Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 1. Nature of Business and Basis of Presentation
FuelCell Energy, Inc., together with its subsidiaries (the “Company”, “FuelCell Energy”, “we”, “us”, or “our”), is a leading integrated fuel cell company. Founded in 1969, FuelCell Energy is a manufacturer of clean fuel cell power platforms delivering power and thermal energy and capable of delivering hydrogen, long-duration hydrogen energy storage, and carbon capture applications. We develop turn-key distributed power generation solutions and operate and provide comprehensive service for the life of the power plant. FuelCell Energy is focused on growing its global presence in delivering environmentally responsible distributed baseload power solutions through its proprietary, molten-carbonate and solid oxide fuel cell technologies. We are working to expand the proprietary technologies that we have developed over the past five decades into new product platforms, applications, markets and geographies. Our mission and purpose is to utilize our proprietary, state-of-the-art fuel cell platforms to enable a world empowered by clean energy and contribute to climate change mitigation. FuelCell Energy’s platforms are capable of reducing the global environmental footprint of baseload power generation by providing environmentally responsible solutions for reliable electrical power, distributed hydrogen, electrolysis, long-duration hydrogen-based energy storage, carbon capture, microgrid applications, hot water, steam, and chilling. 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 South Korea, and we are pursuing opportunities in other countries around the world.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial information. Accordingly, they do not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, all normal and recurring adjustments necessary to fairly present the Company’s financial position and results of operations as of and for the three months ended January 31, 2021 and 2020 have been included. All intercompany accounts and transactions have been eliminated.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The balance sheet as of October 31, 2020 has been derived from the audited financial statements at that date, but it does not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the Company’s financial statements and notes thereto for the fiscal year ended October 31, 2020, which are contained in the Company’s Annual Report on Form 10-K previously filed with the SEC. The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.
Use of Estimates
The preparation of financial statements and related disclosures in conformity with GAAP 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. 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. 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.
Liquidity
Our principal sources of cash have been sales of our common stock through public equity offerings, proceeds from third party debt such as borrowings under our credit facilities, 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 power plants, perform research and development on Advanced Technologies, pay down existing outstanding indebtedness, and meet our other cash and liquidity needs.
As of January 31, 2021, unrestricted cash and cash equivalents totaled $178.6 million compared to $149.9 million as of October 31, 2020.
In December 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 December 7, 2020, the Company paid $87.3 million to settle the outstanding principal, accrued but unpaid interest, 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 $11.2 million of restricted cash to the Company.
|
7
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
|
•
|
Extinguishment of the Series 1 Preferred Shares: On December 17, 2020, the Company paid all amounts owed to Enbridge Inc. (“Enbridge”) under the Series 1 Preferred Shares (as defined elsewhere herein), totaling Cdn. $27.4 million, or approximately $21.5 million in U.S. dollars. Following such payment, Enbridge surrendered its shares in FCE Ltd. (as defined elsewhere herein) and the related Guarantee and January 2020 Letter Agreement (in each case, as defined elsewhere herein) were terminated.
|
|
•
|
Working Capital: The remaining $47.5 million of proceeds from the offering was included in unrestricted cash and may be 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.
|
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 and to successfully commercialize our Advanced Technologies platforms, including our solid oxide platform, (vii) implement the product cost reductions necessary to achieve profitable operations, (viii) manage working capital and the Company's unrestricted cash balance and (ix) access the capital markets to raise funds through the sale of equity securities, convertible notes, and other equity-linked instruments, all of which will require an increase in authorized shares, and/or other debt instruments.
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 lower-cost 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.
As of January 31, 2021, we had 15,093,242 shares of common stock available for issuance, excluding treasury stock, of which 5,185,674 shares were reserved for issuance under various warrants and equity awards, upon conversion of preferred stock, and under our employee stock purchase and equity incentive plans. The limited number of shares of our common stock available for issuance will limit our ability to raise capital in the equity markets and satisfy obligations with shares instead of cash, which could adversely affect our business and operations. We are seeking stockholder approval to increase the number of shares of common stock we are authorized to issue at the Company’s Annual Meeting of Stockholders on April 8, 2021, but such approval may not be obtained.
Note 2. Recent Accounting Pronouncements
Recently Adopted Accounting Guidance
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-13 (ASU 2016-13), “Measurement of Credit Losses (Topic 326) on Financial Instruments,” which replaces the existing incurred impairment model for trade receivables with an expected loss model which requires the use of forward-looking information to calculate expected credit loss estimates. The Company adopted ASU 2016-13 as of November 1, 2020, which had no impact on the Company’s Consolidated Financial Statements.
Recent Accounting Guidance Not Yet Effective
There is no recent accounting guidance not yet effective that is expected to have a material impact on the Company’s financial statements when adopted.
Note 3. Revenue Recognition
Contract Balances
Contract assets as of January 31, 2021 and October 31, 2020 were $20.4 million and $16.9 million, respectively. The contract assets relate to the Company’s rights to consideration for work completed but not billed. These amounts are included on a separate line item as Unbilled receivables, and balances expected to be billed later than one year from the balance sheet date are included within Other assets on the accompanying Consolidated Balance Sheets. The net change in contract assets represents amounts recognized as revenue offset by customer billings.
8
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Contract liabilities as of January 31, 2021 and October 31, 2020 were $44.3 million and $41.9 million, respectively. The contract liabilities relate to the advance billings to customers for services that will be recognized over time and in some instances for deferred revenue relating to license performance obligations that will be recognized at a future point in time. The Company has discontinued revenue recognition of the deferred license revenue related to the terminated POSCO Energy License Agreements (as defined elsewhere herein) given the pending arbitration and will continue to evaluate this deferred revenue in future periods (for more information, refer to Note 18. “Commitment and Contingencies”). As of January 31, 2021, $22.2 million related to the terminated POSCO Energy License Agreements is included within Long-term deferred revenue on the accompanying Consolidated Balance Sheets. The net change in contract liabilities represents customer billings offset by revenue recognized.
Remaining Performance Obligations
Remaining performance obligations are the aggregate amount of total contract transaction price that is unsatisfied or partially unsatisfied. As of January 31, 2021, the Company’s total remaining performance obligations for service agreements were $141.7 million, for license agreements were $22.2 million and for Advanced Technologies contracts were $44.1 million in the aggregate. Service revenue in periods in which there are no module replacements is expected to be relatively consistent from period to period, whereas module replacements will result in an increase in revenue when replacements occur.
Note 4. Accounts Receivable, Net and Unbilled Receivables
Accounts receivable, net and Unbilled receivables as of January 31, 2021 and October 31, 2020 consisted of the following (in thousands):
|
|
January 31,
|
|
|
October 31,
|
|
|
|
2021
|
|
|
2020
|
|
Commercial Customers:
|
|
|
|
|
|
|
|
|
Amount billed
|
|
$
|
8,409
|
|
|
$
|
7,329
|
|
Unbilled receivables (1)
|
|
|
7,262
|
|
|
|
7,063
|
|
|
|
|
15,671
|
|
|
|
14,392
|
|
Advanced Technologies (including U.S. government(2)):
|
|
|
|
|
|
|
|
|
Amount billed
|
|
|
1,612
|
|
|
|
2,234
|
|
Unbilled receivables
|
|
|
981
|
|
|
|
978
|
|
|
|
|
2,593
|
|
|
|
3,212
|
|
Accounts receivable, net and unbilled receivables
|
|
$
|
18,264
|
|
|
$
|
17,604
|
|
(1)
|
Additional long-term unbilled receivables of $12.1 million and $8.9 million are included within “Other Assets” as of January 31, 2021 and October 31, 2020, respectively.
|
(2)
|
Total U.S. government accounts receivable, including unbilled receivables, outstanding as of January 31, 2021 and October 31, 2020 were $1.0 million and $1.1 million, respectively.
|
We bill customers for power platform and power platform component sales based on certain contractual milestones being reached. We bill service agreements based on the contract price and billing terms of the contracts. Generally, our Advanced Technologies contracts are billed based on actual revenues recorded, typically in the subsequent month. Some Advanced Technologies contracts are billed based on contractual milestones or costs incurred. Unbilled receivables relate to revenue recognized on customer contracts that have not been billed.
The Company had no allowance for doubtful accounts as of January 31, 2021 and October 31, 2020. Uncollectible accounts receivable are charged against the allowance for doubtful accounts when all collection efforts have failed and it is deemed unlikely that the amount will be recovered.
Note 5. Inventories
Inventories (short and long-term) as of January 31, 2021 and October 31, 2020 consisted of the following (in thousands):
|
|
January 31,
|
|
|
October 31,
|
|
|
|
2021
|
|
|
2020
|
|
Raw materials
|
|
$
|
25,776
|
|
|
$
|
21,726
|
|
Work-in-process (1)
|
|
|
40,711
|
|
|
|
38,231
|
|
Inventories
|
|
|
66,487
|
|
|
|
59,957
|
|
Inventories - short-term
|
|
|
(61,901
|
)
|
|
|
(50,971
|
)
|
Inventories - long-term (2)
|
|
$
|
4,586
|
|
|
$
|
8,986
|
|
(1)
|
Work-in-process includes the standard components of inventory used to build the typical modules or module components that are intended to be used in future project asset construction or power plant orders or for use under the Company’s service agreements. Included in work-in-process as of January 31, 2021 and October 31, 2020 was $26.7 million and $19.6 million, respectively, of completed standard components and modules.
|
9
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
(2)
|
Long-term inventory includes modules that are contractually required to be segregated for use as replacement modules for specific project assets.
|
Raw materials consist mainly of various nickel powders and steels, various other components used in producing cell stacks and purchased components for balance of plant. Work-in-process inventory is comprised of material, labor, and overhead costs incurred to build fuel cell stacks and modules, which are subcomponents of a power plant.
The Company incurred costs associated with excess plant capacity and manufacturing variances of $2.0 million and $1.7 million for the three months ended January 31, 2021 and 2020, respectively, which were included within product cost of revenues on the Consolidated Statements of Operations and Comprehensive Loss.
Note 6. Project Assets
Project assets as of January 31, 2021 and October 31, 2020 consisted of the following (in thousands):
|
|
January 31,
|
|
|
October 31,
|
|
|
Estimated
|
|
|
2021
|
|
|
2020
|
|
|
Useful Life
|
Project Assets - Operating
|
|
$
|
103,452
|
|
|
$
|
99,351
|
|
|
5-20 years
|
Project Assets - Construction in progress
|
|
|
93,998
|
|
|
|
91,276
|
|
|
7-20 years
|
|
|
|
197,450
|
|
|
|
190,627
|
|
|
|
Accumulated depreciation
|
|
|
(32,857
|
)
|
|
|
(28,818
|
)
|
|
|
Project Assets, net
|
|
$
|
164,593
|
|
|
$
|
161,809
|
|
|
|
Project assets as of January 31, 2021 and October 31, 2020 included eight, completed, commissioned installations generating power with respect to which the Company has a power purchase agreement (“PPA”) with the end-user of power and site host or utility with an aggregate value of $70.6 million and $70.5 million as of January 31, 2021 and October 31, 2020, respectively. Certain of these assets are the subject of sale-leaseback arrangements with PNC Energy Capital, LLC (“PNC”) and Crestmark Equipment Finance (“Crestmark”). Project asset depreciation was approximately $4.0 million and $3.0 million for the three months ended January 31, 2021 and 2020, respectively.
Project assets as of January 31, 2021 and October 31, 2020 also include installations with carrying values of $94.0 million and $91.3 million, respectively, which are being developed and constructed by the Company in connection with projects for which we have entered into PPAs or projects for which we expect to secure PPAs or otherwise recover the asset value and which have not yet been placed in service. Of these totals, as of January 31, 2021 and October 31, 2020, approximately $4.9 million and $4.8 million, respectively, relates to projects for which we expect to secure long-term contracts and/or otherwise recover the asset value and which have not yet been placed in service.
Project construction costs incurred for long-term project assets are reported as investing activities in the Consolidated Statements of Cash Flows. The proceeds received from the sale and subsequent leaseback of project assets are classified as “Cash flows from financing activities” within the Consolidated Statements of Cash Flows and are classified as a financing obligation within “Current portion of long-term debt” and “Long-term debt and other liabilities” on the Consolidated Balance Sheets (refer to Note 16. “Debt” for more information).
Note 7. Goodwill and Intangible Assets
As of January 31, 2021 and October 31, 2020, the Company had goodwill of $4.1 million and intangible assets of $19.6 million and $20.0 million, respectively, that were recorded in connection with the Company’s 2012 acquisition of Versa Power Systems, Inc. (“Versa”) and the 2019 Bridgeport Fuel Cell Project acquisition. The Versa acquisition intangible asset is an indefinite-lived in-process research and development intangible asset for cumulative research and development efforts associated with the development of solid oxide fuel cell stationary power generation. Amortization expense for the Bridgeport Fuel Cell Project PPA asset for each of the three months ended January 31, 2021 and 2020 was $0.3 million.
10
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
The following tables summarize the Company’s intangible assets as of January 31, 2021 and October 31, 2020 (in thousands):
As of January 31, 2021
|
|
Gross Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Amount
|
|
In-Process Research and Development
|
|
$
|
9,592
|
|
|
$
|
-
|
|
|
$
|
9,592
|
|
Bridgeport PPA
|
|
|
12,320
|
|
|
|
(2,269
|
)
|
|
|
10,051
|
|
Total
|
|
|
21,912
|
|
|
|
(2,269
|
)
|
|
|
19,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2020
|
|
Gross Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Amount
|
|
In-Process Research and Development
|
|
$
|
9,592
|
|
|
$
|
-
|
|
|
$
|
9,592
|
|
Bridgeport PPA
|
|
|
12,320
|
|
|
|
(1,945
|
)
|
|
|
10,375
|
|
Total
|
|
|
21,912
|
|
|
|
(1,945
|
)
|
|
|
19,967
|
|
Note 8. Other Current Assets
Other current assets as of January 31, 2021 and October 31, 2020 consisted of the following (in thousands):
|
|
January 31,
|
|
|
October 31,
|
|
|
|
2021
|
|
|
2020
|
|
Advance payments to vendors (1)
|
|
$
|
1,483
|
|
|
$
|
1,954
|
|
Prepaid expenses and other (2)
|
|
|
5,939
|
|
|
|
4,352
|
|
Other current assets
|
|
$
|
7,422
|
|
|
$
|
6,306
|
|
(1)
|
Advance payments to vendors relate to payments for inventory purchases ahead of receipt.
|
(2)
|
Primarily relates to other prepaid vendor expenses including insurance expense.
|
Note 9. Other Assets
Other assets as of January 31, 2021 and October 31, 2020 consisted of the following (in thousands):
|
|
January 31,
|
|
|
October 31,
|
|
|
|
2021
|
|
|
2020
|
|
Long-term stack residual value (1)
|
|
$
|
702
|
|
|
$
|
890
|
|
Long-term unbilled receivables (2)
|
|
|
12,119
|
|
|
|
8,856
|
|
Other (3)
|
|
|
5,667
|
|
|
|
5,593
|
|
Other assets
|
|
$
|
18,488
|
|
|
$
|
15,339
|
|
(1)
|
Relates to estimated residual value for module exchanges performed under the Company’s service agreements where the useful life extends beyond the contractual term of the service agreement and the Company obtains title for the module from the customer upon expiration or non-renewal of the service agreement. If the Company does not obtain rights to title from the customer, the full cost of the module is expensed at the time of the module exchange.
|
(2)
|
Represents unbilled receivables that relate to revenue recognized on customer contracts that will be billed in future periods in excess of 12 months from the balance sheet date.
|
(3)
|
The Company entered into an agreement with one of its customers on June 29, 2016 which includes payments for the purchase of the customer’s power platforms by the Company at the end of the term of the agreement. The payments are to be made in installments over the term of the agreement and the total amount paid as of each of January 31, 2021 and October 31, 2020 was $2.4 million. Also included within “Other” are long-term security deposits and prepaid withholding taxes on deferred revenue as of January 31, 2021 and October 31, 2020.
|
11
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 10. Accrued Liabilities
Accrued liabilities as of January 31, 2021 and October 31, 2020 consisted of the following (in thousands):
|
|
January 31,
|
|
|
October 31,
|
|
|
|
2021
|
|
|
2020
|
|
Accrued payroll and employee benefits
|
|
$
|
1,955
|
|
|
$
|
4,461
|
|
Accrued product warranty cost (1)
|
|
|
91
|
|
|
|
97
|
|
Accrued service agreement and PPA costs (2)
|
|
|
5,853
|
|
|
|
7,037
|
|
Accrued legal, taxes, professional and other (3)
|
|
|
2,864
|
|
|
|
4,086
|
|
Accrued liabilities
|
|
$
|
10,763
|
|
|
$
|
15,681
|
|
(1)
|
The decrease in accrued product warranty cost represents a reduction related to actual warranty activity as contracts progress through the warranty period. Product warranty expense for the three months ended January 31, 2021 and 2020 was $0.01 million and $0.02 million, respectively.
|
(2)
|
Accrued service agreement costs include loss accruals on service agreements of $5.5 million as of October 31, 2020, which decreased to $4.5 million as of January 31, 2021. The decrease is the result of a change in the timing of future module replacements. The accruals for performance guarantees, including PPA performance guarantees was $1.3 million as of January 31, 2021, which reflects a slight decrease from $1.4 million as of October 31, 2020.
|
(3)
|
Accrued legal, taxes, professional and other includes deferred director compensation of $0.8 million and $0.1 million as of January 31, 2021 and October 31, 2020, respectively, for cash compensation to be paid out in the future upon cessation of service on the Board of Directors for two Directors. The increase in deferred director compensation reflects the increase in the Company share price as of January 31, 2021 (compared to the Company’s share price as of October 31, 2020) as this compensation amount is based upon the current share price.
|
Note 11. Leases
The Company enters into operating and finance lease agreements for the use of real estate, vehicles, information technology equipment, and certain other equipment. We determine if an arrangement contains a lease at inception, which is the date on which the terms of the contract are agreed to and the agreement creates enforceable rights and obligations. Operating leases are included in Operating lease right-of-use assets, net, Operating lease liabilities, and Long-term operating lease liabilities in the Company’s Consolidated Balance Sheet. Finance leases are not considered significant to the Company’s Consolidated Balance Sheet or Consolidated Statement of Operations and Comprehensive Loss. Finance lease ROU assets at January 31, 2021 and October 31, 2020 of $0.03 million and $0.04 million, respectively, are included in Property, plant and equipment, net in the Company’s consolidated balance sheet. Finance lease liabilities at January 31, 2021 and October 31, 2020 of $0.02 million and $0.04 million, respectively, are included in Current portion of long-term debt and Long-term debt and other liabilities in the Company’s Consolidated Balance Sheet.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the present value of the Company’s obligation to make lease payments arising from the lease over the lease term at the commencement date of the lease. As most of the Company’s leases do not provide an implicit rate, the Company estimated the incremental borrowing rate based on the information available at the date of adoption in determining the present value of lease payments and used the implicit rate when readily determinable. The Company determined incremental borrowing rates through market sources for secured borrowings including relevant industry rates. The Company’s operating lease ROU assets also include any lease pre-payments and exclude lease incentives. Certain of the Company’s leases include variable payments, which may vary based upon changes in facts or circumstances after the start of the lease. The Company excludes variable payments from lease ROU assets and lease liabilities, to the extent not considered in-substance fixed, and instead, expenses variable payments as incurred. Variable lease expense and lease expense for short term contracts are not material components of lease expense. The Company’s leases generally have remaining lease terms of 1 to 26 years, some of which include options to extend leases. The exercise of lease renewal options is at the Company’s sole discretion and the Company’s lease ROU assets and liabilities reflect only the options the Company is reasonably certain that it will exercise. We do not have leases with residual value guarantees or similar covenants.
Operating lease expense for the three months ended January 31, 2021 and 2020 was $0.4 million and $0.2 million, respectively. As of January 31, 2021, the weighted average remaining lease term (in years) was approximately 20 years and the weighted average discount rate was 7.5%. Lease payments made during the three months ended January 31, 2021 and 2020 were $0.3 million and $0.2 million, respectively.
12
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Undiscounted maturities of operating lease and finance lease liabilities are as follows:
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
Due Year 1
|
|
$
|
1,244
|
|
|
$
|
21
|
|
Due Year 2
|
|
|
1,425
|
|
|
|
3
|
|
Due Year 3
|
|
|
898
|
|
|
|
—
|
|
Due Year 4
|
|
|
740
|
|
|
|
—
|
|
Due Year 5
|
|
|
712
|
|
|
|
—
|
|
Thereafter
|
|
|
14,684
|
|
|
|
—
|
|
Total undiscounted lease payments
|
|
|
19,703
|
|
|
|
24
|
|
Less imputed interest
|
|
|
(10,421
|
)
|
|
|
(1
|
)
|
Total discounted lease payments
|
|
$
|
9,282
|
|
|
$
|
23
|
|
Note 12. Stockholders’ Equity and Warrant Liabilities
December Common Stock Offering
In December of 2020, the Company and Orion Energy Credit Opportunities Fund II, L.P., Orion Energy Credit Opportunities Fund II GPFA, L.P., Orion Energy Credit Opportunities Fund II PV, L.P., and Orion Energy Credit Opportunities FuelCell Co-Invest, L.P. (the lenders under the Credit Agreement among the Company, certain of its affiliates as guarantors, Orion Energy Partners Investment Agent, LLC (the “Orion Agent”) and such lenders (as amended, the “Orion Credit Agreement”) for a $200.0 million senior secured credit facility (the “Orion Facility”)) (the “Selling Stockholders”) completed a public offering of the Company’s common stock. In connection with this public offering, the Company and the Selling Stockholders entered into an underwriting agreement pursuant to which (i) the Company agreed to issue and sell to the underwriters 19,822,219 shares of the Company’s common stock, plus up to 5,177,781 shares of common stock pursuant to an option to purchase additional shares, and (ii) the Selling Stockholders agreed to sell to the underwriters 14,696,320 shares of common stock, in each case at a price to the public of $6.50 per share. The underwriters exercised their option to purchase additional shares, resulting in the issuance and sale by the Company at the closing of the offering of a total of 25,000,000 shares of common stock. The offering closed on December 4, 2020.
Gross proceeds from the sale of common stock by the Company in the offering were $162.5 million. The Company did not receive any proceeds from the sale of common stock in the offering by the Selling Stockholders.
The Company and the Selling Stockholders paid underwriting discounts and commissions of $0.2275 per share, and net proceeds to the Company were approximately $156.4 million after deducting such underwriting discounts and commissions and other estimated offering expenses.
Outstanding Warrants
Orion Warrants
In connection with the closing of the Orion Credit Agreement and the Company’s initial draw down under the Orion Credit Agreement of $14.5 million (the “Initial Funding”), on October 31, 2019, the Company issued warrants to the lenders under the Orion Credit Agreement to purchase up to a total of 6,000,000 shares of the Company’s common stock, at an exercise price of $0.310 per share (the “Initial Funding Warrants”). In addition, under the Orion Credit Agreement, on November 22, 2019, the date on which the Company made a second draw of $65.5 million under the Orion Credit Agreement (the “Second Funding”), the Company issued warrants to the lenders under the Orion Credit Agreement to purchase up to a total of 14,000,000 shares of the Company’s common stock, with an exercise price with respect to 8,000,000 of such shares of $0.242 per share and with an exercise price with respect to 6,000,000 of such shares of $0.62 per share (the “Second Funding Warrants”, and together with the Initial Funding Warrants, the “Orion Warrants”). During fiscal year 2020, the lenders exercised all of the Orion Warrants, except for Orion Warrants to purchase 2,700,000 shares of common stock. On December 7, 2020, all remaining Orion Warrants were exercised to purchase a total of 2,700,000 shares of the Company’s common stock for an aggregate exercise price of $653,400 (or $0.242 per share).
The Orion Warrants that were converted on December 7, 2020 were remeasured to fair value immediately preceding the conversion based upon volatility of 117.02%, a risk free rate of 0.70% and the Company’s common stock price of $7.95 on December 4, 2020, which resulted in a $16.0 million charge for the three months ended January 31, 2021. The estimated fair value of the converted warrants as of the date of conversion of $21.2 million was reclassified to Additional paid in capital.
13
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
During the three months ended January 31, 2020, the lenders exercised, on a cashless basis, Orion Warrants representing the right to purchase 12,000,000 shares of the Company’s common stock. Because these Orion Warrants were exercised on a cashless basis, the Company issued in the aggregate 9,396,320 shares of the Company’s common stock. The Orion Warrants that were converted were remeasured to fair value immediately preceding the conversion based upon volatility of 103.7%, a risk free rate of 1.81% and the Company’s common stock price of $2.29 on January 8, 2020, which resulted in a $23.7 million charge for the three months ended January 31, 2020. The revised estimated fair value of the converted warrants as of the date of conversion of $26.0 million was reclassified to Additional paid in capital. The remaining warrants as of January 31, 2020 were remeasured to estimated fair value based upon a volatility of 104.9%, a risk free rate of 1.45% and the Company’s common stock price at January 31, 2020 of $1.59 per share, which resulted in a charge for the three months ended January 31, 2020 of $10.5 million.
Other Warrants
On May 3, 2017, the Company completed an underwritten public offering that included the offering and sale of: (i) 1,000,000 shares of its common stock, and (ii) Series C warrants to purchase 1,000,000 shares of its common stock that have an exercise price of $19.20 per share and a term of five years. No Series C warrants were exercised during the three months ended January 31, 2021. The Series C warrants contain provisions regarding adjustments to their exercise price and the number of shares of common stock issuable upon exercise.
The following table summarizes outstanding warrant activity during the three months ended January 31, 2021:
|
|
Series C Warrants
|
|
|
Orion Warrants
|
|
Balance as of October 31, 2020
|
|
|
964,128
|
|
|
|
2,700,000
|
|
Warrants exercised
|
|
|
—
|
|
|
|
(2,700,000
|
)
|
Balance as of January 31, 2021
|
|
|
964,128
|
|
|
|
—
|
|
Note 13. Redeemable Preferred Stock
The Company is authorized to issue up to 250,000 shares of preferred stock, par value $0.01 per share, in one or more series, of which 105,875 shares were designated as 5% Series B Cumulative Convertible Perpetual Preferred Stock (“Series B Preferred Stock”) in March 2005.
Series B Preferred Stock
As of January 31, 2021, the Company had 105,875 shares of Series B Preferred Stock, with a liquidation preference of $1,000.00 per share, authorized for issuance. As of January 31, 2021 and October 31, 2020, there were 64,020 shares of Series B Preferred Stock issued and outstanding, with a carrying value of $59.9 million. Dividends of $0.8 million and $2.4 million were paid in cash during the three-month periods ended January 31, 2021 and 2020, respectively. The payment of $2.4 million made in the fiscal quarter ended January 31, 2020 represented the dividends payable with respect to the May 15, 2019 and August 15, 2019 dividend dates and the dividends payable with respect to the November 15, 2019 dividend date that were declared on October 30, 2019.
Class A Preferred Shares
As of October 31, 2020, FCE FuelCell Energy, Ltd. (“FCE Ltd.”) had 1,000,000 Class A Preferred Shares (the “Series 1 Preferred Shares”) issued and outstanding, which were held by Enbridge Inc. (“Enbridge”). Dividends and return of capital payments were due quarterly based on calendar quarters. The Company made payments of Cdn. $1.2 million during the three-month period ended January 31, 2020. The Company’s payments made during the fiscal quarter ended January 31, 2020 included the payments which were not made previously for the calendar quarters ended on March 31, 2019, June 30, 2019 and September 30, 2019. The Company recorded interest expense, which reflects the amortization of the fair value discount of approximately Cdn. $0.6 million for the three months ended January 31, 2021 and 2020. As of October 31, 2020, the carrying value of the Series 1 Preferred Shares was Cdn. $25.6 million (U.S. $19.2 million) and was classified as a preferred stock obligation of a subsidiary on the Consolidated Balance Sheets.
14
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
On January 20, 2020, the Company, FCE Ltd. and Enbridge entered into a letter agreement (the “January 2020 Letter Agreement”), pursuant to which they agreed to amend the articles of FCE Ltd. relating to and setting forth the terms of the Series 1 Preferred Shares to: (i) remove the provisions of the articles permitting or requiring the issuance of shares of the Company’s common stock in exchange for the Series 1 Preferred Shares or as payment of amounts due to the holders of the Series 1 Preferred Shares, (ii) remove certain provisions of the articles relating to the redemption of the Series 1 Preferred Shares, (iii) increase the annual dividend rate, commencing on January 1, 2020, to 15%, (iv) extend the final payment date for all accrued and unpaid dividends and all return of capital payments (i.e., payments of the principal redemption price) from December 31, 2020 to December 31, 2021, (v) clarify when dividend and return of capital payments are to be made in the future and extend the quarterly dividend and return of capital payments through December 31, 2021 (which were previously to be paid each quarter through December 31, 2020), (vi) remove certain terms and provisions of the articles that are no longer applicable, and (vii) make other conforming changes to the articles. In addition, the parties agreed to amend the Company’s guarantee in favor of Enbridge (the “Guarantee”) as necessary or as the parties may mutually agree, in either case, in order to be consistent with such amended articles and to maintain the Company’s guarantee of FCE Ltd.’s obligations under the Series 1 Preferred Shares. The articles of FCE Ltd. were amended and filed in accordance with the provisions of the January 2020 Letter Agreement on March 26, 2020. Under the terms of the January 2020 Letter Agreement, the Company was still required to make (i) annual dividend payments of Cdn. $500,000 and (ii) annual return of capital payments of Cdn. $750,000. Dividend and return of capital payments were to be made on a quarterly basis and were scheduled to end on December 31, 2021 unless these obligations were satisfied in advance of such date.
The amendment to the Series 1 Preferred Shares resulted in an extinguishment of the prior Series 1 Preferred Shares for accounting purposes. A revised fair value was estimated using a discounted cash flow model resulting in a revised carrying value being recorded for the amended Series 1 Preferred Shares which resulted in a loss of Cdn. $0.2 million (U.S. $0.2 million) recorded in Other (expense) income, net on the Consolidated Statements of Operations and Comprehensive Loss during the three months ended January 31, 2020.
Prior to the amendment, the Company bifurcated embedded derivatives related to the conversion feature and a variable dividend feature. As a result of the January 2020 Letter Agreement, both features were removed from the Series 1 Preferred Shares which resulted in the Company recognizing a gain of U.S. $0.6 million related to the extinguishment of the embedded derivatives during the three months ended January 31, 2020.
In December 2020, the Company, FCE Ltd., and Enbridge entered into a payoff letter, pursuant to which the Company paid all amounts owed to Enbridge under the terms of the Series 1 Preferred Shares. As of the date of the payoff letter, the amount owed to Enbridge under the Series 1 Preferred Shares totaled Cdn. $27.4 million, which included Cdn. $4.3 million of principal and Cdn. $23.1 million of accrued dividends.
On December 18, 2020, the Company remitted payment totaling Cdn. $27.4 million, or approximately $21.5 million U.S. dollars, to Enbridge. Upon making the payment, the Company recorded a loss on extinguishment for the Series 1 Preferred Shares of $0.9 million. Concurrent with receipt of the payment from the Company, Enbridge surrendered its Series 1 Preferred Shares in FCE Ltd., and the Guarantee and the January 2020 Letter Agreement were terminated. All obligations related to the Series 1 Preferred Shares were extinguished upon payment.
Note 14. Loss Per Share
The calculation of basic and diluted loss per share was as follows:
|
|
Three Months Ended January 31,
|
|
|
|
2021
|
|
|
2020
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(45,960
|
)
|
|
$
|
(40,151
|
)
|
Series B preferred stock dividends
|
|
|
(800
|
)
|
|
|
(931
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(46,760
|
)
|
|
$
|
(41,082
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average basic common shares
|
|
|
312,109,888
|
|
|
|
202,216,493
|
|
Effect of dilutive securities (1)
|
|
|
—
|
|
|
|
—
|
|
Weighted average diluted common shares
|
|
|
312,109,888
|
|
|
|
202,216,493
|
|
Basic loss per share
|
|
$
|
(0.15
|
)
|
|
$
|
(0.20
|
)
|
Diluted loss per share (1)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.20
|
)
|
(1)
|
Due to the net loss to common stockholders in each of the periods presented above, diluted loss per share was computed without consideration to potentially dilutive instruments as their inclusion would have been anti-dilutive. As of January 31, 2021 and 2020, potentially dilutive securities excluded from the diluted loss per share calculation are as follows:
|
15
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
|
|
January 31,
|
|
|
January 31,
|
|
|
|
2021
|
|
|
2020
|
|
Orion Warrants
|
|
|
-
|
|
|
|
8,000,000
|
|
May 2017 Offering - Series C Warrants
|
|
|
964,128
|
|
|
|
964,128
|
|
Outstanding options to purchase common stock
|
|
|
23,891
|
|
|
|
24,927
|
|
Unvested Restricted Stock Awards
|
|
|
538
|
|
|
|
24,009
|
|
Unvested Restricted Stock Units
|
|
|
2,914,459
|
|
|
|
176,561
|
|
5% Series B Cumulative Convertible Preferred Stock
|
|
|
37,837
|
|
|
|
37,837
|
|
Total potentially dilutive securities
|
|
|
3,940,853
|
|
|
|
9,227,462
|
|
Note 15. Restricted Cash
As of January 31, 2021 and October 31, 2020, there was $31.0 million and $42.2 million, respectively, of restricted cash and cash equivalents pledged as performance security, reserved for future debt service requirements, reserved for letters of credit for certain banking requirements and contracts, and reserved to pay down the Orion Facility or be redeployed into other project financing at the option of the Orion Agent and the lenders under the Orion Facility. Refer to Note 16. “Debt” for additional information on the release of the restricted cash under the Orion Facility. The allocation of restricted cash is as follows (in thousands):
|
|
January 31,
|
|
|
October 31,
|
|
|
|
2021
|
|
|
2020
|
|
Cash Restricted for Outstanding Letters of Credit (1)
|
|
$
|
6,478
|
|
|
$
|
6,543
|
|
Cash Restricted for PNC Sale-Leaseback Transactions
|
|
|
13,031
|
|
|
|
15,125
|
|
Cash Restricted for Crestmark Sale-Leaseback Transaction
|
|
|
431
|
|
|
|
431
|
|
Bridgeport Fuel Cell Park Project Debt Service and Performance Reserves
|
|
|
10,457
|
|
|
|
7,549
|
|
Orion Facility - Performance Reserve (2)
|
|
|
—
|
|
|
|
5,000
|
|
Orion Facility - Module and Debt Service Reserves (3)
|
|
|
—
|
|
|
|
1,950
|
|
Orion Facility - Project Proceeds Account (4)
|
|
|
—
|
|
|
|
4,243
|
|
Other
|
|
|
627
|
|
|
|
1,344
|
|
Total Restricted Cash
|
|
|
31,024
|
|
|
|
42,185
|
|
Restricted Cash and Cash Equivalents - Short-Term (5)
|
|
|
(12,252
|
)
|
|
|
(9,233
|
)
|
Restricted Cash and Cash Equivalents - Long-Term
|
|
$
|
18,772
|
|
|
$
|
32,952
|
|
(1)
|
Letters of credit outstanding as of January 31, 2021 expire on various dates through August 2028.
|
(2)
|
Short-term reserve related to certain project construction and financing milestones.
|
(3)
|
Long-term reserve to be used primarily to fund future module replacements for operating projects falling under the collateral pool (CCSU and Triangle Street) under the Orion Facility.
|
(4)
|
Reserve related to proceeds received from project refinancing to be used to pay-down the Orion Facility unless redeployed into other project financing (at the option of the Orion Agent and the lenders under the Orion Facility).
|
(5)
|
Short-term restricted cash and cash equivalents are amounts expected to be released and categorized as unrestricted cash within twelve months of the balance sheet date.
|
16
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Note 16. Debt
Debt as of January 31, 2021 and October 31, 2020 consisted of the following (in thousands):
|
|
January 31,
|
|
|
October 31,
|
|
|
|
2021
|
|
|
2020
|
|
Orion Energy Partners Credit Facility
|
|
$
|
—
|
|
|
$
|
80,000
|
|
Connecticut Green Bank Loan
|
|
|
4,800
|
|
|
|
4,800
|
|
Connecticut Green Bank Loan (Bridgeport Fuel Cell Project)
|
|
|
4,884
|
|
|
|
5,065
|
|
Liberty Bank Term Loan Agreement (Bridgeport Fuel Cell Project)
|
|
|
9,028
|
|
|
|
9,549
|
|
Fifth Third Bank Term Loan Agreement (Bridgeport Fuel Cell Project)
|
|
|
9,028
|
|
|
|
9,549
|
|
Finance obligation for sale-leaseback transactions
|
|
|
49,253
|
|
|
|
49,274
|
|
State of Connecticut Loan
|
|
|
9,248
|
|
|
|
9,454
|
|
Liberty Bank Promissory Note (PPP Note)
|
|
|
6,515
|
|
|
|
6,515
|
|
Finance lease obligations
|
|
|
23
|
|
|
|
38
|
|
Deferred finance costs
|
|
|
(1,529
|
)
|
|
|
(3,737
|
)
|
Unamortized debt discount
|
|
|
—
|
|
|
|
(5,152
|
)
|
Total debt and financing obligations
|
|
$
|
91,250
|
|
|
$
|
165,355
|
|
Current portion of long-term debt and financing obligations
|
|
|
(14,594
|
)
|
|
|
(21,366
|
)
|
Long-term debt and financing obligations
|
|
$
|
76,656
|
|
|
$
|
143,989
|
|
Orion Energy Partners Investment Agent, LLC Credit Agreement
On November 30, 2020, the Company, its subsidiary guarantors, and the Orion Agent entered into a payoff letter with respect to the Orion Credit Agreement (the “Orion Payoff Letter”). Pursuant to the Orion Payoff Letter, on December 7, 2020, the Company paid a total of $87.3 million to the Orion Agent, representing the outstanding principal, accrued but unpaid interest, prepayment premium, fees, costs and other expenses due and owing under the Orion Facility and the Orion Credit Agreement and related loan documents, in full repayment of the Company’s outstanding indebtedness under the Orion Facility and the Orion Credit Agreement and related loan documents. In accordance with the Orion Payoff Letter, the aggregate prepayment premium set forth in the Orion Credit Agreement was reduced from approximately $14.9 million to $4.0 million and the Orion Agent, on behalf of itself and the lenders, agreed that any portion of the prepayment premium that would otherwise be required to be paid pursuant to the Orion Credit Agreement in excess of $4.0 million was waived by the Orion Agent and the lenders. The Company expensed the remaining deferred finance costs and debt discount of $7.1 million. The Company has classified the $4.0 million prepayment premium and the deferred finance costs and debt discount expense as Loss on extinguishment of debt on the Consolidated Statements of Operations and Comprehensive Loss.
Concurrently with the Orion Agent’s receipt of full payment pursuant to the Orion Payoff Letter, 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 $11.2 million of restricted cash to the Company, which became unrestricted cash), and the Company and its subsidiaries were unconditionally released from their respective obligations under the Orion Credit Agreement (and related loan documents) and the Orion Facility without further action. With the termination of the Orion Facility and the Orion Credit Agreement and related loan documents, the lenders no longer have the right to appoint representatives to attend the Company’s Board of Director meetings as observers.
Liberty Bank Promissory Note
On April 20, 2020, the Company entered into the PPP Note, dated April 16, 2020, evidencing a loan to the Company from Liberty Bank, under the CARES Act, administered by the SBA. Pursuant to the PPP Note, the Company received total proceeds of approximately $6.5 million on April 24, 2020.
Refer to Note. 19. “Subsequent Events” for information regarding the withdrawal of the application for forgiveness and the repayment of the PPP Note.
Note 17. Benefit Plans
We have stockholder approved equity incentive plans, a stockholder approved Employee Stock Purchase Plan and an employee tax-deferred savings plan. During the three months ended January 31, 2021, the Company approved a sub-plan to its 2018 Omnibus Incentive Plan, as amended and restated, which is described in more detail below:
17
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
2018 Omnibus Incentive Plan
The Company’s 2018 Omnibus Incentive Plan (as amended and restated from time to time, the “2018 Incentive Plan”) authorizes grants of stock options, stock appreciation rights (“SARs”), restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance shares, performance units and incentive awards to employees, directors, consultants and advisors. Stock options, RSAs and SARs have restrictions as to transferability. Stock option exercise prices are fixed by the Company’s Board of Directors but shall not be less than the fair market value of our common stock on the date of the grant. SARs may be granted in conjunction with stock options.
On November 24, 2020, the Company’s Board of Directors approved a Long Term Incentive Plan (the “LTI Plan”) as a sub-plan consisting of awards made under the 2018 Incentive Plan. The participants in the LTI Plan are members of senior management and include the Company’s named executive officers (as identified in the definitive proxy statement filed by the Company on February 19, 2021). The LTI Plan consists of three award components: (1) relative total shareholder return (“TSR”) performance shares, (2) absolute TSR performance shares, and (3) time-vesting restricted stock units. The performance shares granted during the three months ended January 31, 2021 will be earned over the performance period ending on October 31, 2023, but will remain subject to a continued service-based vesting requirement until the third anniversary of the date of grant. The performance measure for the relative TSR performance shares is the TSR of the Company relative to the TSR of the Russell 2000 from November 1, 2020 through October 31, 2023. The performance measure for the absolute TSR performance shares is an increase in the Company’s stock price during the performance period of November 1, 2020 through October 31, 2023. The time-vesting RSUs granted during the three months ended January 31, 2021 will vest at a rate of one-third of the total number of RSUs on each of the first three anniversaries of the date of grant. None of the awards granted as part of the LTI Plan include any dividend equivalent or other stockholder rights. To the extent the awards are earned, they may be settled in shares or cash of an equivalent value at the Company’s option.
On November 24, 2020, 848,078 RSUs were awarded under the LTI Plan, which include 551,252 performance awards and 296,826 time-based awards. Should the Company’s share price achieve the 200% performance level, awardees will receive up to 551,252 additional RSUs. The performance awards were valued based on a Monte-Carlo Simulation, and the estimated fair value of the 275,626 relative TSR performance shares are $14.41 per share and the estimated fair value of the 275,626 absolute TSR performance shares are $15.36 per share. The performance shares and time-based awards will be expensed over the three-year service period.
Share-based compensation was reflected in the Consolidated Statements of Operations and Comprehensive Loss as follows (in thousands):
|
|
Three months Ended January 31,
|
|
|
|
2021
|
|
|
2020
|
|
Cost of revenues
|
|
$
|
178
|
|
|
$
|
117
|
|
General and administrative expense
|
|
$
|
1,163
|
|
|
$
|
339
|
|
Research and development expense
|
|
$
|
30
|
|
|
$
|
21
|
|
|
|
$
|
1,371
|
|
|
$
|
477
|
|
Restricted Stock Awards and Restricted Stock Units Including Performance Based Awards
The following table summarizes our RSA and RSU activity for the three months ended January 31, 2021:
Restricted Stock Awards and Units
|
|
Shares
|
|
|
Weighted-Average Fair Value
|
|
Outstanding as of October 31, 2020
|
|
|
2,067,140
|
|
|
$
|
5.06
|
|
Granted - performance shares
|
|
|
551,252
|
|
|
|
14.89
|
|
Granted - time-vesting restricted stock units
|
|
|
296,826
|
|
|
|
3.28
|
|
Vested
|
|
|
(221
|
)
|
|
|
20.40
|
|
Outstanding as of January 31, 2021
|
|
|
2,914,997
|
|
|
|
5.46
|
|
Note 18. Commitments and Contingencies
Service Agreements
Under the provisions of its service agreements, the Company provides services to maintain, monitor, and repair customer power plants to meet minimum operating levels. Under the terms of such service agreements, the particular power plant must meet a minimum operating output during defined periods of the term. If minimum output falls below the contract requirement, the Company may be subject to performance penalties and/or may be required to repair or replace the customer’s fuel cell module(s).
18
FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
Power Purchase Agreements
Under the terms of the Company’s PPAs, customers agree to purchase power from the Company’s fuel cell power plants at negotiated rates. Electricity rates are generally a function of the customers’ current and estimated future electricity pricing available from the grid. As owner or lessee of the power plants, the Company is responsible for all operating costs necessary to maintain, monitor and repair the power plants. Under certain agreements, the Company is also responsible for procuring fuel, generally natural gas or biogas, to run the power plants. In addition, under the terms of some of the PPAs, the Company may be subject to a performance penalty if the Company does not meet certain performance requirements.
Other
As of January 31, 2021, the Company had unconditional purchase commitments aggregating $64.4 million, for materials, supplies and services in the normal course of business.
Legal Proceedings
POSCO Energy Matters
From approximately 2007 through 2015, we relied on POSCO Energy to develop and grow the South Korean and Asian markets for our products and services. We received upfront license payments and were entitled to receive royalty income from POSCO Energy pursuant to certain manufacturing and technology transfer agreements, including the Alliance Agreement dated February 7, 2007 (and the amendments thereto), the Technology Transfer, License and Distribution Agreement dated February 7, 2007 (and the amendments thereto), the Stack Technology Transfer and License Agreement dated October 27, 2009 (and the amendments thereto), and the Cell Technology Transfer and License Agreement dated October 31, 2012 (and the amendments thereto), which are collectively referred to herein as the “License Agreements”. The License Agreements provided POSCO Energy with the exclusive technology rights to manufacture, sell, distribute and service our SureSource 300, SureSource 1500 and SureSource 3000 fuel cell technology in the South Korean and broader Asian markets. Due to certain actions and inactions of POSCO Energy, the Company has not realized any new material revenues, royalties or new projects developed by POSCO Energy since late 2015.
In November 2019, POSCO Energy spun-off its fuel cell business into a new entity, Korea Fuel Cell Co., Ltd. (“KFC”), without the Company’s consent. As part of the spin-off, POSCO Energy transferred manufacturing and service rights under the License Agreements to KFC, but retained distribution rights and severed its own liability under the License Agreements. The Company formally objected to POSCO Energy’s spin-off, and POSCO Energy posted a bond to secure any liabilities to the Company arising out of the spin-off. In September 2020, the Korean Electricity Regulatory Committee found that POSCO Energy’s spin-off of the fuel cell business to KFC may have been done in violation of South Korean law.
On February 19, 2020, the Company notified POSCO Energy in writing that it was in material breach of the License Agreements by (i) its actions in connection with the spin-off of the fuel cell business to KFC, (ii) its suspension of performance through its cessation of all sales activities since late 2015 and its abandonment of its fuel cell business in Asia, and (iii) its disclosure of material nonpublic information to third parties and its public pronouncements about the fuel cell business on television and in print media that have caused reputational damage to the fuel cell business, the Company and its products. The Company also notified POSCO Energy that, under the terms of the License Agreements, it had 60 days to fully cure its breaches to the Company’s satisfaction and that failure to so cure would lead to termination of the License Agreements. Further, on March 27, 2020, the Company notified POSCO Energy of additional instances of its material breach of the License Agreements based on POSCO Energy’s failure to pay royalties required to be paid in connection with certain module replacements.
On April 27, 2020, POSCO Energy initiated a series of three arbitration demands against the Company at the International Court of Arbitration of the International Chamber of Commerce seated in Singapore alleging certain warranty defects in a sub-megawatt conditioning facility at its facility in Pohang, South Korea and seeking combined damages of approximately $3.3 million. Prior to filing the arbitrations, POSCO Energy obtained provisional attachments from the Seoul Central District Court attaching certain revenues owed to the Company by Korea Southern Power Company (“KOSPO”) as part of such warranty claims, which has delayed receipt of certain payments owed to the Company. POSCO Energy subsequently sought additional provisional attachments on KOSPO revenues from the Seoul Central District Court based on unspecified warranty claims not yet filed in an additional amount of approximately $7 million, and additional provisional attachments on KOSPO revenues from the Seoul Central District Court based on its alleged counterclaims in the license termination arbitration described below in an additional amount of approximately $110 million. As of January 31, 2021, outstanding accounts receivable due from KOSPO were $6.4 million.
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FUELCELL ENERGY, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts in thousands, except share and per share amounts)
On June 28, 2020, the Company terminated the License Agreements with POSCO Energy and filed a demand for arbitration against POSCO Energy and KFC in the International Court of Arbitration of the International Chamber of Commerce based on POSCO Energy’s (i) failure to exercise commercially reasonable efforts to sell the Company’s technology in the South Korean and Asian markets, (ii) disclosure of the Company’s proprietary information to third parties, (iii) attack on the Company’s stock price and (iv) spin-off of POSCO Energy’s fuel cell business into KFC without the Company’s consent. The Company has requested that the arbitral tribunal (a) confirm through declaration that POSCO Energy’s exclusive license to market the Company’s technology and products in South Korea and Asia is null and void as a result of the breaches of the License Agreements and that the Company has the right to pursue direct sales in these markets, (b) order POSCO Energy and KFC to compensate the Company for losses and damages suffered in the amount of more than $200 million, and (c) order POSCO Energy and KFC to pay the Company’s arbitration costs, including counsel fees and expenses. The Company has retained outside counsel on a contingency basis to pursue its claims, and outside counsel has entered into an agreement with a litigation finance provider to fund the legal fees and expenses of the arbitration. In October 2020, POSCO Energy filed a counterclaim in the arbitration (x) seeking approximately $880 million in damages based on allegations that the Company misrepresented the capabilities of its fuel cell technology to induce POSCO Energy to enter into the License Agreements and failed to turn over know-how sufficient for POSCO Energy to successfully operate its business; (y) seeking a declaration that the License Agreements remain in full force and effect and requesting the arbitral tribunal enjoin the Company from interfering in POSCO Energy’s exclusive rights under the License Agreements and (z) seeking an order that the Company pay POSCO Energy’s arbitration costs, including counsel fees and expenses.
The Company has discontinued revenue recognition of the deferred license revenue related to the terminated POSCO Energy License Agreements given the pending arbitration and will continue to evaluate this deferred revenue in future periods.
On August 28, 2020, POSCO Energy filed a complaint in the Court of Chancery of the State of Delaware (the “Court”) purportedly seeking to enforce its rights as a stockholder of the Company to inspect and make copies and extracts of certain books and records of the Company and/or the Company’s subsidiaries pursuant to Section 220 of the Delaware General Corporation Law and/or Delaware common law. POSCO Energy alleges that it is seeking to inspect these documents for a proper purpose reasonably related to its interests as a stockholder of the Company, including investigating whether the Company’s Board of Directors and its management breached their fiduciary duties of loyalty, due care, and good faith. POSCO Energy seeks an order of the Court permitting POSCO Energy to inspect and copy the demanded books and records, awarding POSCO Energy reasonable costs and expenses, including reasonable attorney’s fees incurred in connection with the matter, and granting such other and further relief as the Court deems just and proper.
On September 14, 2020, POSCO Energy filed a complaint in the United States District Court for the Southern District of New York alleging that the Company delayed the removal of restrictive legends on certain share certificates held by POSCO Energy in 2018, thus precluding POSCO Energy from selling the shares and resulting in claimed losses in excess of $1,000,000.
The Company does not believe that any of the arbitrations or legal proceedings brought against the Company by POSCO Energy are for a proper purpose. Further, the Company believes that all such arbitrations and legal proceedings are in fact simply fulfillment of POSCO Energy’s prior threats to file a series of actions against the Company and are attempts to obtain leverage over the Company and, in certain proceedings, gain advantage in the pending arbitration filed by the Company against POSCO Energy. The Company will vigorously defend itself against POSCO Energy’s claims in all forums and believes it will be apparent at the conclusion of each matter that each action was filed for an improper purpose.
Other Legal Proceedings
From time to time, the Company is involved in other legal proceedings, including, but not limited to, regulatory proceedings, claims, mediations, arbitrations and litigation, arising out of the ordinary course of its business (“Other Legal Proceedings”). Although the Company cannot assure the outcome of such Other Legal Proceedings, management presently believes that the result of such Other Legal Proceedings, either individually, or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial statements, and no material amounts have been accrued in the Company’s consolidated financial statements with respect to these matters.
Note 19. Subsequent Events
Repayment of Paycheck Protection Program Promissory Note
As disclosed in Note 16. Debt, on April 20, 2020, the Company entered into the PPP Note, dated April 16, 2020, evidencing a loan to the Company from Liberty Bank under the CARES Act, administered by the SBA. Pursuant to the PPP Note, the Company received total loan proceeds of approximately $6.5 million on April 24, 2020 (the “PPP Loan”).
As required by Orion Energy Partners Investment Agent, LLC and its affiliated lenders (collectively, “Orion”) under the Company’s (now former) senior secured credit facility, the Company applied for forgiveness of the PPP Loan in October 2020. However, with the repayment in full of all amounts owed to Orion in December 2020, the Company is no longer required to pursue forgiveness of the PPP Loan. Additionally, since the time of the application for forgiveness, the Company’s financial circumstances have changed substantially, such that the Company is no longer in need of forgiveness of the PPP Loan. Accordingly, on February 11, 2021, the Company withdrew its application for forgiveness and repaid all amounts outstanding under the PPP Note.
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