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, 2020 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 the utility regulatory environment; changes in the utility industry and the markets for distributed generation, distributed hydrogen, and fuel cell power platforms configured for carbon capture or carbon sequestration; potential volatility of energy prices; 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; the arbitration and other legal proceedings withPOSCO Energy Co., Ltd. ("POSCO Energy"); our ability to implement our strategy; our ability to reduce our levelized cost of energy and 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; 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 power plants 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 (the "SBA") or other governmental authorities to, or with respect to the implementation or interpretation of, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES 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. 28
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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, 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 ended October 31, 2020 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 AND RECENT DEVELOPMENTS
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 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.
Recent Developments
Crestmark Sale-Leaseback Transaction
OnAugust 25, 2021 , an indirect wholly-owned subsidiary of the Company,San Bernardino Fuel Cell, LLC ("SBFC"), entered into a Purchase and Sale Agreement (the "Purchase Agreement") and an Equipment Lease Agreement (the "Lease") with Crestmark Equipment Finance ("Crestmark"). Under these agreements, SBFC sold the 1.4 megawatt ("MW") biogas fueled fuel cell power plant (the "Plant") located at theSan Bernardino wastewater treatment plant inSan Bernardino, California to Crestmark for a purchase price of$10.2 million and then leased the Plant back from Crestmark. SBFC sells the power produced by the Plant to a third party under a twenty-year power purchase agreement (the "San Bernardino PPA"). 29 Table of Contents The Lease has an initial term of ten years but may be extended at the option of SBFC. An initial rental down payment and one quarter's rent totaling$2.2 million was paid using the proceeds from the sale of the Plant. Lease payments are expected to be funded with proceeds from the sale of power under the San Bernardino PPA on a quarterly basis. Reserves covering debt service and future module replacement totaling$2.5 million were also deducted from the proceeds from the sale of the Plant and will be classified as restricted cash of the Company until such time as it meets its performance obligations (such as servicing the Plant and providing module replacements) under the Long Term Service Agreement for the Plant. The Company's net unrestricted cash proceeds from the transaction totaled approximately$5.3 million , which is the purchase price less the initial rent payments, debt and module reserves, and taxes and transaction fees. In addition, SBFC and Crestmark entered into an Assignment Agreement onAugust 25, 2021 (the "Assignment Agreement") andFuelCell Energy Finance, LLC ("FuelCell Finance", a wholly-owned subsidiary of the Company and the direct parent of SBFC) and Crestmark entered into a Pledge Agreement onAugust 25, 2021 (the "Pledge Agreement") pursuant to which agreements collateral was provided to Crestmark to secure SBFC's obligations under the Lease which includes a security interest in (i) certain agreements relating to the sale-leaseback transaction, (ii) the revenues with respect to the Plant, (iii) a cash module replacement reserve for the Plant, and (iv) FuelCell Finance's equity interest in SBFC. SBFC and the Company also entered into a Technology License and Access Agreement with Crestmark onAugust 25, 2021 , which provides Crestmark with certain intellectual property license rights to have access to the Company's proprietary fuel cell technology, but only for the purpose of maintaining and servicing the Plant in certain circumstances in which the Company is not satisfying its obligations under its service agreement with regard to the maintenance and servicing of
the Plant. Pursuant to the Lease, SBFC has an obligation to indemnify Crestmark for the amount of any actual reduction in theU.S. investment tax credit ("ITC") anticipated to be realized by Crestmark in connection with this sale-leaseback transaction. Such obligation would arise as a result of reductions to the value of the underlying fuel cell project as assessed by theU.S. Internal Revenue Service ("IRS"). The Company does not believe that any such obligation is probable based on the facts known as ofAugust 25, 2021 . The maximum potential future payments that SBFC could be required to make as a result of this obligation would depend on the difference between the fair value of the fuel cell project sold or financed and the value theIRS would determine as the fair value of the project for purposes of claiming the ITC. The value of the ITC in the sale-leaseback agreements is based on guidelines provided by regulations from theIRS . The Company and Crestmark used a fair value determined with the assistance of an independent third-party appraisal. The Purchase Agreement and the Lease contain representations and warranties, affirmative and negative covenants, and events of default that entitle Crestmark to cause SBFC's indebtedness under the Lease to become immediately due and payable.
Pursuant to a Guaranty Agreement executed on
East West Bank Tax Equity Financing Transaction
The Company closed on a tax equity financing transaction inAugust 2021 with East West Bancorp, Inc. ("East West Bank ") for the 7.4 MW fuel cell project (the "Groton Project ") located on theU.S. Navy Submarine Base inGroton, CT , also known as the Submarine Force.East West Bank's tax equity commitment totals$15 million (the "Purchase Price"). This transaction was structured as a "partnership flip," which is a structure commonly used by tax equity investors in the financing of renewable energy projects. Under this partnership flip structure, a partnership, in this caseGroton Station Fuel Cell Holdco, LLC (the "Partnership") was organized to acquire fromFuelCell Energy Finance II, LLC , a wholly-owned subsidiary of the Company, all outstanding equity interests inGroton Station Fuel Cell, LLC (the "Project Company ") which in turn owns theGroton Project and is the party to the power purchase agreement and all project agreements. At the closing of the transaction, the Partnership is owned byEast West Bank , holdingClass A Units and Fuel Cell Energy Finance Holdco, LLC , a subsidiary ofFuelCell Energy Finance, LLC , holding ClassB Units . The acquisition of the Project Company by the Partnership was funded in part by an initial draw fromEast West Bank and funds contributed downstream to the Partnership by the Company. The initial closing occurred onAugust 4, 2021 , upon the satisfaction of 30
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certain conditions precedent (including the receipt of an appraisal and confirmation that theGroton Project would be eligible for the ITC under Section 48 of the Internal Revenue Code of 1986, as amended). In connection with the initial closing, the Company was able to draw down$3.0 million , of which approximately$0.8 million was used to pay closing costs including appraisal fees, title insurance expenses and legal and consulting fees. The Company is eligible to draw the remaining amount of the commitment, approximately$12 million , once theGroton Project achieves commercial operation. When such funds are drawn down, the funds will be distributed upstream to the Company, as a reimbursement of prior construction costs incurred by the Company. Under a partnership flip structure, tax equity investors agree to receive a minimum target rate of return, typically on an after-tax basis. Prior to receiving a contractual rate of return or a date specified in the contractual arrangements,East West Bank will receive substantially all of the non-cash value attributable to theGroton Project , which includes accelerated depreciation and Section 48(a) investment tax credits; however, the Company will receive a majority of the cash distributions (based on the operating income of theGroton Project ), which are paid quarterly. AfterEast West Bank receives its contractual rate of return, the Company will receive approximately 95% of the cash and tax allocations. The Company (through a separate wholly owned entity) may enter into a back leverage debt financing transaction and use the cash distributions from the Partnership to service the debt. Under this partnership flip structure, we have an option to acquire all of the equity interests thatEast West Bank holds in the Partnership starting approximately five and a half years (the anticipated "flip" date) after theGroton Project is operational. If we exercise this option, we are required to pay the greater of the following: (i) the fair market value ofEast West Bank's equity interest at the time the option is exercised, (ii) 5% of the Purchase Price or (iii)East West Bank's claim in liquidation determined using the hypothetical liquidation at book value method.
Impact of the COVID-19 Pandemic
During fiscal year 2020, the Company launched a proactive response to the escalating COVID-19 outbreak and temporarily suspended operations at itsTorrington, Connecticut manufacturing facility inMarch 2020 . The Company also commenced remote work protocol for those employees worldwide that were capable of working from home. The Company took these actions to secure the safety of the Company's employees, our corporate community as a whole, and the communities in which our team members live, and to adhere toCenters for Disease Control (CDC ) recommendations of social distancing and limited public exposure in connection with the COVID-19 pandemic. All employees that were not able to work from home during the manufacturing facility shutdown due to their job function received full wages and benefits during such time. We did not implement any furlough, layoff or shared work program during such time. The Company resumed manufacturing inJune 2020 and theTorrington, Connecticut manufacturing facility employees returned to work. We established a phased-in return to work schedule commencingMarch 15, 2021 for those employees working from home which was completed inApril 2021 , as a result of which allU.S. based employees are now back in the office. We continue to evaluate our ability to operate in the event of a resurgence of COVID-19 and the advisability of continuing operations based on federal, state and local guidance, evolving data concerning the pandemic and the best interests of our employees, customers and stockholders. Given the recent increase of COVID-19 cases throughout theU.S. as a result of the highly transmissible Delta variant, the Company has instituted policies to protect its employees and customers such as mask mandates in our facilities and a mandatory vaccination policy requiring allU.S. employees to be fully vaccinated byNovember 1, 2021 . 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"). 31 Table of Contents Comparison of Three Months EndedJuly 31, 2021 and 2020
Revenues and Costs of revenues
Our revenues and cost of revenues for the three months endedJuly 31, 2021 and 2020 were as follows: Three Months Ended July 31, Change (dollars in thousands) 2021 2020 $ % Total revenues$ 26,820 $ 18,728 $ 8,092 43% Total costs of revenues 25,720 21,856 3,864 18% Gross profit (loss)$ 1,100 $ (3,128) $ 4,228 (135)% Gross margin 4.1% (16.7)% Total revenues for the three months endedJuly 31, 2021 of$26.8 million reflects an increase of$8.1 million from$18.7 million for the same period in the prior year. Cost of revenues for the three months endedJuly 31, 2021 of$25.7 million increased$3.9 million from$21.9 million for the same period in the prior year. A discussion of the changes in product revenues, service and license 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 ended
Three Months Ended July 31, Change
(dollars in thousands) 2021 2020 $ %
Product revenues $ - $ - $ - N/A
Cost of product revenues 1,903 2,658 (755) (28)%Gross loss from product revenues$ (1,903) $ (2,658) $
755 28% Product gross margin N/A N/A
There was no product revenue during the three months ended
Cost of product revenues decreased$0.8 million for the three months endedJuly 31, 2021 to$1.9 million , compared to$2.7 million in the same period in the prior year. Both periods were impacted by the under-absorption of fixed overhead costs due to low production volumes. Manufacturing variances, primarily related to low production volumes and unabsorbed overhead costs, totaled approximately$1.7 million for the three months endedJuly 31, 2021 compared to approximately$2.6 million for the three months endedJuly 31, 2020 . The decrease in manufacturing variances is primarily the result of increased production volumes during the three months endedJuly 31, 2021 . For the three months endedJuly 31, 2021 , we operated at an annualized production rate of approximately 35 MW, which is an increase from the annualized production rate of 10 MW for the three months endedJuly 31, 2020 . The production rate during the three months endedJuly 31, 2020 was impacted by the factory shutdown in response to the COVID-19 pandemic.
Service agreements and license revenues
Service agreements and license revenues and related costs for the three months
ended
Three Months Ended July 31, Change
(dollars in thousands) 2021 2020 $ %
Service agreements and license revenues $ 14,344 $ 7,113 $ 7,231 102%
Cost of service agreements and license revenues 13,026 8,833 4,193 47%
Gross profit (loss) from service agreements and license revenues
9.2% (24.2)%
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Revenues for the three months ended July 31, 2021 from service agreements and
license fee and royalty agreements increased $7.2 million to $14.3 million from
$7.1 million for the three months ended July 31, 2020 . The service and license
revenues for the three months ended July 31, 2021 include revenues recorded for
module exchanges at several plants and routine maintenance activities. The
increase in revenue for the three months ended July 31, 2021 is primarily due to
the fact that there were more module exchanges during the three months ended
July 31, 2021 (generating approximately $13.4 million of revenue in the three
months ended July 31, 2021 compared to revenue of $6.0 million in the comparable
prior year period).
Cost of service agreements and license revenues increased $4.2 million to $13.0
million for the three months ended July 31, 2021 from $8.8 million for the
three months ended July 31, 2020 , resulting, in part, from the fact that there
were several new module exchanges in the three months ended July 31, 2021
compared to two new module exchanges in the three months ended July 31, 2020 .
Cost of service agreements includes maintenance and operating costs and module
exchanges.
Overall gross profit from service agreements and license revenues was $1.3
million for the three months ended July 31, 2021 , which represents an increase
of $3.0 million from a gross loss of $1.7 million for the three months ended
July 31, 2020 . The overall gross margin was 9.2% for the three months ended July
31, 2021 compared to a gross margin of (24.2)% in the comparable prior year
period. Gross margin increased during the three months ended July 31, 2021
primarily due to more new module exchanges for projects with higher margins
compared to the three months ended July 31, 2020 .
Generation revenues
Generation revenues and related costs for the three months endedJuly 31, 2021 and 2020 were as follows: Three Months Ended July 31, Change (dollars in thousands) 2021 2020 $ % Generation revenues$ 6,230 $ 4,722$ 1,508 32% Cost of generation revenues 6,728 6,327 401 6%
Gross loss from generation revenues$ (498) $ (1,605) $ 1,107 (69)% Generation revenues gross margin (8.0)% (34.0)% Revenues from generation for the three months endedJuly 31, 2021 totaled$6.2 million , which represents an increase of$1.5 million from revenue recognized of$4.7 million for the three months endedJuly 31, 2020 . Generation revenues for the three months endedJuly 31, 2021 and 2020 reflect revenue from electricity generated under our power purchase agreements ("PPAs") as well as sales of renewable energy credits. The increase in generation revenues in the three months endedJuly 31, 2021 is primarily due to 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$6.7 million in the three months endedJuly 31, 2021 . The increase from the comparable prior year period was primarily due to an increase in maintenance activities undertaken in the three months endedJuly 31, 2021 in order to improve operating output. Cost of generation revenues included depreciation and amortization of approximately$3.3 million and$3.4 million for the three months endedJuly 31, 2021 and 2020, respectively.
The decrease in generation revenues gross margin loss is primarily related to an
increase in revenues and a decrease in depreciation expense compared to the
three months ended
We had 34.0 MW of operating power plants in our operating portfolio as ofJuly 31, 2021 , which increased from 32.6 MW as ofJuly 31, 2020 . The increase relates to the 1.4 MW platform at the wastewater treatment facility inSan Bernardino which commenced commercial operations during the three months endedJuly 31, 2021 . 33 Table of Contents
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) 2021 2020 $ %
Advanced Technologies contract revenues $ 6,246 $ 6,893 $ (647) (9)%
Cost of Advanced Technologies contract revenues 4,063 4,038 25 1%
Gross profit from Advanced Technologies contracts $ 2,183 $ 2,855 $ (672) (24)%
Advanced Technologies contract gross margin 35.0%
41.4%
Advanced Technologies contract revenues decreased to $6.2 million for the
three months ended July 31, 2021 from $6.9 million for the three months ended
July 31, 2020 . Compared to the three months ended July 31, 2020 , Advanced
Technologies contract revenues recognized under the Joint Development Agreement
entered into with ExxonMobil Research and Engineering Company ("EMRE") on
November 5, 2019 (the "EMRE Joint Development Agreement") were approximately
$0.1 million higher during the three months ended July 31, 2021 , reflecting
continued performance under the EMRE Joint Development Agreement during the
quarter. However, the increased revenues under the EMRE Joint Development
Agreement were offset by $0.8 million less revenue recognized under government
contracts during the three months ended July 31, 2021 than during the
three months ended July 31, 2020 .
Cost of Advanced Technologies contract revenues were $4.1 million for the
three months ended July 31, 2021 , compared to $4.0 million for the same period
in the prior year. Advanced Technologies contracts for the three months ended
July 31, 2021 generated a gross margin of $2.2 million compared to a gross
margin of $2.9 million for the three months ended July 31, 2020 . The decrease in
Advanced Technologies contract gross margin is primarily related to the mix of
government contracts which resulted in a higher cost share incurred by the
Company on such contracts in the three months ended July 31, 2021 compared to
the three months ended July 31, 2020 .
Administrative and selling expenses
Administrative and selling expenses were$8.7 million and$6.6 million for the three months endedJuly 31, 2021 and 2020, respectively. The three months endedJuly 31, 2021 included legal expenses associated with tax equity financings (refer to Note 19. "Subsequent Events" to the Consolidated Financial Statements for more information regarding the tax equity financings) and additional expense for share-based compensation of$0.5 million due to the grants made inAugust 2020 andNovember 2020 under our new Long Term Incentive Plans (the "LTI Plans") (refer to Note 17. "Benefit Plans" to the Consolidated Financial Statements for more information on theNovember 2020 grants). Also contributing to the increase in administrative and selling expenses for the three months endedJuly 31, 2021 was increased compensation expense as a result of an increase in staff compared to the comparable prior year period.
Research and development expenses
Research and development expenses increased to$3.0 million for the three months endedJuly 31, 2021 compared to$1.0 million for the three months endedJuly 31, 2020 . The increase relates to an increase in spending on the Company's hydrogen commercialization initiatives compared to the comparable prior year period. The comparable prior year period was impacted by restructuring initiatives implemented in 2019 and the reallocation of resources from Company-funded research and development projects to funded Advanced Technologies projects.
Loss from operations
Loss from operations for the three months endedJuly 31, 2021 was$10.6 million compared to$10.8 million for the three months endedJuly 31, 2020 . This decrease was due to a gross profit of$1.1 million in the three months endedJuly 31, 2021 compared to a gross loss of$3.1 million in the three months endedJuly 31, 2020 , offset by a$4.1 million increase in operating expenses for the three months endedJuly 31, 2021 . As discussed above, impacting gross profit for the quarter were (i) higher service gross margin primarily due to more new module exchanges for projects with higher margins during the quarter, (ii) improved generation gross margin primarily related to an increase in revenues and a decrease in 34 Table of Contents
depreciation expense, and (iii) lower manufacturing variances primarily as a result of increased production volumes. Operating expenses were higher in the period as (a) administrative and selling expenses for the three months endedJuly 31, 2021 were higher and included legal fees associated with tax equity financings, additional share-based compensation expense under the LTI Plans and an increase in compensation expense and (b) research and development expenses were higher due to an increase in spending on the Company's hydrogen commercialization initiatives compared to the comparable prior year period.
Interest expense
Interest expense for the three months endedJuly 31, 2021 and 2020 was$1.6 million and$4.2 million , respectively. Interest expense for both periods presented includes interest related to sale-leaseback transactions and on the loans outstanding associated with theBridgeport Fuel Cell Project . Interest expense for the three months endedJuly 31, 2020 includes interest for the amortization of the redeemable preferred stock of subsidiary fair value discount. Amounts owed pursuant to the terms of the redeemable preferred stock issued byFCE FuelCell Energy, Ltd. ("FCE Ltd. ") (which is referred to elsewhere herein as the Series 1 Preferred Shares) were paid, in full, inDecember 2020 . The decrease in interest expense for the three months endedJuly 31, 2021 is primarily due to the repayment of the$80.0 million principal balance outstanding under the Orion Credit Agreement (as defined below), which was fully repaid inDecember 2020 .
Change in fair value of common stock warrant liability
The$1.7 million expense for the three months endedJuly 31, 2020 represents an adjustment to the estimated fair value of the Orion Warrants (as defined below) still outstanding as ofJuly 31, 2020 . The expense was primarily a result of an increase in the price of the Company's common stock during the quarter endedJuly 31, 2020 . OnDecember 7, 2020 , all remaining Orion Warrants were exercised.
Other income (expense), net
Other income (expense), net was$0.1 million and$(0.5) million for the three months endedJuly 31, 2021 and 2020, respectively. Other expense, net for the three months endedJuly 31, 2020 primarily relates to a foreign exchange loss of$0.6 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 Ltd. ) offset by a gain of approximately$0.2 million related to the income from refundable research and development tax credits.
Gain on extinguishment of financing obligation
The$1.8 million gain for the three months endedJuly 31, 2020 represents the difference between the amount of the payoff of the lease and the repurchase of theUCI Fuel Cell, LLC project asset and the carrying amount of the financing obligation. 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 July 31, 2021 and 2020.
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, 2021 and 2020, net loss attributable to common stockholders was$12.8 million and$16.1 million , respectively, and loss per common share was$0.04 and$0.07 , 35
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respectively. The decrease in the net loss attributable to common stockholders for the three months endedJuly 31, 2021 is primarily due to incurring a higher gross margin for the three months endedJuly 31, 2021 compared to the corresponding period in fiscal year 2020, lower interest expense during the quarter as a result of the repayment of the Orion Facility (as defined below) and the fact that there was no charge for the change in fair value of common stock warrant liability during the three months endedJuly 31, 2021 offset by higher operating expenses and the fact that there was no gain on extinguishment of financing obligation recorded in the three months endedJuly 31, 2021 . The lower loss per common share for the three months endedJuly 31, 2021 as compared to the three months endedJuly 31, 2020 is primarily due to the higher weighted average shares outstanding as ofJuly 31, 2021 as a result of share issuances sinceJuly 31, 2020 and the lower net loss attributable to common stockholders. Comparison of Nine Months EndedJuly 31, 2021 and 2020
Revenues and Costs of revenues
Our revenues and cost of revenues for the nine months endedJuly 31, 2021 and 2020 were as follows: Nine Months Ended July 31, Change (dollars in thousands) 2021 2020 $ % Total revenues$ 55,650 $ 53,872 $ 1,778 3% Total costs of revenues 62,924 53,552 9,372 18% Gross (loss) profit$ (7,274) $ 320$ (7,594) (2,373)% Gross margin (13.1)% 0.6% Total revenues for the nine months endedJuly 31, 2021 of$55.7 million reflects an increase of$1.8 million from$53.9 million during the same period in the prior year. Cost of revenues for the nine months endedJuly 31, 2021 of$62.9 million reflects a$9.4 million increase from$53.6 million during the same period in the prior year. A discussion of the changes in product revenues, service and license 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 nine months ended
Nine Months Ended July 31, Change
(dollars in thousands) 2021 2020 $ %
Product revenues $ - $ - $ - N/A
Cost of product revenues 6,190 7,512 (1,322) (18)%Gross loss from product revenues$ (6,190) $ (7,512) $ 1,322 (18)% Product revenues gross loss N/A
N/A
There was no product revenue during the nine months ended
Cost of product revenues decreased$1.3 million for the nine months endedJuly 31, 2021 to$6.2 million , compared to$7.5 million in the same period in the prior year. Both periods were impacted by the under-absorption of fixed overhead costs due to low production volumes. Manufacturing variances, primarily related to low production volumes and unabsorbed overhead costs, totaled approximately$5.0 million for the nine months endedJuly 31, 2021 compared to approximately$7.0 million for the nine months endedJuly 31, 2020 . The decline in manufacturing variances is primarily the result of increased production volumes. For the nine months endedJuly 31, 2021 , we operated at an annualized production rate of approximately 30 MW, which is an increase from the annualized production rate of 14.0 MW for the nine months endedJuly 31, 2020 . The production rate during the nine months endedJuly 31, 2020 was impacted by the factory shutdown in response to the COVID-19 pandemic. 36 Table of Contents Service and license revenues
Service and license revenues and related costs for the nine months ended
Nine Months Ended July 31, Change
(dollars in thousands) 2021 2020 $ %
Service and license revenues $ 19,917 $ 19,697 $ 220 1%Cost of service and license revenues 20,992 16,418 4,574 28% Gross (loss) profit from service and license revenues$ (1,075) $ 3,279 $ (4,354) (133)% Service and license revenues gross margin (5.4)%
16.6% Revenues for the nine months endedJuly 31, 2021 from service agreements and license fee and royalty agreements increased marginally by$0.2 million to$19.9 million from$19.7 million for the nine months endedJuly 31, 2020 . The increase in service and license revenues for the nine months endedJuly 31, 2021 is primarily due to an increase in new module exchanges offset by cost estimate adjustments related to changes in the expected timing of future module exchanges. Service and license revenues for the nine months endedJuly 31, 2020 includes license revenues of$4.0 million associated with the EMRE Joint Development Agreement, while the nine months endedJuly 31, 2021 does not include comparable license revenues. Cost of service and license revenues increased$4.6 million to$21.0 million for the nine months endedJuly 31, 2021 from$16.4 million for the nine months endedJuly 31, 2020 . Cost of service and license revenues were higher for the nine months endedJuly 31, 2021 than for the nine months endedJuly 31, 2020 primarily due to increases in planned maintenance activities, increased module exchanges and continued investment in the service fleet in order to improve performance. Cost of service agreements includes maintenance and operating costs and module exchanges. Overall gross loss from service agreements and license revenues was$1.1 million for the nine months endedJuly 31, 2021 , which represents a decrease of$4.4 million from a gross profit of$3.3 million for the nine months endedJuly 31, 2020 . The overall gross margin was (5.4)% for the nine months endedJuly 31, 2021 compared to a gross margin of 16.6% in the comparable prior year period. Gross margin decreased during the nine months endedJuly 31, 2021 primarily due to residual value charges for certain plants which had reached the end of their service terms and an increase in performance guarantees in the nine months endedJuly 31, 2021 , compared to gross margin for the nine months endedJuly 31, 2020 which included license revenues associated with theEMRE Joint Development Agreement which resulted in positive margins.
Generation revenues
Generation revenues and related costs for the nine months endedJuly 31, 2021 and 2020 were as follows: Nine Months Ended July 31, Change (dollars in thousands) 2021 2020 $ % Generation revenues$ 17,306 $ 14,795 $ 2,511 17% Cost of generation revenues 23,265 17,576 5,689 32%
Gross loss from generation revenues$ (5,959) $ (2,781) $ (3,178) 114% Generation revenues gross margin (34.4)%
(18.8)% Revenues from generation for the nine months endedJuly 31, 2021 totaled$17.3 million , which represents an increase of$2.5 million from revenue recognized of$14.8 million for the nine months endedJuly 31, 2020 due to improved operating output of the generation fleet portfolio and sales of renewable energy credits. Generation revenues for the nine months endedJuly 31, 2021 and 2020 reflect revenue from electricity generated under our PPAs and the sale of renewable energy credits. Cost of generation revenues totaled$23.3 million in the nine months endedJuly 31, 2021 , which represents an increase from the comparable prior year period primarily due to higher plant maintenance costs in 2021 in order to improve operating output and an increase in depreciation and amortization expense related to a higher installed base of operating assets for the 2021 period compared to the prior year period. Cost of generation revenues included depreciation and 37 Table of Contents amortization of approximately$11.2 million and$9.6 million for the nine months endedJuly 31, 2021 and 2020, respectively, and the increase reflects additional depreciation expense recorded for module exchanges during the nine months endedJuly 31, 2021 . The decrease in generation revenues gross margin is primarily related to higher plant maintenance costs and depreciation expense compared to the nine months endedJuly 31, 2020 .
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) 2021 2020 $ %
Advanced Technologies contract revenues $ 18,427 $ 19,380 $ (953) (5)%
Cost of Advanced Technologies contract revenues 12,477 12,046 431 4%
Gross profit from Advanced Technologies contracts $ 5,950 $ 7,334 $ (1,384) (19)%
Advanced Technologies contract gross margin 32.3%
37.8%
Advanced Technologies contract revenues decreased 5% to $18.4 million for the
nine months ended July 31, 2021 from $19.4 million for the nine months ended
July 31, 2020 . Compared to the nine months ended July 31, 2020 , Advanced
Technologies contract revenues recognized under the EMRE Joint Development
Agreement were approximately $0.8 million higher during the nine months ended
July 31, 2021 , reflecting continued performance under the EMRE Joint Development
Agreement during the nine months ended July 31, 2021 . However, the increased
revenues under the EMRE Joint Development Agreement were offset by the $1.9
million less revenue recognized under government contracts during the
nine months ended July 31, 2021 than during the nine months ended July 31, 2020 .
Cost of Advanced Technologies contract revenues increased $0.4 million to
$12.5 million for the nine months ended July 31, 2021 , compared to $12.0 million
for the same period in the prior year. Advanced Technologies contracts for the
nine months ended July 31, 2021 generated a gross margin of $6.0 million
compared to a gross margin of $7.3 million for the nine months ended July 31,
2020 . The decrease in Advanced Technologies contract gross margin is related to
the mix of government contracts which resulted in a higher cost share incurred
by the Company on such contracts in the nine months ended July 31, 2021 compared
to the nine months ended July 31, 2020 .
Administrative and selling expenses
Administrative and selling expenses were$27.3 million and$19.0 million for the nine months endedJuly 31, 2021 and 2020, respectively. The nine months endedJuly 31, 2021 included legal expenses for tax equity financings (refer to Note 19. "Subsequent Events" to the Consolidated Financial Statements for more information regarding the tax equity financings), additional expense for shared-based compensation of$2.3 million due to the grants made inAugust 2020 andNovember 2020 under our new LTI Plans (refer to Note 17. "Benefit Plans" to the Consolidated Financial Statements for more information on theNovember 2020 grants), increased compensation expense and proxy mailing expenses associated with the Company's annual stockholder meeting. The comparable prior year period also included a legal settlement of$2.2 million which was recorded as an offset to administrative and selling expenses.
Research and development expenses
Research and development expenses increased to$7.8 million for the nine months endedJuly 31, 2021 compared to$3.3 million for the nine months endedJuly 31, 2020 . The increase relates to an increase in spending on the Company's hydrogen commercialization initiatives compared to the comparable prior year period. The comparable prior year period was impacted by restructuring initiatives implemented in 2019 and the reallocation of resources from Company-funded research and development projects to funded Advanced Technologies projects. During the nine months endedJuly 31, 2021 , the Company successfully commenced operation and testing of a prototype solid oxide electrolysis hydrogen platform inDanbury, Connecticut . 38 Table of Contents Loss from operations Loss from operations for the nine months endedJuly 31, 2021 was$42.3 million compared to$22.0 million for the nine months endedJuly 31, 2020 . This increase was due to a gross loss of$7.3 million and a$12.7 million increase in operating expenses for the nine months endedJuly 31, 2021 . As discussed above, impacting gross loss for the nine month period endedJuly 31, 2021 were (i) lower service gross margin primarily due to residual value charges for certain plants which had reached the end of their service terms and an increase in performance guarantees, whereas gross margin for the nine months endedJuly 31, 2020 included license revenues associated with the EMRE Joint Development Agreement which resulted in positive margins, (ii) lower generation revenues gross margin primarily related to higher plant maintenance costs and depreciation expense and (iii) lower Advanced Technologies gross margin related to the mix of government contracts during the period. These impacts were partially offset by lower manufacturing variances primarily resulting from increased production volumes. Operating expenses were higher in the period as administrative and selling expenses and research and development expenses both increased for the nine months endedJuly 31, 2021 . Administrative and selling expenses included legal expenses for tax equity financings, additional share-based compensation expense under the LTI Plans, an increase in compensation expense, and proxy mailing expenses associated with the Company's annual stockholder meeting. In addition, administrative and selling expenses for the nine months endedJuly 31, 2020 included a$2.2 million legal settlement that offset administrative and selling expenses and there was no comparable gain for the nine months endedJuly 31, 2021 . Research and development expenses were higher due to an increase in spending on the Company's hydrogen commercialization initiatives compared to the comparable prior year period.
Interest expense
Interest expense for the nine months endedJuly 31, 2021 and 2020 was$5.7 million and$11.0 million , respectively. Interest expense for both periods presented includes interest related to sale-leaseback transactions and on the loans outstanding associated with theBridgeport Fuel Cell Project . Interest expense for both periods also includes interest for the amortization of the redeemable preferred stock of subsidiary fair value discount. Amounts owed pursuant to the terms of the redeemable preferred stock issued byFCE Ltd. (which is referred to elsewhere herein as the Series 1 Preferred Shares) were paid, in full, inDecember 2020 . The decrease in interest expense for the nine months endedJuly 31, 2021 is primarily due to the repayment of the$80.0 million principal balance outstanding under the Orion Credit Agreement (as defined below), which was fully repaid inDecember 2020 .
Loss (gain) on extinguishment of debt and financing obligation
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 Orion Credit Agreement. The loss on extinguishment of debt amount includes an early prepayment penalty of$4.0 million and the write-off of unamortized debt discounts and deferred finance costs of$7.1 million . The$1.8 million gain for the nine months endedJuly 31, 2020 represents the difference between the amount of the payoff of the lease and the repurchase of theUCI Fuel Cell, LLC project asset and the carrying amount
of the financing obligation.
Loss of extinguishment of Series 1 preferred share obligation
A charge of$0.9 million was recorded for the extinguishment of preferred stock obligation of subsidiary to recognize the difference between the amount of the payoff of the obligation and the carrying amount of the Series 1 Preferred Share obligation.
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 remaining Orion Warrants prior to exercise, which were exercised, in full, during the nine months endedJuly 31, 2021 . The$39.3 million expense for the nine months endedJuly 31, 2020 included$23.7 million for the Orion Warrants that were converted during the period and$15.6 million for the Orion Warrants that were still outstanding as of July
31,
2020.
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Other (expense) income, net
Other (expense), net was ($0.8) million and other income, net was $0.4 million
for the nine months ended July 31, 2021 and 2020, respectively. Other (expense),
net for the nine months ended July 31, 2021 primarily relates to a foreign
exchange loss of $0.9 million related to the remeasurement of the Canadian
Dollar denominated preferred stock obligation (the Series 1 Preferred Share
obligation) of our U.S. Dollar functional currency Canadian subsidiary (FCE
Ltd. ) prior to the payoff of the preferred share obligation in December 2020 .
Other income, net for the nine months ended July 31, 2020 primarily relates to a
net non-cash gain on the extinguishment accounting related to the modification
of the Series 1 Preferred Shares including the extinguishment related to the
embedded derivatives.
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 inSouth Korea . There was an income tax provision recorded for the nine months endedJuly 31, 2021 of$3 thousand compared to an income tax provision of$40 thousand for the nine months endedJuly 31, 2020 .
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, 2021 and 2020, net loss attributable to common stockholders was$79.3 million and$72.8 million , respectively, and loss per common share was$0.24 and$0.35 , respectively. The increase in the net loss attributable to common stockholders for the nine months endedJuly 31, 2021 is primarily due to incurring (i) a gross loss for the period compared to a gross profit for the corresponding period in fiscal year 2020, (ii) higher operating expenses for the period, (iii) an$11.2 million loss recorded on the extinguishment of the Orion Facility, and (iv) a$0.9 million charge for the extinguishment of the Series 1 Preferred Share obligation. These amounts were offset by lower interest expense due to repayment of the Orion Facility and a lower charge for the change in fair value of common stock warrant liability. The net loss attributable to common stockholders for the nine-months endedJuly 31, 2020 reflected a$1.8 million gain on the extinguishment of a financing obligation. There was no comparable gain recorded in the nine-months endedJuly 31, 2021 . The lower loss per common share for the nine months endedJuly 31, 2021 as compared to the nine months endedJuly 31, 2020 is due to the higher weighted average shares outstanding as ofJuly 31, 2021 as a result of share issuances sinceJuly 31, 2020 . 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 and license 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
40
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InDecember 2020 , the Company closed an underwritten offering of 25.0 million shares of the Company's common stock. Net proceeds to the Company were approximately$156.4 million after deducting underwriting discounts and commissions and other offering expenses. Proceeds from this offering have been utilized as follows:
Extinguishment of Senior Secured Debt: On
prepayment premium, fees, costs and other expenses due and owing to the Orion
? Agent and the lenders under the Orion Facility and the Orion Credit Agreement
(in each case as defined elsewhere herein) and related loan documents.
Concurrently, the Orion Agent released all of the collateral from the liens
granted under the security documents associated with the Orion Facility, which
included the release of
Extinguishment of the Series 1 Preferred Shares: On
Company paid all amounts owed to Enbridge Inc. ("Enbridge") under the Series 1
Preferred Shares (as defined elsewhere herein), totaling Cdn.
? approximately
surrendered its shares in
related Guarantee and
elsewhere herein) were terminated.
Working Capital: The remaining
included in unrestricted cash and is being used to accelerate the development
? and commercialization of our solid oxide platform and for project development,
project financing, debt service, working capital support and other general
corporate purposes.
In
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 throughJuly 31, 2021 , approximately 44.0 million shares were sold resulting in net proceeds to the Company totaling approximately$369.0 million . Subsequent toJuly 31, 2021 , an additional 0.9 million shares were sold resulting in net proceeds of approximately$0.6 million . The remaining availability under the Open Market Sale Agreement as of the date of filing of this report 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 will depend on its ability to (i) timely complete current projects in process within budget, (ii) increase cash flows from its generation portfolio, including by meeting conditions required to timely commence operation of new projects, operating its generation portfolio in compliance with minimum performance guarantees and operating its generation 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. 41
Table of Contents
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, license arrangements, joint ventures or other business transactions for the purpose(s) of geographic or manufacturing expansion and/or new product or technology development and commercialization. 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 expects to seek long-term debt and tax equity (e.g., sale-leaseback and partnership transactions) for its project asset portfolio as these projects commence commercial operations. The proceeds of any such financing, if obtained, may allow the Company 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, Projects, and Backlog
To grow our generation 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 operating portfolio (34.0 MW as ofJuly 31, 2021 ) contributes higher long-term cash flows to the Company than if these projects had been sold. These projects currently generate approximately$19.9 million per year in annual revenue, but this amount may 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, 2021 , the Company had projects representing an additional 42.1 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 ofJuly 31, 2021 , net debt outstanding related to project assets was$67.8 million . Future required payments totaled$40.3 million as ofJuly 31, 2021 . The outstanding financing obligations under our sale-leaseback transactions, which totaled$48.6 million as ofJuly 31, 2021 , include an embedded gain of$31.4 million , which will be recognized at the end of the applicable lease terms.
Our operating portfolio provides us with the full benefit of future cash flows, net of any debt service requirements.
42
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The following table summarizes our operating portfolio as of
Actual
Commercial
Rated Operation Date
Capacity (FuelCell Energy PPA Term
Project Name Location Power Off - Taker (MW) 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 20
CA
Total MW Operating: 34.0
The following table summarizes projects in process, all of which are in backlog,
as of July 31, 2021 :
Rated PPA
Capacity Term
Project Name Location Power Off-Taker (MW) (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
LIPA 1 Long Island, NY PSEG / LIPA, LI NY 7.4 20
(Utility)
CT RFP-1 Hartford, CT Eversource/United
Illuminating (CT 7.4 20
Utilities)
CT RFP-2 Derby, CT Eversource/United
Illuminating (CT 14.8 20
Utilities)
SCEF - Derby Derby, CT Eversource/United
Illuminating (CT 2.8 20
Utilities)
Total MW in Process: 42.1
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. The Company achieved mechanical completion, executed the
interconnect agreement in July, and commenced the process of commissioning the
7.4 MW platform at the
the commissioning process (the final stage prior to commercial operation), a
localized and contained elevated temperature was observed inside a component on
one of the two installed plants and, as a result, the commissioning process was
? suspended. Due to the temporary elevated temperature being above the
installation heat rating, we need to repair the gasket seals and insulation.
Our team has identified the root cause of the issue and is in the process of
applying improvements and preventative upgrades as well as making the necessary
repairs to the plant. The issue identified affects unique aspects of this plant
and does not affect the rest of our fleet. We expect to resume commissioning on
the project in late September but timing is dependent on non-
related activities on theNavy base. Our intent is to achieve 43 Table of Contents
commercial operations as expeditiously as possible. If commercial operations are
delayed beyond
the
when fully operational, will demonstrate the ability of
platforms to perform at high efficiencies and provide low CO2 to MWh output.
Incorporation of the platform into a microgrid will demonstrate the ability of
supporting theU.S. military's efforts to fortify base energy supply and demonstrating theNavy's commitment to clean reliable power. As described in additional detail above under "Overview and Recent Developments - Recent Developments - East West Bank Tax Equity Financing Transaction," subsequent to quarter end, inAugust 2021 , the Company closed on a tax equity financing transaction withEast West Bank for this 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 , of which approximately$0.8 million was used to pay closing costs including appraisal fees, title insurance expenses and legal and consulting fees. 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 our agreement withEast West Bank , the project has a required commercial operations deadline ofOctober 18, 2021 , unless that deadline is amended or waived. If commercial operations are delayed beyondOctober 18, 2021 , an extension will be required from theNavy and theNavy will determine whether such extension will be granted. .
? facility in
2021.
LIPA - Yaphank (
? project has materially advanced, with all foundations having been completed and
most equipment necessary for the complete construction of the fuel cell project
having been delivered to the site.
having largely completed the foundational construction necessary in order to
? begin to receive delivery of the fuel cell platform equipment. This utility
scale fuel cell platform will contain 5
will be installed on engineering platforms alongside the
produce electricity, hydrogen and hot water, has advanced to early site civil
? construction. It is anticipated that the fuel cell platform equipment will be
received on-site over the next 90 days following the date of filing of this
report.
Backlog by revenue category is as follows:
Service agreements and license backlog totaled
? 2021, compared to
license backlog includes future contracted revenue from maintenance and scheduled module exchanges for power plants under service agreements.
Generation backlog totaled
? Generation backlog represents future contracted energy sales under contracted
PPAs or approved utility tariffs.
? There was no product sales backlog as of
Advanced Technologies contract backlog totaled
? 2021 compared to
contract backlog primarily represents remaining revenue under the EMRE Joint
Development Agreement and government projects.
Backlog decreased 2.2% to$1.30 billion as ofJuly 31, 2021 compared to$1.33 billion as ofJuly 31, 2020 , reflecting the continued execution of backlog and adjustments to generation backlog, primarily resulting from the decrease in
fuel
pricing
44
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which has lowered estimated future revenue, offset by the inclusion of the
project with United Illuminating in
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 and license 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 in fiscal year 2021 and beyond include:
? The Company's cash on hand and access to additional liquidity. As of
2021, 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
by the manufacturing facility shutdown from
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. As a result of these improvements, we now have the capability to
increase our annualized production rate up to 45 MW on a single production
shift. We have increased our annualized production rate from 17 MW at the end
of fiscal year 2020 to 30 MW as of
an annualized production rate of 45 MW by the end of this calendar year.
As project sizes and the number of projects evolves, 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
revenue or are under construction. Project assets as of
of
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installations and
we had 34.0 MW of operating project assets that generated
revenue in the nine months ended
As of
construction, some of which are expected to generate operating cash flows
beginning in fiscal years 2021 and 2022. To build out this portfolio, for
fiscal year 2021, we forecast project asset expenditures to range between
fund 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.
Capital expenditures are expected to range between
fiscal year 2020, as we make investments in our factories, laboratories and
business systems.
Company funded research and development activities are expected to increase to
our Advanced Technologies solutions including distributed 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.
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, 2021 and 2020, depreciation and amortization totaled$4.5 million and$4.7 million , respectively (of these totals, approximately$3.3 million and$3.4 million for the three months endedJuly 31, 2021 and 2020, respectively, relate to depreciation and amortization of project assets in our generation portfolio). For the nine months endedJuly 31, 2021 and 2020, depreciation and amortization totaled$14.9 million and$13.8 million respectively (of these totals, approximately$11.2 million and$9.9 million for the nine months endedJuly 31, 2021 and 2020, respectively, relate to depreciation and amortization of project assets in our generation portfolio).
Cash Flows
Cash and cash equivalents and restricted cash and cash equivalents totaled$494.0 million as ofJuly 31, 2021 compared to$192.1 million as ofOctober 31, 2020 . As ofJuly 31, 2021 , unrestricted cash and cash equivalents was$468.6 million compared to$149.9 million of unrestricted cash and cash equivalents as ofOctober 31, 2020 . As ofJuly 31, 2021 , restricted cash and cash equivalents was$25.5 million , of which$10.2 million was classified as current and$15.2 million was classified as non-current, compared to$42.2 million of restricted cash and cash equivalents as ofOctober 31, 2020 , of which$9.2 million was classified as current and$33.0 million was classified as non-current.
The following table summarizes our consolidated cash flows:
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