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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to

Commission file number: 1-14204

GRAPHIC

FUELCELL ENERGY, INC.

(Exact name of registrant as specified in its charter)

Delaware

06-0853042

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

3 Great Pasture Road

Danbury, Connecticut

06810

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (203825-6000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.0001 per share

FCEL

The Nasdaq Stock Market LLC

(Nasdaq Global Market)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes       No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No  

Number of shares of common stock, par value $0.0001 per share, outstanding as of September 10, 2021:  366,613,715

FUELCELL ENERGY, INC.

FORM 10-Q

Table of Contents

    

    

Page

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements.

3

Consolidated Balance Sheets as of July 31, 2021 and October 31, 2020.

3

Consolidated Statements of Operations and Comprehensive Loss for the three months ended July 31, 2021 and 2020.

4

Consolidated Statements of Operations and Comprehensive Loss for the nine months ended July 31, 2021 and 2020.

5

Consolidated Statements of Changes in Equity for the three and nine months ended July 31, 2021.

6

Consolidated Statements of Changes in Equity for the three and nine months ended July 31, 2020.

7

Consolidated Statements of Cash Flows for the nine months ended July 31, 2021 and 2020.

8

Notes to Consolidated Financial Statements.

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

28

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

53

Item 4.

Controls and Procedures.

54

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings.

55

Item 1A.

Risk Factors.

57

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

59

Item 3.

Defaults Upon Senior Securities.

59

Item 4.

Mine Safety Disclosures.

59

Item 5.

Other Information.

59

Item 6.

Exhibits.

60

Signatures

62

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FUELCELL ENERGY, INC.

Consolidated Balance Sheets

(Unaudited)

(Amounts in thousands, except share and per share amounts)

July 31,

October 31,

    

2021

    

2020

ASSETS

Current assets:

Cash and cash equivalents, unrestricted

$

468,565

$

149,867

Restricted cash and cash equivalents - short-term

10,212

9,233

Accounts receivable, net

14,182

9,563

Unbilled receivables

8,690

8,041

Inventories

60,413

50,971

Other current assets

12,170

6,306

Total current assets

574,232

233,981

Restricted cash and cash equivalents - long-term

15,243

32,952

Inventories - long-term

4,586

8,986

Project assets

199,218

161,809

Property, plant and equipment, net

35,961

36,331

Operating lease right-of-use assets, net

7,993

10,098

Goodwill

4,075

4,075

Intangible assets, net

18,994

19,967

Other assets

19,330

15,339

Total assets

$

879,632

$

523,538

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Current portion of long-term debt

$

9,154

$

21,366

Current portion of operating lease liabilities

950

939

Accounts payable

10,893

9,576

Accrued liabilities

13,531

15,681

Deferred revenue

8,454

10,399

Preferred stock obligation of subsidiary

938

Total current liabilities

42,982

58,899

Long-term deferred revenue

28,969

31,501

Long-term preferred stock obligation of subsidiary

18,265

Long-term operating lease liabilities

8,011

9,817

Long-term debt and other liabilities

73,582

150,651

Total liabilities

153,544

269,133

Redeemable Series B preferred stock (liquidation preference of $64,020 as of
July 31, 2021 and October 31, 2020)

59,857

59,857

Total equity:

Stockholders’ equity:

Common stock ($0.0001 par value); 500,000,000 and 337,500,000 shares authorized as of July 31, 2021 and October 31, 2020, respectively; 366,483,758 and 294,706,758 shares issued and outstanding as of July 31, 2021 and October 31, 2020, respectively

37

29

Additional paid-in capital

1,908,011

1,359,454

Accumulated deficit

(1,241,070)

(1,164,196)

Accumulated other comprehensive loss

(747)

(739)

Treasury stock, Common, at cost (67,694 and 56,411 shares as of July 31, 2021
and October 31, 2020, respectively)

(544)

(432)

Deferred compensation

544

432

Total stockholders’ equity

666,231

194,548

Total liabilities and stockholders' equity

$

879,632

$

523,538

See accompanying notes to consolidated financial statements

3

FUELCELL ENERGY, INC.

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(Amounts in thousands, except share and per share amounts)

Three Months Ended July 31,

    

2021

    

2020

Revenues:

Product

$

$

Service and license

14,344

7,113

Generation

6,230

4,722

Advanced Technologies

6,246

6,893

Total revenues

26,820

18,728

Costs of revenues:

Product

1,903

2,658

Service and license

13,026

8,833

Generation

6,728

6,327

Advanced Technologies

4,063

4,038

Total costs of revenues

25,720

21,856

Gross profit (loss)

1,100

(3,128)

Operating expenses:

Administrative and selling expenses

8,662

6,607

Research and development expenses

3,023

1,027

Total costs and expenses

11,685

7,634

Loss from operations

(10,585)

(10,762)

Interest expense

(1,554)

(4,165)

Change in fair value of common stock warrant liability

(1,694)

Gain on extinguishment of financing obligation

1,801

Other income (expense), net

149

(501)

Loss before provision for income taxes

(11,990)

(15,321)

Provision for income taxes

(7)

(10)

Net loss

(11,997)

(15,331)

Series B preferred stock dividends

(800)

(800)

Net loss attributable to common stockholders

$

(12,797)

$

(16,131)

Loss per share basic and diluted:

Net loss per share attributable to common stockholders

$

(0.04)

$

(0.07)

Basic and diluted weighted average shares outstanding

337,291,562

217,966,402

Three Months Ended July 31,

    

2021

    

2020

Net loss

$

(11,997)

$

(15,331)

Other comprehensive loss:

Foreign currency translation adjustments

(6)

(139)

Total comprehensive loss

$

(12,003)

$

(15,470)

See accompanying notes to consolidated financial statements.

4

FUELCELL ENERGY, INC.

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(Amounts in thousands, except share and per share amounts)

Nine Months Ended July 31,

    

2021

    

2020

Revenues:

Product

$

$

Service and license

19,917

19,697

Generation

17,306

14,795

Advanced Technologies

18,427

19,380

Total revenues

55,650

53,872

Costs of revenues:

Product

6,190

7,512

Service and license

20,992

16,418

Generation

23,265

17,576

Advanced Technologies

12,477

12,046

Total costs of revenues

62,924

53,552

Gross (loss) profit

(7,274)

320

Operating expenses:

Administrative and selling expenses

27,264

19,041

Research and development expenses

7,810

3,323

Total costs and expenses

35,074

22,364

Loss from operations

(42,348)

(22,044)

Interest expense

(5,662)

(11,026)

(Loss) gain on extinguishment of debt and financing obligation

(11,156)

1,801

Loss on extinguishment of Series 1 preferred share obligation

(934)

Change in fair value of common stock warrant liability

(15,974)

(39,311)

Other (expense) income, net

(797)

370

Loss before provision for income taxes

(76,871)

(70,210)

Provision for income taxes

(3)

(41)

Net loss

(76,874)

(70,251)

Series B preferred stock dividends

(2,400)

(2,531)

Net loss attributable to common stockholders

$

(79,274)

$

(72,782)

Loss per share basic and diluted:

Net loss per share attributable to common stockholders

$

(0.24)

$

(0.35)

Basic and diluted weighted average shares outstanding

323,983,465

210,389,907

Nine Months Ended July 31,

    

2021

    

2020

Net loss

$

(76,874)

$

(70,251)

Other comprehensive loss:

Foreign currency translation adjustments

(8)

(230)

Total comprehensive loss

$

(76,882)

$

(70,481)

5

FUELCELL ENERGY, INC.

Consolidated Statements of Changes in Equity

(Unaudited)

(Amounts in thousands, except share amounts)

Common Stock

    

Shares

    

Amount

    

Additional
Paid-in
Capital

    

Accumulated
Deficit

    

Accumulated
Other
Comprehensive
Income (Loss)

    

Treasury
Stock

    

Deferred
Compensation

    

Total
Equity

Balance, October 31, 2020

294,706,758

$

29

$

1,359,454

$

(1,164,196)

$

(739)

$

(432)

$

432

$

194,548

Sale of common stock, net of fees

25,000,000

3

156,363

156,366

Orion warrant exercises

2,700,000

21,824

21,824

Common stock issued, non-employee compensation

2,734

45

45

Stock issued under benefit plans, net of taxes paid upon vesting of restricted stock awards

4,521

8

8

Share based compensation

1,417

1,417

Preferred dividends — Series B

(800)

(800)

Effect of foreign currency translation

58

58

Adjustment for deferred compensation

(1,669)

(30)

30

Release of a share reserve

(48)

Net Loss

(45,960)

(45,960)

Balance, January 31, 2021

322,412,296

$

32

$

1,538,311

$

(1,210,156)

$

(681)

$

(462)

$

462

$

327,506

Sale of common stock, net of fees

5

5

Warrant exercises

14,026

269

269

Common stock issued, non-employee compensation

5,456

55

55

Stock issued under benefit plans, net of taxes paid upon vesting of restricted stock awards

64,782

(262)

(262)

Share based compensation

1,253

1,253

Preferred dividends — Series B

(800)

(800)

Effect of foreign currency translation

(60)

(60)

Adjustment for deferred compensation

(3,756)

(41)

41

Net Loss

(18,917)

(18,917)

Balance, April 30, 2021

322,492,804

$

32

$

1,538,831

$

(1,229,073)

$

(741)

$

(503)

$

503

$

309,049

Sale of common stock, net of fees

43,978,999

5

368,949

368,954

Common stock issued, non-employee compensation

12,985

95

95

Share based compensation

903

903

Stock issued under benefit plans

4,828

33

33

Preferred dividends — Series B

(800)

(800)

Adjustment for deferred compensation

(5,858)

(41)

41

Effect of foreign currency translation

(6)

(6)

Net loss

(11,997)

(11,997)

Balance, July 31, 2021

366,483,758

37

1,908,011

(1,241,070)

(747)

(544)

544

666,231

6

FUELCELL ENERGY, INC.

Consolidated Statements of Changes in Equity

(Unaudited)

(Amounts in thousands, except share amounts)

Common Stock

    

Shares

    

Amount

    

Additional
Paid-in
Capital

    

Accumulated
Deficit

    

Accumulated
Other
Comprehensive
Loss

    

Treasury
Stock

    

Deferred
Compensation

    

Total
Equity

Balance, October 31, 2019

193,608,684

$

19

$

1,151,454

$

(1,075,089)

$

(647)

$

(466)

$

466

$

75,737

Share based compensation

488

488

Orion warrant exercises

9,396,320

1

25,993

25,994

Sale of common stock, net of fees

7,938,228

1

3,501

3,502

Taxes paid upon vesting of restricted stock
awards, net of stock issued under benefit
plans

2,585

(6)

(6)

Preferred dividends — Series B

(931)

(931)

Adjustment for deferred compensation

20,012

29

(29)

Effect of foreign currency translation

(49)

(49)

Net loss

(40,151)

(40,151)

Balance, January 31, 2020

210,965,829

$

21

$

1,180,499

$

(1,115,240)

$

(696)

$

(437)

$

437

$

64,584

Share based compensation

375

375

Taxes paid upon vesting of restricted stock
awards, net of stock issued under benefit
plans

86,572

(32)

(32)

Preferred dividends — Series B

(800)

(800)

Effect of foreign currency translation

(42)

(42)

Net loss

(14,769)

(14,769)

Balance, April 30, 2020

211,052,401

$

21

$

1,180,042

$

(1,130,009)

$

(738)

$

(437)

$

437

$

49,316

Sale of common stock, net of fees

25,144,704

3

62,328

62,331

Common stock issued, non-employee compensation

(8,272)

112

112

Reclassification of value of share based compensation
upon approval of authorized shares for grant

434

434

Share based compensation

398

398

Stock issued under benefit plans, net of taxes
paid upon vesting of restricted stock awards

2,150

4

4

Preferred dividends — Series B

(800)

(800)

Effect of foreign currency translation

(139)

(139)

Adjustment for deferred compensation

(18,186)

34

(34)

Net loss

(15,331)

(15,331)

Balance, July 31, 2020

236,172,797

$24

$1,242,518

($1,145,340)

($877)

($403)

$403

$96,325

See accompanying notes to consolidated financial statements.

7

FUELCELL ENERGY, INC.

Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

Nine Months Ended July 31,

    

2021

    

2020

Cash flows from operating activities:

Net loss

$

(76,874)

$

(70,251)

Adjustments to reconcile net loss to net cash used in operating activities:

Share-based compensation

3,573

1,261

Depreciation and amortization

14,921

13,828

Change in fair value of common stock warrant liability

15,974

39,311

Non-cash charge (benefit) for extinguishment of preferred stock obligation of subsidiary

934

(475)

Non-cash interest expense on preferred stock and debt obligations

3,403

5,385

Non-cash charge for extinguishment of debt

7,156

(1,801)

Unrealized (gain) loss on derivative contract

(299)

463

Operating lease expense

1,143

478

Operating lease payments

(902)

(737)

Unrealized foreign currency losses (gains)

911

(312)

Other non-cash transactions, net

171

1,083

(Increase) decrease in operating assets:

Accounts receivable

(4,619)

(4,072)

Unbilled receivables

(5,419)

(2,727)

Inventories

(11,014)

(2,674)

Other assets

(3,281)

(1,697)

Increase (decrease) in operating liabilities:

Accounts payable

668

(7,051)

Accrued liabilities

(2,554)

4,461

Deferred revenue

(4,477)

950

Net cash used in operating activities

(60,585)

(24,577)

Cash flows from investing activities:

Capital expenditures

(2,907)

(160)

Project asset expenditures

(41,301)

(23,493)

Project asset acquisition

(611)

Net cash used in investing activities

(44,208)

(24,264)

Cash flows from financing activities:

Repayment of debt

(93,951)

(27,791)

Proceeds from debt, net of debt discount

87,757

Payment of deferred financing costs

(2,697)

Issuances of common stock issued for benefit plans, net fees

18

5

Payment of preferred dividends and return of capital

(2,400)

(5,438)

Repayment of preferred stock obligation of subsidiary

(21,541)

Proceeds from sales of common stock and warrant exercises, net

524,643

64,737

Net cash provided by financing activities

406,769

116,573

Effects on cash from changes in foreign currency rates

(8)

(230)

Net increase in cash, cash equivalents and restricted cash

301,968

67,502

Cash, cash equivalents and restricted cash-beginning of period

192,052

39,778

Cash, cash equivalents and restricted cash-end of period

$

494,020

$

107,280

Supplemental cash flow disclosures:

Cash interest paid and early prepayment charge

$

5,326

$

6,194

Noncash financing and investing activity:

Operating lease liabilities

1,459

899

Operating lease right-of-use assets

1,459

899

Net noncash reclassifications from project assets to inventory

5,972

1,152

Warrant exercises

21,170

25,994

Accrued sale of common stock, cash received in a subsequent period

1,607

1,096

Accrued purchase of fixed assets, cash to be paid in subsequent period

315

Accrued purchase of project assets, cash to be paid in subsequent period

875

1,364

See accompanying notes to consolidated financial statements.

8

FUELCELL ENERGY, INC.

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 and nine months ended July 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.

9

Liquidity

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 July 31, 2021, unrestricted cash and cash equivalents totaled $468.6 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.
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 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 February 2021, the Company further reduced its debt by repaying the outstanding Paycheck Protection Program Promissory Note from Liberty Bank under the CARES Act totaling $6.5 million.

On June 11, 2021, the Company entered into an Open Market Sale Agreement with Jefferies LLC and Barclays 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 through July 31, 2021, approximately 44.0 million shares were sold resulting in net proceeds to the Company totaling approximately $369.0 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. See Note 12. “Stockholders’ Equity and Warrant Liabilities” for additional information regarding the Open Market Sale Agreement.

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

10

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.

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.

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 July 31, 2021 and October 31, 2020 were $22.3 million and $16.9 million, respectively. The contract assets relate to the Company’s rights to consideration for work performed but not billed. These amounts are included on a separate line item as Unbilled receivables for amounts expected to be billed within one year from the balance sheet date, 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.

Contract liabilities as of July 31, 2021 and October 31, 2020 were $37.4 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.

11

In July 2020, the Company discontinued revenue recognition of the deferred license revenue related to the terminated POSCO Energy License Agreements (as defined elsewhere herein) given the pending arbitration described in Part II, Item 1, “Legal Proceedings” and will continue to evaluate this deferred revenue in future periods (for more information, refer to Note 18. “Commitments and Contingencies”). As of July 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 July 31, 2021, the Company’s total remaining performance obligations were: $127.0 million for service agreements, $22.2 million for license agreements and $40.0 million for Advanced Technologies contracts in the aggregate. Service revenue in periods in which there are no module exchanges is expected to be relatively consistent from period to period, whereas module exchanges will result in an increase in revenue when exchanges occur.

Note 4. Accounts Receivable, Net and Unbilled Receivables

Accounts receivable, net and Unbilled receivables as of July 31, 2021 and October 31, 2020 consisted of the following (in thousands):

July 31,

October 31,

    

2021

    

2020

Commercial Customers:

Amount billed

$

11,659

$

7,329

Unbilled receivables (1)

7,333

7,063

18,992

14,392

Advanced Technologies (including U.S. government(2)):

Amount billed

2,523

2,234

Unbilled receivables

1,357

978

3,880

3,212

Accounts receivable, net and unbilled receivables

$

22,872

$

17,604

(1) Additional long-term unbilled receivables of $13.6 million and $8.9 million are included within “Other Assets” as of July 31, 2021 and October 31, 2020, respectively.
(2) Total U.S. government accounts receivable, including unbilled receivables, outstanding as of July 31, 2021 and October 31, 2020 were $1.3 million and $1.1 million, respectively.

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 July 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.

12

Note 5. Inventories

Inventories (short and long-term) as of July 31, 2021 and October 31, 2020 consisted of the following (in thousands):

July 31,

October 31,

    

2021

    

2020

Raw materials

$

30,831

$

21,726

Work-in-process (1)

34,168

38,231

Inventories

64,999

59,957

Inventories - short-term

(60,413)

(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 July 31, 2021 and October 31, 2020 was $18.6 million and $19.6 million, respectively, of completed standard components and modules.
(2) Long-term inventory includes modules that are contractually required to be segregated for use as exchange 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 platform.

The Company incurred costs associated with excess plant capacity and manufacturing variances of $1.7 million and $2.6 million for the three months ended July 31, 2021 and 2020, respectively, and $5.0 million and $7.0 million for the nine months ended July 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 July 31, 2021 and October 31, 2020 consisted of the following (in thousands):

July 31,

October 31,

Estimated

    

2021

    

2020

    

Useful Life

Project Assets - Operating

$

138,659

$

99,351

5-20 years

Project Assets - Construction in progress

99,646

91,276

7-20 years

238,305

190,627

Accumulated depreciation

(39,087)

(28,818)

Project Assets, net

$

199,218

$

161,809

Project assets as of July 31, 2021 and October 31, 2020 included nine and eight, respectively, 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 an approved utility tariff with an aggregate value of $99.6 million and $70.5 million as of July 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 $3.0 million and $3.1 million for the three months ended July 31, 2021 and 2020, respectively, and $10.3 million and $8.6 million for the nine months ended July 31, 2021 and 2020, respectively.

Project assets as of July 31, 2021 and October 31, 2020 also include installations with carrying values of $99.6 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 and which have not yet been placed in service. As of July 31, 2021 and October 31, 2020, approximately $1.8 million and $4.8 million, respectively, has been capitalized for 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.

13

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 July 31, 2021 and October 31, 2020, the Company had goodwill of $4.1 million and intangible assets of $19.0 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 (“IPR&D”) 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 the three months ended July 31, 2021 and 2020 was $0.3 million and for the nine months ended July 31, 2021 and 2020 was $1.0 million.

The Company completed its annual impairment analysis of goodwill and IPR&D as of July 31, 2021.  A qualitative analysis was completed for fiscal year 2021 and the Company determined that there was no impairment of goodwill or the IPR&D.

The following tables summarize the Company’s intangible assets as of July 31, 2021 and October 31, 2020 (in thousands):

As of July 31, 2021

    

Gross Amount

    

Accumulated
Amortization

    

Net Amount

In-Process Research and Development

$

9,592