BLOOM ENERGY CORPORATION OPERATIONS
Overview
Description ofBloom Energy We created the first large-scale, commercially viable solid oxide fuel-cell based power generation platform that provides clean and resilient power to businesses, essential services, and critical infrastructure. Our technology, invented inthe United States , is the most advanced thermal electric generation technology on the market today. Our fuel-flexible Bloom Energy Servers can use biogas and hydrogen, in addition to natural gas, to create electricity at significantly higher efficiencies than traditional, combustion-based resources. In addition, our fuel cell technology can be used to create hydrogen, which is increasingly recognized as a critically important tool necessary for the full decarbonization of the energy economy. Our enterprise customers are among the largest multi-national corporations who are leaders in adopting new technologies. We also have strong relationships with some of the largest utility companies inthe United States and theRepublic of Korea . We market and sell our Energy Servers primarily through our direct sales organization inthe United States , and also have direct and indirect sales channels internationally. Recognizing that deploying our solutions requires a material financial commitment, we have developed a number of financing options to support sales of our Energy Servers to customers who lack the financial capability to purchase our Energy Servers directly, who prefer to finance the acquisition using third-party financing or who prefer to contract for our services on a pay-as-you-go model. Our typical target commercial or industrial customer has historically been either an investment-grade entity or a customer with investment-grade attributes such as size, assets and revenue, liquidity, geographically diverse operations and general financial stability. We have recently expanded our product and financing options to the below-investment-grade customers and have also expanded internationally to target customers with deployments on a wholesale grid. Given that our customers are typically large institutions with multi-level decision making processes, we generally experience a lengthy sales process. This section includes comparisons of certain 2020 financial information to the same information for 2019. Additional information about results for 2018 and certain year-on-year comparisons between 2019 and 2018 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . COVID-19 Pandemic General We continue to monitor and adjust as appropriate our operations in response to the COVID-19 pandemic. As a technology company that supplies resilient, reliable and clean energy, we have been able to conduct the majority of operations as an "essential business" inCalifornia andDelaware , where we manufacture and perform many of our R&D activities, as well as in other states and countries where we are installing or maintaining our Energy Servers, 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, 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 our facilities are required to wear face coverings and our policy is to direct them not to enter if they have COVID-19-like symptoms. We followCDC and local guidelines when notified of possible exposures. For more information regarding the risks posed to our company by the COVID-19 pandemic, refer to Part I, Item 1A, Risk Factors - Risks Related 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 InMarch 2020 , we successfully extended the maturity of our 10% Convertible Promissory Notes dueDecember 2021 (the "10% Convertible Notes"), our 10% Constellation Promissory Note toDecember 2021 (the "10% Constellation Note"), and additionally entered into a note purchase agreement to issue$70.0 million of the 10.25% Notes in a private placement that was subsequently completed onMay 1, 2020 . Since then, the 10% Convertible Notes and the 10% Constellation Note were converted into equity and the potential liabilities associated with these notes have been extinguished. InAugust 2020 , we issued the Green Notes. InNovember 2020 , we redeemed our 10% Senior Secured Notes dueJuly 2024 (the "10% Notes"). 47
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Although, COVID-19 created disruptions throughout various aspects of our business as noted herein, it had a limited impact on our results of operation throughout 2020. This is in part due to the fact that throughout 2020, we continued to be conservative with our working capital spend, maintaining as much flexibility as possible around the timing of taking and paying for inventory and manufacturing our product while managing potential changes or delays in installations. We also improved our liquidity in light of the issuance of the Green Notes and conversion of 10% Convertible Notes and the 10% Constellation Notes. As we exited 2020, we do have expansion needs for our manufacturing facilities to meet anticipated demand in 2022. We are also expanding our selling territories both domestically and internationally, and anticipate an increase in the necessary resources to expand into new geographies. Although, we believe we have the sufficient capital for these activities over the next 12 months, we may enter the equity market for additional expansion capital. Please refer to Note 7 - Outstanding Loans and Security Agreements in Part II, Item 8, Financial Statements and Supplementary Data; and Part I, Item 1A, Risk Factors - Risks Related to Our Liquidity - Our substantial indebtedness, and restrictions imposed by the agreements governing our and our PPA Entities' outstanding indebtedness, may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs, and We may not be able to generate sufficient cash to meet our debt service obligations, for more information regarding the terms of and risks associated with our debt. Sales Our selling activity was impacted by COVID-19 in the first half of 2020. In some industries, such as education and entertainment, decision makers shifted their focus to the immediate needs of the pandemic, thus delaying their purchase decisions and capital outlays. In other industries, we have experienced an increase in the time necessary to obtain new business as our customers address the impact of the COVID-19 pandemic and assess their facility and electricity needs. While there may ultimately be a reduction in electricity needs due to a decrease in economic activity, to date the impact has generally equated to a longer transaction cycle. Although sales in these sectors and others were impacted in the first half of 2020, a more typical demand and purchasing cycle returned in the second half of 2020. 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 suspended throughout 2020 and have so far continued to do so. To the extent COVID-19 continues throughout 2021 and these travel restrictions remain, our expansion efforts may be impacted. 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. Throughout 2020, we saw a moderate 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 though tempered by the issues noted above. 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 or sulfur 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 moderately increased. Customer Financing COVID-19 has resulted in a significant drop in the ability of many financiers (particularly financing institutions) to monetize tax credits. This is due to a drop in their taxable income stemming from losses due to the COVID-19 pandemic. We were able to obtain financing for our 2020 installations, but are still in the process of securing financing for our 2021 installations. We are actively working with new sources of capital that could finance projects for our 2021 installations. We have experienced in the current environment an increase in the time needed to solidify new relationships. The travel restrictions and limited ability for financiers to conduct due diligence at our facilities has increased the timeline to reach closure with new financiers. 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 is impacting financing for their use of an Energy Server.
As of the end of 2020, all our customers were able to meet their payment obligations and the pandemic had no impact on the current financing instruments we had in place. Our recent experience has been that financing parties have capital to
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deploy and are interested in financing our Energy Servers. However, with the limited availability of tax credits, the difficulty for new potential financing parties to conduct due diligence in light of the pandemic and the drop in credit rating of some customers, it is taking longer to secure financing than in the past. If we are unable to secure financing for our 2021 installations, our revenue, cash flow and liquidity will be materially impacted. Installations and Maintenance of Energy Servers Our installation and maintenance operations have been, and may continue to be, adversely impacted by the COVID-19 pandemic. Our installation projects have experienced delays and may continue to experience delays relating to, among other things, shortages in available labor for design, installation and other work; the inability or delay in our ability to access customer facilities due to shutdowns or other restrictions; the decreased productivity of our general contractors, their sub-contractors, medium-voltage electrical gear suppliers, and the wide range of engineering and construction related specialist suppliers on whom we rely for successful and timely installations; the stoppage of work by gas and electric utilities on which we are critically dependent for hook ups; and the unavailability of necessary civil and utility inspections as well as the review of our permit submissions and issuance of permits by multiple authorities that have jurisdiction over our activities. We are not the only business impacted by these shortages and delays, which means that we may in the future face increased competition for scarce resources, which may result in continuing delays or increases in the cost of obtaining such services, including increased labor costs and/or fees to expedite permitting. In addition, while construction activities have to date been deemed "essential business" and allowed to proceed in many jurisdictions, we have experienced interruptions and delays caused by confusion related to exemptions for "essential business" among our suppliers and their sub-contractors and the relevant permitting utilities. Future changes in applicable government orders or regulations, or changes in the interpretation of existing orders or regulations, could result in reductions in the scope of permitted construction activities or prohibitions on such activities. An inability to install our Energy Servers would negatively impact our acceptances, and thereby impact our cash flows and results of operations, including revenue. Throughout 2020, 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 and potentially material 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 has an adverse and potentially materially affect on our cash flows. Our installations completed in the quarter endedDecember 31, 2020 were minimally impacted by COVID-19 and given mitigation strategies, we were able to complete our planned installations. As to maintenance, if we are delayed in or unable to perform scheduled or unscheduled maintenance, our previously-installed Energy Servers will likely experience adverse performance impacts including reduced output and/or efficiency, which could result in warranty and/or guaranty claims by our customers. Further, due to the nature of our Energy Servers, if we are unable to replace worn parts in accordance with our standard maintenance schedule, we may be subject to increased costs in the future. Supply Chain We have experienced COVID-19 related delays from certain vendors and suppliers, which, in turn, could cause delays in the manufacturing and installation of our Energy Servers and adversely impact our cash flows and results of operations including revenue. We have a global supply chain and obtain components fromAsia ,Europe andIndia . In many cases, the components we obtain are jointly developed with our suppliers and unique to us, which makes it difficult to obtain and qualify alternative suppliers should our suppliers be impacted by COVID-9. In the second quarter, we experienced COVID-19 related delays from certain vendors and suppliers, however, these suppliers were not supplying discrete components to us and we were able to find and qualify alternative suppliers and our production was not impacted. During the third and fourth quarter, our supply chain stabilized; however, we still experienced supply chain disruptions due to COVID-19 with respect to logistics and container shortages. We put actions in place to mitigate the disruptions by booking alternate sea routes, creating virtual hubs and consolidating shipments coming form the same region 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. 49
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Manufacturing
As an essential business in both the states ofCalifornia andDelaware , we have continued to manufacture Energy Servers, but have adopted strict measures to help keep our employees safe. These measures have decreased productivity to a limited 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 followCDC and local guidelines when notified of possible exposures. We also instituted testing of individuals who comes into our facilities. Even with these precautions, it is possible an asymptomatic individual could enter our facilities and transmit the virus to others. We have had a few positive tests and in such cases, we have followedCDC and local guidelines. If we become aware of cases of COVID-19 among our employees, we notify those with whom the person is known to have been in contact, send the exposed employees home for at least 10 days and require employees to test 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. To date, COVID-19 has not impacted our production given the safety protocols we have put in place augmented by our ability to increase our shifts and obtain a contingent work force for some of the manufacturing activities. If COVID-19 materially impacts our supply chain or if we experience a significant COVID-19 outbreak that affects our manufacturing workforce, our production could be adversely impacted which could adversely impact our cash flow and results of operation, including revenue. 50
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Purchase and Lease Options
Overview
Initially, we only offered our Energy Servers on a direct purchase basis, in
which the customer purchases the product directly from us. We learned that while
interested in our Energy Servers, some customers lacked the interest or
financial capability to purchase our Energy Servers directly. Some of these
customers were not in a position to optimize the use of federal tax benefits
like the investment tax credit and accelerated depreciation.
In order to expand our offerings to those unable or those who prefer to not
directly purchase our Energy Servers and/or who prefer to contract for our
services on a pay-as-you-go model, we subsequently developed three financing
options that enabled customers' use of the Energy Servers without a direct
purchase through third-party ownership financing arrangements.
Under the 'Traditional Lease' option, a customer may lease one or more Energy
Servers from a financial institution that purchases such Energy Servers. In most
cases, the financial institution completes its purchase from us immediately
after commissioning. We both (i) facilitate this financing arrangement between
the financial institution and the customer and (ii) provide ongoing operations
and maintenance services for the Energy Servers (such arrangement, a
"Traditional Lease").
Alternatively, a customer may enter into one of two major types of service
contracts with us for the purchase of electricity generated by the Energy
Servers. The first type of services contract has a fixed monthly payment
component that is required regardless of the Energy Servers' performance, and in
some cases also includes a variable payment based on the Energy Server's
performance (a "Managed Services Agreement"). Managed Services Agreements are
then financed pursuant to a sale-leaseback with a financial institution (a
"Managed Services Financing"). The second type of services contract requires the
customer to pay for each kilowatt-hour produced by the Energy Servers (a "Power
Purchase Agreement" or "PPA"). PPAs have been financed through tax equity
partnerships, acquisition financings, and direct sales to investors (each, a
"Portfolio Financing").
Our capacity to offer our Energy Servers through any of these financed
arrangements depends in large part on the ability of the financing party or
parties involved to optimize the federal tax benefits associated with a fuel
cell, like the investment tax credit or accelerated depreciation. Interest rate
fluctuations may also impact the attractiveness of any financing offerings for
our customers, and currency exchange fluctuations may also impact the
attractiveness of international offerings. Each of these financings is limited
by the creditworthiness of the customer. Additionally, the Traditional Lease and
Managed Services Financing options, as with all leases, are also limited by the
customer's willingness to commit to making fixed payments regardless of the
performance of our obligations under the customer agreement.
In each of our 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.
Warranties and Guaranties
We typically provide warranties and guaranties regarding our Energy Servers'
performance (efficiency and output) to both the customer and in the case of
Portfolio Financings, the investor. We refer to a "performance warranty" as a
commitment where the failure of the Energy Servers to satisfy the stated
performance level obligates us to repair or replace the Energy Servers as
necessary to improve performance. If we fail to complete such repair or
replacement, or if repair or replacement is impossible, we may be obligated to
repurchase the Energy Servers from the customer or financier. We refer to a
"performance guaranty" as a commitment where the failure of the Energy Servers
to satisfy the stated performance level obligates us to make a payment to
compensate the beneficiary of such guaranty for the resulting increased cost or
decreased benefits resulting from the failure to meet the guaranteed level. Our
obligation to make payments under the performance guaranty is always
contractually capped.
In most cases, we include the first year of performance warranties and
guaranties in the sale price of the Energy Server. Typically, performance
warranties and guaranties made for the benefit of the Customer are in the
Managed Services Agreement or PPA, as the case may be. In a Portfolio Financing,
the performance warranties and guaranties made for the benefit of the investors
are in an O&M Agreement. In a Traditional Lease or direct purchase option, the
performance warranties and guaranties are in an extended maintenance service
agreement.
Overview of Financing and Lease Options
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The substantial majority of bookings made in recent periods have been Managed Services Agreements and PPAs. Each of our financing and lease options is described in further detail below.
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Managed Services Financing
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Under our Managed Services Financing option, we enter into a Managed Services
Agreement with a customer for a certain term. In exchange for the use of the
Energy Server and its generated electricity the customer makes a monthly
payment. The monthly payment always includes a fixed monthly capacity-based
payment, and in some cases also includes a performance-based payment based on
the performance of the Energy Server. The fixed capacity-based payments made by
the customer under the Managed Services Agreement are applied toward our
obligation to pay down our periodic rent liability under a sale-leaseback
transaction with an investor. The performance payment is transferred to us as
compensation for operations and maintenance services and recognized as
electricity revenue within the consolidated statements of operations.
Under a Managed Services Financing, once we enter into a Managed Services
Agreement with the customer, a financier is identified, we sell the Energy
Server to such financier, as lessor, and the financier, as lessor, leases it
back to us, as lessee, pursuant to a sale-leaseback transaction. The proceeds
from the sale are recognized as a financing obligation within the 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 purchase price for an
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 applied towards our obligation to pay periodic rent under the
sale-leaseback transaction. We assign all our rights to such fixed payments made
by the customer to the financier, as lessor.
The duration of the master lease in a Managed Services Financing is currently
between five and ten years.
Our Managed Services Agreements typically provide only for performance
warranties of both the efficiency and output of the Energy Server, all of which
are written in favor of the customer. These types of projects typically do not
include guaranties above the warranty commitments, but in projects where the
customer agreement includes a service payment for our operations and
maintenance, that payment is typically proportionate to the output generated by
the Energy Server(s) and our pricing assumes service revenues at the 95% output
level. This means that our service revenues may be lower than expected if output
is less than 95% and higher if output exceeds 95%. As of December 31, 2020 , we
had incurred no liabilities due to failure to repair or replace our Energy
Servers pursuant to these performance warranties and the fleet of our Energy
Servers deployed pursuant to the Managed Services Financings was performing at a
lifetime average output of approximately 86%.
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Portfolio Financings
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*Under a Portfolio Financing, pursuant to which we sell an operating company to
an investor or tax-equity partnership, we have no equity in the purchaser, also
referred to as Third-Party PPA.
A PPA is an agreement pursuant to which the owner of an Energy Server sells
electricity to an end customer on a dollar-per-kilowatt-hour basis pursuant to a
power purchase agreement. We have financed PPAs through two types of Portfolio
Financings.
In one type of transaction, we finance a portfolio of PPAs pursuant to a tax
equity partnership in which we hold a managing member interest (such
partnership, a "PPA Entity"). We sell the portfolio of Energy Servers to a
single member limited liability project company (an "Operating Company"). The
Operating Company sells the electricity generated by the Energy Servers
contemplated by the PPAs to the ultimate end customers. As these transactions
include an equity investment by us in the PPA Entity for which we are the
primary beneficiary and therefore consolidate the entities, we recognize revenue
as the electricity is produced. Our future plans to raise capital no longer
contemplate these types of transactions.
We also finance PPAs through a second type of Portfolio Financing pursuant to
which we sell an entire Operating Company to an investor or tax equity
partnership in which we do not have an equity interest (a "Third-Party PPA"). We
recognize revenue on the sale of each Energy Server purchased by the Operating
Company on acceptance. For further discussion, see Note 13 - Portfolio
Financings in Part II, Item 8, Financial Statements and Supplementary Data.
When we finance a portfolio of Energy Servers and PPAs through a Portfolio
Financing, we enter into a sale, engineering and procurement and construction
agreement ("EPC Agreement") and an O&M Agreement, in each case with the
Operating Company that both is counter-party to the portfolio of PPAs and that
will eventually own the Energy Servers. As counter-party to the portfolio of
PPAs, the Operating Company , as owner of the Energy Servers, receives all
customer payments generated under the PPAs, all investment tax credits, all
accelerated tax depreciation benefits, and any other available state or local
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benefits arising out of the ownership or operation of the Energy Servers, to the extent not already allocated to the end customer under the PPA. The sales of our Energy Servers to theOperating Company in connection with a Portfolio Financing have many of the same terms and conditions as a direct sale. Payment of the purchase price is generally broken down into multiple installments, which may include payments prior to shipment, upon shipment or delivery of the Energy Server, and upon acceptance of the Energy Server. Acceptance typically occurs when the Energy Server is installed and running at full power as defined in the applicable EPC Agreement. A one-year service warranty is provided with the initial sale. After the expiration of the initial standard one-year warranty, theOperating Company has the option to extend our operations and maintenance services under the O&M Agreement on an annual basis at a price determined at the time of purchase of our Energy Server, which may be renewed annually for each Energy Server for up to 30 years. After the standard one-year warranty period, theOperating Company has almost always exercised the option to renew our operations and maintenance services under the O&M Agreement. We typically provide performance warranties and guaranties related to output and efficiency or a combination of the two to theOperating Company under the O&M Agreement. We also backstop all of theOperating Company's obligations under the portfolio of PPAs, including both the repair or replacement obligations pursuant to the performance warranties and any payment liabilities under the guaranties. As ofDecember 31, 2020 , we had incurred no liabilities to investors in Portfolio Financings due to failure to repair or replace Energy Servers pursuant to these performance warranties. Our obligation to make payments for underperformance against the performance guaranties was capped at an aggregate total of approximately$114.3 million (including payments both for low output and for low efficiency) and our aggregate remaining potential liability under this cap was approximately$108.9 million . Obligations to Operating Companies In addition to our obligations to the end customers, our Portfolio Financings involve many obligations to theOperating Company that purchases our Energy Servers. These obligations are set forth in the applicable EPC Agreement and O&M Agreement, and may include some or all of the following obligations: •designing, manufacturing, and installing the Energy Servers, and selling such Energy Servers to theOperating Company ; •obtaining all necessary permits and other governmental approvals necessary for the installation and operation of the Energy Servers, and maintaining such permits and approvals throughout the term of the EPC Agreements and O&M Agreements; •operating and maintaining the Energy Servers in compliance with all applicable laws, permits and regulations; •satisfying the performance warranties and guaranties set forth in the applicable O&M Agreements; •satisfying the performance warranties and guaranties in each of the applicable PPAs on behalf of theOperating Company ; and •complying with any other specific requirements contained in the PPAs with individual end-customers. The EPC Agreement obligates us to repurchase the Energy Server in the event of certain IP Infringement claims. The O&M Agreement obligates us to repurchase the Energy Servers in the event the Energy Servers fail to comply with the performance warranties and guaranties in the O&M Agreement and we do not cure such failure in the applicable time period, or that a PPA terminates as a result of any failure by us to perform the obligations in the O&M Agreement. In some of our Portfolio Financings, our obligation to repurchase Energy Servers under the O&M extends to the entire fleet of Energy Servers sold in the event a systemic failure affects more than a specified number of Energy Servers. In some Portfolio Financings, we have also agreed to pay liquidated damages to the 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. 55
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Administration of Operating Companies . In each of our Portfolio Financings in which we hold an interest in the tax equity partnership, we perform certain administrative services as managing member on behalf of the 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.The Operating Company in each of our PPA Entities (with the exception of one PPA Entity) has incurred debt in order to finance the acquisition of Energy Servers. The lenders for these projects are a combination of banks and/or institutional investors. In each case, the debt is secured by all of the assets of the 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 and the PPAs. As further collateral, the lenders receive a security interest in 100% of the membership interest of theOperating Company . The lenders have no recourse to us or to any of the other equity investors (the "Equity Investors ") in theOperating Company for liabilities arising out of the portfolio. We have determined that we are the primary beneficiary in the PPA Entities, subject to reassessments performed as a result of upgrade transactions. Accordingly, we consolidate 100% of the assets, liabilities and operating results of these entities, including the Energy Servers and lease income, in our consolidated financial statements. We recognize theEquity Investors' share of the net assets of the investment entities as noncontrolling interests in subsidiaries in our consolidated balance sheet. We recognize the amounts that are contractually payable to these investors in each period as distributions to noncontrolling interests in our consolidated statements of convertible redeemable preferred stock, redeemable noncontrolling interest, stockholders' deficit and noncontrolling interest. Our consolidated statements of cash flows reflect cash received from these investors as proceeds from investments by noncontrolling interests in subsidiaries. Our 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 consolidated balance sheets. However, the Operating Companies are separate and distinct legal entities, andBloom Energy Corporation may not receive cash or other distributions from the Operating Companies except in certain limited circumstances and upon the satisfaction of certain conditions, such as compliance with applicable debt service coverage ratios and the achievement of a targeted internal rate of return to theEquity Investors , or otherwise. For further information about our Portfolio Financings, see Note 13 - Portfolio Financings in Part II, Item 8, Financial Statements and Supplementary Data. 56
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Traditional Lease
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Under the Traditional Lease option, the customer enters into a lease directly
with a financier (the "Lease"), which pays us for our Energy Servers purchased
pursuant to a direct sales agreement. We recognize product and installation
revenue upon acceptance. After the standard one-year warranty period, our
customers have almost always exercised the option to enter into service
agreement for operations and maintenance work with us, under which we receive
annual service payments from the customer. The price for the annual operations
and maintenance services is set at the time we enter into the Lease. The term of
a lease in a Traditional Lease option ranges from five to ten years.
The direct sales agreement provides for sale and the installation of our Energy
Servers and includes a standard one-year warranty, to the financier as
purchaser. The services agreement with the customer provides certain performance
warranties and guaranties, with the services term offered on an annually
renewing basis at the discretion of, and to, the customer. The customer must
provide fuel for the Bloom Energy Servers to operate.
The direct sales agreement in a Traditional Lease arrangement typically provides
for performance warranties and guaranties of both the efficiency and output of
our Energy Servers, all of which are written in favor of the customer. As of
December 31, 2020 , we had incurred no liabilities due to failure to repair or
replace our Energy Servers pursuant to these performance warranties. Our
obligation to make payments for underperformance against the performance
guaranties for projects financed pursuant to a Traditional Lease was capped
contractually under the sales agreement between us and each customer at an
aggregate total of approximately $6.0 million (including payments both for low
output and for low efficiency) and our aggregate remaining potential liability
under this cap was approximately $3.8 million .
Remarketing at Termination of Lease
In the event the customer does not renew or purchase our Energy Servers to the
end of its Lease, we may remarket any such Energy Servers to a third party. Any
proceeds of such sale would be allocated between us and the applicable financing
partner as agreed between them at the time of such sale.
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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. Our product sales backlog was$1.0 billion , equivalent to 1,994 systems, or 199.4 megawatts, as ofDecember 31, 2020 . Our product sales backlog was$1.1 billion , equivalent to 1,983 systems, or 198.3 megawatts, as ofDecember 31, 2019 . We define product sales backlog as signed customer product sales orders received prior to the period end, but not yet accepted, excluding site cancellations. The timing of the deployment of our backlog depends on the factors described above. However, as a general matter, at any point in time, we expect at least 50% of our backlog to be deployed within the next 12 months. The portion of our backlog in the year endedDecember 31, 2020 attributable to each payment option was as follows: direct purchase (including Third Party PPAs) 90% and Managed Services Agreements 10%. The portion of our backlog in the year endedDecember 31, 2019 attributable to each payment option was as follows: direct purchase (including Third Party PPAs) 93% and Managed Services Agreements 7%.International Channel Partners 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. 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 withSK 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 asSK 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 toSK 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 withSK E&C to establish a light-assembly facility in theRepublic of Korea for sales of certain portions of our Energy Server for the stationary 58
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utility and commercial and industrial market in theRepublic of Korea . The joint venture is majority controlled and managed by us, with the facility, which became operational inJuly 2020 . Other than a nominal initial capital contribution by Bloom, the joint venture will be funded bySK 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 ("CDG") 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. Since then the state ofConnecticut has instituted a similar program and we expect that other states may adopt similar programs in the future. We have entered into sales, installation, operations and maintenance agreements with three developers for the deployment of our Energy Servers pursuant to the New York CDG program, and we subsequently recognized revenue associated with 75 systems in the three months endedSeptember 30, 2020 . InJune 2020 , theNew York Public Service Commission issued an Order that limited the CDG compensation structure for "high capacity factor resources," including fuel cells, in a way that will make the economics for these types of projects more challenging in the future. However, the projects that were already under contract were grandfathered into the program under the previous compensation structure. Irrespective of this development, we believe that these types of subscriber-based programs could be a source of future revenue and will continue to look to generate future sales through these programs during 2021. 59
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Key Operating Metrics In addition to the measures presented in the 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. •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 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 Years EndedDecember 31, 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 years endedDecember 31, 2020 and 2019 were as follows: Years Ended December 31, Change 2020 2019 Amount % Product accepted during the period (in 100 kilowatt systems) 1,326 1,194 132
11.1 %
Product accepted increased by 132 systems, or 11.1%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . Acceptance volume increased as demand increased for our Energy Servers. 60
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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 years endedDecember 31, 2020 and 2019 was as follows: Years Ended December 31, 2020 2019 Direct Purchase (including Third Party PPAs and International Channels) 96 % 93 % Traditional Lease - % - % Managed Services 4 % 7 % 100 % 100 %
The portion of total revenue attributable to each purchase option in the years
ended
Years Ended
December 31,
2020 2019
Direct Purchase (including Third Party PPAs and International
Channels) 88 % 85 %
Traditional Lease 1 % 1 %
Managed Services 5 % 5 %
Portfolio Financings 6 % 9 %
100 % 100 %
Billings Related to Our Products
Total billings attributable to each revenue classification for the years ended
December 31, 2020 and 2019 was as follows:
Years Ended
December 31, Change
2020 2019 Amount %
(dollars in thousands)
Billings for product accepted in the period $ 543,868 $ 681,034 $ (137,166) (20.1) % Billings for installation on product accepted in the period
99,580 61,270 38,310 62.5 %
Billings for annual maintenance services agreements 82,692 76,852 5,840 7.6 %
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Billings for product accepted decreased by approximately$137.2 million , or 20.1%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . The decrease was primarily due to a higher average selling price mix in the year endedDecember 31, 2019 , driven mainly by the one-time PPA II upgrade that occurred in the year endedDecember 31, 2019 . Billings for installation on product accepted increased$38.3 million for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . Although product acceptances in the period increased only 11.1%, billings for installation on product accepted increased 62.5%, primarily due to the mix in installation billings driven by site complexity, site size, personalized applications, and the customer's option to complete the installation of our Energy Servers themselves. Billings for annual maintenance service agreements increased$5.8 million , or 7.6%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . This increase was driven primarily by the increase in our installed base. Costs Related to Our Products Total product related costs for the years endedDecember 31, 2020 and 2019 was as follows: Years Ended December 31, Change 2020 2019 Amount % Product costs of product accepted in the period$2,368 /kW$2,881 /kW
$ 19,573 $ 16,989 $ 2,584 15.2 % Installation costs on product accepted in the period$900 /kW$644 /kW
Product costs of product accepted decreased by approximately$513 per kilowatt, or 17.8%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 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$2.6 million , or 15.2%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . The increase in period costs for the period was primarily driven by a lower benefit from capitalization of stock-based compensation overhead costs to inventory in the current year offset by higher utilization of inventory materials. Installation costs on product accepted increased by approximately$256 per kilowatt, or 39.8%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . Each customer site is different and installation costs can vary due to a number of factors, including site complexity, size, location of gas, personalized applications, and the customer's option to complete the installation of our Energy Servers themselves. As such, installation on a per kilowatt basis can vary significantly from period-to-period. 62
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Results of Operations A discussion regarding the comparison of our financial condition and results of operations for the years endedDecember 31, 2020 and 2019 is presented below (in thousands, except percentage data). Comparison of the Years EndedDecember 31, 2020 and 2019 Revenue Years Ended December 31, Change 2020 2019 Amount % (dollars in thousands) Product$ 518,633 $ 557,336 $ (38,703) (6.9) % Installation 101,887 60,826 41,061 67.5 % Service 109,633 95,786 13,847 14.5 % Electricity 64,094 71,229 (7,135) (10.0) % Total revenue$ 794,247 $ 785,177 $ 9,070 1.2 % Total Revenue Total revenue increased approximately$9.1 million , or 1.2%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . This increase was primarily driven by an 11.1% increase in acceptances, offset by the favorable impact of the PPA II upgrade that occurred in the year endedDecember 31, 2019 . Product Revenue Product revenue decreased approximately$38.7 million , or 6.9%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . The product revenue decrease was driven by the one-time favorable impact of the PPA II upgrade on revenue in the year endedDecember 31, 2019 , partially offset by the increase in product revenue from the 11.1% increase in acceptances and$14.2 million of previously deferred revenue that was recognized in the year endedDecember 31, 2020 that was not associated with acceptances or services in the year. This was a one-time recognition of deferred revenue related to a specific contract that changed scope. Installation Revenue Installation revenue increased approximately$41.1 million , or 67.5%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . This increase was driven by the increase in product acceptances of approximately 132 systems, or 11.1%, for the year endedDecember 31, 2020 and due to the change in mix of installations driven by site complexity, site size, and the customer's option to complete the installation of our Energy Servers themselves. Service Revenue Service revenue increased approximately$13.8 million , or 14.5% for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 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 approximately$7.1 million , or 10.0%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 , due to a reduction in electricity revenue resulting from the decommissioning and an upgrade of PPA II in the year endedDecember 31, 2019 . Electricity revenue was primarily driven by the PPA Entities, which included PPA II, and, to a lesser extent, our Managed Services Agreements. When the PPA Entities are decommissioned, we no longer recognize electricity revenue for them. 63
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Cost of Revenue
Years Ended
December 31, Change
2020 2019 Amount %
(dollars in thousands)
Cost of revenue:
Product $ 332,724 $ 435,479 $ (102,755) (23.6) %
Installation 116,542 76,487 40,055 52.4 %
Service 132,329 100,238 32,091 32.0 %
Electricity 46,859 75,386 (28,527) (37.8) %
Total cost of revenue $ 628,454 $ 687,590 $ (59,136) (8.6) %
Total Cost of Revenue Total cost of revenue decreased approximately$59.1 million , or 8.6%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . Included as a component of total cost of revenue, stock-based compensation decreased approximately$28.0 million , or 61.5%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . In addition, cost of revenue for the year endedDecember 31, 2019 included$94.8 million of one-time expenses associated with the PPA upgrade. Total cost of revenue, excluding stock-based compensation and the one-time expenses, increased approximately$63.6 million , or 11.6%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 due to the 11.1% increase in product acceptances. Cost of Product Revenue Cost of product revenue decreased approximately$102.8 million , or 23.6%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . Stock-based compensation, which is included as a component of cost of product revenue, decreased approximately$22.7 million for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . In addition, cost of product revenue for the year endedDecember 31, 2019 included$70.5 million of one-time expenses associated with the PPA upgrade. Cost of product revenue, excluding stock-based compensation and the one-time expenses, decreased approximately$9.5 million , or 2.9%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 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 approximately$40.1 million , or 52.4%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 , due to the increase in product acceptances of approximately 132 systems, or 11.1%, for the year endedDecember 31, 2020 and due to the change in mix of installations driven by site complexity, size, local ordinance requirements, location of the 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 approximately$32.1 million , or 32.0%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 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 approximately$28.5 million , or 37.8%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 , mainly due to the$24.4 million of one-time expenses associated with the PPA upgrade recognized in the year endedDecember 31, 2019 . 64
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Gross Profit (Loss)
Years Ended
December 31,
2020 2019 Change
(dollars in thousands)
Gross profit:
Product $ 185,909 $ 121,857 $ 64,052
Installation (14,655) (15,661) 1,006
Service (22,696) (4,452) (18,244)
Electricity 17,235 (4,157) 21,392
Total gross profit $ 165,793 $ 97,587 $ 68,206
Gross margin:
Product 36 % 22 %
Installation (14) % (26) %
Service (21) % (5) %
Electricity 27 % (6) %
Total gross margin 21 % 12 %
Total Gross Profit
Gross profit improved $68.2 million in the year ended December 31, 2020 , as
compared to the year ended December 31, 2019 . Stock-based compensation, which is
included as a component of total cost of revenue, decreased approximately $28.0
million for the year ended December 31, 2020 , as compared to the year ended
December 31, 2019 . Total gross profit, excluding stock-based compensation,
improved approximately $40.2 million , or 28.1%, for the year ended December 31,
2020 , as compared to the year ended December 31, 2019 , primarily driven by the
improvement in product gross profit as our product cost reductions outpaced
average selling price ("ASP") reductions.
Product Gross Profit
Product gross profit increased $64.1 million in the year ended December 31,
2020 , as compared to the year ended December 31, 2019 . Excluding stock-based
compensation, product gross profit increased $41.3 million , or 26.5%, in the
year ended December 31, 2020 , as compared to the year ended December 31, 2019 .
This was primarily due to our product cost reductions outpacing our ASP
reductions.
Installation Gross Loss
Installation gross loss improved $1.0 million in the year ended December 31,
2020 , as compared to the year ended December 31, 2019 . Excluding stock-based
compensation, install gross loss worsened $2.6 million , or 29.2%, in the year
ended December 31, 2020 , as compared to the year ended December 31, 2019 , driven
by the change in mix of installations driven by site complexity, size, local
ordinance requirements, location of the utility interconnect and, the customer's
option to complete the installation of our Energy Servers themselves.
Service Gross Profit (Loss)
Service gross loss decreased by $18.2 million in the year ended December 31,
2020 , as compared to the year ended December 31, 2019 . This change 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 growing fleet of
installed Energy Servers.
Electricity Gross Profit (Loss)
Electricity gross profit (loss) improved $21.4 million , or 514.6%, in the year
ended December 31, 2020 , as compared to the year ended December 31, 2019 , mainly
due to charges related to the decommissioning and deconsolidation of Energy
Servers associated with the PPA II and PPA IIIb upgrades of Energy Servers in
the year ended December 31, 2019 .
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Operating Expenses
Years Ended
December 31, Change
2020 2019 Amount %
(dollars in thousands)
Research and development $ 83,577 $ 104,168 $ (20,591) (19.8) %
Sales and marketing 55,916 73,573 (17,657) (24.0) % General and administrative
107,085 152,650 (45,565) (29.8) % Total operating expenses
$
246,578
Total Operating Expenses Total operating expenses decreased$83.8 million , or 25.4%, in the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . Included as a component of total operating expenses, stock-based compensation expenses decreased approximately$94.4 million for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . The decrease in stock-based compensation expense was primarily attributable to a one-time employee grant of RSUs awarded prior to our IPO that completed their vesting in July of 2020. Total operating expenses, excluding stock-based compensation, increased approximately$10.6 million , or 5.9%, in the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . This increase was primarily driven by our investment in our technology roadmap, initiatives to enable market and customer financing expansion, and debt restructuring related expenses. Research and Development Research and development expenses decreased by approximately$20.6 million , or 19.8%, in the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . Included as a component of research and development expenses, stock-based compensation expenses decreased by approximately$21.9 million for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . Total research and development expenses, excluding stock-based compensation, increased by approximately$1.3 million , or 2.1%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . This increase was primarily due to the investments made in our next generation technology development, sustaining engineering projects for the current Energy Server platform, investments made for customer personalized applications, such as microgrids, marine solutions and new fuel solutions utilizing biogas and hydrogen. Sales and Marketing Sales and marketing expenses decreased by approximately$17.7 million , or 24.0%, in the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . Included as a component of sales and marketing expenses, stock-based compensation expenses decreased by approximately$21.5 million for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . Total sales and marketing expenses, excluding stock-based compensation, increased by approximately$3.8 million , or 9.3%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . This increase was driven by our expanded 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$45.6 million , or 29.8%, in the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . Included as a component of general and administrative expenses, stock-based compensation expenses decreased by approximately$51.1 million for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . Total general and administrative expenses, excluding stock-based compensation, increased by approximately$5.5 million , or 7.3%, for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . The increase in general and administrative expenses was mainly due to debt refinancing and SOX compliance activities for the year endedDecember 31, 2020 , offset by a$5.9 million one-time expense in the year endedDecember 31, 2019 associated with the PPA II upgrade. 66
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Stock-Based Compensation
Years Ended
December 31, Change
2020 2019 Amount %
(dollars in thousands)
Cost of revenue $ 17,475 $ 45,429 $ (27,954) (61.5) %
Research and development 19,037 40,949 (21,912) (53.5) %
Sales and marketing 10,997 32,478 (21,481) (66.1) %
General and administrative 26,384 77,435 (51,051) (65.9) % Total stock-based compensation
$
73,893
Total stock-based compensation decreased$122.4 million , or 62.4%, in the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . Of the$73.9 million in stock-based compensation for the year endedDecember 31, 2020 , approximately$59.8 million was related to RSUs and PSUs, of which$13.0 million was related to one-time employee grants of RSUs that were issued at the time of our IPO and that had a two-year vesting period, expensed using a graded vesting method. Other Income and Expense Years Ended December 31, 2020 2019 Change (in thousands) Interest income$ 1,475 $ 5,661 $ (4,186) Interest expense (76,276) (87,480) 11,204 Interest expense - related parties (2,513) (6,756) 4,243 Other income (expense), net (8,318) 706 (9,024) Loss on extinguishment of debt (12,878) - (12,878) Gain (loss) on revaluation of embedded derivatives 464 (2,160) 2,624 Total$ (98,046) $ (90,029) $ (8,017) Total Other Expense Total other expense increased$8.0 million in the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . This increase was primarily due to the loss on extinguishment of debt of$12.9 million . Interest Income Interest income decreased$4.2 million in the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . This decrease was primarily due to the decrease in the rates of interest earned on our cash balances. Interest Expense Interest expense decreased$11.2 million in the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . This decrease was primarily due to lower interest expense as a result of refinancing our notes at a lower interest rate and the debt buy-out due to PPA II and PPA IIIb upgrades, offset by an increase from new Managed Services transactions completed in the year. Interest Expense - Related Parties Interest expense - related parties decreased$4.2 million in the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 due to the conversion of the related party notes during the year. Other Income (Expense), net Other income (expense), net worsened$9.0 million in the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 , due to an impairment in our investment in the Bloom Energy Japan joint venture and changes in foreign currency translation expense. 67
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Loss on Extinguishment of Debt Loss on extinguishment of debt of$12.9 million was recorded in the year endedDecember 31, 2020 resulting from our debt restructuring and we had no similar debt extinguishment in the year endedDecember 31, 2019 . Gain (Loss) on Revaluation of Embedded Derivatives Gain (loss) on revaluation of embedded derivatives improved$2.6 million in the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . This improvement was primarily due to the change in fair value of our sales contracts of embedded EPP derivatives valued using historical grid prices and available forecasts of future electricity prices to estimate future electricity prices. Provision for Income Taxes Years Ended December 31, Change 2020 2019 Amount % (dollars in thousands) Income tax provision$ 256 $ 633 $ (377) (59.6) % Income tax provision decreased in the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 , and was primarily due to fluctuations in the effective taxes payable on income earned by international entities. Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests Years Ended December 31, Change 2020 2019 Amount % (dollars in thousands) Less: Net loss attributable to noncontrolling interests and redeemable noncontrolling interests$ (21,534) $ (19,052) $ (2,482)
13.0 %
Total loss attributable to noncontrolling interests increased$2.5 million , or 13.0%, in the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . The net loss increased due to increased losses in our PPA Entities, which are allocated to our noncontrolling interests. 68
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Liquidity and Capital Resources As ofDecember 31, 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 ofDecember 31, 2020 , we had$168.0 million of total outstanding recourse debt,$222.9 million of non-recourse debt and$12.3 million of other long-term liabilities. See Note 7 - Outstanding Loans and Security Agreements in Part II, Item 8, Financial Statements and Supplementary Data for a complete description of our outstanding debt. As ofDecember 31, 2020 andDecember 31, 2019 , we had cash and cash equivalents of$246.9 million and$202.8 million , respectively. We expect a certain current portion of the non-recourse debt would be refinanced by the PPA Entity prior to maturity. The combination of our existing cash and cash equivalents are expected to be sufficient to meet our anticipated cash flow needs for the next 12 months and thereafter for the foreseeable future. If these sources of cash are insufficient to satisfy our near-term or future cash needs, we may require additional capital from equity or debt financings to fund our operations, in particular, our manufacturing capacity, product development and market expansion requirements, to timely respond to competitive market pressures or strategic opportunities, or otherwise. In addition, we are continuously evaluating alternatives for efficiently funding our capital expenditures and ongoing operations. We may, from time to time, engage in a variety of financing transactions for such purposes. We may not be able to secure timely additional financing on favorable terms, or at all. The terms of any additional financings may place limits on our financial and operating flexibility. If we raise additional funds through further issuances of equity or equity-linked securities, our existing stockholders could suffer dilution in their percentage ownership of us, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. As ofDecember 31, 2020 , the current portion of our total debt is$120.8 million . Our future cash flow requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, the rate of growth in the volume of system builds and the need for additional manufacturing space, the expansion of sales and marketing activities both in domestic and international markets, market acceptance of our products, and overall economic conditions including the impact of COVID-19 on our future operations, as described in the COVID-19 Pandemic section above. For further discussion on our PPA Entities, see Note 13 - Portfolio Financings in Part II, Item 8, Financial Statements and Supplementary Data. Cash Flows A summary of our sources and uses of cash, cash equivalents and restricted cash is as follows (in thousands): Years Ended December 31, 2020 2019 Net cash provided by (used in): Operating activities$ (98,796) $ 163,770 Investing activities (37,913) 53,447 Financing activities 176,031 (120,314) 69
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Net cash provided by (used in) our PPA Entities, which are incorporated into the consolidated statements of cash flows was as follows (in thousands):
Years Ended
December 31,
2020 2019
PPA Entities ¹
Net cash provided by PPA operating activities $ 26,039 $ 279,402
Net cash used in PPA financing activities (23,784) (167,259)
Net cash used in PPA financing activities
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 year endedDecember 31, 2020 was$98.8 million and was primarily the result of net cash loss of$25.5 million plus the net increase in working capital of$73.3 million . Net cash loss is primarily comprised of a net loss of$179.1 million , adjusted for non-cash benefit items including: (i) depreciation and amortization of$52.3 million ; (ii) non-cash lease expense of$5.3 million ; (iii) impairment of equity method investment of$4.2 million ; (iv) stock-based compensation of$73.9 million ; (v) net loss on extinguishment of debt of$11.8 million ; and (vi) amortization of debt issuance and premium cost, net, of$6.5 million ; net of (vii) a gain on revaluation of derivative contracts of$0.5 million . Net cash used by changes in working capital consisted primarily of increases in: (i) accounts receivable of$61.7 million ; (ii) inventories of$33.0 million ; and (iii) prepaid expenses and other current assets of$3.1 million ; plus decreases in: (iv) accounts payable of$0.6 million ; (v) deferred revenue and customer deposits of$13.0 million ; (vi) operating lease liability of$2.9 million and (vii) other long-term liabilities of$4.5 million . These uses of cash from working capital were partially offset by decreases in: (i) deferred cost of revenue of$19.9 million ; and (ii) customer financing receivable and other of$5.2 million , and (iii) other long-term assets of$2.9 million ; plus increases in: (iv) accrued expenses and other current liabilities of$17.8 million . Net cash provided by operating activities for the year endedDecember 31, 2019 was$163.8 million and was the result of net cash earnings of$67.3 million plus net decrease in working capital of$96.5 million . Net cash earnings is primarily comprised of a net loss of$323.5 million , adjusted for non-cash benefit items including: (i) depreciation and amortization of approximately$78.6 million ; (ii) PPA II and PPA IIIb decommissioning costs of$70.5 million ; (iii) write-off of property, plant and equipment, net of$3.1 million ; (iv) impairment of assets of$11.3 million ; (v) a loss on revaluation of derivatives contracts of$2.8 million ; (vi) stock-based compensation of$196.3 million ; (vii) amortization of debt issuance cost of$22.1 million ; plus (viii) an expense reclass to financing activities related to a debt make-whole payment reclassification of$5.9 million . Net cash provided by changes in working capital consisted primarily of decreases in: (i) accounts receivable of$52.0 million ; (ii) inventory of$18.4 million ; (iii) customer financing receivable and other of$5.5 million ; (iv) prepaid expenses and other current assets of$8.6 million ; and (v) other long-term assets of$3.6 million ; plus increases in: (vi) accrued expenses and other current liabilities of$6.7 million ; (vii) other long term liabilities of$4.4 million ; and (viii) deferred revenue and contract liabilities of$37.1 million . These sources of cash from working capital were partially offset by increases in: (i) deferred cost of revenue of$22.0 million ; and decreases in: (ii) accounts payable of$11.3 million and (iii) accrued warranty of$6.6 million . Investing Activities Net cash used in investing activities in the year endedDecember 31, 2020 was$37.9 million , which was entirely related to the purchase of long-lived assets. Net cash provided by investing activities in the year endedDecember 31, 2019 was$53.4 million , which was primarily the result of net proceeds from maturities of marketable securities of$104.5 million , partially offset by$51.1 million used for the purchase of long-lived assets. Our use of cash in the year endedDecember 31, 2019 for the purchase of property, plant and equipment increased due to completing a move to our new corporate headquarters which is used for administration, research and development, and sales and marketing. 70
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Financing Activities Net cash provided by financing activities in the year endedDecember 31, 2020 was$176.0 million , which included borrowings from issuance of debt of$300.0 million , borrowings from issuance of debt to related parties of$30.0 million , proceeds from financing obligations of$26.3 million , contribution from noncontrolling interest of$6.5 million , and proceeds from issuance of common stock of$23.5 million . This was partially offset by repayment of debt of$178.6 million , debt issuance costs of$13.2 million , repayment of financing obligations of$10.8 million , and distributions paid to noncontrolling and redeemable noncontrolling interests of$7.6 million . Net cash used in financing activities in the year endedDecember 31, 2019 was$120.3 million , which included payments to noncontrolling and redeemable noncontrolling interest of$56.5 million , distributions paid to ourPPA Entity Investors of$12.5 million , repayments of debt of$121.5 million , and a the debt make-whole payment of$5.9 million related to our PPA II upgrade of Energy Servers, partially offset by proceeds from the issuance of common stock of$12.7 million . Outstanding Loans and Security Agreements The following is a summary of our debt as ofDecember 31, 2020 (in thousands): Unpaid Net Carrying Value Unused Principal Long- Borrowing Balance Current Term Total Capacity 10.25% notes due March 2027$ 70,000 $ -$ 68,614 $ 68,614 $ - 2.5% Green Notes 230,000 - 99,394 99,394 - Total recourse debt 300,000 - 168,008 168,008 - 7.5% Term Loan due September 2028 34,456 2,826 28,920 31,746 - 6.07% Senior Secured Notes due March 2030 77,837 3,882 73,125 77,007 - LIBOR + 2.5% Term Loan due December 2021 114,761 114,138 - 114,138 - Letters of Credit due December 2021 - - - - 968 Total non-recourse debt 227,054 120,846 102,045 222,891 968 Total debt$ 527,054 $ 120,846 $ 270,053 $ 390,899 $ 968 InAugust 2020 , we issued the Green Notes. The Green Notes had a face value of$200.0 million and included a Greenshoe option of up to$30.0 million , which was fully exercised by the initial purchaser, resulting in net proceeds to us after offering expenses of$220.1 million and resulted in new debt totaling$230.0 million . The primarily purpose and use of the proceeds from the Green Notes was to call and retire earlier issued notes that were priced at higher rates of interest and with other consideration. InAugust 2020 , we called a portion of the 10% Convertible Notes and the holders of those notes subsequently chose to convert those notes to equity in lieu of receiving cash. With the holders exercising this option, inSeptember 2020 , we then issued 19.1 million shares of our Class B common stock, which was subsequently converted to Class A common stock. InSeptember 2020 , we called the remaining portion of the 10% Convertible Notes due 2021. InOctober 2020 , the holder of those remaining notes chose to convert to equity in lieu of receiving cash. With the holder exercising this option, inOctober 2020 , we issued 12.0 million shares of our Class B common stock, which was subsequently converted to Class A common stock. InOctober 2020 , we called our 10% Notes, with a face value of$70.0 million . After redemption fees, accrued and unpaid interest, we paid$84.3 million duringNovember 2020 . These transactions improve our overall financial condition and our working capital, while reducing interest expense. The changes in our overall debt structure are expected to reduce our debt service from more than$59.7 million to under$12.9 million annually, resulting in an improved working capital position. 71
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Contractual Obligations and Other Commitments The following table summarizes our contractual obligations and the debt of our consolidated PPA Entities that is non-recourse to Bloom as ofDecember 31, 2020 : Payments Due By Period Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years (in thousands) Contractual Obligations and Other Commitments: Recourse debt1$ 300,000 $ -$ 21,063 $ 259,415 $ 19,522 Non-recourse debt2 227,054 121,469 17,496 23,493 64,596 Operating leases 64,556 11,388 16,503 16,802 19,863 Financing leases 392 95 185 112 - Service arrangements 1,857 1,297 560 - - Financing obligations 292,130 40,589 84,110 79,808 87,623 Natural gas fixed price forward contracts 2,574 2,351 223 - - Grant for Delaware facility 10,469 1,257 9,212 - - Interest rate swap 15,989 2,076 5,602 4,176 4,135 Supplier purchase commitments 616 - 616 - - Renewable energy credit obligations 367 325 42 - - Asset retirement obligations 500 500 - - - Total$ 916,504 $ 181,347 $ 155,612 $ 383,806 $ 195,739 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 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 - P o rtfol io Financing s in Part II, Item 8, Financial Statements and Supplementary Data. We have not entered into any other transactions that have generated relationships with unconsolidated entities or financial partnerships or special purpose entities. Accordingly, as ofDecember 31, 2020 andDecember 31, 2019 , we had no off-balance sheet arrangements. Critical Accounting Policies and Estimates The consolidated financial statements have been prepared in accordance with generally accepted accounting principles as applied inthe United States ("U.S. GAAP") The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. Our discussion and analysis of our financial results under Results of Operations below are based on our audited results of operations, which we have prepared in accordance withU.S. GAAP. In preparing these consoldiated financial statements, we make assumptions, judgments and estimates that can affect the reported amounts of assets, liabilities, revenues and expenses, and net income. On an ongoing basis, we base our estimates on historical experience, as appropriate, and on various other assumptions that we believe to be reasonable under the circumstances. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material 72
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differences between these estimates and actual results, our future financial
statement presentation, financial condition, results of operations and cash
flows will be affected. We believe that the following critical accounting
policies involve a greater degree of judgment and complexity than our other
accounting policies. Accordingly, these are the policies we believe are the most
critical to understanding and evaluating the consolidated financial condition
and results of operations.
The accounting policies that most frequently require us to make assumptions,
judgments and estimates, and therefore are critical to understanding our results
of operations, include:
Revenue Recognition
We apply Accounting Standards Codification ("ASC") Topic 606, Revenue from
Contracts with Customers. We recognize revenue as we satisfy our performance
obligations and transfer control of our products and services to our customers.
Most of our contracts with customers contain performance obligations with a
combination of our Energy Server product, installation and maintenance services.
For these performance obligations, we allocate the total transaction price to
each performance obligation based on the relative standalone selling price.
We generally recognize product revenue from contracts with customers at the
point that control is transferred to the customers. This occurs when we achieve
customer acceptance which is when the system has been installed and is running
at full power or, in the case of sales to our international channel providers,
based upon shipment terms.
We recognize installation revenue when the system has been installed and is
running at full power.
Service revenue is recognized ratably over the term of the first or renewed
one-year service period. Given our customers' renewal history, we anticipate
that most of them will continue to renew their maintenance services agreements
each year for the period of their expected use of the Energy Server. The
contractual renewal price may be less than the standalone selling price of the
maintenance services and consequently the contract renewal option may provide
the customer with a material right. We estimate the standalone selling price for
customer renewal options that give rise to material rights using the practical
alternative by reference to optional maintenance services renewal periods
expected to be provided and the corresponding expected consideration for these
services. This reflects the fact that our additional performance obligations in
any contractual renewal period are consistent with the services provided under
the standard first-year warranty. Where we have determined that a customer has a
material right as a result of their contract renewal option, we recognize that
portion of the transaction price allocated to the material right over the period
in which such rights are exercised.
Given that we typically sell an Energy Server with a maintenance service
agreement and have not provided maintenance services to a customer who does not
have use of an Energy Server, standalone selling prices are estimated using a
cost-plus approach. Costs relating to Energy Servers include all direct and
indirect manufacturing costs, applicable overhead costs and costs for normal
production inefficiencies (i.e., variances). We then apply a margin to the
Energy Servers which may vary with the size of the customer, geographic region
and the scale of the Energy Server deployment. Costs relating to installation
include all direct and indirect installation costs. The margin we apply reflects
our profit objectives relating to installation. Costs for maintenance service
arrangements are estimated over the life of the maintenance contracts and
include estimated future service costs and future material costs. Material costs
over the period of the service arrangement are impacted significantly by the
longevity of the fuel cells themselves. After considering the total service
costs, we apply a lower margin to our service costs than to our Energy Servers
as it best reflects our long-term service margin expectations and comparable
historical industry service margins. As a result, our estimate of our selling
price is driven primarily by our expected margin on both the Energy Server and
the maintenance service agreements based on their respective costs or, in the
case of maintenance service agreements, the estimated costs to be incurred.
Valuation of 2.5% Green Convertible Senior Notes
In August 2020 , we issued the Green Notes due August 2025 , unless earlier
repurchased redeemed or converted. In the accounting for the issuance of the
Green Notes, we separated the $230.0 million aggregate principal amount into
liability and equity components in accordance with ASC 470 - 20, Debt with
Conversion and Other Options. The fair value of the liability component for the
Green Notes of approximately $93.3 million was calculated by measuring the fair
value of similar debt instruments that do not have an associated convertible
feature. The carrying amount of the equity components for the Green Notes of
approximately $138.1 million , representing the conversion option, was determined
by deducting the fair value of the liability components from the principal
amount of the notes. The difference between the principal amount of the notes
and the liability components represents the debt discount, is presented as a
reduction to the notes on our consolidated balance sheets, and is amortized to
interest expense using the effective interest method over the remaining term of
the notes. The equity
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components of the notes are included in additional paid-in capital on our consolidated balance sheets and is not remeasured as long as it continues to meet the conditions for equity classification. As the valuation model used in determining the fair value of the liability component includes inputs subject to management's assumptions and judgements, determining the fair value of the liability component is a critical accounting estimate. Leases: Incremental Borrowing Rate We adopted ASC 842, Leases onJanuary 1, 2020 on a modified retrospective basis. This guidance requires that, for all our leases, we recognize ROU assets representing our right to use the underlying asset for the lease term, and lease liabilities related to the rights and obligations created by those leases, on the balance sheet regardless of whether they are classified as finance or operating leases, with classification affecting the pattern and presentation of expenses and cash flows on the consolidated financial statements. Lease liabilities are measured at the lease commencement date as the present value of future minimum lease payments over the reasonably certain lease term. Lease ROU assets are measured as the lease liability plus initial direct costs and prepaid lease payments less lease incentives. In measuring the present value of the future minimum lease payments, we used our collateralized incremental borrowing rate as our leases do not generally provide an implicit rate. The determination of the incremental borrowing rate considers qualitative and quantitative factors as well as the estimated impact that the collateral has on the rate. Stock-Based Compensation We account for stock options and other equity awards, such as restricted stock units and performance-based stock units, to employees and non-employee directors under the provisions of ASC 718, Compensation-Stock Compensation. Accordingly, the stock-based compensation expense for these awards is measured based on the fair value on the date of grant. For stock options,we recognize the expense, net of estimated forfeitures, under the straight-line attribution over the requisite service period which is generally the vesting term. The fair value of the stock options is estimated using the Black-Scholes valuation model. For options with a vesting condition tied to the attainment of service and market conditions, stock-based compensation costs are recognized usingMonte Carlo simulations. In addition, we use the Black-Scholes valuation model to estimate the fair value of stock purchase rights under theBloom Energy Corporation 2018 Employee Stock Purchase Plan (the "2018 ESPP"). The fair value of the 2018 ESPP purchase rights is recognized as expense under the multiple options approach. The Black-Scholes valuation model uses as inputs the fair value of our common stock and assumptions we make for the volatility of our common stock, the expected term of the award, the risk-free interest rate for a period that approximates the expected term of the stock options and the expected dividend yield. In developing estimates used to calculate assumptions, we established the expected term for employee options as well as expected forfeiture rates based on the historical settlement experience and after giving consideration to vesting schedules. Income Taxes We account for income taxes using the liability method under ASC 740, Income Taxes. Under this method, deferred tax assets and liabilities are determined based on net operating loss carryforwards, research and development credit carryforwards and temporary differences resulting from the different treatment of items for tax and financial reporting purposes. Deferred items are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. We must assess the likelihood that deferred tax assets will be recovered as deductions from future taxable income. This determination is based on expected future results and the future reversals of existing taxable temporary differences. Furthermore, uncertain tax positions are evaluated by management and amounts are recorded when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits. Significant judgement is required throughout management's process in evaluating each uncertain tax position including future taxable income expectations and tax-planning strategies to determine whether the more likely than not recognition threshold has been met. We have provided a full valuation allowance on our domestic deferred tax assets because we believe it is more likely than not that our deferred tax assets will not be realized. Principles of Consolidation Our consolidated financial statements include the operations of our subsidiaries in which we have a controlling financial interest. We use a qualitative approach in assessing the consolidation requirements for each of our variable interest entities ("VIEs"), which we refer to as our PPA Entities. This approach focuses on determining whether we have the power to direct those activities that significantly affect their economic performance and whether we have the obligation to absorb losses, or the 74
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right to receive benefits that could potentially be significant to the PPA
Entities. The considerations for VIE consolidation is a complex analysis that
requires us to determine whether we are the primary beneficiary and therefore
have the power to direct activities which are most significant to the PPA
Entities.
Allocation of Profits and Losses of Consolidated Entities to Noncontrolling
Interests and Redeemable Noncontrolling Interests
We generally allocate profits and losses to noncontrolling interests under the
HLBV method. The HLBV method is a balance sheet-oriented approach for applying
the equity method of accounting when there is a complex structure, such as the
flip structure of the PPA Entities.
The determination of equity in earnings under the HLBV method requires
management to determine how proceeds, upon a hypothetical liquidation of the
entity at book value, would be allocated between our investors. The
noncontrolling interest balance is presented as a component of permanent equity
in the consolidated balance sheets.
Noncontrolling interests with redemption features, such as put options, that are
not solely within our control are considered redeemable noncontrolling
interests. Exercisability of put options are solely dependent upon the passage
of time, and hence, such put options are considered to be probable of becoming
exercisable. We elected to accrete changes in the redemption value over the
period from the date it becomes probable that the instrument will become
redeemable to the earliest redemption date of the instrument by using an
interest method. The balance of redeemable noncontrolling interests on the
balance sheets is reported at the greater of its carrying value or its maximum
redemption value at each reporting date. The redeemable noncontrolling interests
are classified as temporary equity and therefore are reported in the mezzanine
section of the consolidated balance sheets as redeemable noncontrolling
interests.
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