FUELCELL ENERGY INC [FCEL] Filings

10-Q 1 fcel-20220131x10q.htm 10-Q

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 January 31, 2022

☐	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

A picture containing text, clipart

Description automatically generated

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 March 8, 2022: 366,687,765

Table of Contents

FUELCELL ENERGY, INC.

FORM 10-Q

Table of Contents


		Page

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements.	3

	Consolidated Balance Sheets as of January 31, 2022 and October 31, 2021.	3

	Consolidated Statements of Operations and Comprehensive Loss for the three months ended January 31, 2022 and 2021.	4

	Consolidated Statements of Changes in Equity for the three months ended January 31, 2022 and 2021.	5

	Consolidated Statements of Cash Flows for the three months ended January 31, 2022 and 2021.	6

	Notes to Consolidated Financial Statements.	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	27

Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	46

Item 4.	Controls and Procedures.	47

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings.	48

Item 1A.	Risk Factors.	52

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	52

Item 3.	Defaults Upon Senior Securities.	52

Item 4.	Mine Safety Disclosures.	52

Item 5.	Other Information.	53

Item 6.	Exhibits.	54

Signatures		56

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FUELCELL ENERGY, INC.

Consolidated Balance Sheets

(Unaudited)

(Amounts in thousands, except share and per share amounts)


	January 31,		October 31,
	2022		2021
ASSETS
Current assets:
Cash and cash equivalents, unrestricted	$	376,963	$	432,213
Restricted cash and cash equivalents - short-term		12,643		11,268
Accounts receivable, net		30,702		14,730
Unbilled receivables		13,558		8,924
Inventories		65,386		67,074
Other current assets		9,764		9,177
Total current assets		509,016		543,386
Restricted cash and cash equivalents - long-term		15,825		16,731
Inventories - long-term		4,586		4,586
Project assets		235,602		223,277
Property, plant and equipment, net		41,124		39,416
Operating lease right-of-use assets, net		7,877		8,109
Goodwill		4,075		4,075
Intangible assets, net		18,346		18,670
Other assets		18,240		16,998
Total assets⁽¹⁾	$	854,691	$	875,248
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt	$	9,722	$	10,085
Current portion of operating lease liabilities		1,013		1,032
Accounts payable		22,300		19,267
Accrued liabilities		25,988		16,099
Deferred revenue		16,237		6,287
Total current liabilities		75,260		52,770
Long-term deferred revenue and customer deposits		18,277		30,427
Long-term operating lease liabilities		7,821		8,093
Long-term debt and other liabilities		81,290		78,633
Total liabilities⁽¹⁾		182,648		169,923
Redeemable Series B preferred stock (liquidation preference of $64,020 as of January 31, 2022 and October 31, 2021)		59,857		59,857
Redeemable noncontrolling interests		15,449		3,030
Total equity:
Stockholders’ equity:
Common stock ($0.0001 par value); 500,000,000 shares authorized as of January 31, 2022 and October 31, 2021; 366,686,186 and 366,618,693 shares issued and outstanding as of January 31, 2022 and October 31, 2021, respectively		37		37
Additional paid-in capital		1,908,981		1,908,471
Accumulated deficit		(1,305,875)		(1,265,251)
Accumulated other comprehensive loss		(910)		(819)
Treasury stock, Common, at cost (86,662 and 73,430 shares as of January 31, 2022 and October 31, 2021, respectively)		(650)		(586)
Deferred compensation		650		586
Total stockholder's equity		602,233		642,438
Noncontrolling interests		(5,496)		—
Total equity		596,737		642,438
Total liabilities, redeemable noncontrolling interests and stockholders' equity	$	854,691	$	875,248

(1)

The consolidated assets as of January 31, 2022 and October 31, 2021 include $114,133 and $54,375, respectively, of assets of the variable interest entity (“VIE”) that can only be used to settle obligations of the VIE. These assets include cash of $5,167, accounts receivable of $597, operating lease right of use assets of $1,192 and project assets of $100,832 as of January 31, 2022, and cash of $1,364 and project assets of $53,012 as of October 31, 2021, respectively. The consolidated liabilities as of January 31, 2022 include short-term operating lease liabilities of $142, accrued liabilities of $159 and long-term operating lease liability of $1,458. The consolidated liabilities as of October 31, 2021 were $0.

See accompanying notes to consolidated financial statements

Table of Contents

FUELCELL ENERGY, INC.

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(Amounts in thousands, except share and per share amounts)


	Three Months Ended January 31,
	2022		2021
Revenues:
Product	$	18,000	$	—
Service		2,167		4,913
Generation		7,496		4,891
Advanced Technologies		4,132		5,073
Total revenues		31,795		14,877
Costs of revenues:
Product		18,207		2,366
Service		2,372		5,099
Generation		10,722		7,115
Advanced Technologies		3,389		3,915
Total costs of revenues		34,690		18,495
Gross loss		(2,895)		(3,618)
Operating expenses:
Administrative and selling expenses		36,965		8,932
Research and development expenses		4,984		1,823
Total costs and expenses		41,949		10,755
Loss from operations		(44,844)		(14,373)
Interest expense		(1,428)		(2,545)
Change in fair value of common stock warrant liability		—		(15,974)
Loss on extinguishment of debt		—		(11,156)
Loss on extinguishment of preferred stock obligation of subsidiary		—		(934)
Other income (expense), net		152		(978)
Loss before provision for income taxes		(46,120)		(45,960)
Provision for income taxes		—		—
Net loss		(46,120)		(45,960)
Net loss attributable to redeemable noncontrolling interest		(5,496)		—
Net loss attributable to FuelCell Energy, Inc.		(40,624)		(45,960)
Series B preferred stock dividends		(800)		(800)
Net loss attributable to common stockholders	$	(41,424)	$	(46,760)
Loss per share basic and diluted:
Net loss per share attributable to common stockholders	$	(0.11)	$	(0.15)
Basic and diluted weighted average shares outstanding		366,734,739		312,109,888


	Three Months Ended January 31,
	2022		2021
Net loss	$	(46,120)	$	(45,960)
Other comprehensive loss:
Foreign currency translation adjustments		(91)		58
Total comprehensive loss	$	(46,211)	$	(45,902)
Comprehensive loss attributable to redeemable noncontrolling interest		(5,496)		-
Comprehensive loss attributable to FuelCell Energy, Inc.	$	(40,715)	$	(45,902)

See accompanying notes to consolidated financial statements.

Table of Contents

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 Stockholder's Equity		Noncontrolling Interests	Total Equity
Balance, October 31, 2021	366,618,693	$	37	$	1,908,471	$	(1,265,251)	$	(819)	$	(586)	$	586	$	642,438	$	—	$	642,438
Common stock issued, non-employee compensation	20,673		—		100		—		—		—		—		100		—		100
Stock issued under benefit plans, net of taxes paid upon vesting of restricted stock awards	60,052		—		(260)		—		—		—		—		(260)		—		(260)
Share based compensation	—		—		1,470		—		—		—		—		1,470		—		1,470
Preferred dividends — Series B	—		—		(800)		—		—		—		—		(800)		—		(800)
Effect of foreign currency translation	—		—		—		—		(91)		—		—		(91)		—		(91)
Adjustment for deferred compensation	(13,232)		—		—		—		—		(64)		64		—		—		—
Net loss attributable to redeemable noncontrolling interest	—		—		—		5,496		—		—		—		5,496		(5,496)		—
Net Loss	—		—		—		(46,120)		—		—		—		(46,120)		—		(46,120)
Balance, January 31, 2022	366,686,186	$	37	$	1,908,981	$	(1,305,875)	$	(910)	$	(650)	$	650	$	602,233	$	(5,496)	$	596,737


	Common Stock
	Shares	Amount		Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Deferred Compensation			Total Stockholder's Equity		Noncontrolling Interests	Total Equity
Balance, October 31, 2020	294,706,758	$	29	$	1,359,454	$	(1,164,196)	$	(739)	$	(432)	$	432	$	194,548	$	—	$	194,548
Sale of common stock, net of fees	25,000,000		3		156,363		—		—		—		—		156,366		—		156,366
Orion warrant exercises	2,700,000		—		21,824		—		—		—		—		21,824		—		21,824
Common stock issued, non-employee compensation	2,734		—		45		—		—		—		—		45		—		45
Stock issued under benefit plans, net of taxes paid upon vesting of restricted stock awards	4,521		—		8		—		—		—		—		8		—		8
Share based compensation	—		—		1,417		—		—		—		—		1,417		—		1,417
Preferred dividends — Series B	—		—		(800)		—		—		—		—		(800)		—		(800)
Effect of foreign currency translation	—		—		—		—		58		—		—		58		—		58
Adjustment for deferred compensation	(1,669)		—		—		—		—		(30)		30		—		—		—
Release of a share reserve	(48)		—		—		—		—		—		—		—		—		—
Net Loss	—		—		—		(45,960)		—		—		—		(45,960)		—		(45,960)
Balance, January 31, 2021	322,412,296	$	32	$	1,538,311	$	(1,210,156)	$	(681)	$	(462)	$	462	$	327,506	$	—	$	327,506

See accompanying notes to consolidated financial statements.

Table of Contents

FUELCELL ENERGY, INC.

Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)


	Three Months Ended January 31,
	2022		2021
Cash flows from operating activities:
Net loss	$	(46,120)	$	(45,960)
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation		1,470		1,417
Depreciation and amortization		5,771		5,604
Change in fair value of common stock warrant liability		-		15,974
Non-cash charge for extinguishment of preferred stock obligation of subsidiary		-		934
Non-cash interest expense on preferred stock and debt obligations		1,066		1,566
Non-cash charge for extinguishment of debt		-		7,156
Operating lease costs		395		378
Operating lease payments		(372)		(284)
Impairment of property, plant and equipment		976		—
Unrealized foreign currency losses (gains)		(82)		848
Other non-cash transactions		(316)		628
(Increase) decrease in operating assets:
Accounts receivable		(15,972)		(458)
Unbilled receivables		(4,369)		(3,466)
Inventories		(2,529)		(8,602)
Other assets		(1,994)		(954)
(Decrease) Increase in operating liabilities:
Accounts payable		2,560		(1,887)
Accrued liabilities		10,027		(5,618)
Deferred revenue		1,735		2,407
Net cash used in operating activities		(47,754)		(30,317)
Cash flows from investing activities:
Capital expenditures		(5,331)		(204)
Project asset expenditures		(10,435)		(4,387)
Net cash used in investing activities		(15,766)		(4,591)
Cash flows from financing activities:
Repayment of debt		(2,530)		(82,292)
Common stock issued for stock plans and related expenses		26		8
Contributions received from sale of redeemable noncontrolling interest		12,419		—
Payments for taxes related to net share settlement of equity awards		(285)		—
Repayment of Series 1 Preferred Share Obligation		—		(21,541)
Common stock issuance, net of fees		—		156,363
Proceeds from sale of common stock and warrant exercises, net		—		654
Payment of preferred dividends and return of capital		(800)		(800)
Net cash provided by financing activities		8,830		52,392
Effects on cash from changes in foreign currency rates		(91)		58
Net (decrease) increase in cash, cash equivalents and restricted cash		(54,781)		17,542
Cash, cash equivalents and restricted cash-beginning of period		460,212		192,052
Cash, cash equivalents and restricted cash-end of period	$	405,431	$	209,594
Supplemental cash flow disclosures:
Cash interest paid and early prepayment charge	$	329	$	8,185
Noncash financing and investing activity:
Operating lease liabilities		—		1,336
Operating lease right-of-use assets		—		1,336
Noncash reclassifications from inventory to project assets		4,217		2,072
Warrant exercises		—		21,170
Accrued purchase of fixed assets, cash to be paid in subsequent period		1,077		47
Accrued purchase of project assets, cash to be paid in subsequent period		7,640		839

See accompanying notes to consolidated financial statements.

Table of Contents

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

Headquartered in Danbury, Connecticut, FuelCell Energy, Inc. (together with its subsidiaries, the “Company,” “FuelCell Energy,” “we,” “us,” or “our”) has leveraged five decades of research and development to become a global leader in delivering environmentally responsible distributed baseload power platform solutions through our proprietary fuel cell technology. As an innovator and an American manufacturer of clean fuel cell power platforms, our current commercial technology delivers clean, distributed generation and distributed hydrogen, as well as heat, carbon separation and utilization, and water. We plan to increase our investment in developing and commercializing future technologies expected to deliver hydrogen and long duration hydrogen-based energy storage through our solid oxide technologies, as well as carbon capture solutions.

As a leading global manufacturer of proprietary fuel cell technology platforms, we are uniquely positioned to serve customers worldwide with sustainable products and solutions for businesses, utilities, governments, and municipalities. Our solutions are designed to enable a world empowered by clean energy, enhancing the quality of life for people around the globe. We target large-scale power users with our megawatt-class installations globally, and currently offer sub-megawatt solutions for smaller power consumers in Europe. To provide a frame of reference, one megawatt is adequate to continually power approximately 1,000 average sized U.S. homes. Our customer base includes utility companies, municipalities, universities, hospitals, government entities/military bases and a variety of industrial and commercial enterprises. Our leading geographic markets are currently the United States and South Korea, and we are pursuing opportunities in other countries around the world. Our product offerings drive our mission to help our customers realize their environmental goals, strengthen resiliency, manage energy and other commodity costs, and deliver valuable goods and services to their customers.

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 months ended January 31, 2022 and 2021 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, 2021 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, 2021, 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.

Principles of Consolidation

The unaudited consolidated financial statements reflect our accounts and operations and those of our subsidiaries in which we have a controlling financial interest. We use a qualitative approach in assessing the consolidation requirement for each of our variable interest entities ("VIEs"), which are tax equity partnerships further described in Note 3. “Tax Equity Financings.” This approach focuses on determining whether we have the power to direct those activities of the tax equity partnerships that most significantly affect their economic performance and whether we have the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the tax equity partnerships. For all periods presented, we have determined that we are the primary beneficiary in all of our operational tax equity partnerships. We evaluate our

Table of Contents

relationships on an ongoing basis to ensure that we continue to be the primary beneficiary. All intercompany transactions and balances have been eliminated upon consolidation.

Use of Estimates

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Estimates are used in accounting for, among other things, revenue recognition, contract loss accruals, excess, slow-moving and obsolete inventories, product warranty accruals, loss accruals on service agreements, share-based compensation expense, allowance for doubtful accounts, depreciation and amortization, impairment of goodwill and in-process research and development intangible assets, impairment of long-lived assets (including project assets), 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. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates.

Liquidity

Our principal sources of cash have been sales of our common stock through public equity offerings, proceeds from third party debt, project financing and tax monetization transactions, proceeds from the sale of our projects as well as research and development and service agreements with third parties. We have utilized this cash to develop and construct project assets, perform research and development on Advanced Technologies, pay down existing outstanding indebtedness, and meet our other cash and liquidity needs.

As of January 31, 2022, unrestricted cash and cash equivalents totaled $377.0 million compared to $432.2 million as of October 31, 2021.

On June 11, 2021, the Company entered into an Open Market Sale Agreement with Jefferies LLC and Barclays Capital Inc. with respect to an at the market offering program under which the Company may, from time to time, offer and sell shares of the Company’s common stock having an aggregate offering price of up to $500 million. From the date of the Open Market Sale Agreement through January 31, 2022, approximately 44.1 million shares were sold, resulting in gross proceeds to the Company totaling approximately $377.2 million before deducting expenses and sales commissions. Net proceeds to the Company totaled approximately $369.7 million. The Company plans to use the net proceeds from this offering to accelerate the development and commercialization of our Advanced Technologies products, including our solid oxide platform, for project development, for internal research and development, to invest in capacity expansion for solid oxide and carbonate fuel cell manufacturing, and for project financing, working capital support, and general corporate purposes. The remaining availability under the Open Market Sale Agreement as of the date of filing of this report is approximately $122.8 million. See Note 13. “Stockholders’ Equity and Warrant Liabilities” for additional information regarding the Open Market Sale Agreement.

We believe that our unrestricted cash and cash equivalents, expected receipts from our contracted backlog, and release of short-term restricted cash less expected disbursements over the next twelve months will be sufficient to allow the Company to meet its obligations for at least one year from the date of issuance of these financial statements.

To date, we have not achieved profitable operations or sustained positive cash flow from operations. The Company’s future liquidity, in fiscal year 2022 and in the long-term, will depend on its ability to (i) timely complete current projects in process within budget, (ii) increase cash flows from its generation operating portfolio, including by meeting conditions required to timely commence operation of new projects, operating its generation operating portfolio in compliance with minimum performance guarantees and operating its generation operating portfolio in accordance with revenue expectations, (iii) obtain financing for project construction, (iv) obtain permanent financing for its projects once constructed, (v) increase order and contract volumes, which would lead to additional product sales, service agreements and generation revenues, (vi) obtain funding for and receive payment for research and development under current and future Advanced Technologies contracts, (vii) successfully commercialize its Advanced Technologies platforms, including its solid oxide, hydrogen and carbon capture platforms, (viii) implement the product cost reductions necessary to achieve

Table of Contents

profitable operations, (ix) manage working capital and the Company’s unrestricted cash balance and (x) access the capital markets to raise funds through the sale of equity securities, convertible notes, and other equity-linked instruments.

We are continually assessing different means by which to accelerate the Company’s growth, enter new markets, commercialize new products, and enable capacity expansion. Therefore, from time to time, the Company may consider and enter into agreements for one or more of the following: negotiated financial transactions, minority investments, collaborative ventures, technology sharing, transfer or other technology license arrangements, joint ventures, partnerships, acquisitions or other business transactions for the purpose(s) of geographic or manufacturing expansion and/or new product or technology development and commercialization, including hydrogen production and storage and carbon capture, sequestration and utilization technologies.

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. The Company has invested capital raised from sales of its common stock to build out its project portfolio. The Company has also utilized and expects to continue to utilize a combination of long-term debt and tax equity financing (e.g., sale-leaseback and partnership transactions) to finance its project asset portfolio as these projects commence commercial operations. The Company may also utilize the proceeds from private placements of debt securities of a portfolio of assets to finance its project asset portfolio. The proceeds of any such financing, if obtained, may allow the Company to recycle capital back to the business and to fund other projects. We may also seek to obtain additional financing in both the debt and equity markets in the future. 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 or slow 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.

Note 2. Recent Accounting Pronouncements

Recently Adopted Accounting Guidance

There is no recently adopted accounting guidance.

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. Tax Equity Financing

Groton Tax Equity Financing Transaction

The Company closed on a tax equity financing transaction in August 2021 with East West Bancorp, Inc. (“East West Bank”) for the 7.4 MW fuel cell project (the “Groton Project”) located on the U.S. Navy Submarine Base in Groton, CT, also known as the Submarine Force. East West Bank’s tax equity commitment totals $15 million.

This transaction was structured as a “partnership flip”, which is a structure commonly used by tax equity investors in the financing of renewable energy projects. Under this partnership flip structure, a partnership, in this case Groton Station Fuel Cell Holdco, LLC (the “Groton Partnership”), was organized to acquire from FuelCell Energy Finance II, LLC, a wholly-owned subsidiary of the Company, all outstanding equity interests in Groton Station Fuel Cell, LLC (the “Groton Project Company”) which in turn owns the Groton Project and is the party to the power purchase agreement and all project agreements. At the closing of the transaction, the Groton Partnership is owned by East West Bank, holding Class A Units, and Fuel Cell Energy Finance Holdco, LLC, a subsidiary of FuelCell Energy Finance, LLC, holding Class B Units. The acquisition of the Groton Project Company by the Groton Partnership was funded in part by an initial draw from East West Bank and funds contributed downstream to the Groton Partnership by the Company. The initial closing occurred on August 4, 2021, upon the satisfaction of certain conditions precedent (including the receipt of an appraisal and confirmation that

Table of Contents

the Groton Project would be eligible for the investment tax credit under Section 48 of the Internal Revenue Code of 1986, as amended). In connection with the initial closing, the Company was able to draw down $3.0 million, of which approximately $0.8 million was used to pay closing costs including appraisal fees, title insurance expenses and legal and consulting fees. The Company is eligible to draw the remaining amount of the commitment, approximately $12 million, once the Groton Project achieves commercial operation. When such funds are drawn down, the funds will be distributed upstream to the Company, as a reimbursement of prior construction costs incurred by the Company.

Under most partnership flip structures, tax equity investors agree to receive a minimum target rate of return, typically on an after-tax basis. Prior to receiving a contractual rate of return or a date specified in the contractual arrangements, East West Bank will receive substantially all of the non-cash value attributable to the Groton Project, which includes accelerated depreciation and Section 48(a) investment tax credits; however, the Company will receive a majority of the cash distributions (based on the operating income of the Groton Project), which are paid quarterly. After East West Bank receives its contractual rate of return, the Company will receive approximately 95% of the cash and tax allocations. The Company (through a separate wholly owned entity) may enter into a back leverage debt financing transaction and use the cash distributions from the Groton Partnership to service the debt.

We have determined we are the primary beneficiary in the Groton Partnership for accounting purposes as a Variable Interest Entity (“VIE”) under GAAP. We have considered the provisions within the financing-related agreements (including the limited liability company agreement for the Groton Partnership) which grant us power to manage and make decisions affecting the operations of the Groton Partnership. We consider the rights granted to East West Bank under the agreements to be more protective in nature than participatory. Therefore, we have determined under the power and benefits criterion of Accounting Standards Codification (“ASC”) 810, Consolidations that we are the primary beneficiary of the Groton Partnership. As the primary beneficiary, we consolidate in our consolidated financial statements the financial position, results of operations and cash flows of the Groton Partnership, and all intercompany balances and transactions between us and the Groton Partnership are eliminated in the consolidated financial statements. We recognized East West Bank’s share of the net assets of the Groton Partnership as redeemable noncontrolling interests and noncontrolling interests in our Consolidated Balance Sheets. The income or loss allocations reflected in our Consolidated Statements of Operations and Comprehensive Loss may create volatility in our reported results of operations, including potentially changing net loss attributable to stockholders to net income attributable to stockholders, or vice versa, from quarter to quarter. Once the Groton Project is operational, we will allocate profits and losses to noncontrolling interests under the hypothetical liquidation at book value ("HLBV") method. HLBV is a balance sheet-oriented approach for applying the equity method of accounting when there is a complex structure, such as the partnership flip structure. There was nothing allocated to noncontrolling interest for the three months ended January 31, 2022.

Yaphank Tax Equity Financing Transaction

The Company closed on a tax equity financing transaction in November 2021 with Renewable Energy Investors, LLC (“REI”) , a subsidiary of Franklin Park Infrastructure, LLC, for the 7.4 MW fuel cell project (the “LIPA Yaphank Project”) located in Yaphank Long Island. REI’s tax equity commitment totals $12.4 million.

This transaction was structured as a “partnership flip,” which is a structure commonly used by tax equity investors in the financing of renewable energy projects. Under this partnership flip structure, a partnership, in this case YTBFC Holdco, LLC (the “Yaphank Partnership”), was organized to acquire from FuelCell Energy Finance II, LLC, a wholly-owned subsidiary of the Company, all outstanding equity interests in Yaphank Fuel Cell Park, LLC (the “Yaphank Project Company”) which in turn owns the LIPA Yaphank Project and is the party to the power purchase agreement and all project agreements. At the closing of the transaction, the Yaphank Partnership is owned by REI, holding Class A Units, and FuelCell YT Holdco LLC, a subsidiary of FuelCell Energy Finance, LLC, holding Class B Units. The acquisition of the Yaphank Project Company by the Yaphank Partnership was funded in part by an initial draw from REI and funds contributed downstream to the Yaphank Partnership by the Company. The initial funding occurred on December 13, 2021, upon the satisfaction of certain conditions precedent (including the receipt of an appraisal and confirmation that the LIPA Yaphank Project would be eligible for the investment tax credit (“ITC”) under Section 48 of the Internal Revenue Code of 1986, as amended). In connection with the initial closing, the Company was able to draw down approximately $3.2 million, of which approximately $0.4 million was used to pay closing costs, including title insurance expenses and legal and consulting fees. The Company drew down the remaining amount of the commitment, approximately $9.2 million, in

Table of Contents

December 2021 and January 2022, after the LIPA Yaphank Project achieved commercial operation. These proceeds were partially offset by legal and advisory fees of approximately $0.3 million.

Under a partnership flip structure, tax equity investors agree to receive a minimum target rate of return, typically on an after-tax basis. Prior to receiving a contractual rate of return or a date specified in the contractual arrangements, REI will receive substantially all of the non-cash value attributable to the LIPA Yaphank Project, which includes accelerated depreciation and Section 48(a) investment tax credits; however, the Company will receive a majority of the cash distributions (based on the operating income of the LIPA Yaphank Project), which are paid quarterly. After REI receives its contractual rate of return, the Company will receive approximately 95% of the cash and tax allocations. The Company (through a separate wholly owned entity) may enter into a back leverage debt financing transaction and use the cash distributions from the Yaphank Partnership to service the debt.

Under this partnership flip structure, after the fifth anniversary following commercial operations, we have an option to acquire all of the equity interests that REI holds in the Yaphank Partnership starting after REI receives its contractual rate of return (the anticipated “flip” date) after the LIPA Yaphank Project is operational. If we exercise this option, we will be required to pay the greater of the following: (i) the fair market value of REI's equity interest at the time the option is exercised or (ii) an amount equal 10.3% of REI’s capital contributions. This option payment is to be grossed up for federal taxes if it exceeds the tax basis of the Yaphank Partnership Class A Units.

We have determined we are the primary beneficiary in the Yaphank Partnership for accounting purposes as a VIE under GAAP. We have considered the provisions within the financing-related agreements (including the limited liability company agreement for the Yaphank Partnership) which grant us power to manage and make decisions affecting the operations of the Yaphank Partnership. We consider that the rights granted to REI under the agreements to be more protective in nature rather than participatory. Therefore, we have determined under the power and benefits criterion of ASC 810, Consolidations that we are the primary beneficiary of the Yaphank Partnership. As the primary beneficiary, we consolidate in our consolidated financial statements the financial position, results of operations and cash flows of the Yaphank Partnership, and all intercompany balances and transactions between us and the Yaphank Partnership are eliminated in the consolidated financial statements. We recognized REI’s share of the net assets of the Yaphank Partnership as redeemable noncontrolling interests and noncontrolling interests in our Consolidated Balance Sheets. The income or loss allocations reflected in our Consolidated Statements of Operations and Comprehensive Loss may create volatility in our reported results of operations, including potentially changing net loss attributable to stockholders to net income attributable to stockholders, or vice versa, from quarter to quarter. We allocate profits and losses to noncontrolling interests under the HLBV method. HLBV is a balance sheet-oriented approach for applying the equity method of accounting when there is a complex structure, such as the partnership flip structure. For the three months ended January 31, 2022, net loss allocated to noncontrolling interests totaled $5.5 million.

Note 4. Revenue Recognition

Contract Balances

Contract assets as of January 31, 2022 and October 31, 2021 were $24.9 million and $20.5 million, respectively. The contract assets relate to the Company’s rights to consideration for work performed but not billed. These amounts are included on a separate line item as Unbilled receivables for amounts expected to be billed within one year from the balance sheet date, 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 January 31, 2022 and October 31, 2021 were $34.5 million and $36.7 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. The Company discontinued revenue recognition of the deferred license revenue related to the POSCO Energy License Agreements in July 2020 given the then pending arbitrations. As of January 31, 2022, $22.2 million related to the POSCO Energy License Agreements has been reclassified from deferred revenue to customer deposits within Long-term deferred revenue and customer deposits on the accompanying Consolidated Balance Sheets.

Table of Contents

The net change in contract liabilities represents customer billings offset by revenue recognized.

Contract modification

As a result of the settlement reached with POSCO Energy Co., Ltd. (“POSCO Energy”) (see Note 19. “Commitments and Contingencies” for further background), the Company evaluated the license agreements with POSCO Energy as well as all of the terms of the settlement agreement, which was effective December 20, 2021 (the “Settlement Agreement”). As part of this analysis, the Company considered the accounting surrounding the execution of the Settlement Agreement, reviewed all elements related to the license agreements with POSCO Energy and the Settlement Agreement and considered any potential contingencies in the license agreements and whether any proceeds were related to the litigation settlement.

Under the terms of the Settlement Agreement, the Company agreed that the license agreements are not terminated, but instead are deemed to be amended such that POSCO Energy and its subsidiary, Korea Fuel Cell Co., Ltd. (“KFC”, and with POSCO Energy, collectively, “PE Group”), only have the right (i) to provide maintenance and repair services to PE Group’s existing customers on existing molten carbonate power generation and thermal projects under long-term service agreements currently in force as well as long-term service agreements that have expired and are pending renewal as of the settlement date (collectively, “Existing LTSAs”), (ii) to supply replacement modules purchased from the Company only for their existing customers for existing molten carbonate power generation and thermal projects under Existing LTSAs and (iii) to own, operate and maintain all facilities and factories solely for the purposes set forth in (i) and (ii) above (collectively, the “Right to Service License”) and further agreed to sell modules with a service warranty pursuant to a module sales agreement to be negotiated by the parties after execution of the Settlement Agreement. As such, the Company has considered the execution of the Settlement Agreement to be a contract modification as it results in a change in both the scope and price of a contract with a customer. Therefore, the Company will account for such modification under the contract modification guidance included within ASC 606 (Revenue from Contracts with Customers). Further, the Company noted that none of the parties to the Settlement Agreement specifically acknowledged any payment of damages or reimbursement of any costs related to the matters settled under the Settlement Agreement, which supports the conclusion that the overall settlement is a form of contract modification. Additionally, the transaction price allocated to the modified contract does not exceed the stand-alone selling prices (“SSP”) of the performance obligations under the modified contract (i.e., there is no indication of a premium that would indicate that a portion of the transaction price relates to something other than the promised goods or services).

The Company has identified two revenue elements of the Settlement Agreement related to module sales which include the sale of the module and an extended warranty. The Company assessed the SSP of the modules utilizing a cost-plus margin approach to arrive at $3.0 million per module which will be recognized upon title transfer consistent with the Company’s established revenue recognition policies. The Company is also providing an extended warranty for up to seven years with each module. This SSP was separately evaluated and determined to be $0.67 million per module. This revenue recognition will be recognized over time as the modules perform. In its analysis, the Company determined that it is probable that PE Group will exercise its option to purchase an additional 14 modules (with an extended warranty) beyond the firm order of 20 modules, to which it is contractually committed. Given that the license rights for which the Company was previously recognizing revenue are no longer in place and the Company now has a new revenue stream from the enhanced warranty, the $22.2 million of deferred license revenue has been recharacterized to customer deposit. The Company will monitor the value of this deferred revenue (and related cost obligations) based on the performance of the modules and make adjustments as necessary.

Table of Contents

EMRE Joint Development Agreement

Effective as of October 31, 2019, the Company entered into a Joint Development Agreement (as amended, the “EMRE Joint Development Agreement”) with ExxonMobil Research and Engineering Company (“EMRE”), pursuant to which the Company has engaged in exclusive research and development efforts with EMRE to evaluate and develop new and/or improved carbonate fuel cells to reduce carbon dioxide emissions from industrial and power sources, in exchange for (i) payment by EMRE of certain fees and costs as well as certain milestone-based payments to be paid only if certain technological milestones are met, and (ii) certain licenses.

Effective as of October 31, 2021, the Company and EMRE entered into in Amendment No. 1 to the EMRE Joint Development Agreement and agreed, among other things, to extend the term of the EMRE Joint Development Agreement for an additional six months, ending on April 30, 2022 (unless terminated earlier). This extension allows for the continuation of research that would enable incorporation of design improvements to the Company’s current fuel cell design in order to support a decision to use the improvements in a potential future demonstration of the technology for capturing carbon at ExxonMobil’s Rotterdam refinery in The Netherlands (such demonstration, the “Rotterdam Project”) and provided additional time to achieve the first milestone under the EMRE Joint Development Agreement.

In a related letter agreement between the Company and EMRE dated as of October 28, 2021 and executed on October 29, 2021(the “Letter Agreement”), the Company agreed to invest with EMRE in the Rotterdam Project, should EMRE move forward with the Rotterdam Project. In the Letter Agreement, the Company agreed that, if (i) the Company achieves the first milestone and (ii) EMRE and the Company execute a contractual agreement to proceed with the Rotterdam Project, then at EMRE’s option, the Company will either make an investment in the amount of $5.0 million in the Rotterdam Project or discount EMRE’s purchase of the Company’s fuel cell module and detailed engineering design, as agreed to by the parties, required for the Rotterdam Project by said amount.

During the three months ended January 31, 2022, the Company achieved the first technical milestone under the EMRE Joint Development Agreement and expects to receive payment of $5.0 million. The Company has not recognized revenue in connection with this milestone achievement as a result of its agreement, in the Letter Agreement described above, to either make a $5.0 million investment in the Rotterdam Project or discount EMRE’s purchase of the Company’s fuel cell module and detailed engineering design for the Rotterdam Project by $5.0 million, should the Company enter into a contract with EMRE to proceed with the Rotterdam Project. The Company will continue to evaluate revenue recognition of this milestone achievement as project negotiations with ExxonMobil (or a subsidiary thereof) evolve.

Remaining Performance Obligations

Remaining performance obligations are the aggregate amount of total contract transaction price that is unsatisfied or partially unsatisfied. As of January 31, 2022, the Company’s total remaining performance obligations were: $60.2 million for product revenue, $123.7 million for service agreements, and $31.7 million for Advanced Technologies contracts in the aggregate. Service revenue in periods in which there are no module exchanges is expected to be relatively consistent from period to period, whereas module exchanges will result in an increase in revenue when exchanges occur.

Note 5. Accounts Receivable, Net and Unbilled Receivables

Accounts receivable, net and Unbilled receivables as of January 31, 2022 and October 31, 2021 consisted of the following (in thousands):


	January 31,		October 31,
	2022		2021
Commercial Customers:
Amount billed	$	30,009	$	13,854
Unbilled receivables⁽¹⁾		10,077		7,175
		40,086		21,029
Advanced Technologies (including U.S. government⁽²⁾):
Amount billed		693		876
Unbilled receivables		3,481		1,749
		4,174		2,625
Accounts receivable, net and unbilled receivables	$	44,260	$	23,654

Table of Contents

(1)	Additional long-term unbilled receivables of $11.3 million and $11.6 million are included within “Other Assets” as of January 31, 2022 and October 31, 2021, respectively.

(2)	Total U.S. government accounts receivable, including unbilled receivables, outstanding as of January 31, 2022 and October 31, 2021 were $1.7 million and $2.3 million, respectively.

We bill customers for power platform and power platform component sales based on certain contractual milestones being reached. We bill service agreements based on the contract price and billing terms of the contracts. Generally, our Advanced Technologies contracts are billed based on actual revenues recorded, typically in the subsequent month. Some Advanced Technologies contracts are billed based on contractual milestones or costs incurred. Unbilled receivables relate to revenue recognized on customer contracts that have not been billed.

The Company had no allowance for doubtful accounts as of January 31, 2022 and October 31, 2021. 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 6. Inventories

Inventories (short and long-term) as of January 31, 2022 and October 31, 2021 consisted of the following (in thousands):


	January 31,		October 31,
	2022		2021
Raw materials	$	27,914	$	25,968
Work-in-process ⁽¹⁾		42,058		45,692
Inventories		69,972		71,660
Inventories – short-term		(65,386)		(67,074)
Inventories – long-term ⁽²⁾	$	4,586	$	4,586

(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 January 31, 2022 and October 31, 2021 was $26.5 million and $39.7 million, respectively, of completed standard components and modules.

(2)	Long-term inventory includes modules that are contractually required to be segregated for use as exchange modules for specific project assets.

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 platform.

The Company incurred costs associated with excess plant capacity and manufacturing variances of $3.2 million and $2.0 million for the three months ended January 31, 2022 and 2021, respectively, which were included within product cost of revenues on the Consolidated Statements of Operations and Comprehensive Loss. The increase in manufacturing variances is primarily the result of a fixed asset impairment charge of approximately $1.0 million for the three months ended January 31, 2022 (related to a conditioning facility in Danbury, CT, which is being replaced by a new facility in Torrington, CT as a part of our fiscal year 2022 capital investments) and accrued warranty cost of approximately $0.2 million associated with the module sales to KFC discussed above.

Table of Contents

Note 7. Project Assets

Project assets as of January 31, 2022 and October 31, 2021 consisted of the following (in thousands):


	January 31,		October 31,		Estimated
	2022		2021		Useful Life
Project Assets – Operating	$	165,461	$	116,286	5-20 years
Accumulated depreciation		(20,451)		(19,844)
Project Assets – Operating, net		145,010		96,442
Project Assets – Construction in progress		90,592		126,835	7-20 years
Project Assets, net	$	235,602	$	223,277

The estimated useful lives of these project assets are 20 years from commencement date for balance of plant (“BOP”) and site construction, and four to seven years for modules. Project assets as of January 31, 2022 and October 31, 2021 included ten and nine, respectively, completed, commissioned installations generating power with respect to which the Company has a power purchase agreement (“PPA”) with the end-user of power and site host with a net aggregate value of $145.0 million and $96.4 million as of January 31, 2022 and October 31, 2021, respectively. Certain of these assets are the subject of sale-leaseback arrangements with PNC Energy Capital, LLC (“PNC”) and Crestmark Equipment Finance (“Crestmark”).

Project assets as of January 31, 2022 and October 31, 2021 also include installations with carrying values of $90.6 million and $126.8 million, respectively, which are being developed and constructed by the Company in connection with projects for which we have entered into PPAs and which have not yet been placed in service.

Included in “Construction in progress” is the 2.3 MW Toyota project. It was determined in the fourth quarter of fiscal year 2021 that a potential source of renewable natural gas (“RNG”) at favorable pricing was no longer sufficiently probable and that market pricing for RNG has significantly increased, resulting in the determination that the carrying value of the project asset is no longer recoverable. Refer to Note 19. “Commitments and Contingencies” for more information regarding fuel risk exposure. While the Company is pursuing alternative sources of RNG, a $2.8 million charge was recorded which represents the carrying value of the project asset less the carrying value of inventory components that could be redeployed for alternative use. As this project is being constructed, only amounts that can be redeployed for alternative use are being capitalized. The balance of costs incurred are being expensed as generation cost of revenues.

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 17. “Debt” for more information).

Note 8. Goodwill and Intangible Assets

As of January 31, 2022 and October 31, 2021, the Company had goodwill of $4.1 million and intangible assets of $18.3 million and $18.7 million, respectively, that were recorded in connection with the Company’s 2012 acquisition of Versa Power Systems, Inc. (“Versa”) and the 2019 Bridgeport Fuel Cell Project acquisition. The Versa acquisition intangible asset represents an indefinite-lived in-process research and development intangible asset for cumulative research and development efforts associated with the development of solid oxide fuel cell stationary power generation. Amortization expense for the Bridgeport Fuel Cell Project-related intangible asset for each of the three months ended January 31, 2022 and 2021 was $0.3 million.

Table of Contents

The following tables summarize the Company’s intangible assets as of January 31, 2022 and October 31, 2021 (in thousands):


As of January 31, 2022	Gross Amount		Accumulated Amortization		Net Amount
In-Process Research and Development	$	9,592	$	—	$	9,592
Bridgeport PPA		12,320		(3,566)		8,754
Total	$	21,912	$	(3,566)	$	18,346

As of October 31, 2021	Gross Amount		Accumulated Amortization		Net Amount
In-Process Research and Development	$	9,592	$	—	$	9,592
Bridgeport PPA		12,320		(3,242)		9,078
Total	$

FUELCELL ENERGY INC [FCEL] Filings

FUELCELL ENERGY INC [FCELB] Filings