack degradation mechanisms andnecessary mitigation actions, and this work will continue in the coming year.
Secondly, CFCL continued to work on improving the robustness of the fuel cell system, in particular thermal cycling,which means turning the unit on and off again repeatedly. Solid oxide fuel cells can generate the world’s highestelectrical efficiency because they operate at a higher temperature than other fuel cells. The fuel cell stack worksbest when it is kept at a relatively constant temperature, and needs a significant time for heat-up and cool-down. The power output of the system can be modulated up and down, and while the system is not designed tobe turned off and on (cooled down and heated up) constantly, it does need to withstand a limited number ofthermal cycles during its lifetime.
During this year the Company made very good progress on this issue, developing and making a fuel cell stack withmuch better thermal cycling performance. This performance has been demonstrated in several customer tests,including the rigorous testing conducted by Kiwa Gastec in The Netherlands (discussed above).
CFCL is also taking several steps to mitigate the risk of variable product performance in its early products. TheCompany has developed its BlueGen-net system, also discussed above. Through this system CFCL is building up arich database on the real world performance of the units, which feeds back into ongoing improvements in thedesign, manufacturing and installation of the products.
Progress on mitigating technical risks is regularly reported to the Board Technical Committee.
Manufacturing
CFCL needs to make its products in large numbers at low cost, with consistently high quality. Increasing theCompany’s manufacturing capability has been a key activity over the last three years. In order to mitigatemanufacturing risks, CFCL has built a large scale manufacturing plant, to increase volume, reduce unit cost andimprove quality and consistency.
CFCL is also:
Outsourcing the manufacturing of fuel cells and other volume components.
Establishing commercial agreements with suppliers for system components.
Testing and validating the performance of outsourced components in prototype trials before committingto larger volumes.
During this financial year the two most important manufacturing risks were:
Obtaining a secure supply of high quality fuel cell components. Our previous supplier was unable todeliver cells to meet our quality or volume requirements. This forced us to incur the cost of continuing tomake cells ourselves. We have now changed to a new cell supplier, with the capability to make highervolumes of quality cells. We performed a lot of testing before changing suppliers, and we are confidentthat our new supplier will continue to invest resources needed to match our requirements, however therisk remains that we rely on one supplier for these components.
Increasing the number of fuel cell stacks and BlueGen units made at the German plant. As we explain inthe Manufacturing section above, this year we spent a lot of time working to get a large furnace workingat our German plant. This took longer than expected, which constrained our manufacturing capacity andincreased costs.
These risks, of relying on a small number of suppliers, and needing to scale up manufacturing levels, will continueto be an important focus in the coming year. As manufacturing volumes increase, so does the need to tightly co-ordinate and manage our supply chain and internal resources, as well as the importance of maintaining consistentquality. Strong internal control and management systems will be a priority for the coming year.
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Commercial
The first key commercial risk is that CFCL needs to increase sales to get to a cashflow positive position. In theenergy technology market there is often a long sales lead time, especially with utility customers. Also, earlycustomers often want to ‘try’ one unit before they buy more units.
The Company is mitigating this risk by selling through several distributors in different markets. This in turn createsa different risk, of the Company relying on its distributors to have the capability, resources and motivation toproperly sell, install and service our products.
During the year the Company’s sales partner in Germany invested in building its sales force and succeeded ingenerating early sales. Our sales partner in The Netherlands has been slower than expected to generate sales. Wewill continue to work with both these distributors, and potentially others, to accelerate sales.
(An alternative approach is for the Company to sell products itself directly to commercial and residential customers.While this mitigates the sales channel risk, it requires considerable resources to build a direct sales force. At thispoint Management and the Board believe the Company’s resources are more effectively deployed to support salespartners rather than CFCL trying to build a direct sales organisation.)
CFCL’s products need to be sold at a commercially viable price. Like most products, the Company’s costs ofproduction are higher in low volumes. The challenge is to ensure that prices for early products cover these highercosts; and, as volumes increase, to ensure that costs of production come down faster than prices.
The Company initially adopted a conservative pricing strategy for market entry. This mitigates the risk of makinglosses on early sales, but makes it harder to increase sales volume. Management and the Board are revising thispricing strategy and adopting lower margin expectations in order to drive more sales growth. This requires abalance of risks and Management and the Board will monitor this position on an ongoing basis and adjust ourpricing to meet the market requirements and opportunities.
Once a product is sold, CFCL must provide certain warranties and after-sales support, to ensure the product meetsthe customers’ expectations. When a product is first introduced into the market, it is not possible to test theproduct for all faults, or to test it for its full expected lifetime. Therefore there is a risk that it will cost the Companymore to support early products than the revenue received for those products. In addition, in order to preserve thereputation of the product the Company will need to support early products, even at a loss.
The consequences of this product support risk increase as CFCL deploys more products into the market (there aremore products to support), and as the Company comes to rely more on third parties to install and service theproduct properly. However the likelihood of this risk should reduce, as the Company develops a rich database ofreal world operating data which provides a ‘feedback’ loop into ongoing product improvements (and more reliableestimates of support costs).
There are also tradeoffs between these risks: for example, reducing the price of the Company’s products wouldincrease sales (thereby reducing the sales risk) but this may mean selling at a low or negative margin (whichincreases the pricing risk) and may also increase the total cost of warranty servicing (increasing the support risk).Management and the Board actively monitor the tradeoffs between these risks as CFCL increases its scale ofproduction.
Outlook 2012-13
During FY13 CFCL’s continued focus will be largely the same as FY12: to continue to increase sales revenue andreduce unit costs while moving into volume sales of its products.
To achieve this goal the Company’s targets for the next financial year include:
Sales: Continue strong revenue growth, translate the order book into sales and cashflow
o Continued focus on primary launch markets of Germany, UK and Benelux
o Expand existing direct sales networks in primary launch markets where market settings arealready favourable
o Faster sales from distributors in Germany and Netherlands: complete all of their first order of 100units each; follow on order for 500 units in Germany
o Secure larger orders from Utilities with fixed delivery dates
o Deploy BlueGen units into large scale Utility operated Virtual Power Plants in Germany andNetherlands
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o Deliver all units to EWE in the German NOW project and secure commercial market introductionof integrated mCHP product
o Increase sales in UK through Resellers/Installers, Housing Associations, new build homecontractors
Products & Services
o Finalise integrated mCHP product design and commence deployment with EON UK
o Work with service partners to make it faster and cheaper for customers to install our products
o Continue to transfer after-sales service activities to local service partners
o Release next version of BlueGen-net with updated customer control functionality
o Deploy BlueGen units with North American product approvals
o Continue to improve product performance, including longer stack lifetime and longer mean timebetween failure
Manufacturing
o Outsource remaining production activities and selected component supply from Noble Park tosupply partners
o Secure and implement agreements with remaining key component suppliers to increase scaleand further reduce costs
o Improve operational efficiencies to increase Heinsberg output without additional capitalexpenditure
o (Subject to funding) upgrade second large furnace for additional capacity of 1,500-2,000 stacksper year
Financial
o Realign corporate structure and operational activities to substantially reduce overhead costs
o Reduce operational cash burn by removing production activities from Noble Park, relocatingresponsibility for operational activities to Germany and refocusing Noble Park as the Company’sResearch and Development centre
o Complete the implementation of the enterprise resource planning (ERP) system and processes
The Board and Management continue to be focused on achieving a cashflow breakeven position as soon aspossible, whilst managing the challenges of introducing a new product into global energy markets, and inparticular the scale up of manufacturing, installation and after-sales service.
We are currently adopting a focused strategy to get to a cashflow positive position as soon as possible, whilstmanaging the many risks of commercialising breakthrough technology. This strategy focuses the Company’sresources on a single technology (solid oxide fuel cells), for a single product (mCHP), for a small number ofgeographic markets. This focus is necessary and appropriate given the Company’s resources. However in thelonger term there are many other opportunities to generate value from the Company’s technology, either with theappropriate resources ourselves, or with new development partners. The most near-term opportunities are:
Expanding more quickly in existing markets, particularly the USA;
Developing products for new geographic markets, such as China, India or Brazil;
Developing products for new fuels such as LPG and biogas;
Developing new applications, such as off-grid power, electric vehicle charging stations, on-site generation plusbattery storage, and units with a larger power output.
These opportunities, and the strong interest received from many markets, indicate that there is a very large globalmarket for the Company’s world leading clean energy technology.
Brendan DowManaging Director
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Directors’ Report
For the year ended 30 June 2012
Your directors present their report on the consolidated entity (referred to hereafter as the Group) consisting ofCeramic Fuel Cells Limited and the entities it controlled during, and at the end of, the year ended 30 June 2012.
DIRECTORS
The directors of Ceramic Fuel Cells Limited in office at the date of this report are:
Mr Jeff Harding, ChairmanMr Brendan Dow, Managing DirectorMr Roy Rose, Deputy ChairmanDr Peter BinksMr John DempseyDr Roman DudenhausenMs Janine HoeyMr Robert (Bob) Kennett
PRINCIPAL ACTIVITIES
The principal activity of the Group during the year was the commercial development and demonstration of powergenerating products based on the Group’s ceramic (solid oxide) fuel cell technology.
There were no significant changes in the nature of the activities of the Group during the year.
DIVIDENDS
No dividends were recommended, declared or paid during the year and to the date of this report.
REVIEW OF OPERATIONS
Information on the operations and financial position of the Group and its business strategies and prospects is set out inthe Review of Operations and Activities on pages 6 to 22 of this document.
EARNINGS PER SHARE
Consolidated2012 2011cents cents
Basic and diluted earnings per share (2.33) (1.82)
SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS
Significant changes in the state of affairs of the Group during the financial year were as follows:
a) Share capital
An increase in contributed equity of $17,006,950 (from $260,275,437 to $277,282,387) asfollows:
Issue of 54,559,999 fully paid ordinary shares at a price of 7 pence sterling (Australian dollarequivalent of 10.8 cents) via a placement and subscription to UK and European investors 5,892,480
Issue of 76,983,530 fully paid ordinary shares at a price of 10.8 Australian cents via a rightsissue to shareholders in Australia and New Zealand 8,314,220
Issue of 25,686,748 fully paid ordinary shares at a price of 7 pence sterling (Australian dollarequivalent of 10.8 cents) via an overseas offer to UK investors 2,781,636
Issue of 6,663,850 fully paid ordinary shares at a price of 12.4 Australian cents to employees 826,317
Issue of 1,051,170 fully paid ordinary shares at a price of 11.0 Australian cents to B Dow,Managing Director 115,629
17,930,282
Less: Employee shares held in escrow (320,141)
Less: Share issue transaction costs (refer Note 20(b) to the Financial Statements) (603,191)
Net increase in share capital 17,006,950
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b) Cash and cash equivalents (including restricted cash equivalents)
A net reduction in cash of S10.2 million (from $19.1 million to $8.8 million) after taking into account $16.4 million ofequity raised, $24.7 million of net operating expenditure and $1.5 million of capital expenditure.
c) Inventory
An increase of $4.2 million (from $5.1 million to $9.3 million) arising from the ongoing commercialisation plans thatsaw an increase in the volume size of orders placed on component suppliers to achieve an average cost reductionof 25%.
d) Plant and equipment
A net reduction of $5.2 million (from $16.5 million to $11.3 million) resulting from depreciation and amortisationcharges of $3.3 million, the treatment of the powder plant in the UK as fully impaired $2.6 million (refer Note 7 tothe Financial Statements). This decrease was partially offset by capital expenditure during the year of $1.3 million.
e) Significant gains and expenses
Gains
Increase in revenue by $3.0 million (from $3.7 million to $6.7 million) arising from a 177% increase in unit sales
volume.
Expenses
Impairment of the UK powder plant resulting in a charge to the income statement of $2.6 million (refer Note 7
to the Financial Statements).
In the opinion of the directors there were no other significant changes in the state of affairs of the consolidatedentity that occurred during the year under review not otherwise disclosed in this report or in the financialstatements.
MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR
Subsequent to the end of the financial year the Company has successfully concluded several financing activities asfollows:
Share placement
On 11 September 2012 the Company entered into a share subscription agreement with a major supplier tosubscribe for 100,000,000 ordinary shares at a price of 6 cents per share. This subscription would raise A$6.0m(before costs). The full amount of the subscription has been received by the Company. The Company has allottedand issued 99,500,000 shares on 20 September 2012 and will issue a further 500,000 shares subject to shareholderapproval, which will be sought at the forthcoming Annual General Meeting.
Australian and New Zealand rights issue
The Company has concluded a rights issue to ASX shareholders registered in Australia and New Zealand. The offerwas a one for four non-renouncable rights issue of ordinary shares in the Company at an offer price of 6 cents pernew share. The offer, which was not underwritten, closed on 17 September 2012 and has resulted in the issue of69,677,901 ordinary shares and the raising of $4.2m (before costs).
UK Issue
In conjunction with the rights issue the Company also undertook an Open Offer to existing United Kingdom andEuropean AIM shareholders to raise up to £1,945,875 at a share price of 4 pence. The offer closed on 17 September2012 and has resulted in the issue of 23,254,556 ordinary shares and the raising of $1.4m (before costs).
No other matter or circumstance has arisen since 30 June 2012 which has significantly affected, or may significantlyaffect:
(a) the Group’s operations in future financial years, or
(b) the results of those operations in future financial years, or
(c) the Group’s state of affairs in future financial years.
LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS
Information on likely developments and expected results of operations is set out under the heading Outlook
2012-13 within the Review of Operations and Activities on pages 21 to 22 of this document.
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ENVIRONMENTAL REGULATION
The Group is not subject to any significant environmental regulation under a law of the Commonwealth, or of a State orTerritory, of Australia.
DIRECTORS’ DETAILS
Further information regarding the directors of Ceramic Fuel Cells Limited in office at the date of this report is asfollows:
Mr Jeff Harding
BE(Civil) Hons, BA(Economics), Master of Science in Industrial Administration, FAICD. Age 66.
Chairman since 22 November 2007. Director since 17 September 2007.
Member of Audit, Technical and Remuneration and Nominations Committees.
Experience and expertise
From 1995 to 2005 Mr Harding was Managing Director of Pacific Hydro Limited, one of Australia’s largest renewableenergy developers with wind and hydro energy projects in Australia, Asia and Chile. During his tenure, Mr Hardingoversaw the international expansion of the business with growth in market capitalization from A$5 million to overA$750 million and an increase in profit after tax each year from 1996 to 2005, when Pacific Hydro was sold to IFMRenewable Energy. Previously he was a Divisional General Manager of Brambles Australia for 5 years.
Current directorships of other listed companies
Non-executive director of ASX listed Carnegie Wave Energy Limited since 19 May 2009.
Former directorships of other listed companies (last 3 years)
Non-executive director and Audit Committee Chairman of AIM listed Renewable Energy Holdings Plc from 11February 2005 to 1 September 2009.
Interests in shares and options (refer Note 22 to the Financial Statements)
12,826,852 ordinary shares in Ceramic Fuel Cells Limited, owned by Jeffrey Harding ATF The Harding SuperannuationFund.
Mr Brendan Dow
B.Eng.(Hons), MBA. Age 47.
Managing Director since 11 January 2007 (previously Chief Executive Officer).
Member of Technical Committee.
Experience and expertise
Prior to joining Ceramic Fuel Cells Limited, Mr Dow spent almost 10 years as Managing Director of the Australiansubsidiary of global electrical component manufacturers ebmpapst and Ziehl Abegg AG. He was responsible foroperations across Australia and New Zealand, as well as for establishing and managing Greenfield manufacturingoperations in Malaysia, and sales and marketing activities across the south-east Asian region. From 1992 to 1996 MrDow was a Regional Manager within General Electric Company and GEC Alstom, and from 1989 to 1992 he workedas Production Manager in London for the Gillette Company.
Current directorships of other listed companies
None.
Former directorships of other listed companies (last 3 years)
None.
Interests in shares and options (refer Note 22 to the Financial Statements)
1,800,170 ordinary shares in Ceramic Fuel Cells Limited.
2,445,000 options over ordinary shares in Ceramic Fuel Cells Limited.For
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Mr Roy Rose
B.Sc.(Chem.), GAICD. Age 65.
Deputy Chairman, independent non-executive director. Director since 7 July 2009.
Chairman of Remuneration and Nominations Committee, member of Audit and Technical Committees.
Experience and expertise
Mr Rose has 30 years experience in the paint, chemicals, fertiliser and medical products industries, possessingstrong skills in technology and innovation, including experience commercialising and manufacturing innovativetechnologies. He has held non-executive directorships of ITL Ltd, Incitec Limited, CRC for EnvironmentalBiotechnology and Qenos Pty Ltd, as well as having held senior management positions at Orica Australia. Mr Rosewas previously Chairman of CSIRO’s Future Manufacturing Flagship Advisory Committee and has served onnumerous Australian industry groups, including as a member and Past President of Australasian Industrial ResearchGroup.
Current directorships of other listed companies
None.
Former directorships of other listed companies (last 3 years)
ITL Limited.
Interests in shares and options (refer Note 22 to the Financial Statements)
458,332 ordinary shares in Ceramic Fuel Cells Limited, owned by Holmwood Enterprises Super Fund.
Dr Peter Binks
D.Phil (Oxon), B.Sc. (Hons – Tas Uni.). Age 52.
Independent non-executive director. Director since 5 May 2009.
Chairman of Technical Committee and member of Remuneration and Nominations Committee.
Experience and expertise
After completing a science degree at the University of Tasmania (Hons) majoring in Physics, Dr Binks attendedOxford University as a Rhodes Scholar. He completed his doctoral thesis in Theoretical Physics. Dr Binks has had asuccessful career with McKinsey & Company, BHP, Telstra and Nanotechnology Victoria Ltd. He was most recentlythe CEO of NanoVentures Australia Ltd, a company set up to attract funding and commercialise outcomes fromNanotechnology Victoria. Dr Binks is currently a director of NanoVentures Australia Limited, a director of NanoVicCommercial, and a director of NanoVic IP Holdings. From January 2006 to June 2008 Dr Binks was also a director ofThe Australian Nano Business Forum. Dr Binks is currently CEO and member of the Board of the General Sir JohnMonash Foundation.
Current directorships of other listed companies
None.
Former directorships of other listed companies (last 3 years)
None.
Interests in shares and options (refer Note 22 to the Financial Statements)
12,500 ordinary shares in Ceramic Fuel Cells Limited.
Mr John Dempsey
Grad.Dip.Acct.&Fin.Mgmt, Grad.Dip.Ag.Econ., FIPA, ACIS, GAICD, JP. Age 66.
Independent non-executive director. Director since 1 July 2002.
Member of Audit Committee and Remuneration and Nominations Committee.
Experience and expertise
Mr Dempsey has been a qualified Accountant since 1974 and has worked in public practice, commerce and theQueensland rural sector in various positions. Previous appointments have included deputy Mayor of the City of Cairns,member of the Queensland Sugar Industry Tribunal, and Director/Partner in a public accountancy practice in Cairns. In2007 Mr Dempsey sold his accountancy practice in Brisbane and retired from public practice. Mr Dempsey was a non-executive Director of Queensland energy utility Energex Limited from July 1999 to June 2012 and Chairman of thatorganisation from January 2007 to June 2012. He was also Chairman of Allconnex Water from February 2010 toSeptember 2011 and is a non-executive director of MS Australia-Queensland, a not-for-profit organisation.
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Current directorships of other listed companies
None.
Former directorships of other listed companies (last 3 years)
None.
Interests in shares and options (refer Note 22 to the Financial Statements)
500,000 ordinary shares in Ceramic Fuel Cells Limited, owned by JHM Super Fund.
Dr Roman Dudenhausen
D.Ec, Dipl.-Kfm. Age 43.
Independent non-executive director (resident in Germany). Director since 17 May 2011.
Experience and expertise
Dr. Dudenhausen has studied economics in Essen, Germany and in Toronto, Canada, with a focus on the energyindustry. He was one of the founders of the con|energy company in Essen in 1996 and, after the transformation ofthe company into a corporation, since 1998 has been CEO of con|energy ag. con|energy supports the energyindustry with industry-specific services in the fields of management consulting, training and advanced education,information and communications, and is one of the leading service providers to the German energy market. Thecompany is now a group which includes E-world energy & water, one of the biggest energy trade fairs worldwide,and mia electric, an electric car company. Dr Dudenhausen’s doctoral work in 2000 at the University GHS in Essenwas on “Risk Management in the Liberalised Energy Market”. He is recognized as an expert energy advisor tocompanies, associations and politicians. Dr Dudenhausen has written numerous national and international articleson the subjects of energy, climate and mobility.
Current directorships of other listed companies
None.
Former directorships of other listed companies (last 3 years)
None.
Interests in shares and options
625,000 ordinary shares in Ceramic Fuel Cells Limited, owned by con|energy ag.
Ms Janine Hoey
B.Comm., GAICD. Age 49.
Independent non-executive director. Director since 1 July 2011.
Chairman of Audit Committee.
Experience and expertise
Ms Hoey is currently the Pacific Hydro Pty Ltd General Manager Group Operations, Strategic Planning and Riskbased in Melbourne. Her primary responsibility is the management and optimization of the company’s key revenue,operating, cost drivers, health, safety, sustainability, strategic planning and risk across the company’s globalportfolio of wind and run of river hydro assets, located in Australia, Chile and Brazil. Janine is also a Non ExecutiveDirector of Ecogen Holdings Pty Ltd which owns and operates 960MW of gas electricity generation at Newport inMelbourne and Jeeralang in the La Trobe valley. From 2005 to 2009 Ms Hoey was based in Santiago Chile as theGeneral Manager Latin America. She was responsible for Pacific Hydro’s entry into the Brazil market in late 2006 andwas acting CFO for Pacific Hydro for a 6 month period, upon her return to Australia in 2009. Prior to joining PacificHydro Ltd in 2004, Janine held a number of executive positions with Qantas, over a 10 year period, in addition to 4years as Director of her own consulting company from 2001 to 2004.
Current directorships of other listed companies
None.
Former directorships of other listed companies (last 3 years)
None.
Interests in shares and options
100,000 ordinary shares in Ceramic Fuel Cells Limited.
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Mr Robert (Bob) Kennett
B.Sc.(Mech.Eng.), C.Eng., FIMechE. Age 62.
Independent non-executive director (resident in the United Kingdom). Director since 24 August 2006.
Experience and expertise
Mr Kennett has spent his career in the energy sector, specialising in Combined Heat and Power and renewables. Hewas Managing Director of Powergen Combined Heat and Power Ltd for 12 years and, for three years simultaneously,was the Chairman of PowerGen Renewables Ltd. In his ten years in this position, Mr Kennett successfullyestablished and managed a leading and profitable business in the UK Combined Heat and Power market withassets of more than £600m at 22 sites. Mr Kennett is currently a consultant advising financiers and investors onbusiness opportunities in the UK Combined Heat and Power and Renewable Energy markets. He is on a Panel ofIndependent Assessors for DTI Energy Programmes, a board member of the Power Industries division of theInstitution of Mechanical Engineers, a non-executive Chairman of Ignis Energy, a board member of the UKCombined Heat and Power Association and the Chairman of the Micro CHP committee of that organisation.
Current directorships of other listed companies
None.
Former directorships of other listed companies (last 3 years)
None.
Interests in shares and options (refer Note 22 to the Financial Statements)
444,000 shares in Ceramic Fuel Cells Limited.
COMPANY SECRETARY
Mr Andrew Neilson
LLB(Hons), B.Comm., GAICD. Age 42.
Member of Executive Management Team. Company Secretary since 5 August 2004.
Experience and expertise
Mr Neilson has worked as a solicitor with one of Australia’s largest law firms, and as an in-house legal counsel andcommercial manager in the information technology industry. He has experience with commercialising technology,identification and allocation of commercial risk and in structuring and negotiating a range of commercial ventures withglobal partners, suppliers and customers. He was previously Legal Counsel for two NYSE-listed global informationtechnology firms.
DIRECTORS' MEETINGS
The numbers of meetings of the board of directors of Ceramic Fuel Cells Limited and of each board committee heldduring the year ended 30 June 2011, and the numbers of meetings attended by each director as a member of therelevant committee, were:
Meetings of committeesFull meetings of
directors Technical AuditRemuneration and
Nominations
Name of Director
A B A B A B A B
J Harding, Chairman 13 15 2 3 6 8 3 3
R R Rose, Deputy Chairman 15 15 3 3 8 8 3 3
B L Dow, Managing Director 15 15 3 3 * * * *
P N Binks 15 15 3 3 * * 3 3
J P Dempsey 13 15 * * 7 8 3 3
R Dudenhausen 12 15 * * * * * *
J Hoey 15 15 * * 8 8 * *
R J Kennett 15 15 * * * * * *
A = Number of meetings attendedB = Number of meetings held during the time the director held office, and was a member of the committee, during
the year* = Not a member of the relevant committee
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REMUNERATION REPORT
This remuneration report sets out remuneration information for Ceramic Fuel Cells Limited’s non-executivedirectors, executive director and other key management personnel, including the five highest remuneratedexecutives of the Group and the company.
A Principles Used to Determine the Nature and Amount of Remuneration
Non-Executive Directors
The fees paid to non-executive directors, including the Chairman, reflect the demands which are made on, and theresponsibilities of, the directors. Directors’ remuneration consists of an annual fee plus statutory superannuation(where applicable). Directors are also entitled to be reimbursed for expenses incurred on Company business.Directors do not receive additional ‘per meeting’ fees.
The current annual fees for non-executive directors, excluding statutory superannuation, are:
Director Fee p.a. CommentJeff Harding $103,000 Chairman.Roy Rose
$66,000Deputy Chairman, Remuneration & Nominations CommitteeChairman.
Peter Binks $66,000 Technical Committee Chairman.Janine Hoey $66,000 Audit Committee Chairman.John Dempsey $50,000 Member of Audit Committee.Robert Kennett £49,000 Non-executive director resident in the United Kingdom.Dr Roman Dudenhausen €55,000 Non-executive director resident in Germany.
The Board may adjust remuneration of non-executive directors from time to time, up to an aggregate amountdetermined by the shareholders. The Board last adjusted the fees of non-executive directors in February 2011. Thecurrent aggregate amount is $600,000 per annum, approved by shareholders at the Annual General Meeting inNovember 2011.
In 2009 the Company’s shareholders approved a Directors and Employee Benefits Plan (Equity Plan), which givesthe Board discretion to offer equity to directors (with shareholder approval). In 2007, 100,000 share options wereissued to four non-executive directors, including current directors Mr Harding and Mr Kennett. Those options hadan exercise price of $1.01, and lapsed in November 2011.
The Board considers that it is important to create a strong alignment of interests between staff (including seniormanagers and directors) and shareholders, and that at this stage of the Company’s development it is appropriatefor the Company to achieve this alignment by offering equity rather than by the Company paying higher cash fees.Currently non-executive directors do not receive issues of shares or options as part of their remuneration.
Managing Director and Executives
The Company enters into individual employment agreements with each of its executives, including the ManagingDirector.
For the financial year ended 30 June 2012, executive pay comprised annual remuneration plus two ‘at risk’components, namely a short-term incentive and a long-term incentive.
Each executive’s annual remuneration is based upon market rates for that person’s role and responsibilities withinthe Company. Annual remuneration is expressed as a total remuneration package, which comprises base salaryplus statutory superannuation and other entitlements.
At least once a year the Managing Director reviews the performance of each executive against previously agreedkey performance indicators (KPIs), and sets KPIs for the next performance period. Information from the reviewprocess is then taken into account, along with such factors as increases in the cost of living and market parity, indetermining the individual’s remuneration for the next financial year. Apart from this annual review process, theManaging Director may also approve remuneration increases based upon changes in individual roles whichincrease an individual’s level of responsibility, or recognise an increased level of skill necessary to perform a role.
The Company’s short-term incentive program comprises a bonus that may be payable depending on:
personal performance against KPIs; and
Company performance against milestones agreed with the Board.
The short-term incentive program is part of the remuneration package for most employees who have worked withthe Company for more than 12 months, including executives.
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Personal KPIs and Company milestones relate to the Company’s internal objectives, such as:
technology achievements;
product development;
manufacturing scale up;
sales revenue goals.
At this stage of the Company’s development, personal KPIs do not relate to the earnings or dividends of theCompany and there is no direct link between cash remuneration and the share price performance of the Company(or any other company).
The short-term incentive bonus has in the past been paid as cash although it usually comprises equity issued underthe Equity Plan. Under the Equity Plan the Board has discretion to offer staff shares, performance rights or optionsin the Company.
The Company’s long-term incentive program comprises offers of equity under the Company’s Equity Plan. Like theshort-term incentive, the level of long-term incentive depends on personal performance against KPIs and Companyperformance against milestones. The long-term incentive is also generally made available to most employees whohave worked with the Company for more than 12 months, including to all executives.
Over the past few years the Board has increased the amount of equity offered to staff, in particular to seniormanagers, in order to attract and retain quality staff, align employee incentives with shareholders’ interests (bygiving staff a higher ownership stake in the Company) and to give key staff significant incentives to achieve theCompany’s goals. The Board intends to continue to take this approach in coming years, subject to the Companycontinuing to achieve its commercialisation milestones.
The specific details of any staff equity offers are set by the Board within the rules of the Equity Plan previouslyapproved by shareholders. All such equity consequently issued is disclosed to the market.
The remuneration of the Managing Director comprises an annual salary package plus an annual equity incentive,depending on personal and Company performance against agreed KPIs. The annual offer of equity is made in lieuof a cash bonus.
Each year the Board reviews the performance of the Company and the Managing Director against previouslyagreed KPIs. The results of this review feed into the annual performance and remuneration review of all staff. TheBoard also approves offers of equity to staff, including the Managing Director, and determines the remuneration ofdirectors.
Since 2009, Australian staff members have been offered ordinary shares, while employees based in Europe aretypically offered share options. Half of any shares issued to staff are escrowed for two years, meaning that if thestaff member leaves the Company within that time they forfeit the remaining shares (subject to Board discretionwhere for example the employee leaves because of redundancy, retirement, ill health etc, or if the business is sold).Options issued to staff have a one year waiting period before they can be exercised. The number of shares andoptions issued to staff is disclosed to the market as soon as they are issued.
B Remuneration details
Details of the remuneration of the directors and the key management personnel of the Group (as defined in AASB 124Related Party Disclosures) are set out in the following tables. The key management personnel of the Group are thedirectors of Ceramic Fuel Cells Limited (see pages 25 to 28 above) and those executives who report directly to theManaging Director:
Mr Frank Boyd Group General Manager – ERP Systems
Dr Karl Föger Chief Technology Officer
Mr Peter McDonell General Manager Human Resources
Mr Andrew Neilson Group General Manager - Commercial (and Company Secretary)
Mr Frank Obernitz Managing Director, Ceramic Fuel Cells B.V.
Mr John Rajoo Chief Operations Officer
Mr Trent Rowe Group General Manager - Product & Marketing
Mr Nevill (Tony) Sherburn Chief Financial Officer
Mr Paddy Thompson General Manager – Business DevelopmentFor
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Key management personnel of the Group
2012 Short-term benefits Post-employment
benefits
Share-based payment Long-termbenefits
Name Cash salary& fees
$
Non-monetarybenefits
$
Super-annuation
$
Options 1
$
Shares 1
$
Long serviceleave 2
$
Total
$
DirectorsManaging DirectorB L Dow 536,952 - 25,000 - 213,886 63,105 838,943Non-Executive DirectorsJ Harding (Chairman) 68,270 - 44,000 - - - 112,270R R Rose (Deputy Chairman) 21,940 - 50,000 - - - 71,940P N Binks 66,000 - 5,940 - - - 71,940J P Dempsey 47,413 - 12,900 - - - 60,313R Dudenhausen 72,167 - - - - - 72,167J Hoey 60,667 - 5,460 - - - 66,127R J Kennett 75,034 - - - - - 75,034
Sub-total Directors 948,443 - 143,300 - 213,886 63,105 1,368,734
Other key managementpersonnelF R Boyd 257,137 - 50,000 - 65,548 - 372,685F Obernitz 228,930 31,287 3,550 53,693 11,180 - 328,640K Föger 173,022 22,525 50,000 - 65,911 12,564 324,022J C Rajoo 178,783 - 48,189 - 60,570 27,194 314,736N A Sherburn 191,878 33,473 15,775 - 59,433 7,093 307,652A D Neilson 194,882 - 15,775 - 67,145 25,444 303,246T M Rowe 181,797 - 15,775 - 57,830 - 255,402P A Thompson 168,000 - 13,836 29,474 - - 211,310P R McDonell 93,502 - 47,369 - 38,010 16,057 194,938
Sub-total Other keymanagement personnel
1,667,931 87,285 260,269 83,167 425,627 88,352 2,612,631
Total 2,616,374 87,285 403,569 83,167 639,513 151,457 3,981,365
1. The options and shares amounts represent variable components of remuneration.2. Long service leave is an entitlement of Australian employees which accrues at the rate of one week for every 60 weeks of
full-time employment with one employer. An employee becomes legally entitled to long service leave after 7 yearscontinuous service. The amount of long service leave disclosed is the movement, for the reporting period, in the longservice leave entitlement of each employee, once they become unconditionally entitled. It does not represent long serviceleave taken (which would be disclosed within Short-term benefits: Cash salary & fees) nor does it represent long serviceleave paid out which, for the Company’s Australian employees, can only occur on termination of employment (and whichwould, likewise, be disclosed within Short-term benefits: Cash salary & fees).
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Key management personnel of the Group
2011 Short-term benefits Post-employment
benefits
Share-based payment Long-term
benefits
Name Cash salary& fees
$
Non-monetarybenefits
$
Super-annuation
$
Options 1
$
Shares 1
$
Longserviceleave 2
$
Total
$
DirectorsManaging DirectorB L Dow 521,874 - 25,000 - 147,329 - 694,203Non-Executive DirectorsJ Harding (Chairman) 25,750 - 79,760 - - - 105,510R R Rose (Deputy Chairman) 44,220 - 24,450 - - - 68,670P N Binks 63,000 - 5,670 - - - 68,670J P Dempsey 55,770 - 12,900 - - - 68,670R Dudenhausen (7/5/2011 –30/6/2011)
12,472 - - - - - 12,472
R J Kennett 72,471 - - - - - 72,471
Sub-total Directors 795,557 - 147,780 - 147,329 - 1,090,666
Other key managementpersonnelF R Boyd 215,412 - 93,521 - 52,132 - 361,065F Obernitz 197,172 18,671 9,064 46,786 12,909 - 284,602K Föger 140,802 34,476 50,000 - 44,265 3,801 273,344A D Neilson 184,556 - 15,199 - 68,200 - 267,955N A Sherburn 202,718 699 15,199 - 43,985 2,251 264,852J C Rajoo 192,571 - 15,199 - 53,738 - 261,508T M Rowe 175,574 - 15,199 - 50,697 - 241,470P A Thompson 165,753 - 13,570 46,786 - - 226,109P R McDonell 84,198 - 49,207 - 24,258 - 157,663
Sub-total Other keymanagement personnel
1,558,756 53,846 276,158 93,572 350,184 6,052 2,338,568
Total 2,354,313 53,846 423,938 93,572 497,513 6,052 3,429,234
1. The options and shares amounts represent variable components of remuneration.
The relative proportions of remuneration that were linked to performance, and those that were fixed, were as follows forthe year ended 30 June 2012:
At risk remunerationName Fixedremuneration Shares Options Total
DirectorsB L Dow (Managing Director) 74.5% 25.5% - 25.5%Non-Executive DirectorsJ Harding (Chairman) 100.0% - - -R R Rose (Deputy Chairman) 100.0% - - -P N Binks 100.0% - - -J P Dempsey 100.0% - - -R Dudenhausen 100.0% - - -J Hoey 100.0% - - -R J Kennett 100.0% - - -Other key management personnelF R Boyd 82.4% 17.6% - 17.6%F Obernitz 80.3% 3.4% 16.3% 19.7%K Föger 79.7% 20.3% - 20.3%J C Rajoo 80.8% 19.2% - 19.2%N A Sherburn 80.7% 19.3% - 19.3%A D Neilson 77.9% 22.1% - 22.1%T M Rowe 77.4% 22.6% - 22.6%P A Thompson 86.1% - 13.9% 13.9%P R McDonell 80.5% 19.5% - 19.5%
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C Service agreements
Remuneration and other terms of employment for the Managing Director and other key management personnelare formalised in written agreements, the major remuneration provisions of which are set out below (as at 30 June2012):
B L Dow, Managing Director
Employment contract: ongoing position
Annual Total Salary Package (TSP): $553,850 reviewable annually (next review in subsequent reporting period).
Incentive Plan: Issue of equity (share options, shares or performance rights) under the CFCL Directors andEmployee Benefits Plan. The type and quantity of equity to be offered will be determined by the Board basedon performance against agreed key performance indicators, and within the terms approved by shareholders.
Executive’s (and Company’s) notice period: 6 months.
Other key management personnel
All employment contracts with key management personnel may be terminated early as follows: by the executive -by the giving of the required period of notice; by the company - by the giving of notice or by payment in lieu ofnotice or by part payment and part notice. Other than statutory entitlements and payments in lieu of notice, notermination payments apply.
F R Boyd, Group General Manager – ERP Systems Employment contract: Fixed term contract ending 26 August 2012 (since extended to 26 August 2013)
TSP of $299,890 p.a. reviewable annually (next review in subsequent reporting period).
Executive’s (and Company’s) notice period: 3 months.
K Föger, Chief Technology Officer Employment contract: ongoing position
TSP of $236,095 p.a. reviewable annually (next review in subsequent reporting period).
Executive’s (and Company’s) notice period: 3 months.
P R McDonell, General Manager Human Resources Employment contract: ongoing position
TSP of $140,353 p.a. reviewable annually (next review in subsequent reporting period).
Executive’s (and Company’s) notice period: 1 month.
A D Neilson, Group General Manager - Commercial (& Company Secretary) Employment contract: ongoing position
TSP of $208,000 p.a. reviewable annually (next review in subsequent reporting period)
Executive’s (and Company’s) notice period: 1 month
F Obernitz, General Manager – Business Development Employment contract: ongoing position
Base salary of €180,000 p.a. reviewable annually (next review in subsequent reporting period)
Performance-based equity component of up to €65,000 gross p.a.
Motor vehicle lease cost of up to €9,900 p.a. plus running expenses
Executive’s (and Company’s) notice period: 3 months.
J C Rajoo, Chief Operations Officer Employment contract: ongoing position
TSP of $219,733 p.a. reviewable annually (next review in subsequent reporting period)
Executive’s (and Company’s) notice period: 1 month
T M Rowe, Group General Manager - Product & Marketing Employment contract: ongoing position
TSP of $194,306 p.a. reviewable annually (next review in subsequent reporting period)
Executive’s (and Company’s) notice period: 1 month
N A Sherburn, Chief Financial Officer Employment contract: ongoing position
Annual TSP of $232,541 reviewable annually (next review in subsequent reporting period)
Executive’s (and Company’s) notice period: 3 months
P A Thompson, General Manager – Business Development Employment contract: ongoing position
Base salary of £100,152 p.a. reviewable annually (next review in subsequent reporting period)
Performance-based equity component of up to £18,000 gross p.a.
Car allowance of £7,500 p.a.
Medical insurance premium allowance of £1,800 p.a.
Executive’s (and Company’s) notice period: 3 months
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D Share-based compensation
Options
Options over shares in Ceramic Fuel Cells Limited have been granted under the CFCL Share Option Plan (approvedby shareholders on 26 November 1999) and under the Directors and Employee Benefits Plan (approved byshareholders on 28 November 2006). Under each plan, all full time and part time permanent employees, includingdirectors but excluding casual and short-term contract employees, may be offered options on terms agreed by theBoard. Any offer of options to directors requires shareholder approval.
During the year ended 30 June 2012, options were only granted to non-Australian resident key managementpersonnel.The terms of each grant of options affecting remuneration in the current or a future reporting period are as follows:
Grant date Date vested and potentially exercisable Expiry date Exercise priceat grant date
Value peroption at
grant date
% Vested
1 Oct 2010The options vested and becomeexercisable on 1 Oct 20111 30 Sep 2020 $0.1825 $0.11 100
28 Sep 2011The options are expected to vest andbecome exercisable on 28 Sep 2012 1 27 Sep 2021 $0.15 $0.07 n/a
1. There were no vesting conditions other than a 12 month waiting period.
Options granted under the plan carry no dividend, nor voting, rights. When exercisable, each option is convertibleinto one ordinary share of Ceramic Fuel Cells Limited. The exercise price of options is currently based upon thevolume weighted average closing price (VWAP) at which the company’s shares are traded upon the AustralianSecurities Exchange (ASX) during the week immediately prior to the date of grant.
Details of options over ordinary shares in the company provided as remuneration to directors and other keymanagement personnel of the Group are set out below. Further information on options is set out in Note 30 to theFinancial Statements.
Name Number ofoptionsgranted
during theyear
Value ofoptions at
grant date 1
Number ofoptionsvested
during theyear
Number ofoptionslapsed
during theyear
Value atlapse date 2
Other key management personnelF Obernitz 725,670 $50,797 - - -P A Thompson 264,370 $18,506 - - -
1. The value at grant date is calculated in accordance with AASB 2 Share-based Payment.
2. The value at lapse date of options which were granted as part of remuneration and which lapsed during the yearbecause the exercise period expired.
The assessed fair value at grant date of options granted to the individuals is allocated equally over the period fromgrant date to vesting date, and the amount is included in the remuneration tables above.
Fair values at grant date are determined using a trinomial lattice option pricing model that takes into account theexercise price, the term of the option, the share price at grant date, an expected price volatility range of theunderlying share, any share market-based performance conditions applying to the exercise of the option, therestrictions on exercise applied by the Group’s Securities Trading Policy, an allowance for expected early exercise,the expected dividend yield and the risk-free rate for the term of the option.
Details of remuneration: options
For each grant of options included in the remuneration tables in section B, and in the options tables in section D,the percentage of the available grants which vested in the financial year ended 30 June 2012 and the percentagethat was forfeited because the person did not fully meet the relevant service or performance criteria is set outbelow.
Refer above for options vesting details. No options will vest if the vesting conditions are not satisfied, hence theminimum value of the options yet to vest is nil. The maximum value of the options yet to vest has beendetermined as the amount of the grant date fair value of the options which is yet to be expensed.F
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OptionsName
Financialyear
granted
Vestedduring
financialyear
ended30/6/2012
%
Potentialoptions
foregoneduring year
%
Financialyears inwhich
options mayvest
Minimum totalvalue of grant
yet to vestat 30/6/2012
$
Maximum total valueof grant yet to vest
at 30/6/2012
$
F Obernitz 20112012
100-
--
n/a2013
n/a-
n/a12,699
P A Thompson 20112012
100-
--
n/a2013
n/a-
n/a4,627
Share-based compensation: options
Further details relating to options granted to each director of Ceramic Fuel Cells Limited and the five company andgroup executives who received the highest remuneration for the year ended 30 June 2012, are set out below:
Name ARemunerationconsisting of
options
BValue at grant
date
CValue at
exercise date
DValue at lapse
date
Other key management personnel
F Obernitz 16.3% $50,797 - -
A = The percentage of the value of remuneration consisting of options, based on the value of options expensedduring the current year
B = The value at grant date (calculated in accordance with AASB 2 Share-Based Payment) of options granted duringthe year as part of remuneration, which had not lapsed and which remained unexercised as at the end of theyear
C = The value at exercise date of options that were granted as part of remuneration and which were exercisedduring the year, being the intrinsic value of the options at that date
D = The value at lapse date of options that were granted as part of remuneration and which lapsed during the yearbecause a vesting condition was not satisfied. The value is determined at the time of lapsing, but assuming thecondition was satisfied.
E Additional information
Performance of Ceramic Fuel Cells Limited
The options granted on 12 October 2005 with an exercise price of $0.58 had a 3 year vesting period and, thereafter,may only be exercised if certain share market-based performance conditions are met, as follows:
Compound share price growth perannum from grant date
Percentage of optionsthat are exercisable
Less than 15% p.a. Nil
15% p.a. 50%
20% p.a. 75%
25% p.a. 100%
The compound share price growth targets equate to the following share prices as at 30 June 2012:
Compound share price growth perannum from grant date
Share price target
15% p.a. $1.589
20% p.a. $2.223
25% p.a. $3.111
On 30 June 2012 Ceramic Fuel Cells Limited’s ordinary shares closed at $0.08 on the Australian Securities Exchange,accordingly none of these options have become exercisable.
LOANS TO DIRECTORS AND EXECUTIVES
No loans were made to directors or to executives during the financial year and to the date of this report.
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SHARES UNDER OPTIONUnissued ordinary shares of Ceramic Fuel Cells Limited under option as at the date of this report are as follows:
Grant date Expiry date Issue price ofshares
Number ofshares under
option
6 May 2004 5 May 2014 $2.00 170,0001 Sep 2004 31 Aug 2014 $0.76 30,00012 Oct 2005 11 Oct 2015 $0.57 335,50024 Aug 2006 23 Aug 2016 $0.58 549,60029 Aug 2007 28 Aug 2017 $0.99 100,00029 Aug 2007 28 Aug 2017 $1.01 3,053,7104 Dec 2007 3 Dec 2017 $0.685 285,00028 Mar 2008 27 Mar 2018 $0.45 1,735,40028 Aug 2008 27 Aug 2018 $0.102 285,00028 Aug 2008 27 Aug 2018 $0.44 2,899,1805 Dec 2008 5 Dec 2018 $0.44 1,000,0005 Dec 2008 5 Dec 2018 $0.45 200,00026 Jun 2009 25 Jun 2019 $0.175 3,937,96026 Jun 2009 25 Jun 2019 $0.175 675,0001 Oct 2010 30 Sep 2020 $0.1825 1,478,90028 Sep 2011 27 Sep 2021 $0.15 2,326,540
19,061,790
No option holder has any right under the terms of the issuance of their options to participate in any other shareissue of the company or of any other entity.
SHARES ISSUED ON THE EXERCISE OF OPTIONS
No options over shares were exercised during the year ended 30 June 2012 and from 1 July 2012 to the date of thisreport.
INSURANCE OF OFFICERS AND INDEMNIFICATION OF AUDITOR
During the year ended 30 June 2012, Ceramic Fuel Cells Limited paid a premium of $50,982 (2011 - $52,875) toinsure the directors and secretary of the company and its subsidiaries, plus the key management personnel andofficers of the Group.
The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may bebrought against the officers in their capacity as officers of entities in the consolidated entity, and any otherpayments arising from liabilities incurred by the officers in connection with such proceedings, other than wheresuch liabilities arise out of:
conduct involving a wilful breach of duty in relation to the company, or
improper use of position or information to gain advantage for self or someone else, or
conduct causing detriment to the company.
It is not possible to apportion the premium between amounts relating to the insurance against legal costs andthose relating to other liabilities.
The Auditor is indemnified by the Group against claims from third parties arising from the provision of auditservices except where prohibited by the Corporations Act 2001, or due to negligence, fraudulent conduct,dishonesty or breach of trust by the auditor.
PROCEEDINGS ON BEHALF OF THE COMPANY
No proceedings have been brought or intervened in on behalf of the company with leave of the Court undersection 237 of the Corporations Act 2001.
NON-AUDIT SERVICES
The company may decide to employ the auditor on assignments additional to their statutory audit duties where theauditor’s expertise and experience with the company and/or the Group is important.
Details of the amounts paid or payable to the auditor (PricewaterhouseCoopers) for audit and non-audit servicesprovided during the year are set out below.
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The board of directors has considered the position and, in accordance with the advice received from the auditcommittee, is satisfied that the provision of the non-audit services is compatible with the general standard ofindependence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of theCorporations Act 2001 for the following reasons:
all non-audit services have been reviewed by the audit committee to ensure that they do not impact theimpartiality and objectivity of the auditor; and
none of the services undermine the general principles relating to auditor independence as set out in APES 110Code of Ethics for Professional Accountants.
During the year the following fees were paid or payable for non-audit services provided by the auditor of the parententity and its related practices:
Consolidated2012 2011
$ $
(a) Taxation Services
PricewaterhouseCoopers’ Australian firm
Preparation of company income tax returns 23,000 31,000Other tax compliance and tax planning services 116,671 188,261
Related practices of PricewaterhouseCoopers’ Australian firm 21,805 23,779
Total Fees for Taxation Services 161,476 243,040(b) Other Assurance Services
PricewaterhouseCoopers’ Australian firm - -
Related practices of PricewaterhouseCoopers’ Australian firm - 6,901
Total Fees for Other Assurance Services - 6,901
Total Fees for Non-Audit Services 161,476 249,941
AUDITOR’S INDEPENDENCE DECLARATIONA copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is setout on page 38.
AUDITOR
PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act 2001.
This report is made in accordance with a resolution of the directors.
Jeff HardingChairman
Melbourne21 September 2012F
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PricewaterhouseCoopers, ABN 52 780 433 757 Freshwater Place, 2 Southbank Boulevard, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001 T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation.
Auditor’s Independence Declaration
As lead auditor for the audit of Ceramic Fuel Cells Limited for the year ended 30 June 2012, I declare that to the best of my knowledge and belief, there have been:
a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and
b) no contraventions of any applicable code of professional conduct in relation to the audit.
This declaration is in respect of Ceramic Fuel Cells Limited and the entities it controlled during the period.
Michael Shewan Melbourne Partner 21 September 2012 PricewaterhouseCoopers
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Corporate Governance Statement
Corporate Governance
As an Australian listed company, Ceramic Fuel Cells Limited is required to have regard to the ASX CorporateGovernance Council’s Principles of Good Corporate Governance and Best Practice Recommendations (ASXRecommendations, available on www.asx.com.au).
The Directors are also mindful of the corporate governance requirements imposed on AIM quoted companies andthe expectations of European investors, including the recommendations of the UK Combined Code on CorporateGovernance.
The Company intends to comply with both sets of recommendations to the maximum extent practicable,considering the Company's resources, stage of development and current priorities.
ASX Recommendations
The ASX Recommendations were first published in 2003. The most recent version came into force on 1 January2011. The ASX Recommendations are guidelines rather than prescriptions. The essence of the Recommendationsis an “if not, why not” approach: that is, a company is free to depart from the Recommendations provided itdiscloses and explains the approach it has taken. The table below sets out the Company’s compliance with the ASXRecommendations:
ASX Principles and Recommendations Compliance
Principle 1 – Lay solid foundations for management and oversight
Companies should establish and disclose the respective roles and responsibilities of board and management.
Recommendation 1.1:
Companies should establish the functions reserved to theboard and those delegated to senior executives anddisclose those functions.
Complies.
CFCL has a written Board Charter and CommitteeCharters which set out these matters.
Box 1.1
Content of a director’s letter upon appointment
Complies.
CFCL considers these matters when drafting directors’engagement letters.
Recommendation 1.2:
Companies should disclose the process for evaluating theperformance of senior executives.
Complies.
CFCL regularly reviews the performance of seniorexecutives. The Board (and/or the Remuneration &Nomination Committee) formally reviews theperformance of the Managing Director against agreedmilestones at least annually, usually at the end of thefinancial year. The Managing Director formally reviewsthe performance of senior executives against agreed KPIstwice a year, usually after each financial half year.
Recommendation 1.3:
Companies should provide the information indicated inthe Guide to reporting on Principle 1.
Complies.
Principle 2 – Structure the board to add value
Companies should have a board of an effective composition, size and commitment to adequately discharge itsresponsibilities and duties.
Recommendation 2.1:
A majority of the board should be independent directors.
Complies.
All Directors apart from the Managing Director are‘independent’ directors according to the ASX guidelines.
Box 2.1:
Relationships affecting independent status.
Complies.
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ASX Principles and Recommendations Compliance
Recommendation 2.2:
The chair should be an independent director.
Complies.
Recommendation 2.3:
The roles of chair and chief executive officer should not beexercised by the same individual.
Complies.
Recommendation 2.4:
The board should establish a nomination committee.
Complies. The Board has established a Remuneration &Nomination Committee.
Recommendation 2.5:
Companies should disclose the process for evaluating theperformance of the board, its committees and individualdirectors.
Partially complies. The Directors evaluate theperformance of the Board, its committees and individualdirectors, generally annually. This process is led by theChairman and may be formal or informal. In 2012 theBoard conducted an internal review, including eachDirector completing a questionnaire on Board and AuditCommittee performance and areas for improvement.
Recommendation 2.6:
Companies should provide the information indicated inthe Guide to reporting on Principle 2.
Complies.
Information about the Directors is set out in the Directors’Report. The Company also maintains a CorporateGovernance section on its website, www.cfcl.com.au.
Principle 3 – Promote ethical and responsible decision-making
Companies should actively promote ethical and responsible decision-making.
Recommendation 3.1:
Companies should establish a code of conduct anddisclose the code or a summary of the code as to:
the practices necessary to maintain confidence in thecompany’s integrity
the practices necessary to take into account theirlegal obligations and the reasonable expectations oftheir stakeholders
the responsibility and accountability of individualsfor reporting and investigating reports of unethicalpractices.
Complies.
The Company has a written Code of Conduct, designedto maintain confidence in the integrity of the Companyand its subsidiaries. The Code expresses certain basicprinciples that CFCL, its employees, contractors andexternal consultants should follow in all dealings relatedto the Company. The Code is given to new employeesand directors as part of their induction into the Company.
Box 3.1:
Suggestions for the content of a code of conduct
Complies.The Company’s Code of Conduct includes principlesrelating to:
Compliance with the law, particularly laws relatingto competition and consumer protection, insidertrading and privacy
Occupational health & safety policy
Equality in employment
Confidentiality
Conflict of interests
Procedures for reporting any breaches of the Code.
Recommendation 3.2
Companies should establish a policy concerning diversityand disclose the policy or a summary of that policy. Thepolicy should include requirements for the board toestablish measurable objectives for achieving genderdiversity and for the board to assess annually both theobjectives and progress in achieving them.
While the Company provides a workplace that is open togender diversity, the Company currently does not have aformal policy or specific objectives for gender diversity.The Board recognises the benefits of a diverse workforceand is considering how the Company can best achievethese benefits at its current stage of development.
Recommendation 3.3
Companies should disclose in each annual report themeasurable objectives for achieving gender diversity setby the board in accordance with the diversity policy andprogress towards achieving them.
The Company does not currently have measurableobjectives for achieving gender diversity – see above.
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ASX Principles and Recommendations Compliance
Recommendation 3.4
Companies should disclose in each annual report theproportion of women employees in the wholeorganisation, women in senior executive positions andwomen on the board.
As at 3 September 2012 there are 34 women employeesin the CFCL group. Currently there are no women insenior executive positions. The Company has one femaleDirector, Ms Janine Hoey.
Recommendation 3.5:
Companies should provide the information indicated inthe Guide to reporting on Principle 3.
Complies (apart from the new Recommendations 3.2 and3.3).
Principle 4 – Safeguard integrity in financial reporting
Companies should have a structure to independently verify and safeguard the integrity of their financialreporting.
Recommendation 4.1:
The board should establish an audit committee.
Complies.
Recommendation 4.2:
The audit committee should be structured so that it:
• consists only of non-executive directors
• consists of a majority of independent directors
• is chaired by an independent chair, who is not chair ofthe board
• has at least three members.
Complies.
The Board has an audit committee comprising Ms Hoey(Chair), Mr Dempsey, Mr Harding and Mr Rose. Each ofthese directors is an independent non-executive director.
Recommendation 4.3:
The audit committee should have a formal charter.
Complies.
Recommendation 4.4:
Companies should provide the information indicated inthe Guide to reporting on Principle 4.
Complies.
Details of the qualifications of the audit committeemembers, and meetings of the committee, are set out inthe Directors’ Report.
Principle 5 – Make timely and balanced disclosure
Companies should promote timely and balanced disclosure of all material matters concerning the company.
Recommendation 5.1:
Companies should establish written policies designed toensure compliance with ASX Listing Rule disclosurerequirements and to ensure accountability at a seniorexecutive level for that compliance and disclose thosepolicies or a summary of those policies.
Complies.
The Company has a Continuous Disclosure Policy.
Box 5.1:
Continuous disclosure policies
Complies.
Recommendation 5.2:
Companies should provide the information indicated inthe Guide to reporting on Principle 5.
Complies.
A summary of the Company’s Continuous DisclosurePolicy is provided in the Corporate Governance section ofwww.cfcl.com.au.
Principle 6 – Respect the rights of shareholders
Companies should respect the rights of shareholders and facilitate the effective exercise of those rights.
Recommendation 6.1:
Companies should design a communications policy forpromoting effective communication with shareholdersand encouraging their participation at general meetingsand disclose their policy or a summary of that policy.
The Company has a strategy for promoting effectivecommunications with shareholders, brokers, media andother stakeholders. The Company has not disclosed aformal communications policy.
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ASX Principles and Recommendations Compliance
Box 6.1:
Using electronic communications effectively
Complies.As a dual-listed company, with shareholders across theworld, the Company uses several electroniccommunications tools to communicate withshareholders:
Shareholders can receive all announcements andother correspondence by email, through theCompany’s website and also throughComputershare’s e-Tree service;
The Company’s website includes all announcementssince the Company listed on ASX in 2004, otherCompany presentations, and the full text of AGMnotices and explanatory material;
The Company provides webcasts, podcasts andvideos through the Boardroomradio servicewww.brr.com.au/cfu.
Recommendation 6.2:
Companies should provide the information indicated inthe Guide to reporting on Principle 6.
Complies.
Principle 7 – Recognise and manage risk
Companies should establish a sound system of risk oversight and management and internal control.
Recommendation 7.1:
Companies should establish policies for the oversight andmanagement of material business risks and disclose asummary of those policies.
Complies.
The Directors’ Report section of each Annual Reportincludes an overview of the Company’s material businessrisks.
Recommendation 7.2:
The board should require management to design andimplement the risk management and internal controlsystem to manage the company’s material business risksand report to it on whether those risks are being managedeffectively. The board should disclose that managementhas reported to it as to the effectiveness of the company’smanagement of its material business risks.
Complies.
Management reports material business risks to the Board,including regular reports to the Board Technicalcommittee on technical risks, and to the Board Auditcommittee on non-technical risks. This is an area ofongoing focus and improvement.
Recommendation 7.3:
The board should disclose whether it has receivedassurance from the chief executive officer (or equivalent)and the chief financial officer (or equivalent) that thedeclaration provided in accordance with section 295A ofthe Corporations Act is founded on a sound system of riskmanagement and internal control and that the system isoperating effectively in all material respects in relation tofinancial reporting risks.
Complies.
This disclosure is contained in the Directors’ Report.
Recommendation 7.4:
Companies should provide the information indicated inthe Guide to reporting on Principle 7.
Complies.
Principle 8 – Remunerate fairly and responsibly
Companies should ensure that the level and composition of remuneration is sufficient and reasonable and thatits relationship to performance is clear.
Recommendation 8.1:
The board should establish a remuneration committee.
Complies. The Board has established a Remuneration &Nomination Committee.
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ASX Principles and Recommendations Compliance
Recommendation 8.2 (from 1 January 2011)
The remuneration committee should be structured so thatit:
consists of a majority of independent directors
is chaired by an independent director
has at least three members
Complies.
The Remuneration & Nomination Committee comprisesMr Rose (Chair), Mr Harding, Mr Dempsey and Dr Binks –all independent non-executive directors.
Recommendation 8.3:
Companies should clearly distinguish the structure of non-executive directors’ remuneration from that of executivedirectors and senior executives.
Complies.
Box 8.1:
Guidelines for executive remuneration packages
Complies.
Box 8.2:
Guidelines for non-executive director remuneration
Complies.
The Company’s non-executive directors are remuneratedby way of fees. There are no retirement benefits otherthan superannuation.
Recommendation 8.4:
Companies should provide the information indicated inthe Guide to reporting on Principle 8.
Complies.
Further details of the Remuneration & Nominationcommittee are set out in the Directors’ Report.
Board of Directors
The Board consists of a Chairman, Deputy Chairman, Managing Director and five other non-executive directors. TheBoard has ultimate responsibility to the shareholders for the welfare of the Company by guiding and monitoringthe Company’s business affairs. The Board delegates management of the Company's resources to the executivemanagement team, under the leadership of the Managing Director. The responsibilities of the Board and the rolesand division of authority between the Chairman and Managing Director are set down in a Board Charter.
Under the Company's constitution, directors are elected for three years subject to the requirement that one-third ofthe directors (excluding a Managing Director) must retire at each annual general meeting. A retiring director maystand for re-election.
A director must declare any conflict of interest, and directors may not participate in discussions or resolutionspertaining to any matter in which the director has a material personal interest without Board approval. Indischarging their duties, directors are provided with direct access to senior management and outside advisors andauditors. Board committees and individual directors may seek, with the Chairman's approval, independentprofessional advice at the Company's expense in order to perform their duties.
The Company's practise is to execute a formal deed with each director and the Company Secretary regarding accessto Board papers, indemnity and insurance.
The Board meets monthly, with additional meetings when required. The details of directors’ attendance at Boardmeetings during the year are shown in the Directors’ Report.
Board Committees
The Board has established three standing committees. Each of these Committees has adopted a written charter.
Audit Committee
The Audit Committee comprises Ms Hoey (Chair), Mr Dempsey, Mr Harding and Mr Rose. The Audit Committeerecommends to the Board the appointment of the external auditors, reviews and monitors compliance with theaudit plan, reviews the Company's financial reports, monitors the effectiveness of the accounting systems, theinternal control environment, and the risk management and compliance system, and provides a clear line ofcommunication between the external auditors and the Board. The Audit Committee regularly reviews theevaluation and testing of the Company’s internal control environments undertaken by the Company’s financial staff.
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Technical Committee
The Technical Committee comprises Dr Binks (Chair), Mr Rose, Mr Harding and Mr Dow, with the Chief TechnicalOfficer and other senior managers attending by invitation. All Directors are entitled to attend all meetings of theTechnical Committee. The Technical Committee overviews the Company's product and technology developmentprogrammes and advises the Board upon those matters, including technology risks.
Remuneration and Nomination Committee
The Remuneration and Nomination Committee comprises Mr Rose (Chair), Mr Harding, Mr Dempsey and DrBinks. The Committee reviews the remuneration of directors and senior management and the Company'srecruitment, retention and termination policies for senior management. The Committee also monitors Boardcomposition, Board and senior management succession planning, and reviews the performance of the ManagingDirector.
Directors’ Independence
All directors other than Managing Director Mr Dow are independent non-executive directors.
Company Policies
The Company has adopted a range of policies and procedures to follow appropriate standards of corporategovernance, including:
A Code of Conduct which requires all directors and employees to observe high standards of ethics andbehaviour in the Company’s activities.
Continuous disclosure policies, to keep the ASX and AIM markets informed of material price sensitiveinformation.
A Securities Trading policy, to govern when directors and employees may trade in the Company’s shares.The Board has adopted a formal Charter, including a Directors’ code of conduct, modelled on the AustralianInstitute of Company Directors Code of Conduct. The Charter sets out the responsibilities of the Board and theroles and division of authority between the Chairman and Managing Director.
Communication with Shareholders
The Board aims to ensure that the shareholders are informed of all major developments affecting the Company’sperformance. The Company promotes effective communications to keep shareholders regularly informed aboutthe Company.
Information is communicated to shareholders through the Company’s annual report, annual general meeting, half-yearly results, quarterly cashflow statements and trading updates, email alerts, market announcements and website,www.cfcl.com.au. CFCL also holds ad hoc ‘Open Days’ for shareholders to meet senior staff and to tour theCompany’s facilities. The Company also provides a facility on its website for shareholders to subscribe to receiveCompany announcements and shareholder communications by email. The Company also provides webcaststhrough the Boardroomradio service. Details of the Company's Corporate Governance practices are also publishedon www.cfcl.com.au.
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Financial Report
For the year ended 30 June 2012
Contents
Page
Financial report
Consolidated statement of comprehensive income 46
Consolidated balance sheet 47
Consolidated statement of changes in equity 48
Consolidated statement of cash flows 49
Notes to the consolidated financial statements 51
Directors’ declaration 82
Independent auditor’s report to the members 83
This financial report is the consolidated financial report of the consolidated entity consisting of Ceramic FuelCells Limited and its subsidiaries. The financial report is presented in the Australian currency.
Ceramic Fuel Cells Limited is a public company limited by shares, incorporated and domiciled in Australia,listed on both the Australian Securities Exchange and on the AIM Market of the London Stock Exchange. Itsregistered office and principal place of business is at 170 Browns Road, Noble Park, Victoria 3174, Australia.
A description of the nature of the consolidated entity’s operations and its principal activities is included inthe review of operations and activities on pages 6 to 22 and in the directors’ report on page 23, both ofwhich are not part of this financial report.
The financial report was authorised for issue by the directors on 21 September 2012. The directors have thepower to amend and to reissue the financial report.
A copy of this financial report may be obtained from Ceramic Fuel Cells Limited’s website: www.cfcl.com.au
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Consolidated Statement of Comprehensive Income
For the year ended 30 June 2012
Note 2012 2011
$ $
Revenue from continuing operations 5 6,717,104 3,680,972Cost of sales, service & warranty 7 (7,590,570)
Gross profit/(loss) (873,466)
Other income 6 568,678 4,395,876
Research & Product Development 1(e) (11,539,261) (15,126,946)General & Administration 1(e) (13,225,527) (10,281,220)Sales & Marketing 1(e) (2,373,902) (1,640,363)Other gains/(losses) - foreign exchange (88,404) (2,093,891)Impairment reversal/(charge) 7 (2,576,718) -Finance costs (89,123) (110,911)
Loss before income tax (30,197,723) (21,176,483)
Income tax expense - -
Loss for the year entirely attributable to members ofCeramic Fuel Cells Limited 21(b) (30,197,723) (21,176,483)
Other comprehensive income
Exchange differences on translation of foreign operations 21(a) 325,475 (1,297,226)
Other comprehensive income for the year, net of tax 325,475 (1,297,226)
Total comprehensive income/(expense) for the year entirelyattributable to members of Ceramic Fuel Cells Limited (29,872,248) (22,473,709)
Cents CentsEarnings per share for loss attributable to the ordinary
equity holders of the company
Basic and diluted earnings per share 29 (2.33) (1.82)
The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes.
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Consolidated Balance Sheet
As at 30 June 2012
Note 2012 2011
$ $ASSETS
Current Assets
Cash and cash equivalents 9(a) 6,621,759 15,852,905Cash equivalents (restricted) 9(b) 2,224,419 3,204,104Trade and other receivables 10 2,795,774 1,291,287Inventories 11 9,328,366 5,131,081Other 12 514,856 811,893
Total Current Assets 21,485,174 26,291,270
Non-Current Assets
Plant and equipment 13 11,323,758 16,492,827Intangible assets 14 1,000 1,000
Total Non-Current Assets 11,324,758 16,493,827
Total Assets 32,809,932 42,785,097
LIABILITIES
Current Liabilities
Trade and other payables 15 3,364,784 1,840,879Borrowings 18 264,031 271,937Provisions 16 3,390,648 2,535,065Other liabilities 17 2,977,367 2,352,647
Total Current Liabilities 9,996,830 7,000,528
Non-Current Liabilities
Borrowings 18 1,029,750 1,413,812Provisions 19 886,196 835,631
Total Non-Current Liabilities 1,915,946 2,249,443
Total Liabilities 11,912,776 9,249,971
Net Assets 20,897,156 33,535,126
EQUITY
Contributed equity 20(b) 277,282,387 260,275,437Reserves 21(a) 68,950 (483,853)Retained profits/(losses) 21(b) (256,454,181) (226,256,458)
Total Equity 20,897,156 33,535,126
The above consolidated balance sheet should be read in conjunction with the accompanying notes.
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Consolidated Statement of Changes in Equity
For the year ended 30 June 2012
Entirely attributable to owners of Ceramic Fuel Cells Limited
Note Contributedequity
Reserves Retainedearnings
Total equity
$ $ $ $
Balance at 1 July 2010 230,415,020 710,438 (205,079,975) 26,045,483
Profit/(loss) for the year (21,176,483) (21,176,483)Other comprehensive income (1,297,226) (1,297,226)
Total comprehensive income forthe year - (1,297,226) (21,176,483) (22,473,709)
Transactions with owners in theircapacity as ownersContributions of equity, net oftransaction costs 20(b) 28,857,507 - - 28,857,507Employee shares - value ofemployee services 20(b) 1,002,910 - - 1,002,910Employee share options - value ofemployee services 21(a) - 102,935 - 102,935
Balance at 30 June 2011 260,275,437 (483,853) (226,256,458) 33,535,126
Profit/(loss) for the year (30,197,723) (30,197,723)Other comprehensive income 325,475 325,475
Total comprehensive income forthe year - 325,475 (30,197,723) (29,872,248)
Transactions with owners in theircapacity as ownersContributions of equity, net oftransaction costs 20(b) 16,385,145 - - 16,385,145Employee shares - value ofemployee services 20(b) 621,805 - - 621,805Employee share options - value ofemployee services 21(a) - 227,328 - 227,328
Balance at 30 June 2012 277,282,387 68,950 (256,454,181) 20,897,156
The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.
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Consolidated Statement of Cash Flows
For the year ended 30 June 2012
Note 2012 2011
$ $
Cash Flows from Operating Activities
Receipts from customers(inclusive of goods & services tax) 6,835,632 4,530,838Payments to suppliers and employees(inclusive of goods & services tax) (32,442,172) (27,759,750)
(25,606,540) (23,228,912)Grant receipts 736,604 -Other receipts 295,839 4,040,072Interest receipts/(payments) (89,123) (110,788)
Net cash inflow (outflow) from operating activities 28 (24,663,220) (19,299,628)
Cash Flows from Investing Activities
Decrease/(increase) in security deposits(including restricted cash equivalents) 776,917 (836,909)Payments for plant and equipment (1,481,846) (1,296,298)
Net cash inflow (outflow) from investing activities (704,929) (2,133,207)
Cash Flows from Financing Activities
Proceeds from issue of shares 16,988,336 30,217,073Share issue costs (584,691) (1,330,995)Interest receipts 278,027 331,859Repayment of borrowings (248,849) (256,289)
Net cash inflow from financing activities 16,432,823 28,961,648
Net increase (decrease) in cash and cash equivalents (8,935,326) 7,528,813Cash and cash equivalents at the beginning of the financial year 15,852,905 8,895,133Effects of exchange rate changes on cash and cash equivalents (295,820) (571,041)
Cash and cash equivalents at the end of the year 9(a) 6,621,759 15,852,905
The above consolidated statement of cash flows should be read in conjunction with the accompanying notes.
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Notes to the Consolidated Financial Statements30 June 2012
Note Page
Contents
1 Summary of significant accounting policies 51
2 Financial risk management 59
3 Critical accounting estimates and judgements 64
4 Segment information 65
5 Revenue 66
6 Other income 66
7 Expenses 66
8 Income tax expense 67
Current assets
9 Cash and cash equivalents 67
10 Trade and other receivables 67
11 Inventories 68
12 Other 68
Non-current assets
13 Plant and equipment 68
14 Intangible assets 69
Current liabilities
15 Trade and other payables 69
16 Provisions 70
17 Other liabilities 70
18 Borrowings 70
Non-current liabilities
19 Provisions 71
Total equity
20 Contributed equity 71
21 Reserves and retained profits/(losses) 72
22 Key management personnel disclosures 73
23 Remuneration of auditors 75
24 Commitments 76
25 Related party transactions 77
26 Subsidiaries 77
27 Events occurring after the reporting period 7728 Reconciliation of profit/(loss) after income tax to net cash
inflow/(outflow) from operating activities 78
29 Earnings per share 78
30 Share-based payments 79
31 Parent entity financial information 81For
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Notes to the Consolidated Financial Statements30 June 2012
Note 1. Summary of Significant Accounting Policies
The principal accounting policies adopted in the preparation of this consolidated financial report are set out below. Thesepolicies have been consistently applied to all the years presented, unless otherwise stated. The financial report is for theconsolidated entity consisting of Ceramic Fuel Cells Limited and its subsidiaries.
(a) Basis of preparation
This general purpose financial report has been prepared in accordance with Australian Accounting Standards,other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues GroupInterpretations and the Corporations Act 2001.
Compliance with IFRS
The consolidated financial report of the Ceramic Fuel Cells Limited Group also complies with InternationalFinancial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
Historical cost convention
These financial statements have been prepared under the historical cost convention.
Critical accounting estimates
The preparation of financial statements in conformity with IFRS requires the use of certain critical accountingestimates. It also requires management to exercise its judgement in the process of applying the Group’saccounting policies. The areas involving a higher degree of judgement or complexity, or areas whereassumptions and estimates are significant to the financial statements, are disclosed in Note 3.
Going Concern
Over the life of the Group it has incurred substantial operating losses and is yet to become cashflow positive atan operational level. The Directors are mindful of this and continue to closely monitor the level of the Company’scash resources. The Group has commercialised its fuel cell technology into products and has begun to makesales, but it has not yet achieved sales and production levels that allow the Group to generate positive operatingcashflow or profits. These factors represent uncertainty about the ability of the Group to continue as a goingconcern. The Directors have considered these factors and believe it is appropriate to prepare the financialstatements 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 theproduction capacity and reduce the cost per unit.
Management and the Board’s recent focus has been to deliver products and convert these orders into revenueand cashflow. Revenue has increased each year over the last four years. Management and the Board are takingsteps to increase sales more quickly, particularly in Germany, including more aggressive marketing and pricingstrategies. In order to achieve profitable sales growth, the Company continued to work on increasing theproduction 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 tointernally produce the Group’s fuel cells at its pilot plant facility in Melbourne by outsourcing this to an industrialscale ceramics manufacturer, placing higher volume orders and undertaking cost-down engineering work.
Financing strategies
Subsequent to the end of the financial year the Company has successfully concluded several financing activitiesas follows:
a) Share placement
On 11 September 2012 the Company entered into a share subscription agreement with a major supplier tosubscribe for 100,000,000 ordinary shares at a price of 6 cents per share. This subscription would raise A$6.0m(before costs). The full amount of the subscription has been received by the Company. The Company hasallotted and issued 99,500,000 shares on 20 September 2012 and will issue a further 500,000 shares subject toshareholder approval, which will be sought at the forthcoming Annual General Meeting.
b) Australian and New Zealand rights issue
The Company has concluded a rights issue to ASX shareholders registered in Australia and New Zealand. Theoffer was a one for four non-renouncable rights issue of ordinary shares in the Company at an offer price of 6cents per new share. The offer, which was not underwritten, closed on 17 September 2012 and has resulted inthe issue of 69,677,901 ordinary shares and the raising of $4.2m (before costs).
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Notes to the Consolidated Financial Statements30 June 2012
c) UK Issue
In conjunction with the rights issue the Company also undertook an Open Offer to existing United Kingdom andEuropean AIM shareholders to raise up to £1,945,875 at a share price of 4 pence. The offer closed on 17September 2012 and has resulted in the issue of 23,254,556 ordinary shares and the raising of $1.4m (beforecosts).
In addition to these concluded activities, the Company is also pursuing several other funding options tostrengthen its balance sheet and to allow it to continue to implement its sales strategies and to increaseproduction levels.
The continuing viability of the company, its ability to continue as a going concern and meet its debts andcommitments as they fall due is dependent on the successful conclusion of these fund raising activities and theability to achieve profitable sales growth. As such, there is material uncertainty as to whether the Company willcontinue as a going concern and, therefore, whether it will realise its assets and settle its liabilities andcommitments 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 preparedthe 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 theamount at which it is recorded in the financial report at 30 June 2012. Accordingly, no adjustments have beenmade to the financial report relating to the recoverability and classification of the asset carrying amounts or theamounts and classification of liabilities that might be necessary should the Company not continue as a goingconcern.
(b) Principles of consolidation
The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Ceramic FuelCells Limited (“company” or “parent entity”) as at 30 June 2012 and the results of all subsidiaries for the year thenended. Ceramic Fuel Cells Limited and its subsidiaries together are referred to in this financial report as theGroup or the consolidated entity.
Subsidiaries are all those entities over which the Group has the power to govern the financial and operatingpolicies, generally accompanying a shareholding of more than one-half of the voting rights. The existence andeffect of any potential voting rights that are currently exercisable or convertible are considered when assessingwhether the Group controls another entity.
Subsidiaries are fully consolidated from the date on which control is transferred to, or acquired by, the Group.They are de-consolidated from the date that control ceases.
Intercompany transactions, balances and unrealised gains on transactions between Group companies areeliminated.Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the assettransferred. Accounting policies of subsidiaries have been changed, where necessary, to ensure consistencywith the policies adopted by the Group.
(c) Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chiefoperating decision maker, who is responsible for allocating resources to, and assessing the performance of, theoperating segments. The chief operating decision maker is considered to be the Managing Director.
(d) Foreign currency translation
(i) Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of theprimary economic environment in which the entity operates (“the functional currency”). The consolidatedfinancial statements are presented in Australian dollars, which is Ceramic Fuel Cells Limited’s functional andpresentation currency.
(ii) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing atthe dates of the transactions. Foreign exchange gains and losses resulting from the settlement of suchtransactions and from the translation at reporting period-end exchange rates of monetary assets and liabilitiesdenominated in foreign currencies are recognised in profit or loss except when they are deferred in equity asqualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the netinvestment in a foreign operation.
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Notes to the Consolidated Financial Statements30 June 2012
Foreign exchange gains and losses which relate to borrowings are presented in the statement of comprehensiveincome within finance costs. All other foreign exchange gains and losses are presented in the statement ofcomprehensive income on a net basis.
Translation differences on assets and liabilities carried at fair value are reported in the profit or loss as part of thefair value gain or loss.
(iii) Group companies
The results and financial position of all the Group entities (none of which has the currency of a hyper-inflationaryeconomy) that have a functional currency different from the presentation currency are translated into thepresentation currency as follows:
assets and liabilities for each balance sheet presented are translated at the closing rate at the date ofthat balance sheet;
income and expenses for each profit or loss and statement of comprehensive income item aretranslated at average exchange rates (unless this is not a reasonable approximation of the cumulativeeffect of the rates prevailing on the transaction dates, in which case income and expenses aretranslated at the dates of the transactions); and
all resulting exchange differences are recognised in other comprehensive income.
On consolidation, exchange differences arising from the translation of net investments in foreign entities arerecognised in other comprehensive income.
(e) Expenses classification
The statement of comprehensive income continues to be reported on the basis of the function of expensesincurred rather than by their nature. The main reasons for the classification of expenses into the functional sub-categories of Cost of sales, service & warranty, Research & Product Development, General & Administration andSales & Marketing are as follows:
readers of the Group’s statement of comprehensive income will gain a better understanding ofprogress towards achievement of its business plans than they would otherwise have gained ifreporting was based upon the nature of costs, and
these classifications are widely recognised within the Australian and international financial community.
Cost of sales, service & warranty expense includes cost of goods sold, product warranty expense and productservice and support costs. Research & Product Development expense, as denoted in the statement ofcomprehensive income, includes the cost of all research and development projects and activities, incorporatingdirect labour and direct material costs, as well as parent entity depreciation and amortisation charges, butexcludes indirect project support costs and otherwise apportionable overheads, which are borne within theGeneral & Administration expense classification. Sales & Marketing expense includes depreciation costsattributable to Ceramic Fuel Cells B.V. and Ceramic Fuel Cells (Europe) Limited.
(f) Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable. The Group’s sales contractsgenerally contain multiple revenue elements. These elements include:
the delivery and installation of the unit; and
the provision of services. These services are for the ongoing support and maintenance of the unit for adefined period of time and, in addition to this, in the case of product development agreements, for theprovision of engineering services involved in the development of the unit.
The fair value of the unit delivery and service revenue components is determined based on the proportion ofcosts associated with that component, which approximates their relative fair values. Revenue in relation to thedelivery and installation of the unit is recognised upon substantive completion of the installation. Revenue inrelation to the ongoing support and maintenance of the unit is recognised over the life of the service period.
(g) Other income recognition
Interest income is accrued and recognised on a time proportion basis using the effective interest method.Interest income is brought to account as other income in profit or loss as the Group derives interest from its cashand financial assets which are being utilised to fund the Group’s operations.
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Notes to the Consolidated Financial Statements30 June 2012
(h) Government grants
Grants from governments are recognised as revenue, at their fair value, where there is a reasonable assurancethat the grant will be received and the Group will comply with all attached conditions. Government grantsrelating to costs are deferred, if received in advance, and recognised in profit or loss over the period necessary tomatch them with the costs that they are intended to compensate. Government grants relating to the purchaseof property, plant and equipment are included in non-current liabilities as deferred income and are credited toprofit or loss on a straight-line basis over the expected lives of the related assets.
(i) Income tax
The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based onthe national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilitiesattributable to temporary differences and to unused tax losses.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the taxbases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, thedeferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction otherthan a business combination that at the time of the transaction affects neither accounting, nor taxable, profit or loss.Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by thebalance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferredincome tax liability is settled.
Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probablethat future taxable amounts will be available to utilise those temporary differences and losses.
Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and taxbases of investments in controlled entities where the parent entity is able to control the timing of the reversal of thetemporary differences and it is probable that the differences will not reverse in the foreseeable future.
Deferred tax assets and tax liabilities are offset when there is a legally enforceable right to offset current tax assetsand liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and taxliabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis,or to realise the asset and settle the liability simultaneously.
Current and deferred tax is recognized in profit or loss except to the extent that it relates to items recognized eitherin other comprehensive income or directly in equity. In these circumstances the tax is also recognized in othercomprehensive income or directly in equity, respectively. Ceramic Fuel Cells Limited does not have any wholly-owned, Australian resident, controlled entities and so has not implemented the Australian tax consolidationlegislation.
(j) Leases
Leases of property, plant and equipment where the Group, as lessee, has substantially all the risks and rewards ofownership, are classified as finance leases (refer Note 13). Finance leases are capitalised at the lease’s inception at thefair value of the leased property or, if lower, the present value of the minimum lease payments. The correspondingrental obligations, net of finance charges, are included in other short-term and long-term payables. Each leasepayment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over thelease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for eachperiod. Property, plant and equipment acquired under finance leases is depreciated over the asset's useful life orover the shorter of the asset's useful life and the lease term if there is no reasonable certainty that the Group willobtain ownership at the end of the lease term.
Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lesseeare classified as operating leases (refer Note 24). Payments made under operating leases (net of any incentivesreceived from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease.
(k) Impairment of assets
Intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually forimpairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Otherassets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amountmay not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amountexceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell andvalue in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there areseparately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups ofassets (cash generating units). Any non-financial assets, other than goodwill, that suffer impairment are reviewed forpossible reversal of the impairment at each reporting date.
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(l) Cash and cash equivalents
For the purpose of presentation in the statement of cash flows, cash and cash equivalents includes cash on hand,deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities ofthree months or less that are readily convertible to known amounts of cash and which are subject to an insignificantrisk of changes in value, and bank overdrafts.
(m) Trade receivables
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using theeffective interest method, less any provision for impairment. Trade receivables are generally due for settlement nomore than 30 days from the date of recognition. Collectability of trade receivables is reviewed on an ongoing basis.Debts which are known to be uncollectable are written off by reducing the carrying amount directly. A provision forimpairment of trade receivables is established when there is objective evidence that the Group will not be able tocollect all amounts due according to the original terms of the receivables. Factors which would indicate that a tradereceivable might be impaired include significant financial difficulty of the debtor, probability that the debtor willenter bankruptcy or financial reorganization, and default or delinquency in payments. The amount of the provisionwould be the difference between the asset’s carrying amount and the present value of estimated future cash flows,discounted at the original effective interest rate. Cash flows relating to short-term receivables would not bediscounted if the effect of the discount were to be immaterial. The amount of the provision would be recognised inprofit or loss.
(n) Inventories
Raw materials and stores, work in progress and finished goods are stated at the lower of cost and net realizablevalue. Cost comprises direct materials, direct labour and an appropriate proportion of variable and fixedoverhead expenditure, the latter being allocated on the basis of normal operating capacity. Costs are assignedto individual items of inventory on a standard cost basis. Costs of purchased inventory are determined afterdeducting any rebates and discounts. Net realizable value is the estimated selling price in the ordinary course ofbusiness less the estimated costs of completion and the estimated costs necessary to effect the sale.
(o) Plant and equipment
Machinery, equipment and vehiclesAll machinery, equipment and vehicles are stated at historical cost less depreciation. Historical cost includesexpenditure that is directly attributable to the acquisition of the asset.
Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, onlywhen it is probable that future economic benefits associated with the item will flow to the Group and the cost of theitem can be measured reliably. The carrying amount of any component accounted for as a separate asset isderecognised when replaced. All other repairs and maintenance are charged to profit or loss during the reportingperiod in which they are incurred.
Depreciation of machinery, equipment and vehicles is calculated using the straight line method to allocate their cost,net of their residual values, over their estimated useful lives, as follows:
Plant and equipment: 5 to 10 years;
Assets under finance lease: 10 years
Vehicles: 6.7 years;
Furniture and fittings: 5 years; and
Computer equipment: 3 years.
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount isgreater than its estimated recoverable amount (refer Note 1(k)).
Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included inprofit or loss.
Leasehold improvementsThe cost of improvements to or on leasehold properties is amortised over the unexpired period of the lease, or theestimated useful life of the improvement to the company, whichever is the shorter. Leasehold improvements notalready completely written down as at reporting date are being amortised over periods ranging from 0.5 to 4.5 years.
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(p) Intangible assets and expenditure carried forward
(i) Intellectual property
Intellectual property consists of the actual cost incurred in purchasing (for a nominal sum) thebeneficial interest in the company’s intellectual property, which previously resided in the company’sfounding members.
This asset has an indefinite life, hence it is reviewed for impairment at each reporting date, or morefrequently if events or changes in circumstance indicate that it may be impaired.
(ii) Research and product development
Expenditure on research and product development activities, being the application of researchfindings or other knowledge to a plan or design for the production of new or substantially improvedproducts or services before the start of commercial production or use, is capitalised only if the productor service is technically and commercially feasible and adequate resources are available to completedevelopment. Any expenditure so capitalised would comprise all directly attributable costs, includingcosts of materials, services, direct labour and an appropriate proportion of overheads. Such capitalisedexpenditure would be stated at cost less accumulated amortisation, the latter being calculated on astraight-line basis over the period of the expected benefit. All research and product developmentexpenditures not meeting the criteria for capitalisation are recognised in profit or loss as expenseswhen incurred. The Group does not consider that the expenditure on the current programme ofresearch and product development activities meets the full criteria for capitalisation and, as such, thisexpenditure is being expensed as incurred.
(iii) Patents
Patent costs are written off to profit or loss in the reporting periods in which incurred.
(iv) Information Technology (IT) systems
Costs incurred in the initial acquisition and development phase of the Group’s global EnterpriseResources & Planning (ERP) computer system which will contribute to future period financial benefitsthrough revenue generation and/or cost reduction have been capitalised. Costs capitalised includeexternal direct costs of materials and service, direct payroll and payroll related costs of employees’time spent on the project. Amortisation is calculated on a straight-line basis from the time of initialimplementation over a period of 5 years. Costs incurred after the completion of the initialdevelopment phase in maintaining, modifying or increasing functionality are expensed to profit andloss as incurred.
(q) Trade and other payables
These amounts represent liabilities for goods and services provided to the Group prior to the end of the reportingperiod and which are unpaid at that date. The amounts are unsecured and are usually paid within 30 days ofrecognition.
(r) Borrowings
Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequentlymeasured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemptionamount is recognised in profit or loss over the period of the borrowings using the effective interest method. Any feespaid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it isprobable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw downoccurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, thefee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of theliability for at least 12 months after the reporting period.
(s) Provisions
Provisions for service warranties and make good obligations are recognized when the Group has a present legal orconstructive obligation as a result of past events, it is probable that an outflow of resources will be required to settlethe obligation and the amount has been reliably estimated. Provisions are not recognised for any anticipated futureoperating losses.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement isdetermined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of anoutflow with respect to any one item included in the same class of obligations may be small.
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Provisions are measured at the present value of management’s best estimate of the expenditure required to settlethe present obligation at the reporting date. The discount rate used to determine the present value is a pre-tax ratewhich reflects current market assessments of the time value of money and the liability-specific risks. Any increase inthe provision due to the passage of time would be recognized as an interest expense.
The Group is required to restore all of its leased premises to their original condition at the end of the respective leaseterms. A provision has been recognised for the present value of the estimated expenditure required to remove anyleasehold improvements. These costs have been capitalised as part of the cost of leasehold improvements and areamortised over the shorter of the term of the lease or the useful life of the assets.
(t) Employee benefits
(i) Wages, salaries and annual leave
Liabilities for wages and salaries, including non-monetary benefits, expected to be settled within 12months of the reporting date are recognised in other payables in respect of employees’ services up tothe reporting date and are measured at the amounts expected to be paid when the liabilities aresettled. Liabilities for annual leave are recognised in current provisions in respect of employees’services up to the reporting date and are measured at the amounts expected to be paid when theliabilities are settled.
(ii) Long service leave
The liability for long service leave is recognised in the provision for employee benefits and measured asthe present value of expected future payments to be made in respect of services provided byemployees up to the reporting date using the accrued benefit method pro-rated on service.Consideration is given to expected future wage and salary levels, experience of employee departuresand periods of service and any known impending changes to relevant legislation. Expected futurepayments are discounted using market yields at the reporting date on national government bondswith terms to maturity and currency that match, as closely as possible, the estimated future cashoutflows.
(iii) Short-term incentive
The Group recognises an expense for short-term incentives based on a formula that takes intoconsideration, as at each reporting date, progress towards the expected achievement of bothcompany and employee key performance indicators. The Group recognises a provision wherecontractually obliged or where there is a past practice that has created a constructive obligation.
(iv) Share-based payments
Share-based compensation benefits are provided to employees, and have been provided to formerdirectors, via the Ceramic Fuel Cells Limited Directors and Employee Benefits Plan (Equity Plan - referNote 30(a)).
Shares
The fair value at grant date of shares granted as remuneration to employees is as follows: for servicesalready provided, the fair value is immediately expensed to profit or loss; for services yet to beprovided, the fair value is expensed as the services are provided. The share capital account is creditedwith the fair value of employee shares as the services are provided.
Share options
The fair value of options granted under the Equity Plan is recognised as an employee benefit expensewith a corresponding increase in equity. The fair value is measured at grant date and recognised overthe period during which the employees become unconditionally entitled to the options.
The fair value at grant date is determined using an option pricing model which takes into account theexercise price, the term of the option, the vesting and performance criteria, the non-tradeable natureof the option, the share price at grant date, the expected price volatility of the underlying share, theexpected dividend yield and the risk-free interest rate for the term of the option.
The fair value of the options granted excludes the impact of any non-market vesting conditions (forexample, profitability and sales growth targets). Non-market vesting conditions are included inassumptions about the number of options that are expected to become exercisable. At each balancesheet date the entity revises its estimate of the number of options that are expected to becomeexercisable. The employee benefit expense recognised each period takes into account the mostrecent estimate.
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Upon the exercise of options the balance of the share-based payments reserve relating to thoseoptions is transferred to share capital and the proceeds received, net of any directly attributabletransaction costs, are credited to share capital.
(u) Contributed equity
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or optionsare shown in equity as a deduction, net of tax, from the proceeds.
(v) Earnings per share
(i) Basic earnings per share
Basic earnings per share is calculated by dividing the profit/(loss) attributable to equity holders of thecompany, excluding any costs of servicing equity other than ordinary shares, by the weighted averagenumber of ordinary shares outstanding during the reporting period, adjusted for any bonus elementsin ordinary shares issued during the period.
(ii) Diluted earnings per share
Diluted earnings per share adjusts the figures used in the determination of basic earnings per share totake into account the after income tax effect of interest and other financing costs associated withdilutive potential ordinary shares and the weighted average number of additional ordinary shareswhich would have been outstanding assuming the conversion of all dilutive potential ordinary shares.
(w) Goods and Services Tax (GST) (including European Value Added Tax)
Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is notrecoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or aspart of the expense.
Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GSTrecoverable from, or payable to, the taxation authority is included with other receivables or payables in the balancesheet.
Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financingactivities which are recoverable from, or payable to, the taxation authority are presented as operating cash flows.
(x) Parent entity financial information
The financial information for the parent entity, Ceramic Fuel Cells Limited, disclosed in Note 31 has been prepared onthe same basis as the consolidated financial statements with the exception of investments in subsidiaries, which areaccounted for at cost in the financial statements of Ceramic Fuel Cells Limited.
Share-based payments
The grant by Ceramic Fuel Cells Limited of options over its equity instruments to the employees of subsidiaryundertakings in the Group is treated as a capital contribution to that subsidiary undertaking. The fair value ofemployee services received, measured by reference to the grant date fair value, is recognized over the vesting periodas an increase to investment in subsidiary undertakings, with a corresponding credit to equity.
(y) New accounting standards and interpretations
Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2012reporting periods. The Group’s assessment of the impact of these new standards and interpretations is set outbelow.
(i) AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests inOther Entities, revised AASB 127 Separate Financial Statements and AASB 128 Investments in Associatesand Joint Ventures and AASB 2011-7 Amendments to Australian Accounting Standards arising from theConsolidation and Joint Arrangements Standards (effective 1 January 2013)
In August 2011, the AASB issued a suite of five new and amended standards which address theaccounting for joint arrangements, consolidated financial statements and associated disclosures. AASB10 replaces all of the guidance on control and consolidation in AASB 127 Consolidated and SeparateFinancial Statements, and Interpretation 12 Consolidation – Special Purpose Entities. The core principlethat a consolidated entity presents a parent and its subsidiaries as if they are a single economic entityremains unchanged, as do the mechanics of consolidation. However, the standard introduces a singledefinition of control that applies to all entities. It focuses on the need to have both power and rights orexposure to variable returns. Power is the current ability to direct the activities that significantlyinfluence returns. Returns must vary and can be positive, negative or both. Control exists when theinvestor can use its power to affect the amount of its returns. There is also new guidance on
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participating and protective rights and on agent/principal relationships. The Group does not expect thenew standard to impact on its current composition.
AASB 12 sets out the required disclosures for entities reporting under the two new standards, AASB 10and AASB 11, and replaces the disclosure requirements currently found in AASB 127 and AASB 128.Application of this standard by the Group will not affect any of the amounts recognised in the financialstatements.
Amendments to AASB 128 provide clarification that an entity continues to apply the equity method anddoes not remeasure its retained interest as part of ownership changes where a joint venture becomesan associate, and vice versa. The amendments also introduce a “partial disposal” concept. Thesechanges will not have an impact on the current Group.
The Group does not expect to adopt the new standards before their operative date. They would,therefore, be first applied in the financial statements for the annual reporting period ending 30 June2014.
(ii) AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standardsarising from AASB 13 (effective 1 January 2013)
AASB 13 was released in September 2011. It explains how to measure fair value and aims to enhancefair value disclosures. The Group has yet to determine which, if any, of its current measurementtechniques will have to change as a result of the new guidance. It is therefore not possible to state theimpact, if any, of the new rules on any of the amounts recognised in the financial statements. However,application of the new standard will impact the type of information disclosed in the notes to thefinancial statements. The Group does not intend to adopt the new standard before its operative date,which means that it would be first applied in the annual reporting period ending 30 June 2014.
There are no other standards that are not yet effective and that are expected to have a material impact on the entityin the current or future reporting periods and on foreseeable future transactions.
Note 2. Financial Risk Management
The Group’s activities expose it to a variety of financial risks: market risk (including currency risk and interest rate risk), credit riskand liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets andseeks to earn an appropriate return on surplus funds whilst mitigating the potential for cash flow losses arising fromunfavourable movements in foreign exchange rates on funds intended for the operation of the Group’s businesses. Suchfunds are held in pounds sterling or euros to provide a hedge against expected future cash flow requirements. The Group hasnot used derivative financial instruments to hedge its risk exposures during the year.
The Group holds the following financial instruments:
2012 2011
$ $
Financial assets
Cash and cash equivalents 6,621,759 15,852,905
Cash equivalents (restricted) 2,224,419 3,204,104
Trade and other receivables 1,986,554 1,291,287
10,832,732 20,348,296
Financial liabilities
Trade and other payables 3,364,784 1,840,879
Borrowings 1,293,781 1,685,749
4,658,565 3,526,628
Financial risk management is the responsibility of the Chief Financial Officer, acting within policies approved by the Board ofDirectors. The Board approves documented principles for overall financial risk management, as well as written policiescovering specific areas such as mitigating foreign exchange, interest rate and credit risks, use of derivative financial instrumentsand investing excess liquidity.
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The Group’s investment policy guidelines set the framework within which management must manage the Group’s investmentportfolio. The current objectives and policy goals are to:
Within the Investment Risk framework
earn appropriate returns on surplus cash within conservative levels of risk return exposure;
mitigate the credit and liquidity risks inherent within its investment activities; and
set dealing policy controls and management reporting processes.
Within the Operational framework
ensure investments are only made in approved interest bearing securities. The policy does not permit equityinvestments. Investments may only be placed in a limited number of highly liquid securities;
ensure investments are only made within the guidelines for approved institutions and limits as defined in the policy;
ensure investments are classified appropriately for accounting purposes at the time the investments are made;
ensure investments are either held directly or in safe custody, Euroclear or Austraclear in the name of Ceramic FuelCells Limited;
ensure that the investment policy guidelines are reviewed on a regular and timely basis.
Other aspects of the financial risk management programme and policies include:
(a) Market risk
(i) Foreign exchange risk
Foreign exchange risk arises when future commercial transactions and recognised assets and liabilities are denominated in acurrency that is not the Group’s functional currency.
The Group operates internationally and holds foreign currency funds which are intended to be used in the operation of itsEuropean businesses. As such its Australian dollar reported results are exposed to foreign currency translation adjustmentsarising from holding currencies other than in the Group’s functional currency. During the reporting period this exposure wasprincipally to pounds sterling and euros. The Group’s policy is to retain these funds in the currencies in which they are expectedto be spent as a natural hedge and not to acquire financial instruments to offset the foreign currency translation adjustmentsarising in the Australian dollar reported results. The potential adjustment is measured using sensitivity analysis. To the extentthat these funds are matched to specific future currency outflows, there is no risk to the Group’s cashflow forecasts.
The Group’s accounting exposure to foreign currency risk at the reporting date that would impact the post tax loss for the year,expressed in Australian dollars, was as follows:
EUR GBP USD NZD EUR GBP USD NZD JPY
$ $ $ $ $ $ $ $ $
Cash and cash equivalents 1,344,430 1,473,388 14,017 - 1,976,315 5,776,790 15,623 - -
Trade and other receivables 74,144 120,784 - - 166,016 - 18,437 - -
Trade and other payables 157,551 15,635 38,073 22,909 255,201 1,500 13,932 22,000 29,790
30-Jun-12 30-Jun-11
Sensitivity
Based on the financial instruments held at 30 June 2012 had the Australian dollar weakened/strengthened by 5% against thepound sterling and euro, with all other variables held constant, the Group’s post tax loss for the year would have been$139,630 lower/higher (2011 – $381,538 lower/higher), mainly as a result of foreign exchange gains/losses on the translation ofcash, investments, receivables and payables denominated in pounds sterling and euros as detailed in the above table. Profit ismore sensitive in both 2012 and 2011 to movements in the Australian dollar/euro exchange rate due to the higher level of eurodenominated investments.
(ii) Interest rate risk - cash flow and fair value
The Group’s main interest rate risk arises from holding cash and interest-bearing securities as investments. Funds invested atvariable rates expose the Group to cash flow interest rate risk. Funds invested at fixed interest rates expose the Group to fairvalue interest rate risk. The Group’s investment policy allows for funds to be invested in securities with maximum interest rateduration of 3 years. During the reporting period the majority of the Group’s funds were invested in cash and short interest rateduration securities with leading commercial banks. The value of cash and cash equivalents at 30 June 2012 that was exposedto variable interest rate risk was $8,846,178 (2011 - $19,057,009).
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The Group also has borrowings in the form of a finance lease on certain equipment located in the German plant. At30 June 2012 the amount owing was $1,293,781 (2011 - $1,685,749). The borrowings are at a fixed effective interest rate of5.8% per annum and the lease has a further 4.3 years to run. Changes in interest rates will not effect the interest payments onthese borrowings and, as they are being measured on the basis of amortised cost, nor will it affect the value of the borrowingsin the balance sheet.
Sensitivity
If, during the year ended 30 June 2012, interest rates in each currency that the Group held cash and investments in hadchanged by +/- 50 basis points from the actual rates with all other variables held constant, post-tax loss for the year would havebeen $79,000 lower/higher (2011 – change of 50 basis points: $132,000 lower/higher), mainly as a result of higher/lowerinterest income.
(b) Credit risk
The Group is exposed to credit risk arising from the potential of a counterparty to a financial instrument failing to fulfil theirobligations. To manage this risk the Group employs the Standard & Poors (S&P) credit rating system and has policies thatdefine the maximum exposure to a single counterparty within a ratings category and the level of asset concentration of theportfolio as a whole to a specific ratings category. The Group does not invest in securities that have an S&P credit rating lowerthan ‘A’ for long-term securities and ‘A-2’ for short-term securities.
The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets.
The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external creditratings (if available) or to historic information about counterparty default rates:
S&P Rating 2012 2011
$ $
Trade receivables
Counterparties with external credit ratings (S&P)
AA+ - 4,675
A+ - 18,679
A - 816,282
A- 597,739
BBB - 27,397
Counterparties without external credit ratings:
- New customers (less than 6 months) 49,848 6,150- Existing customers (more than 6 months) with nodefaults in the past 782,326 -
1,429,913 867,033
Cash and cash equivalents
- denominated in AUD
AA 56,707 1,857,812
AA- 1,536,284 -
A - 3,070,182
- denominated in EUR
AA - 1,987,841
AA- 1,354,844 -
A 1,964,265 3,068,400
- denominated in GBP
AA - 5,853,047
AA- 1,672,525 -
A 23,117 -
- denominated in USD
AA - 15,623
AA- 14,017 -
6,621,759 15,852,905
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Financial assets that are past due as at the end of the reporting period but not impaired are as follows:
2012 2011
$ $
Trade receivables
0 – 30 days 110,984 12,000
30 – 60 days 1,528 102,555
60 – 90 days 217,575 -
Over 90 days 87,684 -
417,771 114,555
(c) Liquidity risk
Prudent liquidity risk management implies maintaining sufficient cash and marketable securities to meet fundingrequirements.
The Group manages liquidity by continuously monitoring forecast and actual cash flows. The Group does not currently haveany lines of credit or bank overdrafts.
Maturities of financial liabilities
The tables below analyse the Group’s financial liabilities into relevant maturity groupings based on their contractual maturities.The amounts disclosed in the tables are the contractual undiscounted cash flows. Balances due within 12 months equal theircarrying amounts as the impact of discounting is not significant.
30 June 2012
Less than6 months
6 – 12months
Between1 and 2
years
Between2 and 5
years
Over5 years
Totalcontractualcash flows
Carryingamount(assets)/liabilities
Contractual maturities of financialliabilities
$ $ $ $ $ $ $
Non-derivativesTrade and other payables 3,364,784 - - - - 3,364,784 3,364,784Borrowings (finance leaseliabilities)
166,866 166,866 333,732 806,519 - 1,473,983 1,293,781
Total non-derivatives 3,531,650 166,866 333,732 806,519 - 4,838,767 4,658,565
30 June 2011
Less than6 months
6 – 12months
Between1 and 2
years
Between2 and 5
years
Over5 years
Totalcontractualcash flows
Carryingamount(assets)/liabilities
Contractual maturities of financialliabilities
$ $ $ $ $ $ $
Non-derivativesTrade and other payables 1,840,879 - - - - 1,840,879 1,840,879Borrowings (finance leaseliabilities)
182,347 182,347 364,694 1,094,083 151,956 1,975,427 1,685,749
Total non-derivatives 2,023,226 182,347 364,694 1,094,083 151,956 3,816,306 3,526,628
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(d) Summarised sensitivity analysis
The following table summarises the sensitivity of the Group’s financial assets and financial liabilities to interest rate risk:
Interest rate risk30 June 2012 Carryingamount -50bps +50bps
LossOtherEquity
LossOtherEquity
Financial assets
Cash and cash equivalents 6,621,759 (59,135) - 59,135 -
Cash equivalents (restricted) 2,224,419 (19,865) - 19,865 -
Trade and other receivables 1,986,554
Financial liabilities
Trade and other payables 3,364,784
Borrowings 1,293,781
The following table summarises the sensitivity of the Group’s financial assets and financial liabilities to foreign exchange risk:
Foreign exchange risk30 June 2012 Carryingamount -5% +5%
LossOtherEquity
LossOtherEquity
Financial assets
Cash and cash equivalents 6,621,759 105,988 - (105,988) -
Cash equivalents (restricted) 2,224,419 35,604 - (35,604) -
Trade and other receivables 1,986,554 9,746 - (9,746) -
Financial liabilities
Trade and other payables 3,364,784 (11,708) - 11,708 -
Borrowings 1,293,781 - - - -
As noted above, this sensitivity analysis focuses on the accounting impact of these foreign exchange risks. The Group’s policy isto hold funds in currencies in which they are expected to be spent, thus minimising the economic impact on future cash flows.
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Note 3. Critical Accounting Estimates and Judgements
Estimates and judgements are continually evaluated and are based on historical experience and other factors, includingexpectations of future events that may have a financial impact on the Group and that are believed to be reasonable under thecircumstances.
(a) Critical accounting estimates and assumptions
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition,seldom equal subsequent actual results. The estimates and assumptions that have a significant risk of causing a materialadjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
Revenue recognition and warranty provisions
As described in Note 1(f) some of the Group’s sales contracts contain multiple revenue elements. Revenue is recognised inrelation to each element based on the proportion of the estimated cost associated with that element. A provision for estimatedwarranty claims is also created at the time of the initial revenue recognition for all contracts. The adequacy of this provision isreviewed at each reporting date.
The products being developed and sold by the Group are new and as such there is a relative lack of historical experience inundertaking the service, maintenance and warranty obligations of the units. This has meant that management has had tomake significant assumptions as to future contract outcomes, from both a cost and technical perspective.
For most contracts the service and warranty obligations cover a period of between 1 and 3 years. The major variable costassumption in relation to the service and maintenance of the units is the amount of labour time required. The major variablecost assumption in relation to the warranty provision is the estimated life of the fuel cell stack, which will determine how manyreplacement stacks (if any) will be required during the warranty period.
If the amount of labour time required to service and maintain the units is greater than management’s estimates then theamount of revenue that has been deferred, and recorded in the balance sheet, will not be sufficient to cover the future costs.
If the number of stacks that are required to be replaced during the warranty period is greater than management’s estimatesthen the warranty provision will need to be increased, resulting in an increased charge to profit or loss.
(b) Critical judgements in applying the entity’s accounting policies
Impairment of non-current assets
The Group assesses impairment at each reporting date by evaluating conditions specific to the Group that may lead to theimpairment of assets. The Directors consider that the Group represents a single cash-generating unit. If an impairment triggerwere to arise in the future, such as a change in technical research direction leading to potential obsolescence of one or moreitems of plant and equipment, then the recoverable amount of the asset/s would need to be reconsidered and determined.The value of the Group’s UK powder plant has been treated as fully impaired as at 30 June 2012 for the reasons explained inNote 7. The carrying amount of the Group’s other plant and equipment at 30 June 2012 is approximately $11.3 million (2011 -$16.5 million), the majority of which is specialist equipment dedicated to solid oxide (ceramic) fuel cell research and productdevelopment and the production and assembly of ceramic fuel cell stacks.
Income tax losses
The ability of each member of the Group to obtain the potential tax benefit of unused tax losses, for which no deferred taxasset has been recognised, is dependent upon:
the derivation of future assessable income of a nature and of an amount sufficient to enable the benefit from thedeductions for the losses to be realised;
continued compliance with the conditions for deductibility imposed by the taxation legislation of the relevant taxjurisdiction; and
there being no changes in tax legislation which may adversely affect the ability to realize the benefit from the deductionsfor the losses.
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Notes to the Consolidated Financial Statements30 June 2012
Note 4. Segment Information
(a) Operating segment
Management has determined the operating segment based on the reports reviewed by the Managing Director which are usedto make strategic decisions.
The Managing Director considers the business from a product perspective and monitors performance as a single operatingsegment.
(b) Other segment information
2012 2011
$ $Sales revenue from external customers domiciled in:
Australia 1,946,961 1,362,265Germany 2,777,556 1,359,433United Kingdom 1,751,609 335,760Other 240,978 623,514
Total revenue 6,717,104 3,680,972
Non-current assets located in:Australia 1,769,078 2,978,926Germany 9,545,791 10,549,226United Kingdom - 2,965,675Other 9,889 -
Total revenue 11,324,758 16,493,827
Major customers
The Group’s reliance on major customers, individually contributing ten percent or more of total revenue, was as follows:
2012
Revenue of $5,464,109 was derived from four customers as follows:
• $1,740,771
• $1,681,807
• $1,304,828
• $736,703
2011
Revenue of $1,896,449 was derived from two customers as follows:
• $1,107,785
• $788,664
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Notes to the Consolidated Financial Statements30 June 2012
2012 2011
$ $
Note 5. Revenue
From continuing operationsSales revenueFuel cell products 6,193,594 3,345,508Service and support 522,420 325,238Powder sales income 1,090 9,641Licensing income - 585
Total revenue from continuing operations 6,717,104 3,680,972
Note 6. Other Income
Sundry income 294,925 172,579Net interest revenue 273,753 369,731Settlement of legal action - 3,853,566
Total other income 568,678 4,395,876
Note 7. Expenses
Profit/(loss) before income tax includes the following specific expenses:
Cost of sales, service & warranty
Cost of goods sold 5,358,028
Product warranty expense 1,451,003
Service and support costs 781,539
7,590,570
Depreciation
Depreciation – Equipment 2,599,533 2,303,852Depreciation - Leasehold improvements 678,889 1,342,924
3,278,422 3,646,776
Impairment charge
Impairment – Plant and equipment of UK powder production plant 2,576,718 -
Equity-based payments expense
- Share-based expense 1,461,719 678,394- Share options expense 227,328 102,935
1,689,047 781,329
Other provisions - Employee entitlements 1,015,682 749,478
Rental expense relating to operating leases - Minimum lease payments 805,744 746,416
Defined contribution superannuation expense 882,865 733,629
Cost Of SalesCost of goods sold includes product and installation costs. In the prior year the cost of building units for developmentand early deployment was an integral part of the research and development activities of the Group. They remain inResearch and Product Development Expense for that year.Impairment chargeIn July 2012 the Group announced that it had terminated its contract for the purchase of fuel cells from its previoussupplier and had signed an agreement with a different supplier to manufacture cells to the Group’s design. At thesame time the Group also terminated the reciprocal supply agreement under which the Group’s UK powder plant wasto supply ceramic powder to be made into cells by the original supplier. As a result, the Group has decided to fullywrite down the value of the plant, resulting in an impairment charge of $2,576,718 in the current reporting period.
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Notes to the Consolidated Financial Statements30 June 2012
2012 2011
$ $
Note 8. Income Tax Expense
(a) Numerical reconciliation of income tax expense to prima facie taxpayableProfit/(loss) before income tax expense (30,197,723) (21,176,483)
Tax at the Australian tax rate of 30% (2011 - 30%) (9,059,317) (6,352,945)
Tax effect of amounts which are not deductible (taxable) in calculating taxableincome:
Share-based payments expense 509,461 387,461Sundry non-deductible items 54,177 31,849Australian R&D tax concession - (600,000)
(8,495,679) (6,533,635)
Difference in overseas tax rates 619,274 147,782Adjustments for tax of prior periods 155,435 (5,773,379)Income tax benefit not recognised 7,720,970 12,159,232Income tax expense - -
(b) Tax losses
Unused tax losses for which no deferred tax asset has been recognised 290,134,359 262,826,151
Potential tax benefit 86,421,033 78,700,063
Unused tax losses have been incurred by all Group entities and are calculated atrates applicable to each taxation jurisdiction.
Note 9. Current Assets - Cash and Cash Equivalents
(a) Cash and Cash EquivalentsCash at bank and on hand(balance as per statement of cash flows) 6,621,759 15,852,905
Cash at bank and on handCash on hand is non-interest bearing. Cash at bank consists of multiple currenciesin ‘at call’ accounts (bearing balance-dependent interest rates in accordance withindividual account terms) and short-term deposits of up to 3 months duration.Further information about the Group’s exposure to interest rate risk is discussed inNote 2.
(b) Cash Equivalents (Restricted)Bank term deposits 2,224,419 3,204,104
Cash Equivalents (Restricted)The amount of restricted cash equivalents at 30 June 2012 has been pledged assecurity for a €1,800,000 bank guarantee issued in relation to a government grantreceived in December 2009, and so is unavailable for use by the Group (refer alsoNote 17 Other Liabilities).
Note 10. Current Assets - Trade and Other Receivables
Trade receivables 1,847,684 987,741GST/VAT receivable 809,220 260,324Other receivables 138,870 43,222
2,795,774 1,291,287
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Notes to the Consolidated Financial Statements30 June 2012
2012 2011
$ $
Note 11. Current Assets - Inventories
Raw materials and stores 4,671,169 3,323,009Work in progress 3,417,441 426,391Finished goods 1,239,756 1,381,681
9,328,366 5,131,081
Inventory expenseWrite-downs of inventories to net realisable value recognized as an expenseduring the year ended 30 June 2012 amounted to $Nil (2011 – $323,476).
Note 12. Current Assets - Other
Prepayments 256,708 551,640Security deposits 258,148 260,253
514,856 811,893Security depositsThe deposits are bearing fixed interest rates between 0% and 5.7% at reportingdate (2011 – 0% and 6.0%).
Note 13. Non-Current Assets – Plant and Equipment
Equipment
Machinery - at cost 29,382,523 28,872,545Less: Accumulated depreciation (17,887,892) (15,214,123)Less: Impairment loss (2,576,718) -
Net book amount 8,917,913 13,658,422
ReconciliationOpening net book amount 13,658,422 15,741,846Exchange differences (253,231) (1,161,783)Additions 688,973 1,382,211Depreciation expense (Note 7) (2,599,533) (2,303,852)Impairment loss (Note 7) (2,576,718) -
Closing net book amount 8,917,913 13,658,422
Leasehold Improvements
Leasehold improvements - at cost 9,959,799 9,785,142Less: Accumulated depreciation (7,553,954) (6,950,737)
Net book amount 2,405,845 2,834,405
ReconciliationOpening net book amount 2,834,405 3,693,606Exchange differences (309,794) (76,966)Additions 560,123 560,689Depreciation expense (Note 7) (678,889) (1,342,924)
Closing net book amount 2,405,845 2,834,405For
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Notes to the Consolidated Financial Statements30 June 2012
2012 2011
$ $
Total Plant and Equipment
Plant and equipment - at cost 39,342,322 38,657,687Less: Accumulated depreciation (25,441,846) (22,164,860)Less: Impairment loss (2,576,718) -
Net book amount 11,323,758 16,492,827
ReconciliationOpening net book amount 16,492,827 19,435,452Exchange differences (563,025) (1,238,749)Additions 1,249,096 1,942,900Depreciation expense (Note 7) (3,278,422) (3,646,776)Impairment loss (Note 7) (2,576,718) -
Closing net book amount 11,323,758 16,492,827
(a) Impairment lossThe impairment loss relates solely to the Group’s UK powder plant which hasbeen fully written off as at 30 June 2012 (refer also to Note 7).(b) ReclassificationDue to a reclassification the amount of the net transfer between plant andleasehold improvements in the prior reporting period has been reduced from$6,972,246 to $Nil, resulting in a corresponding adjustment to the opening netbook amount.(c) Leased assetsEquipment includes the following amounts where the Group is a lessee under afinance lease:
Plant and equipment - at cost 3,778,668 4,129,234Less: Accumulated depreciation (724,056) (586,388)
Net book amount 3,054,612 3,542,846
Note 14. Non-Current Assets – Intangible Assets
Intellectual propertyCost 1,000 1,000Less: Impairment charge - -
Net book amount 1,000 1,000
Reconciliation
Opening net book amount 1,000 1,000Additions - -Impairment charge - -
Closing net book amount 1,000 1,000
Note 15. Current Liabilities – Trade and Other Payables
Trade payables 1,482,984 495,200Other payables 1,881,800 1,345,679
3,364,784 1,840,879
Information about the Group’s exposure to foreign exchange risk is provided inNote 2.
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Notes to the Consolidated Financial Statements30 June 2012
2012 2011
$ $
Note 16. Current Liabilities - Provisions
Provisions for employee benefits: annual and long service leave 1,728,191 1,361,719Provision for product warranty 1,065,571 987,871Provision for leased property reinstatement 563,424 129,385Provision for operating leases 33,462 56,090
3,390,648 2,535,065
Note 17. Current Liabilities – Other Liabilities
Deferred revenue 555,633 480,939Government grants 2,421,734 1,871,708
2,977,367 2,352,647
(a) Deferred revenueDeferred revenue includes customer deposits received in advance and unearnedservice and support revenue.
(b) Government grantsIn 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 NorthRhine Westphalia in Germany. The funding requires the company to meet certainrequirements as to expenditure on construction of the Group’s plant in Germanyand the creation of jobs. The Group has met the requirement in relation toexpenditure on the plant and has until December 2012 to satisfy the job creationcriteria. At 30 June 2012 the full amount of the grant (A$1,712,803) has beentreated as deferred revenue and will be brought to account in a future period inline 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 ofceramic fuel cell micro-CHP units. At 30 June 2012 the full amount of the granthas been treated as deferred revenue and will be brought to account in futurereporting periods in line with the satisfaction of the obligations.
Note 18. Borrowings
In December 2009 the Group entered into a sale-and-leaseback transaction forcertain equipment located in the Group’s plant in Germany. The transactioninvolved the sale of equipment with a cost of €3,057,698 (A$4,899,372 as attransaction date) to the German banking group Commerzbank. This equipment isincluded within the non-current asset, plant and equipment, in the balance sheet.The equipment is being leased back over 7 years with an upfront lease paymentof 50% of the value of the equipment.
Finance lease liabilities (refer also to Note 24)Current 264,031 271,937Non-current 1,029,750 1,413,812
1,293,781 1,685,749
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Notes to the Consolidated Financial Statements30 June 2012
2012 2011
$ $
Note 19. Non-Current Liabilities - Provisions
Provision for product warranty 459,892 -Provision for operating leases 223,167 243,874Provision for employee benefits: long service leave 111,183 59,968Provision for leased property reinstatement 91,954 531,789
886,196 835,631
Provision for Operating Leases (Current and Non-Current)
Carrying amount at start of reporting period 299,964 393,767Initial and/or additional provisions recognised - 313Amounts used (43,335) (94,116)
Carrying amount at end of reporting period 256,629 299,964
The provision for operating leases relates to premises leased by the parent entityand its European-based subsidiaries during the reporting period. AustralianAccounting Standard AASB 117 Leases requires that lease payments under anoperating lease be recognised as an expense on a straight-line basis over thelease term.
Note 20. 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:
Date Details Number ofshares
Issueprice
Amount$
1-7-2010 Opening balance 1,029,873,280 230,415,020
27-8-2010 Placing and subscription 95,238,096 $0.1825 17,380,952
23-9-2010 Overseas offer 19,222,606 $0.1825 3,508,126
23-9-2010 Australia and New Zealand rights issue 51,112,184 $0.1825 9,327,995
18-10-2010 Employee share scheme issue 5,233,400 $0.1700 889,678
1-12-2010 Employee share scheme issue 674,000 $0.1680 113,232
Less: Transaction costs arising on share issues - (1,359,566)
30-6-2011 1,201,353,566 260,275,437
3-10-2011 Employee share scheme issue 6,663,850 $0.124 826,317
10-11-2011 Placing and subscription 54,559,999 $0.108 5,892,480
28-11-2011 Employee share scheme issue 1,051,170 $0.11 115,629
7-12-2011 Overseas offer 25,686,748 $0.108 2,781,636
12-12-2011 Australia and New Zealand rights issue 76,983,530 $0.108 8,314,220
Less: Employee shares in escrow - (320,141)
Less: Transaction costs arising on share issues (603,191)
30-6-2012 Balance 1,366,298,863 277,282,387
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Notes to the Consolidated Financial Statements30 June 2012
(c) Ordinary shares
Ordinary shares entitle the holder to participate in dividends, and the proceeds on winding up of the company, in proportionto the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at ameeting of the company, either personally or by duly authorised representative, proxy or attorney, is entitled to one vote, andupon a poll each share is entitled to one vote.
(d) Share options
Information relating to the company’s Directors and Employee Benefits Plan, including details of options issued, exercised andlapsed during the financial year and options outstanding at the end of the financial year, is set out in Note 30.
(e) Capital management
The Group’s and the parent entity’s objective when managing capital is to safeguard their ability to continue as a goingconcern. This objective has been historically met by issuing shares in the capital of the parent so as to ensure sufficient cashreserves to enable the Group to carry out its operations and to meet current and future obligations as and when they arise.Further information on the Group’s future funding is set out in Note 1(a).
Capital under management consists solely of fully paid up, ordinary shares. Neither the parent nor any of its subsidiaries issubject to any externally imposed capital requirements. There has been no change, from the previous reporting period, in theway in which the Group and parent has managed its capital objective.
2012 2011
$ $
Note 21. Reserves and Retained Profits/(Losses)
(a) Reserves
Share-based payments reserve 4,708,135 4,480,807Foreign currency translation reserve (4,639,185) (4,964,660)
Total reserves 68,950 (483,853)
Share-based payments reserveBalance at 1 July 4,480,807 4,377,872Option expense 227,328 102,935
Balance at 30 June 4,708,135 4,480,807
Foreign currency translation reserveBalance at 1 July (4,964,660) (3,667,434)Currency translation differences arising during the year 325,475 (1,297,226)
Balance at 30 June (4,639,185) (4,964,660)
(b) Retained profits/(losses)
Movements in retained profits/(losses) were as follows:Balance at 1 July (226,256,458) (205,079,975)Net profit/(loss) for the year (30,197,723) (21,176,483)
Balance at 30 June (256,454,181) (226,256,458)
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Notes to the Consolidated Financial Statements30 June 2012
Note 22. Key Management Personnel Disclosures
(a) Key management personnel compensation
2012 2011
$ $
Short-term employee benefits 2,703,659 2,408,159Post-employment benefits 403,569 423,938Long-term benefits 151,457 6,052Termination benefits - -Share-based payments 722,680 591,085
3,981,365 3,429,234
Detailed remuneration disclosures are provided in the Directors’ Report, within sections A to D of the RemunerationReport, on pages 29 to 35.
(b) Equity instrument disclosures relating to key management personnel
(i) Options provided as remuneration and shares issued on exercise of such options
Details of options provided as remuneration and shares issued on the exercise of such options, together with the termsand conditions of the options, are provided in the Directors’ Report, within section D of the Remuneration Report, onpages 34 to 35.
(ii) Option holdings
The numbers of options over ordinary shares in the company held during the financial year by each director of CeramicFuel Cells Limited and other key management personnel of the Group, including their personally related parties, are setout below.
2012Name Balance at
the start ofthe year
Granted ascompen-
sation
Exercisedduring the
year
Otherchanges
Balance atthe end of
the year
Vested andexercisableat year-end
Unvestedat year-end
Directors of Ceramic Fuel Cells Limited
B L Dow 2,445,000 - - - 2,445,000 2,445,000 -
J Harding 100,000 - - (100,000) - - -
R J Kennett 100,000 - - (100,000) - - -
Other key management personnel of the Group
F R Boyd 718,750 - - - 718,750 718,750 -
K Föger 934,450 - - - 934,450 889,950 44,500
P R McDonell 984,450 - - - 984,450 939,950 44,500
A D Neilson 1,084,450 - - - 1,084,450 1,039,950 44,500
F Obernitz 567,100 725,670 - - 1,292,770 567,100 725,670
J C Rajoo 1,183,450 - - - 1,183,450 1,139,950 43,500
T M Rowe 1,068,750 - - - 1,068,750 1,068,750 -
N A Sherburn 928,200 - - - 928,200 883,700 44,500
P A Thompson 567,100 264,370 - - 831,470 567,100 264,370For
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2011Name Balance at
the start ofthe year
Granted ascompen-
sation
Exercisedduring the
year
Otherchanges
Balance atthe end of
the year
Vested andexercisableat year-end
Unvested atyear-end
Directors of Ceramic Fuel Cells Limited
B L Dow 2,645,000 - - (200,000) 2,445,000 2,445,000 -
J Harding 100,000 - - - 100,000 100,000 -
R J Kennett 100,000 - - - 100,000 100,000 -
Other key management personnel of the Group
F R Boyd 718,750 - - - 718,750 718,750 -
K Föger 934,450 - - - 934,450 889,950 44,500
P R McDonell 984,450 - - - 984,450 939,950 44,500
A D Neilson 1,084,450 - - - 1,084,450 1,039,950 44,500
F Obernitz - 567,100 - - 567,100 - 567,100
J C Rajoo 1,183,450 - - - 1,183,450 1,139,950 43,500
T M Rowe 1,068,750 - - - 1,068,750 1,068,750 -
N A Sherburn 928,200 - - - 928,200 883,700 44,500
P A Thompson - 567,100 - - 567,100 - 567,100
(iii) Share holdings
The number of shares in the company held during the financial year by each director of Ceramic Fuel Cells Limited andother key management personnel of the Group, including their personally related parties, are set out below.
2012Name Balance at the
start of the yearReceived
duringthe yearon the
exerciseof options
Received duringthe year as
compensation
Otherchanges
during theyear
Balance at theend of the year
Directors of Ceramic Fuel Cells Limited
J Harding 12,225,000 - - 601,852 12,826,852
B L Dow 1 674,000 - 1,051,170 75,000 1,800,170
R Rose 366,666 - - 91,666 458,332
P Binks 10,000 - - 2,500 12,500
J P Dempsey 400,000 - - 100,000 500,000
R Dudenhausen - - - 625,000 625,000
J Hoey - - - 100,000 100,000
R J Kennett 320,000 - - 124,000 444,000
Other key management personnel of the Group
F R Boyd 2 147,900 - 325,790 404,695 878,385
K Föger 2 527,900 - 408,620 49,255 985,775
P R McDonell 2 74,000 - 236,100 - 310,100
A D Neilson 2 412,000 - 340,000 30,688 782,688
F Obernitz 2 107,200 - 63,060 - 170,260
J C Rajoo 2 351,100 - 316,920 - 668,020
T M Rowe 2 246,600 - 316,090 (123,300) 439,390
N A Sherburn 2 147,900 - 337,010 20,000 504,910
P A Thompson 73,039 - - - 73,039
1. Received during the year as compensation: half the shares are subject to escrow agreements under which they may not be sold ortransferred, and they may be forfeited if employment ceases, prior to 24 November 2013.
2. Received during the year as compensation: half the shares are subject to escrow agreements under which they may not be sold ortransferred, and they may be forfeited if employment ceases, prior to 3 October 2013.
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Notes to the Consolidated Financial Statements30 June 2012
2011Name Balance at the
start of the yearReceived
duringthe yearon the
exerciseof options
Received duringthe year as
compensation
Otherchanges
during theyear
Balance at theend of the year
Directors of Ceramic Fuel Cells Limited
J Harding 10,350,000 - - 1,875,000 12,225,000
B L Dow 1 - - 674,000 - 674,000
R Rose - - - 366,666 366,666
P Binks - - - 10,000 10,000
J P Dempsey 20,000 - - 380,000 400,000
R J Kennett 290,000 - - 30,000 320,000
Other key management personnel of the Group
F R Boyd 2 - - 147,900 - 147,900
K Föger 2 380,000 - 147,900 - 527,900
P R McDonell 2 - - 74,000 - 74,000
A D Neilson 2 28,000 - 384,000 - 412,000
F Obernitz 2 - - 107,200 - 107,200
J C Rajoo 2 104,500 - 246,600 - 351,100
T M Rowe 2 - - 246,600 - 246,600
N A Sherburn 2 - - 147,900 - 147,900
P A Thompson 2 9,777 - - 63,262 73,0391. Received during the year as compensation: half the shares are subject to an escrow agreement under which they may not be sold or
transferred, and they may be forfeited if employment ceases, prior to 30 June 2012.2. Received during the year as compensation: half the shares are subject to escrow agreements under which they may not be sold or
transferred, and they may be forfeited if employment ceases, prior to 1 October 2012.
(c) Loans to key management personnel
No loans were made to directors or to other key management personnel during the year ended 30 June 2012 (2011 – Nil).
2012 2011
$ $
Note 23. Remuneration of Auditors
During the year the following fees were paid or payable for services provided by theauditor of the parent entity and its related practices:
(a) PricewaterhouseCoopers Australia
Audit and other assurance servicesAudit and review of financial reports
Current reporting period 157,781 147,344Prior reporting period 34,525 20,759
Total fees for audit and other assurance services 192,306 168,103
Taxation servicesReview of company income tax returns 23,000 31,000Other tax compliance and planning services 116,671 188,261
Total fees for taxation services 139,671 219,261
Total fees of PricewaterhouseCoopers Australia 331,977 387,364
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Notes to the Consolidated Financial Statements30 June 2012
2012 2011
$ $(b) Related practices of PricewaterhouseCoopers Australia
Audit and other assurance services
Audit and review of financial reports 62,929 39,686Other audits - 6,901
Total fees for audit and other assurance services 62,929 46,587
Taxation servicesPreparation of company tax returns 13,926 -Tax advice and planning services 7,879 23,779
Total fees for taxation services 21,805 23,779
Total fees of related practices of PricewaterhouseCoopers Australia 84,734 70,366
Note 24. Commitments
(a) Capital Commitments
Commitments for the acquisition of plant and equipment contracted for at thereporting date but not recognised as liabilities, payable:
Within one year 79,760 125,064Later than one year but not later than five years - -Later than five years - -
79,760 125,064
(b) Lease Commitments
Commitments in relation to leases contracted for at the reporting date but notrecognised as liabilities.
(i) Operating leasesThe Group leases offices and warehouses under non-cancellable operating leasesexpiring within 0.6 to 4.5 years. The leases have varying terms, escalation and breakclauses, and renewal rights.
Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows:
Within one year 606,756 806,736Later than one year but not later than five years 935,545 1,429,876Later than five years - 154,048
Commitments not recognised in the financial statements 1,542,301 2,390,660
(ii) Finance leasesThe Group leases certain equipment located at its plant in Germany under a 7 year,non-cancellable finance lease.
Commitments for minimum lease payments in relation to non-cancellable financeleases are payable as follows:
Within one year 333,732 364,694Later than one year but not later than five years 1,140,251 1,458,777Later than five years - 151,956
Minimum lease payments 1,473,983 1,975,427Future finance charges (180,202) (289,678)
Total lease liability 1,293,781 1,685,749
Representing lease liabilities (Note 18):Current 264,031 271,937Non-current 1,029,750 1,413,812
1,293,781 1,685,749
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Notes to the Consolidated Financial Statements30 June 2012
2012 2011
$ $
The present value of finance lease liabilities is as follows:Within one year 264,031 271,937Later than one year but not later than five years 1,029,750 1,264,086Later than five years - 149,726
1,293,781 1,685,749
Note 25. Related Party Transactions
(a) Parent entity
The parent entity within the Group is Ceramic Fuel Cells Limited which, at 30 June 2012, owned 100% of the issued sharecapital of its two UK subsidiaries, Ceramic Fuel Cells (Europe) Limited and Ceramic Fuel Cells (Powder) Limited, its Germansubsidiary, Ceramic Fuel Cells GmbH, and its Dutch subsidiary, Ceramic Fuel Cells B.V..
(b) Key management personnel
2012 2011
$ $
Key management personnel compensation 3,981,365 3,429,234
Disclosures relating to key management personnel are set out in Note 22.
Note 26. Subsidiaries
The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordancewith the accounting policy described in Note 1(b):
Name of entity Country of incorporation Class of shares
Parent entityCeramic Fuel Cells Limited Australia Ordinary
Equity holding 1
Subsidiaries2012
%2011
%
Ceramic Fuel Cells (Europe) Limited United Kingdom Ordinary 100 100Ceramic Fuel Cells (Powder) Limited United Kingdom Ordinary 100 100Ceramic Fuel Cells GmbH Germany Ordinary 100 100Ceramic Fuel Cells B.V. Netherlands Ordinary 100 100
1. The proportion of ownership interest is equal to the proportion of voting power held.
Note 27. Events occurring after the reporting period
Subsequent to the end of the financial year the Company has successfully concluded several financing activities as follows:
(a) Share placement
On 11 September 2012 the Company entered into a share subscription agreement with a major supplier to subscribe for100,000,000 ordinary shares at a price of 6 cents per share. This subscription would raise A$6.0m (before costs). The full amountof the subscription has been received by the Company. The Company has allotted and issued 99,500,000 shares on20 September 2012 and will issue a further 500,000 shares subject to shareholder approval, which will be sought at theforthcoming Annual General Meeting.
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Notes to the Consolidated Financial Statements30 June 2012
(b) Australian and New Zealand rights issue
The Company has concluded a rights issue to ASX shareholders registered in Australia and New Zealand. The offer was a onefor four non-renouncable rights issue of ordinary shares in the Company at an offer price of 6 cents per new share. The offer,which was not underwritten, closed on 17 September 2012 and has resulted in the issue of 69,677,901 ordinary shares and theraising of $4.2m (before costs).
(c) UK Issue
In conjunction with the rights issue the Company also undertook an Open Offer to existing United Kingdom and European AIMshareholders to raise up to £1,945,875 at a share price of 4 pence. The offer closed on 17 September 2012 and has resulted inthe issue of 23,254,556 ordinary shares and the raising of $1.4m (before costs).
2012 2011
$ $
Note 28. Reconciliation of Profit/(Loss) after Income Tax to NetCash Inflow/(Outflow) from Operating Activities
Operating profit/(loss) after income tax (30,197,723) (21,176,483)
Depreciation and amortisation 3,278,422 3,646,776Impairment charge/(reversal) on financial assets 2,576,718 -Non-cash employee benefits expense: share-based payments 1,689,047 781,329Net foreign exchange differences 295,820 571,041Interest revenue (273,753) (369,731)Change in operating assets and liabilities
Decrease/(increase) in trade and other receivables (1,525,245) (432,884)Decrease/(increase) in inventories (4,197,285) (4,049,609)Decrease/(increase) in other operating assets 294,932 (309,868)Increase/(decrease) in trade and other payables 1,859,183 838,811Increase/(decrease) in other provisions 911,944 1,109,953Increase/(decrease) in other liabilities 624,720 91,037
Net cash inflow/(outflow) from operating activities (24,663,220) (19,299,628)
Note 29. Earnings Per Share
Cents Cents
Basic and diluted earnings per share (2.33) (1.82)
Number Number
Weighted average number of sharesWeighted average number of shares used as the denominatorin calculating basic and diluted earnings per share
1,295,090,405 1,166,669,245
$ $
Earnings used in calculating basic and diluted earnings per shareProfit/(loss) attributable to the ordinary equity holders of the company (30,197,723) (21,176,483)
There were no results from discontinued operations, nor net loss attributable to outside equity interests, to be taken intoaccount in determining earnings used in calculating basic and diluted earnings per share.
Information concerning the classification of securitiesAll options issued will be anti-dilutive until such time as the Group generates profits, rather than losses, hence all optionshave been excluded from the calculation of diluted earnings per share.
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Notes to the Consolidated Financial Statements30 June 2012
Note 30. Share-based Payments
(a) Equity Plan
Options over shares in Ceramic Fuel Cells Limited have been granted under:
the CFCL Share Option Plan, originally approved by shareholders at the annual general meeting of the companyheld on 26 November 1999; and
the Directors and Employee Benefits Plan, approved by shareholders on 28 November 2006,
hereinafter collectively referred to as the Equity Plan.
Under the Equity Plan, all full time and part time permanent employees, including directors but excluding casual andshort-term contract employees, may be offered equity upon successful completion of their employment probationaryperiod. Any offer of equity is at the Board’s discretion and no individual has a contractual right to receive any guaranteedbenefit. No option holder has any right under the options to participate in any other share issue of the company or of anyother entity. Options granted under the Equity Plan carry no dividend or voting rights.
Options
Unissued ordinary shares of Ceramic Fuel Cells Limited under option at 30 June 2012 totalled 19,073,040, all of which havebeen issued under the Equity Plan.
2012
Grant Date Expiry Date ExercisePrice
($)
Balance atstart of year
(number)
Grantedduring the
year(number)
Forfeitedduring the
year 1
(number)
Exercisedduring the
year(number)
Balance atend of year(number)
Vested andexercisable at
end of year(number)
27 Jul 2001 26 Jul 2011 1.49 3,000 - (3,000) - - -
6 May 2004 5 May 2014 2.00 170,000 - - - 170,000 170,000
1 Sep 2004 31 Aug 2014 0.76 30,000 - - - 30,000 30,000
12 Oct 2005 11 Oct 2015 0.57 339,500 - (4,000) - 335,500 -
24 Aug 2006 23 Aug 2016 0.58 552,000 - (2,400) - 549,600 549,600
29 Aug 2007 28 Aug 2017 1.01 3,062,260 - (8,550) - 3,053,710 3,053,71029 Aug 2007 28 Aug 2017 0.99 100,000 - - - 100,000 100,0004 Dec 2007 3 Dec 2017 0.685 285,000 - - - 285,000 285,0004 Dec 2007 3 Dec 2011 1.01 200,000 - (200,000) - - -28 Mar 2008 27 Mar 2018 0.45 1,789,900 - (54,500) - 1,735,400 1,735,40028 Aug 2008 27 Aug 2018 0.102 285,000 - - - 285,000 285,00028 Aug 2008 27 Aug 2018 0.44 2,906,830 - (7,650) - 2,899,180 2,899,1805 Dec 2008 5 Dec 2018 0.44 1,000,000 - - - 1,000,000 1,000,0005 Dec 2008 5 Dec 2018 0.45 200,000 - - - 200,000 200,00026 Jun 2009 25 Jun 2019 0.175 4,039,154 - (89,944) - 3,949,210 3,949,21026 Jun 2009 25 Jun 2019 0.175 675,000 - - - 675,000 675,0001 Oct 2010 30 Sep 2020 0.1825 1,478,900 - - - 1,478,900 1,478,90028 Sep 2011 27 Sep 2021 0.15 - 2,326,540 - - 2,326,540 -
Total 17,116,544 2,326,540 (370,044) - 19,073,040 16,411,000
Weighted average exercise price: $0.48 $0.15 $0.71 - $0.43 $0.47
1. Forfeited includes lapsed due to expiration of option.
The weighted average remaining life of share options outstanding at the end of the period was 6.5 years (2011 – 6.3 years).
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Notes to the Consolidated Financial Statements30 June 2012
2011
Grant Date Expiry Date ExercisePrice
($)
Balanceat startof year
(number)
Grantedduring
the year(number)
Forfeitedduring
the year 1
(number)
Exercisedduring
the year(number)
Balanceat endof year
(number)
Vested andexercisable at
end of year(number)
25 Jul 2000 24 Jul 2010 1.49 134,000 - (134,000) - - -
23 Feb 2001 22 Feb 2011 1.49 1,000 - (1,000) - - -
27 Jul 2001 26 Jul 2011 1.49 3,000 - - - 3,000 3,000
6 May 2004 5 May 2014 2.00 170,000 - - - 170,000 170,000
1 Sep 2004 31 Aug 2014 0.76 30,000 - - - 30,000 30,000
12 Oct 2005 11 Oct 2015 0.57 339,500 - - - 339,500 -
24 Aug 2006 23 Aug 2016 0.58 556,000 - (4,000) - 552,000 552,000
26 Oct 2006 26 Oct 2010 0.2699 200,000 - (200,000) - - -29 Aug 2007 28 Aug 2017 1.01 3,071,760 - (9,500) - 3,062,260 3,062,26029 Aug 2007 28 Aug 2017 0.99 100,000 - - - 100,000 100,0004 Dec 2007 3 Dec 2017 0.685 285,000 - - - 285,000 285,0004 Dec 2007 3 Dec 2011 1.01 300,000 - (100,000) - 200,000 200,00028 Mar 2008 27 Mar 2018 0.45 1,814,900 - (25,000) - 1,789,900 1,789,90028 Aug 2008 27 Aug 2018 0.102 285,000 - - - 285,000 285,00028 Aug 2008 27 Aug 2018 0.44 2,949,330 - (42,500) - 2,906,830 2,906,8305 Dec 2008 5 Dec 2018 0.44 1,000,000 - - - 1,000,000 1,000,0005 Dec 2008 5 Dec 2018 0.45 200,000 - - - 200,000 200,00026 Jun 2009 25 Jun 2019 0.175 4,039,154 - - - 4,039,154 4,039,15426 Jun 2009 25 Jun 2019 0.175 675,000 - - - 675,000 675,0001 Oct 2010 30 Sep 2020 0.1825 - 1,478,900 - - 1,478,900 -
Total 16,153,644 1,478,900 (516,000) - 17,116,544 15,298,144Weighted average exercise price: $0.52 $0.18 $0.77 - $0.48 $0.51
1. Forfeited includes lapsed due to expiration of option.
The weighted average remaining life of share options outstanding at the end of the period was 6.3 years (2010 – 6.9 years).
(b) Expenses arising from share-based payment transactions
Total expenses arising from share-based payment transactions recognised during the period as part of employee benefitexpense were as follows:
2012 2011
$ $
Share-based payments expense 1,689,047 781,329
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Notes to the Consolidated Financial Statements30 June 2012
2012 2011
$ $
Note 31. Parent Entity Financial Information
(a) Summary financial information
Aggregated items within the financial statements of the parent entity include:
Balance Sheet
Current assets 9,848,515 17,388,050
Total assets 27,820,600 43,009,227
Current liabilities 5,929,343 4,197,206
Total liabilities 6,500,418 4,688,478
Shareholders’ equity
Contributed equity 277,282,387 260,275,437Share-based payments reserves 4,000,549 4,000,549Retained profits/(losses) (259,962,754) (225,955,237)
Total Equity 21,320,182 38,320,749
Net profit/(loss) for the year (34,007,517) (17,596,014)
Total comprehensive income/(expense) for the year (34,007,517) (17,596,014)
(b) Guarantees entered into by the parent entityThe parent entity has not provided any financial guarantees in respect of itssubsidiary undertakings as at 30 June 2012 (2011 – Nil).
(c) Contingent liabilities of the parent entityThe parent entity did not have any contingent liabilities as at 30 June 2012(2011 – Nil).
(d) Contractual commitments for the acquisition of plant and equipment
Commitments for the acquisition of plant and equipment contracted for atreporting date but not recognised as liabilities: 2,958 71,541
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DIRECTORS’ DECLARATION
In the directors’ opinion:
(a) the financial statements and notes set out on pages 46 to 81 are in accordance with the Corporations
Act 2001, including:
(i) complying with Accounting Standards, the Corporations Regulations 2001 and other
mandatory professional reporting requirements; and
(ii) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2012
and of its performance for the financial year ended on that date; and
(b) there are reasonable grounds to believe that the company will be able to pay its debts as and when
they become due and payable.
Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards
(IFRS) as issued by the International Accounting Standards Board.
The directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer
required by section 295A of the Corporations Act 2001.
This declaration is made in accordance with a resolution of the directors.
Jeff Harding
Chairman
Melbourne21 September 2012
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PricewaterhouseCoopers, ABN 52 780 433 757 Freshwater Place, 2 Southbank Boulevard, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001 T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation.
Independent auditor’s report to the members of Ceramic Fuel Cells Limited
Report on the financial report We have audited the accompanying financial report of Ceramic Fuel Cells Limited (the company), which comprises the balance sheet as at 30 June 2012, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for the Ceramic Fuel Cells Limited Group (the consolidated entity). The consolidated entity comprises the company and the entities it controlled at the year’s end or from time to time during the financial year.
Directors’ responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards.
Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.
Our procedures include reading the other information in the Financial Report to determine whether it contains any material inconsistencies with the financial report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.
Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. F
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Auditor’s opinion In our opinion,
(a) the financial report of Ceramic Fuel Cells Limited and its controlled entities is in accordance with the Corporations Act 2001, including:
(i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2012 and of its performance for the year ended on that date, and
(ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and
(b) the financial report and notes also comply with International Financial Reporting Standards as disclosed in Note 1
Material Uncertainty Regarding Continuation as a Going Concern Without qualifying our opinion, we draw attention to Note 1 in the financial report, which indicates the need for additional funding to ensure the continuation of the consolidated entity. This condition, along with the other matters as set forth in Note 1, indicate the existence of a material uncertainty that may cast significant doubt about the consolidated entity’s ability to continue as a going concern and, therefore whether it will realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report.
Report on the Remuneration Report We have audited the remuneration report included in pages 29 to 35 the director’s report for the year ended 30 June 2012. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards.
Auditor’s opinion In our opinion, the remuneration report of Ceramic Fuel Cells Limited for the year ended 30 June 2012, complies with section 300A of the Corporations Act 2001.
PricewaterhouseCoopers
Michael Shewan Melbourne Partner 21 September 2012
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Shareholder Information
The shareholder information in this section was applicable as at 3 September 2012.
Equity SecuritiesThe Company had on issue 1,366,298,863 fully paid ordinary shares, held by a total of 12,506 shareholders: 12,147shareholders on the Australian Securities Exchange (ASX) and 359 depository interest (DI) holders on the London StockExchange AIM market (AIM). There is no on-market buy-back and there are no ‘restricted securities’ as defined in the ASXListing Rules.
The Company had 19,061,790 ordinary shares of the Company under option under the CFCL Share Option Plan andDirectors and Employees Benefits Plan, held by 89 option holders. Options do not carry any voting rights and are notlisted.
Distribution
Ordinary Shares Options
RangeASX
shareholdersAIM
DI holdersTotal
shareholders
1 - 1,000 369 11 380 -
1,001 - 5,000 1,897 46 1,943 2
5,001 - 10,000 1,954 47 2,001 6
10,001 - 100,000 6,431 156 6,587 43
100,000+ 1,496 99 1,595 38
Total 12,147 359 12,506 89
There are 1,681 security investors holding less than a marketable parcel.
Substantial holders as disclosed in substantial shareholding notices received by the Company as at 3 September 2012 are:
Holder Number of securities
Neo International Investments Limited 90,909,090
KBC Asset Management Limited 82,334,808
Top 20 Shareholders
Registered Holder of Shares or Depository Interests Number % of totalshares
HSBC CLIENT HOLDINGS NOMINEE (UK) 90,966,090 6.66
BBHISL NOMINEES LIMITED <120077> 67,662,988 4.95
J P MORGAN NOMINEES AUSTRALIA 44,535,508 3.26
METASOURCE PTY LTD 38,250,000 2.80
LOG CREEK PTY LTD 36,458,332 2.67
KBC SECURITIES NV <CLIENT> 35,346,889 2.59
VIDACOS NOMINEES LIMITED <BRITUT> 29,948,519 2.19
STATE STREET NOMINEES LIMITED 28,777,335 2.11
JP MORGAN NOMINEES AUSTRALIA 27,315,379 2.00
NORTRUST NOMINEES LIMITED <SLEND> 26,680,993 1.95
HSBC CUSTODY NOMINEES 14,928,070 1.09
MR JEFFREY HARDING 12,826,852 0.94
BARCLAYSHARE NOMINEES LIMITED 12,591,867 0.92
MOORE FAMILY NOMINEE PTY LTD 12,585,616 0.92
CBD PLAZA (AUST) PTY LTD 12,339,128 0.90
CHASE NOMINEES LIMITED <CMBLJPPB> 11,095,238 0.81
TD DIRECT INVESTING NOMINEES 11,049,066 0.81
CITY OF BRADFORD METROPOLITAN 9,750,000 0.71
L R NOMINEES LIMITED <NOMINEE> 8,522,507 0.62
NATIONAL NOMINEES LIMITED 7,660,533 0.56
Total for Top 20 546,555,698 40%
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