FUELCELL ENERGY, INC. FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains both historical and forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks, uncertainties and assumptions. The statements contained in this report that are not purely historical are forward-looking statements that are subject to the safe harbors created under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions and strategies for the future. When used in this report, the words "expects," "anticipates," "estimates," "goals," "projects," "intends," "plans," "believes," "predicts," "should," "will," "could," "would," "may," "forecast," and similar expressions and variations of such words are intended to identify forward-looking statements. Such statements relate to, among other things, the following: (i) the development and commercialization byFuelCell Energy, Inc. and its subsidiaries of fuel cell technology and products and the market for such products; (ii) expected operating results such as revenue growth and earnings; (iii) our belief that we have sufficient liquidity to fund our business operations for the next 12 months; (iv) future funding under Advanced Technologies contracts; (v) future financing for projects, including equity and debt investments by investors and commercial bank financing, as well as overall financial market conditions; (vi) the expected cost competitiveness of our technology; and (vii) our ability to achieve our sales plans, market access and market expansion goals, and cost reduction targets. The forward-looking statements contained in this report are subject to risks and uncertainties, known and unknown, that could cause actual results and future events to differ materially from those set forth in or contemplated by the forward-looking statements, including, without limitation, the risks described in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2021 and in the section below entitled "Item 1A. Risk Factors," and the following risks and uncertainties: general risks associated with product development and manufacturing; general economic conditions; changes in interest rates, which may impact project financing; supply chain disruptions; changes in the utility regulatory environment; changes in the utility industry and the markets for distributed generation, distributed hydrogen, and fuel cell power plants configured for carbon capture or carbon separation; potential volatility of commodity and energy prices that may adversely affect our projects; availability of government subsidies and economic incentives for alternative energy technologies; our ability to remain in compliance withU.S. federal and state and foreign government laws and regulations and the listing rules ofThe Nasdaq Stock Market ("Nasdaq"); rapid technological change; competition; the risk that our bid awards will not convert to contracts or that our contracts will not convert to revenue; market acceptance of our products; changes in accounting policies or practices adopted voluntarily or as required by accounting principles generally accepted inthe United States ; factors affecting our liquidity position and financial condition; government appropriations; the ability of the government and third parties to terminate their development contracts at any time; the ability of the government to exercise "march-in" rights with respect to certain of our patents; our ability to successfully market and sell our products internationally; our ability to implement our strategy; our ability to reduce our levelized cost of energy and deliver on our cost reduction strategy generally; our ability to protect our intellectual property; litigation and other proceedings; the risk that commercialization of our products will not occur when anticipated or, if it does, that we will not have adequate capacity to satisfy demand; our need for and the availability of additional financing; our ability to generate positive cash flow from operations; our ability to service our long-term debt; our ability to increase the output and longevity of our platforms and to meet the performance requirements of our contracts; our ability to expand our customer base and maintain relationships with our largest customers and strategic business allies; changes by theU.S. Small Business Administration or other governmental authorities to, or with respect to the implementation or interpretation of, the Coronavirus Aid, Relief, and Economic Security Act, the Paycheck Protection Program or related administrative matters; and concerns with, threats of, or the consequences of, pandemics, contagious diseases or health epidemics, including the novel coronavirus ("COVID-19"), and resulting supply chain disruptions, shifts in clean energy demand, impacts to our customers' capital budgets and investment plans, impacts to our project schedules, impacts to our ability to service existing projects, and impacts on the demand for our products. We cannot assure you that: we will be able to meet any of our development or commercialization schedules; any of our new products or technologies, once developed, will be commercially successful; ourSureSource power plants will be commercially successful; we will be able to obtain financing or raise capital to achieve our business plans; the government will appropriate the funds anticipated by us under our government contracts; the government will not exercise its right to 27 Table of Contents terminate any or all of our government contracts; or we will be able to achieve any other result anticipated in any other forward-looking statement contained herein. Investors are cautioned that forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond our ability to control, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors discussed herein. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. Management's Discussion and Analysis of Financial Condition and Results of Operations is provided as a supplement to the accompanying financial statements and footnotes to help provide an understanding of our financial condition, changes in our financial condition and results of operations. The preparation of financial statements and related disclosures requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities, as well as management's assessment of the Company's ability to meet its obligations as they come due over the next twelve months. Actual results could differ from those estimates. Estimates are used in accounting for, among other things, revenue recognition, contract loss accruals, excess, slow-moving and obsolete inventories, product warranty accruals, loss accruals on service agreements, share-based compensation expense, allowance for doubtful accounts, depreciation and amortization, impairment of goodwill and in-process research and development intangible assets, impairment of long-lived assets (including project assets), lease liabilities and right-of-use ("ROU") assets, and contingencies, and in management's assessment of the Company's ability to meet its obligations as they come due over the next twelve months. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates. The following discussion should be read in conjunction with information included in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2021 filed with theSecurities and Exchange Commission ("SEC"). Unless otherwise indicated, the terms "Company", "FuelCell Energy", "we", "us", and "our" refer toFuelCell Energy, Inc. and its subsidiaries. All tabular dollar amounts are in thousands. OVERVIEWFuelCell Energy is a global leader in sustainable clean energy technologies that address some of the world's most critical challenges around energy, safety, and global urbanization. As a leading global manufacturer of proprietary fuel cell technology platforms, we are uniquely positioned to serve customers worldwide with sustainable products and solutions for businesses, utilities, governments, and municipalities. Our solutions are designed to enable a world empowered by clean energy, enhancing the quality of life for people around the globe. We target large-scale power users with our megawatt-class installations globally, and currently offer sub-megawatt solutions for smaller power consumers inEurope . To provide a frame of reference, one megawatt is adequate to continually power approximately 1,000 average sizedU.S. homes. Our customer base includes utility companies, municipalities, universities, hospitals, government entities/military bases and a variety of industrial and commercial enterprises. Our leading geographic markets are currentlythe United States andSouth Korea , and we are pursuing opportunities in other countries around the world.FuelCell Energy , based inConnecticut , was founded in 1969 as aNew York corporation to provide applied research and development services on a contract basis. We completed our initial public offering in 1992 and reincorporated inDelaware in 1999. We began selling stationary fuel cell power plants commercially in 2003. RESULTS OF OPERATIONS Management evaluates our results of operations and cash flows using a variety of key performance indicators, including revenues compared to prior periods and internal forecasts, costs of our products and results of our cost reduction initiatives, and operating cash use. These are discussed throughout the "Results of Operations" and "Liquidity and Capital Resources" sections. Results of Operations are presented in accordance with accounting principles generally accepted inthe United States ("GAAP"). 28 Table of Contents Comparison of Three Months EndedJanuary 31, 2022 and 2021
Revenues and Costs of revenues
Our revenues and cost of revenues for the three months endedJanuary 31, 2022 and 2021 were as follows: Three Months Ended January 31, Change (dollars in thousands) 2022 2021 $ % Total revenues$ 31,795 $ 14,877 $ 16,918 114% Total costs of revenues 34,690 18,495 16,195 88% Gross loss$ (2,895) $ (3,618) $ 723 (20)% Gross margin (9.1)% (24.3)%
Total revenues for the three months endedJanuary 31, 2022 of$31.8 million reflects an increase of$16.9 million from$14.9 million for the same period in the prior year. Cost of revenues for the three months endedJanuary 31, 2022 of$34.7 million increased$16.2 million from$18.5 million for the same period in the prior year. A discussion of the changes in product revenues, service agreements revenues, generation revenues and Advanced Technologies contract revenues follows.
Product revenues
Our product revenues, cost of product revenues and gross loss from product revenues for the three months endedJanuary 31, 2022 and 2021 were as follows: Three Months Ended January 31, Change (dollars in thousands) 2022 2021 $ % Product revenues$ 18,000 $ -$ 18,000 N/A Cost of product revenues 18,207 2,366 15,841 670%
Gross loss from product revenues$ (207) $ (2,366) $ 2,159 91% Product gross margin (1.2)% N/A Product revenues for the three months endedJanuary 31, 2022 were$18.0 million compared to$0 for the three months endedJanuary 31, 2021 . The increase in product revenues is a result of module sales toKorea Fuel Cell Co., Ltd. ("KFC") (a subsidiary ofPOSCO Energy Co., Ltd. ("POSCO Energy")) for which the Company recognized$18.0 million on the delivery Ex Works of 6 modules from the Company's facility inTorrington, Connecticut inJanuary 2022 . Cost of product revenues increased$15.8 million for the three months endedJanuary 31, 2022 to$18.2 million , compared to$2.4 million in the same period in the prior year. The increase is primarily due to the module sales toKFC . The increase also relates to a fixed asset impairment charge of approximately$1.0 million for the three months endedJanuary 31, 2022 (related to the cessation of operations at a conditioning facility inDanbury, CT , which is being replaced by a new facility inTorrington, CT as a part of our fiscal year 2022 capital investments) and accrued warranty cost of approximately$0.2 million associated with the module sales toKFC discussed above. Manufacturing variances, primarily related to production volumes and unabsorbed overhead costs, totaled approximately$2.2 million for the three months endedJanuary 31, 2022 compared to approximately$2.0 million for the three months endedJanuary 31, 2021 .
For the three months ended
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Service agreements revenues
Service agreements revenues and related costs for the three months ended
Three Months Ended January 31, Change
(dollars in thousands) 2022 2021 $ %
Service agreements revenues $ 2,167 $ 4,913 $ (2,746) (56)%
Cost of service agreements revenues 2,372 5,099 (2,727) (53)%
Gross loss from service agreements revenues $ (205) $ (186) $ (19) 10%
Service agreements revenues gross margin (9.5)% (3.8)%
Revenues for the three months endedJanuary 31, 2022 from service agreements and license fee and royalty agreements decreased$2.7 million to$2.2 million from$4.9 million for the three months endedJanuary 31, 2021 . The service revenues for the three months endedJanuary 31, 2021 include revenues recorded for module exchanges at several plants and routine maintenance activities. The decrease in revenues for the three months endedJanuary 31, 2022 is primarily due to the fact that there were no new module exchanges during the three months endedJanuary 31, 2022 . Cost of service agreements revenues decreased$2.7 million to$2.4 million for the three months endedJanuary 31, 2022 from$5.1 million for the three months endedJanuary 31, 2021 , resulting, in part, from the fact that there were no new module exchanges during the three months endedJanuary 31, 2022 . Cost of service agreements includes maintenance and operating costs and module exchanges. Overall gross loss from service agreements revenues was$0.2 million for the three months endedJanuary 31, 2022 andJanuary 31, 2021 . The overall gross margin was (9.5)% for the three months endedJanuary 31, 2022 compared to a gross margin of (3.8)% in the comparable prior year period. Gross margin decreased during the three months endedJanuary 31, 2022 primarily due to the fact that there were no new module exchanges for projects.
Generation revenues
Generation revenues and related costs for the three months ended
Three Months Ended January 31, Change
(dollars in thousands) 2022 2021 $ %
Generation revenues $ 7,496 $ 4,891 $ 2,605 53%
Cost of generation revenues 10,722 7,115 3,607 51%Gross loss from generation revenues$ (3,226) $ (2,224) $ (1,002) 45% Generation revenues gross margin (43.0)% (45.5)% Revenues from generation for the three months endedJanuary 31, 2022 totaled$7.5 million , which represents an increase of$2.6 million from revenue recognized of$4.9 million for the three months endedJanuary 31, 2021 . Generation revenues for the three months endedJanuary 31, 2022 and 2021 reflect revenue from electricity generated under our power purchase agreements ("PPAs"). The increase in generation revenues in the three months endedJanuary 31, 2022 is primarily due to the higher operating output of the generation fleet portfolio as a result of investments in maintenance activities and an increase in the size of the fleet. Cost of generation revenues totaled$10.7 million in the three months endedJanuary 31, 2022 . The increase from the comparable prior year period was primarily due to construction costs of approximately$3.0 million related to theToyota project and costs of approximately$0.9 million related to the increased size of the installed fleet with theSan Bernardino and LIPA Yaphank projects achieving commercial operation. As further background on the costs related to theToyota project, it was determined in the fourth quarter of fiscal year 2021 that a potential source of renewable natural gas ("RNG") at favorable pricing was no longer sufficiently probable for theToyota project. Thus, as theToyota project is being constructed, only amounts that can be redeployed for alternative use are being capitalized. The balance of costs incurred (i.e., the construction costs mentioned above in an amount equal to$3.0 million ) are being expensed as cost of generation revenues. 30
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Cost of generation revenues included depreciation and amortization of
approximately
The decrease in generation revenues gross margin loss is primarily related to
the
We had 41.4 MW of operating power plants in our operating portfolio as ofJanuary 31, 2022 , which increased from 32.6 MW as ofJanuary 31, 2021 . The increase relates to the 1.4 MW platform at theCity of San Bernardino Municipal Water Department inSan Bernardino, California , which commenced commercial operations inJune 2021 , and the 7.4 MW platform for theLong Island Power Authority ("LIPA") inYaphank Long Island ,New York , which commenced commercial operations during the three months endedJanuary 31, 2022 .
Advanced Technologies contract revenues
Advanced Technologies contract revenues and related costs for the three months
ended
Three Months Ended January 31, Change
(dollars in thousands) 2022 2021 $ %
Advanced Technologies contract revenues $ 4,132 $ 5,073 $ (941) (19)%
Cost of Advanced Technologies contract revenues 3,389 3,915 (526) (13)%
Gross profit from Advanced Technologies contracts $ 743 $ 1,158 $ (415) (36)%
Advanced Technologies contract gross margin 18.0% 22.8%
Advanced Technologies contract revenues decreased to$4.1 million for the three months endedJanuary 31, 2022 from$5.1 million for the three months endedJanuary 31, 2021 . Compared to the three months endedJanuary 31, 2021 , Advanced Technologies contract revenues recognized under the Joint Development Agreement entered into withExxonMobil Research and Engineering Company ("EMRE") onNovember 5, 2019 (as amended effective as ofOctober 31, 2021 , the "EMRE Joint Development Agreement") were approximately$1.4 million lower during the three months endedJanuary 31, 2022 offset by an increase in revenue recognized under government contracts of$0.3 million for the three months endedJanuary 31, 2022 . Cost of Advanced Technologies contract revenues were$3.4 million for the three months endedJanuary 31, 2022 , compared to$3.9 million for the same period in the prior year based on the level of activity in the period. Advanced Technologies contracts for the three months endedJanuary 31, 2022 generated a gross margin of$0.7 million compared to a gross margin of$1.2 million for the three months endedJanuary 31, 2021 .
Administrative and selling expenses
Administrative and selling expenses were$37.0 million and$8.9 million for the three months endedJanuary 31, 2022 and 2021, respectively. The three months endedJanuary 31, 2022 included higher legal expenses associated with the settlement of the Company's disputes withPOSCO Energy andKFC (as described in additional detail in Note 19. "Commitments and Contingencies" to our Consolidated Financial Statements for the three months endedJanuary 31, 2022 included in this Quarterly Report on Form 10-Q). The Company retained outside counsel on a contingency basis to pursue its claims againstPOSCO Energy andKFC , and outside counsel entered into an agreement with a litigation finance provider to fund the legal fees and expenses of the arbitration proceedings brought by the Company againstPOSCO Energy andKFC . In conjunction with the Settlement Agreement, datedDecember 20, 2021 , among the Company,POSCO Energy andKFC (the "Settlement Agreement"), the Company is required to remit fees to its counsel,Wiley Rein, LLP ("Wiley"), subject to the terms of its engagement letter with Wiley. OnDecember 23, 2021 , the Company agreed that it would pay Wiley a total of$24.0 million to satisfy all obligations to Wiley under the Company's engagement letter, of which$14.0 million was paid onDecember 30, 2021 ,$5.0 million will be paid on or beforeMarch 30, 2022 , and$5.0 million will be paid on or beforeJune 30, 2022 . Excluding these fees, Administrative and selling expenses were$13.0 million and$8.9 million for the three months endedJanuary 31, 2022 and 2021, respectively. The increase is related to higher sales, marketing and 31 Table of Contents consulting costs, as the Company is investing in rebranding and accelerating its sales and commercialization efforts, and an increase in compensation expense resulting from an increase in headcount.
Research and development expenses
Research and development expenses increased to$5.0 million for the three months endedJanuary 31, 2022 compared to$1.8 million for the three months endedJuly 31, 2021 . The increase relates to an increase in spending on the Company's hydrogen commercialization initiatives compared to the comparable prior year period. Loss from operations
Loss from operations for the three months endedJanuary 31, 2022 was$44.8 million compared to$14.4 million for the three months endedJanuary 31, 2021 . This increase was driven by a$31.2 million increase in operating expenses for the three months endedJanuary 31, 2022 as a result of (a) administrative and selling expenses for the three months endedJanuary 31, 2022 , which were higher and included legal fees associated with thePOSCO Energy settlement as well as higher sales, marketing and consulting costs and an increase in compensation expense resulting from an increase in headcount and (b) research and development expenses, which were higher due to an increase in spending on the Company's hydrogen commercialization initiatives compared to the comparable prior year period. This increase was partially offset by a lower gross loss of$2.9 million in the three months endedJanuary 31, 2022 compared to a gross loss of$3.6 million in the three months endedJanuary 31, 2021 . Impacting gross loss for the quarter were higher manufacturing variances primarily as the result of a fixed asset impairment charge related to the cessation of operations at a conditioning facility inDanbury, CT and accrued warranty cost associated with the module sales toKFC , offset by higher product gross margin primarily due to module sales toKFC .
Interest expense
Interest expense for the three months endedJanuary 31, 2022 and 2021 was$1.4 million and$2.5 million , respectively. Interest expense for both periods presented includes interest related to sale-leaseback transactions and interest on the loans outstanding associated with theBridgeport Fuel Cell Project .
Change in fair value of common stock warrant liability
The$16.0 million expense for the three months endedJanuary 31, 2021 represents an adjustment to the estimated fair value of the outstanding unexercised warrants to purchase common stock held by the lenders under the Orion Credit Agreement (as defined below), which were exercised, in full, during the year endedOctober 31, 2021 . The expense was primarily a result of an increase in the price of the Company's common stock during the quarter endedJanuary 31, 2021 .
Loss on extinguishment of debt
The loss on extinguishment of debt for the three months endedJanuary 31, 2021 represents costs associated with the repayment of the$80.0 million principal balance outstanding under the Credit Agreement among the Company, certain of its affiliates as guarantors,Orion Energy Partners Investment Agent, LLC , and certain lenders affiliated therewith (as amended, the "Orion Credit Agreement"). The amount includes an early prepayment penalty of$4.0 million and the write-off of debt discounts and deferred finance costs of$7.2 million .
Extinguishment of preferred stock obligation of subsidiary
For the three months endedJanuary 31, 2021 , a charge of$0.9 million was recorded for the extinguishment of preferred stock obligation of subsidiary to adjust for the difference between the amount of the payoff of the obligation and the carrying amount of the obligation under the terms of the Class A Preferred Shares issued byFCE FuelCell Energy Ltd. (which are referred to elsewhere herein as the "Series 1 Preferred Shares"), which obligation was guaranteed
by
the Company.
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Other income (expense), net
Other income (expense), net was $0.2 million and $(1.0) million for the
three months ended January 31, 2022 and 2021, respectively. Other expense, net
for the three months ended January 31, 2021 primarily relates to a foreign
exchange loss of $0.8 million related to the remeasurement of the Canadian
Dollar denominated preferred stock obligation of our U.S. Dollar functional
currency Canadian subsidiary (FCE FuelCell Energy Ltd. ) prior to the payoff of
the preferred share obligation in December 2020 .
Provision for income taxes
We have not paid federal or state income taxes in several years due to our
history of net operating losses, although we have paid foreign income and
withholding taxes in
Series B preferred stock dividends
Dividends recorded on our 5% Series B Cumulative Convertible Perpetual Preferred
Stock ("Series B Preferred Stock") were $0.8 million for each of the three-month
periods ended January 31, 2022 and 2021.
Net loss attributable to redeemable noncontrolling interest
Net loss attributable to redeemable noncontrolling interests is the result of
allocating profits and losses to noncontrolling interests under the hypothetical
liquidation at book value ("HLBV") method. HLBV is a balance sheet-oriented
approach for applying the equity method of accounting when there is a complex
structure, such as the flip structure of our tax equity financings with East
West Bancorp, Inc. ("East West Bank ") and Renewable Energy Investors, LLC
("REI").
For the three months ended January 31, 2022 , net loss allocated to
noncontrolling interests totaled $5.5 million for the LIPA Yaphank tax equity
financing transaction with REI. There was no comparable net loss for the prior
year as the LIPA Yaphank tax equity transaction closed and the LIPA Yaphank
project began operating in the first quarter of fiscal year 2022. The loss is
primarily driven by the Investment Tax Credit ("ITC") attributable to the
noncontrolling interest for the 2021 tax year. The ITC reduces the
noncontrolling interest's claim on hypothetical liquidation proceeds in the HLBV
waterfall. This reduction in liquidation proceeds drove the loss in the period.
Net loss attributable to common stockholders and loss per common share
Net loss attributable to common stockholders represents the net loss for the period less the preferred stock dividends on the Series B Preferred Stock. For the three-month periods endedJanuary 31, 2022 and 2021, net loss attributable to common stockholders was$41.4 million and$46.8 million , respectively, and loss per common share was$0.11 and$0.15 , respectively. The decrease in the net loss attributable to common stockholders for the three months endedJanuary 31, 2022 is primarily due to lower gross loss for the three months endedJanuary 31, 2022 compared to the corresponding period in fiscal year 2021, lower interest expense during the quarter and the fact that there was no loss on extinguishment of debt in the quarter, no loss on extinguishment of preferred stock obligation during the quarter and no charge for the change in fair value of common stock warrant liability during the quarter, offset by higher operating expenses (which included the$24 million non-recurring legal expense discussed above). The lower net loss attributable to common stockholders was partially offset by a net loss allocated to noncontrolling interests totaling$5.5 million for the LIPA Yaphank tax equity financing transaction or approximately$0.01 per share. The lower loss per common share for the three months endedJanuary 31, 2022 as compared to the three months endedJanuary 31, 2021 is primarily due to the higher weighted average 33 Table of Contents
shares outstanding as of
LIQUIDITY AND CAPITAL RESOURCES
Overview, Cash Position, Sources and Uses
Our principal sources of cash have been sales of our common stock through public equity offerings, proceeds from third party debt, project financing and tax monetization transactions, proceeds from the sale of our projects as well as research and development and service agreements with third parties. We have utilized this cash to develop and construct project assets, perform research and development on Advanced Technologies, pay down existing outstanding indebtedness, and meet our other cash and liquidity needs.
As of
OnJune 11, 2021 , the Company entered into an Open Market Sale Agreement withJefferies LLC andBarclays Capital Inc. with respect to an at the market offering program under which the Company may, from time to time, offer and sell shares of the Company's common stock having an aggregate offering price of up to$500 million . From the date of the Open Market Sale Agreement throughJanuary 31, 2022 , approximately 44.1 million shares were sold resulting in gross proceeds to the Company totaling approximately$377.2 million before deducting expenses and sales commissions. Net proceeds to the Company totaled approximately$369.7 million after deducting commissions and offering expenses totaling approximately$7.5 million . There were no sales during, and there have been no sales subsequent to, the quarter endedJanuary 31, 2022 . The remaining availability under the Open Market Sale Agreement as ofJanuary 31, 2022 is approximately$122.8 million . The Company plans to use the net proceeds from this offering to accelerate the development and commercialization of our Advanced Technologies products, including our solid oxide platform, for project development, for internal research and development, to invest in capacity expansion for solid oxide and carbonate fuel cell manufacturing, and for project financing, working capital support, and general corporate purposes. We believe that our unrestricted cash and cash equivalents, expected receipts from our contracted backlog, and release of short-term restricted cash less expected disbursements over the next twelve months will be sufficient to allow the Company to meet its obligations for at least one year from the date of issuance of these financial statements. To date, we have not achieved profitable operations or sustained positive cash flow from operations. The Company's future liquidity, in fiscal year 2022 and in the long-term, will depend on its ability to (i) timely complete current projects in process within budget, (ii) increase cash flows from its generation operating portfolio, including by meeting conditions required to timely commence operation of new projects, operating its generation operating portfolio in compliance with minimum performance guarantees and operating its generation operating portfolio in accordance with revenue expectations, (iii) obtain financing for project construction, (iv) obtain permanent financing for its projects once constructed, (v) increase order and contract volumes, which would lead to additional product sales, service agreements and generation revenues, (vi) obtain funding for and receive payment for research and development under current and future Advanced Technologies contracts, (vii) successfully commercialize its Advanced Technologies platforms, including its solid oxide, hydrogen and carbon capture platforms, (viii) implement the product cost reductions necessary to achieve profitable operations, (ix) manage working capital and the Company's unrestricted cash balance and (x) access the capital markets to raise funds through the sale of equity securities, convertible notes, and other equity-linked instruments. We are continually assessing different means by which to accelerate the Company's growth, enter new markets, commercialize new products, and enable capacity expansion. Therefore, from time to time, the Company may consider and enter into agreements for one or more of the following: negotiated financial transactions, minority investments, collaborative ventures, technology sharing, transfer or other technology license arrangements, joint ventures, partnerships, acquisitions or other business transactions for the purpose(s) of geographic or manufacturing expansion and/or new product or technology development and commercialization, including hydrogen production and storage and carbon capture, sequestration and utilization technologies. 34
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Our business model requires substantial outside financing arrangements and satisfaction of the conditions of such financing arrangements to construct and deploy our projects and facilitate the growth of our business. The Company has invested capital raised from sales of its common stock to build out its project portfolio. The Company has also utilized and expects to continue to utilize a combination of long-term debt and tax equity financing (e.g., sale-leaseback and partnership transactions) to finance its project asset portfolio as these projects commence commercial operations. The Company may also utilize the proceeds from private placements of debt securities of a portfolio of assets to finance its project asset portfolio. The proceeds of any such financing, if obtained, may allow the Company to recycle capital back to the business and to fund other projects. We may also seek to obtain additional financing in both the debt and equity markets in the future. If financing is not available to us on acceptable terms if and when needed, or on terms acceptable to us or our lenders, if we do not satisfy the conditions of our financing arrangements, if we spend more than the financing approved for projects, if project costs exceed an amount that the Company can finance, or if we do not generate sufficient revenues or obtain capital sufficient for our corporate needs, we may be required to reduce or slow planned spending, reduce staffing, sell assets, seek alternative financing and take other measures, any of which could have a material adverse effect on our financial condition and operations.
Generation Operating Portfolio, Project Assets, and Backlog
To grow our generation operating portfolio, the Company will invest in developing and building turn-key fuel cell projects which will be owned by the Company and classified as project assets on the balance sheet. This strategy requires liquidity and the Company expects to continue to have increasing liquidity requirements as project sizes increase and more projects are added to backlog. We may commence building project assets upon the award of a project or execution of a multi-year PPA with an end-user that has a strong credit profile. Project development and construction cycles, which span the time between securing a PPA and commercial operation of the platform, vary substantially and can take years. As a result of these project cycles and strategic decisions to finance the construction of certain projects, we may need to make significant up-front investments of resources in advance of the receipt of any cash from the sale or long-term financing of such projects. To make these up-front investments, we may use our working capital, seek to raise funds through the sale of equity or debt securities, or seek other financing arrangements. Delays in construction progress and completing current projects in process within budget, or in completing financing or the sale of our projects may impact our liquidity in a material way. Our generation operating portfolio (41.4 MW as ofJanuary 31, 2022 ) contributes higher long-term cash flows to the Company than if these projects had been sold. In fiscal year 2021, our operating portfolio generated approximately$24.0 million of revenue. We expect this revenue amount to continue to grow as additional projects achieve commercial operation, but this revenue amount may also fluctuate from year to year depending on platform output, operational performance and management and site conditions. The Company plans to continue to grow this portfolio while also selling projects to investors. As ofJanuary 31, 2022 , the Company had projects representing an additional 33.9 MW in various stages of development and construction, which projects are expected to generate operating cash flows in future periods, if completed. Retaining long-term cash flow positive projects, combined with our service fleet, is expected to result in reduced reliance on new project sales to achieve cash flow positive operations, however, operations and performance issues could impact results. We have worked with and are continuing to work with lenders and financial institutions to secure construction financing, long-term debt, tax equity and sale-leasebacks for our project asset portfolio, but there can be no assurance that such financing can be attained, or that, if attained, it will be retained and sufficient. As ofJanuary 31, 2022 , net debt outstanding related to project assets was$73.0 million . Future required payments totaled$51.8 million as ofJanuary 31, 2022 . The outstanding financing obligations under our sale-leaseback transactions, which totaled$56.4 million as ofJanuary 31, 2022 , include an embedded gain of$40.8 million , which will be recognized at the end of the applicable lease terms.
Our generation operating portfolio provides us with the full benefit of future cash flows, net of any debt service requirements.
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The following table summarizes our generation operating portfolio as ofJanuary 31, 2022 : Actual Commercial Rated Operation Date Capacity (FuelCell Energy PPA Term Project Name Location Power Off - Taker (MW) (1) Fiscal Quarter) (Years)
Central CT State New CCSU (CT University)
University Britain, CT
("CCSU") 1.4 Q2 '12 10
UCI Medical Center Orange, CA UCI (CA University Hospital)
("UCI") 1.4 Q1 '16 19
Riverside Regional Riverside, City of Riverside (CA Municipality)
Water CA
Quality Control Plant 1.4 Q4 '16 20
Pfizer, Inc. Groton, CT Pfizer, Inc. 5.6 Q4 '16 20
Santa Rita Jail Dublin, CA Alameda County, California 1.4 Q1 '17 20
Bridgeport Fuel Cell Bridgeport, Connecticut Light and Power Company (CT
Project CT Utility) 14.9 Q1 '13 15
Tulare BioMAT Tulare, CA Southern California Edison (CA Utility) 2.8 Q1 '20 20
Triangle Street Danbury, CT Tariff - Eversource (CT Utility) 3.7 Q2 '20 Tariff
San Bernardino San City of San Bernardino Municipal Water
Bernardino, Department 1.4 Q3'21
CA 20
LIPA Yaphank Project Long PSEG / LIPA, LI NY (Utility) 7.4 Q1'22
Island, NY 18
Total MW Operating: 41.4
(1) Rated capacity is the platform's design rated output as of the date of
initiation of commercial operations.
The following table summarizes projects in process, all of which are in backlog, as ofJanuary 31, 2022 : Rated PPA Capacity Term Project Name Location Power Off-Taker (MW) (1) (Years) Groton Sub Base Groton, CT CMEEC (CT Electric 7.4 20 Co-op) Toyota Los Angeles, CA Southern California 2.3 20 Edison; Toyota CT RFP-1 Hartford, CT Eversource/United Illuminating (CT 7.4 20 Utilities) CT RFP-2 Derby, CT Eversource/United Illuminating (CT 14.0 20 Utilities) SCEF - Derby Derby, CT Eversource/United Illuminating (CT 2.8 20 Utilities) Total MW in Process: 33.9
(1) Rated capacity is the platform's design rated output as of the date of
initiation of commercial operations.
The projects listed in the above table are in various stages of development or on-site construction and installation. Current project updates are as follows:
Groton Sub Base -
mechanical completion, executed the interconnect agreement, and commenced the
? process of commissioning the 7.4 MW platform at the
disclosed that the process of commissioning theGroton Project was temporarily suspended due to 36 Table of Contents
a needed repair. Following the completion of that repair, the Company resumed
commissioning of the
the Company observed operating parameter data from one of the two fuel cell
platforms installed at the project site that indicated a mechanical component
was not performing according to engineered specifications. The Company recently
determined that component should be removed from the project site to facilitate
the necessary repair and upgrade. The Company is in the process of performing
the necessary repairs and upgrades to the mechanical component. Upon completion
of the repair and upgrade work and reinstallation of the mechanical component at
the project site, the Company will restart the process of commissioning the
which commercial operations are to be achieved to
In addition, as previously disclosed, inAugust 2021 , the Company closed on a tax equity financing transaction with East West Bancorp, Inc. ("East West Bank ") for theGroton Project .East West Bank's tax equity commitment totals$15 million . In connection with the initial closing, the Company was able to draw down$3.0 million . The Company is eligible to draw the remaining amount of the commitment, approximately$12 million , once theGroton Project achieves commercial operation. Under the terms of the Company's agreement withEast West Bank , the project had a required commercial operation deadline ofOctober 18, 2021 .East West Bank has granted several extensions of the commercial operation deadline, most recently toMay 15, 2022 , in exchange for fees of$0.4 million in the aggregate. If commercial operations are delayed beyondMay 15, 2022 , extensions would be required fromEast West Bank and theNavy and those parties will determine whether such extensions will be granted in their sole discretion. In the event that extensions fromEast West Bank and theNavy become necessary, andEast West Bank and/or theNavy do not grant an extension, such an event could have a material adverse impact on the Company's financial condition and results of operations. Once completed, this platform is expected to demonstrate the ability ofFuelCell Energy's platforms to perform at high efficiencies and provide low CO2 to MW hour output. Incorporation of the platform into a microgrid is expected to demonstrate the ability ofFuelCell Energy's platforms to increase grid stability and resilience while supporting theU.S. military's efforts to fortify base energy supply and demonstrate theNavy's commitment to clean reliable power with microgrid capabilities.
platform will produce electricity, hydrogen and water. Fuel cell platform
equipment has been built and delivered to the site and civil construction work
is underway. While we have made substantial progress, we do anticipate that
? commercial operations will be delayed beyond
our Hydrogen Power Purchase Agreement will be required from
may not grant such extension in its sole discretion. If
an extension, such an event would have a material adverse impact on the Company's financial condition and results of operations.
Company has largely completed the foundational construction and balance of
? plant components have been delivered and installed on site. This utility scale
fuel cell platform will contain 5
be installed on engineered platforms alongside the
Backlog by revenue category is as follows:
Service agreements backlog totaled
compared to
includes future contracted revenue from maintenance and scheduled module
? exchanges for power plants under service agreements. Approximately
million of backlog which was previously classified as "Service and license"
backlog was reclassified to "Product" backlog as a result of the settlement
agreement with
warranty associated with the module order.
Generation backlog totaled
?
under contracted PPAs or approved utility tariffs.
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? Product sales backlog totaled
no product sales backlog as of
Advanced Technologies contract backlog totaled
? 2022 compared to
contract backlog primarily represents remaining revenue under the EMRE Joint
Development Agreement and government projects.
Backlog increased by approximately 3% to$1.31 billion as ofJanuary 31, 2022 compared to$1.27 billion as ofJanuary 31, 2021 , resulting from the addition to backlog for product sales and generation offset by a reduction in service and Advanced Technologies, reflecting the continued execution of backlog and adjustments to generation backlog, primarily resulting from (i) the addition of product sales backlog from the module order received fromKFC , (ii) module exchanges with higher future output and revenues expected and (iii) the inclusion of the project with United Illuminating inDerby, Connecticut which was awarded in the second quarter of fiscal year 2021. Advance Technologies backlog reflects new contracts from theU.S. Department of Energy partially offset by work performed under our Joint Development Agreement with EMRE. Note that approximately$22.2 million of backlog which was previously classified as "Service and license" backlog was reclassified to "Product" backlog as a result of the settlement agreement withPOSCO Energy . This amount represents the value of the extended warranty associated with the module order. Backlog represents definitive agreements executed by the Company and our customers. Projects for which we have an executed PPA are included in generation backlog, which represents future revenue under long-term PPAs. Projects sold to customers (and not retained by the Company) are included in product sales and service agreements backlog, and the related generation backlog is removed upon sale. Together, the service and generation portion of backlog had a weighted average term of approximately 18 years, with weighting based on the dollar amount of backlog and utility service contracts of up to 20 years in duration at inception.
Factors that may impact our liquidity
Factors that may impact our liquidity both in fiscal year 2022 and in periods beyond fiscal year 2022 include:
? The Company's cash on hand and access to additional liquidity. As of January
31, 2022, unrestricted cash and cash equivalents totaled
We bid on large projects in diverse markets that can have long decision cycles
and uncertain outcomes. We manage production rate based on expected demand and
project schedules. Changes to production rate take time to implement. The
annualized production rate as of
impacted by the manufacturing facility shutdown from
2020 that was implemented in response to the COVID-19 pandemic. During ? fiscal year 2020, we made a number of improvements in our manufacturing
processes and capabilities, focusing on increasing throughput and simplifying
and streamlining production steps, while implementing applicable social
distancing protocols. During fiscal year 2021, we increased our production
rate, and we achieved an annualized production rate of 38.3 MW as of January
31, 2022. We expect to maintain an annualized production rate in the range of
45 to 50 MW during fiscal year 2022.
As project sizes and the number of projects evolve, project cycle times may
increase. We may need to make significant up-front investments of resources in ? advance of the receipt of any cash from the financing or sale of our projects.
These amounts include development costs, interconnection costs, costs associated with posting of letters of credit, bonding or other forms of security, and engineering, permitting, legal, and other expenses.
The amount of accounts receivable and unbilled receivables as of
2022 and
classified as "Other assets") and
classified as "Other assets"), respectively. Unbilled accounts receivable
represent revenue that has been recognized in advance of billing the customer ? under the terms of the underlying contracts. Such costs have been funded with
working capital and the unbilled amounts are expected to be billed and
collected from customers once we meet the billing criteria under the contracts.
Our accounts receivable balances may fluctuate as of any balance sheet date
depending on the timing of individual contract milestones and progress on
completion of our projects.
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The amount of total inventory as of
million (
which includes work in process inventory totaling
million, respectively. Work in process inventory can generally be deployed
rapidly while the balance of our inventory requires further manufacturing prior ? to deployment. To execute on our business plan, we must produce fuel cell
modules and procure balance of plant ("BOP") components in required volumes to
support our planned construction schedules and potential customer contractual
requirements. As a result, we may manufacture modules or acquire BOP components
in advance of receiving payment for such activities. This may result in
fluctuations in inventory and in use of cash as of any given balance sheet
date.
The amount of total project assets as of
was
capitalized costs for fuel cell projects that are operating and producing
? revenue or are under construction. Project assets as of
consisted of
million of projects in development. As of
operating project assets that generated
months ended
As of
and construction, some of which are expected to generate operating cash flows
beginning in fiscal year 2022. To build out this portfolio, we currently
estimate the remaining investment in project assets to be approximately
between
expects to use unrestricted cash on hand and to seek sources of construction
financing. In addition, once the projects under development become operational,
the Company will seek to obtain permanent financing (tax equity and debt) which
would be expected to return cash to the business.
Certain of our PPAs for project assets in our generation operating portfolio
and project assets under construction expose us to fluctuating fuel price risks
as well as the risk of being unable to procure the required amounts of fuel and
the lack of alternative available fuel sources. We seek to mitigate our fuel
risk using strategies including: (i) fuel cost reimbursement mechanisms in our
PPAs to allow for pass through of fuel costs (full or partial) where possible
? which we have done with our 14.9 MW operating project in
7.4 MW project under construction in
fixed price physical contracts with investment grade counterparties which we
have done for twenty years for our Tulare BioMAT project and the initial seven
years of the twenty year PPA for our LIPA
entering into future financial hedges with investment grade counterparties to
offset potential negative market fluctuations.
We currently have three projects in development with fuel sourcing risk, which are theToyota project, which requires procurement of renewable natural gas ("RNG"), and ourDerby, CT 14.0 MW and 2.8 MW projects, which require natural gas. Fuel sourcing and risk mitigation strategies for all three projects are being assessed and will be implemented as project operational dates become firm. Such strategies may require cash collateral or reserves to secure fuel or related contracts for these three projects.
Capital expenditures are expected to range between
for fiscal year 2022, which includes expected investments in our factories for ? molten carbonate and solid oxide production capacity expansion, the addition of
test facilities for new products and components, the expansion of our laboratories and upgrades to and expansion of our business systems.
Company funded research and development activities are expected to increase to
hydrogen, hydrogen based long duration energy storage and hydrogen power generation.
Under the terms of certain contracts, the Company will provide performance
security for future contractual obligations. As of
collateral for performance security and for letters of credit for certain
banking requirements and contracts. This balance may increase with a growing
backlog and installed fleet.
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Depreciation and Amortization
As the Company builds project assets and makes capital expenditures,
depreciation and amortization expenses are expected to increase. For the
three months ended
Cash Flows
Cash and cash equivalents and restricted cash and cash equivalents totaled$405.4 million as ofJanuary 31, 2022 compared to$460.2 million as ofOctober 31, 2021 . As ofJanuary 31, 2022 , unrestricted cash and cash equivalents was$377.0 million compared to$432.2 million of unrestricted cash and cash equivalents as ofOctober 31, 2021 . As ofJanuary 31, 2022 , restricted cash and cash equivalents was$28.5 million , of which$12.7 million was classified as current and$15.8 million was classified as non-current, compared to$28.0 million of restricted cash and cash equivalents as ofOctober 31, 2021 , of which$11.3 million was classified as current and$16.7 million was classified as non-current.
The following table summarizes our consolidated cash flows:
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