Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 1. Nature of Business and Basis of Presentation
FuelCell Energy, Inc., together with its subsidiaries (the “Company”, “FuelCell Energy”, “we”, “us”, or “our”) is a leading integrated fuel cell company with a growing global presence. We design, manufacture, install, operate and service ultra-clean, efficient and reliable stationary fuel cell power plants. Our SureSource power plants generate electricity and usable high quality heat for commercial, industrial, government and utility customers. We have commercialized our stationary carbonate fuel cells and are also pursuing the complementary development of planar solid oxide fuel cells and other fuel cell technologies. Our operations are funded primarily through sales of equity instruments to strategic investors or in public markets, corporate and project level debt financing and local or state government loans or grants. In order to produce positive cash flow from operations, we need to be successful at increasing annual order volume and production and in our cost reduction efforts.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial information. Accordingly, they do not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, all normal and recurring adjustments necessary to fairly present the Company’s financial position and results of operations as of and for the three and nine months ended July 31, 2019 and 2018 have been included. All intercompany accounts and transactions have been eliminated.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The balance sheet as of October 31, 2018 has been derived from the audited financial statements at that date, but it does not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the Company’s financial statements and notes thereto for the fiscal year ended October 31, 2018, which are contained in the Company’s Annual Report on Form 10-K previously filed with the SEC. The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.
On May 8, 2019 at 5:00 p.m. Eastern time, the Company effected a 1-for-12 reverse stock split, reducing the number of the Company’s common shares outstanding on that date from 183,411,230 shares to 15,284,269 shares. The number of authorized shares of common stock remains unchanged at 225,000,000 shares and the number of authorized shares of preferred stock remains unchanged at 250,000 shares. Additionally, the conversion rate of our Series B Preferred Stock (as defined elsewhere herein), the conversion price of our Series C Preferred Stock and Series D Preferred Stock (each as defined elsewhere herein), the exchange price of our Series 1 Preferred Shares (as defined elsewhere herein), the exercise price of all then outstanding options and warrants, and the number of shares reserved for future issuance pursuant to our equity compensation plans were all adjusted proportionately in connection with the reverse stock split. All share and per share amounts and conversion prices presented herein have been adjusted retroactively to reflect these changes.
Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. The Company adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” effective November 1, 2018 and applied the modified retrospective transition method. As a result of the adoption of this ASU, Unbilled receivables has been reclassified as a separate line item from Accounts receivable, net on the Consolidated Balance Sheets and Unbilled receivables has been classified as a separate item from Accounts receivable, net in the Consolidated Statement of Cash Flows for the prior year period.
Going Concern and Liquidity Considerations
The Company’s consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company has significant short-term debt and other obligations currently due or maturing in less than one year, which are in excess of the Company’s cash and current asset balance. Due to the Company’s constrained liquidity, the Company has been delaying certain payments to third parties, including trade creditors, to conserve cash. Management has been actively working with trade creditors, and entering into forbearance agreements and payment arrangements. However, the Company may not be able to enter into forbearance agreements or make suitable payment arrangements with its trade creditors, or the terms of any forbearance agreements or payment arrangements may not be favorable to the Company. If the Company is unable to negotiate such forbearance agreements or payment arrangements, trade creditors whose payments have been delayed may take action against the Company, including, but not limited to, filing litigation, arbitration or other proceedings against the Company. Going forward, suppliers may require changes to payment terms and advance payments which may create an additional strain on liquidity.
9
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
The Company has entered into a series of amendments to its senior secured debt facility with its senior lender Hercules Capital, Inc. (“Hercules”) in order to, among other things, provide for a lower minimum cash covenant, obtain a waiver of the minimum cash covenant during certain amendment periods, and avoid events of default and acceleration of amounts due under the loan agreement. Most recently, Hercules provided an amendment through September 30, 2019, which would extend to October 22, 2019 if the outstanding loan balance is less than or equal to $5.0 million on or before September 30, 2019. As of September 4, 2019, the outstanding principal balance under the Hercules facility totaled approximately $5.6 million. In exchange for these amendments, the Company has paid down the principal balance under the Hercules facility and agreed to make additional principal payments equal to 30% of the net proceeds of stock sales under the Company’s at-the-market sales agreement, as further described in Note 17. “Debt and Financing Obligation” and Note 20. “Subsequent Events”.
As of July 31, 2019, the Company had an accumulated deficit from recurring net losses for the current and prior years. These factors as well as negative cash flows from operating and investing activities and negative working capital raise substantial doubt about the Company’s ability to continue as a going concern.
Management is working to address the Company’s current liquidity position through the exploration of various alternatives, including, but not limited to, refinancing the Company’s senior secured credit facility with Hercules; retaining existing project financing facilities and securing additional project financing facilities (including construction and term debt facilities and tax equity financing); potential sales of the Company’s assets, its intellectual property, or all or part of its business; potential licensing of certain of the Company’s technology and intellectual property; implementing cost reduction measures such as the reduction in force implemented in April; increasing sales activity related to the Company’s products; negotiating and entering into advanced technology research and development contracts; and sales of common stock or other equity securities directly to investors or through the Company’s at-the-market sales plan. Notwithstanding the Company’s efforts, the Company may not be able to refinance the Hercules credit facility on acceptable terms, or at all, retain existing project financing facilities or secure additional project financing facilities on acceptable terms, or at all, consummate any sale of its assets or all or part of its business, any sale or license of any of its intellectual property, or any sale of equity securities, implement further cost reduction measures, increase its sales activity, or successfully negotiate and enter into advanced technology contracts. Although the maturity date of the Hercules credit facility is April 1, 2020, the waiver by Hercules of certain covenants (including the minimum unrestricted cash covenant) expires by September 30, 2019 (or October 22, 2019 if the Hercules loan balance is less than or equal to $5.0 million on or before September 30, 2019). Accordingly, if the Company is not able to refinance the Hercules credit facility, and if Hercules is not willing to provide further accommodations, the Company may not meet certain covenant requirements and as a result may default on its obligations under its senior secured credit facility with Hercules. The occurrence of an event of default under the Hercules credit facility also constitutes or may result in an event of default under, and causes or may cause the acceleration of, a number of material financial obligations of the Company, including the loan from the State of Connecticut, the loan from Connecticut Green Bank, and the project finance facilities with Generate Lending, LLC (“Generate Lending”), PNC Energy Capital, LLC (“PNC”), and Fifth Third Bank (“Fifth Third”). The occurrence of an event of default under the Hercules credit facility also constitutes a triggering event under the Certificate of Designations, Preferences and Rights of the Series D Convertible Preferred Stock of the Company.
At the project finance level, as further described in Note 17. “Debt and Financing Obligation” and Note 20. “Subsequent Events”, the Company has outstanding construction loans from NRG Energy, Inc. (“NRG”), Generate Lending and Fifth Third. Under the most recent amendment to the loan agreement with NRG, the maturity date of each note payable to NRG is now the date that is the earliest of (a) September 30, 2019, (b) the commercial operation date or substantial completion date, as applicable, with respect to the fuel cell project owned by the co-borrower under such note, and (c) the repayment in full or the closing of a refinancing of the Company’s indebtedness with Hercules. NRG may also accelerate the maturity dates if it determines, in its sole discretion, that the Company is not making sufficient progress towards the completion of the construction of the 2.8 MW Tulare BioMAT project in California. If the Company is unable to make sufficient progress toward the completion of such project or to obtain another amendment, extension or refinancing, the Company may default on the NRG loan. The occurrence of an event of default under the NRG loan agreement may result in the principal and all accrued interest becoming immediately due and payable.
10
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Under the most recent amendment to the loan agreement with Generate Lending, Generate Lending has a call right, which may be exercised during the period beginning on September 1, 2019 and ending on (and including) September 30, 2019 (which period may be further extended by mutual agreement of the parties), and which, if exercised, would require payment of all outstanding loans from Generate Lending (which are further described in Note 17. “Debt and Financing Obligations”) and all accrued and unpaid interest thereon on September 30, 2019. If Generate Lending calls the loan or determines to cease lending under its construction loan facility, the Company will be required to pursue alternative financing for the Company’s generation backlog. If the Company is unable to obtain such financing, it may result in delays in project execution and potential termination or events of default under certain power purchase agreements.
Finally, under the most recent amendment to the construction loan agreement with Fifth Third, the Company has agreed (among other things) that, no later than September 28, 2019, it will deliver to Fifth Third a binding loan agreement for permanent financing from another lender and one or more binding letters of intent from tax equity investors in an amount of at least $18.0 million, provided that such date will be automatically extended to October 21, 2019 in the event that the Hercules credit facility is repaid or extended beyond October 21, 2019, and further provided that both dates could be extended by an additional 60 days due to delays outside of the control of the Company or if Fifth Third is reasonably satisfied that the Company is negotiating diligently and in good faith with potential take-out lenders or tax equity investors. If the Company is unable to obtain a binding loan agreement for permanent financing from another lender and one or more binding letters of intent from tax equity investors in an amount of at least $18.0 million, and if Fifth Third does not provide further accommodation, the Company may default on the Fifth Third loan. The occurrence of an event of default under the Fifth Third loan may result in the principal and all accrued interest becoming immediately due and payable.
Should these obligations to NRG, Generate Lending and Fifth Third mature as described above without further extension or amendment, the Company may not have the liquidity to repay such obligations. The occurrence of an event of default under any of these project finance agreements also constitutes or may result in an event of default under, and causes or may cause the acceleration of amounts due under these agreements and a number of other material financial obligations of the Company, including the Hercules facility, the loan from the State of Connecticut, the financing agreements with PNC and the loan from the Connecticut Green Bank.
The terms of any financing and other measures to obtain funds that may be undertaken by the Company may adversely affect the holdings or the rights of the Company’s stockholders. If the Company is unable to obtain and retain funding, the Company could be forced to delay, reduce or eliminate some or all of its research and development efforts and commercialization efforts and accelerate its exploration of potential sales of its intellectual property, other assets, and business, any of which could adversely affect its business prospects, or the Company may be unable to continue operations. Although management continues to pursue its business plans, there is no assurance that the Company will be successful in obtaining and retaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all. If the Company is unable to obtain external financing and/or increase liquidity through sales of its assets, its intellectual property or all or part of its business or through licensing of its technology and intellectual property, it may not be able to sustain future operations. As a result, the Company may be required to delay, reduce and/or cease its operations and/or seek bankruptcy protection. Based on its recurring losses from operations, expectation of continuing operating losses for the foreseeable future, negative working capital, and need to raise additional capital to finance its future operations, the Company has concluded that there is substantial doubt about its ability to continue as a going concern for a period of one year after the date of filing of this Quarterly Report on Form 10-Q.
The Company’s financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accordingly, the financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
Use of Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent liabilities. Estimates are used in accounting for, among other things, revenue recognition, contract loss accruals, excess, slow-moving and obsolete inventories, product warranty accruals, loss accruals on service agreements, share-based compensation expense, allowance for doubtful accounts, depreciation and amortization, impairment of goodwill and in-process research and development intangible assets, impairment of long-lived assets (including project assets), income taxes, contingencies and valuing assets acquired and pre-existing contractual arrangements settled in the acquisition of Bridgeport Fuel Cell, LLC. Estimates and assumptions are reviewed periodically, and the
11
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates.
Note 2. Recent Accounting Pronouncements
Recently Adopted Accounting Guidance
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The objective of this ASU is to remove inconsistent practices with regard to revenue recognition in and between GAAP and International Financial Reporting Standards. ASU 2014-09 intends to improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The adoption of this ASU by the Company on November 1, 2018 resulted in a cumulative effect adjustment that increased Accumulated deficit by $6.7 million.
In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” which provides for a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The standard is effective, on a prospective basis for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The Company adopted this ASU effective November 1, 2018. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements.
Recent Accounting Guidance Not Yet Effective
In February 2016, the FASB issued ASU 2016-02, “Leases” that amends the accounting and disclosure requirements for leases. The new guidance requires that a lessee shall recognize a right-of-use (“ROU”) asset and a corresponding lease liability, initially measured at the present value of the lease payments, in its balance sheet. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the Consolidated Statements of Operations. The new standard required a modified retrospective transition approach that the Company is required to adopt on November 1, 2019. In July 2018, the FASB issued an amendment to the new leasing standard which provides an alternative transition method that allows companies to recognize a cumulative effect adjustment to the opening balance sheet upon adoption. The Company intends to elect this alternative transition method and forgo the adjustments to comparative-period financial information.
The Company has both operating and capital leases (refer to Note 19. “Commitments and Contingencies”) as well as sale-leaseback transactions that are accounted for under the finance method. The new standard provides entities with several practical expedient elections. Among them, the Company intends to elect the package of practical expedients that permits the Company to not reassess prior conclusions related to its leasing arrangements, lease classifications and initial direct costs. In addition, the Company plans to elect the practical expedients to not separate lease and non-lease components, to use hindsight in determining the lease terms and impairment of ROU assets, and to not apply the new standard’s recognition requirements to short-term leases or use the portfolio approach to a group of leases with similar characteristics. Upon adoption of this ASU, the Company will record ROU assets and the present value of its lease liabilities which are currently not recognized on its consolidated balance sheet. The Company is in the process of implementing changes to its business processes, systems and controls to support the new lease standard and its disclosure requirements. The Company is still in the process of reviewing its contractual arrangements and the impact that adoption of ASU 2016-02 will have on the Company’s consolidated financial statements.
Note 3. Revenue Recognition
Under Accounting Standards Codification (“ASC”) Topic 606: Revenue from Contracts with Customer (“Topic 606”), the amount of revenue recognized for any goods or services reflects the consideration that the Company expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, the Company applies the following five-step approach: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as a performance obligation is satisfied.
12
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
A contract is accounted for when there has been approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Performance obligations under a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract. In certain instances, the Company has concluded distinct goods or services should be accounted for as a single performance obligation that is a series of distinct goods or services that have the same pattern of transfer to the customer. To the extent a contract includes multiple promised goods or services, the Company must apply judgment to determine whether the customer can benefit from the goods or services either on their own or together with other resources that are readily available to the customer (the goods or services are distinct) and if the promise to transfer the goods or services to the customer is separately identifiable from other promises in the contract (the goods or services are distinct in the context of the contract). If these criteria are not met, the promised services are accounted for as a single performance obligation. The transaction price is determined based on the consideration that the Company will be entitled to in exchange for transferring goods or services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price, generally utilizing the expected value method. Determining the transaction price requires judgment. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. Standalone selling price is determined by the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price by taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Performance obligations are satisfied either over time or at a point in time as discussed in further detail below. In addition, the Company’s contracts with customers generally do not include significant financing components or non-cash consideration.
Revenue streams are classified as follows:
Product. Includes the sale of completed project assets, sale and installation of fuel cell power plants including site engineering and construction services, and the sale of modules, balance of plant (“BOP”) components and spare parts to customers.
Service. Includes performance under long-term service agreements for power plants owned by third parties.
License and royalty. Includes license fees and royalty income from manufacturing and technology transfer agreements.
Generation. Includes the sale of electricity under power purchase agreements (“PPAs”) and utility tariffs from project assets retained by the Company. This also includes revenue received from the sale of other value streams from these assets including the sale of heat, steam, capacity and renewable energy credits.
Advanced Technologies. Includes revenue from customer-sponsored and government-sponsored Advanced Technologies projects.
See below for discussion of revenue recognition under Topic 606 by disaggregated revenue stream, including a comparison to revenue recognition treatment under ASC 605, Revenue Recognition (“ASC 605”).
Completed project assets
Contracts for the sale of completed project assets includes the sale of the project asset, the assignment of the service agreement, and the assignment of the PPA. The relative stand-alone selling price is estimated and is used as the basis for allocation of the contract consideration. Revenue is recognized upon the satisfaction of the performance obligations, which includes the transfer of control of the project asset to the customer, which is when the contract is signed and the PPA is assigned to the customer. See below for further discussion regarding revenue recognition for service agreements. The revenue recognition for completed project assets under Topic 606 is consistent with treatment under ASC 605.
Contractual payments related to the sale of the project asset and assignment of the PPA are generally received up-front. Payment terms for service agreements are generally ratable over the term of the agreement.
13
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Service agreements
Service agreements represent a single performance obligation whereby the Company performs all required maintenance and monitoring functions, including replacement of modules, to ensure the power plant(s) under the service agreement generate a minimum power output. To the extent the power plant(s) under service agreements do not achieve the minimum power output, certain service agreements include a performance guarantee penalty. Performance guarantee penalties represent variable consideration, which is estimated for each service agreement based on past experience, using the expected value method. The net consideration for each service agreement is recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Under ASC 605, revenue for service agreements was generally recorded ratably over the term of the service agreement, as the performance of routine monitoring and maintenance under the service agreements was expected to be incurred on a straight-line basis. If there was an estimated module exchange during the term, the costs of performance were not expected to be incurred on a straight-line basis, and therefore a portion of the initial contract value relating to the module exchange was deferred and recognized upon such module replacement event. Prior to the implementation of Topic 606, an estimate for a performance guarantee was not recorded until a performance issue occurred at a particular power plant. At that point, the actual power plant’s output was compared against the minimum output guarantee and an accrual was recorded. Furthermore, under ASC 605, performance guarantee accruals were recorded based on actual performance and the related expense was recorded to service and license cost of revenues. The review of power plant performance was updated for each reporting period to incorporate the most recent performance of the power plant and minimum output guarantee payments made to customers, if applicable.
The Company reviews its cost estimates on service agreements on a quarterly basis and records any changes in estimates on a cumulative catch-up basis.
Loss accruals for service agreements are recognized to the extent that the estimated remaining costs to satisfy the performance obligation exceed the estimated remaining unrecognized net consideration. Estimated losses are recognized in the period in which losses are identified.
The Company records any amounts that are billed to customers in excess of revenue recognized as deferred revenue and revenue recognized in excess of amounts billed to customers as unbilled receivables. Payment terms for service agreements are generally ratable over the term of the agreement.
Advanced Technologies contracts
Advanced Technologies contracts include the promise to perform research and development services and as such this represents one performance obligation. Revenue from most government sponsored Advanced Technologies projects is recognized as direct costs are incurred plus allowable overhead less cost share requirements, if any. Revenue is only recognized to the extent the contracts are funded. Revenue from fixed price Advanced Technologies projects is recognized using the cost to cost input method. There was no impact of adoption of Topic 606 on revenue recognition for Advanced Technologies contracts.
The Company records any amounts that are billed to customers in excess of revenue recognized as deferred revenue and revenue recognized in excess of amounts billed to customers as unbilled receivables. Payments are based on costs incurred for government sponsored Advanced Technologies projects and upon completion of milestones for all other projects.
License agreements
The Company entered into manufacturing and technology transfer agreements (the “license agreements”) with POSCO Energy Co., Ltd. (“POSCO Energy”) in 2007, 2009 and 2012. Revenue from the license fees received from POSCO Energy were previously recognized over the term of the associated agreements. In connection with the adoption of Topic 606, several performance obligations were identified including previously satisfied performance obligations for the transfer of licensed intellectual property, two performance obligations for specified upgrades of the previously licensed intellectual property, a performance obligation to deliver unspecified upgrades to the previously licensed intellectual property on a when and if available basis, and a performance obligation to provide technical support for previously delivered intellectual property. The performance obligations related to the specified upgrades will be satisfied and related consideration recognized as revenue upon the delivery of the specified upgrades. The performance obligations for unspecified upgrades and technical support are being recognized on a straight-line basis over the license term on the basis this represents the method that best depicts the progress towards completion of the related performance obligations. All fixed consideration for the license agreements was previously collected.
14
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Effective as of June 11, 2019, the Company entered into a License Agreement (the “EMRE License Agreement”) with ExxonMobil Research and Engineering Company (“EMRE”), pursuant to which the Company agreed, subject to the terms of the EMRE License Agreement, to grant EMRE and its affiliates a non-exclusive, worldwide, fully paid, perpetual, irrevocable, non-transferrable license and right to use the Company’s patents, data, know-how, improvements, equipment designs, methods, processes and the like to the extent it is useful to research, develop, and commercially exploit carbonate fuel cells in applications in which the fuel cells concentrate carbon dioxide from industrial and power sources and for any other purpose attendant thereto or associated therewith. Such right and license is sublicensable to third parties performing work for or with EMRE or its affiliates, but shall not otherwise be sublicensable. Upon the payment by EMRE to the Company of $10.0 million, which was received by the Company on June 14, 2019, EMRE and its affiliates were fully vested in the rights and licenses granted in the EMRE License Agreement, and any further obligations under the license agreement are considered by the Company to be minimal. As a result, the total amount received of $10.0 million was recorded as revenue for the three and nine months ended July 31, 2019.
Generation revenue
For project assets where customers purchase electricity from the Company under PPAs, the Company has determined that these agreements should be accounted for as operating leases pursuant to ASC 840, Leases. Revenue is recognized based on the amount of electricity delivered at rates specified under the contracts, assuming all other revenue recognition criteria are met.
Payments for electricity are made after the electricity has been delivered.
The cumulative effect of the changes made to the Company’s Consolidated Balance Sheets as of November 1, 2018 as a result of the adoption of Topic 606 was as follows:
|
|
|
October 31,
2018
|
|
|
Adjustments
due to
Topic 606
|
|
|
Balance at
November 1,
2018
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
$
|
13,759
|
|
|
$
|
471
|
|
|
$
|
14,230
|
|
|
Other assets
|
|
|
13,505
|
|
|
|
(132
|
)
|
|
|
13,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
7,632
|
|
|
$
|
995
|
|
|
$
|
8,627
|
|
|
Deferred revenue, current portion
|
|
|
11,347
|
|
|
|
(240
|
)
|
|
|
11,107
|
|
|
Long-term deferred revenue
|
|
|
16,793
|
|
|
|
6,238
|
|
|
|
23,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(990,867
|
)
|
|
$
|
(6,654
|
)
|
|
$
|
(997,521
|
)
|
The increase in long-term deferred revenue primarily pertains to license arrangement consideration previously recognized as revenue under ASC 605 that will be recognized when the specified upgrade performance obligations are satisfied.
15
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
The following tables summarize the impacts of Topic 606 on the Company’s consolidated financial statements.
|
|
|
July 31, 2019
|
|
|
|
|
As reported
|
|
|
Adjustments
|
|
|
Balances without
adoption of
Topic 606
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled receivables
|
|
$
|
8,186
|
|
|
$
|
(110
|
)
|
|
$
|
8,076
|
|
|
Other assets
|
|
|
10,019
|
|
|
|
(901
|
)
|
|
|
9,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
8,582
|
|
|
$
|
(939
|
)
|
|
$
|
7,643
|
|
|
Deferred revenue
|
|
|
15,650
|
|
|
|
(1,518
|
)
|
|
|
14,132
|
|
|
Long-term deferred revenue
|
|
|
22,190
|
|
|
|
(7,083
|
)
|
|
|
15,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(1,039,910
|
)
|
|
$
|
8,529
|
|
|
$
|
(1,031,381
|
)
|
|
|
|
For the Three Months Ended July 31, 2019
|
|
|
|
|
As reported
|
|
|
Adjustments
|
|
|
Balances without
adoption of
Topic 606
|
|
|
Total revenues
|
|
$
|
22,712
|
|
|
$
|
974
|
|
|
$
|
23,686
|
|
|
Total cost of revenues
|
|
|
14,747
|
|
|
|
397
|
|
|
|
15,144
|
|
|
Gross profit
|
|
|
7,965
|
|
|
|
577
|
|
|
|
8,542
|
|
|
Administrative and selling expenses
|
|
|
7,058
|
|
|
|
—
|
|
|
|
7,058
|
|
|
Research and development expenses
|
|
|
1,977
|
|
|
|
—
|
|
|
|
1,977
|
|
|
Loss from operations
|
|
|
(1,070
|
)
|
|
|
577
|
|
|
|
(493
|
)
|
|
Interest expense
|
|
|
(3,536
|
)
|
|
|
—
|
|
|
|
(3,536
|
)
|
|
Other expense, net
|
|
|
(685
|
)
|
|
|
—
|
|
|
|
(685
|
)
|
|
Loss before provision for income taxes
|
|
|
(5,291
|
)
|
|
|
577
|
|
|
|
(4,714
|
)
|
|
Provision for income taxes
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
(20
|
)
|
|
Net loss
|
|
$
|
(5,311
|
)
|
|
$
|
577
|
|
|
$
|
(4,734
|
)
|
|
|
|
For the Nine Months Ended July 31, 2019
|
|
|
|
|
As reported
|
|
|
Adjustments
|
|
|
Balances without
adoption of
Topic 606
|
|
|
Total revenues
|
|
$
|
49,711
|
|
|
$
|
3,315
|
|
|
$
|
53,026
|
|
|
Total cost of revenues
|
|
|
47,591
|
|
|
|
1,440
|
|
|
|
49,031
|
|
|
Gross profit
|
|
|
2,120
|
|
|
|
1,875
|
|
|
|
3,995
|
|
|
Administrative and selling expenses
|
|
|
23,622
|
|
|
|
—
|
|
|
|
23,622
|
|
|
Research and development expenses
|
|
|
12,435
|
|
|
|
—
|
|
|
|
12,435
|
|
|
Loss from operations
|
|
|
(33,937
|
)
|
|
|
1,875
|
|
|
|
(32,062
|
)
|
|
Interest expense
|
|
|
(7,807
|
)
|
|
|
—
|
|
|
|
(7,807
|
)
|
|
Other expense, net
|
|
|
(556
|
)
|
|
|
—
|
|
|
|
(556
|
)
|
|
Loss before provision for income taxes
|
|
|
(42,300
|
)
|
|
|
1,875
|
|
|
|
(40,425
|
)
|
|
Provision for income taxes
|
|
|
(89
|
)
|
|
|
—
|
|
|
|
(89
|
)
|
|
Net loss
|
|
$
|
(42,389
|
)
|
|
$
|
1,875
|
|
|
$
|
(40,514
|
)
|
For the three and nine month periods ended July 31, 2019, the only adjustment to comprehensive loss when comparing the balances with Topic 606 and the balances without Topic 606 included the adjustment to net loss.
16
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
For the nine month period ended July 31, 2019, the impact of adoption of Topic 606 on the Consolidated Statement of Cash Flows included an adjustment to net loss of $1.9 million and adjustments to changes in operating assets and liabilities consistent with the impact of adoption of Topic 606 on the July 31, 2019 Consolidated Balance Sheet as reflected above.
Contract Balances
Contract assets as of July 31, 2019 and October 31, 2018 were $12.3 million and $23.2 million, respectively. The contract assets relate to the Company’s rights to consideration for work completed but not billed. These amounts are included on a separate line item as Unbilled receivables and balances expected to be billed later than one year from the balance sheet date are included within Other assets on the accompanying consolidated balance sheets. The net change in contract assets represents amounts recorded as revenue offset by customer billings. A total of $6.6 million was transferred to accounts receivable from contract assets recognized at the beginning of the period.
Contract liabilities as of July 31, 2019 and October 31, 2018 were $37.8 million and $28.1 million, respectively. The contract liabilities relate to the advance billings to customers for services that will be recognized over time and in some instances for deferred revenue relating to license performance obligations that will be recognized at a future point in time. These amounts are included within Deferred revenue and Long-term deferred revenue on the accompanying consolidated balance sheets. The net change in contract liabilities represents customer billings offset by revenue recorded.
Remaining Performance Obligations
Remaining performance obligations are the aggregate amount of total contract transaction price that is unsatisfied or partially unsatisfied. As of July 31, 2019, the Company’s total remaining performance obligations for service agreements, license agreements and Advanced Technologies contracts were $284.1 million. License revenue recognized over time will be recognized over the remaining term of the license agreement. License revenue recognized at a point in time will be recognized when the first specified upgrade that has been developed is delivered and when the second specified upgrade is developed and delivered. Service revenue in periods where there are no module replacements is expected to be relatively consistent from period to period whereas module replacements will result in an increase in revenue. Advanced Technologies revenue will be recognized as costs are incurred.
Note 4. Acquisition
On October 31, 2018, FuelCell Energy Finance, LLC (“FuelCell Finance”) entered into a membership interest purchase agreement (the “Purchase Agreement”) with Dominion Generation, Inc., amended on January 15, 2019 and May 9, 2019, pursuant to which FuelCell Finance purchased (on May 9, 2019) all of the outstanding membership interests in Dominion Bridgeport Fuel Cell, LLC (which is now known as Bridgeport Fuel Cell, LLC) (“BFC”). BFC owns a 14.9 MW fuel cell park in Bridgeport, Connecticut (the “Bridgeport Fuel Cell Project”), which the Company originally developed and constructed and has been operating, for Dominion Generation, Inc. since December 2013 under a service agreement.
On May 9, 2019, FuelCell Finance closed on the purchase of BFC for a total purchase price of approximately $35.5 million, subject to a dollar-for-dollar post-closing adjustment to the extent that the closing working capital is greater or less than $1.0 million (the “BFC Purchase Price”). The Company has estimated a working capital adjustment of $0.4 million, which has been included in the BFC Purchase Price. Certain balance sheet accounts as of the transaction date, May 9, 2019, relating to the Bridgeport Fuel Cell Project service agreement (accounts receivable of $2.7 million, unbilled receivables of $15.3 million and accrued performance guarantees of $1.3 million) were settled in connection with the acquisition and accordingly were included in the consideration for the acquisition.
The acquisition was funded by loans from Fifth Third, Liberty Bank and Connecticut Green Bank (refer to Note 17. “Debt and Financing Obligation” for more information). The balance of the financing for the acquisition was funded by the $15 million of restricted cash on hand that was tied to the Bridgeport Fuel Cell Project and released at closing.
ASC Topic 805, “Business Combinations” states that a business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. As the acquisition did not meet the definition of a business combination under ASC 805, the Company accounted for the transaction as an asset acquisition. In an asset acquisition, goodwill is not recognized, but rather any excess consideration transferred over the fair value of the net assets acquired is allocated on a relative fair value basis to the identifiable net assets. The Company determined the estimated fair values using Level 3 inputs after review and consideration of relevant information, including discounted cash flows, quoted market prices and estimates made by management. The acquisition of BFC also
17
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
included a PPA with Connecticut Light and Power, a land lease with the City of Bridgeport, and working capital. The pre-existing service agreement was determined to be priced similar to current market rates and no gain or loss was recorded. A total of $38.8 million of consideration was allocated to the fuel cell power plants installation which is recorded in Project Assets, a total of $12.3 million of consideration was allocated to the PPA which is recorded as an intangible asset, and the remaining consideration was allocated to the acquired working capital. The project asset and PPA intangible asset will be depreciated and amortized over their respective useful lives. Additionally, the land lease with the City of Bridgeport was not assigned any consideration due to its insignificant value.
As of July 31, 2019, the total value of the acquired project asset was $37.4 million. The major depreciable assets of the Bridgeport Fuel Cell Project are the fuel cell modules, which will be depreciated over their estimated remaining useful lives of approximately one to seven years, and balance of plant assets, which will be depreciated over its estimated remaining useful life of approximately fifteen years. As of July 31, 2019, the total value of the intangible assets was $12.0 million and amortization expense recorded since the acquisition date of May 9, 2019 was $0.3 million. The intangible assets will be amortized over their remaining useful life of approximately ten years.
Note 5. Restructuring and Impairment
On April 12, 2019, the Company undertook a reorganization, which included a reduction in force of 135 employees, which represented 30% of the Company’s global workforce. The workforce was reduced at the North American production facility in Torrington, Connecticut, as well as at corporate offices in Danbury, Connecticut and at remote locations. There was no restructuring expense recorded because no severance was provided in connection with the reduction in force. The Company has also reduced its procurement of inventory and is implementing various cost control initiatives.
In connection with the reorganization, the Company also reviewed certain construction in process projects and identified a construction in process asset related to automation equipment for use in manufacturing which has been determined to be impaired due to uncertainty as to whether the asset will be completed as a result of the Company’s liquidity position and continued low level of production rates. The Company recorded a charge of $2.8 million which is included in Product cost of revenues on the Consolidated Statements of Operations for the nine months ended July 31, 2019.
Note 6. Accounts Receivable, Net and Unbilled Receivables
Accounts receivable, net and Unbilled receivables as of July 31, 2019 and October 31, 2018 consisted of the following:
|
|
|
July 31,
|
|
|
October 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Commercial Customers:
|
|
|
|
|
|
|
|
|
|
Amount billed
|
|
$
|
2,016
|
|
|
$
|
7,415
|
|
|
Unbilled receivables (1)
|
|
|
6,217
|
|
|
|
10,632
|
|
|
|
|
|
8,233
|
|
|
|
18,047
|
|
|
Advanced Technologies (including U.S. government(2)):
|
|
|
|
|
|
|
|
|
|
Amount billed
|
|
|
1,689
|
|
|
|
1,865
|
|
|
Unbilled receivables
|
|
|
1,969
|
|
|
|
3,127
|
|
|
|
|
|
3,658
|
|
|
|
4,992
|
|
|
Accounts receivable, net and unbilled receivables
|
|
$
|
11,891
|
|
|
$
|
23,039
|
|
|
(1)
|
Additional long-term unbilled receivables of $4.2 million and $9.4 million are included within “Other Assets” as of July 31, 2019 and October 31, 2018, respectively. The balance decreased because amounts previously recorded in connection with the Bridgeport Fuel Cell Project service agreement were settled in connection with the acquisition of the Bridgeport Fuel Cell Project.
|
|
(2)
|
Total U.S. government accounts receivable, including unbilled receivables, outstanding as of July 31, 2019 and October 31, 2018 were $1.0 million and $2.3 million, respectively.
|
18
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Accounts receivable are presented net of an allowance for doubtful accounts of $0.2 million as of October 31, 2018. There was no allowance for doubtful accounts as of July 31, 2019. Uncollectible accounts receivable are charged against the allowance for doubtful accounts when all collection efforts have failed and it is deemed unlikely that the amount will be recovered.
Note 7. Inventories
Inventories as of July 31, 2019 and October 31, 2018 consisted of the following:
|
|
|
July 31,
|
|
|
October 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Raw materials
|
|
$
|
24,564
|
|
|
$
|
24,467
|
|
|
Work-in-process (1)
|
|
|
35,266
|
|
|
|
29,108
|
|
|
Inventories
|
|
$
|
59,830
|
|
|
$
|
53,575
|
|
|
(1)
|
Work-in-process includes the standard components of inventory used to build the typical modules or module components that are intended to be used in future project asset construction, power plant orders or for use under the Company’s service agreements. Included in work-in-process as of July 31, 2019 and October 31, 2018 was $23.4 million and $19.0 million, respectively, of completed standard components.
|
Additional long-term inventory of $2.2 million as of July 31, 2019 includes a module that is contractually required to be segregated for use as a replacement at the Bridgeport Fuel Cell Project which is expected to be utilized beyond twelve months from July 31, 2019. There was no long-term inventory as of October 31, 2018.
Raw materials consist mainly of various nickel powders and steels, various other components used in producing cell stacks and purchased components for balance of plant. Work-in-process inventory is comprised of material, labor, and overhead costs incurred to build balance of plant components, fuel cell stacks and modules, which are all subcomponents of a power plant.
The Company incurred excess plant capacity and manufacturing variances of $4.4 million and $3.0 million for the three months ended July 31, 2019 and 2018, respectively, and $11.0 million and $8.5 million for the nine months ended July 31, 2019 and 2018, respectively, which were included within product cost of revenues on the consolidated statements of operations.
Note 8. Project Assets
Project assets as of July 31, 2019 and October 31, 2018 were $156.4 million and $99.6 million, respectively. Project assets as of July 31, 2019 and October 31, 2018 included six and five, respectively, completed, commissioned installations generating power with respect to which the Company has a PPA with an aggregate carrying value of $62.3 million and $28.6 million as of July 31, 2019 and October 31, 2018, respectively. Certain of these assets are the subject of sale-leaseback arrangements with PNC, which are accounted for under the financing method. The increase in project assets between October 31, 2018 and July 31, 2019 is primarily a result of the acquisition of the Bridgeport Fuel Cell Project. Project asset depreciation was approximately $2.4 million and $1.1 million for the three months ended July 31, 2019 and 2018, respectively, and was approximately $4.4 million and $3.1 million for the nine months ended July 31, 2019 and 2018, respectively.
The Project assets balance as of July 31, 2019 and October 31, 2018 also includes installations with an aggregate value of $94.1 million and $71.0 million, respectively, which are being developed and constructed by the Company under existing PPAs that have not been placed in service.
Project construction costs incurred for the project assets are reported as investing activities in the Consolidated Statements of Cash Flows. The proceeds received from the sale and subsequent leaseback of project assets are classified as a financing obligation within “Current portion of long-term debt” and “Long-term debt and other liabilities” on the Consolidated Balance Sheets (refer to Note 17. “Debt and Financing Obligation” for more information).
19
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 9. Goodwill and Intangible Assets
As of July 31, 2019 and October 31, 2018, the Company had goodwill of $4.1 million and intangible assets of $9.6 million that were recorded in connection with the acquisition in fiscal year 2012 of Versa Power Systems, Inc. The intangible asset represents indefinite lived in-process research and development for cumulative research and development efforts associated with the development of solid oxide fuel cells stationary power generation.
The Company completed its annual impairment analysis of goodwill and in-process research and development assets as of July 31, 2019. A quantitative analysis was completed for fiscal year 2019 and the Company determined there was no impairment of goodwill or the indefinite lived intangible asset.
Note 10. Other Current Assets
Other current assets as of July 31, 2019 and October 31, 2018 consisted of the following:
|
|
|
July 31,
|
|
|
October 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Advance payments to vendors (1)
|
|
$
|
1,577
|
|
|
$
|
2,696
|
|
|
Deferred finance costs (2)
|
|
|
22
|
|
|
|
97
|
|
|
Prepaid expenses and other (3)
|
|
|
5,655
|
|
|
|
5,799
|
|
|
Other current assets
|
|
$
|
7,254
|
|
|
$
|
8,592
|
|
|
(1)
|
Advance payments to vendors relate to payments for inventory purchases ahead of receipt.
|
|
(2)
|
The July 31, 2019 balance represents deferred finance costs for securing the $100.0 million credit facility with Generate Lending, which are being amortized over a one-year period, and the October 31, 2018 balance represents direct deferred finance costs relating to securing the $40.0 million loan facility with NRG, which were being amortized over the five-year life of the facility.
|
|
(3)
|
Primarily relates to other prepaid expenses including insurance, rent and lease payments.
|
Note 11. Other Assets
Other assets as of July 31, 2019 and October 31, 2018 consisted of the following:
|
|
|
July 31,
|
|
|
October 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Long-term stack residual value (1)
|
|
$
|
987
|
|
|
$
|
1,206
|
|
|
Long-term unbilled receivables (2)
|
|
|
4,159
|
|
|
|
9,385
|
|
|
Other (3)
|
|
|
4,873
|
|
|
|
2,914
|
|
|
Other assets
|
|
$
|
10,019
|
|
|
$
|
13,505
|
|
|
(1)
|
Relates to estimated residual value for module exchanges performed under the Company’s service agreements where the useful life extends beyond the contractual term of the service agreement and the Company obtains title for the module from the customer upon expiration or non-renewal of the service agreement. If the Company does not obtain rights to title from the customer, the full cost of the module is expensed at the time of the module exchange.
|
|
(2)
|
Represents unbilled receivables that relate to revenue recognized on customer contracts that will be billed in future periods in excess of twelve months from the balance sheet date.
|
|
(3)
|
The Company entered into an agreement with one of its customers on June 29, 2016 that includes a fee for the purchase of the power plants at the end of the term of the agreement. The fee is payable in installments over the term of the agreement and the total paid as of July 31, 2019 and October 31, 2018 was $2.3 million and $2.0 million, respectively. Also included within “Other” are long-term security deposits and as of July 31, 2019, prepaid withholding taxes on deferred revenue.
|
20
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 12. Accrued Liabilities
Accrued liabilities as of July 31, 2019 and October 31, 2018 consisted of the following:
|
|
|
July 31,
|
|
|
October 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Accrued payroll and employee benefits
|
|
$
|
1,730
|
|
|
$
|
2,550
|
|
|
Accrued product warranty cost (1)
|
|
|
38
|
|
|
|
147
|
|
|
Accrued service agreement costs (2)
|
|
|
2,559
|
|
|
|
2,029
|
|
|
Accrued legal, taxes, professional and other
|
|
|
4,255
|
|
|
|
2,906
|
|
|
Accrued liabilities
|
|
$
|
8,582
|
|
|
$
|
7,632
|
|
|
(1)
|
Activity in the accrued product warranty costs for the nine months ended July 31, 2019 represents reductions related to actual warranty spend of $0.1 million as contracts progress through the warranty period or are beyond the warranty period.
|
|
(2)
|
The loss accruals on service contracts were $0.9 million as of October 31, 2018 which increased to $1.7 million as of July 31, 2019. The increase is a result of the adoption of Topic 606. The accruals for performance guarantees decreased from $1.1 million as of October 31, 2018 to $0.8 million as of July 31, 2019 as a result of the acquisition of the Bridgeport Fuel Cell Project as amounts previously recorded in connection with the Bridgeport Fuel Cell Project service agreement were settled in connection with the acquisition of the Bridgeport Fuel Cell Project on May 9, 2019.
|
Note 13. Stockholders’ Equity
At Market Issuance Sales Agreement
On June 13, 2018, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley FBR, Inc. and Oppenheimer & Co. Inc. (together, the “Agents”) to create an at the market equity program under which the Company from time to time may offer and sell shares of its common stock having an aggregate offering price of up to $50.0 million through the Agents. Under the Sales Agreement, the Agent making the sales will be entitled to a commission in an amount equal to 3.0% of the gross proceeds from such sales. During the three and nine months ended July 31, 2019, the Company sold approximately 44.0 million shares under the Sales Agreement at an average sale price of $0.38 per share and raised aggregate gross proceeds of approximately $16.7 million before deducting expenses and commissions. Commissions of $0.5 million were paid to the Agent making the sales during the three and nine months ended July 31, 2019, resulting in net proceeds of approximately $16.2 million. As the Company had sold an aggregate of approximately $24.7 million of shares of common stock under the Sales Agreement as of July 31, 2019, the Company could sell, as of July 31, 2019, up to approximately $25.3 million of shares of its common stock in the future under the Sales Agreement, subject to contractual requirements, trading windows and market conditions (refer to Note 20. “Subsequent Events” for information on common stock sales under the Sales Agreement subsequent to July 31, 2019).
Public Offerings and Outstanding Warrants
On May 3, 2017, the Company completed an underwritten public offering of (i) 1,000,000 shares of its common stock, (ii) Series C warrants to purchase 1,000,000 shares of its common stock and (iii) Series D warrants to purchase 1,000,000 shares of its common stock. The Series C warrants have an exercise price of $19.20 per share and a term of five years. The Series D warrants were all exercised prior to October 31, 2018. No Series C warrants were exercised during the nine months ended July 31, 2019.
On July 12, 2016, the Company closed on a registered public offering of securities to a single institutional investor pursuant to a placement agent agreement with J.P. Morgan Securities LLC. In conjunction with the offering, the Company issued a Series A warrant to purchase 640,000 shares of the Company’s common stock (the “Series A Warrant”) with an exercise price of $69.96 per share.
21
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
On February 21, 2019, the Company entered into an Exchange Agreement (the “Exchange Agreement”) with the holder (the “Warrant Holder”) of the Series A Warrant. Pursuant to the Exchange Agreement, the Company agreed to issue to the Warrant Holder 500,000 shares of the Company’s common stock (subject to adjustment for stock dividends, stock splits, stock combinations, and other reclassifications) in exchange for the transfer of the Series A Warrant back to the Company, in reliance on an exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended. Following the transfer of the Series A Warrant back to the Company, the Series A Warrant was cancelled and no further shares were issuable pursuant to the Series A Warrant. For the nine months ended July 31, 2019, the Company recorded a charge to common stockholders for the difference between the fair value of the Series A Warrant prior to the modification of $0.3 million and the fair value of the common shares issuable at the date of the Exchange Agreement of $3.5 million.
The following table summarizes outstanding warrant activity during the nine months ended July 31, 2019:
|
|
|
Series A
Warrants
|
|
|
Series C
Warrants
|
|
|
Balance as of October 31, 2018
|
|
|
640,000
|
|
|
|
964,114
|
|
|
Warrants exchanged
|
|
|
(640,000
|
)
|
|
|
—
|
|
|
Warrants exercised
|
|
|
—
|
|
|
|
—
|
|
|
Warrants expired
|
|
|
—
|
|
|
|
—
|
|
|
Balance as of July 31, 2019
|
|
|
—
|
|
|
|
964,114
|
|
Note 14. Redeemable Preferred Stock
The Company is authorized to issue up to 250,000 shares of preferred stock, par value $0.01 per share, in one or more series, of which, as of July 31, 2019, shares were issued and designated as Series D Convertible Preferred Stock (referred to herein as “Series D Preferred Stock”) and 5% Series B Cumulative Convertible Perpetual Preferred Stock (referred to herein as “Series B Preferred Stock”). The Series C Convertible Preferred Stock (referred to herein as “Series C Preferred Stock”) previously issued by the Company were fully converted prior to July 31, 2019.
Series D Preferred Stock
On August 27, 2018, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Oppenheimer & Co. Inc. (the “Underwriter”), relating to an underwritten offering (the “Offering”) of the Company’s Series D Preferred Stock with a par value of $0.01 per share. Subject to the terms and conditions contained in the Underwriting Agreement, the Underwriter agreed to purchase, and the Company agreed to sell, 30,680 shares of Series D Preferred Stock, which were initially convertible into 1,852,657 shares of the Company’s common stock (without regard to any limitation on conversion set forth in the Certificate of Designations, Preferences and Rights of the Series D Preferred Stock of the Company (the “Series D Certificate of Designation”)), at an initial conversion price of $16.56 per share, subject to certain adjustments (“Series D Conversion Price”).
The Offering closed on August 29, 2018. The net proceeds to the Company from the sale of the Series D Preferred Stock, after deducting the underwriting discounts and commissions and the offering expenses payable by the Company, were approximately $25.3 million.
In conjunction with the closing of the Offering, on August 29, 2018, the Company filed the Series D Certificate of Designation with the Secretary of State of the State of Delaware, designating 30,680 shares of the Company’s preferred stock as Series D Convertible Preferred Stock (such shares, the “Series D Preferred Shares”).
As of July 31, 2019 and October 31, 2018, there were 25 and 30,680 shares, respectively, of Series D Preferred Stock issued and outstanding with a carrying value of $27.0 thousand and $27.4 million, respectively.
22
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
During the three and nine months ended July 31, 2019, holders of the Series D Preferred Stock converted 18,932 and 30,655 Series D Preferred Shares into 59,021,202 and 61,947,759 shares of common stock, respectively, through installment and optional conversions, triggering event conversions and acceleration of future installment amounts, resulting in a reduction of $20.5 million and $31.1 million, respectively, to the carrying value being recorded to equity. Conversions in which the conversion price was below $16.56 (the conversion price of the Series D Preferred Stock as of July 31, 2019 and during the three and nine months ended July 31, 2019) resulted in a variable number of shares being issued to settle the conversion amounts and are treated as a partial redemption of the Series D Preferred Shares. Conversions during the three and nine months ended July 31, 2019 that were settled in a variable number of shares and treated as redemptions resulted in deemed dividends of $3.1 million and $6.0 million, respectively. The deemed dividends represent the difference between the fair value of the shares of common stock issued to settle the conversion amounts and the carrying value of the Series D Preferred Shares.
The Series D Preferred Stock redemption accretion of $3.8 million for the nine months ended July 31, 2019 reflects the accretion of the difference between the carrying value and the amount that would have been redeemed if stockholder approval had not been obtained for the issuance of common stock equal to 20.0% or more of the Company’s outstanding voting stock prior to the issuance of the Series D Preferred Stock. Additionally, prior to receiving stockholder approval of the issuance of 20.0% or more of the Company’s outstanding voting stock immediately preceding the issuance of the Series D Preferred Stock, the holders were prohibited from converting Series D Preferred Shares into shares of common stock if such conversion would have caused the Company to issue pursuant to the terms of the Series D Preferred Stock a number of shares in excess of the maximum number of shares permitted to be issued thereunder without breaching the Company’s obligations under the rules or regulations of the Nasdaq Global Market. The Company received stockholder approval of such issuance at the annual meeting of the Company’s stockholders on April 4, 2019.
Any failure to pay any amounts due to the holders of the Series D Preferred Shares, as well as certain other “triggering events,” including, without limitation, the Company’s failure to timely deliver shares, the suspension of trading of the Company’s common stock, the Company’s failure to keep reserved for issuance an adequate number of shares of common stock to cover conversion of the Series D Preferred Shares, breaches of certain agreements that permit the other party to such agreement to declare a default or accelerate amounts due, the existence of a circumstance or event that would result in a default under another agreement that would or is reasonably expected to have a material adverse effect, and breaches of certain covenants that are not timely cured, where a cure period is permitted, would permit the holders of the Series D Preferred Shares to require the Company to redeem such Series D Preferred Shares in cash at a price equal to the greater of (i) 125% of the stated value of the Series D Preferred Shares being redeemed plus accrued dividends, if any, and (ii) the market value of the number of shares issuable on conversion of the Series D Preferred Shares valued at the greatest closing sales price during the period from the date immediately before the triggering event through the date the Company makes the redemption payment.
Alternatively, in the event of such a triggering event, the holders of Series D Preferred Shares may elect to convert such shares (subject to the beneficial ownership limitations provided in the Series D Certificate of Designation) into shares of common stock at a conversion price equal to the lower of the Series D Conversion Price in effect on the trading day (as such term is defined in the Series D Certificate of Designation) immediately preceding the delivery of the conversion notice and 85% of the lowest dollar volume weighted average price (“VWAP”) of the common stock on any of the five consecutive trading days ending on the trading day immediately prior to delivery of the applicable conversion notice.
During the week of June 10, 2019, the holders of the Series D Preferred Stock asserted that certain triggering events had occurred under the Series D Certificate of Designation and indicated their intent to exercise their rights to convert certain of their shares at a reduced conversion price. While the Company did not agree with the basis for their assertions or their characterization of such events, there are provisions under the Series D Certificate of Designation which could be interpreted as giving them the right to demand such conversion at a reduced conversion price. Accordingly, during the period beginning on June 11, 2019 and ending on July 3, 2019, the Company effected conversions at reduced conversion prices ranging from $0.14 to $0.61, resulting in the issuance of 52,702,282 shares of common stock.
Series C Preferred Stock
The Company issued an aggregate of 33,500 shares of its Series C Convertible Preferred Stock (“Series C Preferred Stock” and such shares, the “Series C Preferred Shares”), $0.01 par value and $1,000 stated value per share, during the fiscal year ended October 31, 2017. As of July 31, 2019 and October 31, 2018, there were 0 and 8,992 shares, respectively, of Series C Preferred Stock issued and outstanding with a carrying value of $0 and $7.5 million, respectively.
23
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
On February 21, 2019, the Company entered into a waiver agreement (the “Waiver Agreement”) with the holder of the Series C Preferred Stock (such holder, the “Series C Holder”). Under the Waiver Agreement, the Series C Holder waived any equity conditions failures that may have occurred under the Certificate of Designations, Preferences and Rights of the Series C Preferred Stock (the “Series C Certificate of Designations”). The Series C Holder further waived any triggering event occurring after the date of the Waiver Agreement, as well as its right to demand, require or otherwise receive cash payments under the Series C Certificate of Designations, which waiver would have terminated upon the occurrence of certain key triggering events (failure to provide freely tradable shares, suspension from trading on the Nasdaq Global Market or another eligible market, or failure to convert or deliver shares under certain circumstances), the occurrence of a fundamental transaction, a breach of the Waiver Agreement, or the occurrence of a bankruptcy triggering event. In addition, the Company agreed in the Waiver Agreement, pursuant to Section 8(d) of the Series C Certificate of Designations, to adjust the conversion price of the Series C Preferred Stock in connection with future conversions, such that, when the Series C Holder converted its Series C Preferred Stock into common stock, it would receive approximately 25% more shares than it would have received upon conversion prior to the execution of the Waiver Agreement. Under the Waiver Agreement, the conversion price of the Series C Preferred Stock is stated to be the lowest of (i) $4.45, (ii) 85% of the lowest closing bid price of the Company’s common stock during the period beginning on and including the fifth trading day prior to the date on which the applicable conversion notice is delivered to the Company and ending on and including the date on which the applicable conversion notice is delivered to the Company, and (iii) 85% of the quotient of (A) the sum of the five lowest VWAPs of the Company’s common stock during the twenty consecutive trading day period ending and including the trading day immediately preceding the applicable conversion date divided by (B) five. To determine the number of shares of common stock to be issued upon conversion, 125% of the value of the Series C Preferred Shares being converted is divided by the applicable conversion price. The parties further agreed to waive the installment payment/conversion provisions in Section 9 of the Series C Certificate of Designations, which required installment conversions or payments to be made on the 1st and 16th of each month (as described in additional detail below). Under the Waiver Agreement, conversions of Series C Preferred Stock were permitted to occur and did occur after the original March 1, 2019 maturity date, and the Company further agreed to reserve specific numbers of shares for issuance to the Series C Holder and the holders of the Series D Preferred Stock until the Company effected a reverse stock split, which occurred on May 8, 2019, or increased its authorized shares of common stock.
The Waiver Agreement was treated for accounting purposes to be an extinguishment of the Series C Preferred Stock instrument as of February 21, 2019. The Series C Preferred Stock remained classified in mezzanine equity, however, the carrying value was adjusted to reflect the estimated fair value of the post-modification Series C Preferred Shares which incorporated the new terms outlined in the Waiver Agreement. The valuation utilized a Binomial Lattice Model (“Lattice Model”) which is a commonly used methodology to value path-dependent options or stock units in order to capture their potential early conversion. The Lattice Model produces an estimated fair value based on changes in the underlying stock price over successive periods of time. The assumptions used in the model such as stock price, conversion price and conversion ratio were consistent with date of execution and terms in the Waiver Agreement. Other assumptions included the volatility of the Company’s stock which was assumed to be 75% and a discount rate of 20% which was estimated based on various indices consistent with the Company’s profile, venture capital rates of return and the Company’s borrowing rate. The Lattice Model resulted in an estimated fair value as of February 21, 2019 of $13.5 million whereby the Series C Preferred Stock carrying value was adjusted to this amount. As discussed above, a beneficial conversion feature was recorded during the three months ended January 31, 2019 due to reductions in the conversion price. Upon extinguishment during the three months ended April 30, 2019, the Company first allocated $6.6 million to the reacquisition of the embedded conversion option equal to the intrinsic value that was previously recognized during the three months ended January 31, 2019 for the embedded conversion option. Because the remaining estimated fair value of the instrument on February 21, 2019 was less than the carrying amount of the Series C Preferred Stock, the amount of the shortfall resulted in a decrease in loss available to common stockholders for purposes of computing loss per share of $0.5 million.
In order to resolve different interpretations of the provisions of the Series C Certificate of Designations that governed adjustments to the conversion price in connection with sales of common stock under the Company’s at-the-market stock sales plan below the initial conversion price $22.08 and whether such sales constituted sales of variable priced securities under the Series C Certificate of Designations, the Company’s Board of Directors (the “Board”) agreed to reduce the conversion price of the Series C Preferred Shares from $22.08 to $18.00 effective August 27, 2018 in exchange for a waiver of certain anti-dilution and price adjustment rights under the Series C Certificate of Designations for future at-the-market sales of common stock. The conversion price of the Series C Preferred Shares was adjusted again on December 3, 2018 to $6.96, on December 17, 2018 to $6.00 and on January 2, 2019 to $5.16. During the period from February 1, 2019 to May 23, 2019, the conversion price was further adjusted to prices ranging from $4.45 to $1.27, the conversion price as of the last conversion, which occurred on May 23, 2019. Conversions occurring during the three and nine months ended July 31, 2019 resulted in a variable number of shares being issued to settle the conversion amounts and were treated as a partial redemption of the Series C Preferred Shares. Conversions during the three and nine months ended July 31, 2019 that were settled in a variable number of shares and treated as partial redemptions resulted in deemed contributions of $0.9 million and $1.5 million,
24
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
respectively. The deemed contributions represent the difference between the fair value of the common shares issued to settle the conversion amounts and the carrying value of the Series C Preferred Shares. Additionally, as discussed in more detail below, the net loss attributable to common stockholders for the nine months ended July 31, 2019 was impacted by a $0.5 million decrease in the loss resulting from accounting for the Waiver Agreement in February 2019 which was recorded during the three months ended April 30, 2019. The net loss attributable to common stockholders for the nine months ended July 31, 2019 also includes the $8.6 million redemption value adjustment recorded during the three months ended January 31, 2019.
Based on review of pertinent accounting literature including ASC 470 – Debt, ASC 480 - Distinguishing Liabilities from Equity and ASC 815 - Derivative and Hedging, the Series C Preferred Shares are classified outside of permanent equity on the Consolidated Balance Sheets and were recorded at fair value on the issuance date (proceeds from the issuance, net of direct issuance cost). The decline in the Company’s stock price during the three months ended January 31, 2019 and between January 31, 2019 and the execution of the Waiver Agreement in February 2019 resulted in equity conditions failures under the Series C Certificate of Designations, which were waived by the Series C Holder in the Waiver Agreement, as described above. Prior to the execution of such Waiver Agreement, the conversion price was adjusted in December 2018 and January 2019 as described in the paragraph above. This contingent beneficial conversion feature resulted in a $6.6 million reduction in the Series C Preferred Shares carrying value. Because the equity conditions failures were continuing as of January 31, 2019 (prior to the execution of the Waiver Agreement), the Series C Preferred Shares were adjusted to 108% of stated redemption value as of January 31, 2019 with a corresponding charge to common stockholders of $8.6 million.
During the three and nine months ended July 31, 2019, holders of the Series C Preferred Stock converted 1,618 and 8,992 Series C Preferred Shares into 1,658,861 and 3,914,218 shares of common stock, respectively, resulting in a reduction in carrying value of $3.2 million and $15.5 million, respectively. Upon the conversion of the last outstanding Series C Preferred Shares on May 23, 2019, there were no further Series C Preferred Shares outstanding.
Redeemable Series B Preferred Stock
As of July 31, 2019, the Company had 105,875 shares of 5% Series B Cumulative Convertible Perpetual Preferred Stock with a liquidation preference of $1,000.00 per share (referred to herein as “Series B Preferred Stock”) authorized for issuance. As of July 31, 2019 and October 31, 2018, there were 64,020 shares of Series B Preferred Stock issued and outstanding, with a carrying value of $59.9 million. Dividends of $1.6 million and $2.4 million were paid in cash during the nine month periods ended July 31, 2019 and 2018, respectively. Dividends of $0 and $0.8 million were paid during the three month periods ended July 31, 2019 and 2018, respectively.
No dividends were declared or paid by the Company on the Series B Preferred Stock in connection with the May 15, 2019 dividend payment date. Based on the dividend rate in effect on May 15, 2019, the aggregate amount of such dividend payment would have been $0.8 million. Because such dividends were not paid on May 15, under the terms of the Amended Certificate of Designation with respect to the Series B Preferred Stock, the holders of shares of Series B Preferred Stock will be entitled to receive, when, as and if, declared by the Board, dividends at a dividend rate per annum equal to the normal dividend rate of 5% plus an amount equal to the number of dividend periods for which the Company failed to pay or set apart funds to pay dividends multiplied by 0.0625%, for each subsequent dividend period until the Company has paid or provided for the payment of all dividends on the shares of Series B Preferred Stock for all prior dividend periods. As of July 31, 2019, a total of $0.81 million will be payable with respect to the May 15 dividend period, if and when declared by the Board.
Class A Cumulative Redeemable Exchangeable Preferred Shares
As of July 31, 2019, FCE FuelCell Energy, Ltd. had 1,000,000 Class A Cumulative Redeemable Exchangeable Preferred Shares (the “Series 1 Preferred Shares”) issued and outstanding, which are held by Enbridge, Inc. (“Enbridge”), which is a related party. Dividends and return of capital payments are due quarterly based on calendar quarters. The Company made payments of Cdn. $0.3 million and Cdn. $0.9 million during the three month period ended December 31, 2018 and the nine month period ended July 31, 2018, respectively, under the terms of the Company’s agreement with Enbridge. However, the Company’s return of capital payments were not made for the calendar quarters ended on March 31, 2019 and June 30, 2019. The Company recorded interest expense, which reflects the amortization of the fair value discount of approximately Cdn. $1.4 million and Cdn. $0.7 million for the three months ended July 31, 2019 and 2018, respectively, and Cdn. $2.2 million and Cdn. $2.1 million for the nine months ended July 31, 2019 and 2018, respectively. As of July 31, 2019 and October 31, 2018, the carrying value of the Series 1 Preferred Shares was Cdn. $22.2 million (U.S. $16.9 million) and Cdn. $20.9 million (U.S. $15.9 million), respectively, and is classified as a preferred stock obligation of subsidiary on the Consolidated Balance Sheets.
25
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 15. Loss Per Share
The calculation of basic and diluted loss per share was as follows:
|
|
|
Three Months Ended July 31,
|
|
|
Nine Months Ended July 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,311
|
)
|
|
$
|
(15,881
|
)
|
|
$
|
(42,389
|
)
|
|
$
|
(33,238
|
)
|
|
Series A warrant exchange
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,169
|
)
|
|
|
—
|
|
|
Series B preferred stock dividends
|
|
|
(810
|
)
|
|
|
(800
|
)
|
|
|
(2,410
|
)
|
|
|
(2,400
|
)
|
|
Series C preferred stock deemed contributions
(dividends) and redemption value adjustment,
net
|
|
|
884
|
|
|
|
(939
|
)
|
|
|
(6,522
|
)
|
|
|
(8,601
|
)
|
|
Series D Preferred stock deemed dividends and
redemption accretion
|
|
|
(3,091
|
)
|
|
|
—
|
|
|
|
(9,752
|
)
|
|
|
—
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(8,328
|
)
|
|
$
|
(17,620
|
)
|
|
$
|
(64,242
|
)
|
|
$
|
(44,239
|
)
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares
|
|
|
45,069,911
|
|
|
|
7,191,457
|
|
|
|
21,608,427
|
|
|
|
6,607,687
|
|
|
Effect of dilutive securities (1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Weighted average diluted common shares
|
|
|
45,069,911
|
|
|
|
7,191,457
|
|
|
|
21,608,427
|
|
|
|
6,607,687
|
|
|
Basic loss per share
|
|
$
|
(0.18
|
)
|
|
$
|
(2.45
|
)
|
|
$
|
(2.97
|
)
|
|
$
|
(6.70
|
)
|
|
Diluted loss per share (1)
|
|
$
|
(0.18
|
)
|
|
$
|
(2.45
|
)
|
|
$
|
(2.97
|
)
|
|
$
|
(6.70
|
)
|
|
(1)
|
Due to the net loss to common stockholders in each of the periods presented above, diluted loss per share was computed without consideration to potentially dilutive instruments as their inclusion would have been antidilutive. As of July 31, 2019 and 2018, potentially dilutive securities excluded from the diluted loss per share calculation are as follows:
|
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
May 2017 Offering - Series C Warrants
|
|
|
964,114
|
|
|
|
964,114
|
|
|
July 2016 Offering - Series A Warrants
|
|
|
—
|
|
|
|
640,000
|
|
|
Outstanding options to purchase common stock
|
|
|
24,927
|
|
|
|
26,961
|
|
|
Unvested Restricted Stock Awards
|
|
|
28,549
|
|
|
|
97,021
|
|
|
Unvested Restricted Stock Units
|
|
|
168,553
|
|
|
|
273,479
|
|
|
Series C Preferred Shares to satisfy conversion requirements (1)
|
|
|
—
|
|
|
|
529,033
|
|
|
Series D Preferred Shares to satisfy conversion requirements (2)
|
|
|
1,509
|
|
|
|
—
|
|
|
5% Series B Cumulative Convertible Preferred Stock
|
|
|
37,837
|
|
|
|
37,837
|
|
|
Series 1 Preferred Shares to satisfy conversion requirements
|
|
|
1,264
|
|
|
|
1,264
|
|
|
Total potentially dilutive securities
|
|
|
1,226,753
|
|
|
|
2,569,709
|
|
|
(1)
|
The number of shares of common stock issuable upon conversion of the Series C Preferred Stock was calculated using the liquidation preference value outstanding on July 31, 2018 of $11.7 million divided by the reduced conversion price of $22.08. All Series C Preferred Stock was converted prior to July 31, 2019.
|
|
(2)
|
The number of shares of common stock issuable upon conversion of the Series D Preferred Stock was calculated using the liquidation preference value outstanding on July 31, 2019 of $25.0 thousand divided by the conversion price of $16.56. The actual number of shares issued could vary depending on the actual market price of the Company’s common shares on the date of such conversions.
|
26
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 16. Restricted Cash
As of July 31, 2019 and October 31, 2018, there was $29.8 million and $40.9 million, respectively, of restricted cash and cash equivalents pledged as collateral for letters of credit for certain banking requirements and contractual commitments. The restricted cash balance as of October 31, 2018 included $15.0 million, which was placed in a Grantor’s Trust account to secure certain obligations under a 15-year service agreement and has been classified as long-term. In connection with the acquisition of the Bridgeport Fuel Cell Project, $15.0 million of restricted cash was released on May 9, 2019. The restricted cash balance as of July 31, 2019 and October 31, 2018 also includes $17.8 million and $17.7 million, respectively, to support obligations related to the PNC sale-leaseback transactions. As of July 31, 2019, an additional amount of $6.9 million was classified as restricted cash to support future obligations under the loan agreements with Fifth Third and Liberty Bank. As of July 31, 2019 and October 31, 2018, outstanding letters of credit totaled $5.2 million and $3.8 million, respectively. These expire on various dates through August 2028.
Note 17. Debt and Financing Obligation
Debt as of July 31, 2019 and October 31, 2018 consisted of the following:
|
|
|
July 31,
|
|
|
October 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Connecticut Development Authority Note
|
|
$
|
—
|
|
|
$
|
284
|
|
|
Connecticut Green Bank Loans
|
|
|
7,719
|
|
|
|
6,052
|
|
|
Finance obligation for sale-leaseback transactions
|
|
|
45,247
|
|
|
|
46,062
|
|
|
State of Connecticut Loan
|
|
|
10,000
|
|
|
|
10,000
|
|
|
Hercules Loan and Security Agreement
|
|
|
7,426
|
|
|
|
25,343
|
|
|
New Britain Renewable Energy Term Loan
|
|
|
644
|
|
|
|
1,107
|
|
|
NRG Construction Loan Facility
|
|
|
5,750
|
|
|
|
—
|
|
|
Generate Lending Construction Loan
|
|
|
10,000
|
|
|
|
—
|
|
|
Enhanced Capital Term Loan and Security Agreement
|
|
|
1,500
|
|
|
|
—
|
|
|
Liberty Bank Term Loan Agreement
|
|
|
12,153
|
|
|
|
—
|
|
|
Fifth Third Bank Term Loan Agreement
|
|
|
12,153
|
|
|
|
—
|
|
|
Fifth Third Bank Construction Loan Agreement
|
|
|
11,072
|
|
|
|
—
|
|
|
Capitalized lease obligations
|
|
|
195
|
|
|
|
341
|
|
|
Deferred finance costs
|
|
|
(2,621
|
)
|
|
|
(1,311
|
)
|
|
Total debt and financing obligations
|
|
$
|
121,238
|
|
|
$
|
87,878
|
|
|
Current portion of long-term debt and financing obligations
|
|
|
(43,416
|
)
|
|
|
(17,596
|
)
|
|
Long-term debt and financing obligations
|
|
$
|
77,822
|
|
|
$
|
70,282
|
|
As of July 31, 2019, the Company had a long-term loan agreement with the Connecticut Green Bank, providing a total of $5.9 million in support of the Bridgeport Fuel Cell Project. During the three months ended July 31, 2019, this loan was partially repaid with a new project level loan from Connecticut Green Bank in connection with the Company’s acquisition of all of the membership interests in BFC. The balance as of July 31, 2019 was $1.8 million.
On May 9, 2019, in connection with the closing of the purchase of BFC, BFC entered into a subordinated credit agreement with the Connecticut Green Bank whereby Connecticut Green Bank provided financing in the amount of $6.0 million (the “Subordinated Credit Agreement”). As security for the Subordinated Credit Agreement, Connecticut Green Bank received a perfected lien, subordinated and second in priority to the liens securing the $25.0 million loaned under the BFC Credit Agreement (as defined below), in all of the same collateral securing the BFC Credit Agreement. The interest rate under the Subordinated Credit Agreement is 8% per annum. Principal and interest are due monthly in amounts sufficient to fully amortize the loan over an 84 month period ending in May 2026. The Subordinated Credit Agreement contains customary representations, warranties and covenants. The balance under the Subordinated Credit Agreement as of July 31, 2019 was $5.9 million.
27
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Also on May 9, 2019, in connection with the purchase of BFC, FuelCell Finance (a subsidiary of the Company) entered into a Credit Agreement with Liberty Bank, as administrative agent and co-lead arranger, and Fifth Third as co-lead arranger (the “BFC Credit Agreement”), whereby (i) Fifth Third provided financing to BFC in the amount of $12.5 million towards the BFC Purchase Price; and (ii) Liberty Bank provided financing to BFC in the amount of $12.5 million towards the BFC Purchase Price. As security for the BFC Credit Agreement, Liberty Bank and Fifth Third were granted a first priority lien in (i) all assets of BFC, including BFC’s cash accounts, fuel cells, and all other personal property, as well as third party contracts including the Energy Purchase Agreement between BFC and Connecticut Light and Power Company dated July 10, 2009, as amended; (ii) certain fuel cell modules that are intended to be used to replace the Bridgeport Fuel Cell Project’s fuel cell modules as part of routine operation and maintenance; and (iii) FuelCell Finance’s ownership interest in BFC. Principal and interest are due monthly in amounts sufficient to fully amortize the loans over an 84 month period. The maturity date of each loan under the BFC Credit Agreement is May 9, 2025. The interest rate under the BFC Credit Agreement fluctuates monthly at the 30-day LIBOR rate plus 275 basis points on a total notional value which is equivalent to the outstanding principal.
On May 16, 2019, an interest rate swap agreement (the “Swap Agreement”) was entered into with Fifth Third in connection with the BFC Credit Agreement for the term of the loan. The net interest rate across the BFC Credit Agreement and the swap transaction totals a fixed rate of 5.09%. The interest rate swap will be marked-to-market on a quarterly basis. The mark-to-market adjustment is based on Level 2 inputs including primarily the forward LIBOR curve available to swap dealers. The mark-to-market methodology involves comparison of (i) the sum of the present value of all monthly variable rate payments during the term at the notional amount of the loan outstanding based on a reset rate using the forward LIBOR curve and (ii) the sum of the present value of all monthly fixed rate payments during the term of the loan at the notional amount which is equivalent to the outstanding principal. The mark-to-market adjustment for the three and nine months ended July 31, 2019 was $0.4 million.
The BFC Credit Agreement also requires BFC to maintain a debt service reserve at each of Liberty Bank and Fifth Third of $1.25 million, which debt service reserves were funded on May 10, 2019, to be held in deposit accounts at each respective bank, with funds to be disbursed with the consent of or at the request of the required lenders in their sole discretion. Each of Liberty Bank and Fifth Third also has an operation and module replacement reserve (“O&M Reserve”) of $250.0 thousand, both of which were funded at closing, to be held in deposit accounts at each respective bank, and thereafter BFC is required to deposit $100.0 thousand per month into each O&M Reserve for the first five years of the BFC Credit Agreement, with such funds to be released at the sole discretion of Liberty Bank and Fifth Third, as applicable. BFC is also required to maintain excess cash flow reserve accounts at each of Liberty Bank and Fifth Third and to deposit 50% of the excess cash flows from the Bridgeport Fuel Cell Project into these accounts. Excess cash flow consists of cash generated by BFC from the Bridgeport Fuel Cell Project after payment of all expenses (including after payment of service fees to the Company), debt service to Liberty Bank and Fifth Third, the funding of all required reserves, and payments to Connecticut Green Bank for the subordinated facility. BFC is also required to maintain a debt service coverage ratio of not less than 1.20, measured annually based on fiscal quarters beginning with the quarter ended July 31, 2020. The BFC Credit Agreement contains other representations, warranties and covenants and includes a material adverse effect clause related to the operations, business, properties, liabilities or prospects of Bridgeport Fuel Cell, LLC.
Several of the Company’s project finance subsidiaries previously entered into sale-leaseback agreements with PNC for commissioned projects where the Company had entered into a PPA with the site host/end-user of produced power. Under the financing method of accounting for a sale-leaseback, the Company did not recognize as income any of the sale proceeds received from the lessor that contractually constitute payments to acquire the assets subject to these arrangements. Instead, the sale proceeds received were accounted for as financing obligations. The outstanding financing obligation balance as of July 31, 2019 was $45.2 million and the decrease from $46.1 million on October 31, 2018 includes lease payments offset by the recognition of interest expense. The outstanding financing obligation includes an embedded gain which will be recognized at the end of the lease term.
In November 2015, the Company entered into a definitive Assistance Agreement with the State of Connecticut and received a disbursement of $10.0 million, which was used for the first phase of the expansion of the Company’s Torrington, Connecticut manufacturing facility. In conjunction with this financing, the Company entered into a $10.0 million promissory note and related security agreements securing the loan with equipment liens and a mortgage on its Danbury, Connecticut location. Interest accrues at a fixed interest rate of 2.0 percent, repayable over 15 years. Principal payments were deferred for four years from disbursement and begin on December 1, 2019. Under the Assistance Agreement, the Company was eligible for forgiveness of up to 50 percent of the loan principal if the Company created 165 full-time positions and retained 538 full-time positions for two consecutive years (the “Employment Obligation”) as measured on October 28, 2017 (the “Target Date”). The Assistance Agreement was subsequently amended in April 2017 to extend the Target Date by two years to October 28, 2019.
28
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
In January 2019, the Company and the State of Connecticut entered into a Second Amendment to the Assistance Agreement (the “Second Amendment”). The Second Amendment extends the Target Date to October 31, 2022 and amends the Employment Obligation to require the Company to maintain a minimum of 538 full-time positions for 24 consecutive months. If the Company meets the Employment Obligation, as modified by the Second Amendment, and creates an additional 91 full-time positions, the Company may receive a credit in the amount of $2.0 million to be applied against the outstanding balance of the loan. The Second Amendment deletes and cancels the provisions of the Assistance Agreement related to the second phase of the expansion project and the loans related thereto, but the Company had not drawn any funds or received any disbursements under those provisions. A job audit will be performed within ninety days of the Target Date. If the Company does not meet the Employment Obligation, then a penalty shall be assessed at a rate of $18,587.36 times the number of employees below the Employment Obligation. Such penalty, which accelerates the payment, is immediately payable and will be first applied against any outstanding fees or interest due and then against outstanding principal.
In April 2016, the Company entered into a loan and security agreement (as amended from time to time, the “Hercules Agreement”) with Hercules for an aggregate principal amount of up to $25.0 million. The loan was a 30 month secured facility.
The Hercules Agreement was subsequently amended on September 5, 2017, October 27, 2017, March 28, 2018, August 29, 2018, December 19, 2018, February 28, 2019, March 29, 2019, May 8, 2019, June 11, 2019 and July 24, 2019. Principal payments under the Hercules Agreement began on April 1, 2019 and were expected to total approximately $1.8 million per month, however, the Company has been prepaying principal as a result of the recent amendments to the Hercules Agreement, resulting in a loan balance of $7.4 million as of July 31, 2019. The term loan interest rate as of July 31, 2019 was 10.65%. The term loan interest rate is the greater of (i) 9.90% plus the prime rate minus 4.50%, and (ii) 9.90%. The initial end of term charge of $1.7 million was paid on October 1, 2018. An additional end of term charge of $0.9 million will be due on April 1, 2020 or upon repayment of the principal balance. The additional end of term charge is being accreted over a 30-month term.
On June 11, 2019, the Company and each of its qualified subsidiaries, as “Borrower”, certain banks and other financial institutions, as “Lender”, and Hercules, as administrative agent for itself and Lender, entered into the ninth amendment to the Hercules Agreement (the “Ninth Hercules Amendment”). Under the Ninth Hercules Amendment, Borrower agreed, among other things, to: (a) no later than June 11, 2019, pay Lender $1.4 million to be applied towards the outstanding balance of the loan; (b) no later than June 26, 2019, direct EMRE to pay Lender $6.0 million of the $10.0 million payable under the EMRE License Agreement to be applied towards the outstanding balance of the loan; and (c) on each of July 1, 2019 and August 1, 2019, pay Lender interest-only payments on the outstanding principal balance of the loan. In the Ninth Hercules Amendment, the term “Amendment Period” is defined as the period from and after June 11, 2019 through the earlier of (i) August 9, 2019 and (ii) the occurrence of any event of default under the Ninth Hercules Amendment. The Hercules Agreement was further modified by the Tenth Hercules Amendment described below.
On July 24, 2019, the Company and each of its qualified subsidiaries, as Borrower, certain banks and other financial institutions, as Lender, and Hercules, as administrative agent for itself and Lender, entered into the tenth amendment to the Hercules Agreement (the “Tenth Hercules Amendment”). In the Tenth Hercules Amendment, the “Amendment Period” is defined as the period from and after July 24, 2019 through the earlier of (i) September 30, 2019 and (ii) the occurrence of any event of default under the Tenth Hercules Amendment; provided, however, that in the event that the outstanding balance of the secured obligations (including accrued interest, fees, costs, and charges) has been paid down to an amount that is less than or equal to $5.0 million on or before September 30, 2019, the Amendment Period shall be extended automatically through the earlier of (i) October 22, 2019 and (ii) the occurrence of any event of default under the Tenth Hercules Amendment.
Under the Tenth Hercules Amendment, Borrower has agreed, among other things, to: (a) no later than July 25, 2019, pay Lender $4.0 million to be applied towards the outstanding balance of the loan; (b) from and after July 24, 2019 through the end of the Amendment Period under the Tenth Hercules Amendment, pay Lender, on the third trading day of each week (each, an “ATM Payment Date”) following a week in which the Company issues shares of its common stock under the Sales Agreement or any similar or replacement agreement (each such week, an “ATM Issuance Period”), an amount equal to 30% of the net proceeds, after deducting commissions and any offering-related expenses, of such issuances (“Net ATM Proceeds”), if any, received in cash by Borrower from such issuances, if any, during the ATM Issuance Period completed immediately prior to such ATM Payment Date, which amount shall be applied towards the outstanding balance of the loan; and (c) pay to Lender an interest-only payment on the outstanding principal balance of the loan at the term loan interest rate, which payment shall be due and payable on September 1, 2019; provided, however, that in the event the Amendment Period under the Tenth Hercules Amendment is extended to October 22, 2019 (as described above), Borrower shall pay to Lender an interest and amortization payment on the outstanding principal balance of the secured obligations at the term loan interest rate, which payment shall be due and payable on October 1, 2019. Borrower has further agreed that interest at the default rate (which
29
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
is an additional 5% per annum against outstanding obligations), which has been accruing from June 3, 2019, will continue to accrue and be due and payable, subject to the terms of the Tenth Hercules Amendment; provided, however, that in the event that all of the secured obligations are paid in full on or prior to the last day of the Amendment Period under the Tenth Hercules Amendment (as such may be extended as described above), Lender will fully and unconditionally waive its right to payment of accrued and unpaid default rate interest. The accrued and unpaid default rate interest totaled $0.1 million as of July 31, 2019.
In addition, Hercules has waived Borrower’s compliance with certain financial reporting covenants and the minimum unrestricted cash balance covenant set forth in the Hercules Agreement, in each case from June 11, 2019 through the end of the Amendment Period under the Tenth Hercules Amendment.
The Hercules Agreement contains certain representations and warranties, affirmative and negative covenants, and events of default, including the occurrence of a circumstance that would reasonably be expected to have a material adverse effect, that entitle Hercules to cause the indebtedness under the agreement to become immediately due and payable. The occurrence of an event of default under the Hercules Agreement also constitutes or may result in an event of default under, and causes or may cause the acceleration of, a number of material financial obligations of the Company, including the loan from the State of Connecticut, the loan from Connecticut Green Bank, and the project finance facilities with Generate Lending, PNC and Fifth Third. The occurrence of an event of default under the Hercules Agreement also constitutes a triggering event under the Series D Certificate of Designations.
As collateral for obligations under the Hercules Agreement, the Company granted Hercules a security interest in FuelCell Energy, Inc.’s existing and thereafter-acquired assets except for intellectual property and certain other excluded assets. The collateral does not include assets held by FuelCell Finance or any project subsidiary thereof. The Company may continue to collateralize and finance its project subsidiaries through other lenders and partners.
On December 13, 2018, FuelCell Finance’s wholly owned subsidiary, Central CA Fuel Cell 2, LLC, drew a construction loan advance of $5.8 million under the NRG loan facility. This advance was used to support the completion of construction of the 2.8 MW Tulare BioMAT project in California. In conjunction with the December 13, 2018 draw, FuelCell Finance and NRG entered into an amendment to the NRG loan agreement to revise the definitions of the terms “Maturity Date” and “Project Draw Period” under the NRG loan agreement and to make other related revisions. Pursuant to this amendment, FuelCell Finance and its subsidiaries could only request draws through December 31, 2018 and the Maturity Date of each note was the earlier of (a) March 31, 2019 and (b) the commercial operation date or substantial completion date, as applicable, with respect to the fuel cell project owned by the borrower under such note. As of July 31, 2019, there have been no other drawdowns under the NRG loan facility.
Prior to July 31, 2019, the Maturity Date was subsequently extended through amendments to the NRG loan agreement on March 29, 2019 (the “Third Amendment”), June 13, 2019 and July 11, 2019 (the “Fifth Amendment”). In connection with the Third Amendment, the Company agreed to make an additional payment of $750 thousand at the Maturity Date, which is recorded in interest expense on the Consolidated Statement of Operations. In addition, the Fifth Amendment, which was in effect as of the end of the quarter, extended the Maturity Date of each note to the earlier of (a) August 9, 2019, (b) the commercial operation date or substantial completion date, as applicable, with respect to the fuel cell project owned by Central CA Fuel Cell 2, LLC, and (c) closing of a refinancing of indebtedness; provided, however, in the event NRG determines, in its sole discretion, that the Company is not making sufficient progress toward the completion of the construction of the 2.8 MW Tulare BioMAT project in California, including but not limited to delivery of a mutually agreed plan of completion by no later than July 19, 2019, NRG may accelerate the Maturity Date on the date of such determination. Refer to Note 20. “Subsequent Events” for information regarding an additional amendment to the terms of the NRG loan agreement, including a further extension of the Maturity Date.
On December 21, 2018, the Company, through its indirect wholly-owned subsidiary FuelCell Energy Finance II, LLC (“FCEF II”), entered into a Construction Loan Agreement (as amended from time to time, the “Generate Agreement”) with Generate Lending pursuant to which Generate Lending agreed (the “Commitment”) to make available to FCEF II a credit facility in an aggregate principal amount of up to $100.0 million (the “Generate Facility”) to fund the manufacture, construction, installation, commissioning and start-up of stationary fuel cell projects to be developed by the Company on behalf of FCEF II during the Availability Period (as defined below). Fuel cell projects must meet certain conditions to be determined to be “Approved Projects” under the Generate Facility. If approved by Generate Lending at its sole discretion, the Generate Facility may be comprised of multiple loans to individual Approved Projects (each, a “Working Capital Loan”). Each Working Capital Loan will be sized to the lesser of (i) 100% of the construction budget and (ii) the invested amount that allows Generate Lending to achieve a 10% unlevered, after-tax inefficient internal rate of return. Approved Projects will be funded at milestones on a cost incurred basis. FCEF II and the Company will contribute any additional equity required to
30
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
construct an Approved Project on a pari-passu basis with the Working Capital Loans. The Commitment to provide Working Capital Loans will remain in place for thirty-six months from the date of the Generate Agreement (the “Availability Period”). Interest will accrue at 9.5% per annum, calculated on a 30/360 basis, on all outstanding principal, paid on the first business day of each month. The initial draw amount under the Generate Facility, funded at closing, was $10.0 million. The initial draw reflects loan advances for the first Approved Project under the Generate Facility, the Bolthouse Farms 5 MW project in California.
The maturity date for the outstanding principal amount of each Working Capital Loan will be the earlier of (a) the achievement of the Commercial Operation Date under the Engineering, Procurement and Construction (“EPC”) Agreement for such Approved Project, (b) ninety days prior to the required Commercial Operation Date under the Revenue Contract (as defined in the Generate Agreement), or (c) upon certain defaults by FCEF II.
As of September 1, 2019, Generate Lending has the right to issue a notice to FCEF II that all Working Capital Loans shall be due and payable on September 30, 2019. If Generate Lending delivers such notice, all of the Working Capital Loans, together with all accrued and unpaid interest thereon, shall be due and payable in their entirety, without penalty or premium. Further, if Generate Lending delivers such notice, FCEF II may prepay all then outstanding Working Capital Loans at any time prior to September 30, 2019. Mandatory prepayments are required in the event of (i) material damage or destruction to an Approved Project, (ii) termination or default under an Approved Project’s Revenue Contract, (iii) a change of control, or (iv) failure to achieve Substantial Completion as defined under the EPC Agreement for such Approved Project by the required dates. Refer to Note 20. “Subsequent Events” for information regarding recent amendments to the terms of the Generate Agreement.
On January 9, 2019, the Company, through its indirect wholly-owned subsidiary TRS Fuel Cell, LLC, entered into a Loan and Security Agreement (the “Enhanced Capital Loan Agreement”) with Enhanced Capital Connecticut Fund V, LLC in the amount of $1.5 million. Interest will accrue at a rate of 6.0% per annum, calculated on a 30/360 basis, on all outstanding principal, paid on the first business day of each month. The loan maturity date is three years from the date of the Enhanced Capital Loan Agreement upon which the outstanding principal and accrued interest will be payable.
On February 28, 2019, the Company, through its indirect wholly-owned subsidiary, Groton Station Fuel Cell, LLC (“Groton Borrower”), entered into a Construction Loan Agreement (the “Groton Agreement”) with Fifth Third pursuant to which Fifth Third agreed to make available to Groton Borrower a construction loan facility in an aggregate principal amount of up to $23.0 million (the “Groton Facility”) to fund the manufacture, construction, installation, commissioning and start-up of the 7.4 MW fuel cell power plant for the Connecticut Municipal Electric Energy Cooperative located on the U.S. Navy submarine base in Groton, Connecticut (the “Groton Project”). Groton Borrower made an initial draw under the Groton Facility on the date of closing of $9.7 million and made a draw of $1.4 million in April 2019. The total outstanding balance as of July 31, 2019 was $11.1 million.
Amounts borrowed under the Groton Facility bear interest at a rate equal to the sum of the one-month LIBOR Rate plus 2.25%. Regular monthly payments are interest-only. Amounts borrowed under the Groton Facility may be prepaid at any time without penalty. The maturity date of the Groton Facility will be the earlier of (a) October 31, 2019, (b) the commercial operation date of the Groton Project, or (c) one business day after receipt of proceeds of debt financing (i.e., take out financing) in an amount sufficient to repay the outstanding indebtedness under the Groton Facility. Mandatory prepayments are required in the event of material damage or destruction to the Groton Project or a change of control of Groton Borrower.
The Company has agreed to guarantee Groton Borrower’s obligations under the Groton Agreement. In addition, Groton Borrower’s obligations under the Groton Agreement are secured by a first mortgage lien on Groton Borrower’s leasehold interest in the Groton Project site, a security interest in the Groton Project assets, including material Groton Project related contracts such as the power purchase agreement and engineering, procurement and construction agreement, and the Company’s equity interest in the Groton Borrower. The Groton Agreement contains customary representations and warranties, affirmative and negative covenants, and events of default that entitle Fifth Third to cause the indebtedness under the Groton Facility to become immediately due and payable. Refer to Note 20. “Subsequent Events” for information regarding an amendment to the terms of the Groton Agreement.
Deferred finance costs relate primarily to (i) sale-leaseback transactions entered into with PNC which are being amortized over the ten-year term, (ii) payments under the Hercules Agreement, which are being amortized over the term of the loan and (iii) payments under the loans obtained to purchase BFC which are being amortized over the term of the loans.
31
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 18. Income Taxes
The Company recorded income tax expense of $0.1 million for the nine months ended July 31, 2019 compared to an income tax benefit totaling $3.0 million for the nine months ended July 31, 2018. The Company recorded income tax expense of $0.02 million for the three months ended July 31, 2019 and 2018. The income tax benefit for the nine months ended July 31, 2018 primarily related to the Tax Cuts and Jobs Act (the “Act”) that was enacted on December 22, 2017. The Act reduced the U.S. federal corporate tax rate from 34% to 21% effective January 1, 2018 which resulted in a deferred tax benefit of $1.0 million primarily related to a reduction of the Company’s deferred tax liability for an in process research and development asset (“IPR&D”). The Act also established an unlimited carryforward period for the net operating loss (“NOL”) the Company generated in fiscal year 2018. This provision of the Act resulted in a reduction of the valuation allowance attributable to deferred tax assets at the enactment date by $2.0 million based on the indefinite life of the resulting NOL as well as the deferred tax liability for its IPR&D asset.
Note 19. Commitments and Contingencies
Lease Agreements
The Company leases certain computer and office equipment in Torrington and Danbury, Connecticut and manufacturing facilities in Torrington, Connecticut under operating leases expiring on various dates through 2030.
Non-cancelable minimum payments applicable to operating and capital leases as of July 31, 2019 were as follows:
|
|
|
Operating
Leases
|
|
|
Capital
Leases
|
|
|
Due Year 1
|
|
$
|
743
|
|
|
$
|
138
|
|
|
Due Year 2
|
|
|
436
|
|
|
|
47
|
|
|
Due Year 3
|
|
|
441
|
|
|
|
10
|
|
|
Due Year 4
|
|
|
405
|
|
|
|
—
|
|
|
Due Year 5
|
|
|
373
|
|
|
|
—
|
|
|
Thereafter
|
|
|
2,724
|
|
|
|
—
|
|
|
Total
|
|
$
|
5,122
|
|
|
$
|
195
|
|
Service Agreements
Under the provisions of its service agreements, the Company provides services to maintain, monitor, and repair customer power plants to meet minimum operating levels. Under the terms of such service agreements, the particular power plant must meet a minimum operating output during defined periods of the term. If minimum output falls below the contract requirement, the Company may be subject to performance penalties and/or may be required to repair or replace the customer’s fuel cell module(s).
Power Purchase Agreements
Under the terms of the Company’s PPAs, customers agree to purchase power from the Company’s fuel cell power plants at negotiated rates. Electricity rates are generally a function of the customers’ current and estimated future electricity pricing available from the grid. As owner or lessee of the power plants, the Company is responsible for all operating costs necessary to maintain, monitor and repair the power plants. Under certain agreements, the Company is also responsible for procuring fuel, generally natural gas or biogas, to run the power plants.
Other
As of July 31, 2019, the Company had unconditional purchase commitments aggregating $44.8 million, for materials, supplies and services in the normal course of business.
The Company is involved in legal proceedings, claims and litigation arising out of the ordinary conduct of its business. Although the Company cannot assure the outcome, management presently believes that the result of such legal proceedings, either individually, or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial statements, and no material amounts have been accrued in the Company’s consolidated financial statements with respect to these matters.
32
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 20. Subsequent Events
Amendment to NRG Energy, Inc. Loan Agreement
On August 8, 2019, FuelCell Finance, Central CA Fuel Cell 2, LLC, and NRG entered into the sixth amendment to the NRG loan agreement, which amends the definition of “Maturity Date” under the NRG loan agreement. Pursuant to the sixth amendment, the Maturity Date of each note is now the date that is the earliest of (a) September 30, 2019, (b) the commercial operation date or substantial completion date, as applicable, with respect to the fuel cell project owned by the co-borrower under such note, and (c) the repayment in full or the closing of a refinancing of the Company’s indebtedness with Hercules; provided, however, in the event NRG determines, in its sole discretion, that the Company is not making sufficient progress toward the completion of the construction of the 2.8 MW Tulare BioMAT project in California, NRG may accelerate the Maturity Date on the date of such determination. In conjunction with the sixth amendment, Central CA Fuel Cell 2, LLC prepaid interest (which would otherwise be paid at maturity) that had been accrued through the date of the sixth amendment totaling approximately $0.3 million.
Amendment to Generate Lending, LLC Construction Loan Agreement
On December 21, 2018, the Company, through its indirect wholly-owned subsidiary FCEF II, entered into the Generate Agreement with Generate Lending. In connection with the execution of the Generate Agreement and concurrently therewith, Generate Lending, FCEF II and the Company entered into a Right to Finance Agreement, which gave the Generate Lending an exclusive right, subject to certain exclusions and exceptions, to provide construction financing through the Generate facility to all of the Company’s stationary fuel cell projects and provided that, upon a breach of such exclusivity provision, FCEF II would pay to Generate Lending a cash amount equal to $650,000 (the “Liquidated Damages Amount”).
Pursuant to the terms of the Generate Agreement, Generate Lending had an optional call right which, if exercised, was required to be noticed during the ten day period beginning on June 20, 2019 and ending on (and including) June 30, 2019 (as amended or modified from time to time, the “Call Right”). If Generate Lending had exercised its Call Right during that period, all of the Working Capital Loans (as described elsewhere herein) (in an amount equal to $10,000,000), together with all accrued and unpaid interest thereon, would have been due and payable in their entirety, without penalty or premium, prior to September 30, 2019.
On June 28, 2019, FCEF II, Generate Lending, and various project company guarantors entered into the First Amendment to the Generate Agreement (the “First Generate Amendment”). Under the First Generate Amendment, the Call Right was modified to give Generate Lending the right to exercise the Call Right, requiring payment of all Working Capital Loans and all accrued and unpaid interest thereon on September 30, 2019, during the ten day period beginning on August 1, 2019 and ending on (and including) August 11, 2019. Concurrently with the execution of the First Generate Amendment, the Company, FCEF II and Generate Lending entered into the First Amendment to the Right to Finance Agreement, which provided that, if Generate Lending exercised its Call Right, the Right to Finance Agreement (as amended) would terminate. In addition, in the First Amendment to the Right to Finance Agreement, the provision requiring the payment of the Liquidated Damages Amount (as described above) was deleted in its entirety.
On August 7, 2019, Generate Lending exercised the Call Right. On August 13, 2019, FCEF II, Generate Lending and various project company guarantors entered into the Second Amendment to the Generate Agreement (the “Second Generate Amendment”). Under the Second Generate Amendment, the Call Right was further amended to provide Generate Lending the right to exercise the Call Right, requiring payment of all Working Capital Loans and all accrued and unpaid interest thereon on September 30, 2019, any time between September 1, 2019 and September 30, 2019, subject to further extension upon mutual agreement of FCEF II and Generate Lending. Pursuant to the Second Generate Amendment, FCEF II and various project company guarantors agreed to (i) use all commercially reasonable efforts to provide Generate Lending with a consent to assignment of the power purchase agreement for the 7.4 MW project in Brookhaven, New York currently under development, (ii) provide daily reports to Generate Lending in form and substance satisfactory to Generate Lending, (iii) use all commercially reasonable efforts to provide information to Generate Lending within three business days of Generate Lending’s request therefor, and (iv) by September 1, 2019, at FCEF II’s cost and Generate Lending’s option to either (x) provide executed bailee letters for all collateral under the Generate Agreement or (y) move all collateral currently held at the Company’s Danbury and/or Torrington facilities, or any other facility owned or leased by FCEF II or the Company to a mutually agreeable separate location only accessible with the consent of Generate Lending. Failure to timely comply with any of the foregoing shall constitute a Facility Event of Default (as defined in the Generate Agreement). With the execution of the Second Generate Amendment, Generate Lending withdrew its August 7, 2019 notice exercising the Call Right. Concurrently with the execution of the Second Generate Amendment, the Company, FCEF II and Generate Lending entered into the Second Amendment to the Right to Finance Agreement, which provides that if Generate Lending exercises its Call Right (as amended by the Second Generate Amendment), the Right to Finance Agreement will terminate as of September 30, 2019.
33
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Amendment to Fifth Third Bank Construction Loan Agreement
On August 13, 2019, Groton Borrower and Fifth Third entered into Amendment No. 1 to the Groton Agreement (the “Groton Amendment”). Under the Groton Amendment, the definition of “Commitment” was amended to reduce the aggregate principal amount of the facility available to Groton Borrower from $23.0 million to $18.0 million. Pursuant to the Groton Amendment, Groton Borrower has agreed to (i) no later than August 16, 2019, deliver executed bailee letters for certain collateral, (ii) no later than August 21, 2019, provide Fifth Third with a plan to fund the remaining project costs needed to complete the construction of the Groton Project, (iii) complete the conditioning of the first of the remaining two fuel cells units for the Groton Project no later than September 19, 2019 and the final fuel cell unit for the Groton Project by October 25, 2019, and (iv) no later than September 28, 2019, deliver to Fifth Third a binding loan agreement for permanent financing with another lender and one or more binding letters of intent from tax equity investors, such date to be automatically extended to October 21, 2019 in the event that the Company’s credit facility with Hercules is repaid or extended beyond October 21, 2019; and further provided that such dates shall be extended by an additional 60 days due to delays outside of the control of Groton Borrower or if Fifth Third is reasonably satisfied that Groton Borrower is negotiating diligently and in good faith with potential take-out lenders or tax equity investors.
Series B Preferred Stock
No dividends were declared or paid by the Company on the Series B Preferred Stock in connection with the August 15, 2019 dividend payment date. Based on the dividend rate in effect on August 15, 2019, the aggregate amount of such dividend payment would have been $0.8 million. Because such dividends were not paid on August 15, under the terms of the Amended Certificate of Designation with respect to the Series B Preferred Stock, the holders of shares of Series B Preferred Stock will be entitled to receive, when, as and if, declared by the Board, dividends at a dividend rate per annum equal to the normal dividend rate of 5% plus an amount equal to the number of dividend periods for which the Company failed to pay or set apart funds to pay dividends multiplied by 0.0625% for each subsequent dividend period until the Company has paid or provided for the payment of all dividends on the shares of Series B Preferred Stock for all prior dividend periods. A total of $0.83 million will be payable with respect to the August 15 dividend period, if and when declared by the Board.
Sales of Common Stock
During the period beginning on August 1, 2019 and ending on (and including) August 8, 2019, the Company sold approximately 7.5 million shares of its common stock under the Sales Agreement at an average sale price of $0.31 per share and raised aggregate gross proceeds of approximately $2.4 million, before deducting expenses and commissions. Commissions of $0.07 million were paid to the Agent making the sales during the period beginning on August 1, 2019 and ending on (and including) August 8, 2019, resulting in net proceeds of approximately $2.3 million.
As the Company had sold an aggregate of approximately $27.1 million of shares of common stock under the Sales Agreement as of September 4, 2019, the Company may sell up to approximately $22.9 million of common stock in the future under the Sales Agreement, subject to contractual requirements, trading windows and market conditions.
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