BLOOM ENERGY CORPORATION OPERATIONS
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections about our industry, management's beliefs, and certain assumptions made by management. For example, forward-looking statements include, but are not limited to, our expectations regarding our products, services, business strategies, impact of COVID-19, timing and size of the transaction with SK ecoplant, operations, supply chain, new markets, government incentive programs, growth of the hydrogen market and the sufficiency of our cash and our liquidity. Forward-looking statements can also be identified by words such as "future," "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "targets," "forecasts," "will," "would," "could," "can," "may" and similar terms. These statements are based on the beliefs and assumptions of our management based on information currently available to management at the time they are made. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other filings with theSecurities and Exchange Commission , including our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 filed onFebruary 26, 2021 . Such forward-looking statements speak only as of the date of this report. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. You should review these risk factors for a more complete understanding of the risks associated with an investment in our securities. The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Overview Description ofBloom Energy We created the first large-scale, commercially viable solid oxide fuel-cell based power generation platform that provides clean and resilient power to businesses, essential services and critical infrastructure. Our technology, invented inthe United States , is the most advanced thermal electric generation technology on the market today. Our fuel-flexible Bloom Energy Servers can use biogas and hydrogen, in addition to natural gas, to create electricity at significantly higher efficiencies than traditional, combustion-based resources. In addition, our fuel cell technology can be used to create hydrogen, which is increasingly recognized as a critically important tool necessary for the full decarbonization of the energy economy. Our enterprise customers are among the largest multinational corporations who are leaders in adopting new technologies. We also have strong relationships with some of the largest utility companies inthe United States and theRepublic of Korea . We market and sell our Energy Servers primarily through our direct sales organization inthe United States , and also have direct and indirect sales channels internationally. Recognizing that deploying our solutions requires a material financial commitment, we have developed a number of financing options to support sales of our Energy Servers to customers who lack the financial capability to purchase our Energy Servers directly, who prefer to finance the acquisition using third-party financing or who prefer to contract for our services on a pay-as-you-go model. Our typical target commercial or industrial customer has historically been either an investment-grade entity or a customer with investment-grade attributes such as size, assets and revenue, liquidity, geographically diverse operations and general financial stability. We have recently expanded our product and financing options to the below-investment-grade customers and have also expanded internationally to target customers with deployments on a wholesale grid. Given that our customers are typically large institutions with multi-level decision making processes, we generally experience a lengthy sales process. 41 --------------------------------------------------------------------------------Strategic Investment OnOctober 23, 2021 , we entered into a Securities Purchase Agreement (the "SPA") with SK ecoplant Co., Ltd. formerlySK Engineering & Construction Co., Ltd. ("SK ecoplant") in connection with a strategic partnership. Pursuant to the SPA, we have agreed to sell to SK ecoplant 10 million shares of zero coupon, non-voting redeemable convertible Series A preferred stock in us, par value$0.0001 per share ("RCPS"), at a purchase price of$25.50 per share or an aggregate purchase price of approximately$255 million (the "Initial Investment "). The SPA contains liquidation preferences, customary representations, warranties, covenants and conditions to the closing of theInitial Investment (the "First Closing"), including receipt of all approvals or the termination or expiration of all waiting periods required under applicable antitrust laws. In addition to theInitial Investment , following the First Closing and on or prior toNovember 30, 2023 , SK ecoplant will have the option (but not the obligation) to purchase a minimum of 11 million shares of our Class A Common Stock at the higher of (i)US$23 and (ii) one hundred and fifteen percent (115%) of the volume-weighted average closing price of the twenty (20) consecutive trading day period immediately preceding the notice to purchase such shares. The maximum amount of capital stock that SK ecoplant and its subsidiaries may hold is capped at 15 percent of our issued and outstanding capital stock (inclusive of the RCPS purchased in theInitial Investment and any other purchases of our stock). Simultaneous with the execution of the SPA, we and SK ecoplant executed an amendment to the Joint Venture Agreement, an amendment and restatement to our Preferred Distribution Agreement ("PDA Restatement") and a new Commercial Cooperation Agreement regarding initiatives pertaining to the hydrogen market and general market expansion for the Bloom Energy Server andBloom Energy Electrolyzer. For more detail about the SPA we entered into with SK ecoplant, please see Note 18 - Subsequent Events, and for more information about our joint venture with SK ecoplant, please see Note 12 - Related Party Transactions. COVID-19 Pandemic General We continue to monitor and adjust as appropriate our operations in response to the COVID-19 pandemic. As a technology company that supplies resilient, reliable and clean energy, we have been able to conduct the majority of operations as an "essential business" inCalifornia andDelaware , where we manufacture and perform many of our R&D activities, as well as in other states and countries where we are installing or maintaining our Energy Servers. While many of our employees continue to work from home unless they are directly supporting essential manufacturing production operations, installation work, and service and maintenance activities as well as some R&D and general administrative functions, we have implemented a phased-in return of employees who were not included in these essential groups, including at our headquarters inSan Jose, California . We maintain protocols to minimize the risk of COVID-19 transmission within our facilities, including enhanced cleaning and masking if required by the local authorities. We will continue to follow CDC and local guidelines when notified of possible exposures. For more information regarding the risks posed to our company by the COVID-19 pandemic, refer to Part II, Item 1A, Risk Factors - Risks Related to Our Products and Manufacturing - Our business has been and continues to be adversely affected by the COVID-19 pandemic. Liquidity and Capital Resources COVID-19 created disruptions throughout various aspects of our business as noted herein, and impacted our results of operations in the three and nine months endedSeptember 30, 2021 . Throughout 2020, we were conservative with our working capital spend, maintaining as much flexibility as possible around the timing of taking and paying for inventory and manufacturing our product while managing potential changes or delays in installations. While we improved our liquidity in 2020, we increased our working capital spend in the first half of 2021. We have entered into new leases to maintain sufficient manufacturing facilities to meet anticipated demand in 2022, including new product line expansion. In addition, we also increased our working capital spend and resources to enhance our marketing efforts and to expand into new geographies both domestically and internationally. We believe we have the sufficient capital to run our business over the next 12 months, including the completion of the build out of our manufacturing facilities. Our working capital will be strengthened with the closing of our transaction with SK ecoplant as described above. In addition, we may still enter the equity or debt market as need to support the expansion of our business. Please refer to Note 7 - Outstanding Loans and Security Agreements in Part I, Item 1, Financial Statements; and Part II, Item 1A, Risk Factors - Risks Related to Our Liquidity - Our substantial indebtedness, and restrictions imposed by the agreements governing our and our PPA Entities' outstanding indebtedness, may limit our financial and operating activities and 42 -------------------------------------------------------------------------------- may adversely affect our ability to incur additional debt to fund future needs, and We may not be able to generate sufficient cash to meet our debt service obligations, for more information regarding the terms of and risks associated with our debt. Sales We have not experienced a significant impact on our selling activity related to COVID-19 during the three and nine months endedSeptember 30, 2021 . Customer Financing The ongoing COVID-19 pandemic resulted in a significant drop in the ability of many financiers (particularly financing institutions) to monetize tax credits, primarily the result of a potential drop in taxable income stemming from the pandemic. However, during the last two quarters, we began to see this constraint improving. As ofSeptember 30, 2021 , we had obtained financing for almost all of the financing required for our remaining 2021 installations. In addition, our ability to obtain financing for our Energy Servers partly depends on the creditworthiness of our customers, and a few of our customers' credit ratings have fallen during the pandemic, which can impact the financing for their use of an Energy Server. We continue to work on obtaining the remaining financing required for our remaining 2021 installations but if we are unable to secure financing for any of our remaining 2021 installations or any new installations, our revenue, cash flow and liquidity will be materially impacted. Installations and Maintenance of Energy Servers Our installation and maintenance operations were impacted by the COVID-19 pandemic in 2020 and these impacts continued during the three and nine months endedSeptember 30, 2021 . Our installation projects have experienced some delays relating to, among other things, shortages in available parts and labor for design, installation and other work; the inability or delay in our ability to access customer facilities due to shutdowns or other restrictions; and the decreased productivity of our general contractors, their sub-contractors, medium-voltage electrical gear suppliers, and the wide range of engineering and construction related specialist suppliers on whom we rely for successful and timely installations. Our installations completed during the three and nine months endedSeptember 30, 2021 were minimally impacted by these factors, but given our mitigation strategies, we were able to complete all our planned installations except one that is scheduled to be completed in the three months endingDecember 31, 2021 . As to maintenance, if we are delayed in or unable to perform scheduled or unscheduled maintenance, our previously-installed Energy Servers will likely experience adverse performance impacts including reduced output and/or efficiency, which could result in warranty and/or guaranty claims by our customers. Further, due to the nature of our Energy Servers, if we are unable to replace worn parts in accordance with our standard maintenance schedule, we may be subject to increased costs in the future. During the three and nine months endedSeptember 30, 2021 , we experienced no delays in servicing our Energy Servers due to COVID-19. SupplyChain During 2020 and the nine months endedSeptember 30, 2021 , we experienced COVID-19 related delays from certain vendors and suppliers, although we were able to mitigate the impact so that we did not experience delays in the manufacturing and installation of our Energy Servers. We have a global supply chain and obtain components fromAsia ,Europe andIndia . In many cases, the components we obtain are jointly developed with our suppliers and unique to us, which makes it difficult to obtain and qualify alternative suppliers should our suppliers be impacted by the COVID-19 pandemic or related effects. During the three and nine months endedSeptember 30, 2021 , we continued to experience supply chain disruptions due to direct and indirect COVID-19 impacts. There have been a number of disruptions throughout the global supply chain as the global economy opens up and drives demand for certain components that has outpaced the return of the global supply chain to full production. Although we were able to find alternatives for many component shortages, we experienced some delays and cost increases with respect to container shortages, ocean shipping and air freight. We have put actions in place to mitigate the disruptions by booking alternate sea routes, limiting our use of air shipments, creating virtual hubs and consolidating shipments coming from the same region. During the three months endedSeptember 30, 2021 , we continued to manage disruptions from an increase in lead times for most of our components due to a variety of factors, including supply shortages, shipping delays and labor shortages, and we expect this to continue into the fourth quarter of 2021. During the three months endedSeptember 30, 2021 , raw material pricing remained challenging. In addition, we expect component shortages especially for semiconductors and specialty metals to persist at least through the first half of 2022. In the event we are unable to mitigate the impact of price increases in raw materials, electronic components and freight, it could delay the manufacturing and installation of our Energy Servers, which would adversely impact our cash flows and results of operations, including revenue and gross margin. 43 -------------------------------------------------------------------------------- If spikes in COVID-19 occur in regions in which our supply chain operates, including as a result of the Delta variant, we could experience a delay in components and incur further freight price increases, which could in turn impact production and installations and our cash flow and results of operations, including revenue and gross margin. Manufacturing To date, COVID-19 has not impacted our production given the safety protocols we have put in place augmented by our ability to increase our shifts and obtain a contingent work force for some of the manufacturing activities. We have incurred additional labor expense due to enhanced safety protocols designed to minimize exposure and risk of COVID-19 transmission. If COVID-19 materially impacts our supply chain or if we experience a significant COVID-19 outbreak that affects our manufacturing workforce, our production could be adversely impacted which could adversely impact our cash flow and results of operation, including revenue. Purchase and Financing Options Overview Initially, we offered our Energy Servers only as direct sale, in which the customer purchases the product directly from us for cash payments made in installments. Over time, we learned that while interested in our Energy Servers, some customers lacked the interest or financial capability to purchase our Energy Servers directly. Additionally, some of these customers were not in a position to optimize the use of federal tax benefits associated with the ownership of our Energy Servers like the federal Investment Tax Credit ("ITC") or accelerated depreciation. In order to expand our offerings to those unable to or those who prefer not directly purchase our Energy Servers, we subsequently developed three financing options that enabled customers' use of the Energy Servers with a pay as you go model through third-party ownership financing arrangements. Under the Traditional Lease option, a customer may lease one or more Energy Servers from a financial institution that purchases such Energy Servers. In most cases, the financial institution completes its purchase from us immediately after commissioning. We both (i) facilitate this financing arrangement between the financial institution and the customer and (ii) provide ongoing operations and maintenance services for the Energy Servers (such arrangement, a "Traditional Lease"). Alternatively, a customer may enter into one of two major types of contracts with us for the use of the Energy Servers or the purchase of electricity generated by the Energy Servers. The first type of contract has a fixed monthly payment component that is required regardless of the Energy Servers' performance, and in some cases also includes a variable payment based on the Energy Server's performance (a "Managed Services Agreement"). Managed Services Agreements are then financed pursuant to a sale-leaseback with a financial institution (a "Managed Services Financing"). The second type of services contract requires the customer to pay for each kilowatt-hour produced by the Energy Servers (a "Power Purchase Agreement" or "PPA"). PPAs are typically financed on a portfolio basis. PPAs have been financed through tax equity partnerships, acquisition financings and direct sales to investors (each, a "Portfolio Financing"). Our capacity to offer our Energy Servers through any of these financed arrangements depends in large part on the ability of the financing party or parties involved to optimize the federal tax benefits associated with a fuel cell, like the ITC or accelerated depreciation. Interest rate fluctuations may also impact the attractiveness of any financing offerings for our customers, and currency exchange fluctuations may also impact the attractiveness of international offerings. Our ability to finance a Managed Services Agreement or a PPA is limited by the creditworthiness of the customer. Additionally, the Traditional Lease and Managed Services Financing options are also limited by the customer's willingness to commit to making fixed payments regardless of the performance of our obligations under the customer agreement. In each of our financing options, we typically perform the functions of a project developer, including identifying end customers and financiers, leading the negotiations of the customer agreements and financing agreements, securing all necessary permitting and interconnections approvals, and overseeing the design and construction of the project up to and including commissioning the Energy Servers. 44 -------------------------------------------------------------------------------- Warranties and Guaranties We typically provide warranties and guaranties regarding the performance (efficiency and output) of the Energy Servers' to both the customer and in the case of Portfolio Financings, the investor. We refer to a "performance warranty" as a commitment where the failure of the Energy Servers to satisfy the stated performance level obligates us to repair or replace the Energy Servers as necessary to improve performance. If we fail to complete such repair or replacement, or if repair or replacement is impossible, we may be obligated to repurchase the Energy Servers from the customer or financier. We refer to a "performance guaranty" as a commitment where the failure of the Energy Servers to satisfy the stated performance level obligates us to make a payment to compensate the beneficiary of such guaranty for the resulting increased cost or decreased benefits resulting from the failure to meet the guaranteed level. Our obligation to make payments under the performance guaranty is always contractually capped. In most cases, we include the first year of performance warranties and guaranties in the sale price of the Energy Server. Typically, performance warranties and guaranties made for the benefit of the customer are in the Managed Services Agreement or PPA, as the case may be. In a Portfolio Financing, the performance warranties and guaranties made for the benefit of the investors are in an operations and maintenance agreement ("O&M Agreement"). In a Traditional Lease or direct purchase option, the performance warranties and guaranties are in an extended maintenance service agreement. Direct Purchase There are customers who purchase our Energy Servers directly pursuant to a fuel cell system supply and installation agreement. In connection with the purchase of Energy Servers, the customers enter into an O&M Agreement that provide for certain performance warranties and guaranties. The O&M Agreement may either be (i) for a one-year period, subject to annual renewal at the customer's option, under which our customers have historically almost always renewed the O&M Agreement for an additional year each year, or (ii) for a fixed term, typically 20 years. These performance guarantees are negotiated on a case-by-case basis, but we typically provide an output guaranty of 95% measured annually and an efficiency guaranty of 52% measured cumulatively from the date the applicable Energy Server(s) are commissioned. In each case, underperformance obligates us to make a payment to the owner of the Energy Server(s). As ofSeptember 30, 2021 , our obligation to make payments for underperformance on the direct purchase projects was capped at an aggregate total of approximately$106.7 million (including payments both for low output and for low efficiency). As ofSeptember 30, 2021 , our aggregate remaining potential liability under this cap was approximately$85.2 million . Overview of Financing and Lease Options The substantial majority of bookings made in recent periods have been Managed Services Agreements and PPAs. Each of our financing transaction structures is described in further detail below. 45 --------------------------------------------------------------------------------
Managed Services Financing
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Under our Managed Services Financing option, we enter into a Managed Services
Agreement with a customer for a certain term. In exchange for the electricity
generated by the Energy Server, the customer makes a monthly payment. The
monthly payment always includes a fixed monthly capacity-based payment, and in
some cases also includes a performance-based payment based on the performance of
the Energy Server. The fixed capacity-based payments made by the customer under
the Managed Services Agreement are applied toward our obligation to pay down our
periodic rent liability under a sale-leaseback transaction with an investor. We
assign all our rights to such fixed payments made by the customer to the
financier, as lessor. The performance payment is transferred to us as
compensation for operations and maintenance services and recognized as
electricity revenue within the condensed consolidated statements of operations.
Under a Managed Services Financing, once we enter into a Managed Services
Agreement with the customer, and a financier is identified, we sell the Energy
Server to the financier, as lessor, and the financier, as lessor, leases it back
to us, as lessee, pursuant to a sale-leaseback transaction. For failed
sale-and-leaseback transactions, the proceeds from the sale are recognized as a
financing obligation within the condensed consolidated balance sheets. For
successful sale-and-leaseback transactions, we recognize the project sale as
product revenue, and recognize the right-of-use asset and financing obligations
as operating leases. Any ongoing operations and maintenance service payments are
scheduled in the Managed Services Agreement in the form of the performance-based
payment described above. The financier typically pays the purchase price for an
Energy Server contemplated by the Managed Services Agreement on or shortly after
acceptance.
The duration of the master lease in a Managed Services Financing is currently
between five and ten years.
Our Managed Services Agreements typically provide only for performance
warranties of both the efficiency and output of the Energy Server, all of which
are written for the benefit of the customer. These types of projects typically
do not include guaranties above the warranty commitments, but in projects where
the customer agreement includes a service payment for our operations and
maintenance, that payment is typically proportionate to the output generated by
the Energy Server(s) and our pricing assumes service revenues at the 95% output
level. This means that our service revenues may be lower than expected if output
is less than 95% and higher if output exceeds 95%. As of September 30, 2021 , we
had incurred no liabilities due to failure to repair or replace our Energy
Servers pursuant to these performance warranties and the fleet of our Energy
Servers deployed pursuant to the Managed Services Financings was performing at a
lifetime average output of approximately 86%.
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*A type of Portfolio Financing pursuant to which we sell an entire operating
company to an investor or tax-equity partnership in which we have no equity in
the purchaser is referred to as a Third-Party PPA.
We have financed PPAs through two types of Portfolio Financings. In one type of
transaction, we finance a portfolio of PPAs pursuant to a tax equity partnership
in which we hold a managing member interest (such partnership, a "PPA Entity").
We sell the portfolio of Energy Servers to a single member limited liability
project company (an "Operating Company"). The Operating Company sells the
electricity generated by the Energy Servers contemplated by the PPAs to the
ultimate end customers. As these transactions include an equity investment by us
in the PPA Entity for which we are the primary beneficiary and therefore
consolidate the entities, we recognize revenue as the electricity is produced.
Our future plans to raise capital no longer contemplate these types of
transactions.
We also finance PPAs through a second type of Portfolio Financing pursuant to
which we sell an entire Operating Company to an investor or tax equity
partnership in which we do not have an equity interest (a "Third-Party PPA"). We
recognize revenue on the sale of each Energy Server purchased by the Operating
Company on acceptance. For further discussion, see Note 11 - Portfolio
Financings in Part I, Item 1, Financial Statements.
When we finance a portfolio of Energy Servers and PPAs through a Portfolio
Financing, we enter into a sale, engineering and procurement and construction
agreement ("EPC Agreement") and an O&M Agreement, in each case with the
Operating Company that both is counter-party to the portfolio of PPAs and that
will eventually own the Energy Servers. As counter-party to the portfolio of
PPAs, the Operating Company , as owner of the Energy Servers, receives all
customer payments generated under the PPAs, any ITC, all accelerated tax
depreciation benefits, and any other available state or local benefits arising
out of the ownership or operation of the Energy Servers, to the extent not
already allocated to the end customer under the PPA.
The sales of our Energy Servers to the Operating Company in connection with a
Portfolio Financing have many of the same terms and conditions as a direct sale.
Payment of the purchase price is generally broken down into multiple
installments,
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which may include payments prior to shipment, upon shipment or delivery of the
Energy Server, and upon acceptance of the Energy Server. Acceptance typically
occurs when the Energy Server is installed and running at full power as defined
in the applicable EPC Agreement. A one-year service warranty is provided with
the initial sale. After the expiration of the initial standard one-year
warranty, the Operating Company has the option to extend our operations and
maintenance services under the O&M Agreement on an annual basis at a price
determined at the time of purchase of our Energy Server, which may be renewed
annually for each Energy Server for up to 30 years. After the standard one-year
warranty period, the Operating Company has almost always exercised the option to
renew our operations and maintenance services under the O&M Agreement.
We typically provide performance warranties and guaranties related to output to
the Operating Company under the O&M Agreement. We also backstop all of the
Operating Company's obligations under the portfolio of PPAs, including both the
repair or replacement obligations pursuant to the performance warranties and any
payment liabilities under the guaranties.
As of September 30, 2021 , we had incurred no liabilities to investors in
Portfolio Financings due to failure to repair or replace Energy Servers pursuant
to these performance warranties. Our obligation to make payments for
underperformance against the performance guaranties was capped at an aggregate
total of approximately $114.6 million (including payments both for low output
and for low efficiency) and our aggregate remaining potential liability under
this cap was approximately $104.6 million .
Obligations to Operating Companies
In addition to our obligations to the end customers, our Portfolio Financings
involve many obligations to the Operating Company that purchases our Energy
Servers. These obligations are set forth in the applicable EPC Agreement and O&M
Agreement, and may include some or all of the following obligations:
•designing, manufacturing, and installing the Energy Servers, and selling such
Energy Servers to the Operating Company ;
•obtaining all necessary permits and other governmental approvals necessary for
the installation and operation of the Energy Servers, and maintaining such
permits and approvals throughout the term of the EPC Agreements and O&M
Agreements;
•operating and maintaining the Energy Servers in compliance with all applicable
laws, permits and regulations;
•satisfying the performance warranties and guaranties set forth in the
applicable O&M Agreements; and
•complying with any other specific requirements contained in the PPAs with
individual end-customers.
The EPC Agreement obligates us to repurchase the Energy Server in the event of
certain IP Infringement claims. The O&M Agreement obligates us to repurchase the
Energy Servers in the event the Energy Servers fail to comply with the
performance warranties and guaranties in the O&M Agreement and we do not cure
such failure in the applicable time period, or that a PPA terminates as a result
of any failure by us to perform the obligations in the O&M Agreement. In some of
our Portfolio Financings, our obligation to repurchase Energy Servers under the
O&M extends to the entire fleet of Energy Servers sold in the event a systemic
failure affects more than a specified number of Energy Servers.
In some Portfolio Financings, we have also agreed to pay liquidated damages to
the applicable Operating Company in the event of delays in the manufacture and
installation of our Energy Servers, either in the form of a cash payment or a
reduction in the purchase price for the applicable Energy Servers.
Both the upfront purchase price for our Energy Servers and the ongoing fees for
our operations and maintenance are paid on a fixed dollar-per-kilowatt basis.
Administration of Operating Companies
In each of our Portfolio Financings in which we hold an interest in the tax
equity partnership, we perform certain administrative services as managing
member on behalf of the applicable Operating Company , including invoicing the
end customers for amounts owed under the PPAs, administering the cash receipts
of the Operating Company in accordance with the requirements of the financing
arrangements, interfacing with applicable regulatory agencies, and other similar
obligations. We are compensated for these services on a fixed
dollar-per-kilowatt basis.
The Operating Company in each of our PPA Entities (with the exception of one PPA
Entity) has incurred debt in order to finance the acquisition of Energy Servers.
The lenders for these projects are a combination of banks and/or institutional
investors. In each case, the debt is secured by all of the assets of the
applicable Operating Company , such assets being primarily
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comprised of the Energy Servers and a collateral assignment of each of the
contracts to which the Operating Company is a party, including the O&M Agreement
and the PPAs. As further collateral, the lenders receive a security interest in
100% of the membership interest of the Operating Company . The lenders have no
recourse to us or to any of the other equity investors (the "Equity Investors ")
in the Operating Company for liabilities arising out of the portfolio.
We have determined that we are the primary beneficiary in the PPA Entities,
subject to reassessments performed as a result of upgrade transactions.
Accordingly, we consolidate 100% of the assets, liabilities and operating
results of these entities, including the Energy Servers and lease income, in our
condensed consolidated financial statements. We recognize the Equity Investors'
share of the net assets of the investment entities as noncontrolling interests
in subsidiaries in our condensed consolidated balance sheet. We recognize the
amounts that are contractually payable to these investors in each period as
distributions to noncontrolling interests in our condensed consolidated
statements of convertible redeemable preferred stock, redeemable noncontrolling
interest, stockholders' deficit and noncontrolling interest. Our condensed
consolidated statements of cash flows reflect cash received from these investors
as proceeds from investments by noncontrolling interests in subsidiaries. Our
condensed consolidated statements of cash flows also reflect cash paid to these
investors as distributions paid to noncontrolling interests in subsidiaries. We
reflect any unpaid distributions to these investors as distributions payable to
noncontrolling interests in subsidiaries on our condensed consolidated balance
sheets. However, the Operating Companies are separate and distinct legal
entities, and Bloom Energy Corporation may not receive cash or other
distributions from the Operating Companies except in certain limited
circumstances and upon the satisfaction of certain conditions, such as
compliance with applicable debt service coverage ratios and the achievement of a
targeted internal rate of return to the Equity Investors , or otherwise.
For further information about our Portfolio Financings, see Note 11 - Portfolio
Financings in Part I, Item 1, Financial Statements.
Traditional Lease
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Under the Traditional Lease option, the customer enters into a lease directly
with a financier (the "Lease"), which pays us for our Energy Servers purchased
pursuant to a direct sales agreement. We recognize product and installation
revenue upon acceptance. After the standard one-year warranty period, our
customers have almost always exercised the option to enter into service
agreement for operations and maintenance work with us, under which we receive
annual service payments from the customer. The price for the annual operations
and maintenance services is set at the time we enter into the Lease. The term of
a Lease in a Traditional Lease option ranges from five to ten years.
The direct sales agreement provides for sale and the installation of our Energy
Servers and includes a standard one-year warranty, to the financier as
purchaser. The services agreement with the customer provides certain performance
warranties and guaranties, with the services term offered on an annually
renewing basis at the discretion of, and to, the customer. The customer must
provide fuel for the Bloom Energy Servers to operate.
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The direct sales agreement in a Traditional Lease arrangement typically provides
for performance warranties and guaranties of both the efficiency and output of
our Energy Servers, all of which are written in favor of the customer. As of
September 30, 2021 , we had incurred no liabilities due to failure to repair or
replace our Energy Servers pursuant to these performance warranties. Our
obligation to make payments for underperformance against the performance
guaranties for projects financed pursuant to a Traditional Lease was capped
contractually under the sales agreement between us and each customer at an
aggregate total of approximately $6.0 million (including payments both for low
output and for low efficiency) and our aggregate remaining potential liability
under this cap was approximately $2.4 million .
Remarketing at Termination of Lease
In the event the customer does not renew or purchase our Energy Servers upon the
expiration of its Lease, we may remarket any such Energy Servers to a third
party. Any proceeds of such sale would be allocated between us and the
applicable financing partner as agreed between the parties at the time of such
sale.
Delivery and Installation
The timing of delivery and installations of our products have a significant
impact on the timing of the recognition of product and installation revenue.
Many factors can cause a lag between the time that a customer signs a purchase
order and our recognition of product revenue. These factors include the number
of Energy Servers installed per site, local permitting and utility requirements,
environmental, health and safety requirements, weather, and customer facility
construction schedules. Many of these factors are unpredictable and their
resolution is often outside of our or our customers' control. Customers may also
ask us to delay an installation for reasons unrelated to the foregoing,
including delays in their obtaining financing. Further, due to unexpected
delays, deployments may require unanticipated expenses to expedite delivery of
materials or labor to ensure the installation meets the timing objectives. These
unexpected delays and expenses can be exacerbated in periods in which we deliver
and install a larger number of smaller projects. In addition, if even relatively
short delays occur, there may be a significant shortfall between the revenue we
expect to generate in a particular period and the revenue that we are able to
recognize. For our installations, revenue and cost of revenue can fluctuate
significantly on a periodic basis depending on the timing of acceptance and the
type of financing used by the customer.
International Channel Partners
India . In India , sales activities are currently conducted by Bloom Energy
(India) Pvt. Ltd. , our wholly-owned subsidiary; however, we continue to evaluate
the Indian market to determine whether the use of channel partners would be a
beneficial go-to-market strategy to grow our India market sales.
Japan . In Japan , sales were previously conducted pursuant to a Japanese joint
venture established between us and subsidiaries of SoftBank Corp., called Bloom
Energy Japan Limited ("Bloom Energy Japan"). Under this arrangement, we sold
Energy Servers to Bloom Energy Japan and we recognized revenue once the Energy
Servers left the port in the United States . Bloom Energy Japan then entered into
the contract with the end customer and performed all installation work as well
as some of the operations and maintenance work. As of July 1, 2021 , we acquired
Softbank Corp.'s interest in Bloom Energy Japan for a cash payment and are now
the sole owner of Bloom Energy Japan.
The Republic of Korea . In 2018, Bloom Energy Japan consummated a sale of Energy
Servers in the Republic of Korea to Korea South-East Power Company . Following
this sale, we entered into a Preferred Distributor Agreement in November 2018
with SK ecoplant for the marketing and sale of Bloom Energy Servers for the
stationary utility and commercial and industrial South Korean power market.
As part of our expanded strategic partnership with SK ecoplant, the parties
executed the PDA Restatement in October 2021 , which incorporates previously
amended terms and establishes: (i) SK ecoplant's purchase commitments for the
next three years (on a take or pay basis) for Bloom Energy Servers; (ii)
rollover procedures; (iii) premium pricing for product and services; (iv)
termination procedures for material breaches; and (v) procedures if there are
material changes to the Republic of Korea Hydrogen Portfolio Standard. For
additional information, see Note 18, Subsequent Events.
Under the terms of the PDA Restatement, we (or our subsidiary) contract directly
with the customer to provide operations and maintenance services for the Energy
Servers. We have established a subsidiary in the Republic of Korea , Bloom Energy
Korea, LLC , to which we subcontract such operations and maintenance services.
The terms of the operations and maintenance are negotiated on a case-by-case
basis with each customer, but are generally expected to provide the customer
with the option to receive services for at least 10 years, and for up to the
life of the Energy Servers.
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SK ecoplant Joint Venture Agreement. In September 2019 , we entered into a joint
venture agreement with SK ecoplant to establish a light-assembly facility in the
Republic of Korea for sales of certain portions of our Energy Server for the
stationary utility and commercial and industrial market in the Republic of
Korea . The joint venture is majority controlled and managed by us, with the
facility, which became operational in July 2020 . Other than a nominal initial
capital contribution by Bloom Energy , the joint venture will be funded by SK
ecoplant. SK ecoplant, who currently acts as a distributor for our Energy
Servers for the stationary utility and commercial and industrial market in the
Republic of Korea , will be the primary customer for the products assembled by
the joint venture. In October 2021 , as part of our expanded strategic
partnership with SK ecoplant, the parties agreed to increase the scope of the
assembly work done in the joint venture facility. For additional information,
see Note 18, Subsequent Events.
Community Distributed Generation Programs
In July 2015 , the state of New York introduced its Community Distributed
Generation ("CDG") program, which extends New York's net metering program in
order to allow utility customers to receive net metering credits for electricity
generated by distributed generation assets located on the utility's grid but not
physically connected to the customer's facility. This program allows for the use
of multiple generation technologies, including fuel cells. Since then other
states have instituted similar programs and we expect that other states may do
so as well in the future. In June 2020 , the New York Public Service Commission
issued an Order that limited the CDG compensation structure for "high capacity
factor resources," including fuel cells, in a way that will make the economics
for these types of projects more challenging in the future. However, projects
already under contract were grandfathered into the program under the previous
compensation structure.
We have entered into sales, installation, operations and maintenance agreements
with three developers for the deployment of our Energy Servers pursuant to the
New York CDG program for a total of 441 systems. As of September 30, 2021 , we
have recognized revenue associated with 271 systems. We continue to believe that
these types of subscriber-based programs could be a source of future revenue and
will continue to look to generate sales through these programs in the future.
Comparison of the Three and Nine Months Ended September 30, 2021 and 2020
Key Operating Metrics
In addition to the measures presented in the condensed consolidated financial
statements, we use certain key operating metrics below to evaluate business
activity, to measure performance, to develop financial forecasts and to make
strategic decisions.
We no longer consider billings related to our products to be a key operating
metric. Billings as a metric was introduced to provide insight into our customer
contract billings as differentiated from revenue when a significant portion of
those customer contracts had product and installation billings recognized as
electricity revenue over the term of the contract instead of at the time of
delivery or acceptance. Today, a very small portion of our customer contracts
have revenue recognized over the term of the contract, and thus it is no longer
a meaningful metric for us.
Acceptances
We use acceptances as a key operating metric to measure the volume of our
completed Energy Server installation activity from period to period. Acceptance
typically occurs upon transfer of control to our customers, which depending on
the contract terms is when the system is shipped and delivered to our customer,
when the system is shipped and delivered and is physically ready for startup and
commissioning, or when the system is shipped and delivered and is turned on and
producing power.
The product acceptances in the three and nine months ended September 30, 2021
and 2020 were as follows:
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 Amount % 2021 2020 Amount %
Product accepted during
the period
(in 100 kilowatt systems) 353 314 39 12.4 % 1,144 876 268 30.6 %
51-------------------------------------------------------------------------------- Product accepted for the three months endedSeptember 30, 2021 compared to the same period in 2020 increased by 39 systems, or 12.4%, as demand increased for our Energy Servers in theRepublic of Korea andthe United States . Product accepted for the nine months endedSeptember 30, 2021 compared to the same period in 2020 increased by 268 systems, or 30.6%, as demand increased for our Energy Servers in theRepublic of Korea and the utility sector where we accepted 146 systems as part of the CDG program. Our customers have several purchase options for our Energy Servers. The portion of acceptances attributable to each purchase option in the three and nine months endedSeptember 30, 2021 and 2020 was as follows: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Direct Purchase (including Third-Party PPAs and International Channels) 99 % 92 % 99 % 97 % Managed Services 1 % 8 % 1 % 3 % 100 % 100 % 100 % 100 %
The portion of total revenue attributable to each purchase option in the three
and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Direct Purchase (including Third-Party PPAs and
International Channels) 86 % 88 % 88 % 87 %
Traditional Lease 1 % 1 % 1 % 1 %
Managed Services 8 % 5 % 6 % 6 %
Portfolio Financings 5 % 6 % 5 % 6 %
100 % 100 % 100 % 100 %
Costs Related to Our Products
Total product related costs for the three and nine months ended September 30,
2021 and 2020 was as follows:
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 Amount % 2021 2020 Amount %
Product costs of product
accepted in the period $2,398 /kW $2,292 /kW $106 /kW 4.6 % $2,357 /kW $2,398 /kW $(41) /kW (1.7) %
Period costs of
manufacturing related
expenses not included in
product costs (in thousands) $ 6,206 $ 4,000 $ 2,206 55.2 % $ 14,044 $ 15,267 $ (1,223) (8.0) %
Installation costs on
product accepted in the
period $705 /kW $926 /kW $(221) /kW (23.9) % $591 /kW $980 /kW $(389) /kW (39.7) %
Product costs of product accepted for the three months ended September 30, 2021
compared to the same period in 2020 increased by approximately $106 per kilowatt
driven by increased freight charges and other global supply chain issues as a
result of the COVID-19 pandemic.
Product costs of product accepted for the nine months ended September 30, 2021
compared to the same period in 2020 decreased by approximately $41 per kilowatt
driven generally by our ongoing cost reduction efforts to reduce material costs
in
52
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conjunction with our suppliers and our reduction in labor and overhead costs
through improved processes and automation at our manufacturing facilities.
Period costs of manufacturing related expenses for the three months ended
September 30, 2021 compared to the same period in 2020 increased by
approximately $2.2 million primarily driven by global supply chain issues as a
result of the COVID-19 pandemic and investments in future capacity as we prepare
to scale our manufacturing for future growth.
Period costs of manufacturing related expenses for the nine months ended
September 30, 2021 compared to the same period in 2020 decreased by
approximately $1.2 million primarily driven by higher absorption of fixed
manufacturing costs into product costs due to a larger volume of builds through
our factory tied to our acceptance growth, which resulted in higher factory
utilization and higher utilization of inventory materials.
Installation costs on product accepted for the three months ended September 30,
2021 compared to the same period in 2020 decreased by approximately $221 per
kilowatt. Each customer site is different and installation costs can vary due to
a number of factors, including site complexity, size, location of gas,
personalized applications, the customer's option to complete the installation of
our Energy Servers themselves, and the timing between the delivery and final
installation of our product acceptances under certain circumstances. As such,
installation on a per kilowatt basis can vary significantly from period-to-
period. For the three months ended September 30, 2021 , the decrease in
installation cost was driven by site mix as many of the acceptances did not have
installation, either because the installation was done by our distribution
channel partner in the Republic of Korea or the final installation associated
with a specific customer was scheduled to be completed later in the year
although the Energy Servers were delivered and accepted during the quarter.
Installation costs on product accepted for the nine months ended September 30,
2021 compared to the same period in 2020 decreased by approximately $389 per
kilowatt. For the nine months ended September 30, 2021 , the decrease in install
cost was driven by site mix as many of the acceptances did not have
installation, either because the installation was done by our distribution
channel partner in the Republic of Korea or the final installation associated
with a specific customer was scheduled to be completed later in the year
although the Energy Servers were delivered and accepted during the period.
Results of Operations
A discussion regarding the comparison of our financial condition and results of
operations for the three and nine months ended September 30, 2021 and 2020 is
presented below.
Revenue
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 Amount % 2021 2020 Amount %
(dollars in thousands) (dollars in thousands)
Product $ 128,550 $ 131,076 $ (2,526) (1.9) % $ 413,347 $ 346,832 $ 66,515 19.2 %
Installation 22,172 26,603 (4,431) (16.7) % 53,710 73,060 (19,350) (26.5) %
Service 39,251 26,141 13,110 50.2 % 111,375 77,496 33,879 43.7 %Electricity 17,255 16,485 770 4.7 % 51,273 47,472 3,801 8.0 % Total revenue$ 207,228 $ 200,305 $ 6,923 3.5 % $ 629,705$ 544,860 $ 84,845 15.6 % 53 -------------------------------------------------------------------------------- Total Revenue Total revenue increased by$6.9 million , or 3.5%, for the three months endedSeptember 30, 2021 as compared to the prior year period. This increase was primarily driven by a$13.1 million increase in service revenue partially offset by a$4.4 million decrease in installation revenue and a$2.5 million decrease in product revenue. Total revenue increased by$84.8 million , or 15.6%, for the nine months endedSeptember 30, 2021 as compared to the prior year period. This increase was primarily driven by a$66.5 million increase in product revenue and a$33.9 million increase in service revenue partially offset by a$19.4 million decrease in installation revenue. Product Revenue Product revenue decreased by$2.5 million , or (1.9)%, for the three months endedSeptember 30, 2021 as compared to the prior year period. The product revenue decrease was driven primarily by$14.2 million of previously deferred revenue related to a specific contract that changed scope and was recognized in the three months endedSeptember 30, 2020 and unfavorable site mix partially offset by 12.4% increase in product acceptances as a result of expansion in existing markets and in our CDG program. Product revenue increased by$66.5 million , or 19.2%, for the nine months endedSeptember 30, 2021 as compared to the prior year period. The product revenue increase was driven primarily by a 30.6% increase in product acceptances as a result of expansion in existing markets and in our CDG program partially offset by a$14.2 million of previously deferred revenue related to a specific contract that changed scope and was recognized in the nine months endedSeptember 30, 2020 and unfavorable site mix. Installation Revenue Installation revenue decreased by$4.4 million , or (16.7)%, for the three months endedSeptember 30, 2021 as compared to the prior year period. This decrease in installation revenue was driven by site mix as many of the acceptances did not have installation, either because the installation was done by our distribution channel partner in theRepublic of Korea or the final installation associated with a specific customer was scheduled to be completed later in the year although the Energy Servers were delivered and accepted during the quarter. Installation revenue decreased by$19.4 million , or (26.5)%, for the nine months endedSeptember 30, 2021 as compared to the prior year period. This decrease in installation revenue was driven by site mix as many of the acceptances did not have installation, either because the installation was done by our distribution channel partner in theRepublic of Korea or the final installation associated with a specific customer was scheduled to be completed later in the year although the Energy Servers were delivered and accepted during the period. Service Revenue Service revenue increased by$13.1 million , or 50.2%, for the three months endedSeptember 30, 2021 as compared to the prior year period. This increase was primarily due to the continued growth of our installation base driven by both an increase in new acceptances and renewal of existing service contracts. Service revenue increased by$33.9 million , or 43.7%, for the nine months endedSeptember 30, 2021 as compared to the prior year period. This increase was primarily due to the continued growth of our installation base driven by both an increase in new acceptances and renewal of existing service contracts. Electricity Revenue Electricity revenue increased by$0.8 million , or 4.7%, for the three months endedSeptember 30, 2021 as compared to the prior year period due to the increase in the managed services asset base. Electricity revenue increased by$3.8 million , or 8.0%, for the nine months endedSeptember 30, 2021 as compared to the prior year period due to the increase in the managed services asset base. 54 --------------------------------------------------------------------------------
Cost of Revenue
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 Amount % 2021 2020 Amount %
(dollars in thousands) (dollars in thousands)
Product $ 93,704 $ 72,037 $ 21,667 30.1 % $ 289,889 $ 227,653 $ 62,236 27.3 %
Installation 25,616 27,872 (2,256) (8.1) % 66,756 86,938 (20,182) (23.2) %
Service 39,586 33,214 6,372 19.2 % 111,269 92,836 18,433 19.9 %
Electricity 11,439 11,195 244 2.2 % 32,913 35,266 (2,353) (6.7) %
Total cost of revenue $ 170,345 $ 144,318 $ 26,027 18.0 % $ 500,827 $ 442,693 $ 58,134 13.1 %
Total Cost of Revenue
Total cost of revenue increased by $26.0 million , or 18.0%, for the three months
ended September 30, 2021 as compared to the prior year period primarily driven
by a $21.7 million increase in cost of product revenue, $6.4 million increase in
cost of service revenue, increased freight charges and other supply
chain-related pricing pressures partially offset by a $2.3 million decrease in
cost of installation revenue.
Total cost of revenue increased by $58.1 million , or 13.1%, for the nine months
ended September 30, 2021 as compared to the prior year period primarily driven
by a $62.2 million increase in cost of product revenue, $18.4 million increase
in cost of service revenue, increased freight charges and other supply
chain-related pricing pressures partially offset by a $20.2 million decrease in
cost of installation revenue.
Cost of Product Revenue
Cost of product revenue increased by $21.7 million , or 30.1%, for the three
months ended September 30, 2021 as compared to the prior year period. The cost
of product revenue increase was driven primarily by a 12.4% increase in product
acceptances, increased freight charges and other supply chain-related pricing
pressures including increased material, labor and overhead costs on a per unit
basis by 6.4%.
Cost of product revenue increased by $62.2 million , or 27.3%, for the nine
months ended September 30, 2021 as compared to the prior year period. The cost
of product revenue increase was driven primarily by a 30.6% increase in product
acceptances, increased freight charges and other supply chain-related pricing
pressures partially offset by ongoing cost reduction efforts, which reduced
material, labor and overhead costs on a per unit basis by 3.9%.
Cost of Installation Revenue
Cost of installation revenue decreased by $2.3 million , or (8.1)%, for the three
months ended September 30, 2021 as compared to the prior year period. This
decrease, similar to the $4.4 million decrease in installation revenue, was
driven by site mix as many of the acceptances did not have installation in the
three months ended September 30, 2021 .
Cost of installation revenue decreased by $20.2 million , or (23.2)%, for the
nine months ended September 30, 2021 as compared to the prior year period. This
decrease, similar to the $19.4 million decrease in installation revenue, was
driven by site mix as many of the acceptances did not have installation in the
nine months ended September 30, 2021 .
Cost of Service Revenue
Cost of service revenue increased by $6.4 million , or 19.2%, for the three
months ended September 30, 2021 as compared to the prior year period. This
increase was primarily due to the 12.4% increase in acceptances plus the
maintenance contract renewals associated with the increase in our fleet of
Energy Servers, partially offset by the significant improvements in power module
life, cost reductions and our actions to proactively manage fleet optimizations.
55
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Cost of service revenue increased by $18.4 million , or 19.9%, for the nine
months ended September 30, 2021 as compared to the prior year period. This
increase was primarily due to the 30.6% increase in acceptances plus the
maintenance contract renewals associated with the increase in our fleet of
Energy Servers, partially offset by the significant improvements in power module
life, cost reductions and our actions to proactively manage fleet optimizations.
Cost of Electricity Revenue
Cost of electricity revenue increased by $0.2 million , or 2.2%, for the three
months ended September 30, 2021 as compared to the prior year period, primarily
due to the increase in the managed services asset base and a $0.6 million change
in the fair value of the natural gas fixed price forward contract and lower
property tax expenses.
Cost of electricity revenue decreased by $2.4 million , or (6.7)%, for the nine
months ended September 30, 2021 as compared to the prior year period, primarily
due to the $2.5 million change in the fair value of the natural gas fixed price
forward contract and lower property tax expenses partially offset by the
increase in the managed services asset base.
Gross Profit and Gross Margin
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 Change 2021 2020 Change
(dollars in thousands)Gross profit: Product$ 34,846 $ 59,039 $ (24,193) $ 123,458 $ 119,179 $ 4,279 Installation (3,444) (1,269) (2,175) (13,046) (13,878) 832 Service (335) (7,073) 6,738 106 (15,340) 15,446 Electricity 5,816 5,290 526 18,360 12,206 6,154 Total gross profit$ 36,883 $ 55,987 $ (19,104) $ 128,878 $ 102,167 $ 26,711 Gross margin: Product 27 % 45 % 30 % 34 % Installation (16) % (5) % (24) % (19) % Service (1) % (27) % 0 % (20) % Electricity 34 % 32 % 36 % 26 % Total gross margin 18 % 28 % 20 % 19 % Total Gross Profit Gross profit decreased by$19.1 million in the three months endedSeptember 30, 2021 as compared to the prior year period primarily driven by$14.2 million of previously deferred revenue related to a specific contract that changed scope and was recognized in the three months endedSeptember 30, 2020 without a corresponding increase in costs, increased freight charges and other supply chain-related pricing pressures. Gross profit increased by$26.7 million in the nine months endedSeptember 30, 2021 as compared to the prior year period primarily driven by both the improvement in our product revenue and product gross margin resulting from continued product cost reduction initiatives offset by$14.2 million of previously deferred revenue related to a specific contract that changed scope and was recognized in the nine months endedSeptember 30, 2020 without a corresponding increase in costs, increased freight charges and other supply chain-related pricing pressures. 56 -------------------------------------------------------------------------------- Product Gross Profit Product gross profit decreased by$24.2 million in the three months endedSeptember 30, 2021 as compared to the prior year period. The decrease was primarily driven by$14.2 million of previously deferred revenue related to a specific contract that changed scope and was recognized in the three months endedSeptember 30, 2020 without a corresponding increase in costs, increased freight charges and other supply chain-related pricing pressures offset by a 12.4% increase in product acceptances. Product gross profit increased by$4.3 million in the nine months endedSeptember 30, 2021 as compared to the prior year period. The improvement is driven by a 30.6% increase in product acceptances partially offset by$14.2 million of previously deferred revenue related to a specific contract that changed scope and was recognized in the nine months endedSeptember 30, 2020 , increased freight charges and other supply chain-related pricing pressures. Installation Gross Loss Installation gross loss decreased by$2.2 million in the three months endedSeptember 30, 2021 as compared to the prior year period driven by the site mix, as many of the acceptances did not have installation in the current time period, and other site related factors such as site complexity, size, local ordinance requirements and location of the utility interconnect. Installation gross loss decreased by$0.8 million in the nine months endedSeptember 30, 2021 as compared to the prior year period driven by the site mix, as many of the acceptances did not have installation in the current time period, and other site related factors such as site complexity, size, local ordinance requirements and location of the utility interconnect. Service Gross Profit (Loss) Service gross profit (loss) improved by$6.7 million in the three months endedSeptember 30, 2021 as compared to the prior year period. This was primarily due to the significant improvements in power module life, cost reductions and our actions to proactively manage fleet optimizations. Service gross profit (loss) improved by$15.4 million in the nine months endedSeptember 30, 2021 as compared to the prior year period. This was primarily due to the significant improvements in power module life, cost reductions and our actions to proactively manage fleet optimizations. Electricity Gross Profit Electricity gross profit increased by$0.5 million in the three months endedSeptember 30, 2021 as compared to the prior year period mainly due to the increase in the managed service asset base offset by the$0.6 million change in the fair value of the natural gas fixed price forward contract. Electricity gross profit increased by$6.2 million in the nine months endedSeptember 30, 2021 as compared to the prior year period mainly due to the$2.5 million change in the fair value of the natural gas fixed price forward contract. This was primarily due to the significant improvements in power module life, cost reductions and our actions to proactively manage fleet optimizations. Operating Expenses Three Months Ended Nine Months Ended September 30, Change September 30, Change 2021 2020 Amount % 2021 2020 Amount % (dollars in thousands) (dollars in thousands) Research and development$ 27,634 $ 19,231 $ 8,403 43.7 %$ 76,602 $ 61,887 $ 14,715 23.8 % Sales and marketing 20,124 11,700 8,424 72.0 % 62,803 37,076 25,727 69.4 % General and administrative 33,014 25,428 7,586 29.8 % 90,470 79,471 10,999 13.8 % Total operating expenses$ 80,772 $ 56,359 $ 24,413 43.3 %$ 229,875 $ 178,434 $ 51,441 28.8 % 57
-------------------------------------------------------------------------------- Total Operating Expenses Total operating expenses increased by$24.4 million in the three months endedSeptember 30, 2021 as compared to the prior year period. This increase was primarily attributable to our investment in demand origination capability both inthe United States and internationally, investment in brand and product management, and our continued investment in our R&D capabilities to support our technology roadmap. Total operating expenses increased by$51.4 million in the nine months endedSeptember 30, 2021 as compared to the prior year period. This increase was primarily attributable to our investment in business development and front-end sales both inthe United States and internationally, investment in brand and product management, and our continued investment in our R&D capabilities to support our technology roadmap. Research and Development Research and development expenses increased by$8.4 million in the three months endedSeptember 30, 2021 as compared to the prior year period as we began shifting our investments from sustaining engineering projects for the current Energy Server platform to continued development of the next generation platform, and to support our technology roadmap, including our hydrogen, electrolyzer, carbon capture, marine and biogas solutions. Research and development expenses increased by$14.7 million in the nine months endedSeptember 30, 2021 as compared to the prior year period as we began shifting our investments from sustaining engineering projects for the current Energy Server platform, to continued development of the next generation platform and to support our technology roadmap, including our hydrogen, electrolyzer, carbon capture, marine and biogas solutions. Sales and Marketing Sales and marketing expenses increased by$8.4 million in the three months endedSeptember 30, 2021 as compared to the prior year period. This increase was primarily driven by the efforts to expand ourU.S. and international sales force, as well as increased investment in brand and product management. Sales and marketing expenses increased by$25.7 million in the nine months endedSeptember 30, 2021 as compared to the prior year period. This increase was primarily driven by the efforts to expand ourU.S. and international sales force, as well as increased investment in brand and product management. General and Administrative General and administrative expenses increased by$7.6 million in the three months endedSeptember 30, 2021 as compared to the prior year period. This increase was primarily driven by increases in payroll expense, legal expense and facilities expense to ensure our infrastructure and control environment is ready to scale for growth. General and administrative expenses increased by$11.0 million in the nine months endedSeptember 30, 2021 as compared to the prior year period. This increase was primarily driven by increases in outside services and consulting expense, payroll expense and facilities expense to ensure our infrastructure and control environment is ready to scale for growth, partially offset by lower legal expense. 58 --------------------------------------------------------------------------------
Stock-Based Compensation
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 Amount % 2021 2020 Amount %
(dollars in thousands) (dollars in thousands)
Cost of revenue $ 2,945 $ 3,568 $ (623) (17.5) % $ 9,749 $ 13,811 $ (4,062) (29.4) %
Research and development 5,678 4,103 1,575 38.4 % 15,876 14,913 963 6.5 %
Sales and marketing 4,391 2,234 2,157 96.6 % 12,486 8,358 4,128 49.4 %
General and administrative 7,952 5,830 2,122 36.4 % 19,198 20,303 (1,105) (5.4) %
Total stock-based
compensation $ 20,966 $ 15,735 $ 5,231 33.2 % $ 57,309 $ 57,385 $ (76) (0.1) %
Total stock-based compensation for the three months ended September 30, 2021
compared to the prior year period increased by $5.2 million primarily driven by
the efforts to expand our U.S. and international sales force, as well as
investment to build our brand and product management teams.
Total stock-based compensation for the nine months ended September 30, 2021
compared to the prior year period decreased by $0.1 million primarily driven by
the vesting of the one-time employee grants at the time of the initial public
offering, which were completed in July 2020 partially offset by the efforts to
expand our U.S. and international sales force, as well as investment to build
our brand and product management teams.
Other Income and Expense
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 Change 2021 2020 Change
(in thousands)
Interest income $ 72 $ 254 $ (182) $ 222 $ 1,405 $ (1,183)
Interest expense (14,514) (19,902) 5,388 (43,798) (55,030) 11,232
Interest expense - related parties - (353) 353 - (2,513) 2,513
Other income (expense), net 2,011 (221) 2,232 1,948 (4,142) 6,090
Loss on extinguishment of debt - 1,220 (1,220) - (12,878) 12,878
Gain (loss) on revaluation of
embedded derivatives (184) 1,505 (1,689) (1,644) 2,201 (3,845)
Total $ (12,615) $ (17,497) $ 4,882 $ (43,272) $ (70,957) $ 27,685
Interest Income
Interest income is derived from investment earnings on our cash balances
primarily from money market funds.
Interest income for the three months ended September 30, 2021 as compared to the
prior year period decreased by $0.2 million primarily due to a decrease in the
rates of interest earned on our cash balances.
Interest income for the nine months ended September 30, 2021 as compared to the
prior year period decreased by $1.2 million primarily due to the decrease in the
rates of interest earned on our cash balances.
Interest Expense
Interest expense is from our debt held by third parties.
Interest expense for the three months ended September 30, 2021 as compared to
the prior year period decreased by $5.4 million as we paid off our 10% senior
secured notes and converted our 10% promissory notes into equity, resulting in
lower, less expensive debt.
59
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Interest expense for the nine months ended September 30, 2021 as compared to the
prior year period decreased by $11.2 million . This decrease was primarily due to
lower interest expense as a result of refinancing our notes at a lower interest
rate, and the elimination of the amortization of the debt discount associated
with notes that have been converted to equity.
Interest Expense - Related Parties
Interest expense - related parties is from our debt held by related parties.
Interest expense - related parties for the three months ended September 30, 2021
as compared to the prior year period decreased by $0.4 million due to the
conversion of all of our notes held by related parties during 2020.
Interest expense - related parties for the nine months ended September 30, 2021
as compared to the prior year period decreased by $2.5 million due to the
conversion of all of our notes held by related parties during 2020.
Other Expense, net
Other expense, net, is primarily derived from investments in joint ventures,
plus the impact of foreign currency translation.
Other expense, net, for the three months ended September 30, 2021 as compared to
the prior year period decreased by $2.2 million primarily due to a $2.0 million
gain recorded on remeasurement of our equity investment in the BEJ joint venture
in connection with the acquisition thereof.
Other expense, net for the nine months ended September 30, 2021 as compared to
the prior year period decreased by $6.1 million due to a $2.0 million gain
recorded on fair value remeasurement of our equity investment in the Bloom
Energy Japan joint venture in connection with the acquisition thereof plus the
prior year's $3.9 million write-off of our investment in the Bloom Energy Japan
joint venture.
Loss on Extinguishment of Debt
Loss on extinguishment of debt for the nine months ended September 30, 2021 as
compared to the prior year period improved by $12.9 million resulting from our
debt restructuring and debt extinguishment in the prior year period. There were
no comparable debt restructuring activities in the current year's period.
Gain (Loss) on Revaluation of Embedded Derivatives
Gain (loss) on revaluation of embedded derivatives is derived from the change in
fair value of our sales contracts of embedded EPP derivatives valued using
historical grid prices and available forecasts of future electricity prices to
estimate future electricity prices.
Gain (loss) on revaluation of embedded derivatives for the three months ended
September 30, 2021 as compared to the prior year period worsened by $1.7 million
due to the change in fair value of our embedded EPP derivatives in our sales
contracts.
Gain (loss) on revaluation of embedded derivatives for the nine months ended
September 30, 2021 as compared to the prior year period worsened by $3.8 million
due to the change in fair value of our embedded EPP derivatives in our sales
contracts.
Provision for Income Taxes
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 Amount % 2021 2020 Amount %
(dollars in thousands)
Income tax provision $ 158 $ 7 $ 151 2,157.1 % $ 595 $ 272 $ 323 118.8 %
Income tax provision consists primarily of income taxes in foreign jurisdictions in which we conduct business. We maintain a full valuation allowance for domestic deferred tax assets, including net operating loss and certain tax credit carryforwards.
60
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Income tax provision increased for the three and nine months ended September 30,
2021 as compared to the prior year period was primarily due to fluctuations in
the effective tax rates on income earned by international entities.
Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling
Interests
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 Amount % 2021 2020 Amount %
(dollars in thousands)Net loss attributable to noncontrolling interests and redeemable noncontrolling interests$ (4,292) $ (5,922) $ 1,630 27.5 %$ (13,742) $ (17,081) $ 3,339 19.5 % Net loss attributable to noncontrolling interests is the result of allocating 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 flip structure of the PPA Entities. Net loss attributable to noncontrolling interests and redeemable noncontrolling interests for the three months endedSeptember 30, 2021 as compared to the prior year period improved by$1.6 million due to decreased losses in our PPA Entities, which are allocated to our noncontrolling interests. Net loss attributable to noncontrolling interests and redeemable noncontrolling interests for the nine months endedSeptember 30, 2021 as compared to the prior year period improved by$3.3 million due to decreased losses in our PPA Entities, which are allocated to our noncontrolling interests. 61 -------------------------------------------------------------------------------- Liquidity and Capital Resources As ofSeptember 30, 2021 , we had cash and cash equivalents of$121.9 million . Our cash and cash equivalents consist of highly liquid investments with maturities of three months or less, including money market funds. We maintain these balances with high credit quality counterparties, continually monitor the amount of credit exposure to any one issuer and diversify our investments in order to minimize our credit risk. As ofSeptember 30, 2021 , we had$291.3 million of total outstanding recourse debt,$212.9 million of non-recourse debt and$26.8 million of other long-term liabilities. For a complete description of our outstanding debt, please see Note 7 - Outstanding Loans and Security Agreements in Part I, Item 1, Financial Statements. The combination of our existing cash and cash equivalents is expected to be sufficient to meet our anticipated cash flow needs for the next 12 months and thereafter for the foreseeable future. If these sources of cash are insufficient to satisfy our near-term or future cash needs, we may require additional capital from equity or debt financings to fund our operations, in particular, our manufacturing capacity, product development and market expansion requirements, to timely respond to competitive market pressures or strategic opportunities, or otherwise. In addition, we are continuously evaluating alternatives for efficiently funding our capital expenditures and ongoing operations, including entering into the transaction with SK ecoplant as described above for the sale of RCPS that is scheduled to close in the fourth quarter of 2021. We may, from time to time, engage in a variety of financing transactions for such purposes, including factoring our accounts receivable. We may not be able to secure timely additional financing on favorable terms, or at all. The terms of any additional financings may place limits on our financial and operating flexibility. If we raise additional funds through further issuances of equity or equity-linked securities, our existing stockholders could suffer dilution in their percentage ownership of us, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, the rate of growth in the volume of system builds and the need for additional manufacturing space, the expansion of sales and marketing activities both in domestic and international markets, market acceptance of our products, our ability to secure financing for customer use of our Energy Servers, the timing of installations, and overall economic conditions including the impact of COVID-19 on our ongoing and future operations. In order to support and achieve our future growth plans, we may need or seek advantageously to obtain additional funding through an equity or debt financing. As ofSeptember 30, 2021 , we were still working to secure a minimal amount of financing for the planned installations of our Energy Servers in 2021. Failure to obtain this financing or financing in future quarters will affect our results of operations, including revenue and cash flows. As ofSeptember 30, 2021 , the current portion of our total debt is$13.8 million , all of which is outstanding non-recourse debt. We expect a certain portion of the non-recourse debt would be refinanced by the applicable PPA Entity prior to maturity. A summary of our condensed consolidated sources and uses of cash, cash equivalents and restricted cash was as follows (in thousands): Nine Months Ended September 30, 2021 2020 Net cash provided by (used in): Operating activities$ (107,907) $ (79,989) Investing activities (41,511) (33,066) Financing activities 53,130 240,037 62
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Net cash provided by (used in) our PPA Entities, which are incorporated into the
condensed consolidated statements of cash flows, was as follows (in thousands):
Nine Months Ended
September 30,
2021 2020
PPA Entities ¹
Net cash provided by PPA operating activities
Net cash used in PPA financing activities (17,641) (17,217)
1 The PPA Entities' operating and financing cash flows are a subset of our condensed consolidated cash flows and represent the stand-alone cash flows prepared in accordance withU.S. GAAP. Operating activities consist principally of cash used to run the operations of the PPA Entities, the purchase of Energy Servers from us and principal reductions in loan balances. Financing activities consist primarily of changes in debt carried by our PPAs, and payments from and distributions to noncontrolling partnership interests. We believe this presentation of net cash provided by (used in) PPA activities is useful to provide the reader with the impact to condensed consolidated cash flows of the PPA Entities in which we have only a minority interest. Operating Activities Our operating activities have consisted of net loss adjusted for certain non-cash items plus changes in our operating assets and liabilities or working capital. The increase in cash used in operating activities during the nine months endedSeptember 30, 2021 as compared to the prior year period was primarily the result of an increase in our net working capital of$68.9 million in the nine months endedSeptember 30, 2021 due to the timing of revenue transactions and corresponding collections and the increase in inventory levels to support future demand. Investing Activities Our investing activities have consisted of capital expenditures that include increasing our production capacity. We expect to continue such activities as our business grows. Cash used in investing activities of$41.5 million during the nine months endedSeptember 30, 2021 was primarily the result of expenditures on tenant improvements for a newly leased engineering building inFremont, California . We expect to continue to make capital expenditures over the next few quarters to prepare our new manufacturing facility inFremont, California for production, which includes the purchase of new equipment and other tenant improvements. We intend to fund these capital expenditures from cash on hand as well as cash flow to be generated from operations. We may also evaluate and arrange equipment lease financing to fund these capital expenditures. Financing Activities Historically, our financing activities have consisted of borrowings and repayments of debt including to related parties, proceeds and repayments of financing obligations, distributions paid to noncontrolling interests and redeemable noncontrolling interests, and the proceeds from the issuance of our common stock. Net cash provided by financing activities during the nine months endedSeptember 30, 2021 was$53.1 million , a decrease of$186.9 million compared to the prior year period, primarily due to the issuance of debt in 2020, partially offset by higher proceeds in 2021 from stock option exercises and the sale of shares under our 2018 Employee Stock Purchase Plan. Critical Accounting Policies and Estimates The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles as applied inthe United States ("U.S. GAAP") The preparation of the condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. Our discussion and analysis of our financial results under Results of Operations above are based on our audited results of operations, which we have prepared in accordance withU.S. GAAP. In preparing these condensed consolidated financial statements, we make assumptions, judgments and estimates that can affect the reported amounts of assets, liabilities, revenues and expenses, and net income. On an ongoing basis, we base our estimates on historical experience, as appropriate, and on various other assumptions that we believe to be reasonable under the circumstances. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the following critical 63 -------------------------------------------------------------------------------- accounting policies involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to understanding and evaluating the condensed consolidated financial condition and results of operations. The accounting policies that most frequently require us to make assumptions, judgments and estimates, and therefore are critical to understanding our results of operations, include: • Revenue Recognition; • Leases: Incremental Borrowing Rate; • Stock-Based Compensation; • Income Taxes; • Principles of Consolidation; and • Allocation of Profits and Losses of Consolidated Entities to Noncontrolling Interests and Redeemable Noncontrolling Interests Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year endedDecember 31, 2020 provides a more complete discussion of our critical accounting policies and estimates. During the nine months endedSeptember 30, 2021 , there were no significant changes to our critical accounting policies and estimates, except as noted below: We adopted ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40) ("ASU 2020-06"), which simplifies the accounting for convertible instruments. We applied the modified retrospective method as ofJanuary 1, 2021 in our condensed consolidated financial statements. Upon adoption of ASU 2020-06, we no longer record the conversion feature of convertible notes in equity. Instead, our convertible notes are accounted for as a single liability measured at their amortized cost and there is no longer a debt discount representing the difference between the carrying value, excluding issuance costs, and the principal of the convertible debt instrument. As a result, there is no longer interest expense relating to the amortization of the debt discount over the term of the convertible debt instrument. Similarly, the portion of issuance costs previously allocated to equity are now reclassified to debt and will be amortized as interest expense. As a result of this change in accounting policy, management no longer considers valuation of our 2.50% Green Convertible Senior Notes dueAugust 2025 (the "Green Notes") to be a critical accounting policy and estimate.
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