OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties as described under the heading Special Note Regarding Forward-Looking Statements following the Table of Contents of this Quarterly Report on Form 10-Q. You should review the disclosure under Part II, Item 1A - Risk Factors in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
Restatement of Previously Issued Condensed Consolidated Financial Statements We have restated our previously reported financial information as of and for the three and six months endedJune 30, 2019 in this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, including but not limited to information within Results of Operations and Liquidity and Capital Resources sections. See Note 2, Restatement of Previously Issued Condensed Consolidated Financial Statements, in Part I, Item 1, Financial Statements, for additional information related to the restatement, including descriptions of the misstatements and the impacts on our condensed consolidated financial statements. Description ofBloom Energy Our solution, the Bloom Energy Server, is a stationary power generation platform built for the digital age and capable of delivering highly reliable, uninterrupted, 24x7 constant power that is also clean and sustainable. The Bloom Energy Server converts standard low-pressure natural gas, biogas or hydrogen into electricity through an electrochemical process without combustion, resulting in very high conversion efficiencies and lower harmful emissions than conventional fossil fuel generation. A typical configuration produces 250 kilowatts of power in a footprint roughly equivalent to that of half of a standard thirty-foot shipping container, or approximately 125 times more space-efficient than solar power generation. 250 kilowatts of power is roughly equivalent to the constant power requirement of a typical big box retail store. Any number of our Energy Server systems can be clustered together in various configurations to form solutions from hundreds of kilowatts to many tens of megawatts. We currently primarily target commercial and industrial customers. 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. COVID-19 Pandemic General We have been and will continue monitoring and adjusting 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, notwithstanding government "shelter in place" orders. For the safety of our employees and others, many of our employees are still working from home unless they are directly supporting essential manufacturing production operations, installation work, 37 -------------------------------------------------------------------------------- service and maintenance activities and R&D. We have established protocols to minimize the risk of COVID-19 transmission within our facilities, including enhanced cleaning, and temperature screenings upon entry. In addition, all individuals entering Bloom facilities are required to wear face coverings and are directed not to enter if they have COVID-19-like symptoms. We follow all CDC guidelines when notified of possible exposures. For more information regarding the risks posed to our company by the COVID-19 pandemic, refer to Risk Factors - Risks Relating to Our Products and Manufacturing - Our business has been and will continue to be adversely affected by the COVID-19 pandemic. Liquidity and Capital Resources We have implemented measures to preserve cash and enhance liquidity, including suspending salary increases and bonuses, instituting a company-wide hiring freeze, eliminating business travel, reducing capital expenditures, and delaying or eliminating discretionary spending. We are also focused on managing our working capital needs, maintaining as much flexibility as possible around timing of taking and paying for inventory and manufacturing our product while managing potential changes or delays in installations. InMarch 2020 , we extended the terms of the 10% Convertible Notes and the 10% Constellation Note toDecember 2021 . Since then, the 10% Constellation Note was converted into equity and the potential liabilities associated with the 10% Constellation Notes have been extinguished. This relieves some pressure on our liquidity position in the near term. While we will likely need to access the capital markets to raise sufficient capital to redeem the 10% Convertible Notes, we do not expect that it will be necessary to access capital markets for cash to operate our business for the next 12 months, unless the impact of COVID-19 to our business and financial position is more extensive than expected. Capital markets have been volatile and there is no assurance that we would have access to capital markets at a reasonable cost, or at all, at times when capital is needed. In addition, our existing debt has restrictive covenants that limit our ability to raise new debt or to sell assets, which would limit our ability to access liquidity by those means without obtaining consent from existing noteholders. The redemption penalty on our 10% Convertible Notes starting inOctober 2020 could also adversely affect our financial position if we are unable to access capital markets to refinance them on reasonable terms. Refer to Note 7, Outstanding Loans and Security Agreements; Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources; and Risk Factors - Risks Relating 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 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. Operations and maintenance cash flows for certain PPAs, direct purchases and leases are pledged to the 10% Senior Secured Notes and 10.25% Senior Secured Notes. If there is delay in payment from customers, or if a customer does not renew a contract with us that we expect to be renewed, our ability to service existing debt would be adversely affected, which could trigger a default if non-payment extends beyond the grace period. Even if we are able to sustain debt service payments, if we do not meet certain minimum debt service coverage ratio levels specified in our debt agreements, excess cash after the debt has been serviced could not be released to support our operations and would negatively affect our liquidity position. Sales In some markets, we have experienced an increase in time to obtain new business as our customers deal with the impact of the COVID-19 pandemic. Decision makers in organizations such as education and entertainment have shifted their focus to the immediate needs of the pandemic, thus delaying their purchase decisions and capital outlays. While there may ultimately be a reduction in electricity needs due to decrease in economic activity, the current impact generally equates to a longer transaction cycle. Our ability to continue to expand our business both domestically and internationally and develop customer relationships also has been negatively impacted by current travel restrictions. Our marketing efforts historically have often involved customer visits to our manufacturing centers inCalifornia orDelaware , which we have suspended. On the other hand, a significant portion of our customers are hospitals, healthcare companies, retailers and data centers. These industries are composed of essential businesses that still need the resiliency and reliability offered by our products. We have seen an increase in demand for our products in these sectors where the COVID-19 pandemic has highlighted the benefits of always-on, on-site power in times of disaster and uncertainty. In addition, the pandemic has had no significant effect on our business in theRepublic of Korea . We have also had some unique opportunities to deploy our systems on an emergency basis to support temporary hospitals. We believe deploying clean electrical power with no oxides of nitrogen (NOx) or sulfur (SOx) emissions, especially as atmospheric pollutants, is important for facilities preparing to treat a respiratory disease like COVID-19. As a result of this opportunity to introduce our products to more healthcare providers, demand for our products at some permanent hospitals has also increased. 38 -------------------------------------------------------------------------------- Customer Financing COVID-19 has not yet had any significant impact on our ability to obtain financing for our customers' use of our products, but we are finding it more difficult to find financiers who are able to monetize tax credit. A majority of the installations we have planned inthe United States in 2020 have obtained financing. However, we have actively been working with new sources of capital that could finance projects for our 2021 installations. We believe the current environment may increase the time to solidify new relationships, and thus negatively impact the time required to achieve funding. In addition, our ability to obtain financing for our Energy Servers partly depends on the creditworthiness of our customers. Some of our customers' credit ratings have recently fallen, which may make it difficult for us to obtain financing for their use of an Energy Server. Our recent experience has been that financing parties have capital to deploy and are interested in financing our Energy Servers and, at present, cash flow and results of operations including revenue have not been impacted by our inability to obtain financing for customer installations. Installations of Energy Servers The COVID-19 pandemic has caused delays that affected nearly all of our installations with varying degrees of severity. Since we do not recognize revenue on the sales of our products until installation and acceptance, installation delays have a negative impact on our results of operations including revenue. Since we generally earn cash as we progress through the installation process, delays to installation activity also adversely affects our cash flows. While our installation activity has been deemed "essential business" and allowed to proceed in many jurisdictions, the essential business designations for our activities (and those of our suppliers and other third party organizations that are critical to our success) has been inconsistent from region to region and across the various third parties upon whom we are critically dependent to complete our installations. As an example, inNew York City , one of our installations was deemed essential while the other was not deemed essential and the utilities on whom we rely for water, gas and electric inter-connections were also not uniformly affected. This resulted in all of the projects inNew York City being adversely affected to some extent. As another example, while theState of Massachusetts designated construction as an essential business, some local authorities inMassachusetts did not apply the same designation, resulting in delays and additional compliance costs. In addition, we have experienced delays and interruptions to our installations where customers have shut down or otherwise limited access to their facilities. Some of our backlog can only be deployed when the customer brings on sufficient load for our systems. Facility closings and diminished economic activity delay that load coming online, leading customers to postpone the completion of installations. We use general contractors and sub-contractors, and need supplies of various types of ancillary equipment, for our installations. Some of our suppliers have had COVID-19 outbreaks among their workforces, which have caused installation delays. In addition, the availability and productivity of contractors, sub-contractors, and suppliers has generally been negatively impacted by social distancing requirements and other safety measures. Nearly all of our installations completed in the quarter endedJune 30, 2020 were impacted by COVID-19 to some extent and some installations were unable to achieve acceptance in light of the delays which impacted our cash flows and results of operation including revenue for the quarter endedJune 30, 2020 . As examples, our pre-contract installation planning activity was affected by access to potential customer sites, our permitting activity was affected in virtually all jurisdictions by delays in the permitting process as various cities and municipalities shut down or implemented limited services in response to COVID-19, and our utility related work was impacted as our gas and electric utility suppliers facing challenges brought on by COVID-19. We expect disruptions like those noted above to continue with the current COVID-19 restrictions. Supply Chain We have experienced COVID-19 related delays from certain vendors and suppliers, however, we have been able to find and qualify alternative suppliers and our production to date has not been impacted. At present, our supply chain has stabilized; however, if spikes in COVID-19 occur in regions in which our supply chain operates we could experience a delay in materials which could in turn impact production and installations and our cash flow and results of operations including revenue. Manufacturing As an essential business, we have continued to manufacture Energy Servers, but have adopted strict measures to keep our employees safe. These measures have decreased productivity to an extent, but our deployments, maintenance and installations have not yet been constrained by our current pace of manufacturing. As described above, we have established protocols to minimize the risk of COVID-19 transmission within our manufacturing facilities and follow all CDC guidelines when notified of possible exposures. We also are now instituting testing of anyone who comes into any of our facilities. Even with these 39 -------------------------------------------------------------------------------- precautions, it is possible an asymptomatic individual could enter our facilities and transmit the virus to others. We have had a couple positive tests and in such cases, we have followed CDC Guidelines. To date, it has not impacted our production. If we become aware of any cases of COVID-19 among any of our employees, we notify those with whom the person is known to have been in contact, send the exposed employees home for at least 14 days and require each employee to be tested negative before returning to work. Certain roles within our facilities involve greater mobility throughout our facilities and potential exposure to more employees. In the event one of such employees suffers from COVID-19, or if we otherwise believe that a significant number of employees have been exposed and sent home, particularly in our manufacturing facilities, our production could be significantly impacted. Furthermore, since our manufacturing process requires tasks performed at both ourCalifornia facility andDelaware facility, significant exposure at either facility would have a substantial impact on our overall production, and could adversely affect our cash flow and results of operations including revenue. Purchase and Lease Options Initially, we only offered our Energy Servers on a direct purchase basis, in which the customer purchases the product directly from us. In order to expand our offerings to customers who lack the financial capability to purchase our Energy Servers directly (including customers who are unable to monetize the tax credits available to purchasers of our Energy Servers) and/or who prefer to lease the product or contract for our services on a pay-as-you-go model, we subsequently developed the traditional lease ("Traditional Lease"), Managed Services, and power purchase agreement ("PPA") programs ("PPA Programs"). 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 monetize the related investment tax credits, accelerated tax depreciation and other incentives. 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. The Traditional Lease, Managed Services and PPA Program options are limited by the creditworthiness of the customer. Additionally, the Managed Services and Traditional Lease options, as with all leases, are also limited by the customer's willingness to commit to making fixed payments regardless of the performance of the Energy Servers or our performance of our obligations under the customer agreement. In each of our purchase 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. Under each purchase option, we provide warranties and performance guaranties regarding our Energy Servers' efficiency and output. We refer to a "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 "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 diminution in benefits resulting from such failure. Our obligation to make payments under the guaranty is always contractually capped and represents a contingency linked to our services obligation with no economic incentive for us to default and force an exercise of the payment obligation. Under direct purchase and Traditional Lease, the warranties and guaranties are typically included in the price of our Energy Server for the first year. The warranties and guaranties may be renewed annually at the customer's option, as an operations and maintenance services agreement, at predetermined prices for a period of up to 30 years. Historically, our customers and financiers have almost always exercised their option to renew the warranties and guaranties under these operations and maintenance services agreements. Under the Managed Services Program, the warranties and guaranties are included for the fixed period specified in the customer agreement. This period is typically 10 years, which may be extended at the option of the parties for additional years. Under the PPA Programs, we typically provide warranties and guaranties regarding our Energy Servers' efficiency to the customer (i.e., the end user of the electricity generated by our Energy Servers, who is also responsible for the purchase of the fuel required for our Energy Servers' operations), and we provide warranties and guaranties regarding our Energy Servers' output to the financier(s) that purchases our Energy Servers. The warranties and guaranties are typically included in the price of our Energy Server for the first year and may be renewed annually at the financier's option, as an operations and maintenance services agreement, at predetermined prices for a period of up to 30 years. Historically, our financiers have almost always exercised their option to renew the warranties and guaranties under these operations and maintenance services agreements. We 40 -------------------------------------------------------------------------------- also provide a fixed schedule of prices for each year of the term of our agreements with our customers and none of our customers have failed to renew our operations and maintenance agreements. The substantial majority of bookings made in recent periods are pursuant to the PPA and the Managed Services Programs. Each of our financing structures is described in further detail below. Traditional Lease [[Image Removed: be-20200630_g2.jpg]] Under the Traditional Lease arrangement, the customer enters into a lease directly with a financier, which pays us for our Energy Servers purchased pursuant to a sales agreement (see the description of the Financing Agreement below). 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 operations and maintenance services agreements 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 Financing Agreement. The term of a lease in a Traditional Lease ranges from five to eight years. Under a Financing Agreement, we are generally paid the full price of our Energy Servers as if sold as a purchase by the customer based on four milestones. The four payment milestones are typically as follows: (i) 15% upon execution of the financier's entry into the lease with a customer, (ii) 25% on the day that is 180 days prior to delivery of the Energy Servers, (iii) 40% upon shipment of the Energy Servers, and (iv) 20% upon acceptance of the Energy Servers. The financier receives title to the Energy Servers upon installation at the customer site and the financier has risk of loss while our Energy Server is in operation on the customer's site. The Financing Agreement provides for the installation of our Energy Servers and includes a standard one-year warranty, to the financier, which includes the performance guaranties described below, with the warranty 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. Our direct lease deployments typically provide for warranties and guaranties of both the efficiency and output of our Energy Servers, all of which are written in favor of the customer and contained in the operations and maintenance services agreement. These warranties and guaranties may be measured on a monthly, annual, cumulative or other basis. As ofJune 30, 2020 , we had incurred no liabilities due to failure to repair or replace our Energy Servers pursuant to these warranties. Our obligation to make payments for underperformance against the performance guaranties for Traditional Lease projects was capped contractually under the sales agreements 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$4.1 million . 41 -------------------------------------------------------------------------------- Remarketing at Termination of Lease In the event the customer does not renew or purchase our Energy Servers to the end of any customer 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 them at the time of such sale.
Managed Services Financing
[[Image Removed: be-20200630_g3.jpg]] Under our Managed Services Programs, we enter into a Managed Services Agreement with a customer, pursuant to which the customer is able to use the Energy Server for a certain term. Under the Managed Services Agreement, the customer makes a monthly payment for the use of the Energy Server. The customer payment typically has two components: (i) a fixed monthly capacity-based payment and (ii) a performance-based payment based on the output of electricity that month from 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 liability under the master lease with the financier. The performance payment is transferred to us as compensation for operations and maintenance services and recorded as services revenue within the condensed consolidated statements of operations. In some cases, the customer's monthly payment consists solely of the first component, a fixed monthly capacity-based payment. Once a financier is identified and the Energy Server's installation is complete, we sell the Energy Server contemplated by the Managed Services Agreement directly to a financier and the financier, as lessor, leases it back to us, as lessee, pursuant to a master lease in a sale-leaseback transaction. The proceeds from the sale are recorded as a financing obligation within the condensed consolidated balance sheets. 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 financing proceeds for the Energy Server contemplated by the Managed Services Agreement on or shortly after acceptance. The fixed capacity payments made by the customer under the Managed Services Agreement are recognized as electricity revenue when billed and applied toward our obligation to pay the financing obligation under the master lease. Our Managed Services financings have historically shifted customer credit risk to the financier, as lessor, by providing in the master lease agreement that we have no liability for payment of rent except in certain enumerated circumstances, including in the event we are in breach of the Managed Services Agreement between us and the customer. The duration of the master lease in a Managed Services financing is typically 10 years. The term of the master lease is typically the same as the term of the related Managed Services Agreement, but in some cases the term of the master lease is shorter than that of the Managed Services Agreement. Our Managed Services deployments typically provide only for warranties of both the efficiency and output of the Energy Server(s), all of which are written in favor of the customer and contained in the operations and maintenance services agreement. These warranties may be measured on a monthly, annual, cumulative or other basis. Managed Services projects typically do not 42 -------------------------------------------------------------------------------- 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 ofJune 30, 2020 , we had incurred no liabilities due to failure to repair or replace our Energy Servers pursuant to these warranties and the fleet of our Energy Servers deployed pursuant to the Managed Services Program was performing at a lifetime average output of approximately 87%. Power Purchase Agreement Programs [[Image Removed: be-20200630_g4.jpg]] *Under the Third Party PPA arrangements, there is no link with an investment company, as we do not have an equity investment in these arrangements. Under our PPA Programs, we sell our Energy Servers to anOperating Company , which sells the electricity generated by the Energy Servers to the ultimate end customers pursuant to a PPA, energy services agreement, or similar contract. Because the end customer's payment is stated on a dollar-per-kilowatt-hour basis, we refer to these agreements as Power Purchase Agreements ("PPAs"). Currently, our offerings for PPA Programs primarily include our Third-Party PPA Programs pursuant to which we recognize revenue on acceptance. Through 2017, as part of our PPA Programs, we had also offered the Bloom Electrons Program, which included an equity investment by us in theOperating Company and in which we recognized revenue as the electricity was produced. For further discussion on our Bloom Electrons Programs, see Note 13, Power Purchase Agreement Programs, in Part I, Item 1, Financial Statements. In our PPA Program, we enter into an Energy Server sales, operations and maintenance agreement ("EPC and O&M Agreement") with theOperating Company that will own the Energy Servers.The Operating Company then enters into the PPA with the end customer which purchases electricity generated by the Energy Servers.The Operating Company receives all cash flows generated under the PPA(s), in addition to all investment tax credits, all accelerated tax depreciation benefits, and any other cash flows generated by the operation of the Energy Servers not allocated to the end customer under the PPA. The sales of our Energy Servers to theOperating Company in connection with the various PPA Programs have many of the same terms and conditions as a direct sale. Payment of the purchase price is generally broken down into multiple installments, 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 43 -------------------------------------------------------------------------------- defined in the applicable EPC and O&M Agreement. A one-year service warranty is provided with the initial sale. After the expiration of the initial standard one-year warranty, theOperating Company has the option to extend our operations and maintenance services under the EPC and 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, theOperating Company has almost always exercised the option to renew our operations and maintenance obligations under the EPC and O&M Agreement. We typically provide output warranties and output guaranties to theOperating Company pursuant to the applicable EPC and O&M Agreement with theOperating Company . The end customer agreement between theOperating Company and the end customer also provides efficiency warranties and efficiency guaranties to the end user, and we provide a backstop of all of theOperating Company's obligations under those agreements, including both the repair or replacement obligations pursuant to the warranties and any payment liabilities under the guaranties. As ofJune 30, 2020 , we had incurred no liabilities due to failure to repair or replace Energy Servers pursuant to these warranties. Our obligation to make payments for underperformance against the performance guaranties for PPA Program projects was capped at an aggregate total of approximately$106.5 million (including payments both for low output and for low efficiency) and our aggregate remaining potential liability under this cap was approximately$101.4 million . Obligations to Operating Companies In addition to our obligations to the end customers, our PPA Programs involve many obligations to theOperating Company that purchases our Energy Servers. These obligations are set forth in the applicable EPC and O&M Agreement(s), and may include some or all of the following obligations: •designing, manufacturing, and installing the Energy Servers, and selling such Energy Servers to theOperating Company , •obtaining all necessary permits and other governmental approvals necessary for the installation and operation of the Bloom Energy Servers, and maintaining such permits and approvals throughout the term of the EPC and O&M Agreements, •operating and maintaining the Bloom Energy Servers in compliance with all applicable laws, permits and regulations, •satisfying the efficiency and output warranties set forth in such EPC and O&M Agreements and the PPAs ("performance warranties"), and •complying with any specific requirements contained in the PPAs with individual end-customers. The EPC and O&M Agreements obligate us to repurchase the Energy Servers in the event the Energy Servers fail to comply with the performance warranties and in the event we otherwise breach the terms of the applicable EPC and O&M Agreements and we fail to remedy such failure or breach after a cure period, or in the event that a PPA terminates as a result of any failure by us to comply with the applicable EPC and O&M Agreements. In some PPA Program projects, our obligation to repurchase Energy Servers extends to the entire fleet of Energy Servers sold pursuant to the applicable EPC and O&M Agreements in the event such failure affects more than a specified number of Energy Servers. In some PPA Programs, we have also agreed to pay liquidated damages to the applicableOperating 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. Indemnification of Performance Warranty Expenses Under PPAs - In addition to the performance warranties and guaranties in the EPC and O&M Agreements, we also have agreed to indemnify certain Operating Companies for any expenses they incur to any of the end customers resulting from failures of the applicable Energy Servers to satisfy any of the performance warranties and guaranties set forth in the applicable PPAs.Administration of Operating Companies - In each of the Bloom Electrons programs, we perform certain administrative services on behalf of the applicableOperating Company , including invoicing the end customers for amounts owed under the PPAs, administering the cash receipts of theOperating 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. 44 --------------------------------------------------------------------------------The Operating Company in each of the Bloom Electrons Programs (other than PPA I) 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 applicableOperating Company , such assets being primarily comprised of the Energy Servers and a collateral assignment of each of the contracts to which theOperating Company is a party, including the O&M Agreement entered into with us and the off take agreements entered into with theOperating Company's customers, and is senior to all other debt obligations of theOperating Company . As further collateral, the lenders receive a security interest in 100% of the membership interest of theOperating Company . However, as is typical in structured finance transactions of this nature, although the project debt is secured by all of theOperating Company's assets, the lenders have no recourse to us or to any of the other equity investors in the project. The applicable debt agreements include provisions that implement a customary "payment waterfall" that dictates the priority in which theOperating Company will use its available funds to satisfy its payment obligations to us, the lenders, the tax equity investors and other third parties. We have determined that we are the primary beneficiary in the PPA Entities, subject to reassessments performed as a result of upgrade transactions (see Note 13, Power Purchase Agreement Programs, in Part I, Item 1, Financial Statements.) Accordingly, we consolidate 100% of the assets, liabilities and operating results of these entities, including the Energy Servers and lease income, in our consolidated financial statements. We recognize the tax 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 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 PPA Entities are separate and distinct legal entities, andBloom Energy Corporation may not receive cash or other distributions from the PPA Entities 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 tax equity investors, or otherwise. For further information about our PPA Programs, see Note 13, Power Purchase Agreement Programs, in Part I, Item 1, Financial Statements. 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. As described in the Power Purchase Agreement Programs section above, we offered the Bloom Electrons purchase program through the end of 2016 and no longer offer this financing structure to potential customers.International Channel Partners Prior to 2018, we consummated a small number of sales outsidethe United States , including inIndia andJapan .India . InIndia , sales activities are currently conducted byBloom Energy (India) Pvt. Ltd. , our wholly-owned indirect subsidiary; however, we are currently evaluating the Indian market to determine whether the use of channel partners would be a beneficial go-to-market strategy to grow ourIndia market sales.Japan . InJapan , sales are conducted pursuant to a Japanese joint venture established between us and subsidiaries of SoftBank Corp, calledBloom Energy Japan Limited ("Bloom Energy Japan"). Under this arrangement, we sell Energy Servers to Bloom Energy Japan and we recognize revenue once the Energy Servers leave the port inthe United States . Bloom Energy Japan enters into the contract with the end customer and performs all installation work as well as some of the operations and maintenance work. 45 -------------------------------------------------------------------------------- TheRepublic of Korea . In 2018, Bloom Energy Japan consummated a sale of Energy Servers in theRepublic of Korea toKorea South-East Power Company . Following this sale, we entered into a Preferred Distributor Agreement withSK Engineering & Construction Co., Ltd. ("SK E&C") to enable us to sell directly into theRepublic of Korea . Under our agreement with SK E&C, SK E&C has a right of first refusal during the term of the agreement, with certain exceptions, to serve as distributor of Energy Servers for any fuel cell generation project in theRepublic of Korea , and we have the right of first refusal to serve as SK E&C's supplier of generation equipment for anyBloom Energy fuel cell project in theRepublic of Korea . Under the terms of each purchase order, title, risk of loss and acceptance of the Energy Servers pass from us to SK E&C upon delivery at the named port of lading for shipment inthe United States for the Energy Servers shipped in 2018 and thereafter upon delivery at the named port of unlading in theRepublic of Korea , prior to unloading subject to final purchase order terms. The Preferred Distributor Agreement has an initial term expiring onDecember 31, 2021 , and thereafter will automatically be renewed for three-year renewal terms unless either party terminates this agreement by prior written notice under certain circumstances. Under the terms of the Preferred Distributor Agreement, 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 theRepublic 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. SK E&C Joint Venture Agreement. InSeptember 2019 , we entered into a joint venture agreement with SK E&C to establish a light-assembly facility in theRepublic of Korea for sales of certain portions of our Energy Server for the stationary utility and commercial and industrial market in theRepublic of Korea . The joint venture is majority controlled and managed by us. We expect the facility to be operational by mid-2020 subject to the completion of certain conditions precedent to the establishment of the joint venture company. Other than a nominal initial capital contribution by Bloom, the joint venture will be funded by SK E&C. SK E&C, who currently acts as a distributor for our Energy Servers for the stationary utility and commercial and industrial market in theRepublic of Korea , will be the primary customer for the products assembled by the joint venture. Community Distributed Generation Programs InJuly 2015 , the state ofNew York introduced its Community Distributed Generation program, which extendsNew 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. InDecember 2019 , we entered into fuel cell sales, installation, operations and maintenance agreements with two developers for the deployment of fuel cells pursuant to this Community Distributed Generation program. These agreements have many of the same terms and conditions as a direct sale. Payment of the purchase price is generally broken down into multiple installments, 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 each contract. A one-year service warranty is provided with the initial sale. After the expiration of the initial standard one-year warranty, the owner has the option to renew our operations and maintenance services for subsequent quarterly or annual periods for up to 30 years. We provide warranties and guaranties regarding both efficiency and output to the owners of the Energy Servers pursuant to the operations and maintenance services agreement with theOperating Company . As ofJune 30, 2020 , we had not yet completed the sale of any Energy Servers in connection with the New York Community Distributed Generation program. Key Operating Metrics In addition to the measures presented in the condensed consolidated financial statements, we use the following key operating metrics to evaluate business activity, to measure performance, to develop financial forecasts and to make strategic decisions: •Product accepted - the number of customer acceptances of our Energy Servers in any period. We recognize revenue when an acceptance is achieved. We use this metric to measure the volume of deployment activity. We measure each Energy Server manufactured, shipped and accepted in terms of 100 kilowatt equivalents. •Billings for product accepted in the period - the total contracted dollar amount of the product component of all Energy Servers that are accepted in a period. We use this metric to gauge the dollar value of the product acceptances and to evaluate the change in dollar amount of acceptances between periods. 46 -------------------------------------------------------------------------------- •Billings for installation on product accepted in the period - the total contracted dollar amount billable with respect to the installation component of all Energy Servers that are accepted. We use this metric to gauge the dollar value of the installations of our product acceptances and to evaluate the change in dollar value associated with the installation of our product acceptances between periods. •Billings for annual maintenance service agreements - the dollar amount billable for one-year service contracts that have been initiated or renewed. We use this metric to measure the cumulative billings for all service contracts in any given period. As our installation base grows, we expect our billings for annual maintenance service agreements to grow, as well. •Product costs of product accepted in the period (per kilowatt) - the average unit product cost for the Energy Servers that are accepted in a period. We use this metric to provide insight into the trajectory of product costs and, in particular, the effectiveness of cost reduction activities. •Period costs of manufacturing expenses not included in product costs - the manufacturing and related operating costs that are incurred to procure parts and manufacture Energy Servers that are not included as part of product costs. We use this metric to measure any costs incurred to run our manufacturing operations that are not capitalized (i.e., absorbed, such as stock-based compensation) into inventory and therefore, expensed to our condensed consolidated statement of operations in the period that they are incurred. •Installation costs on product accepted (per kilowatt) - the average unit installation cost for Energy Servers that are accepted in a given period. This metric is used to provide insight into the trajectory of install costs and, in particular, to evaluate whether our installation costs are in line with our installation billings. Comparison of the Three and Six Months EndedJune 30, 2020 and 2019 Acceptances We use acceptances as a key operating metric to measure the volume of our completed Energy Server installation activity from period to period. We typically define an acceptance as when an Energy Server is installed and running at full power as defined in the customer contract or the financing agreements. For orders where a third party performs the installation, acceptances are generally achieved when the Energy Servers are shipped. The product acceptances in the periods were as follows: Three Months Ended Six Months Ended June 30, Change June 30, Change 2020 2019 Amount % 2020 2019 Amount % Product accepted during the period (in 100 kilowatt systems) 306 271 35 12.9 % 562 506 56 11.1 %
Product accepted increased by approximately 35 systems and 56 systems, or 12.9%
and 11.1%, for the three and six months ended
47 -------------------------------------------------------------------------------- As discussed in the Purchase and Lease Options section above, our customers have several purchase options for our Energy Servers. The portion of acceptances attributable to each purchase option in the three and six months endedJune 30, 2020 and 2019 was as follows: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Direct Purchase (including Third Party PPAs and International Channels) 100 % 93 % 99 % 94 % Traditional Lease - % 1 % - % - % Managed Services - % 6 % 1 % 6 % 100 % 100 % 100 % 100 % As discussed in the Purchase and Lease Options section above, our customers have several purchase options for our Energy Servers. The portion of total revenue attributable to each purchase option in the period was as follows: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Direct Purchase (including Third Party PPAs and International Channels) 88 % 84 % 87 % 83 % Traditional Lease 1 % 1 % 1 % 1 % Managed Services 5 % 5 % 6 % 5 % Bloom Electrons 6 % 10 % 6 % 11 % 100 % 100 % 100 % 100 % Billings Related to Our Products Total billings attributable to each revenue classification for the three and six months endedJune 30, 2020 and 2019 was as follows (in thousands, except percentages): Three Months Ended Six Months EndedJune 30 , ChangeJune 30 , Change 2020 2019 Amount % 2020 2019 Amount % Billings for product accepted in the period$ 117,483 $ 165,081 $ (47,598) (28.8) %$ 229,254 $ 271,810 $ (42,556) (15.7) % Billings for installation on product accepted in the period 27,841 13,169 14,672 111.4 % 42,452 27,632 14,820 53.6 % Billings for annual maintenance services agreements 18,915 15,158 3,757 24.8 % 39,134 32,778 6,356 19.4 % Billings for product accepted decreased by approximately$47.6 million , or 28.8%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . The decrease is primarily due to a higher average selling price mix in the three months endedJune 30, 2019 , driven mainly by the PPA II upgrade that occurred in the three months endedJune 30, 2019 . Billings for installation on product accepted increased$14.7 million for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Although product acceptances in the period increased 12.9%, billings for installation on product accepted increased 111.4% due to the mix in installation billings driven by site complexity, site size, personalized applications, and customer option to complete the installation of our Energy Servers themselves. Billings for annual maintenance service agreements increased$3.8 million , or 24.8%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . This increase was driven primarily by the increase in our installed base. 48 -------------------------------------------------------------------------------- Billings for product accepted decreased by approximately$42.6 million , or 15.7%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . The decrease is primarily due to a higher average selling price mix in the six months endedJune 30, 2019 , driven mainly by the PPA II upgrade that occurred in the six months endedJune 30, 2019 . Billings for installation on product accepted increased$14.8 million for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Although product acceptances in the period increased 11.1%, billings for installation on product accepted increased 53.6% due to the mix in installation billings driven by site complexity, site size, personalized applications, and customer option to complete the installation of our Energy Servers themselves. Billings for annual maintenance service agreements increased$6.4 million , or 19.4%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . This increase was driven primarily by the increase in our installed base. Costs Related to Our Products Total product related costs for the three and six months endedJune 30, 2020 and 2019 was as follows: Three Months Ended Six Months EndedJune 30 , ChangeJune 30 , Change 2020 2019 Amount % 2020 2019 Amount % Product costs of product accepted in the period$2,409 /kW$3,045 /kW
$(664) /kW (21.3) % Period costs of manufacturing related expenses not included in product costs (in thousands)$ 4,913 $ 3,321 $ 1,592 47.9 %$ 11,267 $ 10,258 $ 1,009 9.8 % Installation costs on product accepted in the period$1,200 /kW$627 /kW$573 /kW 91.4 %$1,011 /kW$650 /kW$361 /kW 55.5 % Product costs of product accepted decreased by approximately$636 per kilowatt, or 20.9%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . The product cost reduction was driven generally by our ongoing cost reduction efforts to reduce material costs in conjunction with our suppliers and our reduction in labor and overhead costs through improved processes and automation at our manufacturing facilities. Product costs of product accepted decreased by approximately$664 per kilowatt, or 21.3%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . The product cost reduction was driven generally by our ongoing cost reduction efforts to reduce material costs in 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 increased by approximately$1.6 million , or 47.9%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . This increase was driven primarily by additional one-time expenses incurred due to COVID-19. Period costs of manufacturing related expenses increased by approximately$1.0 million , or 9.8%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . This increase was driven primarily by additional one-time expenses incurred due to COVID-19. Installation costs on product accepted increased by approximately$573 per kilowatt, or 91.4%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . 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, and customer option to complete the installation of our Energy Servers themselves. As such, installation on a per kilowatt basis can vary significantly from period-to-period. Installation costs on product accepted increased by approximately$361 per kilowatt, or 55.5%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Each customer site is different and installation costs can vary due to a number of factors, including site complexity, size, location of gas, personalized applications, and customer option to complete the installation of our Energy Servers themselves. As such, installation on a per kilowatt basis can vary significantly from period-to-period. 49 -------------------------------------------------------------------------------- Results of Operations A discussion regarding the comparison of our financial condition and results of operations for the three and six months endedJune 30, 2020 and 2019 is presented below (in thousands, except percentage data). Comparison of the Three and Six Months EndedJune 30, 2020 and 2019 Revenue Three Months Ended Six Months EndedJune 30 , ChangeJune 30 , Change 2020 2019 Amount % 2020 2019 Amount % As Restated As Restated Product$ 116,197 $ 144,081 $ (27,884) (19.4) %$ 215,756 $ 235,007 $ (19,251) (8.2) % Installation 29,839 13,076 16,763 128.2 % 46,457 25,295 21,162 83.7 % Service 26,208 23,026 3,182 13.8 % 51,355 46,493 4,862 10.5 % Electricity 15,612 20,143 (4,531) (22.5) % 30,987 40,532 (9,545) (23.5) % Total revenue$ 187,856 $ 200,326 $ (12,470) (6.2)%$ 344,555 $ 347,327 $ (2,772) (0.8) % Total Revenue Total revenue decreased approximately$12.5 million , or 6.2%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . This decrease was driven primarily driven by the decrease in product revenue for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 , offset partially by the increase in installation revenue. The product revenue decrease is primarily due to a higher average selling price mix in the three months endedJune 30, 2019 , driven mainly by the PPA II upgrade that occurred in the three months endedJune 30, 2019 . Total revenue decreased approximately$2.8 million , or 0.8%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . This decrease was primarily driven by the decrease in product revenue and electricity revenue for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 , offset partially by the increase in installation revenue. The product revenue decrease is primarily due to a higher average selling price mix in the six months endedJune 30, 2019 , driven mainly by the PPA II upgrade that occurred in the six months endedJune 30, 2019 . Product Revenue Product revenue decreased approximately$27.9 million , or 19.4%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . The product revenue decrease was primarily due to a higher average selling price mix in the three months endedJune 30, 2019 , driven mainly by the PPA II upgrade that occurred in the three months endedJune 30, 2019 . Product revenue decreased approximately$19.3 million , or 8.2%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . The product revenue decrease was, again, primarily due to a higher average selling price mix in the six months endedJune 30, 2019 , driven mainly by the PPA II upgrade that occurred in the six months endedJune 30, 2019 . Installation Revenue Installation revenue increased by approximately$16.8 million , or 128.2%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . This increase was driven by the increase in product acceptances of approximately 35 systems, or 12.9%, for the three months endedJune 30, 2020 and due to the change in mix of installations driven site complexity, site size, and customer option to complete the installation of our Energy Servers themselves. Installation revenue increased approximately$21.2 million , or 83.7%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . This increase was driven by the increase in product acceptances of approximately 56 systems, or 11.1%, for the six months endedJune 30, 2020 and due to the change in mix of installations driven by site complexity, site size, and customer option to complete the installation of our Energy Servers themselves. Service Revenue Service revenue increased approximately$3.2 million , or 13.8%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . This was primarily due to the increase in the number of annual maintenance contract renewals driven by our growing fleet of installed Energy Servers. 50 -------------------------------------------------------------------------------- Service revenue increased by approximately$4.9 million , or 10.5% for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . This was primarily due to the increase in the number of annual maintenance contract renewals driven by our growing fleet of installed Energy Servers. Electricity Revenue Electricity revenue decreased by approximately$4.5 million , or 22.5%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 , due to a reduction in electricity revenues resulting from the decommissioning and upgrade of PPA II in the three months endedJune 30, 2019 . Electricity revenue was driven by our former Bloom Electrons program, which included PPA II, as well as from our Managed Services agreements. When PPAs associated with our Bloom Electrons program are decommissioned, we no longer recognize electricity revenue for them. Electricity revenue decreased by approximately$9.5 million , or 23.5%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 , due to a reduction in electricity revenues resulting from the decommissioning and an upgrade of PPA II in the six months endedJune 30, 2019 . Electricity revenue was driven by our former Bloom Electrons program, which included PPA II, as well as from our Managed Services agreements. When PPAs associated with our Bloom Electrons program are decommissioned, we no longer recognize electricity revenue for them. Cost of Revenue Three Months Ended Six Months EndedJune 30 , ChangeJune 30 , Change 2020 2019 Amount % 2020 2019 Amount % As Restated As Restated (dollars in thousands) (dollars in thousands) Cost of revenue: Product$ 83,127 $ 113,228 $ (30,101) (26.6) %$ 155,616 $ 202,000 $ (46,384) (23.0) % Installation 38,287 17,685 20,602 116.5 % 59,066 33,445 25,621 76.6 % Service 28,652 18,763 9,889 52.7 % 59,622 46,684 12,938 27.7 % Electricity 11,541 22,300 (10,759) (48.2) % 24,071 35,284 (11,213) (31.8) %
Total cost of revenue$ 161,607 $ 171,976 $ (10,369) (6.0)%$ 298,375 $ 317,413 $ (19,038) (6.0)% Total Cost of Revenue Total cost of revenue decreased by approximately$10.4 million , or 6.0%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Included as a component of total cost of revenue, stock-based compensation decreased approximately$5.8 million for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Cost of revenue for the three months endedJune 30, 2019 included$33.7 million of one-time expenses associated with the PPA II upgrade. Total cost of revenue, excluding stock-based compensation and the one-time expenses, increased approximately$29.1 million , or 22.8%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 due to the 12.9% increase in product acceptances and higher cost of installation revenue due to the change in mix of installations. Total cost of revenue decreased by approximately$19.0 million , or 6.0%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Included as a component of total cost of revenue, stock-based compensation decreased approximately$18.6 million , or 64.5%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Cost of revenue for the six months endedJune 30, 2019 included$33.7 million of one-time expenses associated with the PPA II upgrade. Total cost of revenue, excluding stock-based compensation and the one-time expenses, increased approximately$33.3 million , or 13.1%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 due to the 11.1% increase in product acceptances and higher cost of installation revenue due to the change in mix of installations. 51 -------------------------------------------------------------------------------- Cost of Product Revenue Cost of product revenue decreased by approximately$30.1 million , or 26.6%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Stock-based compensation, which is included as a component of cost of product revenue, decreased approximately$3.9 million for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Cost of product revenue for the three months endedJune 30, 2019 included$25.6 million of one-time expenses associated with the PPA II upgrade. Cost of product revenue, excluding stock-based compensation and the one-time expenses, decreased approximately$0.6 million , or 0.7%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 despite a 12.9% increase in product acceptances due to ongoing cost reduction efforts to reduce material, labor and overhead costs. Cost of product revenue decreased by approximately$46.4 million , or 23.0%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Stock-based compensation, which is included as a component of cost of product revenue, decreased approximately$15.8 million for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Cost of product revenue for the six months endedJune 30, 2019 included$25.6 million of one-time expenses associated with the PPA II upgrade. Cost of product revenue, excluding stock-based compensation and the one-time expenses, decreased approximately$4.9 million , or 3.2%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 despite an 11.1% increase in product acceptances due to ongoing cost reduction efforts to reduce material, labor and overhead costs. Cost of Installation Revenue Cost of installation revenue increased by approximately$20.6 million , or 116.5%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 , primarily due to the increase in product acceptances of approximately 35 systems, or 12.9%, for the three months endedJune 30, 2020 and due to the change in mix of installations driven by site complexity, size, local ordinance requirements, location of utility interconnect, and customer option to complete the installation of our Energy Servers themselves. Cost of installation revenue increased by approximately$25.6 million , or 76.6%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 , primarily due to the increase in product acceptances of approximately 56 systems, or 11.1%, for the six months endedJune 30, 2020 and due to the change in mix of installations driven by site complexity, size, local ordinance requirements, location of utility interconnect and, the customer's option to complete the installation of our Energy Servers themselves. Cost of Service Revenue Cost of service revenue increased by approximately$9.9 million , or 52.7%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . This increase in service cost was primarily due to more power module replacements required in the fleet as our fleet of installed Energy Servers grows with acceptances and additional extended service contracts are executed and renewed. Cost of service revenue increased by approximately$12.9 million , or 27.7%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . This increase in service cost was primarily due to more power module replacements required in the fleet as our fleet of installed Energy Servers grows with acceptances and additional extended service contracts are executed and renewed. Cost of Electricity Revenue Cost of electricity revenue decreased by approximately$10.8 million , or 48.2%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 , mainly due to the decommissioning and upgrade of PPA II in the three months endedJune 30, 2019 , offset by the increase in Managed Services Agreements acceptances and their associated costs of electricity revenue recognized over the period of the related agreement. Cost of electricity revenue decreased by approximately$11.2 million , or 31.8%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 , mainly due to the decommissioning and upgrade of PPA II in the six months endedJune 30, 2019 , offset by the increase in Managed Services Agreements acceptances and their associated costs of electricity revenue recognized over the period of the related agreement. 52 -------------------------------------------------------------------------------- Gross Profit (Loss) Three Months Ended Six Months Ended June 30, June 30, 2020 2019 Change 2020 2019 Change As Restated As Restated (dollars in thousands) Gross profit: Product$ 33,070 $ 30,853 $ 2,217 $ 60,140 $ 33,007 $ 27,133 Installation (8,449) (4,609) (3,840) (12,609) (8,150) (4,459) Service (2,444) 4,263 (6,707) (8,266) (191) (8,075) Electricity 4,071 (2,157) 6,228 6,916 5,248 1,668 Total gross profit$ 26,249 $ 28,350 $ (2,101) $ 46,180 $ 29,914 $ 16,266 Gross margin: Product 28 % 21 % 28 % 14 % Installation (28) % (35) % (27) % (32) % Service (9) % 19 % (16) % - % Electricity 26 % (11) % 22 % 13 % Total gross margin 14 % 14 % 13 % 9 % Total Gross Profit Gross profit decreased$2.1 million in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Stock-based compensation, which is included as a component of total cost of revenue, decreased approximately$5.8 million for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Total gross profit, excluding stock-based compensation, decreased approximately$7.9 million , or 20.3%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 due to the higher margin site mix of installations driven primarily by the PPA II upgrade in the three months endedJune 30, 2019 . Gross profit improved$16.3 million in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Stock-based compensation, which is included as a component of total cost of revenue, decreased approximately$18.6 million for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Total gross profit, excluding stock-based compensation, decreased approximately$2.3 million , or 4.0%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 , despite an 11.1% increase in product acceptances due to the higher margin site mix of installations driven primarily by the PPA II upgrade in the six months endedJune 30, 2019 . Product Gross Profit Product gross profit increased$2.2 million in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Excluding stock-based compensation, product gross profit decreased$1.7 million , or 4.5%, in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . The product gross profit decrease in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 was primarily due to a higher margin site mix in the three months endedJune 30, 2019 , driven primarily by the PPA II upgrade that occurred in the three months endedJune 30, 2019 . Product gross profit increased$27.1 million in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Excluding stock-based compensation, product gross profit increased$11.3 million , or 20.4%, in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . This increase was generally due to the increase in product acceptances and lower product cost driven by ongoing cost reduction activities. 53 -------------------------------------------------------------------------------- Installation Gross Loss Installation gross loss increased$3.8 million in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Excluding stock-based compensation, install gross loss increased$5.0 million , or 183.7%, in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 driven by the change in mix of installations driven by site complexity, size, local ordinance requirements, location of utility interconnect and, customer option to complete the installation of our Energy Servers themselves. Installation gross loss increased$4.5 million in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Excluding stock-based compensation, install gross loss increased$6.7 million , or 153.9%, in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 , driven by the change in mix of installations driven by site complexity, size, local ordinance requirements, location of utility interconnect and, the customer's option to complete the installation of our Energy Servers themselves. Service Gross Profit (Loss) Service gross profit (loss) worsened$6.7 million in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . This decline was primarily due to an increase in service cost driven primarily by the timing of our service schedule for power module replacements required in our fleet of installed Energy Servers. Service gross loss increased$8.1 million in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . This increase was primarily due to an increase in service cost driven primarily by the timing of our service schedule for power module replacements required in our fleet of installed Energy Servers. Electricity Gross Profit (Loss) Electricity gross profit (loss) improved$6.2 million , or 288.8%, in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 , mainly due to the decommissioning and upgrade of PPA II in the three months endedJune 30, 2019 . Electricity gross profit increased$1.7 million , or 31.8%, in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 , mainly due to the decommissioning and upgrade of PPA II in the six months endedJune 30, 2019 . Operating Expenses Three Months Ended Six Months EndedJune 30 , ChangeJune 30 , Change 2020 2019 Amount % 2020 2019 Amount % As Restated As Restated (dollars in thousands) (dollars in thousands) Research and development$ 19,377 $ 29,772 $ (10,395) (34.9) %$ 42,656 $ 58,631 $ (15,975) (27.2) % Sales and marketing 11,427 18,194 (6,767) (37.2) % 25,376 38,567 (13,191) (34.2) % General and administrative 24,945 43,662 (18,717) (42.9) % 54,043 82,736 (28,693) (34.7) % Total operating expenses$ 55,749 $ 91,628 $ (35,879) (39.2) %$ 122,075 $ 179,934 $ (57,859) (32.2) % Total Operating Expenses Total operating expenses decreased$35.9 million , or 39.2%, in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Included as a component of total operating expenses, stock-based compensation expenses decreased approximately$26.9 million for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . The decrease in stock-based compensation expense was primarily attributable to a lower stock-based compensation charge attributed to a one-time employee grant of restricted stock units ("RSUs") awarded prior to IPO with a performance condition of an IPO of the Company's securities. These RSUs have a two-year vesting period starting on the day of IPO and were issued as an employee retention vehicle to bring our stock-based compensation in line with our peer group. These RSUs completed their vesting in July of 2020, and stock-based compensation charge associated with these RSUs decreased quarter-over-quarter until the final vesting date. In addition to the one-time grant, stock-based compensation expense includes some previously granted RSUs with vesting beginning upon the completion of our IPO. Total operating expenses, excluding stock-based compensation, decreased approximately$8.9 million , or 17.6%, in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . This decrease was primarily due to a$5.9 million one-time expense in the three months endedJune 30, 2019 associated with the PPA II upgrade. 54 -------------------------------------------------------------------------------- Total operating expenses decreased$57.9 million , or 32.2%, in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Included as a component of total operating expenses, stock-based compensation expenses decreased approximately$58.9 million for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . The decrease in stock-based compensation expense was primarily attributable to a lower stock-based compensation charge attributed to a one-time employee grant of RSUs awarded prior to IPO with a performance condition of an IPO of the Company's securities. These RSUs have a two-year vesting period starting on the day of IPO and were issued as an employee retention vehicle to bring our stock-based compensation in line with our peer group. These RSUs completed their vesting in July of 2020, and the stock-based compensation charge associated with these RSUs decreased quarter-over-quarter until the final vesting date. In addition to the one-time grant, the stock-based compensation expenses include some previously granted RSUs with vesting beginning upon the completion of our IPO. Total operating expenses, excluding stock-based compensation expense, increased approximately$1.1 million , or 1.2%, in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . This increase was primarily due to compensation related expenses associated with hiring new employees, investments for next generation technology, and fees for restatement related expenses in 2020 offset by a$5.9 million one-time expense in six months endedJune 30, 2019 associated with the PPA II upgrade. Research and Development Research and development expenses decreased approximately$10.4 million , or 34.9%, in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Included as a component of research and development expenses, stock-based compensation expenses decreased by approximately$7.5 million for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Total research and development expenses, excluding stock-based compensation expenses, decreased by approximately$2.9 million , or 16.5%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . This decrease was primarily due to timing of investments made in our next generation technology development, sustaining engineering projects for the current Energy Server platform, and investments made for customer personalized applications, such as microgrids, and new fuel solutions utilizing biogas. Research and development expenses decreased by approximately$16.0 million , or 27.2%, in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Included as a component of research and development expenses, stock-based compensation expenses decreased by approximately$15.6 million for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Total research and development expenses, excluding stock-based compensation, decreased by approximately$0.3 million , or 1.0%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Sales and Marketing Sales and marketing expenses decreased by approximately$6.8 million , or 37.2%, in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Included as a component of sales and marketing expenses, stock-based compensation expenses decreased by approximately$6.7 million for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Total sales and marketing expenses, excluding stock-based compensation, decreased by approximately$0.1 million , or 0.7%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Sales and marketing expenses decreased by approximately$13.2 million , or 34.2%, in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Included as a component of sales and marketing expenses, stock-based compensation expenses decreased by approximately$14.3 million for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Total sales and marketing expenses, excluding stock-based compensation, increased by approximately$1.1 million , or 6.2%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . This increase was primarily due to compensation expenses related to hiring new employees and expenses related to efforts to increase demand and raise market awareness of our Energy Server solutions, expanding outbound communications, as well as efforts to attract new customer financing partners. General and Administrative General and administrative expenses decreased by approximately$18.7 million , or 42.9%, in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Included as a component of general and administrative expenses, stock-based compensation expenses decreased by approximately$12.7 million for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Total general and administrative expenses, excluding stock-based compensation, decreased by approximately$6.0 million , or 25.0%, for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . This decrease was due to a$5.9 million one-time expense in the three months endedJune 30, 2019 associated with the PPA II upgrade. 55 -------------------------------------------------------------------------------- General and administrative expenses decreased by approximately$28.7 million , or 34.7%, in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Included as a component of general and administrative expenses, stock-based compensation expenses decreased by approximately$29.0 million for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Total general and administrative expenses, excluding stock-based compensation, increased by approximately$0.3 million , or 0.7%, for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . The increase in general and administrative expenses was mainly due to increased personnel costs and fees for restatement related expenses in 2020, offset by a$5.9 million one-time expense in the six months endedJune 30, 2019 associated with the PPA II upgrade. Stock-Based Compensation Three Months Ended Six Months EndedJune 30 , ChangeJune 30 , Change 2020 2019 Amount % 2020 2019 Amount % As Restated As Restated (dollars in thousands) Cost of revenue$ 4,736 $ 10,538 $ (5,802) (55.1) %$ 10,243 $ 28,850 $ (18,607) (64.5) % Research and development 4,714 12,218 (7,504) (61.4) % 10,810 26,448 (15,638) (59.1) % Sales and marketing 2,234 8,935 (6,701) (75.0) % 6,124 20,447 (14,323) (70.0) % General and administrative 6,947 19,673 (12,726) (64.7) % 14,473 43,441 (28,968) (66.7) % Total stock-based compensation$ 18,631 $ 51,364 $ (32,733) (63.7) %$ 41,650 $ 119,186 $ (77,536) (65.1) % Total stock-based compensation decreased$32.7 million , or 63.7%, in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Of the$18.6 million in stock-based compensation for the three months endedJune 30, 2020 , approximately$4.8 million was related to one-time employee grants of RSUs that were issued at the time of our IPO and that have a two-year vesting period. These RSUs provided us an employee retention vehicle to bring our stock-based compensation in line with our peer group. In addition, the stock-based compensation included some previously granted RSUs that vested upon the completion of our IPO. Total stock-based compensation decreased$77.5 million , or 65.1%, in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . Of the$41.7 million in stock-based compensation for the six months endedJune 30, 2020 , approximately$11.5 million was related to one-time employee grants of RSUs that were issued at the time of our IPO and that have a two-year vesting period. These RSUs provided us an employee retention vehicle to bring our stock-based compensation in line with our peer group. In addition, the stock-based compensation included some previously granted RSUs that vested upon the completion of our IPO. Other Income and Expense Three Months Ended Six Months Ended June 30, June 30, 2020 2019 Change 2020 2019 Change As Restated As Restated (in thousands) Interest income$ 332 $ 1,700 $ (1,368) $ 1,151 $ 3,585 $ (2,434) Interest expense (14,374) (22,722) 8,348 (35,128) (44,522) 9,394 Interest expense, related parties (794) (1,606) 812 (2,160) (3,218) 1,058 Other income (expense), net (3,913) (222) (3,691) (3,921) 43 (3,964) Loss on extinguishment of debt - - - (14,098) - (14,098) Gain (loss) on revaluation of embedded derivatives 412 (540) 952 696 (1,080) 1,776 Total$ (18,337) $ (23,390) $ 5,053 $ (53,460) $ (45,192) $ (8,268) 56
-------------------------------------------------------------------------------- Total Other Expense Total other expense decreased$5.1 million in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . This decrease was primarily due to reduction in interest expenses. Total other expense increased$8.3 million in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . This increase was primarily due to the loss on extinguishment of debt of$14.1 million . Interest Income Interest income decreased$1.4 million in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . This decrease was primarily due to the decrease in cash balances. Interest income decreased$2.4 million in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . This decrease was primarily due to the decrease in cash balances. Interest Expense Interest expense decreased$8.3 million in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . This decrease was primarily due a one-time credit of$4.3 million due to premium amortization on the convertible notes, and a decrease in interest expense with the debt buy-out due to the PPA II and PPA IIIb upgrades. Interest expense decreased$9.4 million in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . This decrease was primarily due a one-time credit of$4.3 million due to premium amortization on the convertible notes, and a decrease in interest expense with the debt buy-out due to the PPA II and PPA IIIb upgrades. Interest Expense, Related Parties Interest expense, related parties decreased$0.8 million the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 due to the normal interest amortization. Interest expense, related parties decreased$1.1 million the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 due to the normal interest amortization. Other Income (Expense), net Other income (expense), net worsened$3.7 million in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 , due to an impairment in our investment in the Bloom Energy Japan joint venture. Other income (expense), net worsened$4.0 million in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 , due to an impairment in our investment in the Bloom Energy Japan joint venture. Loss on Extinguishment of Debt There was no debt extinguishment in the three months endedJune 30, 2020 . Loss on extinguishment of debt of$14.1 million was recorded in the six months endedJune 30, 2020 . There was no debt extinguishment in the three and six months endedJune 30, 2019 . Gain (Loss) on Revaluation of Embedded Derivatives Gain (loss) on revaluation of embedded derivatives improved$1.0 million in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . This improvement was primarily due to 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 improved$1.8 million in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . This improvement was primarily due to the change in fair value of our sales contracts of embedded EPP derivatives valued using historical grid prices and available forecasts of future electricity prices to estimate future electricity prices. 57 -------------------------------------------------------------------------------- Provision for Income Taxes Three Months Ended Six Months Ended June 30, Change June 30, Change 2020 2019 Amount % 2020 2019 Amount % (dollars in thousands) Income tax provision$ 141 $ 258 $ (117) (45.3) %$ 265 $ 466 $ (201) (43.1) % Income tax provision decreased in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 , and was primarily due to fluctuations in the effective tax rates on income earned by international entities. Income tax provision decreased in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 , and 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 Six Months Ended June 30, Change June 30, Change 2020 2019 Amount % 2020 2019 Amount % (dollars in thousands) Less: net loss attributable to noncontrolling interests and redeemable noncontrolling interests 5,466 5,015$ 451 9.0 %$ 11,159 $ 8,847 $ 2,312 26.1 % Total loss attributable to noncontrolling interests increased$0.5 million , or 9.0%, in the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . The net loss increased due to increased losses in our PPA Entities which are allocated to our noncontrolling interests. Total loss attributable to noncontrolling interests increased$2.3 million , or 26.1%, in the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . The net loss increased due to increased losses in our PPA Entities which are allocated to our noncontrolling interests. 58 -------------------------------------------------------------------------------- Liquidity and Capital Resources As ofJune 30, 2020 , we had an accumulated deficit of approximately$3.1 billion . We have financed our operations, including the costs of acquisition and installation of our Energy Servers, mainly through a variety of financing arrangements and PPA Entities, credit facilities from banks, sales of our common stock, debt financings and cash generated from our operations. As ofJune 30, 2020 , we had$416.0 million of total outstanding recourse debt,$229.7 million of non-recourse debt and$27.3 million of other long-term liabilities. See Note 7, Outstanding Loans and Security Agreements , in Part I, Item 1, Financial Statements for a complete description of our outstanding debt. As ofJune 30, 2020 andDecember 31, 2019 , we had cash and cash equivalents of$144.1 million and$202.8 million , respectively. InMarch 2020 , we successfully extended the maturity of our outstanding 10% Convertible Notes, our 10% Constellation Note and additionally entered into a note purchase agreement to issue$70.0 million of 10.25% Senior Secured Notes due 2027 in a private placement that was subsequently completed onMay 1, 2020 . The combination of our existing cash and cash equivalents, the extension of the 10% Convertible Notes toDecember 2021 , the conversion of the 10% Constellation Note inMay 2020 , and the proceeds from the 10.25% Senior Secured Notes are expected to be sufficient to meet our operational and capital cash flow requirements and other cash flow needs and we do not expect that it will be necessary to access capital markets for cash to operate our business for the next 12 months. If the impact of COVID-19 to our business and financial position is more extensive than expected, we may access capital markets opportunistically to continue to improve our capital structure and to address outstanding debt principal repayments that are due inDecember 2021 if market conditions are favorable. As ofJune 30, 2020 , the current portion of our total debt is$26.1 million . For additional information refer to Note 7, Outstanding Loans and Security Agreements, in Item 1, Financial Statements. Additionally, the impact of COVID-19 on our ability to execute our business strategy and on our financial position and results of operation is uncertain.Our future cash flow requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, the rate of growth in the volume of system builds, the expansion of sales and marketing activities, market acceptance of our products, the timing of receipt by us of distributions from our PPA Entities and overall economic conditions including the impact of COVID-19 on our future operations, as described in the COVID-19 Pandemic section above. We do not expect to receive significant cash distributions from our PPA Entities. For additional information refer to Note 13, Power Purchase Agreement Programs, in Part I, Item 1, Financial Statements. Cash Flows A summary of our sources and uses of cash, cash equivalents and restricted cash is as follows (in thousands): Six Months Ended June 30, 2020 2019 As Restated Net cash provided by (used in): Operating activities$ (40,235) $ 103,616 Investing activities (19,560) 79,911 Financing activities 6,536 (92,946) Net cash provided by (used in) our variable interest entities (the PPA Entities) which are incorporated into the condensed consolidated statements of cash flows for the three months endedJune 30, 2020 and 2019 is as follows (in thousands): Six Months Ended June 30, 2020 2019 PPA Entities ¹
Net cash provided by PPA operating activities
Net cash used in PPA financing activities (13,649)
(118,805)
59 -------------------------------------------------------------------------------- 1 The PPA Entities' operating and financing cash flows are a subset of our consolidated cash flows and represents 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 consolidated cash flows of the PPA Entities in which we have only a minority interest. Operating Activities Net cash used in operating activities for the six months endedJune 30, 2020 was$40.2 million and was primarily the result of net cash loss of$44.3 million partially offset the net decrease in working capital of$4.1 million . Net cash loss is primarily comprised of a net loss of$129.6 million , adjusted for non-cash benefit items including: (i) depreciation and amortization of$25.9 million ; (ii) impairment of equity method investment of$4.2 million ; (iii) a loss on revaluation of derivative contracts of$0.1 million ; (iv) stock-based compensation of$41.7 million ; and (v) net loss on extinguishment of debt of$14.1 million ; net of (vi) recovery of debt issuance cost of$0.5 million . Net cash provided by changes in working capital consisted primarily of decreases in: (i) customer financing receivable and other of$2.5 million ; (ii) prepaid expenses and other current assets of$7.3 million ; plus increases in: (iii) accounts payable of$8.8 million ; (iv) accrued expenses and other current liabilities of$13.7 million ; and (v) deferred revenue and customer deposits of$2.9 million . These sources of cash from working capital were mostly offset by increases in: (i) accounts receivable of$11.8 million ; (ii) inventories of$3.5 million ; (iii) deferred cost of revenue of$10.0 million ; and (iii) other long-term assets of$3.6 million ; plus a decrease in: (iv) other long-term liabilities of$2.1 million . Net cash provided by operating activities for the six months endedJune 30, 2019 was$103.6 million and was the result of net cash earnings of$7.7 million plus net decrease in working capital of$95.9 million . Net cash earnings is primarily comprised of a net loss of$195.7 million , adjusted for non-cash benefit items including: (i) depreciation and amortization of approximately$37.0 million ; (ii) write-off of property, plant and equipment, net of$2.7 million ; (iii) Write-off of PPA II decommissioned assets of 25.6 million; (iv) debt make-whole payment reclassification of$5.9 million ; (v) revaluation of derivatives contracts of$1.6 million ; (vi) stock-based compensation of$119.2 million ; and (vii) amortization of debt issuance cost of$11.3 million . Net cash provided by changes in working capital consisted primarily of decreases in: (i) accounts receivable of$49.7 million ; (ii) inventory of$22.2 million ; (iii) customer financing receivable and other of$2.7 million ; and (iv) prepaid expenses and other current assets of$10.2 million ; plus increases in: (v) accrued expenses and other current liabilities of$5.6 million ; (vi) deferred revenue and customer deposits of$51.9 million ; and (vi) other long term liabilities of$4.7 million . These sources of cash from working capital were partially offset by increases in: (i) deferred cost of revenue of$38.8 million ; and (ii) other long-term assets of$0.3 million ; plus decreases in: (iii) accounts payable of$5.5 million ; and (iv) accrued warranty of$6.7 million . Investing Activities Net cash used in investing activities in the six months endedJune 30, 2020 was$19.6 million entirely related to the purchase of long-lived assets. Net cash provided by investing activities in the six months endedJune 30, 2019 was$79.9 million , which was primarily the result of net proceeds from maturities of marketable securities of$104.5 million , partially offset by$24.6 million used for the purchase of long-lived assets. Financing Activities Net cash provided by financing activities in the six months endedJune 30, 2020 was$6.5 million which included borrowings from issuance of debt of$70.0 million , borrowings from issuance of debt to related parties of$30.0 million and proceeds from issuance of common stock of$5.2 million . This was partially offset by repayment of debt of$84.4 million , debt issuance costs of$3.4 million , repayment of financing obligations of$5.1 million , and distributions paid to ourPPA Equity Investors of$5.8 million . Net cash used in financing activities in the six months endedJune 30, 2019 was$92.9 million and resulted primarily from distributions paid to ourPPA Equity Investors of$7.8 million , and repayments of long-term debt of$85.2 million , the debt make-whole payment reclassification of$5.9 million , payments to noncontrolling and redeemable noncontrolling interests of$18.7 million , and distributions to noncontrolling and redeemable noncontrolling interests of$7.8 million , partially offset by proceeds from the issuance of common stock of$8.3 million and the net proceeds from financing obligations of$16.3 million . 60 -------------------------------------------------------------------------------- Outstanding Loans and Security Agreements The following is a summary of our debt as ofJune 30, 2020 (in thousands): Unpaid Net Carrying Value Unused Principal Long- Borrowing Balance Current Term Total Capacity LIBOR + 4% term loan due November 2020$ 714 $
697 $ -
10% convertible promissory notes due December 2021 249,299 - 263,405 263,405 - 10% notes due July 2024 86,000 14,000 69,497 83,497 - 10.25% notes due March 2027 70,000 68,437 68,437 Total recourse debt 406,013 14,697 401,339 416,036 - 7.5% term loan due September 2028 35,675 2,567 30,078 32,645 - 6.07% senior secured notes due March 2030 79,466 3,511 75,054 78,565 - LIBOR + 2.5% term loan due December 2021 119,472 5,289 113,184 118,473 - Letters of Credit due December 2021 - - - - 968 Total non-recourse debt 234,613 11,367 218,316 229,683 968 Total debt$ 640,626 $ 26,064 $ 619,655 $ 645,719 $ 968 Recourse debt refers to debt thatBloom Energy Corporation has an obligation to pay. Non-recourse debt refers to debt that is recourse to only specified assets or our subsidiaries. The differences between the unpaid principal balances and the net carrying values apply to debt discounts and deferred financing costs. We were in compliance with all financial covenants as ofJune 30, 2020 andDecember 31, 2019 . Recourse Debt Facilities LIBOR + 4% Term Loan dueNovember 2020 - The weighted average interest rate as ofJune 30, 2020 andDecember 31, 2019 was 4.5% and 6.3%, respectively. As ofJune 30, 2020 andDecember 31, 2019 , the unpaid principal balance of debt outstanding was$0.7 million and$1.6 million , respectively, and we are in compliance with all covenants. 10% Constellation Convertible Promissory Note due 2021 - OnMarch 31, 2020 , we entered into an Amended and Restated Subordinated Secured Convertible Note Modification Agreement (the "Constellation Note Modification Agreement") which amended the terms of the 5% Constellation Note to extend the maturity date toDecember 31, 2021 and increased the interest rate from 5% to 10% ("10% Constellation Note"). We further amended the 10% Constellation Note by reducing the strike price on the conversion feature from$38.64 per share to$8.00 per share. When we evaluated the Constellation Note Modification Agreement in accordance with ASC 470-60, Debt - Troubled Debt Restructurings by Debtors, and 470-50, Debt - Modifications and Extinguishments, we concluded that the amendment did not constitute a troubled debt restructuring and, furthermore, the amendment qualified as a substantial modification as a result of the increase in the fair value of the conversion feature due to the reduced strike price. As a result, onMarch 31, 2020 , the 10% Constellation Note, which consisted of$33.1 million in principal and$3.8 million in accrued and unpaid interest, was extinguished and the 10% Constellation Note was recorded at their fair market value which equaled$40.7 million . The difference between the fair market value of the 10% Constellation Note and the carrying value of the 5% Constellation Note of$3.8 million was recorded as a loss on extinguishment of debt in the condensed consolidated statement of operations. OnJune 18, 2020 ,Constellation NewEnergy, Inc. exchanged their entire 10% Constellation Note at the conversion price of$8.00 per share into 4.7 million shares of Class A common stock. At the time of this exchange the unamortized premium of$3.4 million was recorded as an adjustment to additional paid-in capital. 10% Convertible Promissory Notes dueDecember 2021 - OnMarch 31, 2020 , we entered into an Amendment Support Agreement (the "Amendment Support Agreement") with the noteholders of our outstanding 6% Convertible Notes pursuant to which such Noteholders agreed to extend the maturity date of the outstanding 6% Convertible Notes toDecember 1, 2021 and increase the interest rate from 6% to 10%, ("10% Convertible Notes"). Additionally, the debt is convertible at the option of the Noteholders into common stock at any time through the maturity date and we further amended the 10% Convertible Notes by reducing the strike price on the conversion feature from$11.25 to$8.00 per share. In conjunction with entering into the 61 -------------------------------------------------------------------------------- Amendment Support Agreement, onMarch 31, 2020 , we also entered into a Convertible Note Purchase Agreement (the "10% Convertible Note Purchase Agreement") and issued an additional$30.0 million aggregate principal amount of 10% Convertible Notes toForis Ventures, LLC , a newNoteholder andNew Enterprise Associates 10, Limited Partnership, an existing Noteholder. The 10% Convertible Notes and the$30.0 million new 10% Convertible Notes were all reflected in the Amended and Restated Indenture between the Company andU.S. Bank National Association datedApril 20, 2020 . The Amendment Support Agreement required that we repay at least$70.0 million of the 10% Convertible Notes on or beforeSeptember 1, 2020 . In return, collateral was released to support the collateral required under the 10.25% Senior Secured Notes, and 50% of the proceeds from the consummation of certain transactions, including equity offerings or additional indebtedness, will be applied to redeem the 10% Convertible Notes at a redemption price equal to 100% of the principal amount of the 10% Convertible Notes, plus accrued and unpaid interest, plus a certain percentage, determined based on the time of redemption of the aggregate sum of all discounted remaining scheduled interest payments. The discount rate to determine the present value would decrease, creating a redemption penalty, if redemption were to occur afterOctober 21, 2020 . OnMay 1, 2020 , we repaid$70.0 million of the 10% Convertible Notes and accrued and unpaid interest and recorded an adjustment to the unamortized debt premium of$4.3 million . We evaluated the Amendment Support Agreement in accordance with ASC 470-60, Debt - Troubled Debt Restructurings by Debtors, and 470-50, Debt - Modifications and Extinguishments, and concluded that the amendment did not constitute a troubled debt restructuring and, furthermore, the amendment qualified as a substantial modification as a result of the increase in the fair value of the conversion feature due to the reduced strike price. As a result, onMarch 31, 2020 , we recorded a$10.3 million loss on extinguishment of debt in the condensed consolidated statement of operations, which was calculated as the difference between the reacquisition price of the 6% Convertible Notes and the carrying value of the 6% Convertible Notes. The total carrying value of the 6% Convertible Notes equaled$279.0 million which consisted of$289.3 million in principal and$1.4 million in accrued and unpaid interest reduced by$10.7 million in unamortized discount and$1.0 million in unamortized debt issuance costs. The total reacquisition price of the 6% Convertible Notes equaled$289.3 million which consisted of the$340.7 million fair value of the 10% Convertible Notes,$1.4 million in accrued and unpaid interest, and$1.2 million of fees paid to Noteholders as part of the amendment, reduced by$24.0 million , the fair value atMarch 31, 2020 of the embedded derivative relating to the equity classified conversion feature that is reclassified from additional paid-in capital at the time of the extinguishment,$20.0 million cash received from the additional 10% Convertible Notes that were issued toNew Enterprise Associates 10, Limited Partnership, and the$10.0 million issuance toForis Ventures, LLC . The new net carrying amount of the 10% Convertible Notes of$263.4 million , which consists of the$249.3 million principal of the 10% Convertible Notes,$14.1 million net of premium paid for the 10% Convertible Notes and debt issuance costs was classified as non-current as ofJune 30, 2020 . Furthermore, the$14.1 million deemed premium net of debt issuance cost is being amortized over the term of the 10% Convertible Notes using the effective interest method. 10% Notes dueJuly 2024 - The outstanding unpaid principal balance of the 10% Notes of$14.0 million and$14.0 million were classified as current as ofJune 30, 2020 andDecember 31, 2019 , respectively, and the net carrying amount of the 10% Notes of$69.5 million and$76.0 million were classified as non-current as ofJune 30, 2020 andDecember 31, 2019 , respectively. The accrued unpaid interest balance on the 10% Notes was$3.6 million and$3.9 million as onJune 30, 2020 andDecember 31 , 2019respectively. 10.25% Senior Secured Notes dueMarch 2027 - OnMay 1, 2020 , we issued$70.0 million of 10.25% Senior Secured Notes due 2027 (the "10.25% Senior Secured Notes") in a private placement (the "Senior Secured Notes Private Placement"). The 10.25% Senior Secured Notes are governed by an indenture (the "Senior Secured Notes Indenture") entered into among us, the guarantors party thereto andU.S. Bank National Association , in its capacity as trustee and collateral agent. The 10.25% Senior Secured Notes are secured by certain of our operations and maintenance agreements that previously were part of the security for the 6% Convertible Notes. We used the proceeds of this issuance to repay$70.0 million of our 10% Convertible Notes onMay 1, 2020 . The 10.25% Senior Secured Notes are supported by a$150.0 million indenture between us andUS Bank National Association which contains an accordion feature for an additional$80.0 million of notes that can be issued within the next eighteen months. Interest on the 10.25% Senior Secured Notes is payable onMarch 31 ,June 30 ,September 30 andDecember 31 of each year, commencingJune 30, 2020 . The 10.25% Senior Secured Notes Indenture contains customary events of default and covenants relating to, among other things, the incurrence of new debt, affiliate transactions, liens and restricted payments. On or afterMarch 27, 2022 , we may redeem all of the 10.25% Senior Secured Notes at a price equal to 108% of the principal amount of the 10.25% Senior Secured Notes plus accrued and unpaid interest, with such optional redemption prices decreasing to 104% on and afterMarch 27, 2023 , 102% on and afterMarch 27, 2024 and 100% on and afterMarch 27, 2026 . BeforeMarch 27, 2022 , we may redeem the 10.25% Senior Secured Notes upon repayment of a make-whole premium. If we experience a change 62 -------------------------------------------------------------------------------- of control, we must offer to purchase for cash all or any part of each holder's 10.25% Senior Secured Notes at a purchase price equal to 101% of the principal amount of the 10.25% Senior Secured Notes, plus accrued and unpaid interest. The outstanding unpaid principal of the 10.25% Senior Secured Notes of$70.0 million was classified as non-current as ofJune 30, 2020 . Non-recourse Debt Facilities 7.5% Term Loan dueSeptember 2028 - InDecember 2012 and later amended inAugust 2013 , PPA IIIa entered into a$46.8 million credit agreement to help fund the purchase and installation of our Energy Servers. The loan bears a fixed interest rate of 7.5% payable quarterly. The loan requires quarterly principal payments which began inMarch 2014 . The credit agreement requires us to maintain a debt service reserve for all funded systems, the balance of which was$3.8 million and$3.8 million as ofJune 30, 2020 andDecember 31, 2019 , respectively, and which was included as part of long-term restricted cash in the condensed consolidated balance sheets. The loan is secured by all assets of PPA IIIa. 6.07% Senior Secured Notes dueMarch 2025 - The notes bear a fixed interest rate of 6.07% per annum payable quarterly which began inDecember 2015 and ends inMarch 2030 . The notes are secured by all the assets of the PPA IV. The Note Purchase Agreement requires us to maintain a debt service reserve, the balance of which was$8.3 million as ofJune 30, 2020 and$8.0 million as ofDecember 31, 2019 , and which was included as part of long-term restricted cash in the condensed consolidated balance sheets. The notes are secured by all the assets of the PPA IV. LIBOR + 2.5% Term Loan dueDecember 2021 - The outstanding debt balance of the Term Loan of$5.3 million and$5.1 million were classified as current and$113.2 million and$115.3 million were classified as non-current as ofJune 30, 2020 andDecember 31, 2019 , respectively. In accordance with the credit agreement, PPA V was issued a floating rate debt based on LIBOR plus a margin, paid quarterly. The applicable margins used for calculating interest expense are 2.25% for years 1-3 following the Term Conversion Date and 2.5% thereafter. For the Lenders' commitments to the loan and the commitments to the LC loan, the PPA V also pays commitment fees at 0.50% per annum over the outstanding commitments, paid quarterly. The loan is secured by all the assets of the PPA V and requires quarterly principal payments which began inMarch 2017 . In connection with the floating-rate credit agreement, inJuly 2015 PPA V entered into pay-fixed, receive-float interest rate swap agreements to convert its floating-rate loan into a fixed-rate loan. Letters of Credit dueDecember 2021 - InJune 2015 , PPA V entered into a$131.2 million term loan dueDecember 2021 . The agreement also included commitments to a LC facility with the aggregate principal amount of$6.4 million , later adjusted down to$6.2 million . The amount reserved under the letter of credit as ofJune 30, 2020 andDecember 31, 2019 was$5.2 million and$5.0 million , respectively. The unused capacity as ofJune 30, 2020 andDecember 31, 2019 was$1.0 million and$1.2 million , respectively. 63 -------------------------------------------------------------------------------- Contractual Obligations and Other Commitments The following table summarizes our contractual obligations and the debt of our consolidated PPA entities that is non-recourse to Bloom as ofJune 30, 2020 : Payments Due By Period Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years (in thousands) Contractual Obligations and Other Commitments: Recourse debt1$ 406,013 $ 14,714 $ 299,753 $ 63,992 $ 27,554 Non-recourse debt2 234,614 13,878 130,293 21,912 68,531 Operating leases 57,062 9,167 14,271 12,836 20,788 Service arrangements 2,594 1,297 1,297 - - Financing obligations 294,076 38,288 79,324 77,523 98,941 Natural gas fixed price forward contracts 5,185 4,000 1,185 - - Grant for Delaware facility 10,469 - 10,469 - - Interest rate swap 17,881 2,098 5,288 4,657 5,838 Supplier purchase commitments 1,721 1,099 622 - - Renewable energy credit obligations 708 592 116 - - Asset retirement obligations 500 500 - - - Total$ 1,030,823 $ 85,633 $ 542,618 $ 180,920 $ 221,652 1 Our 10% Convertible Notes and our credit agreements related to the building of our facility inNewark, Delaware each contain cross-default or cross-acceleration provisions. See "Recourse Debt Facilities" above for more details. 2 Each of the debt facilities entered into by PPA IIIa, PPA IV and PPA V contain cross-default provisions. See "Non-recourse Debt Facilities" above for more details. Off-Balance Sheet Arrangements We include in our condensed consolidated financial statements all assets and liabilities and results of operations of our PPA Entities that we have entered into and over which we have substantial control. For additional information, see Note 13, Power Purchase Agreement Programs, in Item 1, Financial Statements. We have not entered into any other transactions that have generated relationships with unconsolidated entities or financial partnerships or special purpose entities. Accordingly, as ofJune 30, 2020 and 2019, we had no off-balance sheet arrangements.
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