6
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 31, 2020
OR
|
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-14204
FUELCELL ENERGY, INC.
(Exact name of registrant as specified in its charter)
|
Delaware |
|
06-0853042 |
|
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
|
|
|
|
3 Great Pasture Road Danbury, Connecticut |
|
06810 |
|
(Address of principal executive offices) |
|
(Zip Code) |
Registrant’s telephone number, including area code: (203) 825-6000
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class |
|
Trading Symbol(s) |
|
Name of each exchange on which registered |
|
Common stock, par value $0.0001 per share |
|
FCEL |
|
The Nasdaq Stock Market LLC (Nasdaq Global Market) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer |
☐ |
Accelerated filer |
☐ |
|
Non-accelerated filer |
☒ |
Smaller reporting company |
☒ |
|
Emerging growth company |
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of common stock, par value $0.0001 per share, outstanding as of September 3, 2020: 239,374,041
FUELCELL ENERGY, INC.
FORM 10-Q
Table of Contents
|
|
|
|
|
Page |
|
|
|
|
|
|
|
PART I - FINANCIAL INFORMATION |
|
|
||
|
|
|
|
|
|
|
Item 1. |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets as of July 31, 2020 and October 31, 2019. |
|
3 |
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Changes in Equity for the three and nine months ended July 31, 2020. |
|
6 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Changes in Equity for the three and nine months ended July 31, 2019. |
|
7 |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the nine months ended July 31, 2020 and 2019. |
|
8 |
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
Item 2. |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
|
32 |
|
|
|
|
|
|
|
Item 3. |
|
|
56 |
|
|
|
|
|
|
|
|
Item 4. |
|
|
57 |
|
|
|
|
|
|
|
|
PART II - OTHER INFORMATION |
|
|
||
|
|
|
|
|
|
|
Item 1. |
|
|
58 |
|
|
|
|
|
|
|
|
Item 1A. |
|
|
59 |
|
|
|
|
|
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds. |
|
75 |
|
|
|
|
|
|
|
Item 3. |
|
|
75 |
|
|
|
|
|
|
|
|
Item 4. |
|
|
75 |
|
|
|
|
|
|
|
|
Item 5. |
|
|
75 |
|
|
|
|
|
|
|
|
Item 6. |
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
78 |
|
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FUELCELL ENERGY, INC.
Consolidated Balance Sheets
(Unaudited)
(Amounts in thousands, except share and per share amounts)
|
|
|
July 31, |
|
|
October 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
ASSETS |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, unrestricted |
|
$ |
66,284 |
|
|
$ |
9,434 |
|
|
Restricted cash and cash equivalents - short-term |
|
|
6,087 |
|
|
|
3,473 |
|
|
Accounts receivable, net |
|
|
7,364 |
|
|
|
3,292 |
|
|
Unbilled receivables |
|
|
7,917 |
|
|
|
7,684 |
|
|
Inventories |
|
|
51,502 |
|
|
|
54,515 |
|
|
Other current assets |
|
|
7,640 |
|
|
|
5,921 |
|
|
Total current assets |
|
|
146,794 |
|
|
|
84,319 |
|
|
Restricted cash and cash equivalents - long-term |
|
|
34,909 |
|
|
|
26,871 |
|
|
Inventories - long-term |
|
|
9,018 |
|
|
|
2,179 |
|
|
Project assets |
|
|
160,921 |
|
|
|
144,115 |
|
|
Property, plant and equipment |
|
|
37,301 |
|
|
|
41,134 |
|
|
Operating lease right-of-use assets, net |
|
|
10,316 |
|
|
|
- |
|
|
Goodwill |
|
|
4,075 |
|
|
|
4,075 |
|
|
Intangible assets |
|
|
20,291 |
|
|
|
21,264 |
|
|
Other assets |
|
|
13,144 |
|
|
|
9,489 |
|
|
Total assets |
|
$ |
436,769 |
|
|
$ |
333,446 |
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
17,692 |
|
|
$ |
21,916 |
|
|
Current portion of operating lease liabilities |
|
|
888 |
|
|
|
- |
|
|
Accounts payable |
|
|
10,407 |
|
|
|
16,943 |
|
|
Accrued liabilities |
|
|
14,622 |
|
|
|
11,452 |
|
|
Deferred revenue |
|
|
10,100 |
|
|
|
11,471 |
|
|
Preferred stock obligation of subsidiary |
|
|
932 |
|
|
|
950 |
|
|
Total current liabilities |
|
|
54,641 |
|
|
|
62,732 |
|
|
Long-term deferred revenue |
|
|
31,026 |
|
|
|
28,705 |
|
|
Long-term preferred stock obligation of subsidiary |
|
|
17,565 |
|
|
|
16,275 |
|
|
Long-term operating lease liabilities |
|
|
9,988 |
|
|
|
- |
|
|
Long-term debt and other liabilities |
|
|
167,367 |
|
|
|
90,140 |
|
|
Total liabilities |
|
|
280,587 |
|
|
|
197,852 |
|
|
Redeemable Series B preferred stock (liquidation preference of $64,020 as of July 31, 2020 and October 31, 2019) |
|
|
59,857 |
|
|
|
59,857 |
|
|
Total equity: |
|
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
Common stock ($0.0001 par value); 337,500,000 and 225,000,000 shares authorized as of July 31, 2020 and October 31, 2019, respectively; 236,172,797 and 193,608,684 shares issued and outstanding as of July 31, 2020 and October 31, 2019, respectively |
|
|
24 |
|
|
|
19 |
|
|
Additional paid-in capital |
|
|
1,242,518 |
|
|
|
1,151,454 |
|
|
Accumulated deficit |
|
|
(1,145,340 |
) |
|
|
(1,075,089 |
) |
|
Accumulated other comprehensive loss |
|
|
(877 |
) |
|
|
(647 |
) |
|
Treasury stock, Common, at cost (44,322 and 42,496 shares as of July 31, 2020 and October 31, 2019, respectively) |
|
|
(403 |
) |
|
|
(466 |
) |
|
Deferred compensation |
|
|
403 |
|
|
|
466 |
|
|
Total stockholders’ equity |
|
|
96,325 |
|
|
|
75,737 |
|
|
Total liabilities and stockholders' equity |
|
$ |
436,769 |
|
|
$ |
333,446 |
|
See accompanying notes to consolidated financial statements
3
FUELCELL ENERGY, INC.
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(Amounts in thousands, except share and per share amounts)
|
|
|
Three Months Ended July 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Revenues: |
|
|
|
|
|
|
|
|
|
Product |
|
$ |
— |
|
|
$ |
— |
|
|
Service and license |
|
|
7,113 |
|
|
|
11,496 |
|
|
Generation |
|
|
4,722 |
|
|
|
5,448 |
|
|
Advanced Technologies |
|
|
6,893 |
|
|
|
5,768 |
|
|
Total revenues |
|
|
18,728 |
|
|
|
22,712 |
|
|
Costs of revenues: |
|
|
|
|
|
|
|
|
|
Product |
|
|
2,658 |
|
|
|
4,547 |
|
|
Service and license |
|
|
8,833 |
|
|
|
1,102 |
|
|
Generation |
|
|
6,327 |
|
|
|
5,726 |
|
|
Advanced Technologies |
|
|
4,038 |
|
|
|
3,372 |
|
|
Total costs of revenues |
|
|
21,856 |
|
|
|
14,747 |
|
|
Gross (loss) profit |
|
|
(3,128 |
) |
|
|
7,965 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Administrative and selling expenses |
|
|
6,607 |
|
|
|
7,058 |
|
|
Research and development expenses |
|
|
1,027 |
|
|
|
1,977 |
|
|
Total costs and expenses |
|
|
7,634 |
|
|
|
9,035 |
|
|
Loss from operations |
|
|
(10,762 |
) |
|
|
(1,070 |
) |
|
Interest expense |
|
|
(4,165 |
) |
|
|
(3,536 |
) |
|
Change in fair value of common stock warrant liability |
|
|
(1,694 |
) |
|
|
— |
|
|
Gain on extinguishment of financing obligation |
|
|
1,801 |
|
|
|
— |
|
|
Other expense, net |
|
|
(501 |
) |
|
|
(685 |
) |
|
Loss before provision for income taxes |
|
|
(15,321 |
) |
|
|
(5,291 |
) |
|
Provision for income taxes |
|
|
(10 |
) |
|
|
(20 |
) |
|
Net loss |
|
|
(15,331 |
) |
|
|
(5,311 |
) |
|
Series B preferred stock dividends |
|
|
(800 |
) |
|
|
(810 |
) |
|
Series C preferred stock deemed contributions |
|
|
— |
|
|
|
884 |
|
|
Series D preferred stock deemed dividends |
|
|
— |
|
|
|
(3,091 |
) |
|
Net loss attributable to common stockholders |
|
$ |
(16,131 |
) |
|
$ |
(8,328 |
) |
|
Loss per share basic and diluted: |
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholders |
|
$ |
(0.07 |
) |
|
$ |
(0.18 |
) |
|
Basic and diluted weighted average shares outstanding |
|
|
217,966,402 |
|
|
|
45,069,911 |
|
|
|
|
Three Months Ended July 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Net loss |
|
$ |
(15,331 |
) |
|
$ |
(5,311 |
) |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(139 |
) |
|
|
105 |
|
|
Total comprehensive loss |
|
$ |
(15,470 |
) |
|
$ |
(5,206 |
) |
See accompanying notes to consolidated financial statements.
4
FUELCELL ENERGY, INC.
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(Amounts in thousands, except share and per share amounts)
|
|
|
Nine Months Ended July 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Revenues: |
|
|
|
|
|
|
|
|
|
Product |
|
$ |
— |
|
|
$ |
— |
|
|
Service and license |
|
|
19,697 |
|
|
|
25,866 |
|
|
Generation |
|
|
14,795 |
|
|
|
8,560 |
|
|
Advanced Technologies |
|
|
19,380 |
|
|
|
15,285 |
|
|
Total revenues |
|
|
53,872 |
|
|
|
49,711 |
|
|
Costs of revenues: |
|
|
|
|
|
|
|
|
|
Product |
|
|
7,512 |
|
|
|
14,362 |
|
|
Service and license |
|
|
16,418 |
|
|
|
15,166 |
|
|
Generation |
|
|
17,576 |
|
|
|
9,047 |
|
|
Advanced Technologies |
|
|
12,046 |
|
|
|
9,016 |
|
|
Total costs of revenues |
|
|
53,552 |
|
|
|
47,591 |
|
|
Gross profit |
|
|
320 |
|
|
|
2,120 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Administrative and selling expenses |
|
|
19,041 |
|
|
|
23,622 |
|
|
Research and development expenses |
|
|
3,323 |
|
|
|
12,435 |
|
|
Total costs and expenses |
|
|
22,364 |
|
|
|
36,057 |
|
|
Loss from operations |
|
|
(22,044 |
) |
|
|
(33,937 |
) |
|
Interest expense |
|
|
(11,026 |
) |
|
|
(7,807 |
) |
|
Change in fair value of common stock warrant liability |
|
|
(39,311 |
) |
|
|
— |
|
|
Gain on extinguishment of financing obligation |
|
|
1,801 |
|
|
|
— |
|
|
Other income (expense), net |
|
|
370 |
|
|
|
(556 |
) |
|
Loss before provision for income taxes |
|
|
(70,210 |
) |
|
|
(42,300 |
) |
|
Provision benefit for income taxes |
|
|
(41 |
) |
|
|
(89 |
) |
|
Net loss |
|
|
(70,251 |
) |
|
|
(42,389 |
) |
|
Series A warrant exchange |
|
|
— |
|
|
|
(3,169 |
) |
|
Series B preferred stock dividends |
|
|
(2,531 |
) |
|
|
(2,410 |
) |
|
Series C preferred stock deemed dividends and redemption value adjustment, net |
|
|
— |
|
|
|
(6,522 |
) |
|
Series D preferred stock deemed dividends and redemption accretion |
|
|
— |
|
|
|
(9,752 |
) |
|
Net loss attributable to common stockholders |
|
$ |
(72,782 |
) |
|
$ |
(64,242 |
) |
|
Loss per share basic and diluted: |
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholders |
|
$ |
(0.35 |
) |
|
$ |
(2.97 |
) |
|
Basic and diluted weighted average shares outstanding |
|
|
210,389,907 |
|
|
|
21,608,427 |
|
|
|
|
Nine Months Ended July 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Net loss |
|
$ |
(70,251 |
) |
|
$ |
(42,389 |
) |
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(230 |
) |
|
|
(28 |
) |
|
Total comprehensive loss |
|
$ |
(70,481 |
) |
|
$ |
(42,417 |
) |
5
FUELCELL ENERGY, INC.
Consolidated Statements of Changes in Equity
(Unaudited)
(Amounts in thousands, except share amounts)
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Shares |
|
|
Amount |
|
|
Additional Paid-in Capital |
|
|
Accumulated Deficit |
|
|
Accumulated Other Comprehensive Loss |
|
|
Treasury Stock |
|
|
Deferred Compensation |
|
|
Total Equity |
|
||||||||
|
Balance, October 31, 2019 |
|
|
193,608,684 |
|
|
$ |
19 |
|
|
$ |
1,151,454 |
|
|
$ |
(1,075,089 |
) |
|
$ |
(647 |
) |
|
$ |
(466 |
) |
|
$ |
466 |
|
|
$ |
75,737 |
|
|
Share based compensation |
|
|
— |
|
|
|
— |
|
|
|
488 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
488 |
|
|
Orion warrant exercises |
|
|
9,396,320 |
|
|
|
1 |
|
|
|
25,993 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25,994 |
|
|
Sale of common stock, net of fees |
|
|
7,938,228 |
|
|
|
1 |
|
|
|
3,501 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,502 |
|
|
Taxes paid upon vesting of restricted stock awards, net of stock issued under benefit plans |
|
|
2,585 |
|
|
|
— |
|
|
|
(6 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6 |
) |
|
Preferred dividends — Series B |
|
|
— |
|
|
|
— |
|
|
|
(931 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(931 |
) |
|
Adjustment for deferred compensation |
|
|
20,012 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
29 |
|
|
|
(29 |
) |
|
|
— |
|
|
Effect of foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(49 |
) |
|
|
— |
|
|
|
— |
|
|
|
(49 |
) |
|
Net loss attributable to FuelCell Energy, Inc. |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(40,151 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(40,151 |
) |
|
Balance, January 31, 2020 |
|
|
210,965,829 |
|
|
$ |
21 |
|
|
$ |
1,180,499 |
|
|
$ |
(1,115,240 |
) |
|
$ |
(696 |
) |
|
$ |
(437 |
) |
|
$ |
437 |
|
|
$ |
64,584 |
|
|
Share based compensation |
|
|
— |
|
|
|
— |
|
|
|
375 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
375 |
|
|
Taxes paid upon vesting of restricted stock awards, net of stock issued under benefit plans |
|
|
86,572 |
|
|
|
— |
|
|
|
(32 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(32 |
) |
|
Preferred dividends — Series B |
|
|
— |
|
|
|
— |
|
|
|
(800 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(800 |
) |
|
Effect of foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(42 |
) |
|
|
— |
|
|
|
— |
|
|
|
(42 |
) |
|
Net loss attributable to FuelCell Energy, Inc. |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(14,769 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(14,769 |
) |
|
Balance, April 30, 2020 |
|
|
211,052,401 |
|
|
$ |
21 |
|
|
$ |
1,180,042 |
|
|
$ |
(1,130,009 |
) |
|
$ |
(738 |
) |
|
$ |
(437 |
) |
|
$ |
437 |
|
|
$ |
49,316 |
|
|
Sale of common stock, net of fees |
|
|
25,144,704 |
|
|
|
3 |
|
|
|
62,328 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
62,331 |
|
|
Common stock issued, non-employee compensation |
|
|
(8,272 |
) |
|
|
— |
|
|
|
112 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
112 |
|
|
Reclassification of value of share based compensation upon approval of authorized shares for grant |
|
|
— |
|
|
|
— |
|
|
|
434 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
434 |
|
|
Share based compensation |
|
|
— |
|
|
|
— |
|
|
|
398 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
398 |
|
|
Stock issued under benefit plans, net of taxes paid upon vesting of restricted stock awards |
|
|
2,150 |
|
|
|
— |
|
|
|
4 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
Preferred dividends — Series B |
|
|
— |
|
|
|
— |
|
|
|
(800 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(800 |
) |
|
Effect of foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(139 |
) |
|
|
— |
|
|
|
— |
|
|
|
(139 |
) |
|
Adjustment for deferred compensation |
|
|
(18,186 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
34 |
|
|
|
(34 |
) |
|
|
— |
|
|
Net loss attributable to FuelCell Energy, Inc. |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(15,331 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(15,331 |
) |
|
Balance, July 31, 2020 |
|
|
236,172,797 |
|
|
$ |
24 |
|
|
$ |
1,242,518 |
|
|
$ |
(1,145,340 |
) |
|
$ |
(877 |
) |
|
$ |
(403 |
) |
|
$ |
403 |
|
|
$ |
96,325 |
|
6
FUELCELL ENERGY, INC.
Consolidated Statements of Changes in Equity
(Unaudited)
(Amounts in thousands, except share amounts)
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
Shares |
|
|
Amount |
|
|
Additional Paid-in Capital |
|
|
Accumulated Deficit |
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|
Treasury Stock |
|
|
Deferred Compensation |
|
|
Total Equity |
|
||||||||
|
Balance, October 31, 2018 |
|
|
7,972,686 |
|
|
$ |
1 |
|
|
$ |
1,073,463 |
|
|
$ |
(990,867 |
) |
|
$ |
(403 |
) |
|
$ |
(363 |
) |
|
$ |
363 |
|
|
$ |
82,194 |
|
|
Share based compensation |
|
|
— |
|
|
|
— |
|
|
|
987 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
987 |
|
|
Fee adjustment for common stock issuance |
|
|
— |
|
|
|
— |
|
|
|
90 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
90 |
|
|
Taxes paid upon vesting of restricted stock awards, net of stock issued under benefit plans |
|
|
1,946 |
|
|
|
— |
|
|
|
27 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
27 |
|
|
Series C convertible preferred stock conversions |
|
|
127,829 |
|
|
|
— |
|
|
|
1,974 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,974 |
|
|
Series C convertible preferred stock adjustment for beneficial conversion feature |
|
|
— |
|
|
|
— |
|
|
|
6,586 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,586 |
|
|
Series C convertible stock redemption value adjustments |
|
|
— |
|
|
|
— |
|
|
|
(8,550 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(8,550 |
) |
|
Series D convertible preferred stock conversions |
|
|
932,144 |
|
|
|
— |
|
|
|
4,334 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,334 |
|
|
Series D convertible preferred stock redemption accretion |
|
|
— |
|
|
|
— |
|
|
|
(3,793 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,793 |
) |
|
Preferred dividends — Series B |
|
|
— |
|
|
|
— |
|
|
|
(800 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(800 |
) |
|
Impact of the adoption of Topic 606 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,654 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,654 |
) |
|
Effect of foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
Net loss attributable to FuelCell Energy, Inc. |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(17,548 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(17,548 |
) |
|
Balance, January 31, 2019 |
|
|
9,034,605 |
|
|
$ |
1 |
|
|
$ |
1,074,318 |
|
|
$ |
(1,015,069 |
) |
|
$ |
(396 |
) |
|
$ |
(363 |
) |
|
$ |
363 |
|
|
$ |
58,854 |
|
|
Common stock issued, non-employee compensation |
|
|
29,454 |
|
|
|
— |
|
|
|
102 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
102 |
|
|
Share based compensation |
|
|
— |
|
|
|
— |
|
|
|
955 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
955 |
|
|
Taxes paid upon vesting of restricted stock awards, net of stock issued under benefit plans |
|
|
52,784 |
|
|
|
— |
|
|
|
(219 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(219 |
) |
|
Series A warrant exchange |
|
|
500,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Series C convertible preferred stock conversions |
|
|
2,127,528 |
|
|
|
— |
|
|
|
10,355 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10,355 |
|
|
Series C convertible preferred stock modification |
|
|
— |
|
|
|
— |
|
|
|
(6,047 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,047 |
) |
|
Series D convertible preferred stock conversions |
|
|
1,994,413 |
|
|
|
— |
|
|
|
6,305 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,305 |
|
|
Preferred dividends — Series B |
|
|
— |
|
|
|
— |
|
|
|
(800 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(800 |
) |
|
Effect of foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(140 |
) |
|
|
— |
|
|
|
— |
|
|
|
(140 |
) |
|
Adjustment for deferred compensation |
|
|
(29,454 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(103 |
) |
|
|
103 |
|
|
|
— |
|
|
Net loss attributable to FuelCell Energy, Inc. |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(19,530 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(19,530 |
) |
|
Balance, April 30, 2019 |
|
|
13,709,330 |
|
|
$ |
1 |
|
|
$ |
1,084,969 |
|
|
$ |
(1,034,599 |
) |
|
$ |
(536 |
) |
|
$ |
(466 |
) |
|
$ |
466 |
|
|
$ |
49,835 |
|
|
Sale of common stock, net of fees |
|
|
43,997,807 |
|
|
|
3 |
|
|
|
16,196 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16,199 |
|
|
Share based compensation |
|
|
— |
|
|
|
— |
|
|
|
383 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
383 |
|
|
Taxes paid upon vesting of restricted stock awards, net of stock issued under benefit plans |
|
|
437 |
|
|
|
— |
|
|
|
(9 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(9 |
) |
|
Series C convertible preferred stock conversions |
|
|
1,658,861 |
|
|
|
2 |
|
|
|
3,160 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,162 |
|
|
Series D convertible preferred stock conversions |
|
|
59,021,202 |
|
|
|
6 |
|
|
|
20,513 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
20,519 |
|
|
Preferred dividends — Series B |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
- |
|
|
Effect of foreign currency translation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
105 |
|
|
|
— |
|
|
|
— |
|
|
|
105 |
|
|
Net loss attributable to FuelCell Energy, Inc. |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,311 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,311 |
) |
|
Balance, July 31, 2019 |
|
|
118,387,637 |
|
|
$ |
12 |
|
|
$ |
1,125,212 |
|
|
$ |
(1,039,910 |
) |
|
$ |
(431 |
) |
|
$ |
(466 |
) |
|
$ |
466 |
|
|
$ |
84,883 |
|
See accompanying notes to consolidated financial statements.
7
FUELCELL ENERGY, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
|
|
|
Nine Months Ended July 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(70,251 |
) |
|
$ |
(42,389 |
) |
|
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
1,261 |
|
|
|
2,325 |
|
|
Loss from change in fair value of embedded derivatives |
|
|
— |
|
|
|
54 |
|
|
Depreciation and amortization |
|
|
13,828 |
|
|
|
8,319 |
|
|
Change in fair value of common stock warrant liability |
|
|
39,311 |
|
|
|
— |
|
|
Gain on extinguishment of financing obligation |
|
|
(1,801 |
) |
|
|
— |
|
|
Gain on Series 1 preferred stock extinguishment |
|
|
(475 |
) |
|
|
— |
|
|
Non-cash interest expense on preferred stock and debt obligations |
|
|
5,385 |
|
|
|
4,664 |
|
|
Operating lease expense |
|
|
478 |
|
|
|
— |
|
|
Operating lease payments |
|
|
(737 |
) |
|
|
— |
|
|
Unrealized foreign exchange gains |
|
|
(312 |
) |
|
|
(23 |
) |
|
Impairment of property, plant and equipment |
|
|
— |
|
|
|
2,840 |
|
|
Unrealized loss on derivative contract |
|
|
463 |
|
|
|
432 |
|
|
Other non-cash transactions, net |
|
|
1,083 |
|
|
|
876 |
|
|
(Increase) decrease in operating assets: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(4,072 |
) |
|
|
4,309 |
|
|
Unbilled receivables |
|
|
(2,727 |
) |
|
|
(5,603 |
) |
|
Inventories |
|
|
(2,674 |
) |
|
|
(8,434 |
) |
|
Other assets |
|
|
(1,697 |
) |
|
|
1,734 |
|
|
Increase (decrease) in operating liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
(7,051 |
) |
|
|
9,350 |
|
|
Accrued liabilities |
|
|
4,461 |
|
|
|
(464 |
) |
|
Deferred revenue |
|
|
950 |
|
|
|
3,703 |
|
|
Net cash used in operating activities |
|
|
(24,577 |
) |
|
|
(18,307 |
) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(160 |
) |
|
|
(1,922 |
) |
|
Project asset expenditures |
|
|
(23,493 |
) |
|
|
(21,877 |
) |
|
Project asset acquisition |
|
|
(611 |
) |
|
|
(35,474 |
) |
|
Net cash used in investing activities |
|
|
(24,264 |
) |
|
|
(59,273 |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Repayment of debt |
|
|
(27,791 |
) |
|
|
(23,030 |
) |
|
Proceeds from debt, net of debt discount |
|
|
87,757 |
|
|
|
55,096 |
|
|
Payment of deferred financing costs |
|
|
(2,697 |
) |
|
|
(2,505 |
) |
|
Payment of preferred dividends and return of capital |
|
|
(5,438 |
) |
|
|
(1,840 |
) |
|
Common stock issued for stock plans and related expenses |
|
|
5 |
|
|
|
23 |
|
|
Proceeds from sale of common stock and warrant exercises, net |
|
|
64,737 |
|
|
|
15,424 |
|
|
Net cash provided by financing activities |
|
|
116,573 |
|
|
|
43,168 |
|
|
Effects on cash from changes in foreign currency rates |
|
|
(230 |
) |
|
|
(28 |
) |
|
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
|
67,502 |
|
|
|
(34,440 |
) |
|
Cash, cash equivalents and restricted cash-beginning of period |
|
|
39,778 |
|
|
|
80,239 |
|
|
Cash, cash equivalents and restricted cash-end of period |
|
$ |
107,280 |
|
|
$ |
45,799 |
|
|
Supplemental cash flow disclosures: |
|
|
|
|
|
|
|
|
|
Cash interest paid |
|
$ |
6,194 |
|
|
$ |
2,688 |
|
|
Noncash financing and investing activity: |
|
|
|
|
|
|
|
|
|
Series C preferred share conversions |
|
|
— |
|
|
|
15,491 |
|
|
Series C preferred share modification |
|
|
— |
|
|
|
6,047 |
|
|
Series D preferred share conversions |
|
|
— |
|
|
|
31,158 |
|
|
Addition of operating lease liabilities |
|
|
899 |
|
|
|
— |
|
|
Addition of operating lease right-of-use assets |
|
|
899 |
|
|
|
— |
|
|
Net noncash reclassifications from project assets to inventory |
|
|
1,152 |
|
|
|
— |
|
|
Cashless warrant exercises |
|
|
25,994 |
|
|
|
— |
|
|
Accrued sale of common stock, cash received in a subsequent period |
|
|
1,096 |
|
|
|
775 |
|
|
Accrued purchase of fixed assets, cash to be paid in subsequent period |
|
|
— |
|
|
|
281 |
|
|
Accrued purchase of project assets, cash to be paid in subsequent period |
|
|
1,364 |
|
|
|
2,719 |
|
See accompanying notes to consolidated financial statements.
8
FUELCELL ENERGY, INC.
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. Founded in 1969, FuelCell Energy is a manufacturer of fuel cell clean power platforms delivering power and thermal energy and capable of delivering hydrogen, long-duration hydrogen energy storage, and carbon capture applications. FuelCell Energy is focused on growing its global presence in delivering environmentally-responsible distributed baseload power solutions through its proprietary, molten-carbonate fuel cell technology. We develop turn-key distributed power generation solutions and operate and provide comprehensive service for the life of the power platform. We are working to expand the proprietary technologies that we have developed over the past five decades into new product platforms, applications, markets and geographies. Our mission and purpose is to utilize our proprietary, state-of-the-art fuel cell platforms to enable a world empowered by clean energy and contribute to climate change mitigation. FuelCell Energy’s platforms are capable of reducing the global environmental footprint of baseload power generation by providing environmentally responsible solutions for reliable electrical power, distributed hydrogen, electrolysis, long-duration hydrogen-based energy storage, carbon capture, microgrid applications, hot water, steam, and chilling.
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, 2020 and 2019 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, 2019 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, 2019, 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.
Use of Estimates
The preparation of financial statements and related disclosures requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Estimates are used in accounting for, among other things, revenue recognition, contract loss accruals, excess, slow-moving and obsolete inventories, product warranty accruals, share-based compensation expense, fair value measurements, allowance for doubtful accounts, depreciation and amortization, impairment of goodwill and intangible assets, impairment of long-lived assets (including project assets), lease liabilities and right-of-use (“ROU”) assets and contingencies. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.
Liquidity
The Company’s future liquidity will depend on its ability to (i) timely complete current projects in process within budget, including approved amounts that have been financed, as financing does not cover budget overages or the total cost of the projects, (ii) increase cash flows from its generation portfolio, including by meeting conditions required to timely commence operation of new projects, operating its generation portfolio in compliance with minimum performance guarantees and operating its generation portfolio in accordance with revenue expectations, (iii) obtain approval of and receive funding for project construction under its Credit Agreement with Orion Energy Partners Investment Agent, LLC and its affiliated lenders and meet conditions for release of funds, or obtain other financing, (iv) obtain permanent financing for its projects once constructed, (v) increase order and contract volumes, which would lead to additional product sales, services agreements and generation revenues, (vi) obtain funding for and receive payment for research and development under current and future Advanced Technology contracts, including achieving a $5 million technological performance milestone under its Joint Development Agreement with ExxonMobil Research and Engineering Company (“EMRE”) during calendar year 2020, (vii) implement the cost reductions necessary to achieve profitable operations and (viii) access the capital markets to raise funds through the sale of equity securities, convertible notes, other equity-linked instruments and/or other debt instruments. Our business model requires substantial outside financing arrangements and satisfaction of the conditions of such financing arrangements to construct and deploy our projects and facilitate the growth of our business. We may seek to obtain such financing in both the debt and equity markets. If financing is not available to us on acceptable terms if and when needed, or on terms acceptable to us or our lenders, if we do not satisfy the conditions of our financing arrangements, if we spend more than the financing approved for projects, if project costs exceed an amount that the Company can finance, or if we do not generate sufficient revenues or obtain capital sufficient for our corporate needs, we may be required to reduce planned spending, reduce staffing, sell assets, seek alternative financing and take other measures, any of which could have a material adverse effect on our financial condition and operations.
There are indicators that substantial doubt about the Company’s ability to continue as a going concern exists, including, but not limited to, historical losses and negative cash flows, increasing costs of debt financing, restrictive debt covenants and restrictions imposed by the Company’s current lenders, limited availability of assets to support borrowing that have not already been pledged to existing lenders, and the need for additional financing to carry out the Company’s business plans. When indicators of substantial doubt exist, GAAP requires management to make an assessment of whether substantial doubt is alleviated by management’s plans. Even though equity and debt financings and other sources of funds may be available in the
9
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
future, when assessing whether substantial doubt is alleviated, management is not able to place reliance on uncommitted sources of financing. As of the date of these financial statements, management assessed the Company’s ability to continue as a going concern through analysis of existing cash on hand, expected receipts under existing agreements, and release of short-term restricted cash less expected disbursements over the next twelve months and expects that the Company will meet its obligations for at least one year from the date of issuance of these financial statements (assuming that there are no extraordinary or unanticipated impacts to its business as a result of COVID-19 or otherwise). Execution of the Company’s business plan will require additional financing or other measures to generate cash inflows and reduce cash outflows as early as the expected filing of the Form 10-K for the fiscal year ending October 31, 2020 in order to alleviate substantial doubt in future periods.
The key agreements which have impacted and may in the future impact the Company’s liquidity position include:
|
|
• |
Orion Facility and the Fifth Orion Amendment. |
On October 31, 2019, the Company and certain of its affiliates as guarantors entered into a Credit Agreement (as amended from time to time, the “Orion Credit Agreement”) with Orion Energy Partners Investment Agent, LLC, as Administrative Agent and Collateral Agent (the “Agent”), and its affiliates, Orion Energy Credit Opportunities Fund II, L.P., Orion Energy Credit Opportunities Fund II GPFA, L.P., and Orion Energy Credit Opportunities Fund II PV, L.P., as lenders, for a $200.0 million senior secured credit facility (the “Orion Facility”). The Orion Facility is structured as a delayed draw term loan to be provided by the lenders primarily to fund certain of the Company’s construction and related costs for fuel cell projects which meet the requirements of the Orion Facility. In conjunction with the closing of the Orion Facility, on October 31, 2019, the Company drew down $14.5 million (the “Initial Funding”). The Company drew down an additional $65.5 million on November 22, 2019 (the “Second Funding”). The Company may draw the remainder of the Orion Facility, up to $120.0 million, over the first 18 months following the Initial Funding and subject to the Agent’s approval, to fund project-related expenses consisting of: (i) construction costs, inventory and other capital expenditures of additional fuel cell projects with contracted cash flows (under power purchase agreements (“PPAs”) with creditworthy counterparties) that meet or exceed a mutually agreed coverage ratio; and (ii) inventory, working capital, and other costs that may be required to be delivered by the Company on purchase orders, service agreements, or other binding customer agreements with creditworthy counterparties. Except as may be approved by the Agent and the lenders under the Orion Facility (and except as provided in the Fifth Orion Amendment), the Company cannot use the Orion Facility to fund its working capital or other expenses at the corporate level.
On June 8, 2020, the Company and certain of its affiliates as guarantors entered into a fifth amendment to the Orion Credit Agreement with the Agent and the lenders (the “Fifth Orion Amendment”). Pursuant to the terms of the Fifth Orion Amendment and the amended Orion Credit Agreement, the lenders have committed to make available certain delayed-draw loans to the Company in an aggregate principal amount of up to $35 million (the “Secondary Facility Loans”) between the execution date and September 14, 2020. Such Secondary Facility Loans may be used for general corporate purposes of the Company or the guarantors in accordance with either (i) the then effective operating budget of the Company or the guarantors or (ii) the cash use forecast delivered by the Company to the Agent on June 6, 2020. Any draws under the Secondary Facility Loans must be repaid by September 1, 2021. As of September 10, 2020, the Company has not made any draws under the Secondary Facility Loans.
The lenders and the Agent under the Orion Facility have broad approval rights over the Company’s ability to raise additional capital, obtain other debt financing, and draw, allocate and use funds from the Orion Facility. If the Company is unable to obtain such approvals when the Company seeks to raise additional capital, obtain other debt financing, or use funds under the Orion Facility, it could have a material adverse effect on the Company’s financial condition and operations.
|
|
• |
EMRE Joint Development Agreement. |
On November 5, 2019, the Company signed a two-year Joint Development Agreement with EMRE, pursuant to which the Company will continue exclusive research and development efforts with EMRE to evaluate and develop new and/or improved carbonate fuel cells to capture and reduce carbon dioxide emissions from industrial and power sources, in exchange for (a) payment of (i) an exclusivity and technology access fee of $5.0 million, (ii) up to $45.0 million for research and development efforts, and (iii) milestone-based payments of up to $10.0 million after certain technological milestones are met, and (b) certain licenses.
10
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
|
|
• |
Paycheck Protection Program Loan. |
On April 20, 2020, the Company entered into a Paycheck Protection Program Promissory Note, dated April 16, 2020 (the “PPP Note”), evidencing a loan to the Company from Liberty Bank under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Pursuant to the PPP Note, the Company received total proceeds of approximately $6.5 million on April 24, 2020. In accordance with the requirements of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act (the “PPP Flexibility Act”), at least 60% of the proceeds used by the Company were used to pay eligible payroll costs. Under the requirements of the CARES Act, as amended by the PPP Flexibility Act, the loan may be fully forgiven if (i) proceeds are used to pay eligible payroll costs, rent, mortgage interest and utilities and (ii) full-time employee headcount and salaries are either maintained during the 24-week period following disbursement or restored by December 31, 2020. Any forgiveness of the loan will be subject to approval by the U.S. Small Business Administration (the “SBA”) and Liberty Bank and will require the Company to apply for such treatment in the future. In order to obtain the consent of the Agent and the lenders under the Orion Facility to enter into the PPP Note, the Agent and the lenders have required the Company to apply for forgiveness within 30 days after the last day of the loan forgiveness period as designated under the PPP regulations in effect as of June 6, 2020. While the Company may apply for forgiveness of the PPP Note in accordance with the requirements and limitations under the CARES Act, as amended by the PPP Flexibility Act, and the SBA regulations and requirements, no assurance can be given that any portion of the PPP Note will be forgiven.
|
|
• |
Open Market Sale Agreement. |
On June 16, 2020, the Company entered into an Open Market Sale Agreement (the “Open Market Sale Agreement”) with Jefferies LLC (“Jefferies”), with respect to an at the market offering program under which the Company may offer and sell up to $75 million of shares of the Company’s common stock from time to time. From the date of the Open Market Sale Agreement through August 6, 2020, 28.3 million shares were sold under the Open Market Sale Agreement at an average sales price per share of $2.55, resulting in gross proceeds of $72.3 million, before deducting expenses and sales commissions. Commissions of $2.2 million were paid to Jefferies in connection with these sales, resulting in net proceeds to the Company of approximately $70.1 million. As the Company has sold $72.3 million of common stock under the Open Market Sale Agreement as of September 10, 2020, it may sell up to approximately $2.7 million of shares in the future under the Open Market Sale Agreement.
The Company’s cash, cash equivalents and restricted cash consist of (a) restricted cash and cash equivalents, which consist of amounts pledged as performance security, reserved for future debt service requirements, reserved for letters of credit for certain banking requirements and contracts and reserved to pay down the Orion Facility which can be accessed or redeployed into other project financing at the option of and only with the approval of the lenders and the Agent under the Orion Facility or other lenders or third parties; (b) project cash and cash equivalents, which consist of amounts borrowed under the Orion Facility which can be used only by our consolidated wholly-owned project subsidiaries in the normal course of operations for project construction, purchase of equipment (including inventory from FuelCell Energy, Inc.) and working capital for projects approved under the Orion Facility in accordance with each project’s construction budget and schedule and which are classified as unrestricted cash on the Company’s consolidated balance sheets; and (c) unrestricted cash and cash equivalents, which can be used by the Company for general corporate purposes, including working capital at the corporate level. Unrestricted cash and cash equivalents, as presented on the Company’s consolidated balance sheets, consist of the amounts described in (b) and (c) above. As of July 31, 2020, unrestricted cash and cash equivalents totaled $66.3 million compared to $9.4 million as of October 31, 2019. Of this amount, project cash and cash equivalents funded under the Orion Facility totaled $16.2 million as of July 31, 2020 compared to $0 as of October 31, 2019. Excluding project cash and cash equivalents, unrestricted cash and cash equivalents totaled $50.1 million as of July 31, 2020 compared to $9.4 million as of October 31, 2019.
In future periods, the Company expects to seek lower-cost long-term debt and tax equity (e.g., sale-leaseback and partnership transactions) for its project asset portfolio as these projects commence commercial operations. The proceeds of any such financing, if obtained, may allow the Company to fund other fuel cell projects (subject to the approval of the lenders and the Agent under the Orion Facility) and/or pay down the outstanding principal balance of the Orion Facility. There can be no assurance that the Company can obtain such financing on terms acceptable to the Company, or that the lenders and the Agent under the Orion Facility will consent to such financing. The Company may also seek to raise funds through the sale of equity securities, convertible notes, other equity-linked instruments and/or other debt instruments. If the Company is unable to obtain such financing or raise additional capital, it could have a material adverse effect on the Company’s financial condition and operations, and could require the Company to reduce its expenditures or slow its project spending.
11
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 2. Recent Accounting Pronouncements
Recently Adopted Accounting Guidance
The Company adopted Accounting Standards Update Codification (“ASC”), “Leases” (“Topic 842” or “ASC 842”) on November 1, 2019. ASC 842, including all the related amendments subsequent to its issuance, supersedes the prior guidance for lease accounting and requires lessees to recognize a ROU asset representing the right to use an underlying asset and a lease liability representing the obligation to make lease payments over the lease term for substantially all leases, as well as disclose key quantitative and qualitative information about leasing arrangements. Upon adoption, the Company recognized an operating lease liability of approximately $10.3 million and corresponding operating lease ROU assets of approximately $10.1 million. There was no cumulative effect of the adoption recorded to accumulated deficit. There was no significant net effect on the consolidated statements of operations and comprehensive loss. Refer to Note 11. “Leases” for additional information on the Company’s adoption of ASC 842.
Recent Accounting Guidance Not Yet Effective
There is no recent accounting guidance not yet effective that is expected to have a material impact on the Company’s financial statements when adopted.
Note 3. Revenue Recognition
Contract Balances
Contract assets as of July 31, 2020 and October 31, 2019 were $14.0 million and $11.3 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 recognized as revenue offset by customer billings.
Contract liabilities as of July 31, 2020 and October 31, 2019 were $41.1 million and $40.2 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 (refer to Note 17. “Commitments and Contingencies” for details on future revenue recognition upon the termination of a license agreement). 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 recognized.
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, 2020, the Company’s total remaining performance obligations for service agreements, license agreements and Advanced Technologies contracts were $185.5 million in the aggregate. License revenue recognized over time will be recognized over the remaining term of the applicable 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 (refer to Note 17. “Commitments and Contingencies” for details on future revenue recognition upon the termination of a license agreement). Service revenue in periods in which 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 when replacements occur. Advanced technologies revenue will be recognized as costs are incurred.
The Company has elected practical expedients in the accounting guidance that allow for revenue to be recorded in the amount that the Company has a right to invoice, if that amount corresponds directly with the value to the customer of the Company's performance to date, and not to disclose related unsatisfied performance obligations. Generation sales, to the extent the related power purchase agreements are within the scope of ASC 2014-09, “Revenue from Contracts with Customers” (“Topic 606”), fall into this category, as these sales are recognized as revenue in the period the Company provides the electricity and completes the performance obligation, which is the same as the monthly amount billed to customers. Revenue recognition for the Joint Development Agreement with EMRE also falls into this category where revenue is recorded consistent with the amounts invoiced for research performed.
12
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 4. Accounts Receivable, Net and Unbilled Receivables
Accounts receivable, net and Unbilled receivables as of July 31, 2020 and October 31, 2019 consisted of the following:
|
|
|
July 31, |
|
|
October 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Commercial Customers: |
|
|
|
|
|
|
|
|
|
Amount billed |
|
$ |
5,288 |
|
|
$ |
2,227 |
|
|
Unbilled receivables (1) |
|
|
6,481 |
|
|
|
6,139 |
|
|
|
|
|
11,769 |
|
|
|
8,366 |
|
|
Advanced Technologies (including U.S. government(2)): |
|
|
|
|
|
|
|
|
|
Amount billed |
|
|
2,076 |
|
|
|
1,065 |
|
|
Unbilled receivables |
|
|
1,436 |
|
|
|
1,545 |
|
|
|
|
|
3,512 |
|
|
|
2,610 |
|
|
Accounts receivable, net and unbilled receivables |
|
$ |
15,281 |
|
|
$ |
10,976 |
|
|
(1) |
Additional long-term unbilled receivables of $6.1 million and $3.6 million are included within “Other Assets” as of July 31, 2020 and October 31, 2019, respectively. |
|
(2) |
Total U.S. government accounts receivable, including unbilled receivables, outstanding as of July 31, 2020 and October 31, 2019 were $1.3 million and $1.2 million, respectively. |
Accounts receivable are presented net of an allowance for doubtful accounts. There was no allowance for doubtful accounts as of July 31, 2020 and October 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 5. Inventories
Inventories (short and long-term) as of July 31, 2020 and October 31, 2019 consisted of the following:
|
|
|
July 31, |
|
|
October 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Raw materials |
|
$ |
23,845 |
|
|
$ |
25,466 |
|
|
Work-in-process (1) |
|
|
36,675 |
|
|
|
31,228 |
|
|
Inventories |
|
|
60,520 |
|
|
|
56,694 |
|
|
Inventories - short-term |
|
|
(51,502 |
) |
|
|
(54,515 |
) |
|
Inventories - long-term (2) |
|
$ |
9,018 |
|
|
$ |
2,179 |
|
|
(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 or power plant orders or for use under the Company’s service agreements. Included in work-in-process as of July 31, 2020 and October 31, 2019 was $19.6 million and $23.5 million, respectively, of completed standard components and modules. |
|
(2) |
Long-term inventory includes modules that are contractually required to be segregated for use as replacement modules for specific project assets. Given that these project assets are long-term, the Company classifies the inventory as long-term regardless of the expected timing of such module replacements. |
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 fuel cell stacks and modules, which are subcomponents of a power plant.
The Company incurred costs associated with excess plant capacity and manufacturing variances of $2.6 million and $4.4 million for the three months ended July 31, 2020 and 2019, respectively, and $7.0 million and $11.0 million for the nine months ended July 31, 2020 and 2019, respectively, which were included within product cost of revenues on the consolidated statements of operations and comprehensive loss.
13
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 6. Project Assets
Project assets as of July 31, 2020 and October 31, 2019 were $160.9 million and $144.1 million, respectively. Project assets as of July 31, 2020 and October 31, 2019 included eight and seven, respectively, completed, commissioned installations generating power with respect to which the Company has PPAs with an aggregate carrying value of $74.8 million and $59.2 million as of July 31, 2020 and October 31, 2019, respectively. Certain of these assets are the subject of sale-leaseback arrangements with PNC Energy Capital, LLC (“PNC”) and Crestmark Equipment Finance, a division of MetaBank (“Crestmark”), which are accounted for under the financing method.
In July 2020, the Company paid off the lease with PNC for the equipment of its subsidiary, UCI Fuel Cell, LLC, at the stipulated value in the lease schedule and applicable taxes, which totaled approximately $4.3 million. The funds used for such payoff included $3.0 million of restricted cash associated with this project and $1.3 million of unrestricted cash. The payment to repurchase the equipment prior to the end of the initial lease term resulted in the ownership of the equipment transferring back to UCI Fuel Cell, LLC (refer to Note 16. “Debt and Financing Obligations” for more information).
Project asset depreciation was approximately $3.1 million and $2.7 million for the three months ended July 31, 2020 and 2019, respectively, and $8.6 million and $4.7 million for the nine months ended July 31, 2020 and 2019, respectively.
The Project assets balance as of July 31, 2020 and October 31, 2019 also includes installations with an aggregate value of $86.1 million and $84.9 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 long-term 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 “Cash flows from financing activities” within the consolidated statements of cash flows and 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 16. “Debt and Financing Obligations” for more information).
Note 7. Goodwill and Intangible Assets
As of July 31, 2020 and October 31, 2019, the Company had goodwill of $4.1 million that was recorded in connection with the 2012 acquisition of Versa Power Systems, Inc. (“Versa”) and intangible assets of $20.3 million and $21.3 million, respectively, that were recorded in connection with the 2012 Versa acquisition and the 2019 Bridgeport Fuel Cell Project acquisition. The Versa intangible asset consists of an indefinite-lived in-process research and development intangible asset (“IPR&D”) for cumulative research and development efforts associated with the development of solid oxide fuel cell stationary power generation. The Company recorded a $12.3 million intangible asset during fiscal year 2019 in connection with the Bridgeport Fuel Cell Project acquisition in May 2019 related to an acquired PPA that had favorable terms. The balance for the PPA intangible asset was $10.7 million and $11.7 million as of July 31, 2020 and October 31, 2019, respectively. Amortization expense for the Bridgeport Fuel Cell Project related intangible asset for the three and nine months ended July 31, 2020 was $0.3 million and $1.0 million, respectively, and for the three and nine months ended July 31, 2019 was $0.3 million.
The Company completed its annual impairment analysis of goodwill and IPR&D as of July 31, 2020. A qualitative analysis was completed for fiscal year 2020 and the Company determined that there was no impairment of goodwill or the IPR&D.
Note 8. Other Current Assets
Other current assets as of July 31, 2020 and October 31, 2019 consisted of the following:
|
|
|
July 31, |
|
|
October 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Advance payments to vendors (1) |
|
$ |
1,783 |
|
|
$ |
1,899 |
|
|
Prepaid expenses and other (2) |
|
|
5,857 |
|
|
|
4,022 |
|
|
Other current assets |
|
$ |
7,640 |
|
|
$ |
5,921 |
|
|
(1) |
Advance payments to vendors relate to payments for inventory purchases ahead of receipt. |
|
(2) |
Primarily relates to other prepaid expenses including insurance, rent and lease payments. |
14
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 9. Other Assets
Other assets as of July 31, 2020 and October 31, 2019 consisted of the following:
|
|
|
July 31, |
|
|
October 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Long-term stack residual value (1) |
|
$ |
1,250 |
|
|
$ |
987 |
|
|
Long-term unbilled receivables (2) |
|
|
6,082 |
|
|
|
3,588 |
|
|
Other (3) |
|
|
5,812 |
|
|
|
4,914 |
|
|
Other assets |
|
$ |
13,144 |
|
|
$ |
9,489 |
|
|
(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 12 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, 2020 and October 31, 2019 was $2.4 million and $2.3 million, respectively. Also included within “Other” are long-term security deposits and prepaid withholding taxes on deferred revenue as of July 31, 2020. |
Note 10. Accrued Liabilities
Accrued liabilities as of July 31, 2020 and October 31, 2019 consisted of the following:
|
|
|
July 31, |
|
|
October 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Accrued payroll and employee benefits |
|
$ |
2,751 |
|
|
$ |
2,282 |
|
|
Accrued product warranty cost (1) |
|
|
104 |
|
|
|
144 |
|
|
Accrued service agreement costs (2) |
|
|
6,353 |
|
|
|
4,047 |
|
|
Accrued legal, taxes, professional and other |
|
|
5,414 |
|
|
|
4,979 |
|
|
Accrued liabilities |
|
$ |
14,622 |
|
|
$ |
11,452 |
|
|
(1) |
Activity in the accrued product warranty cost represents reduction related to actual warranty activity as contracts progress through the warranty period or are beyond the warranty period. Accrued product warranty cost for the three months ended July 31, 2020 and 2019 was $0.01 million and $0.04 million, respectively, and for the nine months ended July 31, 2020 and 2019 was $0.04 million and $0.08 million, respectively. |
|
(2) |
Accrued service agreement costs represent loss accruals on service contracts of $3.3 million as of October 31, 2019, which increased to $5.6 million as of July 31, 2020. The increase is the result of a change in the timing of future module replacements. The accruals for performance guarantees decreased from $0.8 million as of October 31, 2019 to $0.7 million as of July 31, 2020. |
Note 11. Leases
The Company adopted ASC 842 and its related amendments (collectively, the “New Lease Accounting Standard”) effective November 1, 2019 and elected the modified retrospective approach in which results and disclosures for periods before 2019 were not adjusted for the new standard and the cumulative effect of the change in accounting, if applicable, is recognized through accumulated deficit at the date of adoption.
The New Lease Accounting Standard establishes a right-of-use model that requires a lessee to record a ROU asset and a lease liability on the consolidated balance sheet for all leases. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statement of operations. In addition, this standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as financing. If the lessor does not convey risks and rewards or control, the lease is treated as operating.
15
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
The New Lease Accounting Standard provides entities with several practical expedient elections. Among them, the Company elected 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 has elected 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 Lease Accounting Standard’s recognition requirements to short-term leases with a term of 12 months or less.
The adoption of the New Lease Accounting Standard did not have a material effect on the Company’s consolidated statement of operations or consolidated statement of cash flows. Upon adoption, the Company recorded a $10.1 million operating lease ROU asset and a $10.3 million operating lease liability. The adoption of the New Lease Accounting Standard had no impact on accumulated deficit.
The Company enters into operating and finance lease agreements for the use of real estate, vehicles, information technology equipment, and certain other equipment. We determine if an arrangement contains a lease at inception, which is the date on which the terms of the contract are agreed to and the agreement creates enforceable rights and obligations. Operating leases are included in Operating lease right-of-use assets, Operating lease liabilities, and Long-term operating lease liabilities in the Company’s consolidated balance sheet. Finance leases are not considered significant to the Company’s consolidated balance sheet or consolidated statement of operations. Finance lease ROU assets at July 31, 2020 of $0.1 million are included in Property, plant and equipment, net in the Company’s consolidated balance sheet. Finance lease liabilities at July 31, 2020 of $0.1 million are included in Current portion of long-term debt and Long-term debt and other liabilities in the Company’s consolidated balance sheet.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the present value of the Company’s obligation to make lease payments arising from the lease over the lease term at the commencement date of the lease (or November 1, 2019 for leases existing upon the adoption of ASC 842). As most of the Company’s leases do not provide an implicit rate, the Company estimated the incremental borrowing rate based on the information available at the date of adoption in determining the present value of lease payments and used the implicit rate when readily determinable. The Company determined incremental borrowing rates through market sources for secured borrowings including relevant industry rates. The Company’s operating lease ROU assets also include any lease pre-payments and exclude lease incentives. Certain of the Company’s leases include variable payments, which may vary based upon changes in facts or circumstances after the start of the lease. The Company excludes variable payments from lease ROU assets and lease liabilities, to the extent not considered in-substance fixed, and instead, expenses variable payments as incurred. Variable lease expense and lease expense for short term contracts are not material components of lease expense. The Company’s leases generally have remaining lease terms of 1 to 26 years, some of which include options to extend leases. The exercise of lease renewal options is at the Company’s sole discretion and the Company’s lease ROU assets and liabilities reflect only the options the Company is reasonably certain that it will exercise. We do not have leases with residual value guarantees or similar covenants.
Operating lease expense for the three and nine months ended July 31, 2020 was $0.2 million and $0.5 million, respectively. As of July 31, 2020, the weighted average remaining lease term (in years) was approximately 20 years and the weighted average discount rate was 6.2%. Lease payments made during the three and nine months ended July 31, 2020 were $0.2 million and $0.7 million, respectively.
Undiscounted maturities of operating lease and finance lease liabilities are as follows:
|
|
|
Operating Leases |
|
|
Finance Leases |
|
||
|
Due Year 1 |
|
$ |
1,330 |
|
|
$ |
41 |
|
|
Due Year 2 |
|
|
1,395 |
|
|
|
26 |
|
|
Due Year 3 |
|
|
1,229 |
|
|
|
8 |
|
|
Due Year 4 |
|
|
752 |
|
|
|
— |
|
|
Due Year 5 |
|
|
716 |
|
|
|
— |
|
|
Thereafter |
|
|
14,809 |
|
|
|
— |
|
|
Total undiscounted lease payments |
|
|
20,231 |
|
|
|
75 |
|
|
Less imputed interest |
|
|
(9,355 |
) |
|
|
(19 |
) |
|
Total discounted lease payments |
|
$ |
10,876 |
|
|
$ |
56 |
|
Rent expense for the three and nine months ended July 31, 2019 was $0.2 million and $0.7 million, respectively.
16
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Crestmark Sale-Leaseback Transaction
On February 11, 2020, an indirect wholly-owned subsidiary of the Company, Central CA Fuel Cell 2, LLC (“CCFC2”), entered into a Purchase and Sale Agreement (the “Purchase Agreement”) and an Equipment Lease Agreement (the “Lease”) with Crestmark. Under these agreements, CCFC2 sold the 2.8 MW biogas fueled fuel cell power plant (the “Plant”) located at the Tulare wastewater treatment plant in Tulare, California to Crestmark and then leased the Plant back from Crestmark through this sale-leaseback transaction. The Plant was designed, manufactured and installed by the Company, and commercial operations began on December 27, 2019. In operating the Plant, CCFC2 purchases biogas from the City of Tulare and sells the power produced by the Plant to Southern California Edison under a twenty-year PPA, which was separately entered into on April 20, 2018 (the “Tulare PPA”), under the California Bioenergy Market Adjusting Tariff.
Under the terms of the Purchase Agreement, Crestmark paid CCFC2 an aggregate purchase price of $14.4 million. A portion of these proceeds were used by CCFC2 to make a down payment and an initial rental payment under the Lease to Crestmark totaling $2.9 million, to pay taxes and transaction costs and to fund a debt service reserve totaling approximately $1.0 million, resulting in net proceeds to CCFC2 of approximately $10.5 million. These net proceeds were allocated as follows:
|
|
• |
Approximately $6.5 million of the net proceeds were deposited into the Project Proceeds Account (restricted cash on the Company’s consolidated balance sheet) under the Orion Facility. These proceeds may be used to repay amounts outstanding under the Orion Facility or redeployed, subject to the approval of the lenders and the Agent under the Orion Facility, to other financing transactions for the Company’s projects. These net proceeds are classified as long-term restricted cash on the consolidated balance sheet. |
|
|
• |
Approximately $1.2 million of the net proceeds were deposited into a module reserve account and debt services reserve account under the Orion Facility. These net proceeds are classified as long-term restricted cash on the consolidated balance sheet. |
|
|
• |
The balance of the net proceeds, totaling $2.8 million, were used to fund the quarterly cash interest payment due to the lenders under the Orion Facility and the dividend payments on the Company’s Series B Preferred Stock (as defined below) and the dividend and return of capital payment on the Series 1 Preferred Shares (as defined below) of FCE Ltd. (as defined below) required to be paid in the second quarter of fiscal year 2020. |
The Lease has an initial term of ten years but may be extended at the option of CCFC2. As noted above, an initial rental down payment and one month’s rent totaling $2.9 million was paid using the proceeds from the sale of the Plant. Lease payments are due on a monthly basis in the amount of $0.1 million. Lease payments are expected to be funded with proceeds from the sale of power under the Tulare PPA. As a result of the sale-leaseback transaction, the remaining lease payments due over the term of the Lease were approximately $9.3 million immediately following the transaction and $8.8 million as of July 31, 2020.
CCFC2 and Crestmark entered into an Assignment Agreement on February 11, 2020 (the “Assignment Agreement”) and FuelCell Energy Finance, LLC (“FuelCell Finance”, a wholly-owned subsidiary of the Company and the direct parent of CCFC2) and Crestmark entered into a Pledge Agreement on February 11, 2020 (the “Pledge Agreement”) pursuant to which collateral was provided to Crestmark to secure CCFC2’s obligations under the Lease. Specifically, CCFC2 and FuelCell Finance granted Crestmark a security interest in (i) certain agreements relating to the sale-leaseback transaction, (ii) the revenues CCFC2 receives with respect to the Plant, (iii) two fuel cell modules to be maintained by CCFC2 as replacement modules for the Plant, and (iv) FuelCell Finance’s equity interest in CCFC2. CCFC2 and the Company also entered into a Technology License and Access Agreement with Crestmark on February 11, 2020, which provides Crestmark with certain intellectual property license rights to have access to the Company’s proprietary fuel cell technology, but only for the purpose of maintaining and servicing the Plant in certain circumstances where the Company is not satisfying its obligations under its service agreement with regard to the maintenance and servicing of the Plant.
Pursuant to the Lease, CCFC2 has an obligation to indemnify Crestmark for the amount of any actual reduction in the U.S. Investment Tax Credit anticipated to be realized by Crestmark in connection with the foregoing sale-leaseback transaction. Such obligations would arise as a result of reductions to the value of the underlying fuel cell project as assessed by the U.S. Internal Revenue Service (“IRS”). The Company does not believe that any such obligation is likely based on the facts known as of July 31, 2020. The maximum potential future payments that CCFC2 could have to make under these obligations would depend on the difference between the fair values of the fuel cell project sold or financed and the values the IRS would determine as the fair value for the system for purposes of claiming the Investment Tax Credit. The value of the Investment Tax Credit in the sale-leaseback agreements is based on guidelines provided by regulations from the IRS. The Company and Crestmark used fair values determined with the assistance of an independent third-party appraisal.
The Purchase Agreement and the Lease contain representations and warranties, affirmative and negative covenants, and events of default that entitle Crestmark to cause CCFC2’s indebtedness under the Lease to become immediately due and payable. The Lease includes an end of term option for CCFC2 to repurchase the transferred assets at the then fair market value of the assets. The repurchase clause precluded sale accounting since there are no alternative assets substantially the same as the transferred assets readily available in the marketplace. As such, the transaction is a failed sale-leaseback transaction that is accounted for as a financing transaction.
17
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Pursuant to a Guaranty Agreement executed on February 11, 2020 by the Company for the benefit of Crestmark (the “Guaranty”), the Company has guaranteed the payment and performance of CCFC2’s obligations under the Lease.
Note 12. Stockholders’ Equity and Warrant Liabilities
Increase in Authorized Shares
The Company obtained stockholder approval on May 8, 2020 at the reconvened 2020 Annual Meeting of Stockholders (the “Annual Meeting”) to increase the number of shares of common stock we are authorized to issue under our Certificate of Incorporation, as amended. Our stockholders approved a 112,500,000 increase in the number of authorized shares of common stock. Accordingly, on May 11, 2020, the Company filed a Certificate of Amendment of the Certificate of Incorporation of the Company with the Delaware Secretary of State increasing the total number of authorized shares of common stock from 225,000,000 shares to 337,500,000 shares.
At Market Issuance Sales Agreement
On October 4, 2019, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley FBR, Inc. (“B. Riley FBR”) to create an at-the-market equity program under which the Company was entitled, from time to time, to offer and sell up to 38.0 million shares of its common stock through B. Riley FBR. However, to ensure that the Company had sufficient shares available for reservation and issuance upon exercise of all of the warrants to be issued to the lenders under the Orion Facility (as discussed in further detail below), the Company, effective as of October 31, 2019, reduced the number of shares reserved for future issuance and sale under the Sales Agreement from 27.9 million shares to 7.9 million shares (thus allowing for total aggregate issuances (past and future) of up to 18.0 million shares under the Sales Agreement) and reserved 20.0 million shares for issuance upon exercise of the warrants by the Orion lenders. Under the Sales Agreement, B. Riley FBR was entitled to a commission in an amount equal to 3.0% of the gross proceeds from each sale of shares under the Sales Agreement.
There were no sales under the Sales Agreement during the three months ended July 31, 2020. During the nine months ended July 31, 2020, the Company issued and sold a total of approximately 7.9 million shares of its common stock under the Sales Agreement at prevailing market prices, with an average sale price of $0.46 per share, and raised aggregate gross proceeds of approximately $3.6 million, before deducting expenses and commissions. Commissions of $0.1 million were paid to B. Riley FBR in connection with these sales, resulting in net proceeds to the Company of approximately $3.5 million.
On June 5, 2020, the Company provided written notice to B. Riley FBR of the Company’s determination to terminate the Sales Agreement, effective as of 5 p.m. Eastern Time on June 12, 2020. As a result of the termination of the Sales Agreement, there have been and will be no further sales of the Company’s common stock thereunder.
Open Market Sale Agreement
On June 16, 2020, the Company entered into an Open Market Sale Agreement with Jefferies, with respect to an at the market offering program under which the Company may offer and sell up to $75 million of shares of the Company’s common stock from time to time. The shares sold under the Open Market Sale Agreement were sold pursuant to the Company’s shelf registration statement on Form S-3, previously filed with the SEC on August 10, 2018. A prospectus supplement related to the Company’s at the market offering program with Jefferies was filed with the SEC on June 16, 2020. Under the Open Market Sale Agreement, the Company must pay (and has paid) Jefferies a commission equal to 3.0% of the aggregate gross proceeds it receives from each sale of shares under the Open Market Sale Agreement. From the date of the Open Market Sale Agreement through July 31, 2020, 25.1 million shares were sold under the Open Market Sale Agreement at an average sales price of $2.56 per share, resulting in gross proceeds of $64.3 million, before deducting expenses and sales commissions. Commissions of $1.9 million were paid to Jefferies in connection with these sales, resulting in net proceeds to the Company of approximately $62.3 million, of which $1.1 million was received subsequent to July 31, 2020. Refer to Note. 18. “Subsequent Events” for information on common stock sales made subsequent to July 31, 2020.
Amendment and Restatement of the Company’s 2018 Omnibus Incentive Plan
At the Annual Meeting, the Company’s stockholders approved the amendment and restatement of the FuelCell Energy, Inc. 2018 Omnibus Incentive Plan (as so amended and restated, the “Plan”), which authorizes the Company to issue up to 4,000,000 additional shares of the Company’s common stock pursuant to awards granted under the Plan and provides for an increase in the annual limit on the grant-date fair value of awards to any non-employee director of the Company from $200,000 to $250,000.
Following the approval of the Plan by the Company’s stockholders at the Annual Meeting, the Plan provides the Company with the authority to issue a total of 4,333,333 shares of the Company’s common stock, 1,000,000 shares of which have been reserved for settlement of restricted stock units granted pursuant to an employment agreement, effective as of August 26, 2019, between the Company and Jason Few, our President and Chief Executive Officer (the “Sign-On Award”). The Sign-On Award was contingent upon obtaining stockholder approval of a sufficient number of additional shares under the Plan. The Company previously recorded the grants as a liability and, after obtaining such stockholder approval, has adjusted accordingly by reclassifying the liability to additional paid in capital. The grants will be recorded as a part of stock-based compensation going forward. The Plan authorizes grants of stock options, stock appreciation rights, restricted stock, restricted stock units, shares, performance shares, performance units, incentive awards and dividend equivalent units to officers, other employees, directors, consultants and advisors.
18
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Outstanding Warrants
Orion Warrants
In connection with the closing of the Orion Facility and the Initial Funding, on October 31, 2019, the Company issued warrants to the lenders under the Orion Facility to purchase up to a total of 6,000,000 shares of the Company’s common stock, at an exercise price of $0.31 per share (the “Initial Funding Warrants”). In addition, pursuant to the Orion Facility, on the date of the Second Funding (November 22, 2019), the Company issued warrants to the lenders under the Orion Facility to purchase up to a total of 14,000,000 shares of the Company’s common stock, with an exercise price with respect to 8,000,000 of such shares of $0.242 per share and with an exercise price with respect to 6,000,000 of such shares of $0.62 per share (the “Second Funding Warrants”, and together with the Initial Funding Warrants, the “Orion Warrants”).
The Orion Warrants have an 8-year term from the date of issuance, are exercisable immediately beginning on the date of issuance, and include provisions permitting cashless exercises.
On January 9, 2020, the lenders exercised, on a cashless basis, Orion Warrants (with cash exercise prices of $0.31 per share and $0.62 per share) representing the right to purchase, in the aggregate, 12,000,000 shares of the Company’s common stock. Because these warrants were exercised on a cashless basis pursuant to the formula set forth in the warrants, the lenders received, in the aggregate 9,396,320 shares of the Company’s common stock upon the cashless exercise of Initial Funding Warrants representing the right to purchase 6,000,000 shares of the Company’s common stock and Second Funding Warrants representing the right to purchase 6,000,000 shares of the Company’s common stock. The cashless exercise resulted in 2,603,680 shares no longer being required to be reserved for issuance upon exercise of the Orion Warrants. Following this exercise, warrants to purchase 8,000,000 shares of the Company’s common stock, with an exercise price of $0.242 per share, remain outstanding.
The estimated fair value of the Orion Warrants upon issuance was based on a Black-Scholes model using Level 2 inputs, including volatility of 96%, a risk free rate of 1.63%, the Company’s common stock price as of October 31, 2019 of $0.24 per share and the term of 8 years, which resulted in a total value of $3.9 million. The Orion Warrants will be remeasured to fair value each reporting period.
The Orion Warrants that were converted on January 9, 2020 were remeasured to fair value immediately preceding the conversion based upon volatility of 103.7%, a risk free rate of 1.81% and the Company’s common stock price of $2.29 on January 8, 2020, which resulted in a $23.7 million charge for the three months ended January 31, 2020. The estimated fair value of the converted warrants as of the date of conversion of $26.0 million was reclassified to Additional paid in capital. The Company remeasured the remaining warrants at July 31, 2020 based upon a volatility of 111.97%, a risk free rate of 0.39% and the Company’s common stock price at July 31, 2020 of $2.23 per share, which resulted in a charge of $1.7 million and $15.6 million for the three and nine months ended July 31, 2020, respectively. The estimated fair value of the remaining warrants outstanding was $17.2 million as of July 31, 2020 and is classified as Long-term debt and other liabilities.
Other 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 exercised previously and are no longer outstanding. No Series C warrants were exercised during the three and nine months ended July 31, 2020.
The following table summarizes outstanding warrant activity during the nine months ended July 31, 2020:
|
|
|
Series C Warrants |
|
|
Orion Warrants |
|
||
|
Balance as of October 31, 2019 |
|
|
964,114 |
|
|
|
6,000,000 |
|
|
Warrants issued |
|
|
— |
|
|
|
14,000,000 |
|
|
Warrants converted |
|
|
— |
|
|
|
(12,000,000 |
) |
|
Balance as of July 31, 2020 |
|
|
964,114 |
|
|
|
8,000,000 |
|
Note 13. 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 105,875 shares were designated as 5% Series B Cumulative Convertible Perpetual Preferred Stock (“Series B Preferred Stock”) in March 2005.
Series B Preferred Stock
As of July 31, 2020, the Company had 105,875 shares of Series B Preferred Stock, with a liquidation preference of $1,000.00 per share, authorized for issuance. As of July 31, 2020 and October 31, 2019, there were 64,020 shares of Series B Preferred Stock issued and outstanding, with a carrying value of $59.9 million. Dividends of $0.8 million and $0 were paid in cash during the three-month periods ended July 31, 2020 and 2019, respectively, and dividends of $4.0 million and $1.6 million were paid in cash during the nine months ended July 31, 2020 and 2019, respectively. A payment of $2.4
19
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
million made in the fiscal quarter ended January 31, 2020 represented the dividends payable with respect to the May 15, 2019 and August 15, 2019 dividend dates and the dividends payable with respect to the November 15, 2019 dividend date that were declared on October 30, 2019.
Class A Preferred Shares
As of July 31, 2020, FCE FuelCell Energy, Ltd. (“FCE Ltd.”) had 1,000,000 Class A Preferred Shares (the “Series 1 Preferred Shares”) issued and outstanding, which are held by Enbridge, Inc. (“Enbridge”). Dividends and return of capital payments are due quarterly based on calendar quarters. The Company made payments of Cdn. $0.3 million during the three-month period ended July 31, 2020 and payments of Cdn. $1.8 million and Cdn. $0.3 million during the nine-month periods ended July 31, 2020 and 2019, respectively. The Company’s payments made during the fiscal quarter ended January 31, 2020 included the payments which were not made previously for the calendar quarters ended on March 31, 2019, June 30, 2019 and September 30, 2019. The Company recorded interest expense, which reflects the amortization of the fair value discount of approximately Cdn. $1.1 million and Cdn. $0.8 million for the three months ended July 31, 2020 and 2019, respectively, and Cdn $2.9 million and Cdn. $1.5 million for the nine months ended July 31, 2020 and 2019, respectively. As of July 31, 2020 and October 31, 2019, the carrying value of the Series 1 Preferred Shares was Cdn. $24.8 million (U.S. $18.5 million) and Cdn. $22.7 million (U.S. $17.2 million), respectively, and is classified as a preferred stock obligation of a subsidiary on the consolidated balance sheets. Under the terms of the January 2020 Letter Agreement (as defined and described below) relating to the amendment of the terms of the Series 1 Preferred Shares, the Company is still required to make (i) annual dividend payments of Cdn. $500,000 and (ii) annual return of capital payments of Cdn. $750,000. Dividend and return of capital payments are to be made on a quarterly basis and are scheduled to end on December 31, 2021 unless these obligations are satisfied in advance of such date.
On January 20, 2020, the Company, FCE Ltd. and Enbridge entered into a letter agreement (the “January 2020 Letter Agreement”), pursuant to which they agreed to amend the articles of FCE Ltd. relating to and setting forth the terms of the Series 1 Preferred Shares to: (i) remove the provisions of the articles permitting or requiring the issuance of shares of the Company’s common stock in exchange for the Series 1 Preferred Shares or as payment of amounts due to the holders of the Series 1 Preferred Shares, (ii) remove certain provisions of the articles relating to the redemption of the Series 1 Preferred Shares, (iii) increase the annual dividend rate, commencing on January 1, 2020, to 15%, (iv) extend the final payment date for all accrued and unpaid dividends and all return of capital payments (i.e., payments of the principal redemption price) from December 31, 2020 to December 31, 2021, (v) clarify when dividend and return of capital payments are to be made in the future and extend the quarterly dividend and return of capital payments through December 31, 2021 (which were previously to be paid each quarter through December 31, 2020), (vi) remove certain terms and provisions of the articles that are no longer applicable, and (vii) make other conforming changes to the articles. In addition, the parties agreed to amend the Company’s guarantee in favor of Enbridge as necessary or as the parties may mutually agree, in either case, in order to be consistent with such amended articles and to maintain the Company’s guarantee of FCE Ltd.’s obligations under the Series 1 Preferred Shares. The articles of FCE Ltd. were amended and filed in accordance with the provisions of the January 2020 Letter Agreement on March 26, 2020.
The Second Amendment to the Orion Credit Agreement (referred to herein as the “Second Orion Amendment”), which was entered into in connection with the January 2020 Letter Agreement, added a new affirmative covenant to the Orion Credit Agreement that obligates the Company to, and to cause FCE Ltd. to, on or prior to November 1, 2021, either (i) pay and satisfy in full all of their respective obligations in respect of, and fully redeem and cancel, all of the Series 1 Preferred Shares of FCE Ltd., or (ii) deposit in a newly created account of FCE Ltd. or the Company cash in an amount sufficient to pay and satisfy in full all of their respective obligations in respect of, and to effect a redemption and cancellation in full of, all of the Series 1 Preferred Shares of FCE Ltd.
After taking into account the amendments to the terms of the Series 1 Preferred Shares described in the January 2020 Letter Agreement, the aggregate amount of all accrued and unpaid dividends to be paid on the Series 1 Preferred Shares on December 31, 2021 is expected to be Cdn. $26.5 million and the balance of the principal redemption price to be paid on December 31, 2021 with respect to all of the Series 1 Preferred Shares is expected to be Cdn. $3.5 million. The amendment to the Series 1 Preferred Shares resulted in an extinguishment of the prior Series 1 Preferred Shares for accounting purposes. A revised fair value was estimated using a discounted cash flow model resulting in a revised carrying value being recorded for the amended Series 1 Preferred Shares of Cdn. $23.4 million (U.S. $17.7 million) as of January 20, 2020, which resulted in a loss of Cdn. $0.2 million (U.S. $0.2 million) recorded in Other income, net on the consolidated statements of operations and comprehensive loss during the nine months ended July 31, 2020. On an undiscounted basis, the Company’s actual aggregate amount of all accrued and unpaid dividends to be paid on the Series 1 Preferred Shares as of July 31, 2020 totaled approximately Cdn. $21.9 million (U.S. $16.4 million) and the balance of the principal redemption price as of July 31, 2020 with respect to all of the Series 1 Preferred Shares totaled approximately Cdn. $4.8 million (U.S. $3.6 million).
Prior to the amendment, the Company bifurcated embedded derivatives related to the conversion feature and a variable dividend feature. As a result of the January 2020 Letter Agreement, both features were removed from the Series 1 Preferred Shares which resulted in the Company recognizing a gain of $0.6 million related to the extinguishment of the embedded derivatives.
20
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 14. 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, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(15,331 |
) |
|
$ |
(5,311 |
) |
|
$ |
(70,251 |
) |
|
$ |
(42,389 |
) |
|
Series A warrant exchange |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,169 |
) |
|
Series B preferred stock dividends |
|
|
(800 |
) |
|
|
(810 |
) |
|
|
(2,531 |
) |
|
|
(2,410 |
) |
|
Series C preferred stock deemed contributions (dividends) and redemption value adjustment, net |
|
|
— |
|
|
|
884 |
|
|
|
— |
|
|
|
(6,522 |
) |
|
Series D Preferred stock deemed dividends and redemption accretion |
|
|
— |
|
|
|
(3,091 |
) |
|
|
— |
|
|
|
(9,752 |
) |
|
Net loss attributable to common stockholders |
|
$ |
(16,131 |
) |
|
$ |
(8,328 |
) |
|
$ |
(72,782 |
) |
|
$ |
(64,242 |
) |
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares |
|
|
217,966,402 |
|
|
|
45,069,911 |
|
|
|
210,389,907 |
|
|
|
21,608,427 |
|
|
Effect of dilutive securities (1) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Weighted average diluted common shares |
|
|
217,966,402 |
|
|
|
45,069,911 |
|
|
|
210,389,907 |
|
|
|
21,608,427 |
|
|
Basic loss per share |
|
$ |
(0.07 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.35 |
) |
|
$ |
(2.97 |
) |
|
Diluted loss per share (1) |
|
$ |
(0.07 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.35 |
) |
|
$ |
(2.97 |
) |
|
(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 anti-dilutive. As of July 31, 2020 and 2019, potentially dilutive securities excluded from the diluted loss per share calculation are as follows: |
|
|
|
July 31, |
|
|
July 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Orion Warrants |
|
|
8,000,000 |
|
|
|
— |
|
|
May 2017 Offering - Series C Warrants |
|
|
964,114 |
|
|
|
964,114 |
|
|
Outstanding options to purchase common stock |
|
|
23,891 |
|
|
|
24,927 |
|
|
Unvested Restricted Stock Awards |
|
|
701 |
|
|
|
28,549 |
|
|
Unvested Restricted Stock Units (1) |
|
|
1,197,889 |
|
|
|
168,553 |
|
|
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 |
|
|
Total potentially dilutive securities |
|
|
10,224,432 |
|
|
|
1,226,753 |
|
|
(1) |
The increase in Unvested Restricted Stock Units includes 1,000,000 restricted stock units (the maximum number of restricted stock units that may be earned) reserved for issuance pursuant to a sign-on award granted to the Company’s President and Chief Executive Officer (the “CEO”) pursuant to the August 26, 2019 employment agreement between the Company and the CEO. Pursuant to the terms of such sign-on award, 500,000 restricted stock units vest on August 26, 2022 and the remaining 500,000 restricted stock units, if earned, will vest on August 26, 2022 and the number earned, if any, will be based on the weighted average price of the Company’s common stock during the thirty (30) day calendar period ending on the vesting date compared to pre-established price goals. The vesting of all restricted stock units is subject to the individual’s continuous employment with the Company through the vesting date. |
|
(2) |
The number of shares of common stock issuable upon conversion of the Series D Convertible Preferred Stock was calculated using the liquidation preference value outstanding on July 31, 2019 of $18.5 million divided by the conversion price of $16.56 per share. |
21
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 15. Restricted Cash
As of July 31, 2020 and October 31, 2019, there was $41.0 million and $30.3 million, respectively, of restricted cash and cash equivalents pledged as performance security, reserved for future debt service requirements, reserved for letters of credit for certain banking requirements and contracts, and reserved to pay down the Orion Facility or be redeployed into other project financing at the option of the Agent and lenders under the Orion Facility. The allocation of restricted cash is as follows:
|
|
|
July 31, |
|
|
October 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Cash Restricted for Outstanding Letters of Credit (1) |
|
$ |
6,879 |
|
|
$ |
5,733 |
|
|
Cash Restricted for PNC Sale-Leaseback Transactions |
|
|
15,026 |
|
|
|
17,934 |
|
|
Cash Restricted for Crestmark Sale-Leaseback Transaction |
|
|
430 |
|
|
|
— |
|
|
Bridgeport Fuel Cell Park Project Debt Service and Performance Reserves |
|
|
6,957 |
|
|
|
4,946 |
|
|
Orion Facility - Performance Reserve (2) |
|
|
5,000 |
|
|
|
— |
|
|
Orion Facility - Module and Debt Service Reserves (3) |
|
|
1,525 |
|
|
|
— |
|
|
Orion Facility - Project Proceeds Account (4) |
|
|
4,243 |
|
|
|
— |
|
|
Other |
|
|
936 |
|
|
|
1,731 |
|
|
Total Restricted Cash |
|
|
40,996 |
|
|
|
30,344 |
|
|
Restricted Cash and Cash Equivalents - Short-Term (5) |
|
|
(6,087 |
) |
|
|
(3,473 |
) |
|
Restricted Cash and Cash Equivalents - Long-Term |
|
$ |
34,909 |
|
|
$ |
26,871 |
|
|
(1) |
Letters of credit outstanding as of July 31, 2020 expire on various dates through August 2028. |
|
(2) |
Short-term reserve related to certain project construction and financing milestones. Refer to Note. 16. “Debt and Financing Obligations” for conditions to be met to achieve the release of this reserve. |
|
(3) |
Long-term reserve primarily to fund future module replacements for operating projects which fall under the collateral pool (CCSU and Triangle Street) under the Orion Facility. |
|
(4) |
Reserve related to proceeds received from project refinancing to be used to pay-down the Orion Facility unless redeployed into other project financing (at the option of the Agent and the lenders under the Orion Facility). |
|
(5) |
Short-term restricted cash and cash equivalents are amounts expected to be released and categorized as unrestricted cash within twelve months of the balance sheet date. |
Note 16. Debt and Financing Obligations
Debt as of July 31, 2020 and October 31, 2019 consisted of the following:
|
|
|
July 31, |
|
|
October 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Orion Energy Partners Credit Facility |
|
$ |
80,000 |
|
|
$ |
14,500 |
|
|
Connecticut Green Bank Loans |
|
|
10,043 |
|
|
|
7,555 |
|
|
Liberty Bank Term Loan Agreement (BFC Loan) |
|
|
10,069 |
|
|
|
11,632 |
|
|
Fifth Third Bank Term Loan Agreement (BFC Loan) |
|
|
10,069 |
|
|
|
11,632 |
|
|
Finance obligation for sale-leaseback transactions |
|
|
49,329 |
|
|
|
45,219 |
|
|
State of Connecticut Loan |
|
|
9,660 |
|
|
|
10,000 |
|
|
New Britain Renewable Energy Term Loan |
|
|
— |
|
|
|
497 |
|
|
Enhanced Capital Term Loan and Security Agreement |
|
|
— |
|
|
|
1,500 |
|
|
Fifth Third Bank Construction Loan Agreement |
|
|
— |
|
|
|
11,072 |
|
|
Liberty Bank Promissory Note (PPP Note) |
|
|
6,515 |
|
|
|
— |
|
|
Capitalized lease obligations |
|
|
56 |
|
|
|
141 |
|
|
Deferred finance costs |
|
|
(4,160 |
) |
|
|
(3,180 |
) |
|
Unamortized debt discount |
|
|
(5,336 |
) |
|
|
(4,251 |
) |
|
Total debt and financing obligations |
|
$ |
166,245 |
|
|
$ |
106,317 |
|
|
Current portion of long-term debt and financing obligations |
|
|
(17,692 |
) |
|
|
(21,916 |
) |
|
Long-term debt and financing obligations |
|
$ |
148,553 |
|
|
$ |
84,401 |
|
22
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Orion Energy Partners Investment Agent, LLC Credit Agreement
On October 31, 2019, the Company and certain of its affiliates as guarantors entered into a Credit Agreement (as amended from time to time, the “Orion Credit Agreement”) with Orion Energy Partners Investment Agent, LLC, as Administrative Agent and Collateral Agent (the “Agent”), and certain lenders affiliated with the Agent for a $200.0 million senior secured credit facility (the “Orion Facility”), structured as a delayed draw term loan to be provided by the lenders primarily to fund certain of the Company’s construction and related costs for fuel cell projects which meet the requirements of the Orion Facility. Under the Orion Credit Agreement, each lender will fund its commitments on each funding date in an amount equal to the principal amount of the loans to be funded by such lender on such date, less 2.50% of the aggregate principal amount of the loans funded by such lender on such date (the “Loan Discount).
On October 31, 2019, the Company drew down $14.5 million (the “Initial Funding”) and received $14.1 million after taking into account a Loan Discount of $0.4 million.
On November 22, 2019, a second draw (the “Second Funding”) of $65.5 million, funded by Orion Energy Credit Opportunities Fund II, L.P., Orion Energy Credit Opportunities Fund II GPFA, L.P., Orion Energy Credit Opportunities Fund II PV, L.P., and Orion Energy Credit Opportunities FuelCell Co-Invest, L.P. (the “Orion Lenders”), was made to fully repay certain outstanding third party debt of the Company, including the outstanding construction loan from Fifth Third Bank with respect to the Groton Project and the outstanding loan from Webster Bank with respect to the CCSU Project, as well as to fund remaining going forward construction costs and anticipated capital expenditures relating to the Groton Project (a 7.4 megawatt (MW) project), the LIPA Yaphank Solid Waste Management Project (a 7.4 MW project), and the Tulare BioMAT Project (a 2.8 MW project). The Company received $63.9 million in the Second Funding after taking into account a Loan Discount of $1.6 million as described above. Also in conjunction with the Second Funding, the Company issued to the Orion Lenders the Second Funding Warrants to purchase up to a total of 14.0 million shares of the Company’s common stock, with an initial exercise price with respect to 8.0 million of such shares of $0.242 per share and with an initial exercise price with respect to 6.0 million of such shares of $0.620 per share.
The Company may draw the remainder of the Orion Facility, up to $120.0 million, over the first 18 months following the Initial Funding and subject to the Agent’s approval to fund project-related expenses consisting of: (i) construction costs, inventory and other capital expenditures of additional fuel cell projects with contracted cash flows (under PPAs with creditworthy counterparties) that meet or exceed a mutually agreed coverage ratio; and (ii) inventory, working capital, and other costs that may be required to be delivered by the Company on purchase orders, service agreements, or other binding customer agreements with creditworthy counterparties. Except as may be approved by the Agent and the Orion Lenders (and except as provided in the Fifth Orion Amendment), the Company cannot use the Orion Facility to fund its working capital or other expenses at the corporate level. The Orion Lenders and the Agent have broad approval rights over the Company’s ability to raise additional capital, obtain other debt financing, and draw, allocate and use funds from the Orion Facility.
Under the Orion Credit Agreement, cash interest of 9.9% per annum is paid quarterly. In addition to the cash interest, payment-in-kind interest of 2.05% per annum accrues which will be added to the outstanding principal balance of the Orion Facility but is paid quarterly in cash to the extent of available cash after payment of the Company’s operating expenses and the funding of certain reserves for the payment of outstanding indebtedness to the State of Connecticut and Connecticut Green Bank. The Orion Credit Agreement contains numerous representations, warranties and covenants.
Outstanding principal under the Orion Facility will be amortized on a straight-line basis over a seven year term in quarterly payments beginning one year after the Initial Funding, with the initial payment due 21 business days after the end of the first quarter of fiscal 2021; provided that, if the Company does not have sufficient cash on hand to make any required quarterly amortization payments, such amounts shall be deferred and payable at such time as sufficient cash is available to make such payments subject to all outstanding principal being due and payable on the maturity date, which is the date that is eight years after the date of the Initial Funding or October 31, 2027.
The issuance of the Initial Funding Warrants and recognition of the Second Funding Warrants resulted in $3.9 million being recorded as a liability as of October 31, 2019 with the offset recorded as a debt discount. Refer to Note 12. “Stockholders’ Equity and Warrant Liabilities” for additional information regarding the Initial Funding Warrants and Second Funding Warrants, including the accounting, terms and conversions during the quarter ended January 31, 2020.
In conjunction with the Second Funding, the Company and the other loan parties entered into the First Amendment to the Orion Credit Agreement (the “First Orion Amendment”), which required the Company to establish a $5.0 million debt reserve, with such reserve to be released on the first date following the date of the Second Funding on which all of the following events shall have occurred: (a) each of (x) the commercial operation date for the Tulare BioMAT project shall have occurred and (y) a disposition, refinancing or tax equity investment in the Tulare BioMAT project of at least $5.0 million is consummated (both conditions (x) and (y) have been satisfied); (b) each of (x) the Groton Project shall have achieved its business plan in accordance with the Groton Construction Budget (as defined in the Orion Credit Agreement), (y) the commercial operation date for the Groton Project shall have occurred and (z) the Groton Project shall have met its annualized output and heat rate guarantees for three months; and (c) a disposition, refinancing or tax equity investment of at least $30 million shall have occurred with respect to the Groton Project. The First Orion Amendment further required the Company (i) to provide, no later than December 31, 2019, a biogas sale and purchase agreement through December 31, 2021 for the Tulare BioMAT project, which was obtained as of such date, (ii) to obtain by December 31, 2019, a fully executed contract for certain renewable energy credits for the Groton Project, which was obtained as of such date, and (iii) to provide by January 31, 2020, certain consents and estoppels from the Connecticut Municipal Electric Energy Cooperative (“CMEEC”) related to the Groton Project and an executed, seventh modification to the lease between CMEEC and the United States Government, acting by and through the Department of the Navy, both of which were obtained as of such date.
23
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
In addition, in connection with the January 2020 Letter Agreement among the Company, FCE Ltd. and Enbridge described above, on January 20, 2020, in order to obtain the Orion Lenders’ consent to the January 2020 Letter Agreement as required under the Orion Credit Agreement, the Company, the Agent, the Orion Lenders, and the other loan parties entered into the Second Amendment to the Orion Credit Agreement (the “Second Orion Amendment”), which added a new affirmative covenant to the Orion Credit Agreement that obligates the Company to, and to cause FCE Ltd. to, on or prior to November 1, 2021, either (i) pay and satisfy in full all of their respective obligations in respect of, and fully redeem and cancel, all of the Series 1 Preferred Shares of FCE Ltd., or (ii) deposit in a newly created account of FCE Ltd. or the Company cash in an amount sufficient to pay and satisfy in full all of their respective obligations in respect of, and to effect a redemption and cancellation in full of, all of the Series 1 Preferred Shares of FCE Ltd. The Second Orion Amendment also provides that the amended articles of FCE Ltd. setting forth the modified terms of the Series 1 Preferred Shares will be considered a “Material Agreement” under the Orion Credit Agreement. Under the Second Orion Amendment, a failure to satisfy this new affirmative covenant or to otherwise comply with the terms of the Series 1 Preferred Shares will constitute an event of default under the Orion Credit Agreement, which could result in the acceleration of any amounts outstanding under the Orion Credit Agreement.
Additionally, in order to obtain the Orion Lenders’ consent to the Crestmark sale-leaseback transaction described in Note 11. “Leases” and to the use of certain proceeds from the Crestmark sale-leaseback transaction (the “Crestmark Proceeds”) as described below, the Company, the Agent, the Orion Lenders and the other loan parties entered into the Third Amendment to the Orion Credit Agreement (the “Third Orion Amendment”) dated February 11, 2020, and a Consent and Waiver dated February 11, 2020 (the “Consent and Waiver”). Pursuant to the Third Orion Amendment, TRS Fuel Cell, LLC was added as an Additional Covered Project Company (as defined in the Orion Credit Agreement), requiring the Company to pledge all of the assets of TRS Fuel Cell, LLC under the Orion Credit Agreement. In addition, pursuant to the Orion Credit Agreement (as modified by the Third Orion Amendment), all of the proceeds received by the Company from the Crestmark sale-leaseback transaction described above, after a down payment and an initial rental payment under the Lease to Crestmark, the payment of taxes and transaction costs and funding a debt service reserve totaling approximately $1.0 million, were deposited in the Company’s Project Proceeds Account, which account is restricted, with withdrawals permitted only with consent of the Agent for use to (i) prepay the loans under the Orion Credit Agreement or (ii) fund (x) construction costs, inventory or other capital expenditures for an Additional Covered Project (as defined in the Orion Credit Agreement) whose contracted cash flows (as determined in the Orion Lenders’ sole discretion) meet or exceed a coverage ratio acceptable to the Orion Lenders, and (y) inventory, working capital and other costs required in connection with the performance of purchase orders, service agreements and other binding customer agreements (as determined in the Orion Lenders’ sole discretion); provided, however, that, pursuant to the Third Orion Amendment, certain portions of the funds deposited in the Project Proceeds Account were used as follows: (a) $1.1 million of the Crestmark Proceeds were transferred to the Module Reserve Account (as defined in the Orion Credit Agreement) to fund module replacement costs for Covered Projects (as defined in the Orion Credit Agreement); (b) $0.1 million of the Crestmark Proceeds were transferred to the Debt Reserve Account; (c) $1.7 million of the Crestmark Proceeds were used to fund the quarterly cash interest due to the Orion Lenders under the Orion Credit Agreement; and (d) $1.1 million of the Crestmark Proceeds were used to fund the aggregate amount of the dividends on the Company’s Series B Preferred Stock and the Series 1 Preferred Shares of FCE Ltd. required to be paid in the second quarter of fiscal 2020. As of July 31, 2020, the remaining approximately $6.5 million of the Crestmark Proceeds was long-term restricted cash in the Project Proceeds Account. As noted below, on April 30, 2020, the Company reached agreement with the Orion Lenders to allocate up to a total of $3.5 million of these funds to the San Bernardino project over time. Pursuant to the Consent and Wavier, subject to the terms and conditions described above in the Third Orion Amendment, the Orion Lenders consented to the release of liens on those assets that were the subject of the Crestmark sale-leaseback transaction and to the Company’s entering into the Guaranty.
On April 30, 2020, the Company, the Agent, the Orion Lenders and the other loan parties entered into the Fourth Amendment to the Orion Credit Agreement (the “Fourth Orion Amendment”). Pursuant to the Fourth Orion Amendment, the Agent and the Orion Lenders agreed to permit the release of $3.5 million from the Project Proceeds Account (as defined in the Orion Credit Agreement) subject to the following terms and conditions. Pursuant to the Fourth Orion Amendment, the Company’s 1.4 MW biogas fueled project at the wastewater treatment plant in San Bernardino, California has been added as an Additional Covered Project (as defined in the Orion Credit Agreement), and the Company subsidiary developing such project, San Bernardino Fuel Cell, LLC, has been added as an Additional Covered Project Company (as defined in the Orion Credit Agreement) such that those covenants, terms and conditions in the Orion Credit Agreement that apply to Covered Projects and Covered Project Companies will now be applicable to the foregoing project and project company, including that the “Project Payoff Amount” (i.e., the amount required pursuant to the Orion Credit Agreement to be realized upon a subsequent sale or refinancing of a project) for the San Bernardino project will be $5 million. In May 2020, $2.3 million of the $3.5 million was released from the Project Proceeds Account, which account is restricted subject to the control of the Agent, and transferred to a General Business Unit Account (as defined in the Orion Credit Agreement), which account is unrestricted and available for general use by the Company. The remaining $1.2 million will be released from the Project Proceeds Account and transferred to a Covered Project Account (as defined in the Orion Credit Agreement) being established for the San Bernardino project for use in connection with the construction of the San Bernardino project upon satisfaction of the following conditions: (a) approval of a self-generation incentive program grant for the San Bernardino project in an amount equal to no less than $1.0 million; (b) approval of an interconnection agreement; (c) provision of a fuel affidavit approval by Southern California Gas Company; (d) issuance of an air permit for the anaerobic digester gas cleanup system; (e) provision of an executed consent to collateral assignment by The City of San Bernardino Municipal Water District; (f) recordation in the land records of San Bernardino County of a memorandum of site license; (g) after giving effect to the release and transfer of $1.2 million to the Covered Project Account, evidence that there will be sufficient cash in the Covered Project Account for the San Bernardino project to cover remaining expenditures and complete the project and (h) written approval of the Agent.
On June 8, 2020, the Company, certain of its affiliates as guarantors, the Agent and the Orion Lenders entered into the Fifth Orion Amendment. Pursuant to the terms of the Fifth Orion Amendment, the Orion Lenders agreed to make a commitment to make certain loans to the Company in an aggregate principal amount of up to $35 million (which are referred to herein as the “Secondary Facility Loans”), and the Company, the guarantors, the Agent and the Orion Lenders agreed to amend the Orion Credit Agreement to facilitate the provision of such Secondary Facility Loans.
24
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Pursuant to the Orion Credit Agreement, as amended by the Fifth Orion Amendment, the Orion Lenders have committed to make Secondary Facility Loans up to an aggregate amount of $35 million available to the Company for general corporate purposes of the Company or the guarantors in accordance with either (i) the then-effective Operating Budget (as defined in the Orion Credit Agreement) of the Company or the guarantors or (ii) the cash use forecast delivered by the Company to the Agent on June 6, 2020. The Secondary Facility Loan commitment allows the Company to draw on the Secondary Facility Loans commencing on June 5, 2020 (the “Commencement Date”) and terminating on September 14, 2020 (the “Termination Date”). The Company may make draws on the Secondary Facility Loans in amounts of no less than $5 million, and no more than $15 million may be drawn in any 30-day period, provided that the Company may draw any remaining available funds under the Secondary Facility Loans between August 15, 2020 and the Termination Date. Any drawn amounts must be fully repaid on or before September 1, 2021 (the “Secondary Facility Repayment Date”). The amended Orion Credit Agreement contains representations and warranties, affirmative and negative covenants and events of default, including failure to make payments when due and termination of or default under certain material agreements as specified in the Orion Credit Agreement, that entitle the Agent and the Orion Lenders to cause the Company’s indebtedness under the amended Orion Credit Agreement to become immediately due and payable.
In exchange for the Secondary Facility Loan commitment, the Company will pay to the Orion Lenders an option premium of $1 million on the earlier of the Termination Date and the date of full repayment of all amounts drawn on the Secondary Facility Loans. Such option premium is fully earned on the Commencement Date and non-refundable and non-creditable thereafter, and is due and payable whether or not any draw is ever made under the Secondary Facility Loan commitment. The Company recorded a pro-rata portion of the option premium as interest expense as of July 31, 2020. Additionally, for each draw made on the Secondary Facility Loans, the Company must pay to the Orion Lenders an initial draw discount of 5% of the amount drawn. In the event that full repayment of all amounts drawn under the Secondary Facility Loans has not occurred within 6 months of the date of the initial draw, the Company must pay to the Orion Lenders an additional draw discount in the amount of 10% of any amount outstanding under the Secondary Facility Loans as of such date. In the event that full repayment has not occurred within 9 months of the date of the initial draw under the Secondary Facility Loans, the Company must pay to the Orion Lenders an additional draw discount in the amount of 20% of any amount outstanding under the Secondary Facility Loans as of such date. All of such draw discounts will be fully earned on the respective dates and non-refundable and non-creditable thereafter, and will be due on the earlier of the Secondary Facility Repayment Date and the date of full repayment of all amounts drawn under the Secondary Facility Loans.
In connection with the Secondary Facility Loan commitment, the Company is providing additional collateral to the Orion Lenders by a pledge of all of the Company’s intellectual property assets. All liens on the Company’s intellectual property will be released upon full repayment of all amounts drawn under the Secondary Facility Loans or upon termination of the Secondary Facility Loan commitment if no amounts are drawn.
Under the amended Orion Credit Agreement, cash interest of 9.9% per annum will be paid quarterly on all outstanding amounts under the Secondary Facility Loans. In addition to the cash interest, payment-in-kind interest of 2.05% per annum will accrue which will be added to the outstanding principal balance under the existing Orion Facility, but will be paid quarterly in cash to the extent of available cash after payment of the Company’s operating expenses and the funding of certain reserves for payment of outstanding indebtedness to the State of Connecticut and Connecticut Green Bank. Any drawn amounts on the Secondary Facility Loans may be prepaid at any time without penalty.
The Company is required to prepay any draws on the Secondary Facility Loans in the event that the Company (i) issues or incurs any indebtedness (other than Permitted Indebtedness (as defined in the Orion Credit Agreement)) (“Debt”) or (ii) issues or sells any capital stock or any option, warrant or other instrument, security or right that is convertible into or exercisable or exchangeable for capital stock (“Equity”), by applying 100% of the net proceeds of any such Debt issuance and 50% of the net proceeds of any such Equity issuance to pay down the outstanding amounts under the Secondary Facility Loans. As of September 10, 2020, the Company has not made any draws under the Secondary Facility Loans.
25
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Connecticut Green Bank Loans
As of October 31, 2019, the Company had a long-term loan agreement with the Connecticut Green Bank, providing the Company with a loan of $1.8 million (the “Green Bank Loan Agreement”). On and effective as of December 19, 2019, the Company and Connecticut Green Bank entered into an amendment to the Green Bank Loan Agreement (the “Green Bank Amendment”). Upon the execution of the Green Bank Amendment on December 19, 2019, Connecticut Green Bank made an additional loan to the Company in the aggregate principal amount of $3.0 million (the “December 2019 Loan”), which is to be used (i) first, to pay closing fees related to the May 9, 2019 acquisition of the Bridgeport Fuel Cell Project and the Subordinated Credit Agreement (as defined below), other fees, and accrued interest from May 9, 2019, totaling $0.4 million (“Accrued Fees”), and (ii) thereafter, for general corporate purposes as determined by the Company, including, but not limited to, expenditures in connection with the project being constructed by Groton Station Fuel Cell, LLC (“Groton Fuel Cell”). Pursuant to the terms of the Green Bank Amendment, Connecticut Green Bank will have no further obligation to make loans under the Green Bank Loan Agreement and the Company will have no right to make additional draws under the Green Bank Loan Agreement. The Green Bank Amendment provides that, until such time as the loan (which includes both the outstanding principal balance of the original loan under the Green Bank Loan Agreement and the outstanding principal amount of the December 2019 Loan) has been repaid in its entirety, interest on the outstanding balance of the loan shall accrue monthly in arrears from the date of the Green Bank Amendment at a rate of 5% per annum until May 8, 2019 and at a rate of 8% per annum thereafter, payable by the Company on a monthly basis in arrears. The Green Bank Amendment further provides that the payment by the Company of the Accrued Fees (as described above) includes any shortfall of interest due but unpaid by the Company through and including November 30, 2019. Interest payments made by the Company after the date of the Green Bank Amendment are to be applied first to interest that has accrued on the outstanding principal balance of the original loan under the Green Bank Loan Agreement and then to interest that has accrued on the December 2019 Loan. The Green Bank Amendment also modifies the repayment and mandatory prepayment terms and extends the maturity date set forth in the original Green Bank Loan Agreement. Under the Green Bank Amendment, to the extent that excess cash flow reserve funds under the BFC Credit Agreement (as defined below) are eligible for disbursement to Bridgeport Fuel Cell, LLC pursuant to Section 6.23(c) of the BFC Credit Agreement, such funds are to be paid to Connecticut Green Bank, to be applied first to repay the outstanding principal balance of the original loan under the Green Bank Loan Agreement and thereafter to repay the outstanding principal amount of the December 2019 Loan, until repaid in full. The Green Bank Amendment further provides that the entire unpaid balance of the loan and all other obligations due under the Green Bank Loan Agreement will be due and payable on May 9, 2026 if not paid sooner in accordance with the Green Bank Loan Agreement. Finally, with respect to mandatory prepayments, the Green Bank Amendment provides that, when the Company has closed on the subordinated project term loan pursuant to the Commitment Letter, dated February 6, 2019, issued by Connecticut Green Bank to Groton Fuel Cell to provide a subordinated project term loan to Groton Fuel Cell in the amount of $5.0 million, the Company will be required to prepay to Connecticut Green Bank the lesser of any then outstanding amount of the December 2019 Loan and the amount of the subordinated project term loan actually advanced by Connecticut Green Bank. The balance under the original Green Bank Loan Agreement and the December 2019 Loan as of July 31, 2020 was $4.8 million.
Bridgeport Fuel Cell Project Loans
On May 9, 2019, in connection with the closing of the purchase of the membership interests of Bridgeport Fuel Cell, LLC (“BFC”) (and the 14.9 MW Bridgeport Fuel Cell Project), 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”). This $6.0 million consisted of $1.8 million in incremental funding that was received by BFC and $4.2 million of funding previously received by FuelCell Energy, Inc. with respect to which BFC became the primary obligor. 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 representations, warranties and covenants. The balance under the Subordinated Credit Agreement as of July 31, 2020 was $5.2 million.
On May 9, 2019, in connection with the closing of the purchase of the Bridgeport Fuel Cell Project, BFC entered into a Credit Agreement with Liberty Bank, as administrative agent and co-lead arranger, and Fifth Third Bank as co-lead arranger and swap hedger (the “BFC Credit Agreement”), whereby (i) Fifth Third Bank provided financing in the amount of $12.5 million towards the purchase price for the BFC acquisition; and (ii) Liberty Bank provided financing in the amount of $12.5 million towards the purchase price for the BFC acquisition. As security for the BFC Credit Agreement, Liberty Bank and Fifth Third Bank 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 (a wholly-owned subsidiary of the Company and the direct parent of BFC) ownership interest in BFC. The maturity date under the BFC Credit Agreement is May 9, 2025. Monthly principal and interest are to be paid in arrears in an amount sufficient to fully amortize the term loan over a 72-month period. BFC has the right to make additional principal payments or pay the balance due under the BFC Credit Agreement in full, provided that it pays any associated breakage fees with regard to the interest rate swap agreements fixing the interest rate. The interest rate under the BFC Credit Agreement fluctuates monthly at the 30-day LIBOR rate plus 275 basis points on an initial total notional value of $25.0 million, reduced for principal payments.
26
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
An interest rate swap agreement was required to be entered into with Fifth Third Bank in connection with the BFC Credit Agreement to protect against movements in the floating LIBOR index. Accordingly, on May 16, 2019, an interest rate swap agreement (the “Swap Agreement”) was entered into with Fifth Third Bank 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 results in a fixed rate of 5.09%. The interest rate swap will be adjusted to fair value on a quarterly basis. The estimated fair value is based on Level 2 inputs including primarily the forward LIBOR curve available to swap dealers. The valuation methodology involves comparison of (i) the sum of the present value of all monthly variable rate payments based on a reset rate using the forward LIBOR curve and (ii) the sum of the present value of all monthly fixed rate payments on the notional amount, which is equivalent to the outstanding principal amount of the loan. The fair value adjustments for the three and nine months ended July 31, 2020 resulted in a $0.04 million gain and a $0.5 million charge, respectively. The fair value of the interest rate swap liability at July 31, 2020 and October 31, 2019 was $1.1 million and $0.6 million, respectively.
Finance obligations for sale leaseback agreements
Several of the Company’s special purpose project 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, and CCFC2 entered into a sale-leaseback with Crestmark on February 11, 2020 (refer to Note. 11. “Leases” for additional information). 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, 2020 was $49.3 million as compared to $45.2 million as of October 31, 2019. This change reflects the recording of the finance obligation with Crestmark and the recognition of interest expense, offset by lease payments and the payoff of the UCI Fuel Cell, LLC lease with PNC. As noted in Note 6. “Project Assets”, the Company paid off the lease with PNC for the UCI Fuel Cell, LLC equipment and the payment to repurchase the equipment prior to the end of the initial lease term resulted in the ownership of the equipment transferring back to UCI Fuel Cell, LLC. The payoff resulted in the recognition of the deferred gain of $1.8 million which is reflected as a Gain on extinguishment of financing obligation on the consolidated statement of operations. The outstanding financing obligation for the remaining leases includes an embedded gain which will be recognized at the end of each 10-year lease term or upon early termination if applicable.
State of Connecticut Loan
In October 2015, the Company closed on a definitive Assistance Agreement with the State of Connecticut (the “Assistance Agreement”) 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%, and the loan is repayable over 15 years from the date of the first advance, which occurred in October of 2015. Principal payments were deferred for four years from disbursement and began on December 1, 2019. Under the Assistance Agreement, the Company was eligible for up to $5.0 million in loan forgiveness 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.
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 continuously 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. However, based on the Company’s current headcount and plans for fiscal year 2020 and beyond, it will not meet this requirement or receive this credit. 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 90 days of the Target Date. If the Company does not meet the Employment Obligation, then an accelerated payment penalty will be assessed at a rate of $18,587.36 multiplied by the number of employees below the number of employees required by the Employment Obligation. Such penalty is immediately payable and will be applied first to accelerate the payment of any outstanding fees or interest due and then to accelerate the payment of outstanding principal.
In April of 2020, as a result of the COVID-19 pandemic, the State of Connecticut agreed to defer three months of principal and interest payments under the Assistance Agreement, beginning with the May 2020 payment. These deferred payments will be added at the end of the loan, thus extending out the maturity date by three months.
27
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Webster Bank Loan
In November 2016, the Company assumed debt with Webster Bank, National Association (“Webster Bank”) as a part of a project asset acquisition transaction. The balance outstanding as of October 31, 2019 was $0.5 million. The loan was paid off and extinguished during the three months ended January 31, 2020.
Enhanced Capital Loan
On January 9, 2019, the Company, through its indirect wholly-owned subsidiary TRS Fuel Cell, LLC, entered into a Loan and Security Agreement with Enhanced Capital Connecticut Fund V, LLC (“Enhanced”) in the amount of $1.5 million. On January 13, 2020, TRS Fuel Cell, LLC and Enhanced entered into a payoff letter pursuant to which the loan was paid off and extinguished on January 14, 2020.
Fifth Third Bank Groton Loan
On February 28, 2019, the Company, through its indirect wholly-owned subsidiary, Groton Fuel Cell, entered into a Construction Loan Agreement (as amended from time to time, the “Groton Agreement”) with Fifth Third Bank pursuant to which Fifth Third Bank agreed to make available to Groton Fuel Cell 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 CMEEC located on the U.S. Navy submarine base in Groton, Connecticut (the “Groton Project”).
The total outstanding balance under the Groton Facility as of October 31, 2019 was $11.1 million. This balance was paid off, the loan was extinguished, and the Groton Facility was terminated during the three months ended January 31, 2020.
Liberty Bank Promissory Note
On April 20, 2020, the Company entered into the PPP Note, dated April 16, 2020, evidencing a loan to the Company from Liberty Bank, under the CARES Act, administered by the SBA. Pursuant to the PPP Note, the Company received total proceeds of approximately $6.5 million on April 24, 2020. In accordance with the requirements of the CARES Act, as amended by the PPP Flexibility Act, the Company is using the proceeds primarily for payroll costs.
The PPP Note is scheduled to mature on April 16, 2022, has a 1.00% per annum interest rate, and is subject to the terms and conditions applicable to loans administered by the SBA under the CARES Act, as amended by the PPP Flexibility Act. Monthly principal and interest payments, less the amount of any potential forgiveness (as discussed below), will commence on November 16, 2020. The Company did not provide any collateral or guarantees for the PPP Note, nor did the Company pay any facility charge to obtain the PPP Note. The PPP Note provides for events of default, including, among others, those relating to failure to make a payment when due under the PPP Note, failure to comply with any provision of the PPP Note, bankruptcy, and breaches of or materially misleading representations. Upon the occurrence of an event of default, Liberty Bank may require immediate payment of all amounts owing under the PPP Note, collect all amounts owing from the Company, and pursue other remedies. The PPP Note may be prepaid at any time with no prepayment penalties.
Under the requirements of the CARES Act, as amended by the PPP Flexibility Act, proceeds may only be used for the Company’s eligible payroll costs (with salary capped at $100,000 on an annualized basis for each employee), rent, mortgage interest and utilities, in each case paid during the 24-week period following disbursement. In accordance with the requirements of the CARES Act, as amended by the PPP Flexibility Act, at least 60% of the proceeds used by the Company were used to pay eligible payroll costs. The loan may be fully forgiven if (i) proceeds are used to pay eligible payroll costs, rent, mortgage interest and utilities and (ii) full-time employee headcount and salaries are either maintained during the 24-week period following disbursement or restored by December 31, 2020. If not so maintained or restored, forgiveness of the loan will be reduced in accordance with the regulations to be issued by the SBA. Any forgiveness of the loan will be subject to approval by the SBA and Liberty Bank and will require the Company to apply for such treatment in the future. In order to obtain the consent of the Agent and the Orion Lenders under the Orion Facility to enter into the PPP Note, the Agent and the Orion Lenders have required the Company to apply for forgiveness within 30 days after the last day of the loan forgiveness period as designated under the PPP regulations in effect as of June 6, 2020.
While we may apply for forgiveness of the PPP Note in accordance with the requirements and limitations under the CARES Act, as amended by the PPP Flexibility Act, and the SBA regulations and requirements, no assurance can be given that any portion of the PPP Note will be forgiven. Based on guidance from the United States Department of the Treasury, since the total PPP Note proceeds exceeded $2.0 million, our forgiveness application will be subject to audit by the SBA.
Deferred Finance Costs
Deferred finance costs relate primarily to (i) sale-leaseback transactions entered into with PNC and Crestmark, which are being amortized over the 10-year terms of the lease agreements, (ii) payments under the loans obtained to purchase the membership interests in BFC, which are being amortized over the 8-year term of the loans and (iii) payments to enter into the Orion Facility, which are being amortized over the 8-year term of the facility.
28
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 17. Commitments and Contingencies
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. In addition, under the terms of some of the PPA agreements, the Company may be subject to a performance penalty if the Company does not meet certain performance requirements.
Other
As of July 31, 2020, the Company had unconditional purchase commitments aggregating $28.8 million, for materials, supplies and services in the normal course of business.
Legal Proceedings
SEC Proceedings
Between August 2005 and April 2017, we sold shares of our common stock pursuant to a series of “at-the-market” sales plans. The shares sold pursuant to these sales plans represented a portion of the shares registered by us pursuant to shelf registration statements we filed with the SEC during this time period. While we reported the number of shares we had sold, along with the net proceeds earned by us from those sales made during each fiscal quarter pursuant to the sales plans in our annual and quarterly reports on Forms 10-K and 10-Q, we omitted from the shelf registration statements certain information about the offerings, including the specific plan of distribution and the nature and terms of compensation or other agreements with any underwriters, dealers, or agents, and for some offerings, also omitted the specific type and quantity of securities offered; and we did not file or deliver prospectus supplements at the time of or prior to making these sales or otherwise timely disclose the information that had been omitted from the shelf registration statements, as is required by SEC regulations.
In 2018, we reported to the SEC Staff these sales and our failure to file or deliver prospectus supplements, and in response to our report, the SEC Staff opened an informal investigation of these sales. Following our self-report and the investigation by the SEC Staff and pursuant to our Offer of Settlement, on September 3, 2020, the SEC entered an order instituting cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933, as amended (the “Securities Act”), finding that we had violated Section 5(b)(2) of the Securities Act with respect to these sales and requiring us to cease and desist from committing or causing any violations and any future violations of Section 5(b)(2) but not imposing any civil penalties or disgorgement. Under the terms of the settlement, we consented to the entry of the order and neither admitted nor denied any of the SEC’s findings. Such a settlement, without a waiver by the SEC, would disqualify us from relying on the safe harbors from registration under the Securities Act set forth in Regulation A, Regulation D and Regulation Crowdfunding, following the effective date of the settlement. Accordingly, we submitted an application to the SEC for a waiver of disqualification under Regulation A and Regulation D. We did not seek a waiver under Regulation Crowdfunding as we do not expect to rely on crowdfunding in raising capital. On September 3, 2020, the SEC Staff granted the requested waivers with respect to Regulation A and Regulation D pursuant to delegated authority.
POSCO Energy Matters
From approximately 2007 through 2015, we relied on POSCO Energy Co., Ltd. (“POSCO Energy”) to develop and grow the South Korean and Asian markets for our products and services. We received upfront license payments and were entitled to receive royalty income from POSCO Energy pursuant to certain manufacturing and technology transfer agreements, including the Alliance Agreement dated February 7, 2007 (and the amendments thereto), the Technology Transfer, License and Distribution Agreement dated February 7, 2007 (and the amendments thereto), the Stack Technology Transfer and License Agreement dated October 27, 2009 (and the amendments thereto), and the Cell Technology Transfer and License Agreement dated October 31, 2012 (and the amendments thereto) (the “License Agreements”). The License Agreements provided POSCO Energy with the exclusive technology rights to manufacture, sell, distribute and service our SureSource 300, SureSource 1500 and SureSource 3000 fuel cell technology in the Korean and broader Asian markets. Due to certain actions and inactions of POSCO Energy, the Company has not realized any material revenues, royalties or new projects developed by POSCO Energy since late 2015.
In November 2019, POSCO Energy spun-off its fuel cell business into a new entity, Korea Fuel Cell Co., Ltd. (“KFC”), without the Company’s consent. As part of the spin-off, POSCO Energy transferred manufacturing and service rights under the License Agreements to KFC, but retained distribution rights and severed its own liability under the License Agreements. The Company formally objected to POSCO Energy’s spin-off and POSCO Energy posted a bond to secure any liabilities to the Company arising out of the spin-off.
29
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
On February 19, 2020, the Company notified POSCO Energy in writing that it was in material breach of the License Agreements by (i) its actions in connection with the spin-off of the fuel cell business to KFC, (ii) its suspension of performance through its cessation of all sales activities since late 2015 and its abandonment of its fuel cell business in Asia, and (iii) its disclosure of material nonpublic information to third parties and its public pronouncements about the fuel cell business on television and in print media that have caused reputational damage to the fuel cell business, the Company and its products. The Company also notified POSCO Energy that, under the terms of the License Agreements, it had 60 days to fully cure its breaches to the Company’s satisfaction and that failure would lead to termination of the License Agreements. Further, on March 27, 2020, the Company notified POSCO Energy of additional instances of its material breach of the License Agreements based on POSCO Energy’s failure to pay royalties required to be paid in connection with certain module replacements.
On April 27, 2020, POSCO Energy initiated a series of three arbitration demands against the Company at the International Chamber of Commerce seated in Singapore alleging certain warranty defects in a sub-megawatt conditioning facility at its facility in Pohang, South Korea and seeking combined damages of approximately $3.3 million. Prior to filing the arbitrations, POSCO Energy obtained provisional attachments from the Seoul Central District Court attaching certain revenues owed to the Company by Korea Southern Power Company as part of such warranty claims which delayed receipt of certain payments owed to the Company. At July 31, 2020, outstanding accounts receivable for Korea Southern Power Company was $3.1 million. The Company is vigorously defending these actions as it believes they lack merit and were filed in an attempt to obtain leverage over the Company to prevent the Company from terminating the License Agreements and filing the arbitration discussed below.
On June 28, 2020, the Company notified POSCO Energy and KFC in writing that the Company terminated the License Agreements effective as of such date. The Company has demanded compliance with POSCO Energy’s obligations under the License Agreements to return all Company confidential information and know-how and that POSCO Energy and KFC not make any further use of the Company’s technology. The Company offered POSCO Energy a limited license in order to fulfill POSCO Energy’s obligations to service existing clients. With the termination of the License Agreements, the Company has commenced the marketing of its products and services directly in the Korean and broader Asian markets.
On June 28, 2020, the Company also filed a demand for arbitration against POSCO Energy and KFC in the International Court of Arbitration of the International Chamber of Commerce based on POSCO Energy’s (i) failure to exercise commercially reasonable efforts to sell the Company’s technology in the Korean and Asian markets, (ii) disclosure of the Company’s proprietary information to third parties, (iii) attack on the Company’s stock price and (iv) spin-off of POSCO Energy’s fuel cell business into KFC without the Company’s consent. The Company has requested that the arbitral tribunal (a) confirm through declaration that POSCO Energy’s exclusive license to market the Company’s technology and products in Korea and Asia is null and void as a result of the breaches of the License Agreements and that the Company has the right to pursue direct sales in these markets, (b) order POSCO Energy and KFC to compensate the Company for losses and damages suffered in the amount of more than $200 million, and (c) order POSCO Energy and KFC to pay the Company’s arbitration costs, including counsel fees and expenses. The Company has retained outside counsel on a contingency basis to pursue its claims, and outside counsel has entered into an agreement with a litigation finance provider to fund the legal fees and expenses of the arbitration.
As of July 31, 2020, the Company has deferred any accounting disposition of the deferred revenue in the amount of $22.3 million related to the terminated POSCO Energy License Agreements given the pending arbitration and will continue to evaluate this deferred revenue in future periods.
On August 28, 2020, POSCO Energy filed a complaint in the Court of Chancery of the State of Delaware (the “Court”) purportedly seeking to enforce its rights as a stockholder of the Company to inspect and make copies and extracts of certain books and records of the Company and/or the Company’s subsidiaries pursuant to Section 220 of the of the Delaware General Corporation Law and/or Delaware common law. POSCO Energy alleges that it is seeking to inspect these documents for a proper purpose reasonably related to its interests as a stockholder of the Company, including investigating whether the Company’s Board of Directors and its management breached their fiduciary duties of loyalty, due care, and good faith. POSCO Energy seeks an order of the Court permitting POSCO Energy to inspect and copy the demanded books and records, awarding POSCO Energy reasonable costs and expenses, including reasonable attorney’s fees incurred in connection with the matter, and granting such other and further relief as the Court deems just and proper.
The Company believes that POSCO Energy’s demand to inspect the books and records of the Company is not for a proper purpose, is in fact simply fulfillment of POSCO Energy’s prior threats to file a series of actions against the Company, and is an attempt to obtain leverage over the Company and gain advantage in the pending arbitration filed by the Company against POSCO Energy. The Company intends to vigorously defend itself against POSCO Energy’s claims and believes it will be apparent at the conclusion of the matter that the action was filed for an improper purpose.
Other Legal Proceedings
From time to time, the Company is involved in other legal proceedings, including, but not limited to, regulatory proceedings, claims, mediations, arbitrations and litigation, arising out of the ordinary course of its business (“Other Legal Proceedings”). Although the Company cannot assure the outcome of such Other Legal Proceedings, management presently believes that the result of such Other 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.
30
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Impact of the COVID-19 Pandemic
On March 18, 2020, in response to the COVID-19 pandemic, we temporarily suspended operations at our Torrington, Connecticut manufacturing facility and also ordered those employees that could work from home to do so. The Company resumed operations in the manufacturing facility on June 22, 2020. The Company is still encouraging employees who can work from home to do so. We continue to evaluate our ability to operate in light of recent resurgences of COVID-19 and the advisability of continuing operations based on federal, state and local guidance, evolving data concerning the pandemic and the best interests of our employees, customers and stockholders.
All employees that were not able to work from home due to their job function during the manufacturing facility shutdown received full wages and benefits during such time. We did not implement any furlough, layoff or shared work program during such time. With the resumption of production on June 22, we currently do not expect a material adverse impact to current project schedules as a result of the shutdown.
While we have attempted to continue business development activities during the pandemic, state and local shut downs, shelter in place orders and travel restrictions have impeded our ability to meet with customers and solicit new business, and certain bids and solicitations in which we typically participate have been postponed. We expect these impacts to continue until such shut downs, shelter in place orders and travel restrictions are fully lifted and bids and solicitations are allowed to proceed.
Note 18. Subsequent Events
Open Market Sale Agreement
As noted in Note 12. “Stockholders’ Equity and Warrant Liabilities,” on June 16, 2020, the Company entered into an Open Market Sale Agreement with Jefferies, with respect to an at the market offering program under which the Company may offer and sell up to $75 million of shares of the Company’s common stock from time to time. Subsequent to quarter end, during the period beginning on August 3, 2020 through August 6, 2020, the Company sold 3.2 million shares under the Open Market Sale Agreement, at an average sales price of $2.51 per share, resulting in gross proceeds of $8.0 million, before deducting expenses and sales commissions. Commissions of $0.2 million were paid to Jefferies in connection with these sales, resulting in net proceeds to the Company of approximately $7.8 million.
2018 Omnibus Incentive Plan – Long Term Incentive Plan
As noted in Note 12. “Stockholders’ Equity and Warrant Liabilities,” on May 8, 2020, the Company’s stockholders approved the amendment and restatement of the Plan, providing the Company with the authority to issue a total of 4,333,333 shares of the Company’s common stock under the Plan. On August 24, 2020, the Board of Directors (the “Board”) of the Company approved a Long Term Incentive Plan (the “LTI Plan”) as a sub-plan consisting of awards made under the Plan. The participants in the LTI Plan are members of senior management and include the Company’s named executive officers. Pursuant to the LTI Plan, 1,503,068 shares of the Company’s common stock under the Plan have been reserved for time-based grants and performance shares.
31
|
ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains both historical and forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 that involve risks, uncertainties and assumptions. The statements contained in this report that are not purely historical are forward-looking statements that are subject to the safe harbors created under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions and strategies for the future. When used in this report, the words “expects,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “believes,” “predicts,” “should,” “will,” “could,” “would,” “may,” “forecast,” and similar expressions and variations of such words are intended to identify forward-looking statements. Such statements relate to, among other things, the following: (i) the development and commercialization by FuelCell Energy, Inc. and its subsidiaries of fuel cell technology and products and the market for such products; (ii) expected operating results such as revenue growth and earnings; (iii) our belief that we have sufficient liquidity to fund our business operations for the next 12 months; (iv) future funding under Advanced Technologies contracts; (v) future financing for projects, including equity and debt investments by investors and commercial bank financing, as well as overall financial market conditions; (vi) actions by our current loan counterparties; (vii) our ability to comply with the terms and conditions of our loans, including the use proceeds of our loans as described herein; (viii) the expected cost competitiveness of our technology; and (ix) our ability to achieve our sales plans, market access and market expansion goals, and cost reduction targets.
The forward-looking statements contained in this report are subject to risks and uncertainties, known and unknown, that could cause actual results to differ materially from those forward-looking statements, including the risks contained in the section below entitled “Item 1A. Risk Factors,” and the following risks and uncertainties: general risks associated with product development and manufacturing; general economic conditions; changes in the utility regulatory environment; changes in the utility industry and the markets for distributed generation, distributed hydrogen, and carbon capture configured fuel cell power plants; potential volatility of energy prices; availability of government subsidies and economic incentives for alternative energy technologies; our ability to remain in compliance with U.S. federal and state and foreign government laws and regulations and the listing rules of The Nasdaq Stock Market (“Nasdaq”); rapid technological change; competition; our dependence on strategic relationships; market acceptance of our products; changes in accounting policies or practices adopted voluntarily or as required by accounting principles generally accepted in the United States; factors affecting our liquidity position and financial condition; government appropriations; the ability of the government to terminate its development contracts at any time; the ability of the government to exercise “march-in” rights with respect to certain of our patents; the arbitration and other legal proceedings with POSCO Energy; our ability to implement our strategy; our ability to reduce our levelized cost of energy and our cost reduction strategy generally; our ability to protect our intellectual property; litigation and other proceedings; the risk that commercialization of our products will not occur when anticipated; our need for and the availability of additional financing; our ability to generate positive cash flow from operations; our ability to service our long-term debt; our ability to increase the output and longevity of our power plants and to meet the performance requirements of our contracts; our ability to expand our customer base and maintain relationships with our largest customers and strategic business allies; changes by the SBA or other governmental authorities to, or with respect to the implementation or interpretation of, the CARES Act, the Payroll Protection Program or related administrative matters; and concerns with, threats of, or the consequences of, pandemics, contagious diseases or health epidemics, including the novel coronavirus (“COVID-19”), and resulting supply chain disruptions, shifts in clean energy demand, impacts to our customers’ capital budgets and investment plans, impacts to our project schedules, impacts to our ability to service existing projects, and impacts on the demand for our products.
We cannot assure you that: we will be able to meet any of our development or commercialization schedules; we will be able to remain in compliance with the minimum bid price requirement of the Nasdaq listing rules; any of our new products or technologies, once developed, will be commercially successful; our existing SureSource power plants will remain commercially successful; we will be able to obtain financing or raise capital to achieve our business plans; the government will appropriate the funds anticipated by us under our government contracts; the government will not exercise its right to terminate any or all of our government contracts; or we will be able to achieve any other result anticipated in any other forward-looking statement contained herein.
Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond our ability to control, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors discussed herein. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.
Management’s Discussion and Analysis of Financial Condition and Results of Operations is provided as a supplement to the accompanying financial statements and footnotes to help provide an understanding of our financial condition, changes in our financial condition and results of operations. The preparation of financial statements and related disclosures requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities, as well as management’s assessment of the Company’s ability to meet its obligations as they come due over the next twelve months. Actual results could differ from those estimates. Estimates are used in accounting for, among other things, revenue recognition, contract loss accruals, excess, slow-moving and obsolete inventories, product warranty accruals, share-based compensation expense, fair value measurements, allowance for doubtful accounts, depreciation and amortization, impairment of goodwill and intangible assets, impairment of long-lived assets (including project assets), lease liabilities and right-of-use (“ROU”) assets and contingencies, and in management’s assessment of the Company’s ability to meet its obligations as they come due over the next twelve months. Estimates and assumptions are reviewed periodically, and the 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. The following discussion should be read in conjunction with information included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019 filed with the Securities and Exchange Commission (“SEC”). Unless otherwise indicated, the terms “Company”, “FuelCell Energy”, “we”, “us”, and “our” refer to FuelCell Energy, Inc. and its subsidiaries. All tabular dollar amounts are in thousands.
32
OVERVIEW AND RECENT DEVELOPMENTS
Overview
FuelCell Energy is a leading integrated fuel cell company. Founded in 1969, FuelCell Energy is a manufacturer of fuel cell clean power platforms delivering power and thermal energy and capable of delivering hydrogen, long-duration hydrogen energy storage, and carbon capture applications. FuelCell Energy is focused on growing its global presence in delivering environmentally-responsible distributed baseload power solutions through its proprietary, molten-carbonate fuel cell technology. We develop turn-key distributed power generation solutions and operate and provide comprehensive service for the life of the power platform. We are working to expand the proprietary technologies that we have developed over the past five decades into new product platforms, applications, markets and geographies. Our mission and purpose is to utilize our proprietary, state-of-the-art fuel cell platforms to enable a world empowered by clean energy and contribute to climate change mitigation. FuelCell Energy’s platforms are capable of reducing the global environmental footprint of baseload power generation by providing environmentally responsible solutions for reliable electrical power, distributed hydrogen, electrolysis, long-duration hydrogen-based energy storage, carbon capture, microgrid applications, hot water, steam, and chilling.
Recent Developments
Impact of the COVID-19 Pandemic
On March 18, 2020, in response to the COVID-19 pandemic, we temporarily suspended operations at our Torrington, Connecticut manufacturing facility and also ordered those employees that could work from home to do so. The Company resumed operations in the manufacturing facility on June 22, 2020. The Company is still encouraging employees who can work from home to do so. We continue to evaluate our ability to operate in light of recent resurgences of COVID-19 and the advisability of continuing operations based on federal, state and local guidance, evolving data concerning the pandemic and the best interests of our employees, customers and stockholders.
All employees that were not able to work from home due to their job function during the manufacturing facility shutdown received full wages and benefits during such time. We did not implement any furlough, layoff or shared work program during such time. With the resumption of production on June 22, we currently do not expect a material adverse impact to current project schedules as a result of the shutdown.
While we have attempted to continue business development activities during the pandemic, state and local shut downs, shelter in place orders and travel restrictions have impeded our ability to meet with customers and solicit new business, and certain bids and solicitations in which we typically participate have been postponed. We expect these impacts to continue until such shut downs, shelter in place orders and travel restrictions are fully lifted and bids and solicitations are allowed to proceed. Refer to the section below entitled “Item 1A. Risk Factors” for more information concerning risks to our business associated with COVID-19.
As described in further detail under “Liquidity and Capital Resources – Commitments and Significant Contractual Obligations” below, on April 20, 2020, we entered into a Paycheck Protection Program Promissory Note, dated April 16, 2020 (the “PPP Note”), evidencing a loan to us from Liberty Bank under the CARES Act. Pursuant to the PPP Note, we received total proceeds of approximately $6.5 million on April 24, 2020. In order to obtain the consent of the Agent (as defined below) and the Orion Lenders (as defined below) under the Orion Facility (as defined below) to enter into the PPP Note, the Agent and the Orion Lenders have required the Company to apply for forgiveness within 30 days after the last day of the loan forgiveness period as designated under the PPP regulations in effect as of June 6, 2020. If we seek forgiveness of the loan, we must apply for such forgiveness by October 31, 2020.
While we may apply for forgiveness of the PPP Note in accordance with the requirements and limitations under the CARES Act, as amended by the PPP Flexibility Act, and the SBA regulations and requirements, no assurance can be given that any portion of the PPP Note will be forgiven. Based on guidance from the United States Department of the Treasury, since the total PPP Note proceeds exceeded $2.0 million, our forgiveness application will be subject to audit by the SBA.
Open Market Sale Agreement
As noted in Note 12. “Stockholders’ Equity and Warrant Liabilities” and Note 18. “Subsequent Events,” on June 16, 2020, the Company entered into an Open Market Sale Agreement (the “Open Market Sale Agreement”) with Jefferies LLC (“Jefferies”), with respect to an at the market offering program under which the Company may offer and sell up to $75 million of shares of the Company’s common stock from time to time. From the date of the Open Market Sale Agreement through July 31, 2020, 25.1 million shares were sold under the Open Market Sale Agreement at an average sales price of $2.56 per share, resulting in gross proceeds of $64.3 million, before deducting expenses and sales commissions. Commissions of $1.9 million were paid to Jefferies in connection with these sales, resulting in net proceeds to the Company of approximately $62.3 million. Subsequent to quarter end, during the period beginning on August 3, 2020 through August 6, 2020, the Company sold 3.2 million shares under the Open Market Sale Agreement, at an average sales price of $2.51 per share, resulting in gross proceeds of $8.0 million, before deducting expenses and sales commissions. Commissions of $0.2 million were paid to Jefferies in connection with these sales, resulting in net proceeds to the Company of approximately $7.8 million. As the Company has sold $72.3 million of common stock under the Open Market Sale Agreement as of September 10, 2020, it may sell up to approximately $2.7 million of shares in the future under the Open Market Sale Agreement.
2018 Omnibus Incentive Plan – Long Term Incentive Plan
33
As noted in Note 12. “Stockholders’ Equity and Warrant Liabilities,” on May 8, 2020, the Company’s stockholders approved the amendment and restatement of the FuelCell Energy, Inc. 2018 Omnibus Incentive Plan (as so amended and restated, the “Plan”), providing the Company with the authority to issue a total of 4,333,333 shares of the Company’s common stock under the Plan. On August 24, 2020, the Board of Directors (the “Board”) of the Company approved a Long Term Incentive Plan (the “LTI Plan”) as a sub-plan consisting of awards made under the Plan. The participants in the LTI Plan are members of senior management and include the Company’s named executive officers. Pursuant to the LTI Plan, 1,503,068 shares of the Company’s common stock under the Plan have been reserved for time-based grants and performance shares.
SEC Proceedings
Between August 2005 and April 2017, we sold shares of our common stock pursuant to a series of “at-the-market” sales plans. The shares sold pursuant to these sales plans represented a portion of the shares registered by us pursuant to shelf registration statements we filed with the SEC during this time period. While we reported the number of shares we had sold, along with the net proceeds earned by us from those sales made during each fiscal quarter pursuant to the sales plans in our annual and quarterly reports on Forms 10-K and 10-Q, we omitted from the shelf registration statements certain information about the offerings, including the specific plan of distribution and the nature and terms of compensation or other agreements with any underwriters, dealers, or agents, and for some offerings, also omitted the specific type and quantity of securities offered; and we did not file or deliver prospectus supplements at the time of or prior to making these sales or otherwise timely disclose the information that had been omitted from the shelf registration statements, as is required by SEC regulations.
In 2018, we reported to the SEC Staff these sales and our failure to file or deliver prospectus supplements, and in response to our report, the SEC Staff opened an informal investigation of these sales. Following our self-report and the investigation by the SEC Staff and pursuant to our Offer of Settlement, on September 3, 2020, the SEC entered an order instituting cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933, as amended (the “Securities Act”), finding that we had violated Section 5(b)(2) of the Securities Act with respect to these sales and requiring us to cease and desist from committing or causing any violations and any future violations of Section 5(b)(2) but not imposing any civil penalties or disgorgement. Under the terms of the settlement, we consented to the entry of the order and neither admitted nor denied any of the SEC’s findings. Such a settlement, without a waiver by the SEC, would disqualify us from relying on the safe harbors from registration under the Securities Act set forth in Regulation A, Regulation D and Regulation Crowdfunding, following the effective date of the settlement. Accordingly, we submitted an application to the SEC for a waiver of disqualification under Regulation A and Regulation D. We did not seek a waiver under Regulation Crowdfunding as we do not expect to rely on crowdfunding in raising capital. On September 3, 2020, the SEC Staff granted the requested waivers with respect to Regulation A and Regulation D pursuant to delegated authority.
POSCO Energy Matters
From approximately 2007 through 2015, we relied on POSCO Energy Co., Ltd. (“POSCO Energy”) to develop and grow the South Korean and Asian markets for our products and services. We received upfront license payments and were entitled to receive royalty income from POSCO Energy pursuant to certain manufacturing and technology transfer agreements, including the Alliance Agreement dated February 7, 2007 (and the amendments thereto), the Technology Transfer, License and Distribution Agreement dated February 7, 2007 (and the amendments thereto), the Stack Technology Transfer and License Agreement dated October 27, 2009 (and the amendments thereto), and the Cell Technology Transfer and License Agreement dated October 31, 2012 (and the amendments thereto) (the “License Agreements”). The License Agreements provided POSCO Energy with the exclusive technology rights to manufacture, sell, distribute and service our SureSource 300, SureSource 1500 and SureSource 3000 fuel cell technology in the Korean and broader Asian markets. Due to certain actions and inactions of POSCO Energy, the Company has not realized any material revenues, royalties or new projects developed by POSCO Energy since late 2015.
In November 2019, POSCO Energy spun-off its fuel cell business into a new entity, Korea Fuel Cell Co., Ltd. (“KFC”), without the Company’s consent. As part of the spin-off, POSCO Energy transferred manufacturing and service rights under the License Agreements to KFC, but retained distribution rights and severed its own liability under the License Agreements. The Company formally objected to POSCO Energy’s spin-off and POSCO Energy posted a bond to secure any liabilities to the Company arising out of the spin-off.
On February 19, 2020, the Company notified POSCO Energy in writing that it was in material breach of the License Agreements by (i) its actions in connection with the spin-off of the fuel cell business to KFC, (ii) its suspension of performance through its cessation of all sales activities since late 2015 and its abandonment of its fuel cell business in Asia, and (iii) its disclosure of material nonpublic information to third parties and its public pronouncements about the fuel cell business on television and in print media that have caused reputational damage to the fuel cell business, the Company and its products. The Company also notified POSCO Energy that, under the terms of the License Agreements, it had 60 days to fully cure its breaches to the Company’s satisfaction and that failure would lead to termination of the License Agreements. Further, on March 27, 2020, the Company notified POSCO Energy of additional instances of its material breach of the License Agreements based on POSCO Energy’s failure to pay royalties required to be paid in connection with certain module replacements.
On April 27, 2020, POSCO Energy initiated a series of three arbitration demands against the Company at the International Chamber of Commerce seated in Singapore alleging certain warranty defects in a sub-megawatt conditioning facility at its facility in Pohang, South Korea and seeking combined damages of approximately $3.3 million. Prior to filing the arbitrations, POSCO Energy obtained provisional attachments from the Seoul Central District Court attaching certain revenues owed to the Company by Korea Southern Power Company as part of such warranty claims which delayed receipt of certain payments owed to the Company. At July 31, 2020, outstanding accounts receivable for Korea Southern Power Company was $3.1 million. The Company is vigorously defending these actions as it believes they lack merit and were filed in an attempt to obtain leverage over the Company to prevent the Company from terminating the License Agreements and filing the arbitration discussed below.
On June 28, 2020, the Company notified POSCO Energy and KFC in writing that the Company terminated the License Agreements effective as of such date. The Company has demanded compliance with POSCO Energy’s obligations under the License Agreements to return all Company
34
confidential information and know-how and that POSCO Energy and KFC not make any further use of the Company’s technology. The Company offered POSCO Energy a limited license in order to fulfill POSCO Energy’s obligations to service existing clients. With the termination of the License Agreements, the Company has commenced the marketing of its products and services directly in the Korean and broader Asian markets.
On June 28, 2020, the Company also filed a demand for arbitration against POSCO Energy and KFC in the International Court of Arbitration of the International Chamber of Commerce based on POSCO Energy’s (i) failure to exercise commercially reasonable efforts to sell the Company’s technology in the Korean and Asian markets, (ii) disclosure of the Company’s proprietary information to third parties, (iii) attack on the Company’s stock price and (iv) spin-off of POSCO Energy’s fuel cell business into KFC without the Company’s consent. The Company has requested that the arbitral tribunal (a) confirm through declaration that POSCO Energy’s exclusive license to market the Company’s technology and products in Korea and Asia is null and void as a result of the breaches of the License Agreements and that the Company has the right to pursue direct sales in these markets, (b) order POSCO Energy and KFC to compensate the Company for losses and damages suffered in the amount of more than $200 million, and (c) order POSCO Energy and KFC to pay the Company’s arbitration costs, including counsel fees and expenses. The Company has retained outside counsel on a contingency basis to pursue its claims, and outside counsel has entered into an agreement with a litigation finance provider to fund the legal fees and expenses of the arbitration.
As of July 31, 2020, the Company has deferred any accounting disposition of the deferred revenue in the amount of $22.3 million related to the terminated POSCO Energy License Agreements given the pending arbitration and will continue to evaluate this deferred revenue in future periods.
On August 28, 2020, POSCO Energy filed a complaint in the Court of Chancery of the State of Delaware purportedly seeking to enforce its rights as a stockholder of the Company to inspect and make copies and extracts of certain books and records of the Company and/or the Company’s subsidiaries pursuant to Section 220 of the of the Delaware General Corporation Law and/or Delaware common law. POSCO Energy alleges that it is seeking to inspect these documents for a proper purpose reasonably related to its interests as a stockholder of the Company, including investigating whether the Company’s Board of Directors and its management breached their fiduciary duties of loyalty, due care, and good faith. POSCO Energy seeks an order of the Court permitting POSCO Energy to inspect and copy the demanded books and records, awarding POSCO Energy reasonable costs and expenses, including reasonable attorney’s fees incurred in connection with the matter, and granting such other and further relief as the Court deems just and proper.
The Company believes that POSCO Energy’s demand to inspect the books and records of the Company is not for a proper purpose, is in fact simply fulfillment of POSCO Energy’s prior threats to file a series of actions against the Company, and is an attempt to obtain leverage over the Company and gain advantage in the pending arbitration filed by the Company against POSCO Energy. The Company intends to vigorously defend itself against POSCO Energy’s claims and believes it will be apparent at the conclusion of the matter that the action was filed for an improper purpose.
RESULTS OF OPERATIONS
Management evaluates our results of operations and cash flows using a variety of key performance indicators, including revenues compared to prior periods and internal forecasts, costs of our products and results of our cost reduction initiatives, and operating cash use. These are discussed throughout the “Results of Operations” and “Liquidity and Capital Resources” sections. Results of Operations are presented in accordance with accounting principles generally accepted in the United States (“GAAP”).
Comparison of Three Months Ended July 31, 2020 and 2019
Revenues and Costs of revenues
Our revenues and cost of revenues for the three months ended July 31, 2020 and 2019 were as follows:
|
|
|
Three Months Ended July 31, |
|
|
Change |
|
||||||||||
|
(dollars in thousands) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||
|
Total revenues |
|
$ |
18,728 |
|
|
$ |
22,712 |
|
|
$ |
(3,984 |
) |
|
|
(18 |
)% |
|
Total costs of revenues |
|
$ |
21,856 |
|
|
$ |
14,747 |
|
|
$ |
7,109 |
|
|
|
48 |
% |
|
Gross (loss) profit |
|
$ |
(3,128 |
) |
|
$ |
7,965 |
|
|
$ |
(11,093 |
) |
|
|
(139 |
)% |
|
Gross margin |
|
|
(16.7 |
)% |
|
|
35.1 |
% |
|
|
|
|
|
|
|
|
Total revenues for the three months ended July 31, 2020 of $18.7 million reflects a decrease of $4.0 million from $22.7 million during the same period in the prior year. Cost of revenues for the three months ended July 31, 2020 of $21.9 million reflect a $7.1 million increase from $14.7 million during the same period in the prior year. A discussion of the changes in product revenues, service and license revenues, generation revenues and Advanced Technologies contract revenues follows.
35
Product revenues
Our product revenues, cost of product revenues and gross loss from product revenues for the three months ended July 31, 2020 and 2019 were as follows:
|
|
|
Three Months Ended July 31, |
|
|
Change |
|
||||||||||
|
(dollars in thousands) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||
|
Product revenues |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
N/A |
|
|
|
Cost of product revenues |
|
|
2,658 |
|
|
|
4,547 |
|
|
|
(1,889 |
) |
|
|
(42 |
)% |
|
Gross loss from product revenues |
|
$ |
(2,658 |
) |
|
$ |
(4,547 |
) |
|
$ |
1,889 |
|
|
|
42 |
% |
|
Product gross margin |
|
N/A |
|
|
N/A |
|
|
|
|
|
|
|
|
|
||
There was no product revenue during the three months ended July 31, 2020 and 2019.
Cost of product revenues decreased $1.9 million for the three months ended July 31, 2020 to $2.7 million, compared to $4.5 million in the same period in the prior year. Both periods were impacted by the under-absorption of fixed overhead costs due to low production volumes, but there were lower overall manufacturing costs for the three months ended July 31, 2020 due to the Company’s reduction in workforce that was implemented during April of 2019 and the temporary shutdown of our Torrington manufacturing facility from March 18, 2020 to June 22, 2020 due to the COVID-19 pandemic. Manufacturing variances, primarily related to low production volumes and unabsorbed overhead costs, totaled approximately $2.6 million (of which approximately $1.1 million is related to the shutdown due to the COVID-19 pandemic) for the three months ended July 31, 2020 compared to approximately $4.4 million for the three months ended July 31, 2019.
For the three months ended July 31, 2020, we operated at an annualized production rate of approximately 10 megawatts (“MW”), which is an increase from the annualized production rate of 2 MW for the three months ended July 31, 2019. The Company increased production during the quarter ended July 31, 2020 and expects to operate at an annualized run rate of approximately 21 MW during the three months ending October 31, 2020.
As of July 31, 2020, there was no product sales backlog, compared to $1,000 of product sales backlog as of July 31, 2019.
Service and license revenues
Service and license revenues and related costs for the three months ended July 31, 2020 and 2019 were as follows:
|
|
|
Three Months Ended July 31, |
|
|
Change |
|
||||||||||
|
(dollars in thousands) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||
|
Service and license revenues |
|
$ |
7,113 |
|
|
$ |
11,496 |
|
|
$ |
(4,383 |
) |
|
|
(38 |
)% |
|
Cost of service and license revenues |
|
|
8,833 |
|
|
|
1,102 |
|
|
|
7,731 |
|
|
|
702 |
% |
|
Gross (loss) profit from service and license revenues |
|
$ |
(1,720 |
) |
|
$ |
10,394 |
|
|
$ |
(12,114 |
) |
|
|
(117 |
)% |
|
Service and license revenues gross margin |
|
|
(24.2 |
)% |
|
|
90.4 |
% |
|
|
|
|
|
|
|
|
Revenues for the three months ended July 31, 2020 from service agreements and license fee and royalty agreements decreased $4.4 million to $7.1 million from $11.5 million for the three months ended July 31, 2019. Service and license revenues for the prior year period included revenues of $10.0 million recorded for a License Agreement that was entered into with ExxonMobil Research and Engineering Company (“EMRE” and such License Agreement, the “EMRE License Agreement”). The service and license revenues for the three months ended July 31, 2020 include revenues recorded for module replacements and routine maintenance activities.
Cost of service and license revenues increased $7.7 million to $8.8 million for the three months ended July 31, 2020 from $1.1 million for the three months ended July 31, 2019, due to the fact that there were module replacements in the three months ended July 31, 2020 compared to no module replacements in the three months ended July 31, 2019 and also due to a $2.8 million increase in our loss accrual during the three months ended July 31, 2020 to reflect changes in the expected timing of future module replacements at one project (the 2.8MW project at the Tulare, California wastewater treatment facility originally commissioned in fiscal year 2018 and owned by Clearway Energy, Inc.) in order to improve operating performance. Site specific issues at one of the Company’s plants required an earlier than expected module replacement and the Company opted to replace another module earlier than expected at the same site to maximize plant efficiencies. As a result, we incurred the $2.8 million charge described above in the quarter ended July 31, 2020, which is expected to result in improved margins over time through enhanced performance. Cost of service agreements includes maintenance and operating costs and module replacements.
36
Overall gross loss from service and license revenues was $1.7 million for the three months ended July 31, 2020, which represents a decrease of $12.1 million from a gross profit of $10.4 million for the three months ended July 31, 2019. The overall gross margin percentage was (24.2%) for the three months ended July 31, 2020 compared to a gross margin of 90.4% in the prior year period. Gross margin decreased in the quarter ended July 31, 2020 primarily as a result of the increase in our service loss accrual recorded in the quarter ended July 31, 2020 to reflect changes in the expected timing of future module replacements and the lack in the quarter ended July 31, 2020 of favorable margins like those experienced in the quarter ended July 31, 2019 as a result of the revenue recognized during that quarter under the EMRE License Agreement.
As of July 31, 2020, service and license backlog totaled approximately $176.0 million, compared to $192.6 million as of July 31, 2019. This backlog relates to service agreements of up to twenty years and is expected to generate positive margins and cash flows based on current estimates. Service backlog also includes future license revenue.
Generation revenues
Generation revenues and related costs for the three months ended July 31, 2020 and 2019 were as follows:
|
|
|
Three Months Ended July 31, |
|
|
Change |
|
||||||||||
|
(dollars in thousands) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||
|
Generation revenues |
|
$ |
4,722 |
|
|
$ |
5,448 |
|
|
$ |
(726 |
) |
|
|
(13 |
)% |
|
Cost of generation revenues |
|
|
6,327 |
|
|
|
5,726 |
|
|
|
601 |
|
|
|
10 |
% |
|
Gross loss from generation revenues |
|
$ |
(1,605 |
) |
|
$ |
(278 |
) |
|
$ |
(1,327 |
) |
|
|
477 |
% |
|
Generation revenues gross margin |
|
|
(34.0 |
)% |
|
|
(5.1 |
)% |
|
|
|
|
|
|
|
|
Revenues from generation for the three months ended July 31, 2020 totaled $4.7 million, which represents a decrease of $0.7 million from revenue recognized of $5.4 million for the three months ended July 31, 2019. Generation revenues for the three months ended July 31, 2020 and 2019 reflect revenue from electricity generated under our PPAs. Generation revenues decreased for the three months ended July 31, 2020 compared to the same period in the prior year due to plant maintenance activities (primarily related to down time for upgrades at our 14.9 MW Bridgeport Fuel Cell Project) during the quarter ended July 31, 2020. Upgrades to the Bridgeport Fuel Cell Project are expected to result in improved revenues and margins over time through enhanced performance. Cost of generation revenues totaled $6.3 million in the three months ended July 31, 2020, which represents an increase from the comparable prior year period primarily as a result of certain maintenance and repair costs (for maintenance and repairs at several plants) incurred in the quarter ended July 31, 2020. Cost of generation revenues also included depreciation and amortization of approximately $3.4 million and $2.7 million for the three months ended July 31, 2020 and 2019, respectively.
We had 32.6 MW of operating power plants in our portfolio as of July 31, 2020, compared to 26.1 MW as of July 31, 2019. This increase is a result of the commencement of operations at the Tulare BioMAT project in December 2019.
As of July 31, 2020, generation backlog totaled approximately $1.1 billion, compared to $1.2 billion as of July 31, 2019.
Advanced Technologies contract revenues
Advanced Technologies contract revenues and related costs for the three months ended July 31, 2020 and 2019 were as follows:
|
|
|
Three Months Ended July 31, |
|
|
Change |
|
||||||||||
|
(dollars in thousands) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||
|
Advanced Technologies contract revenues |
|
$ |
6,893 |
|
|
$ |
5,768 |
|
|
$ |
1,125 |
|
|
|
20 |
% |
|
Cost of Advanced Technologies contract revenues |
|
|
4,038 |
|
|
|
3,372 |
|
|
|
666 |
|
|
|
20 |
% |
|
Gross profit from Advanced Technologies contracts |
|
$ |
2,855 |
|
|
$ |
2,396 |
|
|
$ |
459 |
|
|
|
19 |
% |
|
Advanced Technologies contract gross margin |
|
|
41.4 |
% |
|
|
41.5 |
% |
|
|
|
|
|
|
|
|
Advanced Technologies contract revenues for the three months ended July 31, 2020 were $6.9 million, which reflects an increase of $1.1 million when compared to $5.8 million of revenues for the three months ended July 31, 2019. Advanced Technologies contract revenues were higher for the three months ended July 31, 2020 as a result of revenues recognized in connection with the Company’s Joint Development Agreement with EMRE (which was executed during the first quarter of fiscal 2020) and the timing of activity under other existing contracts. Cost of Advanced Technologies contract revenues increased $0.6 million to $4.0 million for the three months ended July 31, 2020, compared to $3.4 million for the same period in the prior year. Advanced Technologies contracts for the three months ended July 31, 2020 generated a gross margin of $2.9 million compared to a gross margin of $2.4 million for the three months ended July 31, 2019. The increase in Advanced Technologies contract gross margin is related to the timing and mix of contracts, which were more heavily weighted to the Company’s Joint Development Agreement with EMRE during the three months ended July 31, 2020, compared to the same period in the prior year.
As of July 31, 2020, Advanced Technologies backlog totaled approximately $51.9 million, compared to $27.2 million as of July 31, 2019. This increase was primarily a result of the Joint Development Agreement with EMRE.
37
Administrative and selling expenses
Administrative and selling expenses were $6.6 million and $7.1 million for the three months ended July 31, 2020 and 2019, respectively, reflecting lower legal and consulting costs during the three months ended July 31, 2020.
Research and development expenses
Research and development expenses decreased to $1.0 million for the three months ended July 31, 2020 compared to $2.0 million during the three months ended July 31, 2019. The decrease related to the reduction in spending resulting from the restructuring initiatives implemented in 2019 and the reduction in the resources being allocated to research and development (as resources were instead allocated to funded Advanced Technologies projects).
Loss from operations
Loss from operations for the three months ended July 31, 2020 was $10.8 million compared to $1.1 million for the three months ended July 31, 2019. The loss from operations for the three months ended July 31, 2020 was partially a result of the gross loss offset by lower operating expenses primarily due to the reduction in the resources being allocated to research and development. The change to a gross loss for the three months ended July 31, 2020 from a gross profit for the three months ended July 31, 2019 is partly due to the fact that the three months ended July 31, 2019 included $10.0 million of revenue recognized under the EMRE License Agreement, while there was no comparable revenue recognized during the three months ended July 31, 2020. In addition, loss from operations was impacted due to other changes in gross (loss) profit, administrative and selling expenses and research and development expenses as further described above.
Interest expense
Interest expense for the three months ended July 31, 2020 and 2019 was $4.2 million and $3.5 million, respectively. Interest expense for both periods presented includes interest expense related to sale-leaseback transactions and interest for the amortization of the redeemable preferred stock of subsidiary fair value discount. The increase in interest expense during the three months ended July 31, 2020 primarily represents additional interest on the $80.0 million outstanding under our Credit Agreement with Orion Energy Partners Investment Agent, LLC and its affiliated lenders (which is referred to herein as the “Orion Credit Agreement”) and interest on the loans made by Fifth Third Bank and Liberty Bank in connection with the acquisition of the Bridgeport Fuel Cell Project (the “Bridgeport Loans”). The interest expense during the three months ended July 31, 2019 primarily included interest on outstanding amounts under our loan and security agreement with Hercules Capital, Inc.
Change in fair value of common stock warrant liability
The $1.7 million expense for the three months ended July 31, 2020 represents an adjustment to the estimated fair value of the warrants still outstanding as of July 31, 2020 that were issued to the lenders under the Orion Credit Agreement based on a Black-Scholes model. The expense is primarily a result of an increase in the stock price during the quarter ended July 31, 2020.
Gain on extinguishment of financing obligation
The $1.8 million gain for the three months ended July 31, 2020 represents the difference between the amount of the payoff of the lease and the repurchase of the UCI Fuel Cell, LLC project asset and the carrying amount of the financing obligation.
Other expense, net
Other expense, net was $0.5 million and $0.7 million for the three months ended July 31, 2020 and 2019, respectively. Other expense, net for the three months ended July 31, 2020 primarily relates to a foreign exchange loss of $0.6 million related to the remeasurement of the Canadian Dollar denominated preferred stock obligation of our U.S. Dollar functional currency Canadian subsidiary offset by a gain of approximately $0.2 million related to the income from refundable research and development tax credits. Other expense, net for the three months ended July 31, 2019 includes a loss recorded for an interest rate swap and foreign exchange losses related to the remeasurement of the Canadian Dollar denominated preferred stock obligation of our U.S. Dollar functional currency Canadian subsidiary, offset by income from refundable research and development tax credits.
Provision for income taxes, net
We have not paid federal or state income taxes in several years due to our history of net operating losses, although we have paid foreign income and withholding taxes in South Korea. Income tax recorded for the three months ended July 31, 2020 and 2019 was $0.01 million and $0.02 million, respectively.
Series B preferred stock dividends
Dividends recorded on our 5% Series B Cumulative Convertible Perpetual Preferred Stock (“Series B Preferred Stock”) were $0.8 million for each of the three-month periods ended July 31, 2020 and 2019.
Series C preferred stock deemed contributions
38
During the three months ended July 31, 2019, conversions of our Series C Convertible Preferred Stock (“Series C Preferred Stock”) resulted in a variable number of shares of our common stock being issued to settle the conversion amounts and were treated as a partial redemption of our Series C Preferred Stock. Conversions during the three 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. 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 Stock.
The last outstanding shares of Series C Preferred Stock were converted into common stock on May 23, 2019, so there were no shares of Series C Preferred Stock outstanding during the three months ended July 31, 2020.
Series D preferred stock deemed dividends
During the three months ended July 31, 2019, conversions of our Series D Convertible Preferred Stock (“Series D Preferred Stock”) in which the conversion price was below the initial conversion price (as adjusted for the reverse stock split) of $16.56 per share resulted in a variable number of shares of our common stock being issued to settle the conversion amounts and were treated as a partial redemption of the shares of our Series D Preferred Stock. Conversions during the three 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. The deemed dividends represent the difference between the fair value of the common shares issued to settle the conversion amounts and the carrying value of the Series D Preferred Stock.
The last outstanding shares of Series D Preferred Stock were converted into common stock on October 1, 2019, so there were no shares of Series D Preferred Stock outstanding during the three months ended July 31, 2020.
Net loss attributable to common stockholders and loss per common share
Net loss attributable to common stockholders for the quarter ended July 31, 2019 represents the net loss for the period less the preferred stock dividends on the Series B Preferred Stock, the preferred stock deemed contributions on the Series C Preferred Stock and the Series D Preferred Stock deemed dividends. For the three-month periods ended July 31, 2020 and 2019, net loss attributable to common stockholders was $16.1 million and $8.3 million, respectively, and loss per common share was $0.07 and $0.18, respectively. The increase in the net loss for the three-months ended July 31, 2020 is primarily due to incurring a gross loss for the period compared to a gross profit for the corresponding period in 2019, offset slightly by lower operating expenses, a gain recognized on the extinguishment of a financing obligation in connection with payoff of the UCI Fuel Cell, LLC lease, and the fact that there were no adjustments recorded for the Series D Preferred Stock deemed dividends. The lower loss per common share for the three months ended July 31, 2020 as compared to the three months ended July 31, 2019 is due to the higher weighted average shares outstanding as of July 31, 2020 as a result of share issuances since July 31, 2019.
Comparison of Nine Months Ended July 31, 2020 and 2019
Revenues and Costs of revenues
Our revenues and cost of revenues for the nine months ended July 31, 2020 and 2019 were as follows:
|
|
|
Nine Months Ended July 31, |
|
|
Change |
|
||||||||||
|
(dollars in thousands) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||
|
Total revenues |
|
$ |
53,872 |
|
|
$ |
49,711 |
|
|
$ |
4,161 |
|
|
|
8 |
% |
|
Total costs of revenues |
|
$ |
53,552 |
|
|
$ |
47,591 |
|
|
$ |
5,961 |
|
|
|
13 |
% |
|
Gross profit |
|
$ |
320 |
|
|
$ |
2,120 |
|
|
$ |
(1,800 |
) |
|
|
(85 |
)% |
|
Gross margin |
|
|
0.6 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
Total revenues for the nine months ended July 31, 2020 of $53.9 million reflects an increase of $4.2 million from $49.7 million during the same period in the prior year. Cost of revenues for the nine months ended July 31, 2020 of $53.6 million reflects a $6.0 million increase from $47.6 million during the same period in the prior year. A discussion of the changes in product revenues, service and license revenues, generation revenues and Advanced Technologies contract revenues follows.
Product revenues
Our product revenues, cost of product revenues and gross loss from product revenues for the nine months ended July 31, 2020 and 2019 were as follows:
|
|
|
Nine Months Ended July 31, |
|
|
Change |
|
||||||||||
|
(dollars in thousands) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||
|
Product revenues |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
N/A |
|
|
|
Cost of product revenues |
|
|
7,512 |
|
|
|
14,362 |
|
|
|
(6,850 |
) |
|
|
(48 |
)% |
|
Gross loss from product revenues |
|
$ |
(7,512 |
) |
|
$ |
(14,362 |
) |
|
$ |
6,850 |
|
|
|
-48 |
% |
|
Product revenues gross loss |
|
N/A |
|
|
N/A |
|
|
|
|
|
|
|
|
|
||
39
There was no product revenue during the nine months ended July 31, 2020 and 2019.
Cost of product revenues decreased $6.9 million for the nine months ended July 31, 2020 to $7.5 million, compared to $14.4 million in the same period in the prior year. Both periods were impacted by the under-absorption of fixed overhead costs due to low production volumes, but there were lower overall manufacturing costs for the nine months ended July 31, 2020 due to the Company’s reduction in workforce that was implemented during April of 2019 and the temporary shutdown of our Torrington manufacturing facility from March 18, 2020 to June 22, 2020 due to the COVID-19 pandemic. The Company incurred approximately $2.1 million of manufacturing variances during the nine months ended July 31, 2020 due to the manufacturing facility shutdown, which negatively impacted overall gross margin. Manufacturing variances, primarily related to low production volumes and unabsorbed overhead costs, totaled approximately $7.0 million (including the $2.1 million of manufacturing variances mentioned above) for the nine months ended July 31, 2020 compared to approximately $11.0 million for the nine months ended July 31, 2019. Cost of product revenues for the nine months ended July 31, 2019 also includes a charge for a specific construction in process asset related to automation equipment for use in manufacturing with a carrying value of $2.8 million, which was impaired due to uncertainty as to whether the asset will be completed as a result of our liquidity position and continued low level of production rates.
For the nine months ended July 31, 2020, we operated at an annualized production rate of approximately 14.0 MW, which is a reduction from the annualized production rate of 17.5 MW for the nine months ended July 31, 2019. This reduction was a result of the March 18, 2020 manufacturing facility shutdown that was implemented in response to the COVID-19 pandemic.
Service and license revenues
Service and license revenues and related costs for the nine months ended July 31, 2020 and 2019 were as follows:
|
|
|
Nine Months Ended July 31, |
|
|
Change |
|
||||||||||
|
(dollars in thousands) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||
|
Service and license revenues |
|
$ |
19,697 |
|
|
$ |
25,866 |
|
|
$ |
(6,169 |
) |
|
|
(24 |
)% |
|
Cost of service and license revenues |
|
|
16,418 |
|
|
|
15,166 |
|
|
|
1,252 |
|
|
|
8 |
% |
|
Gross profit from service and license revenues |
|
$ |
3,279 |
|
|
$ |
10,700 |
|
|
$ |
(7,421 |
) |
|
|
(69 |
)% |
|
Service and license revenues gross margin |
|
|
16.6 |
% |
|
|
41.4 |
% |
|
|
|
|
|
|
|
|
40
Revenues for the nine months ended July 31, 2020 from service agreements and license fee and royalty agreements decreased $6.2 million to $19.7 million from $25.9 million for the nine months ended July 31, 2019. Service and license revenues decreased primarily due to the lack, during the nine months ended July 31, 2020, of license revenues comparable to the $10.0 million of license revenues recorded during the nine months ended July 31, 2019 in connection with the EMRE License Agreement. In addition, the nine months ended July 31, 2019 included revenue recorded for the Bridgeport Fuel Cell Project service agreement. As a result of the purchase by the Company of the Bridgeport Fuel Cell Project on May 9, 2019, revenue under this service agreement is no longer being recognized. Service and license revenue for the nine months ended July 31, 2020 includes license revenues of $4.0 million associated with the Joint Development Agreement entered into with EMRE on November 5, 2019 as well as revenue recognized from routine maintenance and module replacements.
Cost of service and license revenues increased $1.3 million to $16.4 million for the nine months ended July 31, 2020 from $15.2 million for the nine months ended July 31, 2019, due a $2.8 million increase in our loss accrual during the nine months ended July 31, 2020 to reflect changes in the expected timing of future module replacements at one project (the 2.8 MW project at the Tulare, California wastewater treatment facility originally commissioned in fiscal year 2018 owned by Clearway Energy, Inc.) in order to improve operating performance. Site specific issues at one of the Company’s plants required an earlier than expected module replacement and the Company opted to replace another module earlier than expected at the same site to maximize plant efficiencies. As a result, we incurred the $2.8 million charge described above during the nine months ended July 31, 2020, which is expected to result in improved margins over time through enhanced performance. Cost of service agreements includes maintenance and operating costs and module replacements.
Overall gross profit from service and license revenues was $3.3 million for the nine months ended July 31, 2020, which represents a decrease of $7.4 million from a gross profit of $10.7 million for the nine months ended July 31, 2019. This decrease is primarily a result of the lack in the nine months ended July 31, 2020 of license revenues comparable to the license revenues recognized in connection with the EMRE License Agreement during the nine months ended July 31, 2019. As a result of both decreased service and license revenues and increased cost of service and license revenues, the service and license revenues gross margin percentage decreased to 16.6% for the nine months ended July 31, 2020 from a gross margin of 41.4% in the prior year period.
Generation revenues
Generation revenues and related costs for the nine months ended July 31, 2020 and 2019 were as follows:
|
|
|
Nine Months Ended July 31, |
|
|
Change |
|
||||||||||
|
(dollars in thousands) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||
|
Generation revenues |
|
$ |
14,795 |
|
|
$ |
8,560 |
|
|
$ |
6,235 |
|
|
|
73 |
% |
|
Cost of generation revenues |
|
|
17,576 |
|
|
|
9,047 |
|
|
|
8,529 |
|
|
|
94 |
% |
|
Gross loss from generation revenues |
|
$ |
(2,781 |
) |
|
$ |
(487 |
) |
|
$ |
(2,294 |
) |
|
|
471 |
% |
|
Generation revenues gross margin |
|
|
(18.8 |
)% |
|
|
(5.7 |
)% |
|
|
|
|
|
|
|
|
Revenues from generation for the nine months ended July 31, 2020 totaled $14.8 million, which represents an increase of $6.2 million from revenues from generation recognized of $8.6 million for the nine months ended July 31, 2019. Generation revenues for the nine months ended July 31, 2020 and 2019 reflect revenue from electricity generated under our PPAs. Generation revenues increased for the nine months ended July 31, 2020 compared to the same period in the prior year due to additional revenue recorded for the PPA associated with the Bridgeport Fuel Cell Project, which was acquired on May 9, 2019 and the Tulare BioMAT project, which commenced operations in December 2019. Cost of generation revenues totaled $17.6 million in the nine months ended July 31, 2020, which represents an increase from the comparable prior year period. Cost of generation revenues included depreciation and amortization of approximately $9.6 million and $4.7 million for the nine months ended July 31, 2020 and 2019, respectively. The increase in cost of generation revenues in the nine months ended July 31, 2020 are primarily the result of the Bridgeport, Tulare and Triangle Street plants having a larger contribution to the operating portfolio during the period.
We had 32.6 MW of operating power plants in our portfolio as of July 31, 2020, compared to 26.1 MW as of July 31, 2019. This increase is primarily a result of the commencement of operations at the Tulare BioMAT project in January 2020 and at the Triangle Street project in April 2020.
Advanced Technologies contract revenues
Advanced Technologies contract revenues and related costs for the nine months ended July 31, 2020 and 2019 were as follows:
|
|
|
Nine Months Ended July 31, |
|
|
Change |
|
||||||||||
|
(dollars in thousands) |
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
||||
|
Advanced Technologies contract revenues |
|
$ |
19,380 |
|
|
$ |
15,285 |
|
|
$ |
4,095 |
|
|
|
27 |
% |
|
Cost of Advanced Technologies contract revenues |
|
|
12,046 |
|
|
|
9,016 |
|
|
|
3,030 |
|
|
|
34 |
% |
|
Gross profit from Advanced Technologies contracts |
|
$ |
7,334 |
|
|
$ |
6,269 |
|
|
$ |
1,065 |
|
|
|
17 |
% |
|
Advanced Technologies contract gross margin |
|
|
37.8 |
% |
|
|
41.0 |
% |
|
|
|
|
|
|
|
|
41
Advanced Technologies contract revenues for the nine months ended July 31, 2020 were $19.4 million, which reflects an increase of $4.1 million when compared to $15.3 million of Advanced Technologies contract revenues for the nine months ended July 31, 2019. Advanced Technologies contract revenues were higher for the nine months ended July 31, 2020 due to the timing of activity under existing contracts as well as revenues recognized in connection with the Company’s Joint Development Agreement with EMRE (which was entered into on November 5, 2019). Cost of Advanced Technologies contract revenues increased $3.0 million to $12.0 million for the nine months ended July 31, 2020, compared to $9.0 million for the same period in the prior year as a result of costs incurred in connection with the Company’s Joint Development Agreement with EMRE. Advanced Technologies contracts for the nine months ended July 31, 2020 generated a gross margin of $7.3 million compared to a gross margin of $6.3 million for the nine months ended July 31, 2019. The increase in Advanced Technologies contract gross margin is related to the timing and mix of contracts, which were more heavily weighted to revenue recognized under the Company’s Joint Development Agreement with EMRE during the nine months ended July 31, 2020, compared to the same period in the prior year.
Administrative and selling expenses
Administrative and selling expenses were $19.0 million and $23.6 million for the nine months ended July 31, 2020 and 2019, respectively. The decrease from the same period in the prior year primarily relates to proceeds from a legal settlement of $2.2 million received during the nine months ended July 31, 2020, which was recorded as an offset to administrative and selling expenses, and higher legal and consulting costs incurred during the nine months ended July 31, 2019 in connection with the restructuring and refinancing initiatives undertaken by the Company in 2019.
Research and development expenses
Research and development expenses decreased to $3.3 million for the nine months ended July 31, 2020, compared to $12.4 million during the nine months ended July 31, 2019. The decrease related to the reduction in spending resulting from the restructuring initiatives implemented in 2019 and the reduction in the resources being allocated to internal research and development (as resources were instead allocated to funded Advanced Technologies projects).
Loss from operations
Loss from operations for the nine months ended July 31, 2020 was $22.0 million compared to $33.9 million for the nine months ended July 31, 2019. The decrease in the loss from operations was primarily a result lower operating expenses primarily due to lower spending (personnel and overhead costs) resulting from the restructuring initiatives implemented in 2019 and the reduction in the resources being allocated to research and development for the nine months ended July 31, 2020, partially offset by lower gross profit for the nine months ended July 31, 2020 as described above.
Interest expense
Interest expense for the nine months ended July 31, 2020 and 2019 was $11.0 million and $7.8 million, respectively. Interest expense for both periods presented includes interest expense related to sale-leaseback transactions and interest for the amortization of the redeemable preferred stock of subsidiary fair value discount. The increase in interest expense during the nine months ended July 31, 2020 primarily represents additional interest on the $80.0 million outstanding under the Orion Credit Agreement and interest on the loans made by Fifth Third Bank and Liberty Bank in connection with the acquisition of the Bridgeport Fuel Cell Project. The interest expense during the nine months ended July 31, 2019 primarily included interest on outstanding amounts under our loan and security agreement with Hercules Capital, Inc.
Change in fair value of common stock warrant liability
The $39.3 million expense for the nine months ended July 31, 2020 represents an adjustment to the estimated fair value of the warrants issued to the lenders under the Orion Credit Agreement based on a Black-Scholes model. The adjustment included $23.7 million for warrants that were converted during the first fiscal quarter of 2020 and $15.6 million for warrants that were still outstanding as of July 31, 2020. The expense is primarily a result of an increase in the stock price during the nine months ended July 31, 2020 compared to the stock price used in the Black-Scholes model upon the issuance of the warrants.
Gain on extinguishment of financing obligation
The $1.8 million gain for the nine months ended July 31, 2020 represents the difference between the amount of the payoff of the lease and the repurchase of the UCI Fuel Cell, LLC project asset and the carrying amount of the financing obligation.
Other income (expense), net
Other income, net of $0.4 million and other expense, net of $0.6 million was recorded for the nine months ended July 31, 2020 and 2019, respectively. Other income, net for the nine months ended July 31, 2020 primarily relates to a net non-cash gain on the extinguishment accounting related to the modification of the Series 1 Preferred Stock and the extinguishment related to the embedded derivatives (refer to Note 13. “Redeemable Preferred Stock” for additional information). Other income, net for the nine months ended July 31, 2020 also included a foreign exchange gain of $0.3 million related to the remeasurement of the Canadian Dollar denominated preferred stock obligation of our U.S. Dollar functional currency Canadian subsidiary offset by a loss of approximately $0.5 million related to the remeasurement of the interest rate swap on the Bridgeport Loans. Other expense, net for the nine months ended July 31, 2019 includes the remeasurement of the interest rate swap on the Bridgeport Loans.
42
Provision for income taxes, net
We have not paid federal or state income taxes in several years due to our history of net operating losses, although we have paid foreign income and withholding taxes in South Korea. Income tax recorded for the nine months ended July 31, 2020 and 2019 was $0.04 million and $0.1 million, respectively.
Series A warrant exchange
On February 21, 2019, we entered into an Exchange Agreement (the “Exchange Agreement”) with the holder (the “Warrant Holder”) of the Series A Warrant to Purchase Common Stock, issued by us on July 12, 2016 (the “Series A Warrant”), which was exercisable for 640,000 shares of our common stock. Pursuant to the Exchange Agreement, we agreed to issue to the Warrant Holder 500,000 shares of our 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 us, in reliance on an exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended. All common shares issuable pursuant to the Exchange Agreement were issued prior to April 30, 2019. Following the transfer of the Series A Warrant back to us, the Warrant was cancelled and no further shares are issuable pursuant to the Series A Warrant. During the nine months ended July 31, 2019, we recorded a charge to common shareholders 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.
Series B preferred stock dividends
Dividends recorded on our Series B Preferred Stock were $2.5 million and $2.4 million for the nine-month periods ended July 31, 2020 and 2019, respectively.
Series C preferred stock deemed contributions and redemption value adjustment, net
During the nine months ended July 31, 2019, conversions of our Series C Preferred Stock resulted in a variable number of shares of our common stock being issued to settle the conversion amounts and were treated as a partial redemption of our Series C Preferred Stock. Conversions during the 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 $1.6 million. 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 Stock.
The Company also accounted for an extinguishment of the Series C Preferred Stock by recording a deemed contribution of $0.5 million during the nine months ended July 31, 2019. A charge to common stockholders of $8.6 million was recorded during the nine months ended July 31, 2019 because of equity conditions failures under the Certificate of Designations for the Series C Preferred Stock.
The last outstanding shares of Series C Preferred Stock were converted into common stock on May 23, 2019, so there were no shares of Series C Preferred Stock outstanding during the nine months ended July 31, 2020.
Series D preferred stock deemed dividends and redemption accretion
During the nine months ended July 31, 2019, conversions of our Series D Preferred Stock in which the conversion price was below the initial conversion price (as adjusted for the reverse stock split) of $16.56 per share resulted in a variable number of shares of our common stock being issued to settle the conversion amounts and were treated as a partial redemption of the shares of our Series D Preferred Stock. Conversions during the nine months ended July 31, 2019 that were settled in a variable number of shares and treated as redemptions resulted in deemed dividends of $6.0 million. The deemed dividends represent the difference between the fair value of the common shares issued to settle the conversion amounts and the carrying value of the Series D Preferred Stock.
Redemption accretion of $3.8 million was recorded during the nine months ended July 31, 2019.
The last outstanding shares of Series D Preferred Stock were converted into common stock on October 1, 2019, so there were no shares of Series D Preferred Stock outstanding during the nine months ended July 31, 2020.
Net loss attributable to common stockholders and loss per common share
Net loss attributable to common stockholders for the nine months ended July 31, 2020 represents the net loss for the period less the preferred stock dividends on the Series B Preferred Stock. Net loss attributable to common stockholders for the nine months ended July 31, 2019 represents the net loss for the period less the charge associated with the Series A warrant exchange, the preferred stock dividends on the Series B Preferred Stock, the preferred stock deemed contributions and redemption value adjustment, net on the Series C Preferred Stock and the Series D Preferred Stock deemed dividends and redemption accretion. For the nine-month periods ended July 31, 2020 and 2019, net loss attributable to common stockholders was $72.8 million and $64.2 million, respectively, and loss per common share was $0.35 and $2.97, respectively. The increase in the net loss for the nine months ended July 31, 2020 is primarily due to the change in fair value of the common stock warrant liability discussed above and lower gross profit, partially offset by lower operating expenses and the fact that there were no adjustments recorded for the Series A warrants, the Series D Preferred Stock deemed dividends and redemption accretion and the Series C Preferred Stock deemed contributions and redemption value adjustment, net. The lower loss per common share is due to the higher weighted average shares outstanding as of July 31, 2020 due to share issuances since July 31, 2019.
43
LIQUIDITY AND CAPITAL RESOURCES
The Company’s future liquidity will depend on its ability to (i) timely complete current projects in process within budget, including approved amounts that have been financed, as financing does not cover budget overages or the total cost of the projects, (ii) increase cash flows from its generation portfolio, including by meeting conditions required to timely commence operation of new projects, operating its generation portfolio in compliance with minimum performance guarantees and operating its generation portfolio in accordance with revenue expectations, (iii) obtain approval of and receive funding for project construction under its Credit Agreement with Orion Energy Partners Investment Agent, LLC and its affiliated lenders and meet conditions for release of funds, or obtain other financing, (iv) obtain permanent financing for its projects once constructed, (v) increase order and contract volumes, which would lead to additional product sales, services agreements and generation revenues, (vi) obtain funding for and receive payment for research and development under current and future Advanced Technology contracts, including achieving a $5 million technological performance milestone under its Joint Development Agreement with ExxonMobil Research and Engineering Company (“EMRE”) during calendar year 2020, (vii) implement the cost reductions necessary to achieve profitable operations and (viii) access the capital markets to raise funds through the sale of equity securities, convertible notes, other equity-linked instruments and/or other debt instruments. Our business model requires substantial outside financing arrangements and satisfaction of the conditions of such financing arrangements to construct and deploy our projects and facilitate the growth of our business. We may seek to obtain such financing in both the debt and equity markets. If financing is not available to us on acceptable terms if and when needed, or on terms acceptable to us or our lenders, if we do not satisfy the conditions of our financing arrangements, if we spend more than the financing approved for projects, if project costs exceed an amount that the Company can finance, or if we do not generate sufficient revenues or obtain capital sufficient for our corporate needs, we may be required to reduce planned spending, reduce staffing, sell assets, seek alternative financing and take other measures, any of which could have a material adverse effect on our financial condition and operations.
There are indicators that substantial doubt about the Company’s ability to continue as a going concern exists, including, but not limited to, historical losses and negative cash flows, increasing costs of debt financing, restrictive debt covenants and restrictions imposed by the Company’s current lenders, limited availability of assets to support borrowing that have not already been pledged to existing lenders, and the need for additional financing to carry out the Company’s business plans. When indicators of substantial doubt exist, GAAP requires management to make an assessment of whether substantial doubt is alleviated by management’s plans. Even though equity and debt financings and other sources of funds may be available in the future, when assessing whether substantial doubt is alleviated, management is not able to place reliance on uncommitted sources of financing. As of the date of these financial statements, management assessed the Company’s ability to continue as a going concern through analysis of existing cash on hand, expected receipts under existing agreements, and release of short-term restricted cash less expected disbursements over the next twelve months and expects that the Company will meet its obligations for at least one year from the date of issuance of these financial statements (assuming that there are no extraordinary or unanticipated impacts to its business as a result of COVID-19 or otherwise). Execution of the Company’s business plan will require additional financing or other measures to generate cash inflows and reduce cash outflows as early as the expected filing of the Form 10-K for the fiscal year ending October 31, 2020 in order to alleviate substantial doubt in future periods.
The key agreements which have impacted and may in the future impact the Company’s liquidity position include:
|
|
• |
Orion Facility and the Fifth Orion Amendment. |
On October 31, 2019, the Company and certain of its affiliates as guarantors entered into a Credit Agreement (as amended from time to time, the “Orion Credit Agreement”) with Orion Energy Partners Investment Agent, LLC, as Administrative Agent and Collateral Agent (the “Agent”), and its affiliates, Orion Energy Credit Opportunities Fund II, L.P., Orion Energy Credit Opportunities Fund II GPFA, L.P., and Orion Energy Credit Opportunities Fund II PV, L.P., as lenders, for a $200.0 million senior secured credit facility (the “Orion Facility”). The Orion Facility is structured as a delayed draw term loan to be provided by the lenders primarily to fund certain of the Company’s construction and related costs for fuel cell projects which meet the requirements of the Orion Facility. In conjunction with the closing of the Orion Facility, on October 31, 2019, the Company drew down $14.5 million (the “Initial Funding”). The Company drew down an additional $65.5 million on November 22, 2019 (the “Second Funding”). The Company may draw the remainder of the Orion Facility, up to $120.0 million, over the first 18 months following the Initial Funding and subject to the Agent’s approval, to fund project-related expenses consisting of: (i) construction costs, inventory and other capital expenditures of additional fuel cell projects with contracted cash flows (under power purchase agreements (“PPAs”) with creditworthy counterparties) that meet or exceed a mutually agreed coverage ratio; and (ii) inventory, working capital, and other costs that may be required to be delivered by the Company on purchase orders, service agreements, or other binding customer agreements with creditworthy counterparties. Except as may be approved by the Agent and the lenders under the Orion Facility (and except as provided in the Fifth Orion Amendment), the Company cannot use the Orion Facility to fund its working capital or other expenses at the corporate level.
On June 8, 2020, the Company and certain of its affiliates as guarantors entered into a fifth amendment to the Orion Credit Agreement with the Agent and the lenders (the “Fifth Orion Amendment”). Pursuant to the terms of the Fifth Orion Amendment and the amended Orion Credit Agreement, the lenders have committed to make available certain delayed-draw loans to the Company in an aggregate principal amount of up to $35 million (the “Secondary Facility Loans”) between the execution date and September 14, 2020. Such Secondary Facility Loans may be used for general corporate purposes of the Company or the guarantors in accordance with either (i) the then-effective operating budget of the Company or the guarantors or (ii) the cash use forecast delivered by the Company to the Agent on June 6, 2020. Any draws under the Secondary Facility Loans must be repaid by September 1, 2021. As of September 10, 2020, the Company has not made any draws under the Secondary Facility Loans.
The lenders and the Agent under the Orion Facility have broad approval rights over the Company’s ability to raise additional capital, obtain other debt financing, and draw, allocate and use funds from the Orion Facility. If the Company is unable to obtain such approvals when the Company seeks to raise additional capital, obtain other debt financing, or use funds under the Orion Facility, it could have a material adverse effect on the Company’s financial condition and operations.
44
|
|
• |
EMRE Joint Development Agreement. |
On November 5, 2019, the Company signed a two-year Joint Development Agreement with EMRE, which was effective as of October 31, 2019, pursuant to which the Company will continue exclusive research and development efforts with EMRE to evaluate and develop new and/or improved carbonate fuel cells to capture and reduce carbon dioxide emissions from industrial and power sources, in exchange for (a) payment of (i) an exclusivity and technology access fee of $5.0 million, (ii) up to $45.0 million for research and development efforts, and (iii) milestone-based payments of up to $10.0 million after certain technological milestones are met, and (b) certain licenses.
|
|
• |
Paycheck Protection Program Loan. |
On April 20, 2020, the Company entered into a Paycheck Protection Program Promissory Note, dated April 16, 2020 (the “PPP Note”), evidencing a loan to the Company from Liberty Bank under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Pursuant to the PPP Note, the Company received total proceeds of approximately $6.5 million on April 24, 2020. In accordance with the requirements of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act (the “PPP Flexibility Act”), at least 60% of the proceeds used by the Company were used to pay eligible payroll costs. Under the requirements of the CARES Act, as amended by the PPP Flexibility Act, the loan may be fully forgiven if (i) proceeds are used to pay eligible payroll costs, rent, mortgage interest and utilities and (ii) full-time employee headcount and salaries are either maintained during the 24-week period following disbursement or restored by December 31, 2020. Any forgiveness of the loan will be subject to approval by the U.S. Small Business Administration (the “SBA”) and Liberty Bank and will require the Company to apply for such treatment in the future. In order to obtain the consent of the Agent and the lenders under the Orion Facility to enter into the PPP Note, the Agent and the lenders have required the Company to apply for forgiveness within 30 days after the last day of the loan forgiveness period as designated under the PPP regulations in effect as of June 6, 2020. While the Company may apply for forgiveness of the PPP Note in accordance with the requirements and limitations under the CARES Act, as amended by the PPP Flexibility Act, and the SBA regulations and requirements, no assurance can be given that any portion of the PPP Note will be forgiven.
|
|
• |
Open Market Sale Agreement. |
On June 16, 2020, the Company entered into an Open Market Sale Agreement (the “Open Market Sale Agreement”) with Jefferies LLC (“Jefferies”), with respect to an at the market offering program under which the Company may offer and sell up to $75 million of shares of the Company’s common stock from time to time. From the date of the Open Market Sale Agreement through August 6, 2020, 28.3 million shares were sold under the Open Market Sale Agreement at an average sales price per share of $2.55, resulting in gross proceeds of $72.3 million, before deducting expenses and sales commissions. Commissions of $2.2 million were paid to Jefferies in connection with these sales, resulting in net proceeds to the Company of approximately $70.1 million. As the Company has sold $72.3 million of common stock under the Open Market Sale Agreement as of September 10, 2020, it may sell up to approximately $2.7 million of shares in the future under the Open Market Sale Agreement.
The Company’s cash, cash equivalents and restricted cash consist of (a) restricted cash and cash equivalents, which consist of amounts pledged as performance security, reserved for future debt service requirements, reserved for letters of credit for certain banking requirements and contracts and reserved to pay down the Orion Facility which can be accessed or redeployed into other project financing at the option of and only with the approval of the lenders and the Agent under the Orion Facility or other lenders or third parties; (b) project cash and cash equivalents, which consist of amounts borrowed under the Orion Facility which can be used only by our consolidated wholly-owned project subsidiaries in the normal course of operations for project construction, purchase of equipment (including inventory from FuelCell Energy, Inc.) and working capital for projects approved under the Orion Facility in accordance with each project’s construction budget and schedule and which are classified as unrestricted cash on the Company’s consolidated balance sheets; and (c) unrestricted cash and cash equivalents, which can be used by the Company for general corporate purposes, including working capital at the corporate level. Unrestricted cash and cash equivalents, as presented on the Company’s consolidated balance sheets, consist of the amounts described in (b) and (c) above. As of July 31, 2020, unrestricted cash and cash equivalents totaled $66.3 million compared to $9.4 million as of October 31, 2019. Of this amount, project cash and cash equivalents funded under the Orion Facility totaled $16.2 million as of July 31, 2020 compared to $0 as of October 31, 2019. Excluding project cash and cash equivalents, unrestricted cash and cash equivalents totaled $50.1 million as of July 31, 2020 compared to $9.4 million as of October 31, 2019.
In future periods, the Company expects to seek lower-cost long-term debt and tax equity (e.g., sale-leaseback and partnership transactions) for its project asset portfolio as these projects commence commercial operations. The proceeds of any such financing, if obtained, may allow the Company to fund other fuel cell projects (subject to the approval of the lenders and the Agent under the Orion Facility) and/or pay down the outstanding principal balance of the Orion Facility. There can be no assurance that the Company can obtain such financing on terms acceptable to the Company, or that the lenders and the Agent under the Orion Facility will consent to such financing. The Company may also seek to raise funds through the sale of equity securities, convertible notes, other equity-linked instruments and/or other debt instruments. If the Company is unable to obtain such financing or raise additional capital, it could have a material adverse effect on the Company’s financial condition and operations, and could require the Company to reduce its expenditures or slow its project spending.
45
Generation/Operating Portfolio, Projects, Project Awards, and Backlog
To grow our generation portfolio, the Company will invest in developing and building turn-key fuel cell projects which will be owned by the Company and classified as project assets on the balance sheet. This strategy requires liquidity, and the Company expects to continue to have increasing liquidity requirements as project sizes increase and more projects are added to backlog. We may commence building project assets upon the award of a project or execution of a multi-year PPA with an end-user that has a strong credit profile. Project development and construction cycles, which span the time between securing a PPA and commercial operation of the plant, vary substantially and can take years. As a result of these project cycles and strategic decisions to finance the construction of certain projects, we may need to make significant up-front investments of resources in advance of the receipt of any cash from the sale or long-term financing of such projects. To make these up-front investments, we may use our working capital, access funds available under our construction financing facilities, seek to raise funds through the sale of equity or debt securities, or seek other financing arrangements. Delays in construction progress and completing current projects in process within budget, or in completing financing or the sale of our projects may impact our liquidity in a material way.
Our operating portfolio (32.6 MW as of July 31, 2020) contributes higher long-term cash flows to the Company than if these projects had been sold. These projects currently generate approximately $22.0 million per year in annual revenue depending on plant output, operations performance and management, and site conditions. The Company plans to continue to grow this portfolio while also selling certain projects to investors. As of July 31, 2020, the Company had projects representing an additional 40.6 MW in various stages of development and construction, which projects are expected to generate operating cash flows in future periods, if completed. Retaining long-term cash flow positive projects, combined with our service fleet, is expected to result in reduced reliance on new project sales to achieve cash flow positive operations. However, operations and performance issues could impact results. The Company expects to finance the construction of the projects still under development and construction using proceeds from the Orion Facility, subject to lender approval, satisfaction of conditions for release of funding, including third party consents, keeping project costs within approved budgets, and having sufficient liquidity to fund our equity portion of such projects. We have worked with and expect to continue to work with other lenders and financial institutions to secure lower-cost long-term debt and tax equity (e.g., sale-leaseback and partnership transactions) for our project asset portfolio, but there can be no assurance that such financing can be attained, or that, if attained, it will be retained or sufficient. As of July 31, 2020, we are financing four projects through sale-leaseback transactions.
As of July 31, 2020, total financing obligations related to project assets under sale lease-back transactions was $49.3 million. Future required payments totaled $21.2 million as of July 31, 2020. The outstanding financing obligation under the sale-leaseback transactions includes an embedded gain, which will be recognized at the end of each respective lease term.
Our operating portfolio provides us with the full benefit of future cash flows, net of any debt service requirements.
The following table summarizes our operating portfolio as of July 31, 2020:
|
Project Name |
|
Location |
|
Power Off-Taker |
|
Rated Capacity (MW) |
|
|
Actual Commercial Operation Date (FuelCell Energy Fiscal Quarter) |
|
PPA Term (Years) |
|
|
Central CT State University (“CCSU”) |
|
New Britain, CT |
|
CCSU (CT University) |
|
1.4 |
|
|
Q2 ‘12 |
|
10 |
|
|
UCI Medical Center (“UCI”) |
|
Orange, CA |
|
UCI (CA University Hospital) |
|
1.4 |
|
|
Q1 '16 |
|
19 |
|
|
Riverside Regional Water Quality Control Plant |
|
Riverside, CA |
|
City of Riverside (CA Municipality) |
|
1.4 |
|
|
Q4 '16 |
|
20 |
|
|
Pfizer, Inc. |
|
Groton, CT |
|
Pfizer, Inc. |
|
5.6 |
|
|
Q4 '16 |
|
20 |
|
|
Santa Rita Jail |
|
Dublin, CA |
|
Alameda County, California |
|
1.4 |
|
|
Q1 '17 |
|
20 |
|
|
Bridgeport Fuel Cell Project |
|
Bridgeport, CT |
|
Connecticut Light and Power Company (CT Utility) |
|
14.9 |
|
|
Q1 '13 |
|
15 |
|
|
Tulare BioMAT |
|
Tulare, CA |
|
Southern California Edison (CA Utility) |
|
|
2.8 |
|
|
Q1 '20 |
|
20 |
|
Triangle St |
|
Danbury, CT |
|
Tariff - Eversource (CT Utility) |
|
|
3.7 |
|
|
Q2 '20 |
|
Tariff |
|
|
|
|
|
Total MW Operating: |
|
32.6 |
|
|
|
|
|
|
46
The following table summarizes projects in process, all of which are in backlog, as of July 31, 2020:
|
Project Name |
|
Location |
|
Power Off-Taker |
|
Rated Capacity (MW) |
|
|
PPA Term (Years) |
|
|
Groton Sub Base |
|
Groton, CT |
|
CMEEC (CT Electric Co-op) |
|
|
7.4 |
|
|
20 |
|
Toyota |
|
Los Angeles, CA |
|
Southern California Edison; Toyota |
|
|
2.2 |
|
|
20 |
|
San Bernardino |
|
San Bernardino, CA |
|
City of San Bernardino Municipal Water Department |
|
|
1.4 |
|
|
20 |
|
LIPA 1 |
|
Long Island, NY |
|
PSEG / LIPA, LI NY (Utility) |
|
|
7.4 |
|
|
20 |
|
CT RFP-1 |
|
Hartford, CT |
|
Eversource/United Illuminating (CT Utilities) |
|
|
7.4 |
|
|
20 |
|
CT RFP-2 |
|
Derby, CT |
|
Eversource/United Illuminating (CT Utilities) |
|
|
14.8 |
|
|
20 |
|
|
|
|
|
Total MW in Process: |
|
|
40.6 |
|
|
|
The projects listed in the above table are in various stages of development or on-site construction and installation. In the third fiscal quarter of 2020, the Company completed the majority of its scope of work on the project at the U.S. Navy Base in Groton, Connecticut and is awaiting third-party study and third-party work to be completed prior to commissioning and commercial operation. Additionally, site civil work has been substantially completed for the project at the San Bernardino, California wastewater treatment facility.
Backlog by revenue category is as follows:
|
|
• |
Services and license backlog totaled $176.0 million as of July 31, 2020, compared to $192.6 million as of July 31, 2019. Services backlog includes future contracted revenue from routine maintenance and scheduled module exchanges for power plants under service agreements. |
|
|
• |
Generation backlog totaled $1.1 billion as of July 31, 2020, compared to $1.2 billion as of July 31, 2019. Generation backlog represents future contracted energy sales under contracted PPAs or approved utility tariffs. |
|
|
• |
There was no product sales backlog as of July 31, 2020, compared to $1,000 as of July 31, 2019. |
|
|
• |
Advanced Technologies contract backlog totaled $51.9 million as of July 31, 2020, compared to $27.2 million as of July 31, 2019. Advanced Technologies contract backlog represents remaining revenue under the Joint Development Agreement with EMRE and government funded projects. |
Backlog represents definitive agreements executed by the Company and our customers. Projects for which we have a PPA are included in generation backlog, which represents future revenue under long-term PPAs. Projects sold to customers (and not retained by the Company) are included in product sales and service backlog and the related generation backlog is removed upon sale.
Factors that may impact our liquidity in fiscal year 2020 and beyond include:
|
|
• |
The Company’s cash on hand and access to additional liquidity. The Company’s cash, cash equivalents and restricted cash consist of (a) restricted cash and cash equivalents, which consist of amounts pledged as performance security, reserved for future debt service requirements, reserved for letters of credit for certain banking requirements and contracts and reserved to pay down the Orion Facility which can be accessed or redeployed into other project financing at the option of and only with the approval of the lenders and the Agent under the Orion Facility or other lenders or third parties; (b) project cash and cash equivalents, which consist of amounts borrowed under the Orion Facility which can be used only by our consolidated wholly-owned project subsidiaries in the normal course of operations for project construction, purchase of equipment (including inventory from FuelCell Energy, Inc.) and working capital for projects approved under the Orion Facility in accordance with each project’s construction budget and schedule and which are classified as unrestricted cash on the Company’s consolidated balance sheets; and (c) unrestricted cash and cash equivalents, which can be used by the Company for general corporate purposes, including working capital at the corporate level. Unrestricted cash and cash equivalents, as presented on the Company’s consolidated balance sheets, consist of the amounts described in (b) and (c) above. As of July 31, 2020, unrestricted cash and cash equivalents totaled $66.3 million compared to $9.4 million as of October 31, 2019. Of this amount, project cash and cash equivalents funded under the Orion Facility totaled $16.2 million as of July 31, 2020 compared to $0 as of October 31, 2019. Excluding project cash and cash equivalents, unrestricted cash and cash equivalents totaled $50.1 million as of July 31, 2020 compared to $9.4 million as of October 31, 2019. |
|
|
• |
The Company’s liquidity position is also supported by the Fifth Orion Amendment. Pursuant to the terms of the Fifth Orion Amendment and the amended Orion Credit Agreement, the lenders have committed to make available the Secondary Facility Loans in an amount of up to $35 million between the execution date and September 14, 2020. Such Secondary Facility Loans may be used for general corporate purposes of the Company or the guarantors in accordance with either (i) the then-effective operating budget of the Company or the guarantors or (ii) the cash use forecast delivered by the Company to the Agent on June 6, 2020. Any draws under the Secondary Facility Loans must be repaid by September 1, 2021. As of September 10, 2020, the Company has not made any draws under the Secondary Facility Loans. Refer to Note 16. “Debt and Financing Obligations” for additional details regarding the Fifth Orion Amendment. The Company also intends to pursue other financing arrangements (equity or debt) to further enhance the Company’s liquidity. |
47
|
|
• |
Short-term restricted cash totaled $6.1 million as of July 31, 2020 compared to $3.5 million as of October 31, 2019. The restricted cash balance as of July 31, 2020 includes a $5.0 million debt reserve established in accordance with the First Orion Amendment (as defined below). The debt reserve will be released on the first date on which all of the following events have occurred (a) the Groton Project shall have achieved its business plan in accordance with the Groton Construction Budget (as defined in the Orion Credit Agreement), (b) the commercial operation date for the Groton Project shall have occurred, (c) the Groton Project shall have met its annualized output and heat rate guarantees for three months, and (d) a disposition, refinancing or tax equity investment of at least $30 million shall have occurred with respect to the Groton Project. |
|
|
• |
While the Company has access to the $200.0 million Orion Facility to finance construction of its generation portfolio, the timing, availability and allocation of any new draws beyond the $80.0 million which has been funded under the Orion Facility are at the discretion of the lenders, which may negatively impact the Company’s liquidity as well as its ability to complete various construction projects. In addition, in future periods, we expect to seek lower-cost long-term debt and tax equity (e.g., sale-leaseback and partnership transactions) for our project asset portfolio as these projects commence commercial operations. The proceeds of any such financing, if obtained, may allow the Company to fund other fuel cell projects (subject to the approval of the lenders and the Agent under the Orion Facility), and/or pay down the outstanding principal balance of the Orion Facility. There can be no assurance that the Company can obtain such financing on terms acceptable to the Company, or that the lenders and the Agent under the Orion Facility will consent to such financing. The Company may also seek to raise funds through the sale of equity securities, convertible notes, other equity-linked instruments and/or other debt instruments. If the Company is unable to obtain such financing or raise additional capital, it could have a material adverse effect on the Company’s financial condition and operations, and could require the Company to reduce its expenditures or slow its project spending. The lenders and the Agent under the Orion Facility have broad approval rights over the Company’s ability to raise additional capital, obtain other debt financing, and draw, allocate and use funds from the Orion Facility. If the Company is unable to obtain such approvals when the Company seeks to raise additional capital or use funds under the Orion Facility, it could have a material adverse effect on the Company’s financial condition and operations. |
|
|
• |
We bid on large projects in diverse markets that can have long decision cycles and uncertain outcomes. We manage production rate based on expected demand and projects schedules. Changes to production rate take time to implement. In conjunction with and following the reorganization and reduction in workforce in April 2019, we reduced our production rate to approximately 2 MW, which resulted in an annualized production rate through October 31, 2019 of 17 MW. The annualized production rate as of July 31, 2020 was 14 MW, which has been impacted by the manufacturing facility shutdown from March 18, 2020 to June 22, 2020 that was implemented in response to the COVID-19 pandemic. The Company will evaluate future increases in production rate if and when warranted by business conditions, and after restarting production. |
|
|
• |
As project sizes and the number of projects evolves, project cycle times may increase. We may need to make significant up-front investments of resources in advance of the receipt of any cash from the financing or sale of our projects. These amounts include development costs, interconnection costs, posting of letters of credit, bonding or other forms of security, and incurring engineering, permitting, legal, and other expenses. |
|
|
• |
The amount of accounts receivable and unbilled receivables as of July 31, 2020 and October 31, 2019 was $21.4 million ($6.1 million of which is classified as “Other assets”) and $14.6 million ($3.6 million of which is classified as “Other assets”), respectively. Unbilled accounts receivable represents revenue that has been recognized in advance of billing the customer under the terms of the underlying contracts. Such costs have been funded with working capital and the unbilled amounts are expected to be billed and collected from customers once we meet the billing criteria under the contracts. Our accounts receivable balances may fluctuate as of any balance sheet date depending on the timing of individual contract milestones and progress on completion of our projects. |
|
|
• |
The amount of total inventory as of July 31, 2020 and October 31, 2019 was $60.5 million ($9.0 million is classified as long-term inventory) and $56.7 million ($2.2 million is classified as long-term inventory), respectively, which includes work in process inventory totaling $36.7 million and $31.2 million, respectively. Work in process inventory can generally be deployed rapidly while the balance of our inventory requires further manufacturing prior to deployment. To execute on our business plan, we must produce fuel cell modules and procure balance of plant (“BOP”) components in required volumes to support our planned construction schedules and potential customer contractual requirements. As a result, we may manufacture modules or acquire BOP components in advance of receiving payment for such activities. This may result in fluctuations in inventory and in use of cash as of any given balance sheet date. |
|
|
• |
The amount of total project assets as of July 31, 2020 and October 31, 2019 was $160.9 million and $144.1 million, respectively. Project assets consist of capitalized costs for fuel cell projects that are operating and producing revenue or are under construction. Project assets as of July 31, 2020 consisted of $74.8 million of completed, operating installations and $86.1 million of projects in development. As of July 31, 2020, we had 32.6 MW of operating project assets that generated $14.8 million of revenue in the nine months ended July 31, 2020. Also, as of July 31, 2020, the Company had an additional 40.6 MW of projects under development and construction, some of which are expected to generate operating cash flows in fiscal year 2020. |
|
|
• |
Under the terms of certain contracts, the Company will provide performance security for future contractual obligations. As of July 31, 2020, we had pledged approximately $41.0 million of our cash and cash equivalents as collateral for performance security and for letters of credit for certain banking requirements and contracts. This balance may increase with a growing backlog and installed fleet. |
|
|
• |
For fiscal year 2020, we forecast capital expenditures to be less than $1.0 million compared to capital expenditures of $2.2 million in fiscal year 2019. |
48
As the Company builds project assets and makes capital expenditures, depreciation and amortization expenses are expected to increase. For the three months ended July 31, 2020 and 2019, depreciation and amortization totaled $4.7 million and $3.9 million, respectively (of these totals, approximately $3.1 million and $2.7 million, for the three months ended July 31, 2020 and 2019, respectively, relate to depreciation of project assets in our generation portfolio). For the nine months ended July 31, 2020 and 2019, depreciation and amortization totaled $13.8 million and $8.3 million respectively (of these totals, approximately $8.6 million and $4.7 million for the nine months ended July 31, 2020 and 2019, respectively, relate to depreciation of project assets in our generation portfolio).
Cash Flows
Cash and cash equivalents and restricted cash and cash equivalents totaled $107.3 million as of July 31, 2020 compared to $39.8 million as of October 31, 2019. As of July 31, 2020, restricted cash and cash equivalents was $41.0 million, of which $6.1 million was classified as current and $34.9 million was classified as non-current, compared to $30.3 million in restricted cash and cash equivalents as of October 31, 2019, of which $3.5 million was classified as current and $26.9 million was classified as non-current.
The following table summarizes our consolidated cash flows:
|
|
|
Nine Months Ended July 31, |
|
|||||
|
(dollars in thousands) |
|
2020 |
|
|
2019 |
|
||
|
Consolidated Cash Flow Data: |
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
$ |
(24,577 |
) |
|
$ |
(18,307 |
) |
|
Net cash used in investing activities |
|
|
(24,264 |
) |
|
|
(59,273 |
) |
|
Net cash provided by financing activities |
|
|
116,573 |
|
|
|
43,168 |
|
|
Effects on cash from changes in foreign currency rates |
|
|
(230 |
) |
|
|
(28 |
) |
|
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
$ |
67,502 |
|
|
$ |
(34,440 |
) |
The key components of our cash inflows and outflows were as follows:
Operating Activities – Net cash used in operating activities was $24.6 million during the nine months ended July 31, 2020, compared to $18.3 million of net cash used in operating activities during the nine months ended July 31, 2019.
Net cash used in operating activities for the nine months ended July 31, 2020 was primarily a result of the net loss of $70.3 million, increases in accounts receivable of $4.1 million, inventory of $2.7 million, unbilled receivables of $2.7 million and other assets of $1.7 million, and decreases in accounts payable of $7.1 million, offset by an increase in accrued liabilities of $4.5 million, deferred revenue of $1.0 million and net non-cash adjustments of $59.2 million, including a $39.3 million charge related to the change in fair value of common stock warrant liability.
Net cash used in operating activities for the nine months ended July 31, 2019 was primarily a result of the net loss of $42.4 million and increases in inventory of $8.4 million and unbilled receivables of $5.6 million, offset by increases in accounts payable of $9.4 million, deferred revenue of $3.7 million and a decrease in accounts receivable of $4.3 million and net non-cash adjustments of $19.5 million.
Investing Activities – Net cash used in investing activities was $24.3 million for the nine months ended July 31, 2020, compared to net cash used in investing activities of $59.3 million during the nine months ended July 31, 2019.
Net cash used in investing activities for the nine months ended July 31, 2020 included $23.5 million of project assets expenditures and a $0.6 million payment for a working capital adjustment for the acquisition of the Bridgeport Fuel Cell Project.
Net cash used in investing activities for the nine months ended July 31, 2019 included the purchase of all the outstanding membership interests in Bridgeport Fuel Cell, LLC (“BFC”) for $35.5 million, a $21.9 million investment in project assets to expand our operating portfolio and $1.9 million for capital expenditures.
Financing Activities – Net cash provided by financing activities was $116.6 million during the nine months ended July 31, 2020, compared to net cash provided by financing activities of $43.2 million during the nine months ended July 31, 2019.
Net cash provided by financing activities during the nine months ended July 31, 2020 resulted from the receipt of $65.5 million of debt proceeds from the Orion Facility, net of a loan discount of $1.6 million, $14.4 million of proceeds from the Crestmark sale-leaseback transaction, $6.5 million of debt proceeds from Liberty Bank under the PPP Note, $3.0 million of debt proceeds from Connecticut Green Bank, and $64.7 million of proceeds from common stock sales, net of fees, offset by debt repayments of $27.8 million, the payment of deferred financing costs of $2.7 million and the payment of preferred dividends and return of capital of $5.4 million.
Net cash provided by financing activities during the nine months ended July 31, 2019 resulted from the receipt of $55.1 million of debt proceeds, which included $26.7 million of loans from various lenders used for the purchase of all of the outstanding membership interests in BFC, $11.1 million of loans from Fifth Third Bank, $10.0 million of loans from Generate Lending, LLC, $5.8 million of loans from NRG Energy, Inc., $1.5 million of loans from Enhanced Capital Connecticut Fund V, LLC, and $15.4 million of proceeds from common stock sales, net of fees, offset by debt repayment of $23.0 million, the payment of deferred financing costs of $2.5 million and the payment of preferred dividends and return of capital of $1.8 million.
49
Sources and Uses of Cash and Investments
In order to consistently produce positive cash flow from operations, we need to increase order flow to support higher production levels, leading to lower costs on a per unit basis. We also continue to invest in new product and market development and, as a result, we are not generating positive cash flow from our operations. Our operations are funded primarily through cash generated from product sales, service contracts, generation assets and Advanced Technologies contracts, as well as sales of equity and equity linked securities, issuances of corporate and project level debt, and monetization of technology through licenses. During fiscal year 2019, we implemented a series of restructuring activities aimed at reducing operating costs and streamlining operations while targeting cash generation and long-term financial stability.
Commitments and Significant Contractual Obligations
A summary of our significant commitments and contractual obligations as of July 31, 2020 and the related payments by fiscal year are as follows:
|
|
|
Payments Due by Period |
|
|||||||||||||||||
|
(dollars in thousands) |
|
Total |
|
|
Less than 1 Year |
|
|
1 – 3 Years |
|
|
3 – 5 Years |
|
|
More than 5 Years |
|
|||||
|
Purchase commitments (1) |
|
$ |
28,836 |
|
|
$ |
25,812 |
|
|
$ |
3,024 |
|
|
$ |
- |
|
|
$ |
— |
|
|
Series 1 Preferred obligation (2) |
|
|
23,754 |
|
|
|
932 |
|
|
|
22,822 |
|
|
|
— |
|
|
|
— |
|
|
Term and Construction loans (principal and interest) |
|
|
172,946 |
|
|
|
26,575 |
|
|
|
57,794 |
|
|
|
47,672 |
|
|
|
40,905 |
|
|
Capital and operating lease commitments (3) |
|
|
20,307 |
|
|
|
1,371 |
|
|
|
2,658 |
|
|
|
1,469 |
|
|
|
14,809 |
|
|
Sale-leaseback financing obligation (4) |
|
|
21,186 |
|
|
|
3,969 |
|
|
|
5,679 |
|
|
|
5,426 |
|
|
|
6,112 |
|
|
Natural gas supply contract (5) |
|
|
13,782 |
|
|
|
— |
|
|
|
2,953 |
|
|
|
3,938 |
|
|
|
6,891 |
|
|
Option fee (6) |
|
|
150 |
|
|
|
150 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Series B Preferred dividends payable (7) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Totals |
|
$ |
280,961 |
|
|
$ |
58,809 |
|
|
$ |
94,930 |
|
|
$ |
58,505 |
|
|
$ |
68,717 |
|
|
(1) |
Purchase commitments with suppliers for materials, supplies and services incurred in the normal course of business. |
|
(2) |
On January 20, 2020, the Company, FCE FuelCell Energy, Ltd. (“FCE Ltd.”) and Enbridge Inc. (“Enbridge”) entered into a letter agreement, which is referred to herein as the “January 2020 Letter Agreement,” pursuant to which they agreed to amend the articles of FCE Ltd. relating to and setting forth the terms of the Class A Preferred Stock of FCE Ltd. (the “Series 1 Preferred Shares”) to modify certain terms of the Series 1 Preferred Shares. Under the terms of the January 2020 Letter Agreement (as described in additional detail below), the Company is still required to make (i) annual dividend payments of Cdn. $500,000 and (ii) annual return of capital payments of Cdn. $750,000. Dividend and return of capital payments are to be made on a quarterly basis and are scheduled to end on December 31, 2021, unless these obligations are satisfied in advance of such date. After taking into account the amendments to the terms of the Series 1 Preferred Shares described in the January 2020 Letter Agreement, the aggregate amount of all accrued and unpaid dividends to be paid on the Series 1 Preferred Shares on December 31, 2021 is expected to be Cdn. $26.5 million and the balance of the principal redemption price to be paid on December 31, 2021 with respect to all of the Series 1 Preferred Shares is expected to be Cdn. $3.5 million. Refer to Note 13. “Redeemable Preferred Stock” for additional information regarding such letter agreement and such modified terms. |
|
(3) |
Future minimum lease payments on finance and operating leases. |
|
(4) |
The amount represents payments due on sale-leaseback transactions of our wholly-owned subsidiaries under their respective financing agreements with PNC and Crestmark. Lease payments for each lease under these facilities are generally payable in fixed quarterly installments over a ten-year period. |
|
(5) |
During the three months ended April 30, 2020, the Company entered into a 7-year natural gas contract with an estimated annual cost per year of $2.0 million beginning on November 1, 2021. This gas contract is for the Company’s Yaphank project and the costs will be offset by generation revenues on the project. |
|
(6) |
The Company entered into an agreement with a customer on June 29, 2016 that includes a fee for the purchase of the plants at the end of the term of the agreement. The fee is payable in installments over the term of the agreement. |
|
(7) |
We pay $3.2 million, if and when declared, in annual dividends on our Series B Preferred Stock. The $3.2 million annual dividend payment, if dividends are declared, has not been included in this table as we cannot reasonably determine when or if we will be able to convert the Series B Preferred Stock into shares of our common stock. We may, at our option, convert these shares into the number of shares of our common stock that are issuable at the then prevailing conversion rate if the closing price of our common stock exceeds 150% of the then prevailing conversion price ($1,692 per share at July 31, 2020) for 20 trading days during any consecutive 30 trading day period. |
Term and Construction Loans
Orion Energy Partners Investment Agent, LLC Credit Agreement: On October 31, 2019, the Company and certain of its affiliates as guarantors entered into a Credit Agreement (as amended from time to time, the “Orion Credit Agreement”) with Orion Energy Partners Investment Agent, LLC, as Administrative Agent and Collateral Agent (the “Agent”), and certain lenders affiliated with the Agent for a $200.0 million senior secured credit facility (the “Orion Facility”), structured as a delayed draw term loan to be provided by the lenders primarily to fund certain of the Company’s construction and related costs for fuel cell projects which meet the requirements of the Orion Facility. Under the Orion Credit Agreement, each lender will fund its commitments on each funding date in an amount equal to the principal amount of the loans to be funded by such lender on such date, less 2.50% of the aggregate principal amount of the loans funded by such lender on such date (the “Loan Discount).
50
On October 31, 2019, the Company drew down $14.5 million (the “Initial Funding”) and received $14.1 million after taking into account a Loan Discount of $0.4 million.
On November 22, 2019, a second draw (the “Second Funding”) of $65.5 million, funded by Orion Energy Credit Opportunities Fund II, L.P., Orion Energy Credit Opportunities Fund II GPFA, L.P., Orion Energy Credit Opportunities Fund II PV, L.P., and Orion Energy Credit Opportunities FuelCell Co-Invest, L.P. (the “Orion Lenders”), was made to fully repay certain outstanding third party debt of the Company, including the outstanding construction loan from Fifth Third Bank with respect to the Groton Project and the outstanding loan from Webster Bank, National Association (“Webster Bank”) with respect to the CCSU Project, as well as to fund remaining going forward construction costs and anticipated capital expenditures relating to the Groton Project (a 7.4 MW project), the LIPA Yaphank Solid Waste Management Project (a 7.4 MW project), and the Tulare BioMAT Project (a 2.8 MW project). The Company received $63.9 million in the Second Funding after taking into account a Loan Discount of $1.6 million as described above. Also in conjunction with the Second Funding, the Company issued to the Orion Lenders warrants, which are referred to herein as the “Second Funding Warrants,” to purchase up to a total of 14.0 million shares of the Company’s common stock, with an initial exercise price with respect to 8.0 million of such shares of $0.242 per share and with an initial exercise price with respect to 6.0 million of such shares of $0.620 per share.
The Company may draw the remainder of the Orion Facility, up to $120.0 million, over the first 18 months following the Initial Funding and subject to the Agent’s approval to fund project-related expenses consisting of: (i) construction costs, inventory and other capital expenditures of additional fuel cell projects with contracted cash flows (under PPAs with creditworthy counterparties) that meet or exceed a mutually agreed coverage ratio; and (ii) inventory, working capital, and other costs that may be required to be delivered by the Company on purchase orders, service agreements, or other binding customer agreements with creditworthy counterparties. Except as may be approved by the Agent and the Orion Lenders (and except as provided in the Fifth Orion Amendment), the Company cannot use the Orion Facility to fund its working capital or other expenses at the corporate level. The Orion Lenders and the Agent have broad approval rights over the Company’s ability to raise additional capital, obtain other debt financing, and draw, allocate and use funds from the Orion Facility.
Under the Orion Credit Agreement, cash interest of 9.9% per annum is paid quarterly. In addition to the cash interest, payment-in-kind interest of 2.05% per annum accrues which will be added to the outstanding principal balance of the Orion Facility but is paid quarterly in cash to the extent of available cash after payment of the Company’s operating expenses and the funding of certain reserves for the payment of outstanding indebtedness to the State of Connecticut and Connecticut Green Bank. The Orion Credit Agreement contains numerous representations, warranties and covenants.
Outstanding principal under the Orion Facility will be amortized on a straight-line basis over a seven year term in quarterly payments beginning one year after the Initial Funding, with the initial payment due 21 business days after the end of the first quarter of fiscal 2021; provided that, if the Company does not have sufficient cash on hand to make any required quarterly amortization payments, such amounts shall be deferred and payable at such time as sufficient cash is available to make such payments subject to all outstanding principal being due and payable on the maturity date, which is the date that is eight years after the date of the Initial Funding or October 31, 2027.
The issuance of the warrants issued in connection with the Initial Funding to purchase up to a total of 6.0 million shares of the Company’s common stock (which are referred to herein as the “Initial Funding Warrants”) and recognition of the Second Funding Warrants resulted in $3.9 million being recorded as a liability as of October 31, 2019 with the offset recorded as a debt discount. Refer to Note 12. “Stockholders’ Equity and Warrant Liabilities” for additional information regarding the Initial Funding Warrants and Second Funding Warrants, including the accounting, terms and conversions during the quarter ended January 31, 2020.
In conjunction with the Second Funding, the Company and the other loan parties entered into the First Amendment to the Orion Credit Agreement (the “First Orion Amendment”), which required the Company to establish a $5.0 million debt reserve, with such reserve to be released on the first date following the date of the Second Funding on which all of the following events shall have occurred: (a) each of (x) the commercial operation date for the Tulare BioMAT project shall have occurred and (y) a disposition, refinancing or tax equity investment in the Tulare BioMAT project of at least $5.0 million is consummated (both conditions (x) and (y) have been satisfied); (b) each of (x) the Groton Project shall have achieved its business plan in accordance with the Groton Construction Budget (as defined in the Orion Credit Agreement), (y) the commercial operation date for the Groton Project shall have occurred and (z) the Groton Project shall have met its annualized output and heat rate guarantees for three months; and (c) a disposition, refinancing or tax equity investment of at least $30 million shall have occurred with respect to the Groton Project. The First Orion Amendment further required the Company (i) to provide, no later than December 31, 2019, a biogas sale and purchase agreement through December 31, 2021 for the Tulare BioMAT project, which was obtained as of such date, (ii) to obtain by December 31, 2019, a fully executed contract for certain renewable energy credits for the Groton Project, which was obtained as of such date, and (iii) to provide by January 31, 2020, certain consents and estoppels from the Connecticut Municipal Electric Energy Cooperative (“CMEEC”) related to the Groton Project and an executed, seventh modification to the lease between CMEEC and the United States Government, acting by and through the Department of the Navy, both of which were obtained as of such date.
In addition, in connection with the Letter Agreement, dated January 20, 2020, among the Company, FCE Ltd. and Enbridge (the “January 2020 Letter Agreement”), pursuant to which such parties agreed to amend the articles of FCE Ltd. setting forth the terms of the Series 1 Preferred Shares, on January 20, 2020, in order to obtain the Orion Lenders’ consent to the January 2020 Letter Agreement as required under the Orion Credit Agreement, the Company, the Agent, the Orion Lenders, and the other loan parties entered into the Second Amendment to the Orion Credit Agreement (the “Second Orion Amendment”), which added a new affirmative covenant to the Orion Credit Agreement that obligates the Company to, and to cause FCE Ltd. to, on or prior to November 1, 2021, either (i) pay and satisfy in full all of their respective obligations in respect of, and fully redeem and cancel, all of the Series 1 Preferred Shares of FCE Ltd., or (ii) deposit in a newly created account of FCE Ltd. or the Company cash in an amount sufficient to pay and satisfy in full all of their respective obligations in respect of, and to effect a redemption and cancellation in full of, all of the Series 1 Preferred Shares of FCE Ltd. The Second Orion Amendment also provides that the amended articles of FCE Ltd. setting forth the modified terms of the Series 1 Preferred Shares will be considered a “Material Agreement” under the Orion Credit Agreement. Under the Second Orion Amendment, a failure to satisfy this new affirmative covenant or to otherwise comply with the terms of the Series 1 Preferred Shares will constitute an event of default under the Orion Credit Agreement, which could result in the acceleration of any amounts outstanding under the Orion Credit Agreement.
51
Additionally, in order to obtain the Orion Lenders’ consent to the Crestmark sale-leaseback transaction described in Note 11. “Leases” to our consolidated financial statements and to the use of certain proceeds from the Crestmark sale-leaseback transaction (the “Crestmark Proceeds”) as described below, the Company, the Agent, the Orion Lenders and the other loan parties entered into the Third Amendment to the Orion Credit Agreement (the “Third Orion Amendment”) dated February 11, 2020, and a Consent and Waiver dated February 11, 2020 (the “Consent and Waiver”). Pursuant to the Third Orion Amendment, TRS Fuel Cell, LLC was added as an Additional Covered Project Company (as defined in the Orion Credit Agreement), requiring the Company to pledge all of the assets of TRS Fuel Cell, LLC under the Orion Credit Agreement. In addition, pursuant to the Orion Credit Agreement (as modified by the Third Orion Amendment), all of the proceeds received by the Company from the Crestmark sale-leaseback transaction, after a down payment and an initial rental payment under the Lease to Crestmark, the payment of taxes and transaction costs and funding a debt service reserve totaling approximately $1.0 million, were deposited in the Company’s Project Proceeds Account, which account is restricted, with withdrawals permitted only with consent of the Agent for use to (i) prepay the loans under the Orion Credit Agreement or (ii) fund (x) construction costs, inventory or other capital expenditures for an Additional Covered Project (as defined in the Orion Credit Agreement) whose contracted cash flows (as determined in the Orion Lenders’ sole discretion) meet or exceed a coverage ratio acceptable to the Orion Lenders, and (y) inventory, working capital and other costs required in connection with the performance of purchase orders, service agreements and other binding customer agreements (as determined in the Orion Lenders’ sole discretion); provided, however, that, pursuant to the Third Orion Amendment, certain portions of the funds deposited in the Project Proceeds Account were used as follows: (a) $1.1 million of the Crestmark Proceeds were transferred to the Module Reserve Account (as defined in the Orion Credit Agreement) to fund module replacement costs for Covered Projects (as defined in the Orion Credit Agreement); (b) $0.1 million of the Crestmark Proceeds were transferred to the Debt Reserve Account; (c) $1.7 million of the Crestmark Proceeds were used to fund the quarterly cash interest due to the Orion Lenders under the Orion Credit Agreement; and (d) $1.1 million of the Crestmark Proceeds were used to fund the aggregate amount of the dividends on the Company’s Series B Preferred Stock and the Series 1 Preferred Shares of FCE Ltd. required to be paid in the second quarter of fiscal 2020. As of July 31, 2020, the remaining approximately $6.5 million of the Crestmark Proceeds was long-term restricted cash in the Project Proceeds Account. As noted below, on April 30, 2020, the Company reached agreement with the Orion Lenders to allocate up to a total of $3.5 million of these funds to the San Bernardino project over time. Pursuant to the Consent and Wavier, subject to the terms and conditions described above in the Third Orion Amendment, the Orion Lenders consented to the release of liens on those assets that were the subject of the Crestmark sale-leaseback transaction and to the Company’s entering into the Guaranty (as defined elsewhere herein).
On April 30, 2020, the Company, the Agent, the Orion Lenders and the other loan parties entered into the Fourth Amendment to the Orion Credit Agreement (the “Fourth Orion Amendment”). Pursuant to the Fourth Orion Amendment, the Agent and the Orion Lenders agreed to permit the release of $3.5 million from the Project Proceeds Account (as defined in the Orion Credit Agreement) subject to the following terms and conditions. Pursuant to the Fourth Orion Amendment, the Company’s 1.4 MW biogas fueled project at the wastewater treatment plant in San Bernardino, California has been added as an Additional Covered Project (as defined in the Orion Credit Agreement), and the Company subsidiary developing such project, San Bernardino Fuel Cell, LLC, has been added as an Additional Covered Project Company (as defined in the Orion Credit Agreement) such that those covenants, terms and conditions in the Orion Credit Agreement that apply to Covered Projects and Covered Project Companies will now be applicable to the foregoing project and project company, including that the “Project Payoff Amount” (i.e., the amount required pursuant to the Orion Credit Agreement to be realized upon a subsequent sale or refinancing of a project) for the San Bernardino project will be $5 million. In May 2020, $2.3 million of the $3.5 million was released from the Project Proceeds Account, which account is restricted subject to the control of the Agent, and transferred to a General Business Unit Account (as defined in the Orion Credit Agreement), which account is unrestricted and available for general use by the Company. The remaining $1.2 million will be released from the Project Proceeds Account and transferred to a Covered Project Account (as defined in the Orion Credit Agreement) being established for the San Bernardino project for use in connection with the construction of the San Bernardino project upon satisfaction of the following conditions: (a) approval of a self-generation incentive program grant for the San Bernardino project in an amount equal to no less than $1.0 million; (b) approval of an interconnection agreement; (c) provision of a fuel affidavit approval by Southern California Gas Company; (d) issuance of an air permit for the anaerobic digester gas cleanup system; (e) provision of an executed consent to collateral assignment by The City of San Bernardino Municipal Water District; (f) recordation in the land records of San Bernardino County of a memorandum of site license; (g) after giving effect to the release and transfer of $1.2 million to the Covered Project Account, evidence that there will be sufficient cash in the Covered Project Account for the San Bernardino project to cover remaining expenditures and complete the project and (h) written approval of the Agent.
On June 8, 2020, the Company, certain of its affiliates as guarantors, the Agent and the Orion Lenders entered into the Fifth Orion Amendment. Pursuant to the terms of the Fifth Orion Amendment, the Orion Lenders agreed to make a commitment to make certain loans to the Company in an aggregate principal amount of up to $35 million (which are referred to herein as the “Secondary Facility Loans”), and the Company, the guarantors, the Agent and the Orion Lenders agreed to amend the Orion Credit Agreement to facilitate the provision of such Secondary Facility Loans.
Pursuant to the Orion Credit Agreement, as amended by the Fifth Orion Amendment, the Orion Lenders have committed to make Secondary Facility Loans up to an aggregate amount of $35 million available to the Company for general corporate purposes of the Company or the guarantors in accordance with either (i) the then-effective Operating Budget (as defined in the Orion Credit Agreement) of the Company or the guarantors or (ii) the cash use forecast delivered by the Company to the Agent on June 6, 2020. The Secondary Facility Loan commitment allows the Company to draw on the Secondary Facility Loans commencing on June 5, 2020 (the “Commencement Date”) and terminating on September 14, 2020 (the “Termination Date”). The Company may make draws on the Secondary Facility Loans in amounts of no less than $5 million, and no more than $15 million may be drawn in any 30-day period, provided that the Company may draw any remaining available funds under the Secondary Facility Loans between August 15, 2020 and the Termination Date. Any drawn amounts must be fully repaid on or before September 1, 2021 (the “Secondary Facility Repayment Date”). The amended Orion Credit Agreement contains representations and warranties, affirmative and negative covenants and events of default, including failure to make payments when due and termination of or default under certain material agreements as specified in the Orion Credit Agreement, that entitle the Agent and the Orion Lenders to cause the Company’s indebtedness under the amended Orion Credit Agreement to become immediately due and payable.
52
In exchange for the Secondary Facility Loan commitment, the Company will pay to the Orion Lenders an option premium of $1 million on the earlier of the Termination Date and the date of full repayment of all amounts drawn on the Secondary Facility Loans. Such option premium is fully earned on the Commencement Date and non-refundable and non-creditable thereafter, and is due and payable whether or not any draw is ever made under the Secondary Facility Loan commitment. Additionally, for each draw made on the Secondary Facility Loans, the Company must pay to the Orion Lenders an initial draw discount of 5% of the amount drawn. In the event that full repayment of all amounts drawn under the Secondary Facility Loans has not occurred within 6 months of the date of the initial draw, the Company must pay to the Orion Lenders an additional draw discount in the amount of 10% of any amount outstanding under the Secondary Facility Loans as of such date. In the event that full repayment has not occurred within 9 months of the date of the initial draw under the Secondary Facility Loans, the Company must pay to the Orion Lenders an additional draw discount in the amount of 20% of any amount outstanding under the Secondary Facility Loans as of such date. All of such draw discounts will be fully earned on the respective dates and non-refundable and non-creditable thereafter, and will be due on the earlier of the Secondary Facility Repayment Date and the date of full repayment of all amounts drawn under the Secondary Facility Loans.
In connection with the Secondary Facility Loan commitment, the Company is providing additional collateral to the Orion Lenders by a pledge of all of the Company’s intellectual property assets. All liens on the Company’s intellectual property will be released upon full repayment of all amounts drawn under the Secondary Facility Loans or upon termination of the Secondary Facility Loan commitment if no amounts are drawn.
Under the amended Orion Credit Agreement, cash interest of 9.9% per annum will be paid quarterly on all outstanding amounts under the Secondary Facility Loans. In addition to the cash interest, payment-in-kind interest of 2.05% per annum will accrue which will be added to the outstanding principal balance under the existing Orion Facility, but will be paid quarterly in cash to the extent of available cash after payment of the Company’s operating expenses and the funding of certain reserves for payment of outstanding indebtedness to the State of Connecticut and Connecticut Green Bank. Any drawn amounts on the Secondary Facility Loans may be prepaid at any time without penalty.
The Company is required to prepay any draws on the Secondary Facility Loans in the event that the Company (i) issues or incurs any indebtedness (other than Permitted Indebtedness (as defined in the Orion Credit Agreement)) (“Debt”) or (ii) issues or sells any capital stock or any option, warrant or other instrument, security or right that is convertible into or exercisable or exchangeable for capital stock (“Equity”), by applying 100% of the net proceeds of any such Debt issuance and 50% of the net proceeds of any such Equity issuance to pay down the outstanding amounts under the Secondary Facility Loans. As of September 10, 2020, the Company has not made any draws under the Secondary Facility Loans.
Connecticut Green Bank Loans: As of October 31, 2019, the Company had a long-term loan agreement with the Connecticut Green Bank, providing the Company with a loan of $1.8 million (the “Green Bank Loan Agreement”). On and effective as of December 19, 2019, the Company and Connecticut Green Bank entered into an amendment to the Green Bank Loan Agreement (the “Green Bank Amendment”). Upon the execution of the Green Bank Amendment on December 19, 2019, Connecticut Green Bank made an additional loan to the Company in the aggregate principal amount of $3.0 million (the “December 2019 Loan”), which is to be used (i) first, to pay closing fees related to the May 9, 2019 acquisition of the Bridgeport Fuel Cell Project and the Subordinated Credit Agreement (as defined below), other fees, and accrued interest from May 9, 2019, totaling $0.4 million (“Accrued Fees”), and (ii) thereafter, for general corporate purposes as determined by the Company, including, but not limited to, expenditures in connection with the project being constructed by Groton Station Fuel Cell, LLC (“Groton Fuel Cell”). Pursuant to the terms of the Green Bank Amendment, Connecticut Green Bank will have no further obligation to make loans under the Green Bank Loan Agreement and the Company will have no right to make additional draws under the Green Bank Loan Agreement.
The Green Bank Amendment provides that, until such time as the loan (which includes both the outstanding principal balance of the original loan under the Green Bank Loan Agreement and the outstanding principal amount of the December 2019 Loan) has been repaid in its entirety, interest on the outstanding balance of the loan shall accrue monthly in arrears from the date of the Green Bank Amendment at a rate of 5% per annum until May 8, 2019 and at a rate of 8% per annum thereafter, payable by the Company on a monthly basis in arrears. The Green Bank Amendment further provides that the payment by the Company of the Accrued Fees (as described above) includes any shortfall of interest due but unpaid by the Company through and including November 30, 2019. Interest payments made by the Company after the date of the Green Bank Amendment are to be applied first to interest that has accrued on the outstanding principal balance of the original loan under the Green Bank Loan Agreement and then to interest that has accrued on the December 2019 Loan. The Green Bank Amendment also modifies the repayment and mandatory prepayment terms and extends the maturity date set forth in the original Green Bank Loan Agreement. Under the Green Bank Amendment, to the extent that excess cash flow reserve funds under the BFC Credit Agreement (as defined below) are eligible for disbursement to Bridgeport Fuel Cell, LLC pursuant to Section 6.23(c) of the BFC Credit Agreement, such funds are to be paid to Connecticut Green Bank, to be applied first to repay the outstanding principal balance of the original loan under the Green Bank Loan Agreement and thereafter to repay the outstanding principal amount of the December 2019 Loan, until repaid in full. The Green Bank Amendment further provides that the entire unpaid balance of the loan and all other obligations due under the Green Bank Loan Agreement will be due and payable on May 9, 2026 if not paid sooner in accordance with the Green Bank Loan Agreement. Finally, with respect to mandatory prepayments, the Green Bank Amendment provides that, when the Company has closed on the subordinated project term loan pursuant to the Commitment Letter, dated February 6, 2019, issued by Connecticut Green Bank to Groton Fuel Cell to provide a subordinated project term loan to Groton Fuel Cell in the amount of $5.0 million, the Company will be required to prepay to Connecticut Green Bank the lesser of any then outstanding amount of the December 2019 Loan and the amount of the subordinated project term loan actually advanced by Connecticut Green Bank. The balance under the original Green Bank Loan Agreement and the December 2019 Loan as of July 31, 2020 was $4.8 million.
Bridgeport Fuel Cell Project Loans: On May 9, 2019, in connection with the closing of the purchase of the membership interests of Bridgeport Fuel Cell, LLC (“BFC”) (and the 14.9 MW Bridgeport Fuel Cell Project), 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”). This $6.0 million consisted of $1.8 million in incremental funding that was received by BFC and $4.2 million of funding previously received by FuelCell Energy, Inc. with respect to which BFC became the primary obligor. 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),
53
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 representations, warranties and covenants. The balance under the Subordinated Credit Agreement as of July 31, 2020 was $5.2 million.
On May 9, 2019, in connection with the closing of the purchase of the Bridgeport Fuel Cell Project, BFC entered into a Credit Agreement with Liberty Bank, as administrative agent and co-lead arranger, and Fifth Third Bank as co-lead arranger and swap hedger (the “BFC Credit Agreement”), whereby (i) Fifth Third Bank provided financing in the amount of $12.5 million towards the purchase price for the BFC acquisition; and (ii) Liberty Bank provided financing in the amount of $12.5 million towards the purchase price for the BFC acquisition. As security for the BFC Credit Agreement, Liberty Bank and Fifth Third Bank 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 (a wholly-owned subsidiary of the Company and the direct parent of BFC) ownership interest in BFC. The maturity date under the BFC Credit Agreement is May 9, 2025. Monthly principal and interest are to be paid in arrears in an amount sufficient to fully amortize the term loan over a 72-month period. BFC has the right to make additional principal payments or pay the balance due under the BFC Credit Agreement in full, provided that it pays any associated breakage fees with regard to the interest rate swap agreements fixing the interest rate. The interest rate under the BFC Credit Agreement fluctuates monthly at the 30-day LIBOR rate plus 275 basis points on an initial total notional value of $25.0 million, reduced for principal payments.
An interest rate swap agreement was required to be entered into with Fifth Third Bank in connection with the BFC Credit Agreement to protect against movements in the floating LIBOR index. Accordingly, on May 16, 2019, an interest rate swap agreement (the “Swap Agreement”) was entered into with Fifth Third Bank 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 results in a fixed rate of 5.09%. The interest rate swap will be adjusted to fair value on a quarterly basis. The estimated fair value is based on Level 2 inputs including primarily the forward LIBOR curve available to swap dealers. The valuation methodology involves comparison of (i) the sum of the present value of all monthly variable rate payments based on a reset rate using the forward LIBOR curve and (ii) the sum of the present value of all monthly fixed rate payments on the notional amount, which is equivalent to the outstanding principal amount of the loan. The fair value adjustments for the three and nine months ended July 31, 2020 resulted in a $0.04 million gain and a $0.5 million charge, respectively. The fair value of the interest rate swap liability at July 31, 2020 and October 31, 2019 was $1.1 million and $0.6 million, respectively.
State of Connecticut Loan: In October 2015, the Company closed on a definitive Assistance Agreement with the State of Connecticut (the “Assistance Agreement”) 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%, and the loan is repayable over 15 years from the date of the first advance, which occurred in October of 2015. Principal payments were deferred for four years from disbursement and began on December 1, 2019. Under the Assistance Agreement, the Company was eligible for up to $5.0 million in loan forgiveness 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.
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 continuously 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. However, based on the Company’s current headcount and plans for fiscal year 2020 and beyond, it will not meet this requirement or receive this credit. 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 90 days of the Target Date. If the Company does not meet the Employment Obligation, then an accelerated payment penalty will be assessed at a rate of $18,587.36 multiplied by the number of employees below the number of employees required by the Employment Obligation. Such penalty is immediately payable and will be applied first to accelerate the payment of any outstanding fees or interest due and then to accelerate the payment of outstanding principal.
In April of 2020, as a result of the COVID-19 pandemic, the State of Connecticut agreed to defer three months of principal and interest payments under the Assistance Agreement, beginning with the May 2020 payment. These deferred payments will be added at the end of the loan, thus extending out the maturity date by three months.
Liberty Bank Promissory Note: On April 20, 2020, the Company entered into the PPP Note, dated April 16, 2020, evidencing a loan to the Company from Liberty Bank, under the CARES Act, administered by the SBA. Pursuant to the PPP Note, the Company received total proceeds of approximately $6.5 million on April 24, 2020. In accordance with the requirements of the CARES Act, as amended by the PPP Flexibility Act, the Company is using the proceeds primarily for payroll costs.
The PPP Note is scheduled to mature on April 16, 2022, has a 1.00% per annum interest rate, and is subject to the terms and conditions applicable to loans administered by the SBA under the CARES Act, as amended by the PPP Flexibility Act. Monthly principal and interest payments, less the amount of any potential forgiveness (as discussed below), will commence on November 16, 2020. The Company did not provide any collateral or guarantees for the PPP Note, nor did the Company pay any facility charge to obtain the PPP Note. The PPP Note provides for events of default, including, among others, those relating to failure to make a payment when due under the PPP Note, failure to comply with any provision of the PPP Note, bankruptcy, and breaches of or materially misleading representations. Upon the occurrence of an event of default, Liberty Bank may require immediate payment of
54
all amounts owing under the PPP Note, collect all amounts owing from the Company, and pursue other remedies. The PPP Note may be prepaid at any time with no prepayment penalties.
Under the requirements of the CARES Act, as amended by the PPP Flexibility Act, proceeds may only be used for the Company’s eligible payroll costs (with salary capped at $100,000 on an annualized basis for each employee), rent, mortgage interest and utilities, in each case paid during the 24-week period following disbursement. In accordance with the requirements of the CARES Act, as amended by the PPP Flexibility Act, at least 60% of the proceeds used by the Company were used to pay eligible payroll costs. The loan may be fully forgiven if (i) proceeds are used to pay eligible payroll costs, rent, mortgage interest and utilities and (ii) full-time employee headcount and salaries are either maintained during the 24-week period following disbursement or restored by December 31, 2020. If not so maintained or restored, forgiveness of the loan will be reduced in accordance with the regulations to be issued by the SBA. Any forgiveness of the loan will be subject to approval by the SBA and Liberty Bank and will require the Company to apply for such treatment in the future. In order to obtain the consent of the Agent and the Orion Lenders under the Orion Facility to enter into the PPP Note, the Agent and the Orion Lenders have required the Company to apply for forgiveness within 30 days after the last day of the loan forgiveness period as designated under the PPP regulations in effect as of June 6, 2020.
While we may apply for forgiveness of the PPP Note in accordance with the requirements and limitations under the CARES Act, as amended by the PPP Flexibility Act, and the SBA regulations and requirements, no assurance can be given that any portion of the PPP Note will be forgiven. Based on guidance from the United States Department of the Treasury, since the total PPP Note proceeds exceeded $2.0 million, our forgiveness application will be subject to audit by the SBA.
In addition to the commitments listed in the table under the heading “Commitments and Significant Contractual Obligations,” we have the following outstanding obligations:
Restricted Cash
We have pledged approximately $41.0 million of our cash and cash equivalents as performance security and for letters of credit for certain banking requirements and contracts. As of July 31, 2020, outstanding letters of credit totaled $6.9 million. These expire on various dates through August 2028. Under the terms of certain contracts, we will provide performance security for future contractual obligations. The restricted cash balance as of July 31, 2020 also included $15.0 million primarily to support obligations under the power purchase and service agreements related to the PNC sale-leaseback transactions and $7.0 million relating to future obligations associated with the Bridgeport Fuel Cell Project. Refer to Note 15. “Restricted Cash” for a detailed discussion of the Company’s restricted cash balance.
Uncertain tax positions
As of October 31, 2019, we had uncertain tax positions aggregating $15.7 million and have reduced our net operating loss (“NOL”) carryforwards by this amount. Because of the level of NOLs and valuation allowances, unrecognized tax benefits, even if not resolved in our favor, would not result in any cash payment or obligation and therefore have not been included in the contractual obligation table under the heading “Commitments and Significant Contractual Obligations.”
Power purchase agreements
Under the terms of our PPAs, customers agree to purchase power from our 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. We are responsible for all operating costs necessary to maintain, monitor and repair our fuel cell power plants. Under certain agreements, we are also responsible for procuring fuel, generally natural gas or biogas, to run our fuel cell power plants. In addition, under certain agreements, we are required to produce minimum amounts of power under our PPAs and we have the right to terminate PPAs by giving written notice to the customer, subject to certain exit costs. As of July 31, 2020, our operating portfolio was 32.6 MW.
Service and warranty agreements
We warranty our products for a specific period of time against manufacturing or performance defects. Our standard U.S. warranty period is generally 15 months after shipment or 12 months after acceptance of the product. In addition to the standard product warranty, we have contracted with certain customers to provide services to ensure the power plants meet minimum operating levels for terms of up to 20 years. Pricing for service contracts is based upon estimates of future costs, which could be materially different from actual expenses. Refer to “Critical Accounting Policies and Estimates” for additional details.
Advanced Technologies contracts
We have contracted with various government agencies and certain companies from private industry to conduct research and development as either a prime contractor or sub-contractor under multi-year, cost-reimbursement and/or cost-share type contracts or cooperative agreements. Cost-share terms require that participating contractors share the total cost of the project based on an agreed upon ratio. In many cases, we are reimbursed only a portion of the costs incurred or to be incurred on the contract. While government research and development contracts may extend for many years, funding is often provided incrementally on a year-by-year basis if contract terms are met and Congress authorizes the funds. As of July 31, 2020, Advanced Technologies contracts backlog totaled $51.9 million, of which $41.7 million is funded and $10.2 million, which is related to government contracts, is unfunded. Should funding be terminated or delayed or if business initiatives change, we may choose to devote resources to other activities, including internally funded research and development. The funded backlog includes approximately $10.0 million of milestone payments that are contingent upon achieving technical milestones.
55
Off-Balance Sheet Arrangements
We have no off-balance sheet debt or similar obligations which are not classified as debt. We do not guarantee any third-party debt. See Note 17. “Commitments and Contingencies” to our consolidated financial statements for the nine months ended July 31, 2020 included in this Quarterly Report on Form 10-Q for further information.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. 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 intangible assets, impairment of long-lived assets (including project assets), lease liabilities and right-of-use (“ROU”) assets and contingencies. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.
Our critical accounting policies are those that are both most important to our financial condition and results of operations and require the most difficult, subjective or complex judgments on the part of management in their application, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a complete description of our critical accounting policies that affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements, refer to our Annual Report on Form 10-K for the year ended October 31, 2019 filed with the SEC.
Effective November 1, 2019, we adopted Accounting Standards Update 2016-02, “Leases” (“Topic 842”). See “Note 11. “Leases” included in our notes to consolidated financial statements for changes to our critical accounting policies as a result of adopting Topic 842. Other than changes to our accounting for leases as a result of adopting Topic 842, there have been no significant changes to the critical accounting policies disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended October 31, 2019.
ACCOUNTING GUIDANCE UPDATE
See Note 2. “Recent Accounting Pronouncements,” to our consolidated financial statements included in this Quarterly Report on Form 10-Q for a summary of recently adopted accounting guidance, as well as recent accounting guidance that is not yet effective.
|
Item 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Exposure
Cash is invested overnight with high credit quality financial institutions and therefore we are not exposed to market risk on our cash holdings from changing interest rates. Based on our overall interest rate exposure as of July 31, 2020, including all interest rate sensitive instruments, a change in interest rates of 1% would not have a material impact on our results of operations.
Foreign Currency Exchange Risk
As of July 31, 2020, approximately 1.0% of our total cash and cash equivalents were in currencies other than U.S. dollars (primarily the Euro, Canadian dollars and South Korean Won) and we have no plans of repatriation. We make purchases from certain vendors in currencies other than U.S. dollars. Although we have not experienced significant foreign exchange rate losses to date, we may in the future, especially to the extent that we do not engage in currency hedging activities. The economic impact of currency exchange rate movements on our operating results is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, may cause us to adjust our financing and operating strategies.
Derivative Fair Value Exposure Risk
Interest Rate Swap
On May 16, 2019, an interest rate swap agreement (the “Swap Agreement”) was entered into with Fifth Third Bank 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 results in a fixed rate of 5.09%. The interest rate swap will be adjusted to fair value on a quarterly basis. The estimated fair value is based on Level 2 inputs including primarily the forward LIBOR curve available to swap dealers. The valuation methodology involves comparison of (i) the sum of the present value of all monthly variable rate payments based on a reset rate using the forward LIBOR curve and (ii) the sum of the present value of all monthly fixed rate payments on the notional amount, which is equivalent to the outstanding principal amount of the loan. The fair value adjustments for the three and nine months ended July 31, 2020 resulted in a $0.04 million gain and a $0.5 million charge, respectively.
56
|
Item 4. |
CONTROLS AND PROCEDURES |
Evaluation of disclosure controls and procedures
The Company maintains disclosure controls and procedures, which are designed to provide reasonable assurance that information required to be disclosed in the Company’s periodic SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company’s principal executive officer and principal financial officer have concluded that, due to the material weakness described below, the Company’s disclosure controls and procedures were ineffective to provide reasonable assurance that information required to be disclosed in the Company’s periodic SEC reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Notwithstanding the material weakness described below, management has concluded that our consolidated financial statements included in this Form 10-Q for the quarter ended July 31, 2020 are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States of America for each of the periods presented and that they may be relied upon.
Previously identified material weakness in internal control over financial reporting
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
We previously disclosed in our Form 10-Qs for the quarters ended April 30, 2019, July 31, 2019, January 31, 2020 and April 30, 2020 that the Company did not have resources to sufficiently address asset impairments on a timely basis or the accounting considerations and disclosures related to the Company’s amended credit facilities. As a result, we concluded that there was a material weakness in internal control over financial reporting, as we did not maintain effective controls over the accounting for and disclosures in the consolidated financial statements related to asset impairments and credit facilities. As disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019, this control deficiency had not been remediated as of October 31, 2019 and the Company further identified that it did not have resources to sufficiently address certain other non-routine transactions and disclosures. This material weakness resulted in material misstatements that were corrected in the consolidated financial statements prior to issuance. This control deficiency has not been remediated as of July 31, 2020.
Remediation plan for material weakness
Subsequent to the evaluation made in connection with filing our Form 10-Q for the quarter ended April 30, 2019, our management, with the oversight of the Audit and Finance Committee of the Board of Directors, began the process of remediating the material weakness. Progress to date includes engagement of a third-party resource to help evaluate the accounting and disclosure for significant matters each quarter. In addition, under the oversight of the Audit and Finance Committee, management will continue to review and make necessary changes to the overall design of our internal control environment to improve the overall effectiveness of internal control over financial reporting.
We have made progress in accordance with our remediation plan and our goal is to remediate this material weakness in fiscal year 2020. However, the material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We are committed to continuing to improve our internal control processes and will continue to review, optimize and enhance our financial reporting controls and procedures, however, there can be no assurance that this will occur within 2020.
Changes in internal control over financial reporting
Beginning on November 1, 2019, we adopted ASC 842, Leases. As a result of the adoption of this standard, we implemented changes to our processes related to leasing and the related internal controls. These changes included the development of new policies based on the leasing standard and the implementation of a leasing software tool to track and account for our leases.
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter (ended July 31, 2020) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
57
PART II. OTHER INFORMATION
|
Item 1. |
LEGAL PROCEEDINGS |
SEC Proceedings
Between August 2005 and April 2017, we sold shares of our common stock pursuant to a series of “at-the-market” sales plans. The shares sold pursuant to these sales plans represented a portion of the shares registered by us pursuant to shelf registration statements we filed with the SEC during this time period. While we reported the number of shares we had sold, along with the net proceeds earned by us from those sales made during each fiscal quarter pursuant to the sales plans in our annual and quarterly reports on Forms 10-K and 10-Q, we omitted from the shelf registration statements certain information about the offerings, including the specific plan of distribution and the nature and terms of compensation or other agreements with any underwriters, dealers, or agents, and for some offerings, also omitted the specific type and quantity of securities offered; and we did not file or deliver prospectus supplements at the time of or prior to making these sales or otherwise timely disclose the information that had been omitted from the shelf registration statements, as is required by SEC regulations.
In 2018, we reported to the SEC Staff these sales and our failure to file or deliver prospectus supplements, and in response to our report, the SEC Staff opened an informal investigation of these sales. Following our self-report and the investigation by the SEC Staff and pursuant to our Offer of Settlement, on September 3, 2020, the SEC entered an order instituting cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933, as amended (the “Securities Act”), finding that we had violated Section 5(b)(2) of the Securities Act with respect to these sales and requiring us to cease and desist from committing or causing any violations and any future violations of Section 5(b)(2) but not imposing any civil penalties or disgorgement. Under the terms of the settlement, we consented to the entry of the order and neither admitted nor denied any of the SEC’s findings. Such a settlement, without a waiver by the SEC, would disqualify us from relying on the safe harbors from registration under the Securities Act set forth in Regulation A, Regulation D and Regulation Crowdfunding, following the effective date of the settlement. Accordingly, we submitted an application to the SEC for a waiver of disqualification under Regulation A and Regulation D. We did not seek a waiver under Regulation Crowdfunding as we do not expect to rely on crowdfunding in raising capital. On September 3, 2020, the SEC Staff granted the requested waivers with respect to Regulation A and Regulation D pursuant to delegated authority.
POSCO Energy Matters
From approximately 2007 through 2015, we relied on POSCO Energy Co., Ltd. (“POSCO Energy”) to develop and grow the South Korean and Asian markets for our products and services. We received upfront license payments and were entitled to receive royalty income from POSCO Energy pursuant to certain manufacturing and technology transfer agreements, including the Alliance Agreement dated February 7, 2007 (and the amendments thereto), the Technology Transfer, License and Distribution Agreement dated February 7, 2007 (and the amendments thereto), the Stack Technology Transfer and License Agreement dated October 27, 2009 (and the amendments thereto), and the Cell Technology Transfer and License Agreement dated October 31, 2012 (and the amendments thereto) (the “License Agreements”). The License Agreements provided POSCO Energy with the exclusive technology rights to manufacture, sell, distribute and service our SureSource 300, SureSource 1500 and SureSource 3000 fuel cell technology in the Korean and broader Asian markets. Due to certain actions and inactions of POSCO Energy, the Company has not realized any material revenues, royalties or new projects developed by POSCO Energy since late 2015.
In November 2019, POSCO Energy spun-off its fuel cell business into a new entity, Korea Fuel Cell Co., Ltd. (“KFC”), without the Company’s consent. As part of the spin-off, POSCO Energy transferred manufacturing and service rights under the License Agreements to KFC, but retained distribution rights and severed its own liability under the License Agreements. The Company formally objected to POSCO Energy’s spin-off and POSCO Energy posted a bond to secure any liabilities to the Company arising out of the spin-off.
On February 19, 2020, the Company notified POSCO Energy in writing that it was in material breach of the License Agreements by (i) its actions in connection with the spin-off of the fuel cell business to KFC, (ii) its suspension of performance through its cessation of all sales activities since late 2015 and its abandonment of its fuel cell business in Asia, and (iii) its disclosure of material nonpublic information to third parties and its public pronouncements about the fuel cell business on television and in print media that have caused reputational damage to the fuel cell business, the Company and its products. The Company also notified POSCO Energy that, under the terms of the License Agreements, it had 60 days to fully cure its breaches to the Company’s satisfaction and that failure would lead to termination of the License Agreements. Further, on March 27, 2020, the Company notified POSCO Energy of additional instances of its material breach of the License Agreements based on POSCO Energy’s failure to pay royalties required to be paid in connection with certain module replacements.
On April 27, 2020, POSCO Energy initiated a series of three arbitration demands against the Company at the International Chamber of Commerce seated in Singapore alleging certain warranty defects in a sub-megawatt conditioning facility at its facility in Pohang, South Korea and seeking combined damages of approximately $3.3 million. Prior to filing the arbitrations, POSCO Energy obtained provisional attachments from the Seoul Central District Court attaching certain revenues owed to the Company by Korea Southern Power Company as part of such warranty claims which delayed receipt of certain payments owed to the Company. At July 31, 2020, outstanding accounts receivable for Korea Southern Power Company was $3.1 million. The Company is vigorously defending these actions as it believes they lack merit and were filed in an attempt to obtain leverage over the Company to prevent the Company from terminating the License Agreements and filing the arbitration discussed below.
On June 28, 2020, the Company notified POSCO Energy and KFC in writing that the Company terminated the License Agreements effective as of such date. The Company has demanded compliance with POSCO Energy’s obligations under the License Agreements to return all Company confidential information and know-how and that POSCO Energy and KFC not make any further use of the Company’s technology. The Company offered POSCO Energy a limited license in order to fulfill POSCO Energy’s obligations to service existing clients. With the termination of the License Agreements, the Company has commenced the marketing of its products and services directly in the Korean and broader Asian markets.
58
On June 28, 2020, the Company also filed a demand for arbitration against POSCO Energy and KFC in the International Court of Arbitration of the International Chamber of Commerce based on POSCO Energy’s (i) failure to exercise commercially reasonable efforts to sell the Company’s technology in the Korean and Asian markets, (ii) disclosure of the Company’s proprietary information to third parties, (iii) attack on the Company’s stock price and (iv) spin-off of POSCO Energy’s fuel cell business into KFC without the Company’s consent. The Company has requested that the arbitral tribunal (a) confirm through declaration that POSCO Energy’s exclusive license to market the Company’s technology and products in Korea and Asia is null and void as a result of the breaches of the License Agreements and that the Company has the right to pursue direct sales in these markets, (b) order POSCO Energy and KFC to compensate the Company for losses and damages suffered in the amount of more than $200 million, and (c) order POSCO Energy and KFC to pay the Company’s arbitration costs, including counsel fees and expenses. The Company has retained outside counsel on a contingency basis to pursue its claims, and outside counsel has entered into an agreement with a litigation finance provider to fund the legal fees and expenses of the arbitration.
On August 28, 2020, POSCO Energy filed a complaint in the Court of Chancery of the State of Delaware purportedly seeking to enforce its rights as a stockholder of the Company to inspect and make copies and extracts of certain books and records of the Company and/or the Company’s subsidiaries pursuant to Section 220 of the of the Delaware General Corporation Law and/or Delaware common law. POSCO Energy alleges that it is seeking to inspect these documents for a proper purpose reasonably related to its interests as a stockholder of the Company, including investigating whether the Company’s Board of Directors and its management breached their fiduciary duties of loyalty, due care, and good faith. POSCO Energy seeks an order of the Court permitting POSCO Energy to inspect and copy the demanded books and records, awarding POSCO Energy reasonable costs and expenses, including reasonable attorney’s fees incurred in connection with the matter, and granting such other and further relief as the Court deems just and proper.
The Company believes that POSCO Energy’s demand to inspect the books and records of the Company is not for a proper purpose, is in fact simply fulfillment of POSCO Energy’s prior threats to file a series of actions against the Company, and is an attempt to obtain leverage over the Company and gain advantage in the pending arbitration filed by the Company against POSCO Energy. The Company intends to vigorously defend itself against POSCO Energy’s claims and believes it will be apparent at the conclusion of the matter that the action was filed for an improper purpose.
Other Legal Proceedings
From time to time, we are involved in other legal proceedings, including, but not limited to, regulatory proceedings, claims, mediations, arbitrations and litigation, arising out of the ordinary course of our business (“Other Legal Proceedings”). Although we cannot assure the outcome of such Other Legal Proceedings, management presently believes that the result of such Other Legal Proceedings, either individually, or in the aggregate, will not have a material adverse effect on our consolidated financial statements, and no material amounts have been accrued in our consolidated financial statements with respect to these matters.
|
Item 1A. |
RISK FACTORS |
You should carefully consider the following risk factors before making an investment decision. If any of the following risks actually occur, our business, financial condition, or results of operations could be materially and adversely affected. In such cases, the trading price of our common stock could decline, and you may lose all or part of your investment. The risk factors below amend and supersede the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended October 31, 2019.
Our business and operations may be adversely affected by the 2019 Novel Coronavirus (COVID-19) outbreak or other similar outbreaks.
Any outbreaks of contagious diseases, including the recent outbreak of the coronavirus that was first detected in Wuhan, China in December 2019 and has since developed into a global pandemic, and other adverse public health developments in countries where we and our suppliers operate could have a material and adverse effect on our business, financial condition and results of operations. These effects could include disruptions to or restrictions on our employees’ ability to travel, as well as temporary closures of our facilities or the facilities of our customers, suppliers, or other vendors in our supply chain. In addition, the coronavirus has resulted in a widespread health crisis that has adversely affected, and may continue to adversely affect, the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products or our ability to obtain financing for our business or projects. COVID-19 may impact the health of our team members, directors or customers, reduce the availability of our workforce or those of companies with which we do business, or otherwise cause human impacts that may negatively impact our business. Any of these events, which may result in disruptions to our supply chain or customer demand, could materially and adversely affect our business and our financial results. The extent to which the coronavirus will impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted. Such developments may include the geographic spread of the virus, the severity of the disease, the duration of the outbreak, the actions that may be taken by various governmental authorities in response to the outbreak, such as quarantine or “shelter-in-place” orders and business closures imposed by various states within the United States, and the impact on the U.S. or global economy. For example, on March 18, 2020, the Company, in response to the escalating global COVID-19 outbreak, temporarily suspended operations at its Torrington, Connecticut manufacturing facility, and also ordered those employees that could work from home to do so. This suspension was subsequently extended following the guidance of Connecticut’s stay at home orders. While the Company resumed operations in the manufacturing facility on June 22, 2020, the Company continues to evaluate its ability to operate in light of recent resurgences of COVID-19 and the advisability of continuing operations, based on federal, state and local guidance, evolving data concerning the pandemic and the best interests of its employees, customers and stockholders. Accordingly, there can be no assurance that the Torrington manufacturing facility will remain open (in full or in part), that our employees that continue to work remotely will return to the office or that our other operations will continue at full or limited capacity. If we again have to shut down production either due to general virus conditions or due to an outbreak in one of our facilities, our project schedules and associated financing could be adversely affected. An extended period of remote working by the Company’s employees could strain its technology resources and introduce operational risks, including heightened cybersecurity risk. Further, the Company has experienced, and may continue to experience, increased costs and expenses, including as a result of (i) conducting daily “fitness-for-duty” assessments for employees, including symptom checks and providing personal protective equipment, (ii) the expansion of benefits to the Company’s employees, including the provision of additional time off for employees who have contracted COVID-
59
19 or are required to be quarantined or who are unable to obtain childcare to return to work, (iii) implementing increased health and safety protocols at all of the Company’s facilities, including increased cleaning/sanitization of workspaces, restricting visitor access, mandating social distancing guidelines and increasing the availability of sanitization products, and (iv) the increased cost of personal protective equipment. Although the Company believes it is currently considered an “essential” business in its operating markets, if any of the applicable exceptions or exemptions are curtailed or revoked in the future, that could adversely impact our business, operating results and financial condition. Furthermore, to the extent that these exemptions or exceptions do not extend to our key suppliers and customers, this would also adversely impact our business, operating results and financial condition. While we have attempted to continue business development activities during the pandemic, state and local shut downs, shelter in place orders and travel restrictions have impeded our ability to meet with customers and solicit new business and certain bids and solicitations in which we typically participate have been postponed. As a result, at this time, it is impossible to predict the overall impact of the coronavirus on our business, liquidity, capital resources, supply chain and financial results or its effect on clean energy demand, capital budgets of our customers, or demand for our products. Additionally, while we have continued to prioritize the health and safety of our team members and customers as we continue to operate during the pandemic, we face an increased risk of litigation related to our operating environments. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession that has occurred or may occur in the future because of the pandemic, or because the pandemic worsens again. Additional public health crises could also emerge in the future, including other pandemics or epidemics. Such public health crises could pose further risks to the Company and could also have a material adverse effect on our business, results of operations and financial position.
Our Paycheck Protection Program loan may not be forgiven, may subject us to challenges regarding qualification for the loan and has resulted in an informal SEC inquiry into our financial disclosures.
On April 20, 2020, the Company entered into a Paycheck Protection Program Promissory Note, dated April 16, 2020 (the “PPP Note”), evidencing a loan to the Company from Liberty Bank under the CARES Act. Pursuant to the PPP Note, the Company received total proceeds of approximately $6.5 million on April 24, 2020. In accordance with the requirements of the CARES Act, as amended by the PPP Flexibility Act, at least 60% of the proceeds used by the Company were used to pay eligible payroll costs. The loan may be fully forgiven if (i) proceeds are used to pay eligible payroll costs, rent, mortgage interest and utilities and (ii) full-time employee headcount and salaries are either maintained during the 24-week period following disbursement or restored by December 31, 2020. If not so maintained or restored, forgiveness of the loan will be reduced in accordance with the regulations to be issued by the SBA. In order to obtain the consent of the Agent and the Orion Lenders under the Orion Facility to enter into the PPP Note, the Agent and the Orion Lenders have required the Company to apply for forgiveness within 30 days after the last day of the loan forgiveness period as designated under the PPP regulations in effect as of June 6, 2020. Any forgiveness of the loan will be subject to approval by the SBA and Liberty Bank and will require the Company to apply for such treatment in the future. While we may apply for forgiveness of the PPP Note in accordance with the requirements and limitations under the CARES Act, as amended by the PPP Flexibility Act, and the SBA regulations and requirements, no assurance can be given that any portion of the PPP Note will be forgiven. In addition, based on guidance from the United States Department of the Treasury, since the total PPP Note proceeds exceeded $2.0 million, our forgiveness application will be subject to audit by the SBA, including with respect to our certification that the current economic uncertainty made our loan request necessary to support our ongoing operations. Such certification does not contain any objective criteria and is subject to interpretation. If we are found to have been ineligible to receive the loan under the PPP Note, or in violation of any of the laws or regulations that may apply to us in connection with the PPP Note, including the False Claims Act, we may be subject to penalties, including significant civil, criminal and administrative penalties, and could be required to repay the PPP Note. In addition, our receipt of the loan may result in adverse publicity and damage to our reputation, governmental investigations, inquiries, reviews and audits, such as the SEC inquiry described below, which could consume significant financial and management resources. Any of these events could harm our business, results of operations and financial condition.
On or about May 11, 2020, the Division of Enforcement of the SEC sent the Company an inquiry requesting that the Company voluntarily provide information to the SEC pertaining to the Company’s application and resulting loan under the Paycheck Protection Program and how the need for the loan compares with the Company’s filings, disclosures and financial condition. While this request for information is voluntary and the Company was not obligated to respond, the Company is cooperating and has provided information to the SEC.
We have incurred losses and anticipate continued losses and negative cash flow.
We have transitioned from a research and development company to a commercial products manufacturer, services provider and developer. We have not been profitable since our year ended October 31, 1997. We expect to continue to incur net losses and generate negative cash flows until we can produce sufficient revenues and margins to cover our costs. We may never become profitable. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future. For the reasons discussed in more detail below, there are uncertainties associated with our achieving and sustaining profitability. We have, from time to time, sought financing in the public markets in order to fund operations and will continue to do so. Our future ability to obtain such financing could be impaired by a variety of factors, including, but not limited to, the price of our common stock and general market conditions.
Our cost reduction strategy may not succeed or may be significantly delayed, which may result in our inability to deliver improved margins.
Our cost reduction strategy is based on the assumption that increases in production will result in economies of scale. In addition, our cost reduction strategy relies on advancements in our manufacturing process, global competitive sourcing, engineering design, reducing the cost of capital and technology improvements (including stack life and projected power output). Failure to achieve our cost reduction targets could have a material adverse effect on our results of operations and financial condition.
60
Our workforce reduction and recent manufacturing facility closure may cause undesirable consequences and our results of operations may be harmed.
On April 12, 2019, we undertook a reorganization, which included a workforce reduction of 30%, or 135 employees. On March 18, 2020, we temporarily suspended operations at our Torrington, Connecticut manufacturing facility as a result of the COVID-19 pandemic until we resumed operations on June 22, 2020. This workforce reduction and subsequent manufacturing facility closure may yield unintended consequences, such as attrition beyond our reduction in workforce and reduced employee morale, which may cause our employees who were not affected by the reduction in workforce but have been affected by the manufacturing facility closure, or who fear returning to work in any of our facilities due to COVID-19 to seek alternate employment. Additional attrition could impede our ability to meet our operational goals, which could have a material adverse effect on our financial performance. Furthermore, employees whose positions were eliminated or those who determine to seek alternate employment may seek employment with our competitors. Although all our employees are required to sign a confidentiality agreement with us at the time of hire, we cannot assure you that the confidential nature of our proprietary information will be maintained in the course of such future employment. We cannot assure you that we will not undertake additional workforce reduction activities, that any of our efforts will be successful, or that we will be able to realize the cost savings and other anticipated benefits from our previous or any future workforce reduction plans. In addition, if we continue to reduce our workforce, it may adversely impact our ability to respond rapidly to any new product, growth or revenue opportunities and to execute on our backlog and business plans. Additionally, our recent reduction in workforce and manufacturing facility closure may make it more difficult to recruit and retain new hires as our business grows.
We have debt outstanding and may incur additional debt in the future, which may adversely affect our financial condition and future financial results.
As of July 31, 2020, our total consolidated debt and financing obligations outstanding (“indebtedness”) was $175.7 million ($166.2 million, net of finance costs and debt discounts), of which an aggregate of $80.0 million ($76.0 million, net of finance costs and debt discounts) was senior secured indebtedness under the Orion Credit Agreement and an aggregate of $95.7 million ($90.2 million, net of finance costs and debt discounts) was other secured indebtedness. As of July 31, 2020, our subsidiaries had $128.9 million ($124.6 million, net of finance costs and debt discounts) of indebtedness and other liabilities (including trade payables, but excluding intercompany obligations and liabilities of a type not required to be reflected on a balance sheet of such subsidiaries in accordance with GAAP). The majority of our debt is long-term with $17.7 million due within twelve months of July 31, 2020.
Our ability to make scheduled payments of principal and interest and other required repayments depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. In addition, the Agent and the lenders under the Orion Credit Agreement have broad approval rights over our ability to draw and allocate funds from the Orion Facility and to take on additional debt. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring operations, restructuring debt or obtaining additional equity capital on terms that may be onerous or dilutive.
It is also possible that we may incur additional indebtedness in the future in the ordinary course of business. If new debt is added to current debt levels, the risks described above could intensify. Our debt agreements contain representations and warranties, affirmative and negative covenants, and events of default that entitle the lenders to cause our indebtedness under such debt agreements to become immediately due and payable.
We are required to maintain effective internal control over financial reporting. Our management previously identified a material weakness in our internal control over financial reporting. If we are unable to remediate the material weakness or other control deficiencies are identified in the future, we may not be able to report our financial results accurately, prevent fraud or file our periodic reports in a timely manner, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.
We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. Complying with Section 404 requires a rigorous compliance program as well as adequate time and resources. We may not be able to complete our internal control evaluation, testing and any required remediation in a timely fashion. Additionally, if we identify one or more material weaknesses in our internal control over financial reporting, we will not be able to assert that our internal controls are effective. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
We previously disclosed in our Form 10-Qs for the quarters ended April 30, 2019, July 31, 2019, January 31, 2020 and April 30, 2020 and in our Form 10-K for the year ended October 31, 2019 that we did not have resources to sufficiently address asset impairments on a timely basis or the accounting considerations and disclosures related to our amended credit facilities. As a result, we concluded that there was a material weakness in internal control over financial reporting, as we did not maintain effective controls over the accounting for and disclosures in the consolidated financial statements related to asset impairments, credit facilities and other non-routine transactions and disclosures. This material weakness resulted in material misstatements that were corrected in the consolidated financial statements prior to issuance. This material weakness had not been remediated as of July 31, 2020.
Subsequent to the evaluation made in connection with filing our Form 10-Q for the quarter ended April 30, 2019, our management, with the oversight of the Audit and Finance Committee of our Board of Directors, began the process of remediating the material weakness. Progress to date includes engagement of a third party resource to help evaluate the accounting and disclosure for significant matters each quarter. In addition, under the oversight of the Audit and Finance Committee, management will continue to review and make necessary changes to the overall design of our internal control environment to improve the overall effectiveness of internal control over financial reporting.
61
We have made progress in accordance with our remediation plan and our goal is to remediate this material weakness in fiscal year 2020. However, the material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We are committed to continuing to improve our internal control processes and will continue to review, optimize and enhance our financial reporting controls and procedures, however, there can be no assurance that this will occur within 2020.
We cannot be certain that these measures will successfully remediate the material weakness or that other material weaknesses and control deficiencies will not be discovered in the future. If our efforts are not successful or other material weaknesses are identified in the future, or if we are not able to comply with the requirements of Section 404 in a timely manner, our reported financial results could be materially misstated and we could be subject to investigations or sanctions by regulatory authorities, which would require additional financial and management resources, and the value of our common stock could decline.
To the extent we identify future weaknesses or deficiencies, there could be material misstatements in our consolidated financial statements and we could fail to meet our financial reporting obligations. As a result, our ability to obtain additional financing, or obtain additional financing on favorable terms, could be materially and adversely affected which, in turn, could materially and adversely affect our business, our financial condition and the value of our common stock. If we are unable to assert that our internal control over financial reporting is effective in the future, investor confidence in the accuracy and completeness of our financial reports could be further eroded, which would have a material adverse effect on the price of our common stock.
Our products compete with products using other energy sources, and if the prices of the alternative sources are lower than energy sources used by our products or attributes or performance of other energy sources are favored over our products, sales of our products will be adversely affected.
Our power plants can operate on a variety of fuels, including but not limited to natural gas, renewable biogas, directed biogas and propane. If these fuels are not readily available or if their prices increase such that electricity produced by our products costs more than electricity provided by other generation sources, our products would be less economically attractive to potential customers. In addition, we have no control over the prices of several types of competitive energy sources such as solar, wind, oil, gas or coal or local utility electricity costs. Significant decreases (or short term increases) in the price of these technologies or fuels or prices for grid delivered electricity could also have a material adverse effect on our business because other generation sources could be more economically attractive to consumers than our products. Additionally, in certain markets, consumers and regulators have expressed a preference for zero-carbon generating resources despite their overall environmental footprint over fueled resources. Sales of our products could be adversely affected in these markets due to a misunderstanding of the total carbon footprint associated with zero-carbon intermittent power generating resources. Our products may be selected for certain attributes, such as reliability or resiliency. If our products fail to perform as expected in these markets, our products may no longer be considered attractive for such applications, which could have a material adverse effect on our business.
Financial markets worldwide have experienced heightened volatility and instability which may have a material adverse impact on our Company, our customers and our suppliers.
Financial market volatility can affect the debt, equity and project finance markets. This may impact the amount of financing available to all companies, including companies with substantially greater resources, better credit ratings and more successful operating histories than ours. It is impossible to predict future financial market volatility and instability and the impact on our Company, and it may have a materially adverse effect on us for a number of reasons, such as:
|
|
• |
The long term nature of our sales cycle can require long lead times between application design, order booking and product fulfillment. For such sales, we often require substantial cash down payments in advance of delivery. For our generation business, we must invest substantial amounts in application design, manufacture, installation, commissioning and operation, which amounts are returned through energy sales over long periods of time. Our growth strategy assumes that financing will be available for us to finance working capital or for our customers to provide down payments and to pay for our products. Financial market issues may delay, cancel or restrict the construction budgets and funds available to us or our customers for the deployment of our products and services. |
|
|
• |
Projects using our products are, in part, financed by equity investors interested in tax benefits, as well as by the commercial and governmental debt markets. The significant volatility in the U.S. and international stock markets causes significant uncertainty and may result in an increase in the return required by investors in relation to the risk of such projects. |
|
|
• |
If we, our customers or our suppliers cannot obtain financing under favorable terms, our business may be negatively impacted. |
Our contracted projects may not convert to revenue, and our sales pipeline may not convert to contracts, which may have a material adverse effect on our revenue and cash flow.
Some of the project awards we receive and orders we accept from customers require certain conditions or contingencies (such as permitting, interconnection or financing) to be satisfied, some of which are outside of our control. The time periods from receipt of an award to execution of a contract, or receipt of a contract to installation may vary widely and are determined by a number of factors, including the terms of the award, governmental policies or regulations that go into effect after the award, the terms of the customer contract and the customer’s site requirements. These same or similar conditions and contingencies may be required by financiers in order to draw on financing to complete a project. If these conditions or contingencies are not satisfied, or changes in laws affecting project awards occur, project awards may not convert to contracts, and installations may be delayed or canceled. This could have an adverse impact on our revenue and cash flow and our ability to complete construction of a project.
62
We have signed product sales contracts, engineering, procurement and construction contracts (EPC), power purchase agreements (PPAs) and long-term service agreements with customers subject to contractual, technology and operating risks as well as market conditions that may affect our operating results.
We apply the transfer of control over time revenue recognition method under Accounting Standards Codification Topic 606: Revenue from Contracts with Customer to certain product sales contracts which are subject to estimates. On a quarterly basis, we perform a review process to help ensure that total estimated contract costs include estimates of costs to complete that are based on the most recent available information. The amount of costs incurred on a cumulative to date basis as a function of estimated costs at completion is applied to contract consideration to determine the cumulative revenue that should be recognized to date.
In certain instances, we have executed PPAs with the utility, end-user of the power or site host of the fuel cell power plant. We may then sell the PPA to a project investor or retain the project and collect revenue from the sale of power over the term of the PPA, recognizing electricity revenue as power is generated and sold.
We have contracted under long-term service agreements with certain customers to provide service on our products over terms up to 20 years. Under the provisions of these contracts, we provide services to maintain, monitor, and repair customer power plants to meet minimum operating levels. Pricing for service contracts is based upon estimates of future costs including future module replacements. While we have conducted tests to determine the overall life of our products, we have not run certain of our products over their projected useful life or in all potential conditions prior to large scale commercialization. As a result, we cannot be sure that these products will last to their expected useful life or perform as anticipated in all conditions, which could result in warranty claims, performance penalties, maintenance and module replacement costs in excess of our estimates, losses on service contracts and/or a negative perception of our products.
Our ability to proceed with projects under development and complete construction of projects on schedule and within budget may be adversely affected by escalating costs for materials, tariffs, labor and regulatory compliance, inability to obtain necessary permits, interconnections or other approvals on acceptable terms or on schedule and by other factors. If any development project or construction is not completed, is delayed or is subject to cost overruns, we could become obligated to make delay or termination payments or become obligated for other damages under contracts, experience diminished returns or write off all or a portion of our capitalized costs in the project. Each of these events could have an adverse effect on our business, financial condition, results of operations and prospects.
Our growing portfolio of project assets exposes us to operational risks and commodity market volatility.
We have a growing portfolio of project assets used to generate and sell power under PPAs and utility tariff programs that exposes us to operational risks and uncertainties, including, among other things, lost revenues due to prolonged outages, replacement equipment costs, risks associated with facility start-up operations, failures in the availability or acquisition of fuel, the impact of severe adverse weather conditions, natural disasters, terrorist attacks, risks of property damage or injury from energized equipment, availability of adequate water resources and ability to intake and discharge water, use of new or unproven technology, fuel commodity price risk and fluctuating market prices, and lack of alternative available fuel sources.
We extend product warranties, which could affect our operating results.
We provide for a warranty of our products for a specific period of time against manufacturing or performance defects. We accrue for warranty costs based on historical warranty claim experience; however, actual future warranty expenses may be greater than we have assumed in our estimates. As a result, operating results could be negatively impacted should there be product manufacturing or performance defects in excess of our estimates.
Our products are complex and could contain defects and may not operate at expected performance levels which could impact sales and market adoption of our products or result in claims against us.
We develop complex and evolving products and we continue to advance the capabilities of our fuel cell stacks and are now producing stacks in the United States with a net rated power output of 350 kilowatts and an expected seven-year life.
We are still gaining field operating experience with respect to our products, and despite experience gained from our growing installed base and testing performed by us, our customers and our suppliers, issues may be found in existing or new products. This could result in a delay in recognition or loss of revenues, loss of market share or failure to achieve broad market acceptance. The occurrence of defects could also cause us to incur significant warranty, support and repair costs, could divert the attention of our engineering personnel from our product development efforts, and could harm our relationships with our customers. The occurrence of these problems could result in the delay or loss of market acceptance of our products and would likely harm our business. Defects or performance problems with our products could result in financial or other damages to our customers. From time to time, we have been involved in disputes regarding product warranty issues. Although we seek to limit our liability, a product liability claim brought against us, even if unsuccessful, would likely be time consuming, could be costly to defend, and may hurt our reputation in the marketplace. Our customers could also seek and obtain damages from us for their losses. We have accrued liabilities for potential damages related to performance problems; however, actual results may be different than the assumptions used in our accrual calculations.
63
We currently face and will continue to face significant competition.
We compete on the basis of our products’ reliability, efficiency, environmental considerations and cost. Technological advances in alternative energy products or improvements in the electric grid or other sources of power generation, or other fuel cell technologies may negatively affect the development or sale of some or all of our products or make our products non-competitive or obsolete prior to or after commercialization. Other companies, some of which have substantially greater resources than ours, are currently engaged in the development of products and technologies that are similar to, or may be competitive with, our products and technologies.
Several companies in the U.S. are engaged in fuel cell development, although we are the only domestic company engaged in manufacturing and deployment of stationary carbonate fuel cells. Other emerging fuel cell technologies (and the companies developing them) include small or portable proton-exchange membrane (“PEM”) fuel cells (Ballard Power Systems, Plug Power, and increasing activity by numerous automotive companies including Toyota, Hyundai, Honda and GM), stationary phosphoric acid fuel cells (Doosan), stationary solid oxide fuel cells (Bloom Energy), and small residential solid oxide fuel cells (Ceres Power Holdings and Ceramic Fuel Cells Ltd.). Each of these competitors has the potential to capture market share in our target markets. There are also other potential fuel cell competitors internationally that could capture market share.
Other than fuel cell developers, we must also compete with companies that manufacture combustion-based distributed power equipment, including various engines and turbines, and have well-established manufacturing, distribution, operating and cost features. Electrical efficiency of these products can be competitive with our SureSource power plants in certain applications. Significant competition may also come from gas turbine companies and large scale solar and wind technologies.
We derive significant revenue from contracts awarded through competitive bidding processes involving substantial costs and risks. Due to this competitive pressure, we may be unable to grow revenue and achieve profitability.
We expect a significant portion of the business that we will seek in the foreseeable future will be awarded through competitive bidding against other fuel cell technologies and other forms of power generation. The competitive bidding process involves substantial costs and a number of risks, including the significant cost and managerial time to prepare bids and proposals for contracts that may not be awarded to us and our failure to accurately estimate the resources and costs that will be required to fulfill any contract we win. In addition, following a contract award, we may encounter significant expense, delay or contract modifications as a result of our competitors protesting or challenging contracts awarded to us in competitive bidding. In addition, multi-award contracts require that we make sustained post-award efforts to obtain task orders under the contract. We may not be able to obtain task orders or recognize revenue under these multi-award contracts. Our failure to compete effectively in this procurement environment could adversely affect our revenue and/or profitability.
Unanticipated increases or decreases in business growth may result in adverse financial consequences for us.
If our business grows more quickly than we anticipate, our existing and planned manufacturing facilities may become inadequate and we may need to seek out new or additional space, at considerable cost to us. If our business does not grow as quickly as we expect, our existing and planned manufacturing facilities would, in part, represent excess capacity for which we may not recover the cost. In that circumstance, our revenues may be inadequate to support our committed costs and our planned growth, and our gross margins and business strategy would be adversely affected.
Our plans are dependent on market acceptance of our products.
Our plans are dependent upon market acceptance of, as well as enhancements to, our products. Fuel cell systems represent an emerging market, and we cannot be sure that potential customers will accept fuel cells as a replacement for traditional power sources or non-fuel based power sources. As is typical in a rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty and risk. Since the distributed generation market is still evolving, it is difficult to predict with certainty the size of the market and its growth rate. The development of a market for our products may be affected by many factors that are out of our control, including:
|
|
• |
the cost competitiveness of our fuel cell products including availability and output expectations and total cost of ownership; |
|
|
• |
the future costs of natural gas and other fuels used by our fuel cell products; |
|
|
• |
customer reluctance to try a new product; |
|
|
• |
the market for distributed generation and government policies that affect that market; |
|
|
• |
government incentives, mandates or other programs favoring zero carbon energy sources; |
|
|
• |
local permitting and environmental requirements; |
|
|
• |
customer preference for non-fuel based technologies; and |
|
|
• |
the emergence of newer, more competitive technologies and products. |
If a sufficient market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred in the development of our products and may never achieve profitability.
64
As we continue to expand markets for our products, we intend to continue offering power production guarantees and other terms and conditions relating to our products that will be acceptable to the marketplace, and continue to develop a service organization that will aid in servicing our products and obtain self-regulatory certifications, if available, with respect to our products. Failure to achieve any of these objectives may also slow the development of a sufficient market for our products and, therefore, have a material adverse effect on our results of operations and financial condition.
We are substantially dependent on a concentrated number of customers and the loss of any one of these customers could adversely affect our business, financial condition and results of operations.
We contract with a concentrated number of customers for the sale of products and for research and development contracts. There can be no assurance that we will continue to achieve the current level of sales of our products to our largest customers. Even though our customer base is expected to increase and our revenue streams to diversify, a substantial portion of net revenues could continue to depend on sales to a limited number of customers. Our agreements with these customers may be canceled if we fail to meet certain product specifications or research and development milestones or materially breach the agreements, or if our customers materially breach the agreements, and our customers may seek to renegotiate the terms of current agreements or renewals. The loss of, or a reduction in sales to, one or more of our larger customers could have a material adverse effect on our business, financial condition and results of operations.
If our goodwill and other intangible assets, long-lived assets, inventory or project assets become impaired, we may be required to record a significant charge to earnings.
We may be required to record a significant charge to operations in our financial statements should we determine that our goodwill, other intangible assets (i.e., in process research and development (“IPR&D”)), other long-lived assets (i.e., property, plant and equipment and definite-lived intangible assets), inventory, or project assets are impaired. Such a charge might have a significant impact on our reported financial condition and results of operations. We recorded the following impairment charges during the year ended October 31, 2019: (i) a $2.8 million charge for a specific construction in process asset related to automation equipment for use in manufacturing due to uncertainty as to whether the asset will be completed as a result of our liquidity position and continued low level of production rates, (ii) a $14.4 million charge related to a project asset for which we will not be able to secure a PPA with acceptable terms, and which we have therefore decided to operate under a merchant model for the next 5 years, selling power to the Connecticut grid under wholesale tariff rates and Renewable Energy Credits (RECs) to market participants, and (iii) a $3.1 million charge related to a project asset for which we decided to pursue termination of the related PPA given regulatory changes impacting the future cost profile of the project.
As required by accounting rules, we review our goodwill for impairment at least annually as of July 31 or more frequently if facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit that has goodwill is less than its carrying value. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill might not be recoverable include a significant decline in projections of future cash flows and lower future growth rates in our industry. We review IPR&D for impairment on an annual basis as of July 31 or more frequently if facts and circumstances indicate the fair value is less than the carrying value. If the technology has been determined to be abandoned or not recoverable, we would be required to impair the asset. We review inventory, long-lived assets and project assets for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. We consider a project commercially viable and recoverable if it is anticipated to be sellable for a profit, or generates positive cash flows, once it is either fully developed or fully constructed. If our projects are not considered commercially viable, we would be required to impair the respective project assets.
We have risks associated with high levels of inventory.
The amount of total inventory as of July 31, 2020 and October 31, 2019 was $60.5 million ($9.0 million of which was classified as long-term inventory) and $56.7 million ($2.2 million of which was classified as long-term inventory), respectively, which includes work in process inventory totaling $36.7 million and $31.2 million, respectively. We reduced our production rate and have been operating at a lower level for a period of time in order to deploy inventory to new projects and mitigate future increases in inventory. In addition, there are risks that our inventory could lose some or all of its value due to technological obsolescence, shifts in market demand or other unexpected changes in industry conditions and circumstances. If we are unable to deploy our current inventory or new inventory consistent with our business plan, we may be required to sell it at a loss, abandon it or recycle it into different products. These actions would result in a significant charge to operations. Such a charge might have a significant impact on our financial condition and results of operations.
Our advanced technologies contracts are subject to the risk of termination by the contracting party and we may not realize the full amounts allocated under some contracts due to the lack of Congressional appropriations.
A portion of our fuel cell revenues has been derived from long-term cooperative agreements and other contracts with the U.S. Department of Energy and other U.S. government agencies. These agreements are important to the continued development of our technology and our products. We also contract with private sector companies under certain advanced technologies contracts to develop strategically important and complementary offerings.
Generally, our government research and development contracts are subject to the risk of termination at the convenience of the contracting agency. Furthermore, these contracts, irrespective of the amounts allocated by the contracting agency, are subject to annual Congressional appropriations and the results of government or agency sponsored reviews and audits of our cost reduction projections and efforts. We can only receive funds under these contracts ultimately made available to us annually by Congress as a result of the appropriations process. Accordingly, we cannot be sure whether we will receive the full amounts awarded under our government research and development or other contracts. Failure to receive the full amounts under any of our government research and development contracts could materially and adversely affect our business prospects, results of operations and financial condition.
65
Our privately funded advanced technologies contracts, including our Joint Development Agreement with EMRE, are subject to termination at the convenience of the contracting party and contain certain milestones and deliverables. Accordingly, we cannot be sure whether we will receive the full amounts contracted for under privately funded advanced technologies contracts. Termination of these contracts or failure to receive the full amounts under any of these contracts could materially and adversely affect our business prospects, results of operations and financial condition.
A negative government audit could result in an adverse adjustment of our revenue and costs and could result in civil and criminal penalties.
Government agencies, such as the Defense Contract Audit Agency, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure, and compliance with applicable laws, regulations, and standards. If the agencies determine through these audits or reviews that we improperly allocated costs to specific contracts, they will not reimburse us for these costs. Therefore, an audit could result in adjustments to our revenue and costs.
Further, although we have internal controls in place to oversee our government contracts, no assurance can be given that these controls are sufficient to prevent isolated violations of applicable laws, regulations and standards. If the agencies determine that we or one of our subcontractors engaged in improper conduct, we may be subject to civil or criminal penalties and administrative sanctions, payments, fines, and suspension or prohibition from doing business with the government, any of which could materially affect our results of operations and financial condition.
The U.S. government has certain rights relating to our intellectual property, including the right to restrict or take title to certain patents.
Multiple U.S. patents that we own have resulted from government-funded research and are subject to the risk of exercise of “march-in” rights by the government. March-in rights refer to the right of the U.S. government or a government agency to exercise its non-exclusive, royalty-free, irrevocable worldwide license to any technology developed under contracts funded by the government if the contractor fails to continue to develop the technology. These “march-in” rights permit the U.S. government to take title to these patents and license the patented technology to third parties if the contractor fails to utilize the patents.
Our future success and growth is dependent on our market strategy.
We cannot assure you that we will enter into business relationships that are consistent with, or sufficient to support, our commercialization plans and our growth strategy or that these relationships will be on terms favorable to us. Even if we enter into these types of relationships, we cannot assure you that the business associates with whom we form relationships will focus adequate resources on selling our products or will be successful in selling them. Some of these arrangements have required or will require that we grant exclusive rights to certain companies in defined territories or for specific technologies. These exclusive arrangements could result in our being unable to enter into other arrangements at a time when the business associate with whom we form a relationship is not successful in selling our products or has reduced its commitment to marketing our products. In addition, future arrangements may also include the issuance of equity and/or warrants to purchase our equity, which may have an adverse effect on our stock price and would dilute our existing stockholders. To the extent we enter into partnerships or other business relationships, the failure of these partners or other business associates to assist us with the deployment of our products may adversely affect our results of operations and financial condition.
We depend on third party suppliers for the development and supply of key raw materials and components for our products.
We use various raw materials and components to construct a fuel cell module, including nickel and stainless steel that are critical to our manufacturing process. We also rely on third-party suppliers for the balance-of-plant components in our products. Suppliers must undergo a qualification process, which takes four to twelve months. We continually evaluate new suppliers, and we are currently qualifying several new suppliers. There are a limited number of suppliers for some of the key components of our products. A supplier’s failure to develop and supply components in a timely manner or to supply components that meet our quality, quantity or cost requirements or our technical specifications, or our inability to obtain alternative sources of these components on a timely basis or on terms acceptable to us, could each harm our ability to manufacture our SureSource products. In addition, to the extent the processes that our suppliers use to manufacture components are proprietary, we may be unable to obtain comparable components from alternative suppliers.
During periods of constrained liquidity, we may delay certain payments to third parties, including our suppliers, to conserve cash. Management may enter into forbearance agreements and payment arrangements with certain suppliers. However, suppliers whose payments are delayed may take action against us, including, but not limited to, filing litigation, arbitration or other proceedings against us.
We do not know whether we will be able to maintain long-term supply relationships with our critical suppliers, or secure new long-term supply relationships, or whether such relationships will be on terms that will allow us to achieve our objectives. Our business prospects, results of operations and financial condition could be harmed if we fail to secure long-term relationships with entities that will supply the required components for our SureSource products.
66
We depend on our intellectual property, and our failure to protect that intellectual property could adversely affect our future growth and success.
Failure to protect our existing intellectual property rights may result in the loss of our exclusivity or the right to use our technologies. If we do not adequately ensure our freedom to use certain technology, we may have to pay others for rights to use their intellectual property, pay damages for infringement, misappropriation, or other violation, or be enjoined from using such intellectual property. We rely on patent, trade secret, trademark and copyright law to protect our intellectual property.
We previously licensed certain of our carbonate fuel cell manufacturing intellectual property to POSCO Energy Co., Ltd. (“POSCO Energy”) on an exclusive basis in the Korean and broader Asian markets, but we terminated our license agreements with POSCO Energy on June 28, 2020. In addition, effective as of June 11, 2019, we entered into a License Agreement with ExxonMobil Research and Engineering Company (the “EMRE License Agreement”), pursuant to which we agreed, subject to the terms of the EMRE License Agreement, to grant ExxonMobil Research and Engineering Company (“EMRE”) and its affiliates a non-exclusive, worldwide, fully paid, perpetual, irrevocable, non-transferrable license and right to use our 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. Furthermore, on November 5, 2019, we entered into a Joint Development Agreement with EMRE, pursuant to which we agreed to grant EMRE and its affiliates a worldwide, non-exclusive, royalty-free, irrevocable, perpetual, sub-licensable, non-transferable (subject to certain exceptions) right and license to practice certain Company background intellectual property (to the extent not already licensed pursuant to the EMRE License Agreement) for new carbonate fuel cell technology in carbon capture applications and hydrogen applications. We depend on POSCO Energy and EMRE to also protect our intellectual property rights, but we cannot assure you that POSCO Energy or EMRE will do so. For example, we have filed a demand for arbitration against POSCO Energy in the International Court of Arbitration of the International Chamber of Commerce based, in part, on POSCO Energy’s disclosure of our proprietary information to third parties.
As of July 31, 2020, we, excluding our subsidiaries, had 99 U.S. patents and 176 patents in other jurisdictions covering our fuel cell technology (in certain cases covering the same technology in multiple jurisdictions), with patents directed to various aspects of our SureSource technology, solid oxide fuel cell (“SOFC”) technology, PEM fuel cell technology and applications thereof. As of July 31, 2020, we also had 68 patent applications pending in the U.S. and 113 patent applications pending in other jurisdictions. Our U.S. patents will expire between 2020 and 2038, and the current average remaining life of our U.S. patents is approximately 9.0 years. Our subsidiary, Versa Power Systems, Ltd., as of July 31, 2020, had 33 U.S. patents and 100 international patents covering the SOFC technology (in certain cases covering the same technology in multiple jurisdictions), with an average remaining U.S. patent life of approximately 4.8 years. As of July 31, 2020, Versa Power Systems, Ltd. also had 2 pending U.S. patent applications and 14 patent applications pending in other jurisdictions. In addition, as of July 31, 2020, our subsidiary, FuelCell Energy Solutions, GmbH, had license rights to 2 U.S. patents and 7 patents outside the U.S. for carbonate fuel cell technology licensed from Fraunhofer IKTS.
Some of our intellectual property is not covered by any patent or patent application and includes trade secrets and other know-how that is not able to be patented, particularly as it relates to our manufacturing processes and engineering design. In addition, some of our intellectual property includes technologies and processes that may be similar to the patented technologies and processes of third parties. If we are found to be infringing, misappropriating or otherwise violating third-party intellectual property, we do not know whether we will be able to obtain licenses to use such intellectual property on acceptable terms, if at all. Our patent position is subject to complex factual and legal issues that may give rise to uncertainty as to the validity, scope, and enforceability of a particular patent.
We cannot assure you that any of the U.S. or international patents owned by us or other patents that third parties license to us will not be invalidated, circumvented, challenged, rendered unenforceable or licensed to others, or that any of our owned or licensed pending or future patent applications will be issued with the breadth of claim coverage sought by us or our licensors, if issued at all. In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in certain foreign countries.
We also seek to protect our proprietary intellectual property, including intellectual property that may not be patented or able to be patented, in part by confidentiality agreements and, if applicable, inventors’ rights agreements with our subcontractors, vendors, suppliers, consultants, strategic business associates and employees. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach or that such persons or institutions will not assert rights to intellectual property arising out of these relationships. Certain of our intellectual property has been licensed to us on a non-exclusive basis from third parties that may also license such intellectual property to others, including our competitors. If our licensors are found to be infringing, misappropriating or otherwise violating third-party intellectual property, we do not know whether we will be able to obtain licenses to use the intellectual property licensed to us on acceptable terms, if at all.
If necessary or desirable, we may seek extensions of existing licenses or further licenses under the patents or other intellectual property rights of others. However, we can give no assurances that we will obtain such extensions or further licenses or that the terms of any offered licenses will be acceptable to us. The failure to obtain a license from a third party for intellectual property that we use at present could cause us to incur substantial liabilities, and to suspend the manufacture or shipment of products or our use of processes requiring the use of that intellectual property.
While, other than with respect to claims we have made against POSCO Energy in the arbitration for disclosure of our proprietary information to third parties, we are not currently engaged in any intellectual property litigation, we could become subject to lawsuits in which it is alleged that we have infringed, misappropriated or otherwise violated the intellectual property rights of others or commence lawsuits against others who we believe are infringing, misappropriating or otherwise violating our rights or violating their agreements to protect our intellectual property. Our involvement in intellectual property litigation could result in significant expense to us, adversely affecting the development of sales of the challenged product or intellectual property and diverting the efforts of our technical and management personnel, whether or not that litigation is resolved in our favor.
67
Our future success will depend on our ability to attract and retain qualified management, technical, and other personnel.
Our future success is substantially dependent on the services and performance of our executive officers and other key management, engineering, scientific, manufacturing and operating personnel. The loss of the services of key management, engineering, scientific, manufacturing and operating personnel could materially adversely affect our business. Our ability to achieve our commercialization plans and to increase production at our manufacturing facility in the future will also depend on our ability to attract and retain additional qualified management, technical, manufacturing and operating personnel. Recruiting personnel for the fuel cell industry is competitive. We do not know whether we will be able to attract or retain additional qualified management, technical, manufacturing and operating personnel. Our inability to attract and retain additional qualified management, technical, manufacturing and operating personnel, or the departure of key employees, could materially and adversely affect our development, commercialization and manufacturing plans and, therefore, our business prospects, results of operations and financial condition. In addition, our inability to attract and retain sufficient management, technical, manufacturing and operating personnel to quickly increase production at our manufacturing facility when and if needed to meet increased demand may adversely impact our ability to respond rapidly to any new product, growth or revenue opportunities. Our inability to attract and retain sufficient qualified management, technical, engineering, research, and manufacturing personnel to staff our third party research contracts may result in our inability to complete such contracts or terminations of such contracts, which may adversely impact financial conditions and results of operations.
We may be affected by environmental and other governmental regulation.
We are subject to various federal, state and local laws and regulations relating to, among other things, land use, safe working conditions, handling and disposal of hazardous and potentially hazardous substances and emissions of carbon dioxide and pollutants into the atmosphere. In addition, it is possible that industry-specific laws and regulations will be adopted covering matters such as transmission scheduling, distribution, emissions, and the characteristics and quality of our products, including installation and servicing. These regulations could limit the growth in the use of carbonate fuel cell products, decrease the acceptance of fuel cells as a commercial product and increase our costs and, therefore, the price of our products. Accordingly, compliance with existing or future laws and regulations could have a material adverse effect on our business prospects, results of operations and financial condition.
In addition, certain of our products benefit from federal, state and local governmental incentives, mandates or other programs promoting clean energy generation. Any changes to or termination of these programs could reduce demand for our products, impair sales financing, and adversely impact our business results.
Utility companies may resist the adoption of distributed generation and could impose customer fees or interconnection requirements on our customers that could make our products less desirable.
Investor-owned utilities may resist adoption of distributed generation fuel cell plants as such plants are disruptive to the utility business model that primarily utilizes large central generation power plants and associated transmission and distribution. On-site distributed generation that is on the customer-side of the electric meter competes with the utility. Distributed generation on the utility-side of the meter generally has power output that is significantly less than central generation power plants and may be perceived by the utility as too small to materially impact its business, limiting its interest. Additionally, perceived technology risk may limit utility interest in stationary fuel cell power plants.
Utility companies commonly charge fees to larger, industrial customers for disconnecting from the electric grid or for having the capacity to use power from the electric grid for back up purposes. These fees could increase the cost to our customers of using our SureSource products and could make our products less desirable, thereby harming our business prospects, results of operations and financial condition.
We could incur costs or liabilities, or become subject to other adverse impacts, in connection with federal, state and local environmental laws applicable to our research, development or manufacturing operations or our products.
Our business exposes us to the risk of harmful substances escaping into the environment, resulting in personal injury or loss of life, damage to or destruction of property, and natural resource damage. Depending on the nature of the claim, our current insurance policies may not adequately reimburse us for costs incurred in settling environmental damage claims, and in some instances, we may not be reimbursed at all. Our business is subject to numerous federal, state, and local laws and regulations that govern environmental protection and human health and safety. We believe that our businesses are operating in compliance in all material respects with applicable environmental laws; however, these laws and regulations have changed frequently in the past and it is reasonable to expect additional and more stringent changes in the future.
Our operations may not comply with future laws and regulations and we may be required to make significant unanticipated capital and operating expenditures. If we fail to comply with applicable environmental laws and regulations, governmental authorities may seek to impose fines and penalties on us or to revoke or deny the issuance or renewal of operating permits and private parties may seek damages from us. Under those circumstances, we might be required to curtail or cease operations, conduct site remediation or other corrective action, or pay substantial damage claims.
In addition, given that some of our product configurations run on fossil fuels, we may be negatively impacted by CO2-related changes in applicable laws, regulations, ordinances, rules or the requirements of the incentive programs on which we and our customers currently rely. Changes in any of the laws, regulations, ordinances or rules that apply to our installations and new technology could make it illegal or more costly for us or our customers to install and operate our products at particular sites. Additionally, our customers and potential customers’ energy procurement policies may prohibit or limit their willingness to procure our products. Our business prospects may be negatively impacted if we are prevented from completing new installations or our installations become more costly as a result of laws, regulations, ordinances, or rules applicable to our products, or by our customers’ and potential customers’ energy procurement policies
68
Our products use inherently dangerous, flammable fuels, operate at high temperatures and use corrosive carbonate material, each of which could subject our business to product liability claims.
Our business exposes us to potential product liability claims that are inherent in products that use hydrogen. Our products utilize fuels such as natural gas and convert these fuels internally to hydrogen that is used by our products to generate electricity. The fuels we use are combustible and may be toxic. In addition, our SureSource products operate at high temperatures and use corrosive carbonate material, which could expose us to potential liability claims. Although we have incorporated a robust design and redundant safety features in our power plants, have established comprehensive safety, maintenance, and training programs, follow third-party certification protocols, codes and standards, and do not store natural gas or hydrogen at our power plants, we cannot guarantee that there will not be accidents. Any accidents involving our products or other hydrogen-using products could materially impede widespread market acceptance and demand for our products. In addition, we might be held responsible for damages beyond the scope of our insurance coverage. We also cannot predict whether we will be able to maintain adequate insurance coverage on acceptable terms.
We are subject to risks inherent in international operations.
Since we market our products both inside and outside the U.S., our success depends in part on our ability to secure international customers and our ability to manufacture products that meet foreign regulatory and commercial requirements in target markets. Sales to customers in South Korea have historically represented the majority of our international sales. We have limited experience developing and manufacturing our products to comply with the commercial and legal requirements of international markets. In addition, we are subject to tariff regulations and requirements for export licenses, particularly with respect to the export of some of our technologies. We face numerous challenges in our international expansion, including unexpected changes in regulatory requirements and other geopolitical risks, fluctuations in currency exchange rates, longer accounts receivable requirements and collections, greater bonding and security requirements, difficulties in managing international operations, potentially adverse tax consequences, restrictions on repatriation of earnings and the burdens of complying with a wide variety of international laws. Any of these factors could adversely affect our results of operations and financial condition.
We source raw materials and parts for our products on a global basis, which subjects us to a number of potential risks, including the impact of export duties and quotas, trade protection measures imposed by the U.S. and other countries including tariffs, potential for labor unrest, changing global and regional economic conditions and current and changing regulatory environments. Changes to these factors may have an adverse effect on our ability to source raw materials and parts in line with our current cost structure.
Although our reporting currency is the U.S. dollar, we conduct our business and incur costs in the local currency of most countries in which we operate. As a result, we are subject to currency translation and transaction risk. Changes in exchange rates between foreign currencies and the U.S. dollar could affect our net sales and cost of sales and could result in exchange gains or losses. We cannot accurately predict the impact of future exchange rate fluctuations on our results of operations.
We could also expand our business into new and emerging markets, many of which have an uncertain regulatory environment relating to currency policy. Conducting business in such markets could cause our exposure to changes in exchange rates to increase, due to the relatively high volatility associated with emerging market currencies and potentially longer payment terms for our proceeds. Our ability to hedge foreign currency exposure is dependent on our credit profile with financial institutions that are willing and able to do business with us. Deterioration in our credit position or a significant tightening of the credit market conditions could limit our ability to hedge our foreign currency exposure and, therefore, result in exchange gains or losses.
Exports of certain of our products are subject to various export control regulations and may require a license or permission from the U.S. Department of State, the U.S. Department of Energy or other agencies.
As an exporter, we must comply with various laws and regulations relating to the export of products, services and technology from the U.S. and other countries having jurisdiction over our operations. We are subject to export control laws and regulations, including the International Traffic in Arms Regulation, the Export Administration Regulation, and the Specially Designated Nationals and Blocked Persons List, which generally prohibit U.S. companies and their intermediaries from exporting certain products, importing materials or supplies, or otherwise doing business with restricted countries, businesses or individuals, and require companies to maintain certain policies and procedures to ensure compliance. We are also subject to the Foreign Corrupt Practices Act which prohibits improper payments to foreign governments and their officials by U.S. and other business entities. Under these laws and regulations, U.S. companies may be held liable for their actions and actions taken by their strategic or local partners or representatives. If we, or our intermediaries, fail to comply with the requirements of these laws and regulations, or similar laws of other countries, governmental authorities in the United States or elsewhere, as applicable, could seek to impose civil and/or criminal penalties, which could damage our reputation and have a material adverse effect on our business, financial condition and results of operations.
We are also subject to registration under the U.S. State Department’s Directorate of Defense Trade Controls (“DDTC”). Due to the nature of certain of our products and technology, we must obtain licenses or authorizations from various U.S. government agencies such as DDTC or the U.S. Department of Energy, before we are permitted to sell such products or license such technology outside of the U.S. We can give no assurance that we will continue to be successful in obtaining the necessary licenses or authorizations or that certain sales will not be prevented or delayed. Any significant impairment of our ability to sell products or license technology outside of the U.S. could negatively impact our results of operations, financial condition or liquidity.
69
We depend on strategic relationships with third parties, and the terms and enforceability of many of these relationships are not certain.
We have entered into strategic relationships with third parties for the design, product development, sale and service of our existing products and products under development, some of which may not have been documented by a definitive agreement and others of which may require renewal. The terms and conditions of many of these relationships allow for termination by the third parties. Termination or expiration of any of these relationships could adversely affect our ability to design, develop and distribute these products to the marketplace. We cannot assure you that we will be able to successfully negotiate and execute definitive agreements or renewals with any of these third parties, and failure to do so may effectively terminate the relevant relationship.
We are increasingly dependent on information technology, and disruptions, failures or security breaches of our information technology infrastructure could have a material adverse effect on our operations. In addition, increased information technology security threats and more sophisticated computer crime pose a risk to our systems, networks, products and services.
We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic and financial information and to manage a variety of business processes and activities, including communication with power plants owned by us or our customers and production, manufacturing, financial, logistics, sales, marketing and administrative functions. Additionally, we collect and store data that is sensitive to us and to third parties. Operating these information technology networks and systems and processing and maintaining this data, in a secure manner, are critical to our business operations and strategy. We depend on our information technology infrastructure to communicate internally and externally with employees, customers, suppliers and others. We also use information technology networks and systems to comply with regulatory, legal and tax requirements and to operate our fuel cell power plants. These information technology systems, many of which are managed by third parties or used in connection with shared service centers, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers or other cybersecurity risks, telecommunication failures, user errors, natural disasters, terrorist attacks or other catastrophic events. If any of our significant information technology systems suffer severe damage, disruption or shutdown, and our disaster recovery and business continuity plans do not effectively resolve the issues in a timely manner, our product sales, financial condition and results of operations may be materially and adversely affected, and we could experience delays in reporting our financial results, or our fuel cell power plant operations may be disrupted, exposing us to performance penalties under our contracts with customers.
In addition, information technology security threats — from user error to cybersecurity attacks designed to gain unauthorized access to our systems, networks and data — are increasing in frequency and sophistication. Cybersecurity attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crime and advanced persistent threats. These threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. Cybersecurity attacks could also include attacks targeting customer data or the security, integrity and/or reliability of the hardware and software installed in our products. We have experienced, and may continue to experience in the future, cybersecurity attacks that have resulted in unauthorized parties gaining access to our information technology systems and networks and, in one instance, gaining control of the information technology system at one of our power plants. However, to date, no cybersecurity attack has resulted in any material loss of data, interrupted our day-to-day operations or had a material impact on our financial condition, results of operations or liquidity. While we actively manage information technology security risks within our control, there can be no assurance that such actions will be sufficient to mitigate all potential risks to our systems, networks and data. In addition to the direct potential financial risk as we continue to build, own and operate generation assets, other potential consequences of a material cybersecurity attack include reputational damage, litigation with third parties, disruption to systems, unauthorized release of confidential or otherwise protected information, corruption of data, diminution in the value of our investment in research, development and engineering, and increased cybersecurity protection and remediation costs, which in turn could adversely affect our competitiveness, results of operations and financial condition. The amount of insurance coverage we maintain may be inadequate to cover claims or liabilities relating to a cybersecurity attack.
Additionally, the legal and regulatory environment surrounding information security and privacy in the U.S. and international jurisdictions is constantly evolving. Violation or non-compliance with any of these laws or regulations, contractual requirements relating to data security and privacy, or with our own privacy and security policies, either intentionally or unintentionally, or through the acts of intermediaries could have a material adverse effect on our brands, reputation, business financial condition and results of operations, as well as subject us to significant fines, litigation losses, third-party damages and other liabilities
Litigation could expose us to significant costs and adversely affect our business, financial condition, and results of operations.
We are, or may become, party to various lawsuits, arbitrations, mediations, regulatory proceedings and claims, which may include lawsuits, arbitrations, mediations, regulatory proceedings or claims relating to commercial liability, product recalls, product liability, product claims, employment matters, environmental matters, breach of contract, intellectual property, indemnification, stockholder suits, derivative actions or other aspects of our business. Litigation (including the other types of proceedings identified above) is inherently unpredictable, and although we may believe we have meaningful defenses in these matters, we may incur judgments or enter into settlements of claims that could have a material adverse effect on our business, financial condition, and results of operations. The costs of responding to or defending litigation may be significant and may divert the attention of management away from our strategic objectives. There may also be adverse publicity associated with litigation that may decrease customer confidence in our business or our management, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may have a material adverse effect on our business, financial condition, and results of operations.
70
Our results of operations could vary as a result of changes to our accounting policies or the methods, estimates and judgments we use in applying our accounting policies.
The methods, estimates and judgments we use in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that could lead us to reevaluate our methods, estimates and judgments.
In future periods, management will continue to reevaluate its estimates for contract margins, service agreements, loss accruals, warranty, performance guarantees, liquidated damages and inventory valuation allowances. Changes in those estimates and judgments could significantly affect our results of operations and financial condition. We will also adopt changes required by the Financial Accounting Standards Board and the SEC.
Our stock price has been and could remain volatile.
The market price for our common stock has been and may continue to be volatile and subject to extreme price and volume fluctuations in response to market and other factors, including the following, some of which are beyond our control:
|
|
• |
failure to meet commercialization milestones; |
|
|
• |
failure to win contracts through competitive bidding processes; |
|
|
• |
the loss of a major customer or a contract; |
|
|
• |
variations in our quarterly operating results from the expectations of securities analysts or investors; |
|
|
• |
downward revisions in securities analysts’ estimates or changes in general market conditions; |
|
|
• |
changes in the securities analysts that cover us or failure to regularly publish reports; |
|
|
• |
announcements of technological innovations or new products or services by us or our competitors; |
|
|
• |
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; |
|
|
• |
additions or departures of key personnel; |
|
|
• |
investor perception of our industry or our prospects; |
|
|
• |
insider selling or buying; |
|
|
• |
demand for our common stock; |
|
|
• |
dilution from issuances of common stock; |
|
|
• |
general market trends or preferences for non-fueled resources; |
|
|
• |
the COVID-19 pandemic; |
|
|
• |
general technological or economic trends; and |
|
|
• |
changes in United States or foreign political environment and the passage of laws, including, tax, environmental or other laws, affecting the product development business. |
In the past, following periods of volatility in the market price of their stock, many companies have been the subject of securities class action litigation. If we become involved in securities class action litigation in the future, it could result in substantial costs and diversion of management’s attention and resources and could harm our stock price, business prospects, results of operations and financial condition.
Provisions of Delaware and Connecticut law and of our certificate of incorporation and by-laws and our outstanding securities may make a takeover more difficult.
Provisions in our Certificate of Incorporation, as amended (“Certificate of Incorporation”), and Amended and Restated By-Laws (“By-Laws”) and in Delaware and Connecticut corporate law may make it difficult and expensive for a third-party to pursue a tender offer, change in control or takeover attempt that is opposed by our management and board of directors. In addition, certain provisions and rights of the Series 1 Preferred Shares of FCE Ltd. and our Series B Preferred Stock could make it more difficult or more expensive for a third party to acquire us. Public stockholders who might desire to participate in such a transaction may not have an opportunity to do so. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change in control or change in our management and board of directors.
71
Our By-Laws provide that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a judicial forum deemed favorable by the stockholder for disputes with us or our directors, officers or employees.
Our By-Laws provide that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our Certificate of Incorporation or our By-Laws, any action to interpret, apply, enforce, or determine the validity of our Certificate of Incorporation or By-Laws, or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder finds favorable for disputes against us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our By-Laws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.
The implementation of our business plan and strategy will require additional capital. If we are unable to raise capital, it may create substantial doubt about our ability to continue as a going concern.
The implementation of our business plan and strategy requires additional capital to fund operations as well as investment by us in project assets. If we are unable to raise additional capital in the amounts required, or at all, we will not be able to successfully implement our business plan and strategy. There can be no guarantee that we will be able to raise such additional capital at the times required or in the amounts required for the implementation of our business plan and strategy. In addition, the recent change to a more capital-intensive business model increases the risks of our being able to successfully implement our plans, if we do not raise additional capital in the amounts required. If we are unable to raise additional capital, our business, operations and prospects could be materially and adversely affected.
The lenders and the Agent under the Orion Facility have broad approval rights over our ability to raise additional capital, obtain other debt financing, and draw, allocate and use funds from the Orion Facility. If we are unable to obtain such approvals when we seek to raise additional capital, obtain other debt financing, or use funds under the Orion Facility, it could have a material adverse effect on our financial condition and operations.
There are indicators that substantial doubt about the Company’s ability to continue as a going concern exists, including, but not limited to, historical losses and negative cash flows, increasing costs of debt financing, restrictive debt covenants and restrictions imposed by the Company’s current lenders, limited availability of assets to support borrowing that have not already been pledged to existing lenders, and the need for additional financing to carry out the Company’s business plans. When indicators of substantial doubt exist, GAAP requires management to make an assessment of whether substantial doubt is alleviated by management’s plans. Even though equity and debt financings and other sources of funds may be available in the future, when assessing whether substantial doubt is alleviated, management is not able to place reliance on uncommitted sources of financing. As of the date of these financial statements, management assessed the Company’s ability to continue as a going concern through analysis of existing cash on hand, expected receipts under existing agreements, and release of short-term restricted cash less expected disbursements over the next twelve months and expects that the Company will meet its obligations for at least one year from the date of issuance of these financial statements (assuming that there are no extraordinary or unanticipated impacts to its business as a result of COVID-19 or otherwise). Execution of the Company’s business plan will require additional financing or other measures to generate cash inflows and reduce cash outflows as early as the expected filing of the Form 10-K for the fiscal year ending October 31, 2020 in order to alleviate substantial doubt in future periods.
We will need to raise additional capital, and such capital may not be available on acceptable terms, or on terms acceptable to our lenders, if at all. If we do raise additional capital utilizing equity, existing stockholders will suffer dilution. If we do not raise additional capital, our business could fail or be materially and adversely affected.
We will need to raise additional funds in debt and equity financings, and these funds may not be available to us when we need them or on acceptable terms, or on terms acceptable to our lenders, if at all. Such additional financings could be significant. If we raise additional funds through further issuances of our common stock, or securities convertible or exchangeable into shares of our common stock, into the public market, including shares of our common stock issued upon exercise of options or warrants, holders of our common stock could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of our then-existing capital stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. If we cannot raise additional funds when we need them, our business and prospects could fail or be materially and adversely affected. In addition, if additional funds are not secured in the future, we will have to modify, reduce, defer or eliminate parts of our present and anticipated future projects, or sell some or all of our assets.
Future sales of substantial amounts of our common stock could affect the market price of our common stock.
Future sales of substantial amounts of our common stock, or securities convertible or exchangeable into shares of our common stock, into the public market, including shares of our common stock issued upon exercise of options or warrants, or perceptions that those sales could occur, could adversely affect the prevailing market price of our common stock and our ability to raise capital in the future.
As of July 31, 2020, we had reserved for issuance 8,000,000 shares of our common stock issuable upon the exercise of the Orion Warrants and 964,114 shares of our common stock issuable upon exercise of the Series C Warrants dated May 3, 2017. Upon exercise of these warrants, the underlying shares may be resold into the public market, subject in some cases to volume and other limitations or prospectus delivery requirements pursuant to registration statements registering the resale of such shares. In the case of outstanding warrants that have exercise prices that are below the market price of our common stock from time to time, our stockholders would experience dilution upon the exercise of these warrants. On June 29, 2020, we filed a registration statement pursuant to which selling stockholders may from time to time sell up to 8,000,000 shares of common stock issuable upon the
72
exercise of the Orion Warrants and 9,396,320 shares of common stock issued upon the cashless exercise of the Orion Warrants. The registration statement was declared effective on July 20, 2020. The exercise of the warrants and/or sale of shares underlying these warrants, or the perception that those sales could occur, could adversely affect the prevailing market price of our common stock and our ability to raise capital in the future.
Our ability to use our significant net operating loss (“NOL”) carryforwards may be subject to limitations in the future.
As of October 31, 2019, we had federal and state net operating loss carryforwards of $850.0 million and $438.8 million, respectively. The federal NOL carryforwards expire in varying amounts from fiscal years 2020 through 2037, while state NOL carryforwards expire in varying amounts from fiscal years 2020 through 2039. Federal NOLs generated beginning in fiscal 2018 are not subject to expiration but may be subject to limitation. These deferred tax assets have been fully offset by a valuation allowance. These NOLs may be utilized to reduce future taxable income, subject to certain limitations if we experience an ownership shift of greater than 50%, as determined under Section 382 of the Internal Revenue Code of 1986. We periodically undertake a Section 382 ownership shift analysis to determine whether any of our NOL carryovers may be subject to limitation. As of July 31, 2020, we determined that the ownership shift under Section 382 was 49.7%. If future sales of common stock by the Company, or changes in the number of shares of common stock owned by certain stockholders or groups of stockholders (which are outside of our control), as measured under Section 382, cause us to experience an ownership shift of greater than 50%, our ability to utilize our NOL carryforwards to offset future federal and state income tax liabilities could be limited or deferred.
The pending legal proceedings with POSCO Energy could expose us to costs of such legal proceedings or an adverse judgment.
From approximately 2007 through 2015, we relied on POSCO Energy to develop and grow the South Korean and Asian markets for our products and services. We entered into manufacturing and technology transfer agreements with POSCO Energy, including the Alliance Agreement dated February 7, 2007 (and amendments thereto), the Technology Transfer, License and Distribution Agreement dated February 7, 2007 (and amendments thereto), the Stack Technology Transfer and License Agreement dated October 27, 2009 (and amendments thereto), and the Cell Technology Transfer and License Agreement dated October 31, 2012 (and amendments thereto) (the “License Agreements”). The License Agreements provided POSCO Energy with the exclusive technology rights to manufacture, sell, distribute and service our SureSource 300, SureSource 1500 and SureSource 3000 fuel cell technology in the Korean and broader Asian markets. Due to certain actions and inactions of POSCO Energy, we have not realized any material revenues, royalties or new projects developed by POSCO Energy since late 2015.
In November 2019, POSCO Energy spun-off its fuel cell business into a new entity, Korea Fuel Cell Co., Ltd. (“KFC”), without the Company’s consent. As part of the spin-off, POSCO Energy transferred manufacturing and service rights under the License Agreements to KFC, but retained distribution rights and severed its own liability under the License Agreements. We formally objected to POSCO Energy’s spin-off and POSCO Energy posted a bond to secure any liabilities to the Company arising out of the spin-off.
On February 19, 2020, we notified POSCO Energy in writing that it was in material breach of the License Agreements by (i) its actions in connection with the spin-off of the fuel cell business to KFC, (ii) its suspension of performance through its cessation of all sales activities since late 2015 and its abandonment of its fuel cell business in Asia, and (iii) its disclosure of material nonpublic information to third parties and its public pronouncements about the fuel cell business on television and in print media that have caused reputational damage to the fuel cell business, the Company and its products. We also notified POSCO Energy that, under the terms of the License Agreements, it had 60 days to fully cure its breaches to our satisfaction and that failure would lead to termination of the License Agreements. Further, on March 27, 2020, we notified POSCO Energy of additional instances of its material breach of the License Agreements based on POSCO Energy’s failure to pay royalties required to be paid in connection with certain module replacements.
On April 27, 2020, POSCO Energy initiated a series of three arbitration demands against us at the International Chamber of Commerce seated in Singapore alleging certain warranty defects in a sub-megawatt conditioning facility at its facility in Pohang, South Korea and seeking combined damages of approximately $3.3 million. Prior to filing the arbitrations, POSCO Energy obtained provisional attachments from the Seoul Central District Court attaching certain revenues owed to us by Korea Southern Power Company as part of such warranty claims which has delayed receipt of certain payments owed to us. At July 31, 2020, outstanding accounts receivable for Korea Southern Power Company was $3.1 million.
On June 28, 2020, we terminated our License Agreements with POSCO Energy and filed a demand for arbitration against POSCO Energy and KFC in the International Court of Arbitration of the International Chamber of Commerce based on POSCO Energy’s (i) failure to exercise commercially reasonable efforts to sell our technology in the Korean and Asian markets, (ii) disclosure of our proprietary information to third parties, (iii) attack on our stock price and (iv) spin-off of POSCO Energy’s fuel cell business into KFC without our consent. We have requested that the arbitral tribunal (a) confirm through declaration that POSCO Energy’s exclusive license to market our technology and products in Korea and Asia is null and void as a result of the breaches of the License Agreements and that we have the right to pursue direct sales in these markets, (b) order POSCO Energy and KFC to compensate us for losses and damages suffered in the amount of more than $200 million, and (c) order POSCO Energy and KFC to pay our arbitration costs, including counsel fees and expenses.
On August 28, 2020, POSCO Energy filed a complaint in the Court of Chancery of the State of Delaware purportedly seeking to enforce its rights as a stockholder of the Company to inspect and make copies and extracts of certain books and records of the Company and/or the Company’s subsidiaries pursuant to Section 220 of the of the Delaware General Corporation Law and/or Delaware common law. POSCO Energy alleges that it is seeking to inspect these documents for a proper purpose reasonably related to its interests as a stockholder of the Company, including investigating whether the Company’s Board of Directors and its management breached their fiduciary duties of loyalty, due care, and good faith. POSCO Energy seeks an order of the Court permitting POSCO Energy to inspect and copy the demanded books and records, awarding POSCO Energy reasonable costs and expenses, including reasonable attorney’s fees incurred in connection with the matter, and granting such other and further relief as the Court deems just and proper.
73
We cannot predict the outcome of the arbitration proceedings against POSCO Energy and KFC, the litigation and arbitration proceedings filed by POSCO Energy against us, or any future discussions with, or other actions or legal proceedings against or involving, POSCO Energy or KFC, if they occur, the future status or scope of our relationship with POSCO Energy or KFC, whether our relationship with POSCO Energy or KFC will continue in the future, whether we will become involved in additional mediations, arbitrations, litigation or other proceedings with POSCO Energy or KFC, what the costs of any such current or future proceedings will be or the effect of such current or future proceedings on the market. We also cannot predict collection timing of any receipts which are currently being delayed as a result of these proceedings. Any such current or future proceedings could result in significant expense to us, distract management’s attention from the operation of our business and adversely affect our business and financial condition and reputation in the market, whether or not such proceedings are resolved in our favor. Additionally, although we believe that termination of the License Agreements affords us with the ability to market our products and services in South Korea and the broader Asian market, we cannot predict whether our efforts to access the South Korean and Asian markets, which are complex markets, will be successful or will be limited, hindered or delayed.
The rights of the Series 1 Preferred Shares and our Series B Preferred Stock could negatively impact our cash flows and the rights of our Series B Preferred Stock could dilute the ownership interest of our stockholders.
The terms of the Series 1 Preferred Shares issued by FCE Ltd. provide rights to the holder, Enbridge Inc. (“Enbridge”), which could negatively impact us.
The provisions of the Series 1 Preferred Shares, as such were amended pursuant to a letter agreement entered into by the Company, FCE Ltd. and Enbridge on January 20, 2020, require that FCE Ltd. make annual payments to Enbridge totaling Cdn. $1,250,000, including (i) annual dividend payments of Cdn. $500,000 and (ii) annual return of capital payments of Cdn. $750,000, with such payments to be made on a quarterly basis through December 31, 2021. Commencing on January 1, 2020, dividends accrue at an annual rate of 15% on the principal redemption price with respect to the Series 1 Preferred Shares and any accrued and unpaid dividends on the Series 1 Preferred Shares. The aggregate amount of all accrued and unpaid dividends to be paid on the Series 1 Preferred Shares on or before December 31, 2021 is expected to be Cdn. $26.5 million and the balance of the principal redemption price to be paid on or before December 31, 2021 with respect to all of the Series 1 Preferred Shares is expected to be Cdn. $3.5 million. In connection with the letter agreement, the Company entered into the Second Amendment to the Orion Credit Agreement (the “Second Orion Amendment”), which adds a new affirmative covenant to the Orion Credit Agreement that obligates the Company to, and to cause FCE Ltd. to, on or prior to November 1, 2021, either (i) pay and satisfy in full all of their respective obligations in respect of, and fully redeem and cancel, all of the Series 1 Preferred Shares of FCE Ltd., or (ii) deposit in a newly created account of FCE Ltd. or the Company cash in an amount sufficient to pay and satisfy in full all of their respective obligations in respect of, and to effect a redemption and cancellation in full of, all of the Series 1 Preferred Shares of FCE Ltd. The Second Orion Amendment also provides that the amended articles of FCE Ltd. setting forth the modified terms of the Series 1 Preferred Shares will be considered a “Material Agreement” under the Orion Credit Agreement. Under the Second Orion Amendment, a failure to satisfy this new affirmative covenant or to otherwise comply with the terms of the Series 1 Preferred Shares will constitute an event of default under the Orion Credit Agreement, which could result in the acceleration of any amounts outstanding under the Orion Credit Agreement.
The terms of our Series B Preferred Stock also provide rights to their holders that could negatively impact us. Holders of the Series B Preferred Stock are entitled to receive cumulative dividends at the rate of $50 per share per year, payable either in cash or in shares of our common stock. To the extent the dividend is paid in shares, additional issuances could be dilutive to our existing stockholders and the sale of those shares could have a negative impact on the price of our common stock. A share of our Series B Preferred Stock may be converted at any time, at the option of the holder, into 0.5910 shares of our common stock (which is equivalent to an initial conversion price of $1,692 per share), plus cash in lieu of fractional shares. Furthermore, the conversion rate applicable to the Series B Preferred Stock is subject to additional adjustment upon the occurrence of certain events.
The Series B Preferred Stock ranks senior to our common stock with respect to payments upon liquidation, dividends, and distributions.
The rights of the holders of our Series B Preferred Stock rank senior to our obligations to our common stockholders. Upon our liquidation, the holders of Series B Preferred Stock are entitled to receive $1,000.00 per share plus all accumulated and unpaid dividends (the “Liquidation Preference”). Until the holders of Series B Preferred Stock receive their Liquidation Preference in full, no payment will be made on any junior shares, including shares of our common stock. The existence of senior securities such as the Series B Preferred Stock could have an adverse effect on the value of our common stock.
74
|
Item 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
|
|
(a) |
None. |
|
|
(b) |
Not applicable. |
|
|
(c) |
Stock Repurchases |
The following table sets forth information with respect to purchases made by us or on our behalf of our common stock during the periods indicated:
|
Period |
|
Total Number of Shares Purchased (1) |
|
|
Average Price Paid per Share |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Programs |
|
|
Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs |
|
||||
|
May 1, 2020 – May 31, 2020 |
|
|
1,261 |
|
|
$ |
2.13 |
|
|
|
— |
|
|
|
— |
|
|
June 1, 2020 – June 30, 2020 |
|
|
311 |
|
|
$ |
1.48 |
|
|
|
— |
|
|
|
— |
|
|
July 1, 2020 – July 31, 2020 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
— |
|
|
Total |
|
|
1,572 |
|
|
$ |
2.00 |
|
|
|
— |
|
|
|
— |
|
|
(1) |
Includes only shares that were surrendered by employees to satisfy statutory tax withholding obligations in connection with the vesting of stock-based compensation awards. |
|
Item 3. |
DEFAULT UPON SENIOR SECURITIES |
None.
|
Item 4. |
MINE SAFETY DISCLOSURES |
None.
|
Item 5. |
OTHER INFORMATION |
None.
75
|
Item 6. |
EXHIBITS |
|
Exhibit No. |
|
Description |
|
3.1 |
|
|
|
3.2 |
|
|
|
3.3 |
|
|
|
3.4 |
|
|
|
3.5 |
|
|
|
3.6 |
|
|
|
3.7 |
|
|
|
3.8 |
|
|
|
3.9 |
|
|
|
3.10 |
|
|
|
3.11 |
|
|
|
3.12 |
|
|
|
3.13 |
|
|
|
4.1 |
|
|
|
4.2 |
|
|
|
4.3 |
|
Letter Agreement, dated March 31, 2011, and Guarantee, dated April 1, 2011, by and between the Company and Enbridge, Inc., and Revised Special Rights and Restrictions attributable to the Class A Preferred Stock of FuelCell Energy, Ltd. (incorporated by reference to Exhibits 4.1, 4.2 and 4.3 to the Company’s Current Report on Form 8-K dated March 31, 2011). |
|
4.4 |
|
|
|
4.5 |
|
|
|
4.6 |
|
|
|
4.7 |
|
|
|
4.8 |
|
|
|
4.9 |
|
|
|
4.10 |
|
|
|
4.11 |
|
|
|
4.12 |
|
|
|
4.13 |
|
76
|
Exhibit No. |
|
Description |
|
4.14 |
|
|
|
4.15 |
|
|
|
10.1 |
|
|
|
10.2 |
|
|
|
10.3 |
|
|
|
10.4 |
|
|
|
10.5 |
|
|
|
10.6 |
|
|
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32.1 |
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
32.2 |
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
101.SCH |
|
Inline XBRL Schema Document |
|
101.CAL |
|
Inline XBRL Calculation Linkbase Document |
|
101.LAB |
|
Inline XBRL Labels Linkbase Document |
|
101.PRE |
|
Inline XBRL Presentation Linkbase Document |
|
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
77
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
FUELCELL ENERGY, INC. |
|
|
|
(Registrant) |
|
|
|
|
|
September 10, 2020 |
|
/s/ Michael S. Bishop |
|
Date |
|
Michael S. Bishop Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) |
78
CERTIFICATION
I, Jason B. Few, certify that:
|
|
1. |
I have reviewed this quarterly report on Form 10-Q of FuelCell Energy, Inc.; |
|
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared: |
|
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and |
|
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
|
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
September 10, 2020 |
/s/ Jason B. Few |
|
|
Jason B. Few President and Chief Executive Officer (Principal Executive Officer) |
CERTIFICATION
I, Michael S. Bishop, certify that:
|
|
1. |
I have reviewed this quarterly report on Form 10-Q of FuelCell Energy, Inc.; |
|
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and |
|
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
|
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of FuelCell Energy, Inc. (the “Company”) on Form 10-Q for the quarter ended July 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jason B. Few, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
|
|
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C 78m or 78o(d)); and |
|
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
September 10, 2020 |
/s/ Jason B. Few |
|
|
Jason B. Few President and Chief Executive Officer (Principal Executive Officer) |
A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of FuelCell Energy, Inc. (the “Company”) on Form 10-Q for the quarter ended July 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael S. Bishop, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
|
|
(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C 78m or 78o(d)); and |
|
|
(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
September 10, 2020 |
/s/ Michael S. Bishop |
|
|
Michael S. Bishop Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) |
A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.