FUELCELL ENERGY, INC. FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains both historical statements 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 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. 31
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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, 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 ended October 31, 2021 filed with the Securities and Exchange
Commission ("SEC"). Unless otherwise indicated, the terms "Company", "FuelCell
Energy", "we", "us", and "our" refer to FuelCell Energy, Inc. and its
subsidiaries. All tabular dollar amounts are in thousands.
OVERVIEW
FuelCell 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 in
Europe . To provide a frame of reference, one megawatt is adequate to continually
power approximately 1,000 average sized U.S. homes. Our customer base includes
utility companies, municipalities, universities, hospitals, government
entities/military bases and a variety of industrial and commercial enterprises.
Our leading geographic markets are currently the United States and Korea , and we
are pursuing opportunities in other countries around the world.
FuelCell Energy , based in Connecticut , was founded in 1969 as a New York
corporation to provide applied research and development services on a contract
basis. We completed our initial public offering in 1992 and reincorporated in
Delaware in 1999. We began selling stationary fuel cell power plants
commercially in 2003.
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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 in the United States ("GAAP").
Comparison of Three Months Ended July 31, 2022 and 2021
Revenues and Costs of revenues
Our revenues and cost of revenues for the three months endedJuly 31, 2022 and 2021 were as follows: Three Months Ended July 31, Change (dollars in thousands) 2022 2021 $ % Total revenues$ 43,104 $ 26,820 $ 16,284 61% Total costs of revenues 47,284 25,720 21,564 84% Gross (loss) profit$ (4,180) $ 1,100 $ (5,280) (480)% Gross margin (9.7)% 4.1% Total revenues for the three months endedJuly 31, 2022 of$43.1 million reflects an increase of$16.3 million from$26.8 million for the same period in the prior year. Cost of revenues for the three months endedJuly 31, 2022 of$47.3 million reflects an increase of$21.6 million from$25.7 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 and related costs for the three months endedJuly 31, 2022 and 2021 were as follows: Three Months Ended July 31, Change (dollars in thousands) 2022 2021 $ % Product revenues$ 18,000 $ -$ 18,000 N/A Cost of product revenues 17,919 1,903 16,016 842% Gross profit (loss) from product revenues $ 81$ (1,903) $ 1,984 104% Product gross margin 0.5% N/A Product revenues for the three months endedJuly 31, 2022 were$18.0 million compared to$0 for the three months endedJuly 31, 2021 . The increase in product revenues was 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 six modules from the Company's facility inTorrington, CT inJune 2022 . We have completed manufacturing the eight modules needed to fulfill the order placed byKFC inJune 2022 pursuant to the Settlement Agreement among the Company,POSCO Energy , andKFC (which is discussed in additional detail in Part II, Item 1 of this report) and expect to deliver those modules Ex Works and recognize the resulting revenue in the fourth quarter of fiscal year 2022. Cost of product revenues increased$16.0 million for the three months endedJuly 31, 2022 to$17.9 million , compared to$1.9 million in the same period in the prior year. The increase is primarily due to the module sales toKFC . Manufacturing variances, primarily related to production volumes and unabsorbed overhead costs, totaled approximately$3.0 million for the three months endedJuly 31, 2022 compared to approximately$1.7 million for the three months endedJuly 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 July 31, Change
(dollars in thousands) 2022 2021 $ %
Service agreements revenues $ 9,049 $ 14,344 $ (5,295) (37)%Cost of service agreements revenues 7,718 13,026 (5,308) (41)% Gross profit from service agreements revenues$ 1,331 $ 1,318 $ 13 1% Service agreements revenues gross margin 14.7%
9.2%
Service agreements revenues for the three months endedJuly 31, 2022 decreased$5.3 million to$9.0 million from$14.3 million for the three months endedJuly 31, 2021 . Service agreements revenues for the three months endedJuly 31, 2022 and 2021 include revenues recorded for module exchanges and routine and non-routine maintenance activities. The decrease in revenues for the three months endedJuly 31, 2022 is primarily due to the fact that there were fewer module exchanges and fewer non-routine maintenance activities during the three months endedJuly 31, 2022 than during the three months endedJuly 31, 2021 . Cost of service agreements revenues decreased$5.3 million to$7.7 million for the three months endedJuly 31, 2022 from$13.0 million for the three months endedJuly 31, 2021 . Cost of service agreements revenues includes maintenance and operating costs and costs of module exchanges and the decrease is primarily due to the fact that there were fewer module exchanges and fewer non-routine maintenance activities during the three months endedJuly 31, 2022 than during the three months endedJuly 31, 2021 . Overall gross profit from service agreements revenues was$1.3 million for the three months endedJuly 31, 2022 andJuly 31, 2021 . The overall gross margin was 14.7% for the three months endedJuly 31, 2022 compared to a gross margin of 9.2% in the comparable prior year period. Gross margin was higher during the three months endedJuly 31, 2022 primarily due to the fact that the module exchanges that were completed during the three months endedJuly 31, 2022 were performed pursuant to service agreements with higher margins as compared to the three months endedJuly 31, 2021 .
Generation revenues
Generation revenues and related costs for the three months endedJuly 31, 2022 and 2021 were as follows: Three Months Ended July 31, Change (dollars in thousands) 2022 2021 $ % Generation revenues$ 10,877 $ 6,230 $ 4,647 75% Cost of generation revenues 18,136 6,728 11,408 170%
Gross loss from generation revenues$ (7,259) $ (498) $ (6,761) 1358% Generation revenues gross margin (66.7)% (8.0)% Revenues from generation for the three months endedJuly 31, 2022 totaled$10.9 million , which represents an increase of$4.6 million from revenue recognized of$6.2 million for the three months endedJuly 31, 2021 . Generation revenues for the three months endedJuly 31, 2022 and 2021 reflect revenue from electricity generated under our power purchase agreements ("PPAs"). The increase in generation revenues in the three months endedJuly 31, 2022 is primarily due to the completion of theLong Island Power Authority ("LIPA")Yaphank project during the three months endedJanuary 31, 2022 and the higher operating output of the generation fleet portfolio as a result of module exchanges during the last nine months of fiscal year 2021. Generation revenues for the three months endedJuly 31, 2022 also include revenues from sales of renewable energy credits (which resulted in an increase in generation revenues of approximately$1.7 million ). Cost of generation revenues totaled$18.1 million in the three months endedJuly 31, 2022 . The increase from the comparable prior year period was primarily due to expensed construction costs of approximately$6.9 million related to theToyota project and costs of approximately$1.9 million related to the increased size of the installed fleet with the LIPA Yaphank project achieving commercial operation, offset by lower operating costs for existing plants due to efficiencies from plant maintenance activities and module exchanges. 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 resulting in impairment of the asset. Thus, as theToyota project is being constructed, only amounts associated with inventory components that can be redeployed for 34 Table of Contents
alternative use are being capitalized. The balance of costs incurred (i.e., the
approximately
We currently have three projects in development with fuel sourcing risk, which are theToyota project, which requires procurement of 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. If the Company is unable to secure fuel on favorable economic terms, it may result in impairment charges to theDerby project assets and further impairment charges for theToyota project asset.
Cost of generation revenues included depreciation and amortization of
approximately
The decrease in generation revenues gross margin is primarily related to the$6.9 million of costs being expensed related to theToyota project, partially offset by higher margins from the operating fleet (due in part to the higher operating output of the generation fleet portfolio) compared to the three months endedJuly 31, 2021 . We had 41.4 MW of operating power plants in our generation operating portfolio as ofJuly 31, 2022 , which increased from 34.0 MW as ofJuly 31, 2021 . The increase relates to the 7.4 MW platform for 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 July 31, Change
(dollars in thousands) 2022 2021 $ %
Advanced Technologies contract revenues $ 5,178 $ 6,246 $ (1,068) (17)%
Cost of Advanced Technologies contract revenues 3,511 4,063 (552) (14)%
Gross profit from Advanced Technologies contracts $ 1,667 $ 2,183 $ (516) (24)%
Advanced Technologies contract gross margin 32.2% 35.0%
Advanced Technologies contract revenues decreased to$5.2 million for the three months endedJuly 31, 2022 from$6.2 million for the three months endedJuly 31, 2021 . Compared to the three months endedJuly 31, 2021 , Advanced Technologies contract revenues recognized under the Joint Development Agreement entered into withExxonMobil Technology and Engineering Company f/k/aExxonMobil Research and Engineering Company ("EMTEC"), onNovember 5, 2019 (as amended effective as ofOctober 31, 2021 andApril 30, 2022 , (the "EMTEC Joint Development Agreement")) were approximately$3.1 million lower during the three months endedJuly 31, 2022 due to the more limited scope of work performed during this period compared to the scope of work performed in the comparable prior year period, offset by an increase in revenue recognized under government contracts and other contracts of$2.0 million for the three months endedJuly 31, 2022 . Cost of Advanced Technologies contract revenues were$3.5 million for the three months endedJuly 31, 2022 , compared to$4.1 million for the same period in the prior year. This decrease is a result of the level of activity and the scope of work performed under the EMTEC Joint Development Agreement in the three months endedJuly 31, 2022 . Advanced Technologies contracts for the three months endedJuly 31, 2022 generated a gross profit of$1.7 million compared to a gross profit of$2.2 million for the three months endedJuly 31, 2021 . The lower gross profit was due to lower revenues recognized under the EMTEC Joint Development Agreement during the three months endedJuly 31, 2022 compared to the three months endedJuly 31 2021 .
Administrative and selling expenses
Administrative and selling expenses were$14.2 million and$8.7 million for the three months endedJuly 31, 2022 and 2021, respectively. The increase is related to higher sales, marketing and consulting costs, as the Company is investing in rebranding and accelerating its sales and commercialization efforts including increasing the size of its sales and marketing teams, which resulted in an increase in compensation expense resulting from an increase in headcount. 35
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Research and development expenses
Research and development expenses increased to$9.7 million for the three months endedJuly 31, 2022 compared to$3.0 million for the three months endedJuly 31, 2021 . The increase is due to an increase in spending on the Company's ongoing commercial development efforts related to our solid oxide platform and carbon capture solutions compared to the comparable prior year period.
Loss from operations
Loss from operations for the three months endedJuly 31, 2022 was$28.0 million compared to$10.6 million for the three months endedJuly 31, 2021 . This increase was driven by a$12.1 million increase in operating expenses for the three months endedJuly 31, 2022 as a result of (a) higher sales, marketing and consulting costs and an increase in compensation expense resulting from an increase in headcount and (b) higher research and development expenses, which were higher due to an increase in spending on the Company's ongoing commercial development efforts related to our solid oxide platform and carbon capture solutions compared to the comparable prior year period. The increase in loss from operations was also due to a gross loss of$4.2 million in the three months endedJuly 31, 2022 compared to gross profit of$1.1 million in the three months endedJuly 31, 2021 . The increase in gross loss was driven by higher manufacturing variances,$6.9 million of non-capitalizable costs related to construction of theToyota project, and lower Advanced Technologies contract margin, partially offset by increased service gross profit and reduced generation gross loss (excluding the impact of non-capitalizable costs related to construction of theToyota project).
Interest expense
Interest expense for the three months endedJuly 31, 2022 and 2021 was$1.6 million . Interest expense for both periods includes interest related to finance obligations related to failed sale-leaseback transactions and interest on the outstanding loans associated with theBridgeport Fuel Cell Project .
Other income, net
Other income, net was$1.1 million and$0.1 million for the three months endedJuly 31, 2022 and 2021, respectively. Other income, net for the three months endedJuly 31, 2022 represents$0.9 million of interest earned on money market investments and$0.3 million of research and development tax credits partially offset by foreign exchange rate losses of$0.1 million .
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 inKorea . Provision for income tax recorded for the three months endedJuly 31, 2022 and 2021 was$0.5 million and$7 thousand , respectively. The provision for income tax recorded for the three months endedJuly 31, 2022 reflects the realization of withholding taxes on customer deposits which pertain to the sale of modules toKFC .
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 July 31, 2022 and 2021.
Net income attributable to noncontrolling interest
Net income attributable to noncontrolling interest is the result of allocating
profits and losses to noncontrolling interest 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 July 31, 2022 , net income attributable to
noncontrolling interest totaled $0.4 million for the LIPA Yaphank tax equity
financing transaction with REI. There was no comparable net income for the
prior
year period
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as the LIPA Yaphank tax equity transaction closed and the LIPA Yaphank project began operating in the first quarter of fiscal year 2022.
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 endedJuly 31, 2022 and 2021, net loss attributable to common stockholders was$30.2 million and$12.8 million , respectively, and loss per common share was$0.08 and$0.04 , respectively. The increase in the net loss attributable to common stockholders for the three months endedJuly 31, 2022 is primarily due to the gross loss for the three months endedJuly 31, 2022 compared to gross profit for the three months endedJuly 31, 2021 , as well as higher operating expenses during the three months endedJuly 31, 2022 . The higher net loss per common share for the three months endedJuly 31, 2022 as compared to the three months endedJuly 31, 2021 is primarily due to the higher net loss attributable to common stockholders, partially offset by the higher number of weighted average shares outstanding due to share issuances sinceJuly 31, 2021 . 37 Table of Contents Comparison of Nine Months EndedJuly 31, 2022 and 2021
Revenues and Costs of revenues
Our revenues and cost of revenues for the nine months endedJuly 31, 2022 and 2021 were as follows: Nine Months Ended July 31, Change (dollars in thousands) 2022 2021 $ % Total revenues$ 91,283 $ 55,650 $ 35,633 64% Total costs of revenues 105,668 62,924 42,744 68% Gross loss$ (14,385) $ (7,274) $ (7,111) 98% Gross margin (15.8)% (13.1)% Total revenues for the nine months endedJuly 31, 2022 of$91.3 million reflects an increase of$35.6 million from$55.7 million during the same period in the prior year. Cost of revenues for the nine months endedJuly 31, 2022 of$105.7 million reflects a$42.7 million increase from$62.9 million during 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 and related costs from product revenues for the nine months
ended
Nine Months Ended July 31, Change
(dollars in thousands) 2022 2021 $ %
Product revenues $ 36,000 $ - $ 36,000 N/A
Cost of product revenues 39,159 6,190 32,969 533%Gross loss from product revenues$ (3,159) $ (6,190) $ 3,031 (49)% Product revenues gross loss (8.8)% N/A Product revenues for the nine months endedJuly 31, 2022 were$36.0 million compared to$0 for the nine months endedJuly 31, 2021 . The increase in product revenues is a result of module sales toKFC for which the Company recognized (i)$18.0 million on the delivery Ex Works of six modules from the Company's facility inTorrington, CT inJanuary 2022 and (ii) an additional$18.0 million on the delivery Ex Works of six modules from the Company's facility inTorrington, CT inJune 2022 . Cost of product revenues increased$33.0 million for the nine months endedJuly 31, 2022 to$39.2 million , compared to$6.2 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 incurred during the nine months endedJuly 31, 2022 (related to the cessation of operations at a conditioning facility inDanbury, CT , which is being replaced by a new conditioning facility located at ourTorrington, CT manufacturing facility as a part of our fiscal year 2022 capital investments) and accrued warranty costs of approximately$0.4 million associated with the module sales toKFC discussed above. Manufacturing variances, primarily related to production volumes and unabsorbed overhead costs, totaled approximately$7.7 million for the nine months endedJuly 31, 2022 compared to approximately$5.0 million for the nine months endedJuly 31, 2021 .
For the nine months ended
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Service agreements revenues
Service agreements revenues and related costs for the nine months ended
Nine Months Ended July 31, Change
(dollars in thousands) 2022 2021 $ %
Service agreements revenues $ 13,855 $ 19,917 $ (6,062) (30)%
Cost of service agreements revenues 13,123 20,992 (7,869) (37)%
Gross profit (loss) from service agreements
revenues $ 732 $ (1,075) $ 1,807 (168)%
Service agreements revenues gross margin 5.3% (5.4)%
Service agreements revenues for the nine months endedJuly 31, 2022 decreased$6.1 million to$13.9 million from$19.9 million for the nine months endedJuly 31, 2021 . The decline in service agreements revenues for the nine months endedJuly 31, 2022 is primarily due to fewer module exchanges during the nine months endedJuly 31, 2022 than during the nine months endedJuly 31, 2021 . Cost of service agreements revenues decreased$7.9 million to$13.1 million for the nine months endedJuly 31, 2022 from$21.0 million for the nine months endedJuly 31, 2021 . Cost of service agreements revenues were lower for the nine months endedJuly 31, 2022 than for the nine months endedJuly 31, 2021 primarily due to the fact that less planned module exchanges in the service fleet occurred during the nine months endedJuly 31, 2022 than during the nine months endedJuly 31, 2021 . Cost of service agreements revenues includes maintenance and operating costs and module exchanges. Overall gross profit from service agreements revenues was$0.7 million for the nine months endedJuly 31, 2022 , which represents an increase of$1.8 million from a gross loss of$1.1 million for the nine months endedJuly 31, 2021 . The overall gross margin was 5.3% for the nine months endedJuly 31, 2022 compared to a gross margin of (5.4)% in the comparable prior year period. Gross margin increased during the nine months endedJuly 31, 2022 , primarily due to the fact that the module exchanges that were completed in the nine months endedJuly 31, 2022 were performed pursuant to service agreements with higher margins as compared to the nine months endedJuly 31, 2021 .
Generation revenues
Generation revenues and related costs for the nine months endedJuly 31, 2022 and 2021 were as follows: Nine Months Ended July 31, Change (dollars in thousands) 2022 2021 $ % Generation revenues$ 27,423 $ 17,306 $ 10,117 58% Cost of generation revenues 42,978 23,265 19,713 85% Gross loss from generation revenues$ (15,555) $ (5,959) $ (9,596) 161% Generation revenues gross margin (56.7)%
(34.4)%
Revenues from generation for the nine months endedJuly 31, 2022 totaled$27.4 million , which represents an increase of$10.1 million from revenue recognized of$17.3 million for the nine months endedJuly 31, 2021 . Generation revenues for the nine months endedJuly 31, 2022 and 2021 reflect revenue from electricity generated under our PPAs. The increase in generation revenues in the nine months endedJuly 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$43.0 million in the nine months endedJuly 31, 2022 . The increase from the comparable prior year period was primarily due to construction costs of approximately$14.0 million related to theToyota project and costs of approximately$5.5 million related to the increased size of the installed fleet with theSan Bernardino and LIPA Yaphank projects achieving commercial operations, offset by lower operating costs for existing plants due to efficiencies from plant maintenance activities and module replacements. 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 RNG at favorable pricing was no longer sufficiently probable for theToyota project resulting in impairment of the asset. Thus, as theToyota project is being constructed, only amounts associated with inventory components that can be redeployed for alternative use are being capitalized. The balance of costs incurred (i.e., the approximately$14.0 million associated with the construction costs mentioned above) are being expensed as cost of generation revenues. 39
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We currently have three projects in development with fuel sourcing risk, which are theToyota project, which requires procurement of 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. If the Company is unable to secure fuel on favorable economic terms, it may result in impairment charges to theDerby project assets and further impairment charges for theToyota project asset.
Cost of generation revenues included depreciation and amortization of
approximately
The increase in generation revenues gross loss is primarily related to the$14.0 million of construction costs being expensed related to theToyota project, partially offset by higher margins from the operating fleet (due in part to the higher operating output of the generation fleet portfolio) compared to the nine months endedJuly 31, 2021 .
Advanced Technologies contract revenues
Advanced Technologies contract revenues and related costs for the nine months
ended
Nine Months Ended July 31, Change
(dollars in thousands) 2022 2021 $ %
Advanced Technologies contract revenues $ 14,005 $ 18,427 $ (4,422) (24)%
Cost of Advanced Technologies contract revenues 10,408 12,477 (2,069) (17)%
Gross profit from Advanced Technologies contracts $ 3,597 $ 5,950 $ (2,353) (40)%
Advanced Technologies contract gross margin 25.7% 32.3%
Advanced Technologies contract revenues decreased to$14.0 million for the nine months endedJuly 31, 2022 from$18.4 million for the nine months endedJuly 31, 2021 . Compared to the nine months endedJuly 31, 2021 , Advanced Technologies contract revenues recognized under the EMTEC Joint Development Agreement were approximately$7.7 million lower during the nine months endedJuly 31, 2022 and Advanced Technologies contract revenues recognized under government contracts and other contracts were approximately$3.3 million lower for the nine months endedJuly 31, 2022 . Cost of Advanced Technologies contract revenues decreased$2.1 million to$10.4 million for the nine months endedJuly 31, 2022 , compared to$12.5 million for the same period in the prior year. This decrease is a result of the level of activity and the scope of work performed under theEMTEC Joint Development Agreement in the nine months endedJuly 31, 2022 . Advanced Technologies contracts for the nine months endedJuly 31, 2022 generated a gross profit of$3.6 million compared to a gross profit of$6.0 million for the nine months endedJuly 31, 2021 . This decrease is primarily due to the decrease in revenue recognized under theEMTEC Joint Development Agreement during the period, which resulted in a lower gross margin recognized during the period.
Administrative and selling expenses
Administrative and selling expenses were$64.4 million and$27.3 million for the nine months endedJuly 31, 2022 and 2021, respectively. The nine months endedJuly 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 nine months endedJuly 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 was 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, which was paid during the nine months endedJuly 31, 2022 . The increase is also related to higher sales, marketing and consulting costs, as the Company is investing in rebranding and accelerating its sales and commercialization efforts, including increasing the size 40
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of its sales and marketing teams which resulted in an increase in compensation expense resulting from an increase in headcount.
Research and development expenses
Research and development expenses increased to$22.3 million for the nine months endedJuly 31, 2022 compared to$7.8 million for the nine months endedJuly 31, 2021 . The increase is due to an increase in spending on the Company's ongoing commercial development efforts related to our solid oxide platform and carbon capture solutions compared to the comparable prior year period.
Loss from operations
Loss from operations for the nine months endedJuly 31, 2022 was$101.1 million compared to$42.3 million for the nine months endedJuly 31, 2021 . This increase was primarily driven by a$51.6 million increase in operating expenses for the nine months endedJuly 31, 2022 as a result of (a) higher administrative and selling expenses for the nine months endedJuly 31, 2022 , which included higher legal expenses associated with the settlement of the Company's disputes withPOSCO Energy andKFC as well as higher sales, marketing and consulting costs and an increase in compensation expense resulting from an increase in headcount and (b) higher research and development expenses, which were higher due to an increase in spending on the Company's ongoing commercial development efforts related to our solid oxide platform and carbon capture solutions compared to the comparable prior year period. The increase was also due to higher gross loss of$14.4 million during the nine months endedJuly 31, 2022 . Impacting gross loss for the nine months endedJuly 31, 2022 were higher manufacturing variances and non-capitalizable costs related to construction of theToyota project which were partially offset by lower product gross loss primarily due to module sales
toKFC . Interest expense
Interest expense for the nine months ended
Loss on extinguishment of debt
The loss on extinguishment of debt for the nine months endedJuly 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 nine months endedJuly 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.
Change in fair value of common stock warrant liability
The$16.0 million expense for the nine months endedJuly 31, 2021 represents an adjustment to the estimated fair value of the then outstanding unexercised warrants to purchase common stock held by the lenders under the Orion Credit Agreement, 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 nine months endedJuly 31, 2021 . 41
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Other income (expense), net
Other income (expense), net was$1.1 million and$(0.8) million for the nine months endedJuly 31, 2022 and 2021, respectively. Other income, net for the nine months endedJuly 31, 2022 primarily represents$1.0 million of interest earned on money market investments, a gain on derivative contract of$0.5 million and$0.3 million of research and development tax credits, offset by a foreign exchange loss of$0.7 million . Other expense, net for the nine months endedJuly 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 (the Series 1 Preferred Share obligation) of ourU.S. Dollar functional currency Canadian subsidiary (FCE FuelCell Energy Ltd. ) prior to the payoff of the preferred share obligation inDecember 2020 .
Provision for income taxes, net
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 inKorea . Provision for income tax recorded for the nine months endedJuly 31, 2022 and 2021 was$0.5 million and$3 thousand , respectively. The provision for income tax recorded for the nine months endedJuly 31, 2022 reflects the realization of withholding taxes on customer deposits which pertain to the sale of modules toKFC .
Net loss attributable to noncontrolling interest
For the nine months endedJuly 31, 2022 , net loss attributable to noncontrolling interest totaled$5.0 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 for the nine months endedJuly 31, 2022 is primarily driven by the Investment Tax Credit ("ITC") attributable to the noncontrolling interest for the 2021 tax year (which is consistent with the calendar year). The ITC reduces the noncontrolling interest's hypothetical liquidation proceeds. This reduction in hypothetical liquidation proceeds drove the net loss attributable to the noncontrolling interest in the nine months endedJuly 31, 2022 .
Series B preferred stock dividends
Dividends recorded on our Series B Preferred Stock were
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 nine month periods endedJuly 31, 2022 and 2021, net loss attributable to common stockholders was$102.7 million and$79.3 million , respectively, and loss per common share was$0.27 and$0.24 , respectively. The increase in the net loss attributable to common stockholders for the nine months endedJuly 31, 2022 is primarily due to higher gross loss and higher operating expenses for the nine months endedJuly 31, 2022 compared to the corresponding period in fiscal year 2021, partially offset by (i) lower interest expense during the nine months endedJuly 31, 2022 , (ii) the fact that there was no loss on extinguishment of debt in the nine months endedJuly 31, 2022 , no loss on extinguishment of preferred stock obligation during the nine months endedJuly 31, 2022 , and no charge for the change in fair value of common stock warrant liability during the nine months endedJuly 31, 2022 and (iii) a net loss attributable to noncontrolling interest totaling$5.0 million (or approximately$0.01 per share) for the LIPA Yaphank tax equity financing transaction. The higher net loss per common share for the nine months endedJuly 31, 2022 as compared to the nine months endedJuly 31, 2021 is primarily due to the higher net loss attributable to common stockholders for the nine months endedJuly 31, 2022 , partially offset by the higher number of weighted average shares outstanding as ofJuly 31, 2022 due to share issuances sinceJuly 31, 2021 . 42 Table of Contents 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 debt, project financing and tax monetization transactions, proceeds from the sale of our products and 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
OnJuly 12, 2022 , the Company entered into an Open Market Sale Agreement withJefferies LLC ,B. Riley Securities, Inc. ,Barclays Capital Inc. ,BMO Capital Markets Corp. ,BofA Securities, Inc. ,Canaccord Genuity LLC ,Citigroup Global Markets Inc. ,J.P. Morgan Securities LLC andLoop Capital Markets LLC (the "Open Market Sale Agreement") with respect to an at the market offering program under which the Company may, from time to time, offer and sell up to 95.0 million shares of the Company's common stock. From the date of the Open Market Sale Agreement throughJuly 31, 2022 , the Company sold approximately 18.5 million shares under the Open Market Sale Agreement at an average sale price of$3.63 per share. Of this 18.5 million shares, approximately 7.8 million shares were issued and settled during the period endedJuly 31, 2022 , resulting in gross proceeds of approximately$27.9 million before deducting sales commissions and fees, and net proceeds to the Company of approximately$27.2 million after deducting commissions and fees totaling approximately$0.7 million . The balance of approximately 10.7 million shares were settled subsequent toJuly 31, 2022 resulting in gross proceeds (before deducting sales commissions) of approximately$39.2 million and net proceeds to the Company (received inAugust 2022 ) of approximately$38.4 million after deducting commissions totaling approximately$0.8 million . As ofJuly 31, 2022 , approximately 87.2 million shares were available for issuance under the Open Market Sale Agreement. Taking into account the sales that settled subsequent toJuly 31, 2022 , approximately 76.5 million shares are available for issuance under the Open Market Sale Agreement as of the date of this report. The Company currently intends to use the net proceeds from this offering to accelerate the development and commercialization of its product platforms (including, but not limited to, its solid oxide and carbon capture platforms), for project development, market development, and internal research and development, to invest in capacity expansion for solid oxide and carbonate fuel cell manufacturing, and for project financing, working capital support, and general corporate purposes. The Company may also use the net proceeds from this offering to invest in joint ventures, acquisitions, and strategic growth investments and to acquire, license or invest in products, technologies or businesses that complement its business. OnJune 11, 2021 , the Company entered into an Open Market Sale Agreement withJefferies LLC andBarclays Capital Inc. (the "2021 Sales Agreement") with respect to an at the market offering program under which the Company could, 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 2021 Sales Agreement throughApril 30, 2022 , approximately 64.0 million shares of the Company's common stock were sold under the 2021 Sales Agreement, resulting in aggregate gross proceeds of approximately$498.1 million before deducting sales commissions. Commissions of approximately$10.0 million in the aggregate were paid toJefferies LLC andBarclays Capital Inc. in connection with these sales, resulting in aggregate net proceeds to the Company of approximately$488.1 million . No sales of common stock were made under the 2021 Sales Agreement afterApril 30, 2022 , and no additional sales of common stock can or will be made under the 2021 Sales Agreement, as the Company,Jefferies LLC andBarclays Capital Inc. mutually agreed to terminate the 2021 Sales Agreement as ofJuly 12, 2022 . 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 the financial statements included in this Quarterly Report on Form 10-Q. To date, we have not achieved profitable operations or sustained positive cash flow from operations. The Company's future liquidity, for the remainder of 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 43
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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 debt and equity securities, convertible notes, and other equity-linked instruments. We are continually assessing different means by which to accelerate the Company's growth, enter new markets, commercialize new products, and enable capacity expansion. Therefore, from time to time, the Company may consider and enter into agreements for one or more of the following: negotiated financial transactions, minority investments, collaborative ventures, technology sharing, transfer or other technology license arrangements, joint ventures, partnerships, acquisitions or other business transactions for the purpose(s) of geographic or manufacturing expansion and/or new product or technology development and commercialization, including hydrogen production and storage and carbon capture, sequestration and utilization technologies. Our business model requires substantial outside financing arrangements and satisfaction of the conditions of such arrangements to construct and deploy our projects to 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 seek to undertake 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 reinvest capital back into 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 ofJuly 31, 2022 ) contributes higher long-term cash flows to the Company than if these projects had been sold. We expect generation revenue 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 ofJuly 31, 2022 , the Company had projects representing an additional 34.9 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. 44
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As ofJuly 31, 2022 , net debt outstanding related to project assets was$70.8 million . Future required payments totaled$39.5 million as ofJuly 31, 2022 . The outstanding finance obligations under our sale-leaseback transactions, which totaled$56.5 million as ofJuly 31, 2022 , include an embedded gain of$33.7 million representing the current carrying value of finance obligations less future required payments, 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.
The following table summarizes our generation operating portfolio as ofJuly 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 15
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 ofJuly 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) SCEF - Hartford Hartford, CT Eversource/United Illuminating (CT 1.0 20 Utilities) Total MW in Process: 34.9
(1) Rated capacity is the platform's design rated output as of the date of
initiation of commercial operations.
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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
that the process of commissioning the
due to a needed repair. Following the completion of that repair, the Company
resumed commissioning of the
process, 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 subsequently determined that component should be removed from the
project site to facilitate the necessary repair and upgrade. On
the Company announced that it had completed the necessary repairs and upgrades
to the mechanical component, reinstalled the mechanical component at the
project site, and restarted the process of commissioning. During the restarted
? commissioning process, the Company encountered performance anomalies primarily
in the mixer eductor oxidizer ("MEO") which is a sophisticated piece of
equipment specific to the
flows. The Company is considering operating the project at a reduced output of
3 MW per platform at the start of commercial operations in order to optimize
performance of each of the two MEO units. Over a period of approximately one
year, the Company anticipates implementing upgrades to each of the two MEO
units in order to bring the platform to its rated capacity of 7.4 MW. Under
extensions previously received from the
commercial operations are to be achieved is
the
reduced power output of approximately 6 MW. However, commencement of operations
at a reduced output of approximately 6 MW requires approval by the
the Company is in discussions with CMEEC and the
given that CMEEC and the
This platform is expected to highlight the ability ofFuelCell Energy's platforms to perform at high efficiencies and provide low CO2 to MWh output. Incorporation of the platform into a microgrid is expected to demonstrate the capacity ofFuelCell Energy's platforms to increase grid stability and resilience while supporting theU.S. military's efforts to fortify base energy supply and demonstrate theU.S. Navy's commitment to clean, reliable power with microgrid capabilities. 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 drew down$3.0 million . Under the original terms of the Company's agreement withEast West Bank , the Company would have been eligible to draw the remaining amount of the commitment, approximately$12 million , once theGroton Project achieves commercial operation. In addition, under the original terms of the Company's agreement withEast West Bank , theGroton Project had a required commercial operation deadline ofOctober 18, 2021 .East West Bank granted several extensions of the commercial operation deadline, which collectively extended the deadline toMay 15, 2022 , in exchange for fees of$0.4 million in the aggregate. Because commercial operations were delayed beyondMay 15, 2022 ,East West Bank had a conditional withdrawal right to request the return of their investment at an amount equal to 101% of the amount of the investment. OnJuly 7, 2022 , the Company andEast West Bank amended their tax equity financing agreement. Under the terms of this amended agreement, the commercial operations deadline was extended toSeptember 30, 2022 . In addition, the terms ofEast West Bank's remaining investment commitment of$12.0 million were modified such thatEast West Bank will now contribute$4.0 million on each of the first, second and third anniversaries of theGroton Project achieving commercial operations, rather than contributing the full$12.0 million when theGroton Project achieves commercial operations. Such contributions are subject to certain customer conditions precedent, including a third-party certification by an independent engineer that the plant is operating in conformance with the PPA. In conjunction with this amendment, the Company agreed to aggregate fees of$0.5 million (which are inclusive of the fees from the previous extensions described above), which shall be payable by the Company upon commencement of commercial operations of the plant. Should 46
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the project not achieve commercial operations bySeptember 30, 2022 ,East West Bank will then have a conditional withdrawal right to request the return of its investment at an amount equal to 101% of the amount of the investment. The Company has briefedEast West Bank on the current status of theGroton Project including discussions with CMEEC and theU.S. Navy regarding the possibility of commencing operations at a reduced output of approximately 6 MW bySeptember 30, 2022 .
platform will produce electricity, hydrogen and water. Fuel cell platform
equipment has been built and delivered to the site, civil construction work has
significantly advanced, and certain portions of the platform have advanced to
the conditioning phase of project deployment. We continue to anticipate that
the remaining construction and commissioning activity will be completed in late
? calendar year 2022 or early calendar year 2023. Due to the remaining
construction and commissioning activity to be completed, commencement of
commercial operations has been delayed beyond
deadline for commencing commercial operations under the Company's Hydrogen
Power Purchase Agreement with
HPPA"). On
Amendment of the Toyota HPPA. This amendment extended the required commercial
operations date to
advance, the 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 five
systems that will be installed on engineered platforms alongside the Housatonic
? River. To date, the Company has invested approximately
project, with the majority of site work complete and the electrical and
mechanical balance of plant installed. The Company continues to work with the
utility customer, United Illuminating, on the interconnection process, the
timing of which will drive the continued development of the site, including the
delivery of the ten fuel cell modules required to complete the project.
Backlog by revenue category is as follows:
Service agreements backlog totaled
to
future contracted revenue from maintenance and scheduled module exchanges for
? power plants under service agreements. In the first quarter of fiscal year
2022, approximately
"Service and license" backlog was reclassified to "Product" backlog as a result
of the settlement agreement with
Generation backlog totaled
? Generation backlog represents future contracted energy sales under contracted
PPAs or approved utility tariffs.
? Product sales backlog totaled
product sales backlog as of
Advanced Technologies contract backlog totaled
? 2022 compared to
contract backlog primarily represents remaining revenue under the EMTEC Joint
Development Agreement and government projects.
Backlog decreased by approximately 1.1% to$1.28 billion as ofJuly 31, 2022 , compared to$1.30 billion as ofJuly 31, 2021 , primarily as a result of a reduction in service agreements backlog and Advanced Technologies contract backlog, offset by the addition of product sales backlog (specifically, the addition of product sales backlog from the module order received fromKFC ). Advanced Technologies contract backlog primarily represents remaining revenue under the EMTEC Joint Development Agreement and government projects. 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. 47 Table of Contents
Factors that may impact our liquidity
Factors that may impact our liquidity both in the remainder of fiscal year 2022 and in periods beyond fiscal year 2022 include:
? The Company's cash on hand and access to additional liquidity. As of
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 38.5 MW as of
2022. We are working to increase our production rate during the remainder of
fiscal year 2022 and are targeting achieving a rate capable of producing 40 to
45 MW on an annualized basis by the end of 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
and
"Other assets") and
"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.
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
capitalized costs for fuel cell projects that are operating and producing
? revenue or are under construction. Project assets as of
of
projects in development. As of
project assets that generated
As of
construction. To build out this portfolio, as of
remaining investment in project assets to be in the range of approximately
forecast project asset expenditures to range between
which totaled
such expenditures, the Company 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.
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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 eighteen year PPA for our LIPA
potentially 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 RNG, and ourDerby, CT 14.0 MW and 2.8 MW projects, both of which require natural gas for which there is no pass through mechanism. 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
million 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. Our
molten carbonate capacity expansion includes adding additional conditioning
capacity at our
achieving 100 MW of annualized integrated onsite manufacturing and conditioning
capacity.
During fiscal year 2022, we expect to incur a total of approximately
million to
expenditures as we continue to accelerate commercialization of our Advanced
Technologies solutions including distributed hydrogen, hydrogen based long
duration energy storage and hydrogen power generation. During the nine months
ended
development expenditures compared to approximately
months ended
platform research, including increasing production of solid oxide fuel cell ? modules and expanding manufacturing capacity. The Company continues to work
with
electrolysis platform. This project, done in conjunction with the
can operate at higher electrical efficiency than currently available
electrolysis technologies through the inclusion of an external heat source. To
further accelerate the commercialization activity for the solid oxide platform,
the Company recently commenced the design and construction of two advanced
prototypes targeted for fiscal year 2023 completion: (i) a 250 kW power
generation platform, and (ii) a 1 MW high-efficiency electrolysis platform.
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.
On
signed into law. The provisions of the IRA are intended to, among other things,
incentivize domestic clean energy investment, manufacturing and production. The
IRA includes provisions that provide incentives for clean energy through
enhancement of the Investment Tax Credit ("ITC") program, Production Tax
Credits for clean energy component sourcing and production in the United
States, enhancements to Section 45Q of the Internal Revenue Code which provides
credits for carbon oxide sequestration intended to incentivize investment in ? carbon capture and sequestration, and certain incentives for clean energy
projects that use environmental brownfield sites and/or are located in
economically challenged areas. In addition, the Act would provide a 10-year
Production Tax Credit ("PTC") for the production of clean hydrogen at a
qualified facility that begins construction prior to
option to elect the ITC in lieu of the PTC. The Company views the enactment of
the IRA as favorable for the overall business climate for fuel cell
manufacturers, however, the Company is continuing to evaluate the overall
impact and applicability of the IRA to the Company's current and planned
products and the markets in which the Company seeks to sell its products.
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Table of Contents
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 endedJuly 31, 2022 and 2021, depreciation and amortization totaled$5.3 million and$4.5 million , respectively (of these totals, approximately$4.1 million and$3.3 million for the three months endedJuly 31, 2022 and 2021, respectively, relate to depreciation and amortization of project assets in our generation operating portfolio). For the nine months endedJuly 31, 2022 and 2021, depreciation and amortization totaled$16.4 million and$14.9 million , respectively (of these totals, approximately$11.8 million and$11.2 million for the nine months endedJuly 31, 2022 and 2021, respectively, relate to depreciation of project assets in our generation operating portfolio).
Cash Flows
Cash and cash equivalents and restricted cash and cash equivalents totaled$479.6 million as ofJuly 31, 2022 compared to$460.2 million as ofOctober 31, 2021 . As ofJuly 31, 2022 , unrestricted cash and cash equivalents was$456.5 million compared to$432.2 million of unrestricted cash and cash equivalents as ofOctober 31, 2021 . As ofJuly 31, 2022 , restricted cash and cash equivalents was$23.2 million , of which$5.6 million was classified as current and$17.5 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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