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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended October 31, 2022

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

(I.R.S. Employer

incorporation or organization)

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, $0.0001 par value per share

FCEL

The Nasdaq Stock Market LLC (Nasdaq Global Market)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

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

As of April 30, 2022, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $1,576,676,910 based on the closing sale price of $4.08 as reported on the NASDAQ Global Market.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class

Outstanding at December 14, 2022

Common Stock, $0.0001 par value per share

405,723,084

,

DOCUMENT INCORPORATED BY REFERENCE

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Document

Parts Into Which Incorporated

Definitive Proxy Statement for the 2023 Annual Meeting of Stockholders

Part III

FUELCELL ENERGY, INC.

INDEX

Page

Description

    

Number

Part I

Item 1 Business

3

Item 1A Risk Factors

43

Item 1B Unresolved Staff Comments

61

Item 2 Properties

61

Item 3 Legal Proceedings

62

Item 4 Mine Safety Disclosures

62

Part II

Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

63

Item 6 Reserved

65

Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations

66

Item 7A Quantitative and Qualitative Disclosures About Market Risk

92

Item 8 Financial Statements and Supplementary Data

94

Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

146

Item 9A Controls and Procedures

146

Item 9B Other Information

147

Item 9C Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

147

Part III

Item 10 Directors, Executive Officers and Corporate Governance

148

Item 11 Executive Compensation

148

Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

148

Item 13 Certain Relationships and Related Transactions, and Director Independence

149

Item 14 Principal Accountant Fees and Services

149

Part IV

Item 15 Exhibits and Financial Statement Schedules

150

Item 16 Form 10-K Summary

158

Signatures

159

2

PART I

Item 1.BUSINESS

Index to Item 1. BUSINESS

    

Page

Forward-Looking Statement Disclaimer

4

Risk Factor Summary

6

General Information

8

Business Overview

8

Our History

8

Product Platforms and Applications Overview

9

Our Market Opportunity

10

Our Durable Competitive Advantages

11

Our Commitment to Sustainability

12

Our Business Strategy

12

Our Value Proposition

14

Our Current Products

14

Our Product Platforms and Applications – Current and Future

16

Our Markets

21

Our Business Model

24

Advanced Technologies Programs

25

Company Funded Research and Development

25

Manufacturing and Service Facilities

26

Raw Material Sourcing and Supplier Relationships

27

Engineering, Procurement and Construction

28

Services and Warranty Agreements

28

Competition

28

Backlog

29

License Agreements

30

Regulatory and Legislative Environment

33

Government Regulation

35

Proprietary Rights and Licensed Technology

36

Significant Customers and Information about Geographic Areas

36

Human Capital Resources

37

Critical Assumptions and Additional Information Regarding Calculation of our Total Addressable Market Opportunity

38

Available Information

39

3

Forward-Looking Statement Disclaimer

This Annual Report on Form 10-K contains statements that the Company believes to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). All statements other than statements of historical fact included in this Form 10-K, including statements regarding the Company’s future financial condition, results of operations, plans, objectives, expectations, future performance, business operations and business prospects, are forward-looking statements. Words such as “expects,” “anticipates,” “estimates,” “goals,” “projects,” “intends,” “plans,” “believes,” “predicts,” “should,” “seeks,” “will,” “could,” “would,” “may,” “forecast,” and similar expressions and variations of such words are intended to identify forward-looking statements and are included, along with this statement, for purposes of complying with the safe harbor provisions of the PSLRA. Forward-looking statements are neither historical facts, nor assurances of future performance. Instead, such statements are based only on our beliefs, expectations, and assumptions regarding the future. As such, the realization of matters expressed in forward-looking statements involves inherent risks and uncertainties. Such statements relate to, among other things, the following:

the development and commercialization by FuelCell Energy, Inc. and its subsidiaries (“FuelCell Energy,” “Company,” “we,” “us” and “our”) of fuel cell technology and products and the market for such products,
the expected timing of completion of our ongoing projects,
our business plans and strategies,
the markets in which we expect to operate,
the size and scope of our total addressable market opportunity,
expected operating results such as revenue growth and earnings,
our belief that we have sufficient liquidity to fund our business operations for the next 12 months,
future funding under Advanced Technologies contracts,
future financing for projects, including equity and debt investments by investors and commercial bank financing, as well as overall financial market conditions,
the expected cost competitiveness of our technology, and
our ability to achieve our sales plans, market access and market expansion goals, and cost reduction targets.

The forward-looking statements contained in this report are subject to risks and uncertainties, known and unknown, that could cause actual results and future events to differ materially from those set forth in or contemplated by the forward-looking statements, including, without limitation, the risks described under Item 1A - Risk Factors of this report and the following factors:

general risks associated with product development and manufacturing,
general economic conditions,
changes in interest rates, which may impact project financing,
supply chain disruptions,
changes in the utility regulatory environment,
changes in the utility industry and the markets for distributed generation, distributed hydrogen, and fuel cell power plants configured for carbon capture or carbon separation,
potential volatility of commodity prices that may adversely affect our projects,
availability of government subsidies and economic incentives for alternative energy technologies,
our ability to remain in compliance with U.S. federal and state and foreign government laws and regulations and the listing rules of The Nasdaq Stock Market (“Nasdaq”),
rapid technological change,
competition,

4

the risk that our bid awards will not convert to contracts or that our contracts will not convert to revenue,
market acceptance of our products,
changes in accounting policies or practices adopted voluntarily or as required by accounting principles generally accepted in the United States (“U.S. GAAP”),
factors affecting our liquidity position and financial condition,
government appropriations,
the ability of the government and third-parties to terminate their development contracts at any time,
the ability of the government to exercise “march-in” rights with respect to certain of our patents,
our ability to successfully market and sell our products internationally,
our ability to develop new products to achieve our long-term revenue targets,
our ability to implement our strategy,
our ability to reduce our levelized cost of energy and deliver on our cost reduction strategy generally,
our ability to protect our intellectual property,
litigation and other proceedings,
the risk that commercialization of our new products will not occur when anticipated or, if it does, that we will not have adequate capacity to satisfy demand,
our need for and the availability of additional financing,
our ability to generate positive cash flow from operations,
our ability to service our long-term debt,
our ability to increase the output and longevity of our platforms and to meet the performance requirements of our contracts,
our ability to expand our customer base and maintain relationships with our largest customers and strategic business allies, and
concerns with, threats of, or the consequences of, pandemics, contagious diseases or health epidemics, including the 2019 novel coronavirus (“COVID-19”), and resulting supply chain disruptions, shifts in clean energy demand, impacts to our customers’ capital budgets and investment plans, impacts to our project schedules, impacts to our ability to service existing projects, and impacts on the demand for our products.

We cannot assure you that:

we will be able to meet any of our development or commercialization schedules,
any of our new products or technologies, once developed, will be commercially successful,
our SureSource power plants will be commercially successful,
we will be able to obtain financing or raise capital to achieve our business plans,
the government will appropriate the funds anticipated by us under our government contracts,
the government will not exercise its right to terminate any or all of our government contracts, or
we will be able to achieve any other result anticipated in any other forward-looking statement contained herein.

The forward-looking statements contained herein speak only as of the date of this report and readers are cautioned not to place undue reliance on these forward-looking statements. Except for ongoing obligations to disclose material information under the federal securities laws, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any such statement to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based.

5

Risk Factor Summary

Our business is subject to numerous risks and uncertainties, including those described in Item 1A “Risk Factors”. These risks include, but are not limited to the following:

We have incurred losses and anticipate continued losses and negative cash flows.
Our cost reduction strategy for manufacturing may not succeed or may be significantly delayed, which may result in our inability to deliver improved margins.
We have debt and finance obligations outstanding and may incur additional debt in the future, which may adversely affect our financial condition and future financial results.
We rely on project financing for our generation operating portfolio, which includes debt and tax equity financing arrangements, to realize the benefits provided by investment tax credits and accelerated tax depreciation. In the event that interest rates continue to rise or there are changes in tax policy, our financial results could be harmed.
Unanticipated increases or decreases in business growth may result in adverse financial consequences for us.
We are subject to risks in international operations, including risks relating to our ongoing relationship with POSCO Energy Co., Ltd. (“POSCO Energy”) and Korea Fuel Cell Co., Ltd. (“KFC”).
If our goodwill and other indefinite-lived intangible assets and long-lived assets (including project assets) become impaired, we may be required to record a significant charge to operations.
Our Advanced Technologies contracts are subject to the risk of termination by the contracting party and we may not realize the full amounts allocated under some contracts due to the lack of Congressional appropriations or early termination.
Utility companies may resist the adoption of distributed generation and could impose customer fees or interconnection requirements on our customers that could make our products less desirable.
We depend on third party suppliers for the development and timely supply of key raw materials and components for our products.
An increase in energy costs, including as a result of the ongoing conflict between Russia and Ukraine, may materially adversely affect our business, financial condition, and results of operations.
Failure to meet Environmental, Social, and Governance (“ESG”) expectations or standards or to achieve our ESG goals could adversely affect our business, results of operations, financial condition, and stock price.
We derive significant revenue from contracts awarded through competitive bidding processes involving substantial costs and risks. Our contracted projects may not convert to revenue, and our project awards and sales pipeline may not convert to contracts, which may have a material adverse effect on our revenue and cash flows.
We have signed product sales contracts, engineering, procurement and construction contracts (“EPCs”), power purchase agreements (“PPAs”) and long-term service agreements with customers subject to contractual, technology, operating, commodity (i.e., natural gas) and fuel pricing risks, as well as market conditions that may affect our operating results.
We extend product warranties for our products, which products are complex and could contain defects and may not operate at expected performance levels, which could impact sales and market adoption of our products, affect our operating results or result in claims against us.
We currently face and will continue to face significant competition, including from products using other energy sources that may be lower priced or have preferred environmental characteristics. Our plans are dependent on market acceptance of our products and we must complete development of our new products and develop additional commercially viable products in order to achieve our long-term revenue targets.
Our products use inherently dangerous, flammable fuels, operate at high temperatures and use corrosive carbonate material, each of which could subject our business to product liability claims.

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We are increasingly dependent on information technology, and disruptions, failures or security breaches of our information technology infrastructure could have a material adverse effect on our operations and the operations of our power plant platforms. In addition, increased information technology security threats and more sophisticated computer crime pose a risk to our systems, networks, products and services.
We are required to maintain effective internal control over financial reporting. In a prior fiscal year, our management identified a material weakness in our internal control over financial reporting. If other control deficiencies are identified in the future, we may not be able to report our financial results accurately, prevent fraud or file our periodic reports in a timely manner, which may adversely affect investor confidence in our Company and, as a result, the value of our common stock.
Our results of operations could vary as a result of changes to our accounting policies or the methods, estimates and judgments we use in applying our accounting policies.
We may be affected by environmental and other governmental regulation.
A negative government audit could result in an adverse adjustment of our revenue and costs and could result in civil and criminal penalties.
Exports of certain of our products are subject to various export control regulations and may require a license or permission from the U.S. Department of State, the U.S. Department of Energy or other agencies.
The Paycheck Protection Program loan received by us in 2020 and subsequently repaid by us in 2021 has resulted in an informal SEC inquiry into our financial disclosures and may subject us to challenges regarding qualification for the loan, enforcement actions, fines and penalties.
We will need to raise additional capital, and such capital may not be available on acceptable terms, if at all. If we do raise additional capital utilizing equity, existing stockholders will suffer dilution. If we do not raise additional capital, our business could fail or be materially and adversely affected.
We depend on our intellectual property, and our failure to protect that intellectual property could adversely affect our future growth and success. Additionally, the U.S. government has certain rights relating to our intellectual property, including the right to restrict or take title to certain patents.
Our stock price has been and could remain volatile. Financial markets worldwide have experienced heightened volatility and instability which may have a material adverse impact on our Company, our customers and our suppliers.
Provisions of Delaware and Connecticut law and of our certificate of incorporation and by-laws may make a takeover more difficult. Our by-laws provide that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a judicial forum deemed favorable by the stockholder for disputes with us or our directors, officers or employees.
The rights of our 5% Series B Cumulative Convertible Perpetual Preferred Stock (“Series B Preferred Stock”) could negatively impact our cash flows and dilute the ownership interest of our common stockholders. The Series B Preferred Stock ranks senior to our common stock with respect to payments upon liquidation, dividends, and distributions.
Litigation could expose us to significant costs and adversely affect our business, financial condition, and results of operations.
Weakness in the economy and other conditions affecting the financial stability of our customers could negatively impact future sales of our products and our results of operations.
Our results of operations could be adversely affected by economic and political conditions globally and the effects of these conditions on our customers’ businesses and levels of business activity.
Our future success will depend on our ability to attract and retain qualified management, technical and other personnel.

7

General Information

Information contained in this report concerning the electric power supply industry and the distributed generation market, the distributed hydrogen market, the energy storage market and the carbon capture market, our general expectations concerning these industries and markets, and our position within these industries and markets are based on market research, industry publications, other publicly available information and assumptions made by us based on this information and our knowledge of these industries and markets, which we believe to be reasonable. Although we believe that the market research, industry publications and other publicly available information, including the sources that we cite in this report, are reliable, they have not been independently verified by us and, accordingly, we cannot assure you that such information is accurate in all material respects. Our estimates, particularly as they relate to our general expectations concerning the electric power supply industry and the distributed generation market, the distributed hydrogen market, the energy storage market and the carbon capture market, involve risks and uncertainties and are subject to change based on various factors, including those discussed under the section of this report entitled “Item 1A - Risk Factors.”

Unless otherwise specifically noted herein, all degrees refer to Fahrenheit (“F”); kilowatt (“kW”) and megawatt (“MW”) numbers used in this report designate nominal or rated capacity of the referenced power plant which is the design rated output of the referenced power plant as of the date of initiation of commercial operations; “efficiency” or “electrical efficiency” means the ratio of the electrical energy generated in the conversion of a fuel to the total energy contained in the fuel (lower heating value, the standard for power plant generation, assumes the water in the product is in vapor form; as opposed to higher heating value, which assumes the water in the product is in liquid form, net of parasitic load); kW means 1,000 watts; MW means 1,000,000 watts; “kilowatt hour” (“kWh”) is equal to 1kW of power supplied to or taken from an electric circuit steadily for one hour; and one British Thermal Unit (“Btu”) is equal to the amount of heat necessary to raise one pound of pure water from 59oF to 60oF at a specified constant pressure.

All dollar amounts are in U.S. dollars unless otherwise noted.

Business Overview

Headquartered in Danbury, Connecticut, FuelCell Energy has leveraged five decades of research and development to become a global leader in delivering environmentally responsible distributed baseload energy platform solutions through our proprietary fuel cell technology. Our current commercial technology produces electricity, heat, hydrogen, and water while separating carbon for utilization and/or sequestration.  We continue to invest in developing and commercializing future technologies expected to add new capabilities to our platforms’ abilities to deliver hydrogen and long duration hydrogen-based energy storage through our solid oxide technologies, as well as further enhance our existing platforms’ carbon capture solutions.

FuelCell Energy is a global leader in sustainable clean energy technologies that address some of the world’s most critical challenges around energy access, security, safety and environmental stewardship. As a leading global manufacturer of proprietary fuel cell technology platforms, FuelCell Energy is uniquely positioned to serve customers worldwide with sustainable products and solutions for industrial and commercial businesses, utilities, governments, and municipalities.

Our History

FuelCell Energy was founded in 1969 by Bernard Baker and Martin Klein, who had a powerful vision for the future of energy. The Company, which is now based in Connecticut, was founded as a New York corporation to provide applied research and development services on a contract basis. The Company completed its initial public offering in 1992 and reincorporated in Delaware in 1999. The Company sold its first commercial fuel cell power platform in 2003 to the Kirin Ichiban Brewery Company in Tokyo, Japan, which utilized biofuels to produce carbon neutral electricity and steam. From the development and commercialization of a new type of battery to the deployment of the initial SureSource platform, FuelCell Energy has been a pioneer in developing technologies focused on solving some of the world’s most critical challenges around safe, reliable clean energy. This history of technological leadership, the diversity of our team, and our team members’ ideas drive our culture of innovation and sense of purpose.

Today, FuelCell Energy is a global clean technology manufacturer of stationary fuel cell energy platforms that decarbonize power and produce hydrogen.

Our purpose is to enable a world empowered by clean energy.

8

Product Platforms and Applications Overview

Our product portfolio is based on two electrochemical platforms, carbonate and solid oxide.  The platforms are similar in many ways, but they also have unique capabilities.  Both platforms can support power generation and combined heat and power applications using a variety of fuels, including natural gas, renewable biogas, and hydrogen.  The fuel cells utilized in these platforms react fuel electrochemically, without combusting the fuel, which avoids emissions produced by combustion such as nitrogen oxides (“NOx”), sulfur oxides (“SOx”) and particulates.  In the electrochemical process, fuel and air are reacted in separate chambers in the fuel cell stack. The reactions producing CO2 happen before the fuel is mixed with air, and the CO2 is concentrated and therefore easy to capture.  Both our carbonate and solid oxide platforms are enabled to capture their own CO2 for use or sequestration before it is emitted into the air.  However, our carbonate platforms are unique in their ability to also capture CO2 from an external source, utilizing the flue stream of a power plant or an industrial boiler as a replacement for traditional air intake.

Our solid oxide platform can operate on pure hydrogen fuel. We believe this feature will gain importance in the future as hydrogen becomes more widespread as a fuel, and in the more near term as we work to deploy our technology for hydrogen-based energy storage.

Both platforms can be used in electrolysis, which is the reverse of fuel cell operation – producing hydrogen from power.  Carbonate platforms use a mixture of reforming and electrolysis, while solid oxide platforms can be used for pure hydrogen electrolysis.

Our multi-featured platforms can be configured to provide a number of value streams, including electricity, hydrogen, high grade heat (including steam), water and CO2 upgradable to food and beverage grade and/or usable in cement or other industrial products, and to concentrate and separate CO2 from fossil-fueled industrial applications allowing the sequestration and/or utilization of the CO2. We are focused on using our proprietary technology to pursue the following four significant industry applications, each of which we believe is important to the global energy transition and to limiting global warming:

Distributed generation (commercially available);

Distributed hydrogen (commercially available);

Solid Oxide Electrolysis Cell (“SOEC”) based hydrogen production leveraging electrolysis, long-duration hydrogen energy storage and Reversible Solid Oxide Fuel Cells (“RSOFC”) for the low to zero carbon production of electricity utilizing pure hydrogen as the feedstock (under development and available for order); and

Carbon capture from external sources (under development) and carbon separation and utilization enabling carbon capture utilization and sequestration (“CCUS”) (commercially available).

See the section below entitled “Our Product Platforms and Applications” for more information.

9

Our Market Opportunity

Climate initiatives are driving the global push to reduce greenhouse gases, including CO2, NOx and SOx. We believe a large and increasing combined total addressable market (“TAM”) opportunity exists for solutions we currently have commercially available today and those solutions that we are actively developing for commercialization. Through the capabilities of our platforms, we provide clean, reliable baseload power generation (baseload power generation is power generated over a period of time at a steady rate), hydrogen production, high grade heat, isolation and removal of CO2 from exhaust streams, and the ability to use biofuels, renewable natural gas (“RNG”), and a hydrogen-hydrocarbon fuel blend for power generation feedstock. In addition, we are focused on advancing the commercialization of our platform technology to utilize pure hydrogen for baseload power generation and to perform electrolysis to convert water and electricity into hydrogen and to isolate and remove CO2 from external exhaust streams.

Hydrogen enables zero emissions transportation by utilizing a zero-carbon feedstock as the fuel to power cars, trucks, buses, ships, trains, and, in the future, aircraft and other aerospace applications. Hydrogen is also capable of providing the fuel needed to produce high grade heat for industrial applications such as steel and glass production, in addition to its traditional uses for the refining process, in making ammonia, cement, and chemicals, in building heat, for combustion power generation, and even for residential heating.

Hydrogen is also an effective medium for the storage of energy, and we are in the process of commercializing a highly efficient and environmentally favorable hydrogen-based long-duration energy storage solution. We believe hydrogen-based storage is environmentally superior to a mineral-based storage solution such as lithium-ion batteries. Additionally, through the deployment of our megawatt and sub-megawatt power generation platform solutions, we can deliver the benefits of clean, distributed power generation, including the desirable value stream of thermal energy, and avoid the need for massive, long distance transmission infrastructure and the risks that the traditional transmission grid creates.

CO2 is also a valuable input ingredient in many products and processes. We believe that, by using more CO2 (carbon capture utilization) and emitting less CO2 through the efficiencies of our platforms and by capturing CO2 at the source point, the use of our platforms can positively impact climate change. Our platforms are capable of delivering CO2 for food and beverage use, pH balancing of water supply, extending the shelf life of food vital to global food supply and food security, as a binder in a number of materials from concrete to sustainable building materials and the production of synthetic fuels, polymers and other minerals.

Graphic

1 See the section entitled “Critical Assumptions and Additional Information Regarding Calculation of our Total Addressable Market Opportunity” on page 39 for important information regarding the sources and assumptions used in estimating the value of these market opportunities

We view TAM as the overall revenue opportunity that is available for a product or solution if 100% market share is achieved. We believe that the combined value of the TAM opportunity for the markets that may be served by our solutions which are commercially available and solutions which are actively under development by the Company is approximately $2 trillion cumulatively from the date hereof through the end of calendar year 2030 (the “Measuring Period”). Our estimate of the combined, cumulative value of our TAM opportunity is based on review and analysis of third-party sources and application of management’s current assumptions and business judgment as to our market opportunities within the markets

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that may be served by the four technology solutions described below.  The cumulative TAM number represents the combined estimated total market size over the Measuring Period for the markets which such solutions may serve and is not a projection or estimate of the actual market share that we could achieve or the amount of revenue that could be generated by us in these markets in the Measuring Period. The market opportunities which we believe comprise our combined, cumulative approximately $2 trillion TAM opportunity are described below:

(i)

Global carbon capture, carbon separation and utilization market of approximately $1 trillion – Carbon capture technology is currently under development by the Company to serve this market, while the Company currently has commercially available carbon separation and utilization solutions;

(ii)

Global distributed hydrogen market of approximately $400 billion – The Company currently has commercially available a distributed hydrogen solution to serve this market;

(iii)

Global megawatt and sub-megawatt in front of the meter (“FTM”) and behind the meter (“BTM”) distributed power market of approximately $300 billion – The Company currently has commercially available megawatt and sub-megawatt FTM and BTM distributed power solutions to serve this market; and

(iv)

Global solid oxide based long-duration hydrogen energy storage and electrolysis market of approximately $150 billion – Solid oxide based long-duration hydrogen energy storage and electrolysis is currently under development by the Company to serve this market and is available for order.

See the section entitled “Critical Assumptions and Additional Information Regarding Calculation of our Total Addressable Market Opportunity” on page 39 for important information regarding the sources and assumptions used in estimating the value of these market opportunities.
See the section below entitled “Our Markets” for information regarding our existing and target markets.

Our Durable Competitive Advantages

Given the long history of investment in and deployment of our solutions, we believe we have the following competitive advantages:

Intellectual property that we believe makes new entry to the market challenging and a product portfolio that consists of several proprietary technologies that we believe are attractive based on market economics, rather than government mandates alone.

Technical expertise through a tenured, highly skilled workforce, operating complex processes to deliver our platform solutions.

Operational excellence programs and resource management aim to maximize cost-reduction opportunities while improving safety and product quality, and lean management deployment intended to drive manufacturing speed to market, increase cost competitiveness, and decrease the environmental impact of our operations.

Strategic innovation and development relationships with the U.S. Department of Energy (“DOE”), ExxonMobil Technology and Engineering Company, formerly known as ExxonMobil Research and Engineering Company (“EMTEC”), Canadian Natural Resources Limited (“CNRL”) and Drax Group provide funding for and encourage technology development.

Products characterized by sustainability over their full lifecycle compared to other “clean” technologies such as wind turbines, solar panels and mineral-based batteries for which recycling is neither economical nor practical. In addition, mineral-based batteries often rely on minerals plagued by supply challenges, disruptive mining practices, and geopolitical risk that impacts energy security, and contribute to landfills following their useful life.

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Our Commitment to Sustainability

We have developed and begun implementing a plan to reduce our carbon emissions to net zero by 2050. As part of this plan, during fiscal year 2022, we:

Calculated our organizational carbon footprint baseline;
Conducted product life cycle assessments (“LCAs”) to understand emissions throughout the value chain;
Set short term goals (2030) and long-term goals (2050) aligned with science-based targets;
Worked to develop milestones to net zero emissions to guide our Scope 1, 2 and 3 (as described in the Green House Gas Protocol Corporate Accounting and Reporting Standard) emissions reduction goals and track our year over year progress; and
Engaged team members on our net zero journey and realigned our board committee charters to more formally establish oversight of the Company’s ESG efforts.

Our platforms have a direct impact on reducing our customers’ Scope 1 and Scope 2 emissions thus lowering the global environmental footprint of baseload power generation. However, our platforms are designed to go beyond power generation, delivering hydrogen, carbon separation, water, and thermal energy in various applications. As a result of our platforms’ ability to deliver multiple value streams, we help our customers reduce their Scope 1 and Scope 2 emissions on-site without buying off-site carbon/environmental offsets, which do not positively impact the local communities’ air quality or emissions. In the future, we plan to commercialize our hydrogen, long-duration energy storage, and carbon capture technologies intended to drive next generation solutions to help customers attain their decarbonization goals.

Our patented products offer a sustainable alternative to traditional internal combustion-based power generation and reliable baseload power compared to intermittent sources such as wind, solar, and run of river hydro power. Traditional power plants create harmful emissions, such as NOx, SOx and particulate matter, that are a serious public health concern and have a direct impact on the communities in which these plants operate. Intermittent sources, generally, avoid fewer emissions than our fuel cell platforms. Alternatively, our energy platforms use a combustion-free power generation process that is virtually free of pollutants. When a fuel is combusted (as in traditional power generation), carbon is emitted in addition to SOx, NOx, and other particulates. When intermittent power sources go offline because the sun is not shining, the wind is not blowing, or water is not flowing, they rely on traditional fossil-fueled power resources such as coal and natural gas to provide electricity. Our platforms are highly efficient and environmentally friendly products that support the “Triple Bottom Line” concept of sustainability, consisting of environmental, social, and economic considerations.

As an enterprise, we are proud that, in October 2018, we were certified ISO 14001:2015 compliant, having demonstrated the establishment of and adherence to an environmental management system standard. We believe that we are the only fuel cell manufacturer to have received this certification.

Our commitment to sustainability is also evident in the design, manufacturing, installation and on-going servicing of our fuel cell energy platforms, which are engineered for the circular economy. For example, when our platforms reach the end of their useful lives, we have the capability to refurbish and re-use certain parts and also recycle more than 90% by weight of what we cannot re-use. This is a departure from combustion-based, wind, and solar power generation methods that typically produce a significant amount of unrecyclable waste which increases landfill use. The balance of plant (“BOP”) is designed to have an operating life of 25-to-30 years, at which time metals such as steel and copper are reclaimed for scrap value. For context, by weight, approximately 93% of the entire energy platform can be re-used or recycled at the end of its useful life.

Our Business Strategy

In 2019, we launched our “Powerhouse” strategy to strengthen our business, maximize operational efficiencies and position us for future growth. Having made substantial progress in achieving key initiatives under the original three pillars of our strategy, last year we updated the three key pillars of our strategy to “Grow, Scale and Innovate.” Under these three pillars, we will focus on:

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Grow — Penetrate Significant Market Opportunities

Optimize the core business: Capitalizing on our core technological strengths in key product markets, including the use of biofuels, microgrids, distributed hydrogen, and carbon separation and utilization.

Drive commercial excellence: Strengthening customer relationships and building a customer-centric reputation; building our sales pipeline by increasing focus on targeted differentiated applications, product sales and geographic market and customer segment expansion; and building a broader network of channel and go-to-market relationships.

Expand geographically and by market: Targeting growth opportunities in South Korea and across Asia, Europe, North America, the Middle East, Africa and South America. We will continue to monitor other global markets for expansion as those opportunities develop.

Scale — Scale Our Existing Platform to Support Growth

Invest: Investing in our current manufacturing capabilities and building new capacity as we advance commercialization of our Advanced Technologies, enhancing our commercial organization, and investing in marketing to ensure the various audiences of our message have a clear understanding of the potential value propositions and benefits of our platforms and solutions, including customers, regulatory and legislative bodies in each of our target markets, and investors.

Extend process leadership: Building on our legacy of process excellence, so that we scale with the same degree of quality as our current footprint.

Broaden and deepen our human capital: Implementing the next phase of our plan for human capital development to support our growth and enable our future.

Innovate — Innovate for the Future

Continue product innovations: Investing in continuous product improvement, advancing hydrogen-based energy solutions, including storage and electrolysis solutions using a differentiated high-efficiency electrode supported cell capable of reverse (fuel cell/electrolysis) operation, and continuing development of carbon capture and carbon separation technologies extending our platform applications.

Deepen participation in the developing hydrogen economy: Building on our carbonate distributed hydrogen Trigen platform for the delivery of hydrogen to advance our solid oxide technology to support growing applications for distributed hydrogen electrolysis and energy storage applications, leveraging the high efficiency of the platform in electrolysis mode and the ability to operate reversibly between electrolysis and fuel cell mode.  These features allow high efficiency hydrogen and power production using 100% hydrogen fuel for electricity production, and economic and efficient hydrogen-based energy storage.

Diversify our revenue streams by delivering products and services that support the global energy transition: Through the innovations described above, focusing on developing a suite of platforms which we believe will be in demand throughout the energy transition allowing us to increase, broaden and diversify our revenue streams.

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Our Value Proposition

We are working to deploy our unique and differentiated energy solutions to help customers decarbonize power and produce hydrogen, improving access, cost, resiliency, and sustainability of the energy that powers their lives and businesses. Our commitment to delivering our value proposition drives our strategic focus that advances our work and delivers value to our customers.

This is how we measure value to our customers:

Clean energy supporting decarbonization objectives – both in terms of platform capability and delivered output streams. Our platforms assist our customers in reducing emissions;
Achievement of business objectives - aided by the value our platforms delivered;
Low-cost hydrogen availability - through multiple platform solutions that take into account the cost of electricity, the availability of renewable fuels, and the scarcity of water to create hydrogen at or near the point of use;
Reliability – Local solution that can produce power at the point of use, not reliant on long-distance transmission lines and reducing other above ground risks associated with local distribution networks;
Competitive cost of energy – our efficient platform can deliver electricity cost competitively, while also producing other value streams, including thermal energy, hydrogen, CO2 and water.  Public policy that incentivizes the production of clean energy can allow us to produce electricity for less than grid price;
Resiliency – 24/7 power availability providing continuity of customer operations, reliable delivery of power to homes and businesses, and the ability to provide grid independent power; and
Multiple value streams – electricity, hydrogen, thermal, water, and carbon separation.

Our Current Products

Our core fuel cell products offer clean, highly efficient and affordable power generation and thermal value streams, while our enhanced products offer additional value streams such as hydrogen, water, thermal energy, and carbon separation for customers. The platforms are scalable for smaller sub-megawatt applications to multi-megawatt utility applications, microgrid applications, distributed hydrogen, or use of the platform’s thermal attributes for on-site heat and chilling applications for a broad range of applications.

Our commercial platforms include:

SureSource 1500™, our 1.4 MW platform,
SureSource 3000™, our 2.8 MW platform,
SureSource 4000™, our 3.7 MW high efficiency platform,
SureSource 250™ (Europe only), our 250 kW platform,
SureSource 400™ (Europe only), our 400 kW platform, and
SureSource Hydrogen™, or Trigen™, our 2.3 MW platform that is designed to produce up to 1,200 kg of hydrogen per day.

The applications supported by these platforms include:

Combined heat and power (“CHP”),
Microgrid,
Distributed hydrogen, electricity, and water (also referred to as Trigen),
Carbon separation and, under development, carbon capture from external sources, and
Multi-fuel power generation – Biofuels, renewable natural gas, hydrogen and natural gas blend (up to 50% hydrogen), natural gas, and, in development, 100% pure hydrogen power generation leveraging reversible solid oxide fuel cells and long-duration hydrogen energy storage.

Our global SureSource product line is uniformly based on the same carbonate fuel cell technology, and offers the following advantages:

Sustainable: With the commercialization of our solid oxide platform, we will be able to offer two highly differentiated high temperature platforms. Our solutions produce electricity electrochemically − without combustion − and operate at a low decibel level, which enables siting of the power plants within dense, urban

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areas while meeting clean air permitting regulations. We believe that our solutions represent an important local public health benefit and they often generate tax revenues for the local community. Fuel cells also reduce carbon emissions compared to less efficient combustion-based power generation and avoid greater emissions than intermittent renewable energy resources.

Flexible: Our solutions can operate on renewable natural gas, on-site renewable biogas, directed biogas, natural gas, flare gas and propane to offer combined heat and power (“CHP”) and are scalable to add power incrementally as demand grows. Our solid oxide platform is also capable of operating on hydrogen. For our carbonate platform, the unique chemistry of our fuel cells allows them to directly use low Btu on-site biogas utilizing our proprietary gas cleanup skid (SureSource TreatmentTM), with  no reduction in output or efficiency compared to operation on natural gas. We developed our proprietary biogas cleanup and contaminant monitoring equipment which, combined with the inherent suitability of the carbonate fuel cell chemistry, gives us an advantage in on-site biogas applications. In addition, we have demonstrated operation of our carbonate fuel cell technology with other fuel sources including coal syngas, propane, and hydrogen-natural gas blend. We believe traditional oil and gas companies as well as new market entrants will continue to develop and increase the supply of renewable natural gas which would benefit our customers given the fuel flexibility of our platforms.

Reliable: Our solutions improve power reliability and energy security by lessening reliance on the transmission and distribution infrastructure of the electric grid. Unlike solar, wind, and run of river hydro power, fuel cells are able to operate continuously regardless of weather, time of day, water levels, or geographic location.

Standardized: Our solutions use a standard cell design globally, enabling supply chain volume-based cost reduction, optimal resource utilization and long-life product enhancements.

Attractive Thermal Attributes: In addition to electricity, our standard fuel cell configuration produces high quality thermal energy (approximately 700° F), suitable for heating facilities or water, or steam for industrial processes or for absorption cooling. The high thermal value may allow customers to reduce or eliminate their burning of fuel in carbon intensive boilers, which should reduce emissions that contribute to their Scope 1 emissions. When configured for CHP, our system efficiencies can potentially reach up to 90%, depending on the application. When configured for distributed hydrogen, our plants produce hydrogen in addition to power and water, with a potential effective efficiency (counting the fuel that would have been used to produce hydrogen conventionally) of up to 80% before considering waste heat utilization, which can raise the total efficiency even higher.

Use of Readily Available Catalyst Material: As our fuel cells are designed to operate at approximately 1,100° F, our platform solution has a key advantage afforded high temperature fuel cells, specifically that they do not require the use of geographically limited precious metal electrodes required by lower temperature fuel cells, such as proton exchange membrane (“PEM”), phosphoric acid (“PAFC”), and alkaline (“AFC”) fuel cells. As a result, we are able to use less expensive and more readily available industrial metals, primarily nickel and stainless steel, as catalysts for our fuel cell components.

Easy to Site: Our fuel cell energy platforms are easily sited with a relatively small footprint and low decibel operating level given the amount of power produced, allowing our platforms to be located at the point of demand.  They require significantly less land than solar and wind projects. There is minimal noise produced by the mechanical BOP and our fuel cell platforms have a clean emissions profile, making our fuel cell energy platforms ideally suited for urban locations and in suburban applications at or near the point of energy consumption. Locating our platforms on-site also contributes directly to reducing our customers’ Scope 1 and Scope 2 emissions.

Scalable: Our platforms are scalable, providing a cost-effective solution to adding power incrementally as demand grows, such as multi-megawatt fuel cell parks supporting the electric grid and large scale commercial and industrial operations.

Forward Compatibility: Our fuel cells are multi-fuel capable, allowing a customer to deploy our platforms today utilizing natural gas and to migrate in the future to biofuels, renewable natural gas, and/or a hydrogen

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and natural gas blend as those fuels become more abundant. In addition, upon commercialization of our solid oxide platform, we expect that customers will be able to utilize 100% hydrogen for power production.

Product Efficiency and Effectiveness

The electrical efficiency of our carbonate fuel cell solutions ranges from approximately 47% to 60% upon initial operations of our platforms depending on the configuration. When configured for CHP, our system efficiencies can potentially reach up to 90%, depending on the application. Our solutions are designed to deliver high electrical efficiency where the power is used, avoiding transmission. Transmission line losses average about 5% for the U.S. grid, which represents inefficiency, resulting in additional emissions and a hidden cost to utility customers. In addition, overhead transmission lines have been shown to contribute to the ignition of wildfires in certain geographies, causing significant damage and loss of homes and life.

We are targeting very high efficiencies for our solid oxide platforms, which are currently under development.  In fuel cell mode, we are targeting efficiencies in the low to high 60% range depending on the fuel type.  In electrolysis mode, we are targeting electrical efficiency of about 90%, increasing to approximately 100% when augmented by externally supplied waste heat.  In reversible mode, we expect round trip efficiencies in the high 60% range.

We have demonstrated up to 95% carbon capture from simulated coal power plant sources while simultaneously producing baseload power.  For harder to capture streams, such as natural gas power generation or industrial boiler capture, we can achieve similarly high capture levels but with reduced power output.  Our development work with EMTEC is focused on maximizing power output capabilities at high capture levels.  We believe we will be able to operate at capture levels of 90% or better at economically acceptable power output levels with industrial boiler sources, and, with continued development, we expect to be able to cost-effectively capture high percentages of carbon from lower concentration streams in the future.

Our Product Platforms and Applications – Current and Future

We are focused on using our proprietary technology to pursue the following four significant industry applications to decarbonize power and produce hydrogen:

Distributed generation (commercially available);

Distributed hydrogen (commercially available);

SOEC based hydrogen production leveraging electrolysis, long-duration hydrogen energy storage and RSOFCs for the low to zero carbon production of electricity utilizing pure hydrogen as the feedstock (under development and available for order); and

Carbon capture from external sources (under development) and carbon separation and utilization enabling CCUS (commercially available).

Distributed Generation

Our proprietary, patented SureSource platforms generate electricity directly from a hydrogen-rich fuel, such as biogas, renewable natural gas, natural gas or an up to 50% blend of hydrogen and natural gas. This multi-fuel capability enables the SureSource platform to leverage the established natural gas infrastructure that is readily available in our existing and target markets, compared to some types of fuel cells that can only operate on high purity hydrogen. Our proprietary technology also allows us to utilize on-site biogas, renewable natural gas or a hydrogen and natural gas blend, the application of which is rapidly expanding around the world, to fuel our platforms.

We market different configurations and applications of our SureSource platform to meet specific market needs, including:

On-Site Power (also known as “Behind the Meter”): Customers benefit from improved power resilience, energy security from on-site power that reduces reliance on the electric grid in an environmentally responsible manner, and long-term electric and other value stream price certainty. Additionally, thermal energy produced

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by our fuel cells can be used to produce hot water or steam or to drive high efficiency absorption chillers for cooling applications for commercial and industrial customers. The SureSource platform can also deliver hydrogen and carbon dioxide for beverage and food production in addition to other industrial uses. Carbon separated can also be sequestered depending upon the use case.

Utility Grid Support: Our SureSource energy platforms are scalable, enabling multiple fuel cell platforms to be located together on a very small footprint per MW generated. This capability enables utilities to add multi-megawatt power generation to enhance electric grid resiliency where needed, without the associated cost, inefficiencies of a transmission system, and other associated above-ground transmission risks. Our fuel cells can solidify the total utility power generation solution when combined with intermittent sources, such as solar or wind, or less efficient combustion-based equipment that provides peaking or load following power.

Microgrid Applications: SureSource platforms can also be configured as a microgrid, either independently or with other forms of power generation, with the goal of providing continuous power and a seamless transition during times of grid outages. We have deployed multiple microgrids leveraging our platform solutions, some individually and some integrated with other forms of power generation.

Distributed Hydrogen

SureSource platforms are configurable to deliver on-site hydrogen for transportation, industrial applications, natural gas blending, repowering combustion-based equipment with zero carbon hydrogen, and other uses. The SureSource Hydrogen platform utilizes proprietary fuel cells configured to simultaneously generate three value streams — power generation, hydrogen, and water. When operated on biogas or renewable natural gas, SureSource Hydrogen systems produce renewable hydrogen, also known as Green Hydrogen, but, even when fueled with natural gas, our platforms produce hydrogen with a lower carbon and criteria pollutant impact when compared to conventional steam methane reforming (“SMR”) applications because of the use of internal heat compared to burning fuel in the case of SMRs.  Heat and steam are byproducts of fuel cell operation, allowing Trigen platforms to produce hydrogen without water consumption (in fact with net water production, making our Trigen platform a unique platform for hydrogen production) and with a low carbon footprint. Adding carbon separation or carbon capture to the SureSource Hydrogen platform when fueled with natural gas will deliver Blue Hydrogen (i.e., hydrogen produced with carbon capture). The following figure illustrates the concept of the SureSource Hydrogen platform and identifies typical applications for our distributed hydrogen application.

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Graphic

Trigen Distributed Hydrogen Platform

Solid Oxide Technology - Long Duration Hydrogen-Based Energy Storage and Electrolysis

We are in the process of commercializing a solution for long duration energy storage using our proprietary solid oxide electrolysis technology which is expected to enable production of hydrogen with high electrical efficiency. We believe that our platform will deliver higher efficiency than our competitors and competing technologies with or without the addition of waste heat.

Our solid oxide stacks are designed to alternate between electrolysis and power generation mode, with one of our design goals being improved integration of intermittent wind and solar power generation sources into the modern electrical grid via long duration storage of energy. Hydrogen-based long duration energy storage has the ability to transform the way intermittent resources are supported today as an alternative to combustion energy sources for continuous power. Instead of producing power from fuel and air, a solid oxide fuel cell stack in electrolysis mode splits water into hydrogen and oxygen using supplied carbon-free electricity. The hydrogen can be stored as compressed gas, creating the ability to produce a virtually limitless supply. When the grid needs to discharge power, the stored hydrogen will be sent back to the same solid oxide stacks, which react it with air to produce power and to regenerate the water, which will be stored for the next cycle.

Long duration hydrogen-based energy storage can be achieved without the need to add excessive amounts of conventional battery capacity, a capacity that is reliant on rare earth minerals such as lithium and cobalt, both of which have supply constraints for broad adoption, require extensive mining, present long-term disposal challenges post-use, and are impacted by geopolitical risks associated with supply and mineral processing. The Democratic Republic of the Congo and People’s Republic of China (“China”) were collectively responsible for approximately 70% and 60% of global production of cobalt and rare earth elements, respectively, in 2019.  High levels of production concentration, compounded by complex supply chains, increase the risks that could arise from physical disruption, trade restrictions or other developments in major producing countries, jeopardizing energy security.

Long duration hydrogen-based energy storage is expected to be required at large scale in order to manage the forecasted high penetration of intermittent renewable resources globally, and we believe the water/hydrogen-based approach of our

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solid oxide fuel cell/solid oxide electrolysis cell/reversible solid oxide fuel cell technology has the potential to be a key enabler of long duration hydrogen-based energy storage. Hydrogen can be produced locally, is less reliant on energy transition minerals and is regenerative. We believe hydrogen as an energy storage medium is superior to mineral-based storage platforms.

We are also developing advanced electrolysis systems based on our solid oxide electrolysis platform, which can operate at higher electrical efficiency than currently available electrolysis technologies. The largest factor in the cost of electrolysis-produced hydrogen is the cost of electricity. Consequently, efficiency is one of the most effective ways to lower cost. We believe our solid oxide platform is among the most efficient available electrolysis technologies. This is expected to translate to a 20% to 30% lower cost of hydrogen compared to lower efficiency and low-temperature electrolysis. We believe our solid oxide platform offers one of the best chances of achieving the $1 USD per kg levelized cost of hydrogen targeted by the U.S. Department of Energy by 2050. Applications for this technology include centralized large scale hydrogen production from grid-scale renewables or nuclear power, and decentralized hydrogen production for industrial, transportation, repowered combustion generation assets, and synthetic or sustainable fuels for use in aviation and other applications.

During fiscal year 2022, we operated a sub scale demonstration project of our solid oxide electrolysis technology in our Danbury test facility. We have been awarded a pilot program to provide a packaged 150 kg/day system for demonstration at Idaho National Laboratory.  Idaho National Laboratory is currently conducting stack tests to evaluate performance and durability and we expect our solid oxide electrolysis technology to be placed in service during fiscal year 2023.

We have recently completed conversion of the Danbury electrolysis demonstration system to a reversible system, adding equipment for supply of hydrogen to the stack to make power.  We have begun testing the system in RSOFC mode, alternating the test stack between production of hydrogen in electrolysis mode and consumption of hydrogen in fuel cell mode.  This is an extension of previous tests with single cells or smaller stacks which demonstrated stable operation in RSOFC mode.

During fiscal year 2022, we entered into an agreement with Trinity College in Hartford, Connecticut, for the purchase of our first 250 kW solid oxide fuel cell power generation system. Power and heat produced from the platform will be used at Trinity’s campus in Hartford, Connecticut, to lower energy cost and enhance energy reliability and security.  This solid oxide fuel cell power generation system is expected to be installed late in fiscal year 2023. Our solid oxide platform is manufactured at our manufacturing and research and development facility in Calgary, Alberta, Canada. While we are currently accepting orders for our solid oxide platform, the timing of delivery of future orders will depend on our ability to increase production capacity to meet anticipated demand.

Carbon Capture, Separation and Utilization

Carbon Capture – Power generation and industrial applications are the source of two-thirds of the world’s carbon emissions. Cost effective and efficient carbon capture from these two applications globally represents a large market because it could enable clean use of all available fuels. The SureSource CaptureTM system is being designed to separate and concentrate CO2 from the flue gases of natural gas, biomass or coal-fired power plants or other industrial facilities as a side reaction that extracts and purifies the CO2 in the flue gas during the power generation process and destroys approximately 70% of NOx emissions during the power generation process.

The production of additional baseload power during the carbon capture process, as opposed to consuming power, differentiates the SureSource Capture system from other forms of carbon capture offerings. This added revenue attribute could make the SureSource Capture system more cost effective than other systems which are being considered, or are currently in use, for carbon capture. SureSource Capture systems can be implemented incrementally, managing capital outlay to match decarbonization objectives and regulatory requirements. Since our solution generates a return on capital resulting from the fuel cell's production of electricity compared to an increase in operating expense incurred by other carbon capture technologies, it can extend the life of existing power plants and industrial facilities.

We have a Joint Development Agreement with EMTEC, which first became effective on October 31, 2019 and was executed in fiscal year 2020 (as amended from time to time, the “EMTEC Joint Development Agreement”). Under this agreement, we have engaged in exclusive research and development efforts with

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EMTEC to evaluate and develop new and/or improved carbonate fuel cells to reduce carbon dioxide emissions from industrial and power sources. Since April 30, 2022, we have been operating under the second extension to the EMTEC Joint Development Agreement, which was to run through December 31, 2022 and allowed for the continuation of research intended to enable us and EMTEC to: (i) gain an improved understanding of the fuel cell operating envelope for various carbon capture applications; and (ii) complete data collection to support the project gate decision to use the developed technology in a Company fuel cell module demonstration for capturing carbon at ExxonMobil’s Rotterdam facility. In addition, under this second extension, we and EMTEC agreed to conduct a joint market study to (a) define application opportunities, commercialization strategies, and development requirements, (b) identify partners for potential pilot/demonstration projects, and (c) assess fuel cell/stack/module manufacturing scale-up and cost reduction.  As of October 31, 2022, we were still collaborating with EMTEC on the joint market study, which was completed in early fiscal year 2023.  On December 19, 2022, we and EMTEC entered into a third amendment to and extension of the EMTEC Joint Development Agreement, effective December 1, 2022, which extends the term through August 31, 2023 (unless terminated earlier) and is intended to (I) allow for continuation of research that would enable us and EMTEC to finalize data collection in support of the project gate decision to use the developed technology in a Company fuel cell module demonstration for capturing carbon at ExxonMobil’s Rotterdam facility, (II) allow for the continuation of the development, engineering and mechanical derisking of the Generation 2 Technology fuel cell module prototype, and (III) allow for studying the manufacturing scale-up and cost reduction of a commercial Generation 2 Technology fuel cell carbon capture facility.

Carbon Separation and Utilization – In addition to the ability to capture carbon dioxide from an external source, we are adding the capability to our platforms to extract and purify carbon dioxide produced by the fuel cell power generation process. Our carbon separation technology allows carbon dioxide to be easily extracted and purified to the appropriate level for utilization or sequestration, significantly reducing the carbon footprint of the generated power from our fuel cell platforms. This requires a simple modification to the fuel cell module that can be incorporated into new platforms as well as retrofitted for existing systems during stack replacements. Over time, as we replace fuel cell stacks in our deployed modules, we intend to integrate our carbon separation technology, making every platform receiving a module upgrade carbon separation ready. One attractive application for this technology is the on-site production of carbon dioxide for use in beverage and food production, in addition to other uses such as pH balancing of water, the production of dry ice, as a binder in cement and concrete production, utilization in grow houses, the production of ethanol and synthetic fuels, and numerous other industrial applications and building materials. The ability to provide clean power, heat, and useable carbon dioxide is a unique feature profile that we believe is only available with our SureSource platform. Our systems are modular and scalable, so they can be deployed in a wide variety of applications where on-site carbon dioxide is consumed as a product solution, or carbon dioxide is delivered to multiple nearby consumers. An illustration of the carbon separation application is shown in the following figure, which also shows potential applications for locally produced carbon dioxide.

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Graphic

Carbon separated from our platforms can also be sequestered in instances where the project does not include a use for carbon.

Our Markets

We target distinct markets and applications, including:

Utilities and independent power producers;
Industrial process applications;
Education and health care;
Data centers and communication;
Wastewater treatment;
Government;
Commercial and hospitality;
Microgrids;
Continuous manufacturing;
Hydrogen transportation; and
Food and beverage.

The utilities and independent power producer market has historically been our largest market with customers that include utilities on the East and West coasts of the United States, such as UIL Holdings Corporation, Inc. (owned by Avangrid,

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Inc., a wholly owned subsidiary of Iberdrola), the Long Island Power Authority (“LIPA”) and Southern California Edison. In Europe, utility customers include E.ON Connecting Energies, one of the largest utilities in the world. In South Korea, we are contracted to operate and maintain a 20 MW power plant project (comprised of five SureSource 3000 plants) for Korea Southern Power Company (“KOSPO”). In addition, as of October 31, 2022, our platform technology is deployed across South Korea at another 7 sites totaling more than 144 MW through our previous relationship with POSCO Energy Co., Ltd. (“POSCO Energy”). Upgrading each of those sites over time with new stacks would require us to produce more than 116 MW of stack replacements at our manufacturing facility in Torrington, which does not include the 28 MW of stack replacements which were delivered to KFC in fiscal year 2022.

Our SureSource power platforms are producing power for a variety of industrial, commercial, municipal and government customers, including manufacturing facilities, pharmaceutical processing facilities, universities, healthcare facilities and wastewater treatment facilities. These institutions expect efficient, clean and continuous power to reduce operating expenses, reduce greenhouse gas emissions and avoid pollutant emissions to meet their sustainability goals, while boosting resiliency and limiting dependence on the distribution grid. CHP applications further support economic and sustainability initiatives by minimizing or avoiding the use of combustion-based boilers for heat. Our SureSource power platforms are unique in their ability to run on biogas.

We market our products primarily in the United States, Europe and South Korea, and we are also pursuing expanding opportunities in other countries around the world.

We target for expansion and development markets and geographic regions that:

Benefit from and value clean distributed generation;
Are located where there are high energy costs, poor grid reliability, and/or challenged transmission and distribution lines;
Have a need for distributed hydrogen for transportation or industry;
Can leverage the multiple value streams delivered by our SureSource platforms (electricity, hydrogen, thermal, water, and carbon separation);
Are aligned with regulatory frameworks that harmonize energy, economic and environmental policies; and
Are committed to reducing their Scope 1 and Scope 2 emissions.

Our business model focuses on providing these markets and geographic regions with highly efficient and affordable distributed generation that delivers de-centralized power in a low-carbon, virtually pollutant-free manner. Geographic markets that meet these criteria and where we are already well established include the Northeastern United States and California. We have also installed and are operating plants in Europe and Asia, mainly South Korea, in addition to North America.

We have made significant progress in reducing costs and creating markets since the commercialization of our products in 2003, with more than 220 MW of our SureSource technology installed and operating as of October 31, 2022.

We believe that we can accelerate and expand the adoption of our distributed power generation solutions through:

further reductions in the total cost of ownership;
increasing understanding of total avoided emissions and continued education regarding the multiple value streams that our solutions provide;
continued improvements in product quality, power efficiency, and stack life;
increasing brand recognition and understanding of our differentiated platform portfolio;
expanding our sub megawatt platform to include solid oxide for both hydrogen power production and utilization of hydrogen rich fuels;

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geographic and segment expansion;
working to increase demand for on-site generation and microgrid expansion; and
product expansion across carbon separation and utilization, carbon capture and distributed hydrogen.

Increasing Biogas Application Market Demand

With the growing market for anaerobic digestion (the production of biogas from the breakdown of biodegradable materials in the absence of oxygen) and increasingly stringent regulations regarding air quality, we see a growing market opportunity that we believe is perfectly suited for our fuel cell design. SureSource power platforms operating on biogas are an especially compelling value proposition as they convert a waste product into clean electricity and heat, while reducing or eliminating flaring, which addresses certain economic, environmental, and sustainability challenges faced by our customers and the communities in which they operate.

Biogas is generated by the decay of organic material (i.e., biomass). This decaying organic material releases methane, or biogas. As a harmful greenhouse gas, biogas cannot be released directly into the atmosphere. Flaring of biogas creates pollutants and wastes this potential fuel source. Capturing and using biogas as a fuel addresses these challenges and provides a carbon-neutral renewable fuel source. Our patented, proprietary clean-up skid, SureSource TreatmentTM, provides an economical and reliable system for treating biogas for use on-site at the biogas production facility. Examples of producers of biogas as part of their operations include wastewater treatment facilities, food and beverage processors and agricultural operations.

Our SureSource power platforms convert this biogas into electricity and heat efficiently and economically. Wastewater treatment facilities with anaerobic digesters are an attractive market for our SureSource solution including the power platform as well as treatment of the biogas. Many wastewater treatment plants currently flare biogas produced in the anaerobic digestion process, emitting NOx, SOx and particulate matter into the atmosphere, which does not meet many air quality regulations. Since our fuel cells operate on the biogas produced by the wastewater treatment process and the heat is used to support daily operations at the wastewater treatment facility, the overall thermal efficiency of these installations is high, supporting economics and sustainability. In addition, the fuel cell does not emit the harmful NOx, SOx and particulate matter that come out of a flare or that would result from the use of traditional combustion-based power generation. The unique chemistry of carbonate fuel cells allows them to use low Btu on-site biogas with no reduction in output or efficiency compared to operation on natural gas. We have developed proprietary biogas cleanup and contaminant monitoring equipment which, combined with the inherent suitability of the carbonate fuel cell chemistry, gives us an advantage in on-site biogas applications. Our SureSource 1500 and SureSource 3000 power platforms were the first systems certified to California Air Resource Board emissions standards under the Distributed Generation Certification Program for operation with on-site biogas within the state of California.

Microgrid and resiliency applications

Our fuel cell solutions are also well suited for microgrid applications, either as the sole source of power generation or integrated with other forms of power generation. We have fuel cells operating as microgrids at universities and municipalities, including one university microgrid owned by Clearway Energy and a municipal-based microgrid owned by UIL Holdings Corporation, in addition to the microgrid at a municipal location in Santa Rita, California. For the municipal-based system in Woodbridge, Connecticut owned by UIL Holdings Corporation, under normal operation, the fuel cell supplies power to the grid. If the grid is disrupted, the fuel cell plant will automatically disconnect from the grid and power a number of critical municipal buildings. Heat from this municipal-based fuel cell platform is used by the local high school. Our fuel cell based microgrids have also continued to operate during public safety power shutoffs events in California.

Levelized Cost of Energy

Our fuel cell projects deliver power at a rate comparable to pricing from the grid in our targeted markets. Policy programs that help to support adoption of clean distributed power generation often lead to below-grid pricing. We measure power costs by calculating the Levelized Cost of Energy (“LCOE”) over the life of the project.

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There are several primary elements to LCOE for our fuel cell projects, including:

Capital cost;
Operations and maintenance cost; and
Fuel expense.

Given the level of integration in our business model of manufacturing, installing and operating fuel cell power platforms, there are multiple areas and opportunities for cost reductions. We are actively managing and reducing costs in all three LCOE areas, including cost reduction initiatives with respect to system components and raw materials, advanced lean manufacturing principles, improvements in lifetime product costs through continued system and platform engineering, and improvements in output and efficiency. We are also investing in platform design to reduce overall EPC cost associated with the installation of our platforms.

Our Business Model

Our business model is based on multiple revenue streams, targeting both recurring revenue and non-recurring revenue. Recurring revenue is delivered through recurring electricity, capacity, and renewable energy credit sales under power purchase agreements (“PPAs”) and tariffs for projects we retain in our generation operating portfolio, as well as service revenue, mainly through long-term service agreements. Non-recurring revenue is generated through power platform and component sales, as well as from public and private industry research contracts related to the development of our Advanced Technologies (which are discussed in more detail below).

We are a complete solutions provider for our platform solutions, controlling the design, sales, manufacturing, installation, operations, and maintenance of our patented fuel cell technology under long-term power purchase and service agreements. When utilizing long-term PPAs, the end-user of the power or utility hosts the installation and only pays for power as it is delivered, avoiding up-front capital investment. We also develop projects and sell equipment directly to customers, providing a complete solution of engineering, installing, and servicing the fuel cell power plant under an engineering, procurement, and construction agreement (“EPC”) and a long-term maintenance and service agreement. (See the sections below entitled “Engineering, Procurement and Construction” and “Service and Warranty Agreements” for more information.) We maintain the long-term recurring service obligation and associated revenues running conterminous with the life of such projects.

Historically, in the United States, customers or developers typically purchased our fuel cell power plants outright.  As the size of our fuel cell projects has grown and the availability of project capital has improved, project structures in the U.S. have transitioned predominantly to PPAs. Customers and developers generally have the option to either purchase our fuel cell platforms outright or enter into a PPA under which the customer or developer (i.e. the end-user of the power) commits to purchase power as it is produced for an extended period of time, typically 10 to 20 years. We may elect to retain ownership of a project or we may elect to sell all or some of the project to a third party.  If a project or project asset is sold, revenue from the sale is recognized and reflected in the Product revenues line item of our Consolidated Statements of Operations and Comprehensive Loss, and we recognize revenue separately for the long-term maintenance and service agreement with respect to the project over the term of that agreement. If a project is retained, we recognize electricity, capacity and/or renewable energy credits monthly over the term of the PPA. We report the financial performance of retained projects as Generation revenues and Cost of generation revenues in our Consolidated Statements of Operations and Comprehensive Loss.

Our decision to retain certain projects is based in part on the recurring, predictable cash flows these projects can offer us, the proliferation of PPAs in the industry and the potential access to capital.  Retaining PPAs affords us the full benefit of future cash flows under the PPAs, which are expected to be higher than if we sell the projects, although it requires more upfront capital investment and financing.  As of October 31, 2022, our operating portfolio of retained projects totaled 36.3 MW with an additional 26.8 MW under development or construction. We plan to continue to grow this portfolio prudently and in a balanced manner, while also selling projects to customers or project investors when selling presents the best value and opportunity for our capital needs or meets the customer’s desired ownership structure.

We operate and maintain our project platforms for the life of the project regardless of the ownership structure. For all operating fuel cell platforms not operating under a PPA, customers enter into long-term service agreements with us, some of which have terms of up to 20 years. We report the revenue earned under long-term maintenance and service agreements as Service agreements revenues in our Consolidated Statements of Operations and Comprehensive Loss.

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Internationally, South Korea and Europe have historically been product sale markets for the Company; however, prior to fiscal year 2022, we had not recognized meaningful product sales revenues in these geographies since 2018. Our activities in South Korea were impacted by our prior dispute with POSCO Energy and, until fiscal year 2021, we moderated our investment in business development in Europe due to limited resources. During fiscal year 2022, our commercial team renewed its sales efforts in both markets. Increasing product sales is a focus area for fiscal year 2023 and beyond.  As a result of entering into a settlement agreement with POSCO Energy and its subsidiary, Korea Fuel Cell Co., Ltd. (“KFC”), on December 20, 2021 (the “Settlement Agreement”), we have confirmed our full access to the South Korean and broader Asian markets for sales of our products and we are aggressively pursuing sales in these markets, which we see as key to our future growth. (See the section below entitled “License Agreements— License Agreements and Settlement Agreement with POSCO Energy” for more information related to the terms of the Settlement Agreement.)

Advanced Technologies Programs

Our Advanced Technologies programs include research and development and demonstration programs funded by third parties. We undertake both privately funded and publicly funded research and development to develop and grow these opportunities, reduce product and output costs, and expand our technology portfolio. Our Advanced Technologies programs are currently focused on developing and commercializing solutions that advance solid oxide fuel cells, distributed hydrogen, and carbon capture. We report the revenue earned under these programs as Advanced Technologies contract revenues in our Consolidated Statements of Operations and Comprehensive Loss.

We have historically worked on technology development with various U.S. government departments and agencies, including the DOE, the Department of Defense (“DOD”), the Environmental Protection Agency (“EPA”), the Defense Advanced Research Projects Agency (“DARPA”), the Office of Naval Research (“ONR”), and the National Aeronautics and Space Administration (“NASA”). Government funding, principally from the DOE, provided 6%, 9% and 6% of our revenue for the fiscal years ended October 31, 2022, 2021, and 2020, respectively.

We have been working with EMTEC since 2013 to develop and commercialize our carbon capture solution which is an application of our core carbonate technology.  

Beyond the DOE and EMTEC funding, we intend to prudently invest capital to accelerate commercialization of solid oxide fuel cells, carbon capture and separation, and long-duration energy storage solutions, as discussed below in more detail in the section entitled “Company Funded Research and Development”.

Company Funded Research and Development

In addition to research and development performed under research contracts, including, as described under the heading “Advanced Technologies Programs” above, we also fund our own research and development activities to support the commercial fleet with product enhancements and improvements. We work to continuously improve and mature our products and implement lessons learned into our product designs and manufacturing process subsequent to introduction. We also continue to invest in improvement initiatives with respect to our core molten carbonate technology. For example, we have identified improvement opportunities ranging from improved thermal management by reducing internal temperature to improving the performance of our electrical balance of plant and implemented design changes to our commercial platforms which are expected to improve overall product performance.

As it relates to our fuel cell modules, these improvements center around delivering more uniform temperature distribution within the stack modules with the intent of improving output over the life of the modules to achieve the product’s expected design life. Continued extension of design life and output of our modules over time is a core research and development focus. In addition, we are also investing in commercializing technologies such as carbon capture and separation, solid oxide fuel cells, and solid oxide electrolysis cells for hydrogen production and energy storage as we believe these technologies represent significant future market opportunities. To further accelerate commercialization activity for our solid oxide platform, we commenced the design and construction of two advanced prototypes targeted for fiscal year 2023 completion: (i) a 250 kW power generation platform, and (ii) a 1 MW high-efficiency electrolysis platform.

25

Company funded research and development is included in Research and development expenses (operating expenses) in our consolidated financial statements. The total research and development expenditures in the Consolidated Statements of Operations and Comprehensive Loss, including third party and Company-funded expenditures, are as follows:

    

Years Ended October 31,

(dollars in thousands)

2022

    

2021

    

2020

Cost of Advanced Technologies contract revenues

$

15,184

$

16,496

$

16,254

Research and development expenses

 

34,529

 

11,315

 

4,797

Total research and development

$

49,713

$

27,811

$

21,051

Manufacturing and Service Facilities

We operate a 167,000 square-foot manufacturing facility in Torrington, Connecticut where we produce the individual cell packages and assemble fuel cell modules for our carbonate fuel cell products. This facility also houses our global service center. Our completed modules are conditioned in Torrington and shipped directly to customer sites. We continue to make investments in various manufacturing areas to improve production throughput and annualized production rate. As of October 31, 2022, the Torrington facility was operating at a 45 MW per year annualized production rate on a single production shift. Maximum annualized capacity (module manufacturing, final assembly, testing and conditioning) is 100 MW per year under the Torrington facility’s current configuration when being fully utilized. The Torrington facility is sized to accommodate the eventual annualized production capacity of up to 200 MW per year with additional capital investment in machinery, equipment, tooling and inventory. We continue to invest in manufacturing capability, including through the installation of new fuel cell conditioning equipment. Additionally, we expect to complete the construction of an on-site fuel cell demonstration and test unit in fiscal year 2023. This platform will allow for component testing, with the goal of accelerating the integration of alternate suppliers, and will allow prospective customers to observe demonstrated capabilities of the fuel cell platform, such as carbon separation.

We design and manufacture the core SureSource fuel cell components that are stacked on top of each other to build a fuel cell stack. For megawatt-scale power plants, four fuel cell stacks are combined to build a 1.4 MW fuel cell module. To complete the power platform, the fuel cell module or modules are combined with the balance of plant (“BOP”). The mechanical BOP processes the incoming fuel such as natural gas or biogas and includes various fuel handling and processing equipment such as pipes and blowers. The electrical BOP processes the power generated for use by the customer and includes electrical interface equipment such as an inverter. The BOP components are either purchased directly from suppliers or the manufacturing is outsourced based on our designs and specifications. This strategy allows us to leverage our manufacturing capacity, focusing on the critical aspects of the power plant where we have specialized knowledge and expertise and possess extensive intellectual property. BOP components are shipped directly to a project site and are then assembled with the fuel cell module into a complete power plant.

The Torrington production and service facility and the Danbury corporate headquarters and research and development facility are ISO 9001:2015 and ISO 14001:2015 certified and our Field Service operation (which maintains the installed fleet of our platforms) is ISO 9001:2015 certified, reinforcing the tenets of our quality management system and our core values of safety, continuous improvement, and commitment to quality, environmental stewardship, and customer satisfaction. Sustainability is promoted throughout our organization. We manufacture SureSource products and manage them through end-of-life using environmentally friendly business processes and practices, certified to ISO 14001:2015. We continually strive to improve how we plan and execute across the entire product life cycle. We maintain a chain of custody and responsibility of our SureSource products throughout the product life cycle and strive for “cradle-to-cradle” sustainable business practices, incorporating sustainability in our corporate culture. We utilize “Design for Environment” principles in the design, manufacture, installation and servicing of our power platforms. Design for Environment principles aim to reduce the overall human health and environmental impact of a product, process or service, when such impacts are considered across the product’s lifecycle. When our platforms reach the end of their useful lives, we can refurbish and re-use certain parts and then recycle most of what we cannot re-use. By weight, approximately 93% of the entire power plant can be re-used or recycled at the end of its useful life.

Our manufacturing and research and development facility in Calgary, Alberta, Canada is focused on the engineering and development of our solid oxide fuel cell (“SOFC”) and SOEC technologies. This facility also houses our SOFC and SOEC stack research and development effort and includes equipment for the manufacturing of solid oxide cells and stacks, including advanced manufacturing capabilities. We are making additional investment in the Calgary facility to establish a

26

center of competence and excellence for solid oxide cell and stack research and manufacturing. This facility includes equipment for the manufacturing of solid oxide cells and stacks, including an advanced automated stack manufacturing line which has been developed to ensure that the labor and overhead which are required to produce these technologies are optimized for efficiency and complement the low direct material cost of the stack. As of October 31, 2022, this facility is capable of producing 1 MW per year of SOFC or approximately 4 MW per year of SOEC. We are investing in expanding this facility with the goal of increasing its production capacity to 10 MW per year of SOFC or 40 MW per year of SOEC, and we expect this expansion to be complete by the middle of fiscal year 2024. In parallel, we are also expanding our Connecticut manufacturing activities and evaluating additional U.S. locations in anticipation of increased production volume.

We have a manufacturing and service facility in Taufkirchen, Germany that has the capability to perform final module assembly for up to 20 MW per year of sub-megawatt fuel cell power platforms to service the European market. Our European service activities are also operated out of this location. Our operations in Europe are certified under both ISO 9001:2015 and ISO 14001:2015.

As we continue our focus on business growth in Europe, we plan to expand our existing manufacturing and assembly capabilities to match demand for our existing platforms and to support and fulfill the demand we expect to be associated with the future commercialization of our solid oxide and carbon capture offerings. We will continue to focus our manufacturing strategy on core strengths and competencies while further leveraging strategic outsourcing and supply partnering in support of increasing scale and speed to market.

In Asia, we previously relied on our relationship with POSCO Energy to serve the Asian market. Through that relationship, POSCO Energy manufactured the fuel cells to be used by customers in Asia, as well as operated and maintained fuel cell installations in the South Korean market. Now that we have entered into a settlement agreement with POSCO Energy, we plan to explore manufacturing and assembly opportunities across Asia to achieve more efficient product manufacturing and supply chain operations, as well as meet the increasing government requirements for the inclusion of locally sourced content and components in order to benefit from enhanced clean energy investment incentives.

Raw Material Sourcing and Supplier Relationships

We use various commercially available raw materials and components to construct a fuel cell module, including nickel and stainless steel, which are key inputs in our manufacturing process. Our fuel cell stack raw materials are sourced from multiple vendors and are not considered precious metals. We have a global integrated supply chain with qualified sources of supply, many of which are located locally in the regions in which we have established manufacturing and service operations including Europe and Asia. We have not sourced or procured, and do not source or procure, directly or indirectly, any materials from Russia.  

Despite a somewhat volatile nickel market and increased pricing pressure on stainless steel direct materials, we have employed strategic inventory purchases, negotiated fixed-price supply contracts, and employed financial hedges to help mitigate the impact to our product cost and improve financial planning. We have implemented several initiatives to mitigate the effect of impacts associated with extended lead times for materials and components by optimizing domestic supplier shipping volumes, leveraging competition across multiple qualified freight forwarders, establishing selective direct relationships with steamship lines, and aggregating shipments with qualified suppliers.

From time to time, we may enter into over-the-counter financial hedges to mitigate market price volatility associated with our underlying physical commodity exposure (and other asset classes) consistent with our Financial Risk Management Policy. These hedges are non-speculative in nature, are entered into with investment grade-rated multinational financial institutions and are governed under the terms of the International Swaps and Derivative Association.

While we manufacture the fuel cells in our Torrington facility, the electrical and mechanical BOPs are assembled by and procured from several suppliers. All of our suppliers must undergo a stringent and rigorous qualification process. We continually evaluate and qualify new suppliers as we diversify our supplier base in our pursuit of lower costs, security of supply, and consistent quality. We purchase mechanical and electrical BOP components from third party vendors, based on our own proprietary designs.

Assuring the absence of conflict minerals in our power platforms is a continuing initiative. Our fuel cells, including the fuel cell components and completed fuel cell module, do not utilize any 3TG minerals (i.e., tin, tungsten, tantalum and gold) that are classified as conflict minerals. We utilize componentry in the BOP such as computer circuit boards that

27

utilize trace amounts of 3TG minerals. For perspective, total shipments in fiscal year 2021 weighed approximately 4.6 million pounds, of which only 30.0 pounds, or 0.000667%, represented 3TG minerals, so the presence of these minerals is negligible. Our conflict mineral disclosure filed with the Securities and Exchange Commission (“SEC”) on Form SD contains specific information on the actions we are taking to avoid the use of conflict minerals.

Overall, as we continue to grow our business, we remain focused on improving quality, increasing the competitive supply landscape, maintaining existing supplier relationships, as well as building strong new key supplier relationships to expand our supply chain options.

Engineering, Procurement and Construction

We provide customers with complete turn-key solutions, including development, engineering, procurement, construction, interconnection and operations for our fuel cell projects. We have developed relationships with many design firms and licensed general contractors and have a repeatable, safe, and efficient execution philosophy that has been successfully demonstrated in numerous jurisdictions, both domestically and abroad, all with an exemplary safety record. The ability to rapidly and safely execute installations minimizes high-cost construction period financing and can assist customers in certain situations when the commercial operations date for a project is time sensitive.

Services and Warranty Agreements

We offer a comprehensive portfolio of services, including engineering, project management and installation, and long-term operating and maintenance programs, including trained technicians that remotely monitor and operate our platforms around the world, 24 hours a day and 365 days a year. We directly employ field technicians to service the power platforms and maintain service centers near our customers to support the high availability of our platforms.

For all operating fuel cell platforms not under a PPA, customers purchase long-term service agreements (“LTSAs”), some of which have terms of up to 20 years. Pricing for LTSAs is based upon the value of service assurance and the markets in which we compete and includes all future maintenance and fuel cell module exchanges. Each model of our SureSource power platform has a target design life of 25-to-30 years. The fuel cell modules, with legacy modules having a 5-year target cell design life and current production modules having a 7-year target cell design life, go through periodic replacement, while the BOP systems, which consist of conventional mechanical and electrical equipment, are maintained over the life of the project.

Under the typical provisions of both our LTSAs and PPAs, we provide services to monitor, operate and maintain power platforms to meet specified performance levels. Operations and maintenance are key drivers for power platforms to deliver their projected revenue and cash flows. The service aspects of our business model provide a recurring and predictable revenue stream for the Company. We have committed future production for scheduled fuel cell module exchanges under LTSAs and PPAs through the year which have expiration dates through 2042. The pricing structure of the LTSAs incorporates these scheduled fuel cell module exchanges and the committed nature of this production facilitates our production planning. Many of our PPAs and LTSAs include guarantees for system performance, including electrical output and heat rate. Should the power platform not meet the minimum performance levels, we may be required to replace the fuel cell module with a new or used replacement module and/or pay performance penalties. Our goal is to optimize the power platforms to meet expected operating parameters throughout their contracted service terms.

In addition to our service agreements, we provide a warranty for our products against manufacturing or performance defects for a specific period of time. The warranty term in the U.S. is typically 15 months after shipment or 12 months after acceptance of our products. We accrue for estimated future warranty costs based on historical experience.

Competition

The market for clean energy is highly competitive. Many factors, including government incentives and specific market dynamics, affect how clean energy can deliver outcomes for customers in a given region. While clean energy often competes against the electric grid, which is readily available to prospective customers and supplied by traditional centralized power plants, including coal, gas, hydro, and nuclear plants, clean energy is increasingly able to compete with the grid and long-distance transmission of electricity in terms of levelized cost of electricity. Clean energy sources that

28

customers may consider beyond our solutions include products such as wind turbines, solar arrays, and hydro facilities, as well as a range of hydrogen and fuel cell solutions from both incumbent and developing competitors.

Our platforms are based on a range of technologies and target a variety of applications, each of which have incumbent and developing competitors. Several companies in the U.S. are engaged in fuel cell development, although, to our knowledge, we are the only domestic company engaged in manufacturing and deployment of stationary natural gas or biogas fueled carbonate fuel cells. In addition to different types of stationary fuel cells, some other technologies that compete in the distributed generation marketplace include micro-turbines, turbines, and reciprocating gas engines.

Our stationary fuel cell platforms also compete against large scale solar and wind technologies, although we complement the unreliable intermittent nature of solar and wind power with the continuous, reliable power output of our fuel cells. Utility scale solar and wind power require specific geographies and weather profiles, transmission for utility-scale applications, and a source of back up capacity for when the sun or wind is not available. They also require a significant amount of land compared to our fuel cell power plants, making it difficult to site megawatt-class solar and wind projects in urban areas. While fuel cells emit negligible amounts of NOx, SOx and particulate matter, fuel cells do emit some carbon dioxide when fueled with natural gas or carbon-neutral biogas (although, while operating on biogas, the platform’s emissions would be considered carbon neutral), but in both cases less per kWh than other less-efficient systems. In many markets, baseload fuel cells avoid more emissions than wind or solar systems of similar capacity because they operate for many more hours of the day compared to these intermittent resources.

Product development cycles are long and product quality and efficiency are critical to success. Research and development investments are crucial in this business, as are focused intellectual property strategies and protection of such, as new technologies and solutions could make our solutions less competitive.

We continue to invest in exploring new ways of further improving the efficiency and effectiveness of our platforms. Our objective is to continue to improve our competitive position, including innovating in areas such as offering multiple platform solutions, and methods for producing clean hydrogen, solid oxide, and carbon separation and carbon capture in order to add value for customers looking for clean and renewable energy and to aid in their decarbonization goals.

Backlog

Backlog represents definitive agreements executed by the Company and our customers. Project awards are not included in our backlog.

Backlog as of October 31, 2022 and 2021 consisted of the following (in thousands):

    

2022

    

2021

Commercial:

 

  

 

  

Product

$

9,065

$

Service

 

114,040

 

125,918

Generation

 

944,041

 

1,099,006

License

 

 

22,182

Total Commercial

$

1,067,146

$

1,247,106

Advanced Technologies

 

  

 

  

Non-U.S. Government

$

7,598

$

17,611

U.S. Government - Funded

14,065

22,932

U.S. Government - Unfunded

 

1,190

 

220

Total Advanced Technologies

$

22,853

$

40,763

Total Backlog

$

1,089,999

$

1,287,869

29

Service and generation backlog as of October 31, 2022 had a weighted average term of approximately 17 years, with weighting based on dollar backlog and utility service contracts of up to 20 years in duration at inception. Generally, our government funded and privately funded research and development contracts are subject to the risk of termination at the convenience of the contract counterparty.

Generation backlog is the largest component of our total commercial backlog, reflecting revenues from projects with PPAs in place and of which we have retained ownership. Under a PPA, the utility or end-user of the power (and other attributes such as capacity and renewable energy credits) commits to purchase power as it is produced for an extended period of time, typically 10-to-20 years. With the project being retained, electricity, capacity and/or renewable energy credits are recognized monthly over the term of the PPA. We report the financial performance of retained project assets as generation revenue and cost of generation revenues.

Our outstanding backlog is not indicative of amounts to be earned in the upcoming fiscal year. The specific elements of backlog may vary in terms of timing and revenue recognition from less than one year to up to 20 years.

We may choose to sell or retain operating project assets on the balance sheet, thus creating variability in timing of revenue recognition. Accordingly, the timing and the nature of our business makes it difficult to predict what portion of our backlog will be filled in the next fiscal year.

License Agreements

License Agreement with EMTEC

EMTEC and FuelCell Energy began working together in 2016 under an initial joint development agreement with a focus on better understanding the fundamental science behind carbonate fuel cells for use in advanced applications and specifically how to increase efficiency in separating and concentrating carbon dioxide from the exhaust of natural gas-fueled power generation.

In June 2019, we entered into a license agreement with EMTEC to facilitate the further development of our SureSource CaptureTM product (the “EMTEC License Agreement”). Pursuant to the EMTEC License Agreement, we granted EMTEC and its affiliates a non-exclusive, worldwide, fully-paid, perpetual, irrevocable, non-transferable license and right to use our patents, data, know-how, improvements, equipment designs, methods, processes and the like to the extent it is useful to research, develop and commercially exploit carbonate fuel cells in applications in which the fuel cells concentrate carbon dioxide from external industrial and power sources and for any other purpose attendant thereto or associated therewith, in exchange for a $10 million payment. Such right and license is sublicensable to third parties performing work for or with EMTEC or its affiliates but shall not otherwise be sublicensable.

The EMTEC License Agreement facilitated the execution of the EMTEC Joint Development Agreement, pursuant to which we have engaged in exclusive research and development efforts with EMTEC to evaluate and develop new and/or improved carbonate fuel cells to reduce carbon dioxide emissions from industrial and power sources, in exchange for (a) payment of (i) an exclusivity and technology access fee of $5.0 million, (ii) up to $45.0 million for research and development efforts, and (iii) milestone-based payments of up to $10.0 million to be paid only if certain technological milestones are met (which had not been met as of October 31, 2021), and (b) certain licenses.

Effective as of October 31, 2021, we and EMTEC agreed, among other things, to extend the term of the EMTEC Joint Development Agreement for an additional six months, ending on April 30, 2022. This extension allowed for the continuation of research intended to enable incorporation of design improvements to our fuel cell design in order to support a decision to use the improvements in a future demonstration of the technology for capturing carbon at ExxonMobil’s Rotterdam refinery in the Netherlands and provided additional time to achieve the first milestone under the EMTEC Joint Development Agreement.

Effective as of April 30, 2022, we and EMTEC agreed, among other things, to further extend the term of the EMTEC Joint Development Agreement for an additional eight months, ending on December 31, 2022 and to increase the maximum amount of research costs to be reimbursed by EMTEC from $45.0 million to $50.0 million. This extension to the EMTEC Joint Development Agreement allowed for the continuation of research intended to enable us and EMTEC to: (i) gain an improved understanding of the fuel cell operating envelope for various carbon capture applications; and (ii) complete data collection to support the project gate decision to use the developed technology in a Company fuel cell module

30

demonstration for capturing carbon at ExxonMobil’s Rotterdam facility. In addition, under this second extension, we and EMTEC agreed to conduct a joint market study, with a target completion date on or before October 31, 2022, to (a) define application opportunities, commercialization strategies, and development requirements, (b) identify partners for potential pilot/demonstration projects, and (c) assess fuel cell/stack/module manufacturing scale-up and cost reduction. As of October 31, 2022, we were still collaborating with EMTEC on the joint market study, which was completed in early fiscal year 2023.

On December 19, 2022, we and EMTEC agreed, effective as of December 1, 2022, to further extend the term of the EMTEC Joint Development Agreement such that it will end on August 31, 2023 (unless terminated earlier) and to further increase the maximum amount of research costs to be reimbursed by EMTEC from $50.0 million to $60.0 million. This extension to the EMTEC Joint Development Agreement is intended to (I) allow for continuation of research that would enable us and EMTEC to finalize data collection in support of the project gate decision to use the developed technology in a Company fuel cell module demonstration for capturing carbon at ExxonMobil’s Rotterdam facility, (II) allow for the continuation of the development, engineering and mechanical derisking of the Generation 2 Technology fuel cell module prototype, and (III) allow for studying the manufacturing scale-up and cost reduction of a commercial Generation 2 Technology fuel cell carbon capture facility.

License Agreements and Settlement Agreement with POSCO Energy

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.

Through June of 2020, we recorded license fees and were entitled to receive royalty income from POSCO Energy pursuant to manufacturing and technology transfer agreements entered into with POSCO Energy, including the Alliance Agreement dated February 7, 2007 (and amendments thereto), the Technology Transfer, License and Distribution Agreement dated February 7, 2007 (and amendments thereto), the Stack Technology Transfer and License Agreement dated October 27, 2009 (and amendments thereto), and the Cell Technology Transfer and License Agreement dated October 31, 2012 (and amendments thereto) (collectively, the “License Agreements”). The Cell Technology Transfer and License Agreement (“CTTA”) 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. POSCO Energy built a cell manufacturing facility in Pohang, South Korea which became operational in late 2015, but is no longer operating.

In October 2016, the Company and POSCO Energy extended the terms of certain of the License Agreements to be consistent with the term of the CTTA, which was to expire on October 31, 2027. The CTTA required POSCO Energy to pay us a 3.0% royalty on POSCO Energy net product sales, as well as a royalty on scheduled fuel cell module replacements under service agreements for modules that were built by POSCO Energy and installed at plants in Asia under the terms of long-term service agreements (“LTSAs”) between POSCO Energy and its customers. Due to certain actions and inactions of POSCO Energy, we did not realize any new material revenues, royalties or new projects developed by POSCO Energy between late 2015 and January 2022, at which time we began to recognize revenues in connection with sales of replacement modules to a subsidiary of POSCO Energy.

In November 2019, POSCO Energy spun-off its fuel cell business into a new entity, Korea Fuel Cell Co., Ltd. (“KFC”), without our 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. We formally objected to POSCO Energy’s spin-off.

In February 2020 and March 2020, we notified POSCO Energy of its material breaches of the License Agreements and indicated that the License Agreements would be terminated if such breaches were not cured in a timely manner.

Between April 2020 and October 2020, POSCO Energy initiated a series of proceedings against us, including a series of three arbitration demands against us at the International Court of Arbitration of the International Chamber of Commerce seated in Singapore in which it alleged certain warranty defects in a sub-megawatt conditioning facility at its facility in Pohang, South Korea.

In June 2020, we terminated the License Agreements and filed a demand for arbitration against POSCO Energy and KFC in the International Court of Arbitration of the International Chamber of Commerce. In October 2020, POSCO Energy filed a counterclaim in the arbitration.

We discontinued revenue recognition of the deferred license revenue related to the License Agreements in July 2020 given the then-pending arbitrations.

31

In order to resolve our disputes with POSCO Energy and KFC, on December 20, 2021, we entered into a Settlement Agreement (the “Settlement Agreement”) with POSCO Energy and KFC (POSCO Energy and KFC may be collectively referred to herein as “PE Group”). The Settlement Agreement provides, among other things, that the parties will cooperate in good faith to effect a market transition to us of the molten carbonate fuel cell business in Korea in accordance with the terms and conditions of the Settlement Agreement. To that end, the Settlement Agreement provides that any and all past, current, or potential disputes and claims between us, on the one hand, and POSCO Energy and KFC, on the other, of any nature whatsoever, whether known or unknown, asserted or not asserted, based on actions or omissions of any party on or before the date of Settlement Agreement are fully and finally settled, including such disputes and claims, directly or indirectly, in connection with the legal disputes and License Agreements described above, with the exception of (i) an unfiled claim by us in the amount of approximately $1.8 million with respect to certain royalties we believe are owed by POSCO Energy with respect to replacement modules deployed by POSCO Energy at Gyenonggi Green Energy and other sites for which POSCO Energy has not paid royalties, and (ii) an unfiled claim by POSCO Energy in an unknown amount with respect to a series of purchase orders for materials and components which began in 2014 under a supply chain contract, both of which claims remain unsettled. We do not believe the claim by POSCO Energy with respect to purchase orders for materials and components under the supply chain contract has merit and we retain the right to file a counterclaim for damages we believe we have incurred with respect to such supply chain contract.

Under the Settlement Agreement, the parties also agreed that, within five days of the date thereof, we would withdraw our objection to the spin-off of KFC from POSCO Energy, and that the License Agreements are not terminated, but instead are deemed to be amended such that POSCO Energy and KFC only have the right (i) to provide maintenance and repair services to PE Group’s existing customers on existing molten carbonate power generation and thermal projects under LTSAs currently in force as well as LTSAs that have expired and are pending renewal as of the settlement date (collectively, “Existing LTSAs”), (ii) to supply replacement modules purchased from us only for their existing customers for existing molten carbonate power generation and thermal projects under Existing LTSAs and (iii) to own, operate and maintain all facilities and factories solely for the purposes set forth in (i) and (ii) above (collectively, the “Right to Service License”). POSCO Energy and KFC further agreed that, as of the date of the Settlement Agreement, the License Agreements were deemed to be amended such that we exclusively enjoy all rights as to our technology in Korea and Asia, other than the Right to Service License. The Settlement Agreement further provides that the License Agreements will terminate automatically upon sixty days prior written notice to PE Group if (i) we enter into a business collaboration agreement with a Korean company to construct, assemble, manufacture, market, sell, distribute, import, export, install, commission, service, maintain, or repair products incorporating our technology, or otherwise conduct our business, in the Korean market; or (ii) we expand the capacity of our existing Korean entity such as to perform such activities ourself. In the event of the termination of the License Agreements, the license granted to PE Group under the Right to Service License will continue notwithstanding the termination of the License Agreements, except that PE Group’s right to own, operate, and maintain all facilities and factories for the purpose of servicing any orders or requests made by us will terminate. For the avoidance of doubt, pursuant to the terms of the Settlement Agreement, PE Group has no right to manufacture modules or any other product incorporating our technology under the License Agreements as amended, the Right to Service License or otherwise unless requested and authorized by us to do so.

 

The Settlement Agreement further provides that, in order to service its existing customers under the Existing LTSAs, KFC would place a firm, non-cancelable order for twelve SureSource 3000 modules within two weeks after the date of the Settlement Agreement and an additional firm, non-cancelable order for eight SureSource 3000 modules on or before June 30, 2022, all at a price of $3.0 million per module. We received firm, non-cancelable orders from KFC for a total of twenty SureSource 3000 modules in fiscal year 2022. All of these modules were delivered Ex Works from our facility in Torrington, CT in fiscal year 2022.

In addition, KFC agreed to use commercially reasonable efforts to order fourteen additional SureSource 3000 modules by December 31, 2022, at a price of $3.0 million per module if ordered by such date. KFC has indicated that it does not intend to order additional modules by December 31, 2022.

 

Pursuant to the Settlement Agreement, with respect to new modules supplied by us and deployed by PE Group to its existing customers, we will provide our standard warranty against module defects until the earlier of eighteen months from the date of shipment or twelve months from the date of installation. As part of the global settlement of the disputes among the parties and subject to the qualifications set forth in the Settlement Agreement, we will reimburse PE Group for any annual output penalty amount paid by PE Group to its customers pursuant to Existing LTSAs (whether such Existing LTSA is extended or renewed), caused by a shortfall or defect in the new modules for a period of up to seven years. The

32

maximum annual reimbursement obligation with regard to any PE Group customer for any new module provided by us will not exceed an amount equal to 7.5% per year of the module purchase price. We will not be required to reimburse PE Group for any penalty paid by PE Group under the Existing LTSAs that is not caused by a shortfall or defect in the modules to be supplied by us including, without limitation, any shortfall or defect caused by a site-related problem, a problem with the balance of plant, or other components of the project.

Although we have the exclusive and unrestricted right under the Settlement Agreement to perform, pursue, and otherwise conduct our business in relation to new fuel cell projects (including new projects with PE Group’s existing customers) in Korea and Asia, the parties have agreed that, except as further provided in the Settlement Agreement with respect to PE Group’s existing customers Noeul Green Energy and Godeok Green Energy, we will not engage in discussions with PE Group’s existing customers regarding Existing LTSAs without PE Group’s consent. The parties have further agreed that if PE Group cannot enter into an agreement with its existing customers to extend or renew Existing LTSAs by December 31, 2022, PE Group will cooperate with us so that we may discuss and, at our sole discretion, enter into an extension of an Existing LTSA, a new LTSA to replace an Existing LTSA, or a module sales agreement with PE Group’s existing customers; provided that (i) should we enter into such an arrangement with a PE Group existing customer, and (ii) we are required to provide replacement modules to such existing customer under such arrangement, and (iii) PE Group has not already deployed all or some of the modules that PE Group ordered under the Settlement Agreement, we will purchase the number of required replacement modules from PE Group at a price of $3.0 million per module (to the extent such modules are available and have not yet been deployed). The purchase of such replacement modules by us is contingent upon the modules being in proper condition as determined by inspection process to be agreed to by the parties. Any modules purchased by us from PE Group under these terms will be included as part of the firm orders KFC is required to make pursuant to the Settlement Agreement.

 

With respect to operations and maintenance agreements, the Settlement Agreement provides that KFC will have the right of first refusal on providing operation and maintenance services on commercially reasonable terms for new LTSAs entered into by us in Korea for a period of the first to occur of either twenty-four months after the date of the Settlement Agreement or until such time as we engage a third party capable of providing such services in Korea. If we and KFC agree that KFC should provide operation and maintenance services pursuant to the right of first refusal, we and KFC will enter into one or more operation and maintenance agreements that reflect commercially reasonable terms and conditions as agreed by us and KFC at that time.

 

With respect to BOP, KFC currently has eight units of BOP available, and the Settlement Agreement provides that we have the option to purchase such units of BOP for any new molten carbonate fuel cell projects within Korea at a price of KRW 2,550,000,000 per unit (or USD $1,787,550 per unit as of October 31, 2022). We will also have a non-exclusive, non-transferrable, non-sublicensable license to use the intellectual property imbedded in the BOP units in Korea in consideration for a reasonable license fee to be separately agreed by the parties. Detailed terms and conditions of BOP and related software and firmware supply will be discussed and agreed to in good faith in separate BOP supply agreements in the event we exercise our option to purchase any of such BOP.

 

Regulatory and Legislative Environment

Distributed generation differs from central generation. As such, it is subject to a separate set of legal standards as well as legislative and regulatory policies. The policies that affect our products are not always the same as those imposed on other companies, or the products of other companies, that produce power, and while some policies may make our products less competitive, others may provide an advantage. Certain utility policies may also pose barriers to our installation or interconnection with the utility grid, such as backup, standby or departing load charges that make installation of our products less economically attractive for our customers. Regulatory and legislative support can take the form of policy, incentive programs, and defined sustainability initiatives such as Renewable Portfolio Standards (“RPS”).

United States

Various states and municipalities in the U.S. have adopted programs for which our products qualify, including programs supporting self-generation, clean air power generation, combined heat and power applications, carbon reduction, grid resiliency/microgrids, energy storage and utility ownership of fuel cell projects.

Many states in the U.S. have enacted legislation adopting Clean Energy Standards (“CES”) or RPS mechanisms. Under these standards, regulated utilities and other load serving entities are required to procure a specified percentage of their total electricity sales to end-user customers from eligible resources according to a set schedule. CES and RPS, and their

33

implementing regulations, vary significantly from state to state, particularly with respect to the percentage of renewable energy required to achieve the state’s mandate, the definition of eligible clean and renewable energy resources, and the extent to which renewable energy credits (certificates representing the generation of renewable energy) qualify for CES or RPS compliance. Fuel cells using biogas qualify as renewable power generation technology in all of the CES and RPS states in the U.S., and some states specify that fuel cells operating on natural gas are also eligible for these initiatives in recognition of the high efficiency and low pollutants of fuel cells. Most states are introducing legislation or regulations that seek to reduce the consumption of electricity generated using fossil fuels in favor of zero carbon resources. Additionally, utility regulators are looking for non-wire alternatives to build reliability and resiliency to the grid, which also presents a potential opportunity.

In February 2018, the U.S. Congress reinstated the 30% Investment Tax Credit (“ITC”) for fuel cells and extended and significantly expanded the existing Carbon Oxide Sequestration Credit. The ITC phased down to 26% in 2020 and was scheduled to phase down to 22% by 2022 and expire in 2023. The reinstatement of the ITC for fuel cells provided equal access to tax incentives for U.S. fuel cell manufacturers when compared to other clean energy solutions. The ITC phase down was extended by two years pursuant to the Consolidated Appropriations Act, 2021 passed by Congress in December 2020 and signed by the President on December 27, 2020, thus extending the 26% ITC until 2022 and the expiration to 2025.

Since that time, two pieces of federal legislation have been passed by the U.S. Congress that are expected to have a significant impact on our business model. First, the Bipartisan Infrastructure Law, passed and signed into law during the fall of 2021, allocated over $8 billion for hydrogen-related activity and research, including a hubs initiative to be administered by the DOE. These hydrogen hubs have spurred unprecedented activity across the U.S. to organize networks of hydrogen production, distribution, and consumption in an effort to attract federal matching funds available under the Bipartisan Infrastructure Law. We believe that state-level activity to attract hydrogen hub dollars has created new forums in which we can demonstrate how our existing and future hydrogen-producing solutions can be a part of future hydrogen hubs and economies.

Secondly and more recently, the Inflation Reduction Act of 2022 (“IRA”), signed into law on August 16, 2022, marked a major investment by the U.S. federal government into a broad spectrum of renewable energy technologies by recasting existing investment and production tax credits and creating new credits for zero-emission technology. The IRA extends the existing Internal Revenue Code (“IRC”) Section 48 investment tax credit, which includes fuel cell technology, through 2024 and introduces new prevailing wage conditions required to be eligible for the full credit value. Beyond this change, we could benefit from changes to the production credit pursuant to IRC Section 45Q related to carbon capture and sequestration, the new investment tax credit pursuant to IRC Section 48E for zero emission energy property which will succeed the existing Section 48 ITC, and the IRC Section 45V production tax credit for hydrogen. This new production credit offers up to $3.00 per kilogram of hydrogen produced if the hydrogen is considered zero carbon and if the hydrogen generation project conforms with prevailing wage and apprenticeship requirements. Such an incentive for zero carbon could result in increased demand for commercial solutions to hydrogen production technology, such as our solid oxide electrolyzer which is currently under development and available for order. Many of the modified or new tax credits also include additional credits for using domestically sourced content and for siting projects in specified “energy communities” where fossil fuel production previously has been a significant economic driver. We expect to be well positioned to take advantage of the credit adder for domestic content.

Overall, we believe that the IRA’s passage signals a significant effort by the U.S. federal government to accelerate low- and no-carbon energy production and manufacturing. We believe that the programs and credits included in the IRA align well with our business model and could provide significant benefits with respect to incentivizing the purchase of our current product offerings and technologies under commercial development.

South Korea

Internationally, South Korea has an RPS to promote clean energy, reduce carbon emissions, and develop local manufacturing of clean energy generation products to accelerate economic growth. The RPS is designed to increase new and renewable power generation to 10% of total power generation by 2023 from 2% when the RPS began in 2012. Twenty-two of the largest power generators are obligated to achieve the RPS requirements in their generation or purchase offsetting renewable energy certificates. Financial penalties are levied by the government for non-compliance.

European Union

European governments are supportive of hydrogen-based generation and efficient CHP applications. Italy adopted a system to promote energy efficiency with Italian “White Certificates” (Energy Efficiency Certificates) that are tradable

34

certificates, for which fuel cells qualify, to promote energy savings expressed in tons of oil equivalent saved. Germany, the United Kingdom and the Netherlands provide tax incentives, grants and waivers of regulatory fees for clean energy installations. Additionally, large energy-intensive industry sectors and the aviation sector in European Union countries above a certain size qualify for the ETS (Emissions Trading Scheme) and are subject to a cap-and-trade requirement for carbon emissions.

In the European Union (“EU”), the Emissions Trading System (“ETS”) has created carbon capture sequestration allowances to be applied to ETS calculations for carbon not released into the atmosphere, and instead placed into a  storage location for future use.  Similar credits are allowed for entities that capture CO2 emissions to produce precipitated calcium carbonate, in which the used CO2 is chemically bound.  The European Union is anticipated to develop a standard to be able to classify when CO2 has been “stored” by the end of 2022.  We believe that these developments, along with legislation recently passed by the EU Parliament leading to the creation of the European Hydrogen Bank funded with 3 billion euros, will provide market support for carbon capture technologies.

In response to the hardships and global energy market disruption caused by Russia's invasion of Ukraine, the European Commission presented the REPowerEU Plan.

REPowerEU is a plan for:

saving energy,
producing clean energy, and
diversifying the EU’s energy supplies.

The REPowerEU Plan is backed by financial and legal measures to build the new energy infrastructure and system that Europe needs.  In addition to the construction of a hydrogen backbone by 2030, REPowerEU calls for 6 gigawatts (“GW”) of electrolysis by 2024 and 30 GW by 2030.

South Africa

South African legislation requires the transition from 90% coal-generated electricity to a system that is transparent, equitable, and incorporative of renewable energy and alternative sources.  The governments of South Africa, France, Germany, the United Kingdom and the U.S., along with the European Union, have announced an ambitious, long-term Just Energy Transition Partnership (the “Partnership”) to support South Africa’s decarbonization efforts. The Partnership aims to accelerate the decarbonization of South Africa’s economy, with a focus on the electricity system, to help it achieve the ambitious goals set out in its updated Nationally Determined Contribution emissions goals. This Partnership mobilizes an initial commitment of $8.5 billion for the first phase of financing, through various mechanisms including grants, concessional loans and investments and risk sharing instruments, including to mobilize the private sector.

Government Regulation

Our Company and our products are subject to various federal, provincial, state and local laws and regulations relating to, among other things, land use, safe working conditions, handling and disposal of hazardous and potentially hazardous substances and emissions of pollutants into the atmosphere. Emissions of SOx and NOx from our power plants are substantially lower than conventional combustion-based generating stations and are far below existing and proposed regulatory limits. The primary emissions from our power plants, assuming no cogeneration application, are humid flue gas that is discharged at temperatures of 700-800° F, water that is discharged at temperatures of 10-20° F above ambient air temperatures, and CO2 in per-kW hour amounts that are, due to the high efficiency of fuel cells, significantly less than conventional fossil fuel central generation power plants. Depending on the jurisdiction, whether our plants require water discharge permits is dependent upon whether the discharge is directed to a storm drain or wastewater system.

We are also subject to federal, state, provincial and/or local regulation with respect to, among other things, siting. Furthermore, utility companies and several states in the U.S. have created and adopted, or are in the process of creating and adopting, interconnection regulations covering both technical and financial requirements for the interconnection of fuel cell power plants to utility grids. Our power plants are designed to meet all applicable laws, regulations and industry standards for use in the international markets in which we operate. Our SureSource solutions are California Air Resources Board (“CARB”) 2007 certified, and our SureSource 1500 and SureSource 3000, when operating on biogas, are certified for the CARB 2013 Biogas standard.

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Proprietary Rights and Licensed Technology

Our intellectual property consists of patents, trade secrets, institutional knowledge and know-how that we believe is a competitive advantage and represents a barrier to entry for potential competitors. We have extensive experience in designing, manufacturing, operating and maintaining fuel cell power plants. This experience cannot be easily or quickly replicated and, combined with our trade secrets, proprietary processes and patents, safeguards our intellectual property rights.

As of October 31, 2022, we (excluding our subsidiaries) had 129 U.S. patents and 251 patents in other jurisdictions covering our fuel cell technology (in certain cases covering the same technology in multiple jurisdictions), with patents directed to various aspects of our SureSource technology, SOFC technology, PEM fuel cell technology and applications thereof. As of October 31, 2022, we also had 40 patent applications pending in the U.S. and 107 patent applications pending in other jurisdictions.

As of October 31, 2022, our subsidiary, Versa Power Systems, Ltd. (“Versa”), had 29 U.S. patents and 87 international patents covering SOFC technology (in certain cases covering the same technology in multiple jurisdictions). As of October 31, 2022, Versa also had 7 pending U.S. patent applications and 21 patent applications pending in other jurisdictions. In addition, as of October 31, 2022, our subsidiary, FuelCell Energy Solutions, GmbH, had license rights to 2 U.S. patents and 7 patents outside the U.S. (in certain cases covering the same technology in multiple jurisdictions) for carbonate fuel cell technology licensed from Fraunhofer IKTS.

We continue to innovate, and no patent expiration, either individually or in the aggregate, is expected to have any material impact on our current or anticipated operations.

Certain of our U.S. patents are the result of government-funded research and development programs, including our DOE programs. U.S. patents we own that resulted from government-funded research are subject to the government potentially exercising “march-in” rights. We believe that the likelihood of the U.S. government exercising these rights is remote and would only occur if we ceased our commercialization efforts and there was a compelling national need to use the patents.

Significant Customers and Information about Geographic Areas

We contract with a concentrated number of customers for the sale of our products and for research and development. For the years ended October 31, 2022, 2021 and 2020, our top customers, KFC, Connecticut Light and Power, EMTEC, KOSPO, the DOE, LIPA, Pfizer, Inc., and UIL Holdings Corporation accounted for an aggregate of 87%, 79% and 80%, respectively, of our total annual consolidated revenue. Revenue percentage by major customer for the last three fiscal years is as follows:

    

Years Ended October 31,

 

 

2022

    

2021

    

2020

    

Korea Fuel Cell Co., Ltd (KFC)

46

%  

%  

%  

Connecticut Light and Power

 

14

%  

20

%  

17

%  

ExxonMobil Technology and Engineering Company (f/k/a ExxonMobil Research and Engineering Company) (EMTEC)

 

8

%  

29

%  

32

%  

Korea Southern Power Company (KOSPO)

 

6

%  

12

%  

%  

U.S. Department of Energy (DOE)

 

6

%  

8

%  

9

%  

Long Island Power Authority (LIPA)

5

%  

%  

%  

Pfizer, Inc.

 

2

%  

5

%  

4

%  

UIL Holdings Corporation

 

%  

5

%  

18

%  

Total

 

87

%  

79

%  

80

%  

See Item 7 – “Management's Discussion and Analysis of Financial Condition and Results of Operations” and Item 8 – “Financial Statements and Supplementary Data” for further information regarding our revenue and revenue recognition policies.

We have marketing and manufacturing operations both within and outside the United States. We source raw materials and BOP components from a diverse global supply chain. In fiscal year 2022, the foreign country with the greatest concentration risk was South Korea, accounting for 52% of our consolidated net revenues. While we plan to aggressively pursue sales of our products in South Korea as a result of the Settlement Agreement with POSCO Energy and KFC, we

36

are also in the process of diversifying our sales mix from both a customer specific and geographic perspective as part of our overall strategic plan.

The international nature of our operations subjects us to a number of risks, including fluctuations in exchange rates, adverse changes in foreign laws or regulatory requirements and tariffs, taxes, and other trade restrictions. See Item 1A “Risk Factors” – “We are subject to risks inherent in international operations.” See also Note 13. “Segment Information,” to the consolidated financial statements in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for information about our net sales by geographic region for the years ended October 31, 2022, 2021, and 2020. See also Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for other information about our operations and activities in various geographic regions.

Human Capital Resources

We are committed to our continued efforts to increase diversity and foster an inclusive work environment that supports the global workforce and the communities we serve. We recruit the best qualified employees regardless of gender, ethnicity or other protected traits and it is our policy to fully comply with all laws (domestic and foreign) applicable to discrimination in the workplace. Our diversity, equity and inclusion principles are also reflected in our employee training and policies.

As of October 31, 2022, we had 513 full-time employees, of which 456 were located in the United States, 41 were located in Canada, 10 were located in Germany, and 6 were located in South Korea.  

We increased our diverse team member population by 5% in fiscal year 2022 compared to fiscal year 2021.

Compensation and Benefits

As part of our compensation philosophy, we believe that we must offer and maintain market competitive compensation and benefit programs for all of our team members in order to attract and retain superior and diverse talent. In addition to competitive base wages, additional programs include an annual Management Incentive Plan, Long-Term Equity Incentive Plans, and a Company matched 401(k) Plan.

For plan year 2023, we have joined a captive health insurance group to keep healthcare costs neutral. We have also implemented a wellness program for employees that includes health savings and flexible spending accounts, paid time off, family leave, team member assistance programs and a flexible hybrid work environment.

Workforce Environmental Health and Safety

We take workplace jobsite safety and environmental compliance very seriously. Under our robust environmental, health and safety (EH&S) program, we strongly encourage the reporting of near misses to identify opportunities for improvement and we are constantly evaluating our EH&S protocols in an effort to keep our facilities and workspaces environmentally friendly and safe for our team members, stakeholders, customers, and visitors.

We are committed to EH&S excellence. Our Environmental Management System is certified to ISO 14001:2015, and our Occupational Health & Safety Management System is certified to ISO 45001:2018. Health and safety is both a bottom-up and top-down priority as the Company’s Board of Directors is actively engaged in ongoing review of our polices, protocols and performance.

Our EH&S core principles are:

Zero injuries / incidents;
Compliance with all legal obligations;
Pollution prevention;
Waste reduction; and
Continual improvement. 

We are also in the process of performing life cycle analyses on our products, as well as our production and office locations, and developing a roadmap to net zero carbon emissions.

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Our safety performance is excellent and is demonstrated by experience modification rates (EMR) below the industry average of 1.0 for the last 7 fiscal years: 2016: 0.81, 2017: 0.65, 2018: 0.62, 2019: 0.65, 2020: 0.59, 2021: 0.68 and 2022: 0.088. We have maintained an “A” rating since 2016 providing “Safety Tier 1” performance with ISNetworld, a database for online contractor safety management designed to streamline companies' and contractors' compliance pre-qualification processes. Because EH&S compliance is a priority for us, we also leverage ISNetworld to qualify contractors that work on our projects.

Critical Assumptions and Additional Information Regarding Calculation of our Total Addressable Market Opportunity

The following information should be read in conjunction with the information under the heading “Our Market Opportunity” above.

Total Addressable Market Assumptions:

Our estimate for the combined, cumulative TAM in the Measuring Period with respect to the global markets that may be served by our carbon capture solution (which is under development) and carbon separation and carbon utilization solutions (which are currently available) is based, in part, on review and analysis of the International Energy Agency CCUS in Clean Energy Transitions Report (September 2020), Morgan Stanley Carbon Capture Report (April 2021) and the Intergovernmental Panel on Climate Change Special Report on Global Warming of 1.5°C (October 2018), and is further based on third party estimates of global market demand for purchased CO2 for the food and beverage, enhanced oil recovery and other industrial gas usage markets and global markets for avoided CO2 as it relates to carbon taxation. Our ability to participate in the carbon capture market assumes that we can commercialize our carbon capture technologies within the internal time frames assumed by our management. Our ability to participate in the carbon capture market, which represents a significant portion of the estimated $1 trillion TAM for carbon capture, carbon separation and utilization, also assumes that EMTEC, which funds some of our research into carbon capture and which owns certain intellectual property rights related to the carbon capture technology under development by us, will provide us with the necessary licenses or will otherwise allow us to commercially exploit carbon capture technology outside of capturing CO2 generated by our own platforms (for which we do not require a license from EMTEC). There can be no assurance that we will be successful in commercializing carbon capture technology or, in the event we are successful in developing carbon capture technology to the point of commercial availability, that EMTEC would provide us with necessary licenses or otherwise allow us to exploit carbon capture intellectual property owned by EMTEC which would be necessary for us to sell carbon capture technology for applications not involving carbon capture from our own platforms. Reference to a global market for carbon capture, carbon separation and utilization also assumes that we can create the necessary business infrastructure to manufacture, market, sell, install and service such solutions globally, and there can be no assurance that we will be successful in creating such business infrastructure.

Our estimate for the combined, cumulative TAM in the Measuring Period with respect to the global markets that may be served by our distributed hydrogen solutions is based, in part, on review and analysis of the BloombergNEF, Hydrogen Economy Outlook (March 2020) and Hydrogen Council, Hydrogen Insights (July 2021). Our estimate of the total cumulative TAM for distributed hydrogen includes the markets for grey hydrogen (hydrogen derived from natural gas), blue hydrogen (hydrogen derived from natural gas but with the management of CO2 through carbon capture and storage) and green hydrogen (hydrogen created from renewable sources such as wind and solar power). Reference to a global market for distributed hydrogen also assumes that we can create the necessary business infrastructure to manufacture, market, sell, install and service such solutions globally, and there can be no assurance that we will be successful in creating such business infrastructure.

Our estimate for the combined, cumulative TAM in the Measuring Period with respect to the markets that may be served by our megawatt and sub-megawatt FTM and BTM distributed power solutions is based, in part, on review and analysis of Morgan Stanley equity research (July 2020), MarketLine data research (Q1 2019) and Wells Fargo equity research (April 2021). Our estimate is based on markets in the United States, South Korea and Western Europe, which represent our largest current markets for FTM and BTM distributed power solutions and are markets in which we have an installed base of distributed power solutions.

Our estimate for the combined, cumulative TAM with respect to the global markets that may be served by the solid oxide based long-duration hydrogen energy storage and electrolysis solutions under development by the Company is based, in part, on review and analysis of BloombergNEF, Long-Term Storage Outlook 2020, Wood Mackenzie, Power &

38

Renewables (April 2021) and Guidehouse Insights, Market Data: Utility-Scale Energy Storage Market Update (Q1 2022). Reference to a global market for solid oxide based long-duration hydrogen energy storage and electrolysis solutions assumes that we can successfully commercialize this technology within the internal time frame assumed by our management and create the necessary business infrastructure to manufacture, market, sell, install and service such solutions globally. There can be no assurance that we will be successful in commercializing solid oxide based long-duration hydrogen energy storage and electrolysis solutions or, in the event we are successful in commercializing such solutions, that we will be successful in creating the necessary business infrastructure described above.

Total Addressable Market Sources:

Sources for the estimated market opportunities described on page 11 under the heading “Our Market Opportunity” are as follows (the information included in these sources are not incorporated by reference in this report):

Carbon Capture TAM sources:

1) International Energy Agency, CCUS in Clean Energy Transitions Report (2020), available at https://www.iea.org/reports/ccus-in-clean-energy-transitions

2) Morgan Stanley, Carbon Capture Report (April 2021) (not publicly available, on file with the Company)

3) Intergovernmental Panel on Climate Change, Special Report on Global Warming of 1.5°C (October 2018), available at https://www.ipcc.ch/sr15/

Distributed H2 TAM sources:

1) BloombergNEF, H2 Economy Outlook (2020), available at https://data.bloomberglp.com/professional/sites/24/BNEF-Hydrogen-Economy-Outlook-Key-Messages-30-Mar-2020.pdf

2) Hydrogen Council, Hydrogen Insights 2021, available at https://hydrogencouncil.com/en/hydrogen-insights-2021/

Distributed Power Generation TAM sources:

1) Morgan Stanley, Equity Research (July 2020) (not publicly available, on file with the Company)

2) MarketLine data, (not publicly available, on file with the Company)

3) Wells Fargo, Equity Research (April 2021) (not publicly available, on file with the Company)

Energy Storage TAM sources:

1) BloombergNEF, Long-Term Storage Outlook (2020), available at https://about.bnef.com/new-energy-outlook-2020/

2) Wood Mackenzie, Power & Renewables (April 2021), available at https://www.woodmac.com/store/industry-sector/power-and-renewables/

3) Guidehouse Insights, Market Data: Utility-Scale Energy Storage Market Update (1Q 2022), (not publicly available, on file with the Company)

Available Information

We file annual, quarterly and current reports, proxy statements and other information electronically with the SEC. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are made available free of charge through the “Investors” section of the Company’s website (http://www.fuelcellenergy.com) as soon as practicable after such material is electronically filed with, or furnished to, the

39

SEC. Material contained on our website is not incorporated by reference in this report. Our executive offices are located at 3 Great Pasture Road, Danbury, CT 06810. The SEC also maintains an Internet website that contains reports and other information regarding issuers that file electronically with the SEC located at http://www.sec.gov.

40

Information about our Executive Officers

NAME

   

AGE

    

PRINCIPAL OCCUPATION

Jason B. Few

President, Chief Executive Officer

56

Mr. Few was appointed President and Chief Executive Officer in August 2019 and has served as a director since 2018. Mr. Few chairs the Executive Committee of the Board of Directors (the “Board”). Mr. Few previously served as the Company’s Chief Commercial Officer from September 2019 to March 2022. Prior to joining FuelCell Energy, Mr. Few served as President of Sustayn Analytics LLC, a cloud-based software waste and recycling optimization company, since 2018, and as the Founder and Senior Managing Partner of BJF Partners LLC, a privately held strategic consulting firm, since 2016. Mr. Few has over 30 years of experience increasing enterprise value for Global Fortune 500 and privately-held technology, telecommunications, technology and energy firms. He has overseen transformational opportunities across the technology and industrial energy sectors, in roles including Founder and Senior Managing Partner of BJF Partners, LLC; President and Chief Executive Officer of Continuum Energy, an energy products and services company, from 2013-2016; various roles including Executive Vice President and Chief Customer Officer of NRG Energy, Inc., an integrated energy company, from 2011 to 2012; President of Reliant Energy, from 2009 to 2012 and Vice President, Smart Energy, a retail electricity provider, from 2008 to 2009. Mr. Few also has served as a Senior Advisor to Verve Industrial Protection, an industrial cybersecurity software company, since 2016.

Mr. Few was elected to the board of directors of Enbridge Inc. (NYSE: ENB) effective May 4, 2022, and serves on the Safety & Reliability and Sustainability Committees. Mr. Few also served on the board of directors of Marathon Oil (NYSE: MRO) from April 2019 to May 2022.

Mr. Few received his Bachelor’s Degree in Computer Systems in Business from Ohio University, and a MBA from Northwestern University’s J.L. Kellogg Graduate School of Management.

Michael S. Bishop

Executive Vice President, Chief Financial Officer

54

Mr. Bishop was appointed Executive Vice President in June 2019 and has served as the Company’s Chief Financial Officer since June 2011. Mr. Bishop previously served as the Company’s Treasurer from June 2011 to June 2022 and as Senior Vice President of the Company from June 2011 to June 2019. He has more than 25 years of experience in financial operations and management with public high growth technology companies with a focus on capital raising, project finance, debt/treasury management, investor relations, strategic planning, internal controls, and organizational development. Since joining the Company in 2003, Mr. Bishop has held a succession of financial leadership roles, including Assistant Controller, Corporate Controller and Vice President and Controller. Prior to joining the Company, Mr. Bishop held finance and accounting positions at TranSwitch Corporation, Cyberian Outpost, Inc. and United Technologies, Inc. He is a certified public accountant and began his professional career at McGladrey and Pullen, LLP (now RSM US LLP). Mr. Bishop also served four years in the United States Marine Corps.

Mr. Bishop received a Bachelor of Science in Accounting from Boston University and a MBA from the University of Connecticut.

41

NAME

   

AGE

    

PRINCIPAL OCCUPATION

Michael Lisowski

Executive Vice President, Chief Operating Officer

53

Mr. Lisowski was appointed Executive Vice President and Chief Operating Officer in June 2019. Mr. Lisowski has served as the Company’s Vice President of Global Operations since 2018, and, from 2001 to 2018, held various other positions within the Company, including Vice President of Supply Chain from 2010 to 2018. Mr. Lisowski is a senior global operations leader with 27 years of progressive operations experience in technology-driven businesses. In his position as the Company’s Chief Operating Officer (and in his prior position as the Company’s Vice President of Global Operations), Mr. Lisowski is (and was) responsible for the Supply Chain, Manufacturing, Quality, Project Management, Environmental Health and Safety, and Plant Engineering functions of the Company. Additionally, Mr. Lisowski and his team are responsible for the development and qualification of strategic suppliers for critical direct materials, as well as procurement of capital equipment in support of operations.

Mr. Lisowski received his Bachelor’s Degree in Communications and Business Administration at Western New England University and a Master’s Degree in Management, Global Supply Chain Integrations from Rensselaer Polytechnic Institute.

Anthony Leo

Executive Vice President, Chief Technology Officer

65

Mr. Leo was appointed Executive Vice President and Chief Technology Officer in June 2019 and, prior to that, served as Vice President of Applications and Advanced Technologies since 2014. From 1978 to 2014, Mr. Leo has held various other positions with the Company, including Vice President of Application Engineering and Advanced Technology Development, Vice President of Applications and OEM Engineering, and Vice President of Product Engineering. Mr. Leo has held key leadership roles in the Company’s research, development, and commercialization of stationary fuel cell power plants for more than 30 years. In his current position and in his position as the Company’s Vice President of Applications and Advanced Technologies, Mr. Leo is and has been responsible for Applications and Advanced Technology Development. In Mr. Leo’s other positions with the Company, he has been responsible for managing advanced research and development of rechargeable batteries and fuel cells, managing the first large-scale demonstration stationary fuel cell project, and establishing the Product Engineering Group.

Mr. Leo received his Bachelor of Science Degree in Chemical Engineering from Rensselaer Polytechnic Institute and is currently serving on the U.S. Department of Energy Hydrogen and Fuel Cell Technical Advisory Committee.

Joshua Dolger

Executive Vice President, General Counsel and Corporate Secretary

48

Mr. Dolger was appointed Executive Vice President and General Counsel on December 10, 2021 and Corporate Secretary on June 25, 2021. Mr. Dolger previously served as Interim General Counsel from June 25, 2021 to December 10, 2021 and as Senior Counsel from May 17, 2021 to June 25, 2021. In his current positions, Mr. Dolger oversees all the Company’s legal and governmental affairs, as well as provides leadership in all aspects of the Company’s business, including commercial matters, compliance, corporate governance and board activities. Prior to joining the Company, Mr. Dolger held a variety of legal positions of increasing responsibility at the headquarters of Terex Corporation, a public company and a global manufacturer of aerial work platforms and materials processing

42

machinery, most recently as Assistant General Counsel from January 2016 to March 2021. Mr. Dolger’s focus included Securities and Exchange Commission work, mergers and acquisitions, corporate governance, commercial contract drafting and negotiation, and implementation of the company’s multi-year strategic supply chain initiative. Prior to joining Terex Corporation, Mr. Dolger was a senior corporate attorney at Pullman & Comley, LLC. Mr. Dolger is a licensed attorney in Connecticut and New York.

Mr. Dolger received a Bachelor of Arts Degree from the State University of New York at Albany and Juris Doctor from Pace University School of Law.

Mark Feasel

Executive Vice President, Chief Commercial Officer

52

Mr. Feasel was appointed Executive Vice President and Chief Commercial Officer in April 2022. Mr. Feasel served as President, Smart Grid – North America of Schneider Electric USA (“Schneider Electric”), a multinational energy efficiency and automation provider, from December 2019 to April  2022. Prior to that, he served Schneider Electric as Vice President, Electric Utility Segment & Smart Grid from July 2012 to December 2019, as Vice President, Sales and Marketing from November 2010 through July 2012, and as Director, Sales and Marketing from March 2005 to November 2010. As President, Smart Grid – North America, Mr. Feasel had responsibility for the Electric Utility segment, Smart Grid, and Microgrid for Schneider Electric in North America. Throughout his career at Schneider Electric, he held leadership roles in Energy Management, Power Quality, Utility Solutions, Oil & Gas Solutions, Electrical Distribution Protection and Automation, and Microgrids. Mr. Feasel joined Schneider Electric in 2005 through the company’s acquisition of Power Measurement, Inc., and began his career with the United States Navy serving in the Electrical Division where he was responsible for the operation and maintenance of the systems associated with the nuclear reactor plant on a ballistic missile submarine. Mr. Feasel has also served as an Adjunct Professor at Northwestern University since June 2020, where he teaches Electric Utility Grid Planning and Operations for the Master of Science in Energy and Sustainability Program.

Mr. Feasel is a graduate of the University of Toledo.

ITEM 1A.RISK FACTORS

An investment in our common stock involves a high degree of risk. Prior to making a decision about investing in our securities, you should carefully consider the specific risk factors discussed below, together with all of the other information in this Annual Report on Form 10-K, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes. The risks and uncertainties we have described are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our operations. If any such risks actually occur, our business, financial condition, or results of operations could be materially and adversely affected. In such cases, the market price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business, Industry and Supply Chain

We have incurred losses and anticipate continued losses and negative cash flows.

We have transitioned from a research and development company to a commercial products manufacturer, services provider and developer. We have not been profitable since our year ended October 31, 1997. We expect to continue to incur net losses and generate negative cash flows until we can produce sufficient revenues and gross profit to cover our costs. We

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may never become profitable. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future. For the reasons discussed in more detail below, there are uncertainties associated with our achieving and sustaining profitability. We have, from time to time, sought financing in the public markets in order to fund operations and will continue to do so. Our future ability to obtain such financing could be impaired by a variety of factors, including, but not limited to, the price of our common stock, our lack of available shares and general market conditions.

Our cost reduction strategy for manufacturing may not succeed or may be significantly delayed, which may result in our inability to deliver improved margins.

Our cost reduction strategy for manufacturing is based on the assumption that increases in production will result in economies of scale. In addition, our cost reduction strategy relies on advancements in our manufacturing process, global competitive sourcing, engineering design, reducing the cost of capital and technology improvements (including stack life and projected power output). Failure to achieve our cost reduction targets could have a material adverse effect on our results of operations and financial condition.

We have debt and finance obligations outstanding and may incur additional debt in the future, which may adversely affect our financial condition and future financial results.

As of October 31, 2022, our total consolidated debt and finance obligations outstanding (“indebtedness”) was $83.5 million ($82.4 million, net of deferred finance costs).

Our ability to make scheduled payments of principal and interest and other required repayments depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flows from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flows, we may be required to adopt one or more alternatives, such as selling assets, restructuring operations, restructuring debt or obtaining additional equity capital on terms that may be onerous or dilutive.

We may incur additional indebtedness in the future in the ordinary course of business, which could include onerous restrictions on us. If new debt is added to current debt levels, the risks described above could intensify. Our debt agreements contain representations and warranties, affirmative and negative covenants, and events of default that entitle the lenders to cause our indebtedness under such debt agreements to become immediately due and payable.

We rely on project financing for our generation operating portfolio, which includes debt and tax equity financing arrangements, to realize the benefits provided by investment tax credits and accelerated tax depreciation. In the event that interest rates continue to rise or there are changes in tax policy, our financial results could be harmed.

Rising interest rates may increase our cost of capital. Part of our business strategy is to generate positive cash flows after debt service from our generation operating portfolio. Rising interest rates may have an adverse impact on the cost of debt and thus result in lower cash flows after debt service than we realize today. We also expect that projects we retain in our generation operating portfolio will receive capital from tax equity investors who derive a significant portion of their economic returns through tax benefits. Tax equity investors are generally entitled to substantially all of the project’s tax benefits, such as those provided by the U.S. investment tax credit (“ITC”) and Modified Accelerated Cost Recovery System or bonus depreciation. Our ability to obtain additional financing in the future depends on the continued confidence of financing sources in our business model and the continued availability of tax benefits applicable to our products. If we are unable to enter into tax equity financing agreements with attractive pricing terms, or at all, we may not be able to obtain the capital needed to finance the build out of our generation assets which would impact our overall liquidity and our business, financial condition and results of operations.

Unanticipated increases or decreases in business growth may result in adverse financial consequences for us.

We operate a 167,000 square-foot manufacturing facility in Torrington, Connecticut where we produce the individual cell packages and assemble the fuel cell modules for our carbonate fuel cell products. The maximum annualized capacity (module manufacturing, final assembly, testing and conditioning) is 100 MW per year under the Torrington facility’s current configuration when being fully utilized. The Torrington facility is sized to accommodate the eventual annualized production capacity of up to 200 MW per year with additional capital investment in machinery, equipment, tooling and inventory.

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We have a manufacturing and service facility in Taufkirchen, Germany that has the capability to perform final module assembly for up to 20 MW per year of carbonate sub-megawatt fuel cell power platforms to service the European market. Our European service activities are also operated out of this location.

Our manufacturing and research and development facility in Calgary, Alberta, Canada is focused on the engineering and development of the Company’s solid oxide fuel cell (“SOFC”) and SOEC technologies. This facility also houses our SOFC and SOEC stack research and development effort and includes equipment for the manufacturing of solid oxide cells and stacks, including advanced manufacturing capabilities. This facility includes equipment for the manufacturing of solid oxide cells and stacks, including an advanced automated stack manufacturing line which has been developed to ensure that the labor and overhead which are required to produce these technologies are optimized for efficiency and complement the low direct material cost of the stack. As of October 31, 2022, this facility is capable of producing 1 MW per year of SOFC or approximately 4 MW per year of SOEC. We are investing in expanding this facility with the goal of increasing its production capacity to 10 MW per year of SOFC or 40 MW per year of SOEC, and we expect this expansion to be complete by the middle of fiscal year 2024.  If this expansion is delayed, our ability to timely fulfill future orders to meet anticipated demand and our future revenues and ability to achieve profitability will be negatively impacted.

If our business grows more quickly than we anticipate, our existing and planned manufacturing facilities may become inadequate and we may need to seek out new or additional space, or retrofit or further equip our existing facilities, at considerable cost to us. If our business does not grow as quickly as we expect, our existing and planned manufacturing facilities would, in part, represent excess capacity for which we may not recover the cost. In that circumstance, our revenues may be inadequate to support our committed costs and our planned growth, and our gross margins and business strategy would be adversely affected.

We are subject to risks in international operations, including risks relating to our ongoing relationship with POSCO Energy Co., Ltd. (“POSCO Energy”) and Korea Fuel Cell Co., Ltd. (“KFC”).

Since we market our products both inside and outside the U.S., our success depends in part on our ability to secure international customers and our ability to manufacture products that meet foreign regulatory and commercial requirements in target markets, as well as the ability to provide service to our international customers. With the settlement of our litigation with POSCO Energy and KFC, we expect to make significant product sales into South Korea and, with our renewed emphasis on marketing our products in European markets, we expect to make future product sales there as well.  We have limited experience developing and manufacturing our products to comply with the commercial and legal requirements of international markets. In addition, we are subject to tariff regulations and requirements for export licenses, particularly with respect to the export of some of our technologies. We face numerous challenges in our international expansion, including the strain any future growth may place on management, service and operations teams and financial infrastructure.  We will face risk from complex and changing regulatory requirements, fluctuations in currency exchange rates, accounts receivable requirements and collections, difficulties in managing international operations, potentially adverse tax consequences, restrictions on repatriation of any earnings and the burdens of complying with a wide variety of international laws. In addition, with respect to South Korea, pursuant to the terms of the Settlement Agreement, we may have to rely on POSCO Energy and KFC for some period to provide certain services, such as operations and maintenance services to any new customers, and we will need their cooperation to transition long term service agreements from their existing customers to us in the future. Given the historical relationship among the parties with respect to certain actions and inactions by POSCO Energy and KFC and the prolonged litigation among the parties, there can be no guarantee that the parties will be able to successfully work together. Any of these factors could adversely affect our results of operations and financial condition.

If our goodwill and other indefinite-lived intangible assets and long-lived assets (including project assets) become impaired, we may be required to record a significant charge to operations.

We have recorded significant impairment charges, and may in the future be required to record significant impairment charges, to operations in our financial statements should we determine that our goodwill, other indefinite-lived intangible assets (i.e., in process research and development (“IPR&D”)) and other long-lived assets (i.e., project assets, property, plant and equipment and amortizing intangible assets) are impaired. Such charges might have a significant impact on our reported financial condition and results of operations. Project assets and property, plant and equipment impairment charges totaled approximately $1.8 million, $5.0 million and $2.4 million for the fiscal years ended October 31, 2022, 2021 and 2020, respectively.

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As required by accounting rules, we review our goodwill for impairment at least annually as of July 31 or more frequently if facts and circumstances indicate that it is more likely than not that the fair value of a reporting unit that has goodwill is less than its carrying value. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill might not be recoverable include a significant decline in projections of future cash flows and lower future growth rates in our industry. We review IPR&D for impairment on an annual basis as of July 31 or more frequently if facts and circumstances indicate the fair value is less than the carrying value. If the technology has been determined to be abandoned or not recoverable, we would be required to record a charge reflecting impairment of the asset. We review long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. We consider a project asset commercially viable and recoverable if such project asset is anticipated to be sellable for a profit, or generates positive cash flows, in excess of the cost of the project asset once it is either fully developed or fully constructed. If any of our project assets are not considered commercially viable or costs are not deemed to be recoverable, we would be required to record a charge reflecting the impairment of such project assets.

Our Advanced Technologies contracts are subject to the risk of termination by the contracting party and we may not realize the full amounts allocated under some contracts due to the lack of Congressional appropriations or early termination.

A portion of our revenues has been derived from long-term cooperative agreements and other contracts with the DOE and other U.S. government agencies. These agreements are important to the continued development of our technology and our products. We also contract with private sector companies under certain Advanced Technologies contracts to develop strategically important and complementary offerings.

Generally, our privately funded Advanced Technologies contracts, including our EMTEC Joint Development Agreement, and our government research and development contracts are subject to the risk of termination at the convenience of the contracting party and may contain certain milestones and deliverables which we may not be able to meet if actual results differ materially from our original estimates. Furthermore, with respect to government-funded contracts, irrespective of the amounts allocated by the contracting agency, such contracts are subject to annual Congressional appropriations and the results of government or agency sponsored reviews and audits of our cost reduction projections and efforts. We can only receive funds under government-funded contracts ultimately made available to us annually by Congress as a result of the appropriations process. Accordingly, we cannot be sure whether we will receive the full amounts awarded under our privately funded, government research and development or other contracts. Termination of the contracts or failure to receive the full amounts under any of our Advanced Technologies contracts could materially and adversely affect our business prospects, results of operations and financial condition.

Utility companies may resist the adoption of distributed generation and could impose customer fees or interconnection requirements on our customers that could make our products less desirable.

Investor-owned utilities may resist adoption of distributed generation fuel cell plants as such plants are disruptive to the utility business model that primarily utilizes large central generation power plants and associated transmission and distribution. On-site distributed generation that is on the customer-side of the electric meter competes with the utility. Distributed generation on the utility-side of the meter generally has power output that is significantly less than central generation power plants and may be perceived by the utility as too small to materially impact its business, limiting its interest. Additionally, perceived technology risk may limit utility interest in stationary fuel cell power plants.

Utility companies commonly charge fees to larger, industrial customers for disconnecting from the electric grid or for having the capacity to use power from the electric grid for back up purposes. These fees could increase the cost to our customers of using our SureSource products and could make our products less desirable, thereby harming our business prospects, results of operations and financial condition.

We depend on third party suppliers for the development and timely supply of key raw materials and components for our products.

We use various raw materials and components to construct a fuel cell module, including nickel and stainless steel that are critical to our manufacturing process. We also rely on third-party suppliers for the BOP components in our products. Suppliers must undergo a qualification process, which takes four to twelve months. We continually evaluate new suppliers, and we are currently qualifying several new suppliers. There are a limited number of suppliers for some of the key components of our products. In addition, to the extent the processes that our suppliers use to manufacture components are

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proprietary, we may be unable to obtain comparable components from alternative suppliers, all of which could harm our business prospects, results of operations and financial condition. We do not know whether we will be able to maintain long-term supply relationships with our critical suppliers, or secure new long-term supply relationships on terms that will allow us to achieve our objectives, if at all. A supplier’s failure to develop and supply components in a timely manner or to supply components that meet our quality, quantity or cost requirements or our technical specifications, or our inability to obtain alternative sources of these components on a timely basis or on terms acceptable to us, could each harm our ability to manufacture our SureSource products.  In addition, our supply chain has been, and may continue to be, adversely affected by the COVID-19 pandemic, which has created global shipping and logistics challenges. These challenges include extended shipping lead times and pricing pressures on transportation and logistics that have adversely impacted, and may continue to adversely impact, our ability to meet our production schedules and project deadlines, may result in additional and increased costs, or may otherwise adversely impact our business, results of operations and financial condition. If we are unable to pass these costs on to our customers or timely complete projects, we may experience reduced revenue and other adverse impacts on our business, results of operations and financial condition. Given that our customers and suppliers are facing similar global supply chain challenges, we expect continued difficulty in forecasting demand and supply needs for the foreseeable future. While we have implemented several initiatives to mitigate the effects of the COVID-19 pandemic on our business, our business, results of operations and financial condition may still be adversely impacted.

Our business and operations may be adversely affected by the COVID-19 outbreak or other similar outbreaks.

Any outbreaks of contagious diseases, including COVID-19, and other adverse public health developments in countries where we and our suppliers operate, could have a material and adverse effect on our business, financial condition and results of operations. These effects could include disruptions to or restrictions on our employees’ ability to travel, as well as temporary or prolonged closures of our facilities or the facilities of our customers, suppliers, or other vendors in our supply chain. In addition, COVID-19 has resulted in a widespread health crisis that has adversely affected, and may continue to adversely affect, the economies and financial markets of many countries, resulting in economic downturns that could affect demand for our products or our ability to obtain financing for our business or projects. COVID-19 may impact the health of our team members, directors or customers, reduce the availability of our workforce or those of companies with which we do business, or otherwise cause human impacts that may negatively impact our business. Any of these events, which may result in disruptions to our supply chain or customer demand, could materially and adversely affect our business and our financial results. The extent to which COVID-19 will impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted. Such developments may include new mutations of the virus, the continued efficacy of vaccines and the actions that may be taken by various governmental authorities in response to the outbreak, such as periodic quarantine or “shelter-in-place” orders and business closures imposed by various states within the United States, and the impact on the U.S. or global economy. For example, on March 18, 2020, in response to the escalating global COVID-19 outbreak, we temporarily suspended operations at our Torrington, Connecticut manufacturing facility, and also ordered those employees that could work from home to do so. We resumed operations in the manufacturing facility on June 22, 2020, and we established a phased-in return to work schedule commencing March 15, 2021 for those employees working from home that was completed April 19, 2021. However, we continue to evaluate our ability to operate in the event of resurgences of COVID-19 and the advisability of continuing operations, based on federal, state and local guidance, evolving data concerning the pandemic and the best interests of our employees, customers and stockholders.  Accordingly, there can be no assurance that any of our facilities will remain open (in full or in part) or that our other operations will continue at full or limited capacity. If we again have to shut down production either due to a resurgence of the COVID-19 pandemic or due to an outbreak in one of our facilities, our project schedules and associated financing could be adversely affected. Further, we have experienced, and may continue to experience, increased costs and expenses, including as a result of (i) conducting daily “fitness-for-duty” assessments for employees, including symptom checks and providing personal protective equipment, (ii) the expansion of benefits to our employees, including the provision of additional time off for employees who have contracted COVID-19 or are required to be quarantined or who are unable to obtain childcare to return to work, and the reimbursement of expenses incurred while working from home, (iii) implementing increased health and safety protocols at all of our facilities, including increased cleaning/sanitization of workspaces, restricting visitor access, mandating social distancing guidelines and increasing the availability of sanitization products, and (iv) the increased cost of personal protective equipment. Although we believe the Company is currently considered an “essential” business in its operating markets, if any of the applicable exceptions or exemptions are curtailed or revoked in the future, or any of these exemptions or exceptions do not extend to any of our key suppliers, our business, operating results and financial condition could be adversely impacted. As a result, at this time, it is impossible to predict the future impact of COVID-19 on our business, liquidity, capital resources, supply chain and financial results or its effect on clean energy demand, capital budgets of our customers, or demand for our products. Additionally, while we have continued to prioritize the health and safety of our team members

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and customers as we continue to operate during the pandemic, we face an increased risk of litigation related to our operating environments. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession that has occurred or may occur in the future because of the pandemic, or because the pandemic worsens again. Additional public health crises could also emerge in the future, including other pandemics or epidemics. Any such public health crisis could pose further risks to us and could also have a material adverse effect on our business, results of operations and financial position.

An increase in energy costs, including as a result of the ongoing conflict between Russia and Ukraine, may materially adversely affect our business, financial condition, and results of operations.

Our results of operations can be directly affected by volatility in the cost and availability of energy, which is subject to global supply and demand and other factors beyond our control. The ongoing conflict between Russia and Ukraine has impacted global energy markets, particularly in Europe, leading to high volatility and increasing prices for crude oil, natural gas and other energy supplies. Higher energy costs result in increases in operating expenses at our manufacturing facilities, in the expense of shipping materials to our facilities, and in the expense of operating our projects for which we procure natural gas, all of which may in turn adversely affect our business, financial condition, and results of operations.

Failure to meet Environmental, Social, and Governance (“ESG”) expectations or standards or to achieve our ESG goals could adversely affect our business, results of operations, financial condition, and stock price.

In recent years, there has been an increased focus from stakeholders on ESG matters, including greenhouse gas emissions and climate-related risks, renewable energy, water stewardship, waste management, diversity, equality and inclusion, responsible sourcing and supply chain, human rights, and social responsibility. Given our commitment to ESG, we actively manage these issues and have established and publicly announced certain goals, commitments, and targets which we may refine or even expand further in the future. These goals, commitments, and targets reflect our current plans and aspirations and are not guarantees that we will be able to achieve them. Evolving stakeholder expectations and our efforts to manage these issues, report on them, and accomplish our goals present numerous operational, regulatory, reputational, financial, legal, and other risks, any of which could have a material adverse impact, including on our reputation and stock price.

Such risks and uncertainties include:

•      reputational harm, including damage to our relationships with customers, suppliers, investors, governments, or other stakeholders;

adverse impacts on our ability to sell and manufacture products;
the success of our collaborations with third parties;
increased risk of litigation, investigations, or regulatory enforcement action;
unfavorable ESG ratings or investor sentiment;
diversion of resources and increased costs to control, assess, and report on ESG metrics;
our ability to achieve our goals, commitments, and targets within the timeframes announced;
access to and increased cost of capital; and
adverse impacts on our stock price.

Any failure, or perceived failure, to meet evolving stakeholder expectations and industry standards or achieve our ESG goals, commitments, and targets could have an adverse effect on our business, results of operations, financial condition, and stock price.

Risks Related to Sales of our Products

We derive significant revenue from contracts awarded through competitive bidding processes involving substantial costs and risks. Our contracted projects may not convert to revenue, and our project awards and sales pipeline may not convert to contracts, which may have a material adverse effect on our revenue and cash flows.

We expect a significant portion of the business that we will seek in the foreseeable future will be awarded through competitive bidding against other fuel cell technologies and other forms of power generation. The competitive bidding process involves substantial costs and a number of risks, including the significant cost and managerial time to prepare bids and proposals for contracts that may not be awarded to us and our failure to accurately estimate the resources and costs

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that will be required to fulfill any contract we win. In addition, following a contract award, we may encounter significant expense, delay or contract modifications or award revocation as a result of our competitors protesting or challenging contracts awarded to us in competitive bidding. Our failure to compete effectively in this procurement environment could adversely affect our revenue and/or profitability.

Some of the project awards we receive and orders we accept from customers require certain conditions or contingencies (such as permitting, interconnection, financing or regulatory approval) to be satisfied, some of which are outside of our control. Certain awards are cancelable or revocable at any time prior to contract execution. The time periods from receipt of an award to execution of a contract, or receipt of a contract to installation may vary widely and are determined by a number of factors, including the terms of the award, governmental policies or regulations that go into effect after the award, the terms of the customer contract and the customer’s site requirements. These same or similar conditions and contingencies may be required by financiers in order to draw on financing to complete a project. If these conditions or contingencies are not satisfied, or changes in laws affecting project awards occur, or awards are revoked or cancelled, project awards may not convert to contracts, and installations may be delayed or canceled. This could have an adverse impact on our revenue and cash flow and our ability to complete construction of a project.

We have signed product sales contracts, EPCs, PPAs and long-term service agreements with customers subject to contractual, technology, operating, commodity (i.e. natural gas) and fuel pricing risks as well as market conditions that may affect our operating results.

We apply the transfer of control over time revenue recognition method under Accounting Standards Codification Topic 606: Revenue from Contracts with Customers to certain service contracts which are subject to estimates. On a quarterly basis, we perform a review process to help ensure that total estimated contract costs include estimates of costs to complete that are based on the most recent available information. The amount of costs incurred on a cumulative to date basis as a function of estimated costs at completion is applied to contract consideration to determine the cumulative revenue that should be recognized to date.

We have contracted under long-term service agreements with certain customers to provide service on our products over terms up to 20 years. Under the provisions of these contracts, we provide services to maintain, monitor, and repair customer power plants to meet minimum operating levels. Pricing for service contracts is based upon estimates of future costs including future module exchanges. While we have conducted tests to determine the overall life of our products, we have not run certain of our products over their projected useful life or in all potential conditions prior to large scale commercialization. As a result, we cannot be sure that these products will last to their expected useful life or perform as anticipated in all conditions, which could result in warranty claims, performance penalties, maintenance and module replacement costs in excess of our estimates, losses on service contracts and/or a negative perception of our products. As a result of our products’ lack of maturity, we have incurred and may continue to incur charges for warranty claims, performance penalties, maintenance and module replacement costs in excess of our estimates and losses on service contracts. Each of these risks could be material under these contracts and, as a result, we may experience diminished returns or be required to write off all or a portion of our capitalized costs in these project assets.

In certain instances, we have executed PPAs with the utility, end-user of the power or site host of the fuel cell power plant. We may then sell the PPA and power plant to a project investor or retain the project and collect revenue from the sale of power over the term of the PPA, recognizing electricity revenue as power is generated and sold. Our growing portfolio of project assets used to generate and sell power under PPAs and utility tariff programs exposes us to operational risks and uncertainties, including, among other things, lost revenues due to prolonged outages, replacement equipment costs, risks associated with facility start-up operations, failures in the availability or acquisition of fuel (including natural gas and renewable natural gas), the impact of severe adverse weather conditions, natural disasters, terrorist attacks, cybersecurity attacks, risks of property damage or injury from energized equipment, availability of adequate water resources and ability to intake and discharge water, use of new or unproven technology, fuel commodity price risk and fluctuating market prices, and lack of alternative available fuel sources.

Our ability to proceed with projects under development and complete construction of projects on schedule and within budget may be adversely affected by escalating costs for materials and fuel (including natural gas and renewable natural gas), supply chain and logistics challenges, tariffs, labor and regulatory compliance, inability to obtain necessary permits, interconnections or other approvals on acceptable terms or on schedule and by other factors. If any development project or construction is not completed, is delayed or is subject to cost overruns, we could become obligated to make delay or termination payments or become obligated for other damages under contracts, experience diminished returns or be required

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to write off all or a portion of our capitalized costs in the project. Each of these events could have an adverse effect on our business, financial condition, results of operations and prospects.

We extend product warranties for our products, which products are complex and could contain defects and may not operate at expected performance levels, which could impact sales and market adoption of our products, affect our operating results or result in claims against us.

We develop complex and evolving products and we continue to advance the capabilities of our fuel cell stacks. We now produce stacks in the United States with a net rated power output of 350 kilowatts when new and a 7-year cell design life. We provide for a warranty of our products for a specific period of time against manufacturing or performance defects. We accrue for warranty costs based on historical warranty claim experience; however, actual future warranty expenses may be greater than we have assumed in our estimates. We are still gaining field operating experience with respect to our products, and despite experience gained from our growing installed base and testing performed by us, our customers and our suppliers, issues have been and may continue to be found in existing or new products including, but not limited to, module decay rates which have exceeded and may continue to exceed design expectations. This has resulted and may continue to result in a delay in recognition or loss of revenues and may result in loss of market share or failure to achieve broad market acceptance. The occurrence of defects has also caused and may continue to cause us to incur significant warranty, support and repair costs in excess of our estimates, could divert the attention of our engineering personnel from our product development efforts, and could harm our relationships with our customers. Although we seek to limit our liability, a product liability claim brought against us, even if unsuccessful, would likely be time consuming, could be costly to defend, and may hurt our reputation in the marketplace. Our customers could also seek and obtain damages from us for their losses.

We currently face and will continue to face significant competition, including from products using other energy sources that may be lower priced or have preferred environmental characteristics.

We compete on the basis of our products’ reliability, efficiency, environmental considerations and cost. Technological advances in alternative energy products, improvements in the electric grid or other sources of power generation that use lower priced fuel or no fuel, or other fuel cell technologies may negatively affect the development or sale of some or all of our products or make our products less economically attractive, non-competitive or obsolete prior to or after commercialization. Significant decreases in the price of alternative technologies or grid delivered electricity, or significant increases in the price of our fuels could have a material adverse effect on our business because other generation sources could be more economically attractive to consumers than our products. Additionally, in certain markets, consumers and regulators have expressed a preference for zero-carbon generating resources over fueled resources, which could adversely affect sales of our products in such markets.

Other companies, some of which have substantially greater resources than ours, are currently engaged in the development of products and technologies that are similar to, or may be competitive with, our products and technologies. Several companies in the U.S. are engaged in fuel cell development, although we are the only domestic company engaged in manufacturing and deployment of stationary carbonate fuel cells. Other emerging fuel cell technologies include small or portable PEM fuel cells, stationary phosphoric acid fuel cells, stationary solid oxide fuel cells, and small residential solid oxide fuel cells. Any of these technologies and any of our competitors has the potential to capture market share in our target markets. There are also other potential fuel cell competitors internationally that could capture market share.

Other than fuel cell developers, we must also compete with companies that manufacture combustion-based distributed power equipment, including various engines and turbines, and have well-established manufacturing, distribution, operating and cost features. Electrical efficiency of these products can be competitive with our SureSource power plants in certain applications. Significant competition may also come from gas turbine companies and large scale solar and wind technologies.

Our plans are dependent on market acceptance of our products.

Our plans are dependent upon market acceptance of, as well as enhancements to, our products. Fuel cell systems represent an emerging market, and we cannot be sure that potential customers will accept fuel cells as a replacement for traditional power sources or non-fuel based power sources, hydrogen generation sources or storage. As is typical in a rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of

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uncertainty and risk. Since the distributed generation, hydrogen, carbon capture and storage markets are still evolving, it is difficult to predict with certainty the size of these markets and their growth rates. The development of a market for our products may be affected by many factors that are out of our control, including:

the cost competitiveness of our fuel cell products including availability and output expectations and total cost of ownership;
the future costs of natural gas, renewable natural gas (biofuels), and other fuels used by our fuel cell products;
customer reluctance to try a new product;
the market for distributed generation, hydrogen, carbon capture and storage and government policies that affect those markets;
government incentives, mandates or other programs favoring zero carbon energy sources;
local permitting and environmental requirements;
customer preference for non-fuel based technologies; and
the emergence of newer, more competitive technologies and products.

If a sufficient market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred in the development of our products, and we may never achieve profitability.

We must complete development of our new products and develop additional commercially viable products in order to achieve our long-term revenue targets.

In fiscal year 2022, we established new target revenues to be met by the end of fiscal year 2025 and the end of fiscal year 2030. In developing these revenue targets, we assumed the successful commercialization of our SOEC, SOFC and carbon capture products.  If we experience delays in meeting our development goals for these products, these products exhibit technical defects, or we are unable to meet cost or performance goals with respect to these products, including goals for power output, hydrogen production, rates of carbon capture, useful life and reliability, then our ability to generate revenue and achieve profitability from sales of these new products will be delayed or may not occur at all.  In addition, if we are unable to develop additional commercially viable products in the future, we may not be able to generate sufficient revenue to become profitable. The profitable commercialization of our products depends on our ability to reduce the costs of our products, and we cannot assure you that we will be able to sufficiently reduce these costs to achieve profitability.

Our products use inherently dangerous, flammable fuels, operate at high temperatures and use corrosive carbonate material, each of which could subject our business to product liability claims.

Our business exposes us to potential product liability claims that are inherent in products that use hydrogen. Our products utilize fuels such as natural gas and convert these fuels internally to hydrogen that is used by our products to generate electricity. Although our platforms do not combust fuels for the generation of electricity, the fuels we use are combustible and may be toxic. In addition, our SureSource products operate at high temperatures and use corrosive carbonate material, which could expose us to potential liability claims. Although we have incorporated a robust design and redundant safety features in our power plants, have established comprehensive safety, maintenance, and training programs, follow third-party certification protocols, codes and standards, and do not store natural gas or hydrogen at our power plants, we cannot guarantee that there will not be accidents. Any accidents involving our products or other hydrogen-using products could materially impede widespread market acceptance and demand for our products. In addition, we might be held responsible for damages beyond the scope of our insurance coverage. We also cannot predict whether we will be able to maintain adequate insurance coverage on acceptable terms.

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Risks Related to Privacy, Data Protection and Cybersecurity

We are increasingly dependent on information technology, and disruptions, failures or security breaches of our information technology infrastructure could have a material adverse effect on our operations and the operations of our power plant platforms. In addition, increased information technology security threats and more sophisticated computer crime pose a risk to our systems, networks, products and services.

We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic and financial information and to manage a variety of business processes and activities, including communication with power plants owned by us or our customers and production, manufacturing, financial, logistics, sales, marketing and administrative functions. Additionally, we collect and store data that is sensitive to us and to third parties. Operating these information technology networks and systems and processing and maintaining this data, in a secure manner, are critical to our business operations and strategy. We depend on our information technology infrastructure to communicate internally and externally with employees, customers, suppliers and others. We also use information technology networks and systems to comply with regulatory, legal and tax requirements and to operate our fuel cell power plants. These information technology systems, many of which are managed by third parties or used in connection with shared service centers, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers or other cybersecurity risks, telecommunication failures, user errors, natural disasters, terrorist attacks or other catastrophic events. If any of our significant information technology systems suffer severe damage, disruption or shutdown, and our disaster recovery and business continuity plans do not effectively resolve the issues in a timely manner, our product sales, financial condition and results of operations may be materially and adversely affected, and we could experience delays in reporting our financial results, or our fuel cell power plant operations may be disrupted, exposing us to performance penalties under our contracts with customers.

In addition, information technology security threats — from user error to cybersecurity attacks designed to gain unauthorized access to our systems, networks and data — are increasing in frequency and sophistication. Cybersecurity attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crime and advanced persistent threats. These threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data.

Cybersecurity attacks could also include attacks targeting customer data or the security, integrity and/or reliability of the hardware and software installed in our products. We have experienced, and may continue to experience in the future, cybersecurity attacks that have resulted in unauthorized parties gaining access to our information technology systems and networks and, in one instance, gaining control of the information technology system at one of our power plants. However, to date, no cybersecurity attack has resulted in any material loss of data, interrupted our day-to-day operations or had a material impact on our financial condition, results of operations or liquidity. While we actively manage information technology security risks within our control, there can be no assurance that such actions will be sufficient to mitigate all potential risks to our systems, networks and data. In addition to the direct potential financial risk as we continue to build, own and operate generation assets, other potential consequences of a material cybersecurity attack include reputational damage, litigation with third parties, disruption to systems, unauthorized release of confidential or otherwise protected information, corruption of data, diminution in the value of our investment in research, development and engineering, and increased cybersecurity protection and remediation costs, which in turn could adversely affect our competitiveness, results of operations and financial condition. The amount of insurance coverage we maintain may be inadequate to cover claims or liabilities relating to a cybersecurity attack.

Additionally, the legal and regulatory environment surrounding information security and privacy in the U.S. and international jurisdictions is constantly evolving. Violation or non-compliance with any of these laws or regulations, contractual requirements relating to data security and privacy, or our own privacy and security policies, either intentionally or unintentionally, or through the acts of intermediaries could have a material adverse effect on our brand, reputation, business, financial condition and results of operations, as well as subject us to significant fines, litigation losses, third-party damages and other liabilities.

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Tax, Accounting, Compliance and Regulatory Risks

We are required to maintain effective internal control over financial reporting. In a prior fiscal year, our management identified a material weakness in our internal control over financial reporting. If other control deficiencies are identified in the future, we may not be able to report our financial results accurately, prevent fraud or file our periodic reports in a timely manner, which may adversely affect investor confidence in our Company and, as a result, the value of our common stock.

We are required, pursuant to Section 404 of the Sarbanes-Oxley Act (“Section 404”), to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. Complying with Section 404 requires a rigorous compliance program as well as adequate time and resources. We may not be able to complete our internal control evaluation, testing and any required remediation in a timely fashion. Additionally, if we identify one or more material weaknesses in our internal control over financial reporting, we will not be able to assert that our internal controls are effective. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

In a prior fiscal year, our management identified a material weakness in our internal control over financial reporting, which has been remediated. We cannot be certain that other material weaknesses and control deficiencies will not occur in the future. If material weaknesses are identified in the future, or if we are not able to comply with the requirements of Section 404 in a timely manner, our reported financial results could be materially misstated and we could be subject to investigations or sanctions by regulatory authorities, which would require additional financial and management resources, and the value of our common stock could decline.

To the extent we identify future weaknesses or deficiencies, there could be material misstatements in our consolidated financial statements and we could fail to meet our financial reporting obligations. As a result, our ability to obtain additional financing on favorable terms or at all could be materially and adversely affected which, in turn, could materially and adversely affect our business, our financial condition and the value of our common stock. If we are unable to assert that our internal control over financial reporting is effective in the future, investor confidence in the accuracy and completeness of our financial reports could be further eroded, which would have a material adverse effect on the price of our common stock.

Our results of operations could vary as a result of changes to our accounting policies or the methods, estimates and judgments we use in applying our accounting policies.

The methods, estimates and judgments we use in applying our accounting policies have a significant impact on our results of operations. Such methods, estimates and judgments are, by their nature, subject to substantial risks, uncertainties and assumptions, and factors may arise over time that could lead us to reevaluate our methods, estimates and judgments.

In future periods, management will continue to reevaluate its estimates for contract margins, service agreements, loss accruals, warranty, performance guarantees, liquidated damages, inventory valuation allowances and allowance for doubtful accounts. Changes in those estimates and judgments could significantly affect our results of operations and financial condition. We will also adopt changes required by the Financial Accounting Standards Board and the SEC.

We may be affected by environmental and other governmental regulation.

We are subject to various federal, state and local laws and regulations relating to, among other things, land use, safe working conditions, handling and disposal of hazardous and potentially hazardous substances and emissions of carbon dioxide and pollutants into the atmosphere. Our business exposes us to the risk of harmful substances escaping into the environment, resulting in personal injury or loss of life, damage to or destruction of property, and natural resource damage. Depending on the nature of the claim, our current insurance policies may not adequately reimburse us for costs incurred in settling environmental damage claims, and in some instances, we may not be reimbursed at all. In addition, it is possible that industry-specific laws and regulations will be adopted covering matters such as transmission scheduling, distribution, emissions, and the characteristics and quality of our products, including installation and servicing. These regulations could limit the growth in the use of carbonate fuel cell products, decrease the acceptance of fuel cells as a commercial product and increase our costs and, therefore, the price of our products. We believe that our businesses are operating in compliance in all material respects with applicable environmental laws; however, these laws and regulations have changed frequently

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in the past and it is reasonable to expect additional and more stringent changes in the future. Accordingly, compliance with existing or future laws and regulations could have a material adverse effect on our business prospects, results of operations and financial condition. If we fail to comply with applicable environmental laws and regulations, governmental authorities may seek to impose fines and penalties on us or to revoke or deny the issuance or renewal of operating permits and private parties may seek damages from us. Under those circumstances, we might be required to curtail or cease operations, conduct site remediation or other corrective action, or pay substantial damage claims.

Given that some of our product configurations run on fossil fuels, we may be negatively impacted by CO2-related changes in applicable laws, regulations, ordinances, rules or the requirements of the incentive programs on which we and our customers currently rely. Changes in any of the laws, regulations, ordinances or rules that apply to our installations and new technology could make it illegal or more costly for us or our customers to install and operate our products at particular sites. Additionally, our customers and potential customers’ energy procurement policies may prohibit or limit their willingness to procure our products. Our business prospects may be negatively impacted if we are prevented from completing new installations or our installations become more costly as a result of laws, regulations, ordinances, or rules applicable to our products, or by our customers’ and potential customers’ energy procurement policies.

In addition, certain of our products benefit from federal, state and local governmental incentives, mandates or other programs promoting clean energy generation. Any changes to or termination of these programs could reduce demand for our products, impair sales financing, and adversely impact our business, financial condition and results of operations.

A negative government audit could result in an adverse adjustment of our revenue and costs and could result in civil and criminal penalties.

Government agencies, such as the Defense Contract Audit Agency, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure, and compliance with applicable laws, regulations, and standards. If the agencies determine through these audits or reviews that we improperly allocated costs to specific contracts, they will not reimburse us for these costs. Therefore, an audit could result in adjustments to our revenue and costs.

Further, although we have internal controls in place to oversee our government contracts, no assurance can be given that these controls are sufficient to prevent isolated violations of applicable laws, regulations and standards. If the agencies determine that we or one of our subcontractors engaged in improper conduct, we may be subject to civil or criminal penalties and administrative sanctions, payments, fines, and suspension or prohibition from doing business with the government, any of which could materially affect our results of operations and financial condition.

Exports of certain of our products are subject to various export control regulations and may require a license or permission from the U.S. Department of State, the U.S. Department of Energy or other agencies.

As an exporter, we must comply with various laws and regulations relating to the export of products, services and technology from the U.S. and other countries having jurisdiction over our operations. We are subject to export control laws and regulations, including the International Traffic in Arms Regulation, the Export Administration Regulation, and the Specially Designated Nationals and Blocked Persons List, which generally prohibit U.S. companies and their intermediaries from exporting certain products, importing materials or supplies, or otherwise doing business with restricted countries, businesses or individuals, and require companies to maintain certain policies and procedures to ensure compliance. We are also subject to the Foreign Corrupt Practices Act, which prohibits improper payments to foreign governments and their officials by U.S. and other business entities. Under these laws and regulations, U.S. companies may be held liable for their actions and actions taken by their strategic or local partners or representatives. If we, or our intermediaries, fail to comply with the requirements of these laws and regulations, or similar laws of other countries, governmental authorities in the United States or elsewhere, as applicable, could seek to impose civil and/or criminal penalties, which could damage our reputation and have a material adverse effect on our business, financial condition and results of operations.

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The Paycheck Protection Program loan received by us in 2020 and subsequently repaid by us in 2021 has resulted in an informal SEC inquiry into our financial disclosures and may subject us to challenges regarding qualification for the loan, enforcement actions, fines and penalties.

On April 20, 2020, we entered into a Paycheck Protection Program Promissory Note, dated April 16, 2020 (the “PPP Note”), evidencing a loan to the Company from Liberty Bank under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Pursuant to the PPP Note, we received total proceeds of approximately $6.5 million on April 24, 2020 (the “PPP Loan”). In accordance with the requirements of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”), the PPP Loan may have been fully forgiven if (i) proceeds were used to pay eligible payroll costs, rent, mortgage interest and utilities and (ii) full-time employee headcount and salaries were either maintained during the 24-week period following disbursement of the PPP Loan or restored by December 31, 2020. If not so maintained or restored, forgiveness of the PPP Loan would have been reduced in accordance with regulations issued by the U.S. Small Business Administration. On October 29, 2020, we applied for forgiveness of the PPP Loan. While we believe we met all of the requirements of the CARES Act, as amended by the PPP Flexibility Act, for forgiveness, on February 11, 2021, we withdrew our application for forgiveness and repaid all amounts outstanding under the PPP Note, together with all accrued interest, in part because our financial circumstances had changed substantially since the time of the application for forgiveness, such that we were no longer in need of forgiveness of the PPP Loan. As a result of this repayment, the PPP Loan is not reported on our Consolidated Balance Sheets as of October 31, 2022 and 2021.

Our receipt of the PPP Loan, our submission of a forgiveness application, and our withdrawal of our forgiveness application may result in adverse publicity and damage to our reputation, governmental investigations, inquiries, reviews and audits, such as the SEC inquiry described below, which could consume significant financial and management resources. Any of these events could harm our business, results of operations and financial condition.

On or about May 11, 2020, the Division of Enforcement of the SEC sent us an inquiry requesting that we voluntarily provide information to the SEC pertaining to our application and resulting PPP Loan and how the need for the PPP Loan compares with our filings, disclosures and financial condition. While this request for information was voluntary and we were not obligated to respond, we cooperated with the request for information and voluntarily provided information to the SEC. The SEC did not communicate with us in fiscal year 2021 or fiscal year 2022 about its inquiry.

Risks Related to Our Need for Additional Capital

We will need to raise additional capital, and such capital may not be available on acceptable terms, if at all. If we do raise additional capital utilizing equity, existing stockholders will suffer dilution. If we do not raise additional capital, our business could fail or be materially and adversely affected.

The implementation of our business plan and strategy requires additional capital to fund operations as well as investment by us in project assets. If we are unable to raise additional capital in the amounts required, on terms acceptable to us, or at all, we will not be able to successfully implement our business plan and strategy. Our capital-intensive business model increases the risk that we will not be able to successfully implement our plans if we do not raise additional capital in the amounts required.

In addition, if we raise additional funds through further issuances of our common stock, or securities convertible into or exchangeable for shares of our common stock, into the public market, including shares of our common stock issued upon exercise of options or warrants, holders of our common stock could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of our then-existing capital stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. If we cannot raise additional funds when we need them, our business and prospects could fail or be materially and adversely affected. In addition, if additional funds are not secured in the future, we will have to modify, reduce, defer or eliminate parts of our present and anticipated future projects, or sell some or all of our assets.

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Risks Related to our Intellectual Property and Technology Licenses

We depend on our intellectual property, and our failure to protect that intellectual property could adversely affect our future growth and success.

Failure to protect our existing intellectual property rights may result in the loss of our exclusivity or the right to use our technologies. If we do not adequately ensure our freedom to use certain technology, we may have to pay others for rights to use their intellectual property, pay damages for infringement, misappropriation, or other violation, or be enjoined from using such intellectual property. We rely on patent, trade secret, trademark and copyright law to protect our intellectual property.

We previously licensed certain of our carbonate fuel cell manufacturing intellectual property to POSCO Energy on an exclusive basis in the South Korean and broader Asian markets, and pursuant to the terms of the Settlement Agreement with POSCO Energy, we have done so again, but this time on a limited, non-exclusive basis to enable module replacement to POSCO Energy’s existing LTSA customers only. (See the section above entitled “Business – License Agreements—License Agreements and Settlement Agreement with POSCO Energy” for more information with respect to the limited license granted to POSCO Energy and KFC.) In addition, effective as of June 11, 2019, we entered into the EMTEC License Agreement, pursuant to which we agreed, subject to the terms of the EMTEC License Agreement, to grant EMTEC and its affiliates a non-exclusive, worldwide, fully paid, perpetual, irrevocable, non-transferrable license and right to use our patents, data, know-how, improvements, equipment designs, methods, processes and the like to the extent it is useful to research, develop, and commercially exploit carbonate fuel cells in applications in which the fuel cells concentrate carbon dioxide from industrial and power sources and for any other purpose attendant thereto or associated therewith. Such right and license is sublicensable to third parties performing work for or with EMTEC or its affiliates, but shall not otherwise be sublicensable. Furthermore, on November 5, 2019, we entered into the EMTEC Joint Development Agreement, pursuant to which we agreed to grant EMTEC and its affiliates a worldwide, non-exclusive, royalty-free, irrevocable, perpetual, sub-licensable, non-transferable (subject to certain exceptions) right and license to practice certain Company background intellectual property (to the extent not already licensed pursuant to  the EMTEC License Agreement) for new carbonate fuel cell technology in carbon capture applications and hydrogen applications. We depend on POSCO Energy and EMTEC to also protect our intellectual property rights, but we cannot assure you that POSCO Energy or EMTEC will do so.

As of October 31, 2022, we (excluding our subsidiaries) had 129 U.S. patents and 251 patents in other jurisdictions covering our fuel cell technology (in certain cases covering the same technology in multiple jurisdictions), with patents directed to various aspects of our SureSource technology, SOFC technology, PEM fuel cell technology and applications thereof. As of October 31, 2022, we also had 40 patent applications pending in the U.S. and 107 patent applications pending in other jurisdictions. As of October 31, 2022, our subsidiary, Versa Power Systems, Ltd. (“Versa”), had 29 U.S. patents and 87 international patents covering SOFC technology (in certain cases covering the same technology in multiple jurisdictions). As of October 31, 2022, Versa also had 7 pending U.S. patent applications and 21 patent applications pending in other jurisdictions. In addition, as of October 31, 2022, our subsidiary, FuelCell Energy Solutions, GmbH, had license rights to 2 U.S. patents and 7 patents outside the U.S. (in certain cases covering the same technology in multiple jurisdictions) for carbonate fuel cell technology licensed from Fraunhofer IKTS.

Some of our intellectual property is not covered by any patent or patent application and includes trade secrets and other know-how that is not able to be patented, particularly as it relates to our manufacturing processes and engineering design. In addition, some of our intellectual property includes technologies and processes that may be similar to the patented technologies and processes of third parties. If we are found to be infringing, misappropriating or otherwise violating third-party intellectual property, we do not know whether we will be able to obtain licenses to use such intellectual property on acceptable terms, if at all. Our patent position is subject to complex factual and legal issues that may give rise to uncertainty as to the validity, scope, and enforceability of a particular patent.

We cannot assure you that any of the U.S. or international patents owned by us (including our subsidiaries) or other patents that third parties license to us will not be invalidated, circumvented, challenged, rendered unenforceable or licensed to others, or that any of our owned or licensed pending or future patent applications will be issued with the breadth of claim coverage sought by us or our licensors, if issued at all. In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in certain foreign countries.

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We also seek to protect our proprietary intellectual property, including intellectual property that may not be patented or able to be patented, in part by confidentiality agreements and, if applicable, inventors’ rights agreements with our subcontractors, vendors, suppliers, consultants, strategic business associates and employees. We cannot assure you that these agreements will not be breached, that we will have adequate remedies for any breach or that such persons or institutions will not assert rights to intellectual property arising out of these relationships. Certain of our intellectual property has been licensed to us on a non-exclusive basis from third parties that may also license such intellectual property to others, including our competitors. If our licensors are found to be infringing, misappropriating or otherwise violating third-party intellectual property, we do not know whether we will be able to obtain licenses to use the intellectual property licensed to us on acceptable terms, if at all.

If necessary or desirable, we may seek extensions of existing licenses or further licenses under the patents or other intellectual property rights of others. However, we can give no assurances that we will obtain such extensions or further licenses or that the terms of any offered licenses will be acceptable to us. The failure to obtain a license from a third party for intellectual property that we use at present could cause us to incur substantial liabilities, and to suspend the manufacture or shipment of products or our use of processes requiring the use of that intellectual property.

While we are not currently engaged in any intellectual property litigation, we could become subject to lawsuits in which it is alleged that we have infringed, misappropriated or otherwise violated the intellectual property rights of others or commence lawsuits against others who we believe are infringing, misappropriating or otherwise violating our rights or violating their agreements to protect our intellectual property. Our involvement in intellectual property litigation could result in significant expense to us, adversely affecting the development of sales of the challenged product or intellectual property and diverting the efforts of our technical and management personnel, whether or not that litigation is resolved in our favor.

The U.S. government has certain rights relating to our intellectual property, including the right to restrict or take title to certain patents.

Multiple U.S. patents that we own have resulted from government-funded research and are subject to the risk of exercise of “march-in” rights by the government. March-in rights refer to the right of the U.S. government or a government agency to exercise its non-exclusive, royalty-free, irrevocable worldwide license to any technology developed under contracts funded by the government if the contractor fails to continue to develop the technology. These “march-in” rights permit the U.S. government to take title to these patents and license the patented technology to third parties if the contractor fails to utilize the patents.

Risks Related to Our Common and Preferred Stock

Our stock price has been and could remain volatile.

The market price for our common stock has been and may continue to be volatile and subject to extreme price and volume fluctuations in response to market and other factors, including the following, some of which are beyond our control:

failure to meet commercialization milestones;
failure to win contracts through competitive bidding processes, or the loss of project awards previously announced or anticipated prior to entering into definitive contracts;
the loss of a major customer or a contract;
variations in our quarterly operating results from the expectations of securities analysts or investors;
downward revisions in securities analysts’ estimates or changes in general market conditions;
changes in the securities analysts that cover us or failure to regularly publish reports;
announcements of technological innovations or new products or services by us or our competitors;

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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
additions or departures of key personnel;
investor perception of our industry or our prospects;
insider selling or buying;
demand for our common stock;
dilution from issuances of our common stock;
general market trends or preferences for non-fueled resources;
the COVID-19 pandemic, including any worsening of the pandemic;
general technological or economic trends; and
changes in United States or foreign political environment and the passage of laws, including, tax, environmental or other laws, affecting the product development business.

The closing price of our common stock on December 14, 2022 was $3.72. There can be no assurance that the current stock price will be maintained, and it is possible that our stock price could drop significantly. In the past, following periods of volatility in the market price of their stock, companies have been the subject of securities class action litigation. If we become involved in securities class action litigation in the future, it could result in substantial costs and diversion of management’s attention and resources and could harm our stock price, business prospects, results of operations and financial condition.

Future sales of substantial amounts of our common stock could affect the market price of our common stock.

Future sales of substantial amounts of our common stock, or securities convertible into or exchangeable for shares of our common stock, into the public market, including shares of our common stock issued upon exercise of options or warrants, or perceptions that those sales could occur, could adversely affect the prevailing market price of our common stock and our ability to raise capital in the future.

Provisions of Delaware and Connecticut law and of our certificate of incorporation and by-laws may make a takeover more difficult.

Provisions in our Certificate of Incorporation, as amended (“Certificate of Incorporation”), and Amended and Restated By-Laws (“By-laws”) and in Delaware and Connecticut corporate law may make it difficult and expensive for a third-party to pursue a tender offer, change in control or takeover attempt that is opposed by our management and board of directors. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change in control or change in our management and board of directors.

Our By-laws provide that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a judicial forum deemed favorable by the stockholder for disputes with us or our directors, officers or employees.

Our By-laws provide that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our Certificate of Incorporation or our By-laws, any action to interpret, apply, enforce, or determine the validity of our Certificate of Incorporation or By-laws, or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder finds favorable for disputes against us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other

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employees. Alternatively, if a court were to find the choice of forum provision contained in our By-laws to be inapplicable or unenforceable in such an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.

The rights of our Series B Preferred Stock could negatively impact our cash flows and dilute the ownership interest of our stockholders.

The terms of our Series B Preferred Stock also provide rights to their holders that could negatively impact us. Holders of the Series B Preferred Stock are entitled to receive cumulative dividends at the rate of $50 per share per year, payable either in cash or in shares of our common stock. To the extent the dividend is paid in shares of our common stock, additional issuances could be dilutive to our existing stockholders and the sale of those shares could have a negative impact on the price of our common stock. A share of our Series B Preferred Stock may be converted at any time, at the option of the holder, into 0.5910 shares of our common stock (which is equivalent to an initial conversion price of $1,692 per share), plus cash in lieu of fractional shares. Furthermore, the conversion rate applicable to the Series B Preferred Stock is subject to additional adjustment upon the occurrence of certain events.

The Series B Preferred Stock ranks senior to our common stock with respect to payments upon liquidation, dividends, and distributions.

The rights of the holders of our Series B Preferred Stock rank senior to our obligations to our common stockholders. Upon our liquidation, the holders of Series B Preferred Stock are entitled to receive $1,000.00 per share plus all accumulated and unpaid dividends (the “Liquidation Preference”). Until the holders of Series B Preferred Stock receive the Liquidation Preference with respect to their shares of Series B Preferred Stock in full, no payment will be made on any junior shares, including shares of our common stock. The existence of senior securities such as the Series B Preferred Stock could have an adverse effect on the value of our common stock.

General Risk Factors

Litigation could expose us to significant costs and adversely affect our business, financial condition, and results of operations.

We are, or may become, party to various lawsuits, arbitrations, mediations, regulatory proceedings and claims, which may include lawsuits, arbitrations, mediations, regulatory proceedings or claims relating to commercial liability, product recalls, product liability, product claims, employment matters, environmental matters, breach of contract, intellectual property, indemnification, stockholder suits, derivative actions or other aspects of our business. Litigation (including the other types of proceedings identified above) is inherently unpredictable, and although we may believe we have meaningful defenses in these matters, we may incur judgments or enter into settlements of claims that could have a material adverse effect on our business, financial condition, and results of operations. The costs of responding to or defending litigation may be significant and may divert the attention of management away from our strategic objectives. There may also be adverse publicity associated with litigation that may decrease customer confidence in our business or our management, regardless of whether the allegations are valid or whether we are ultimately found liable.

Financial markets worldwide have experienced heightened volatility and instability which may have a material adverse impact on our Company, our customers and our suppliers.

Financial market volatility can affect the debt, equity and project finance markets. This may impact the amount of financing available to all companies, including companies with substantially greater resources, better credit ratings and more successful operating histories than ours. It is impossible to predict future financial market volatility and instability and the impact on our Company, and it may have a materially adverse effect on us for a number of reasons, such as:

The long-term nature of our sales cycle can require long lead times between application design, order booking and product fulfillment. For such sales, we often require substantial cash down payments in advance of delivery. For our generation business, we must invest substantial amounts in application design, manufacture, installation, commissioning and operation, which amounts are returned through energy sales over long periods of time. Our growth strategy assumes that financing will be available for us to finance working capital or for our customers to provide down payments and to pay for our products. Financial market issues may delay,

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cancel or restrict the construction budgets and funds available to us or our customers for the deployment of our products and services.
Projects using our products are, in part, financed by equity investors interested in tax benefits, as well as by the commercial and governmental debt markets. The significant volatility in the U.S. and international stock markets causes significant uncertainty and may result in an increase in the return required by investors in relation to the risk of such projects.
If we, our customers or our suppliers cannot obtain financing under favorable terms, our business may be negatively impacted.

Weakness in the economy and other conditions affecting the financial stability of our customers could negatively impact future sales of our products and our results of operations.

Our products require a long-term investment from our customers. Global inflationary pressures, particularly in the United States, have increased recently to levels not seen in recent years. Should our customers be impacted by these pressures, it could result in delays in purchasing decisions which could impact future sales of our products and our results of operations.  In addition, downturns in the worldwide economy, due to inflation, geopolitics, major central bank policy actions including interest rate increases, public health crises, or other factors could also adversely affect our business.

Our results of operations could be adversely affected by economic and political conditions globally and the effects of these conditions on our customers’ businesses and levels of business activity.

Economic and political events in 2022 have altered the landscape in which we and other U.S. companies operate in a variety of ways. In response to inflationary pressures, the U.S. Federal Reserve has raised interest rates, resulting in an increase in the cost of borrowing for us, our customers, our suppliers, and other companies relying on debt financing. World events, such as the Russian invasion of Ukraine and the resulting economic sanctions, have impacted the global economy, including by exacerbating inflationary and other pressures linked to COVID-related supply chain disruptions. Prolonged inflationary conditions, high and/or increased interest rates, and additional sanctions or retaliatory measures related to the Russia-Ukraine crisis, or other situations, could further negatively affect U.S. and international commerce and exacerbate or prolong the period of high energy prices and supply chain constraints. At this time, the extent and duration of these economic and political events and their effects on the economy and the Company are impossible to predict.

Our future success will depend on our ability to attract and retain qualified management, technical, and other personnel.

Our future success is substantially dependent on the services and performance of our executive officers and other key management, engineering, scientific, manufacturing and operating personnel. The loss of the services of any such personnel could materially adversely affect our business. Our ability to achieve our commercialization plans and to increase production at our manufacturing facility in the future will also depend on our ability to attract and retain additional qualified personnel, and we cannot assure you that we will be able to do so. Recruiting personnel for the fuel cell industry is competitive. Our inability to attract and retain additional qualified personnel, or the departure of key employees, could materially and adversely affect our development, commercialization and manufacturing plans and, therefore, our business prospects, results of operations and financial condition. In addition, our inability to attract and retain sufficient personnel to quickly increase production at our manufacturing facility when and if needed to meet increased demand may adversely impact our ability to respond rapidly to any new product, growth or revenue opportunities. Our inability to attract and retain sufficient qualified personnel to staff our government or third party funded research contracts may result in our inability to complete such contracts or terminations of such contracts, which may adversely impact financial conditions and results of operations.

We are subject to risks inherent in international operations.

Since we market our products both inside and outside the U.S., our success depends in part on our ability to secure international customers and our ability to manufacture products that meet foreign regulatory and commercial requirements in target markets. We have limited experience developing and manufacturing our products to comply with the commercial and legal requirements of international markets. In addition, we are subject to tariff regulations and requirements for export

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licenses, particularly with respect to the export of some of our technologies. We face numerous challenges in our international expansion, including unexpected changes in regulatory requirements and other geopolitical risks, fluctuations in currency exchange rates, longer accounts receivable requirements and collections, greater bonding and security requirements, difficulties in managing international operations, potentially adverse tax consequences, restrictions on repatriation of earnings and the burdens of complying with a wide variety of international laws. Any of these factors could adversely affect our results of operations and financial condition.

We source raw materials and parts for our products on a global basis, which subjects us to a number of potential risks, including the impact of export duties and quotas, trade protection measures imposed by the U.S. and other countries including tariffs, potential for labor unrest, changing global and regional economic conditions and current and changing regulatory environments. Changes to these factors may have an adverse effect on our ability to source raw materials and parts in line with our current cost structure.

Although our reporting currency is the U.S. dollar, we conduct our business and incur costs in the local currency of most countries in which we operate. As a result, we are subject to currency translation and transaction risk. Changes in exchange rates between foreign currencies and the U.S. dollar could affect our net sales and cost of sales and could result in exchange gains or losses. We cannot accurately predict the impact of future exchange rate fluctuations on our results of operations.

We could also expand our business into new and emerging markets, many of which have an uncertain regulatory environment relating to currency policy. Conducting business in such markets could cause our exposure to changes in exchange rates to increase, due to the relatively high volatility associated with emerging market currencies and potentially longer payment terms for our proceeds. Our ability to hedge foreign currency exposure is dependent on our credit profile with financial institutions that are willing and able to do business with us. Deterioration in our credit position or a significant tightening of the credit market conditions could limit our ability to hedge our foreign currency exposure and, therefore, result in exchange gains or losses.

Item 1B.UNRESOLVED STAFF COMMENTS

None.

Item 2.

PROPERTIES

The following is a summary of our offices and locations:

    

    

Square

    

Lease Expiration

Location

Business Use

Footage

Dates

Danbury, Connecticut

 

Corporate Headquarters, Research and Development, Sales, Marketing, Service, Purchasing and Administration

 

72,000

 

Company owned

Torrington, Connecticut

 

Manufacturing and Administrative

 

167,000

 

December 2030(1)

Taufkirchen, Germany

 

Manufacturing and Administrative

 

20,000

 

June 2023

Calgary, Alberta, Canada

 

Manufacturing, Research and Development

 

32,220

 

January 2023(2)

(1) In November 2015, this lease was extended until December 2030, with the option to extend for three additional five-year periods thereafter.
(2) As of the date of this report, the Company is in negotiations with the lessor to extend this lease through May 2028. The Company is also negotiating a new lease at an adjacent property, which property would provide an additional 48,000 square feet of manufacturing space and which lease would also expire in May 2028.

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Item 3.

LEGAL PROCEEDINGS

From time to time, the Company is involved in legal proceedings, including, but not limited to, regulatory proceedings, claims, mediations, arbitrations and litigation, arising out of the ordinary course of its business (“Legal Proceedings”). Although the Company cannot assure the outcome of such Legal Proceedings, management presently believes that the result of such 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.

Item 4.

MINE SAFETY DISCLOSURES

Not applicable.

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PART II

Item 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

FuelCell Common Stock

Our common stock has been publicly traded since June 25, 1992. Our common stock trades under the symbol “FCEL” on the Nasdaq Global Market.

On December 14, 2022, the closing price of our common stock on the Nasdaq Global Market was $3.72 per share. As of December 14, 2022, there were 123 holders of record of our common stock. This does not include the number of persons whose stock is in nominee or “street” name accounts through brokers.

We have never paid a cash dividend on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, the terms of our Series B Preferred Stock prohibit the payment of dividends on our common stock unless all dividends on the Series B Preferred Stock have been paid in full.

FuelCell Preferred Stock

Information concerning the Company’s Series B Preferred Stock is incorporated herein by reference to Note 12. “Redeemable Preferred Stock” of the Notes to the Consolidated Financial Statements.

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Performance Graph

The following graph compares the annual change in the Company’s cumulative total stockholder return on its common stock for the five fiscal years ended October 31, 2022 with the cumulative stockholder total return on the Russell 2000 Index, a peer group consisting of Standard Industry Classification Group Code 3690 companies listed on the Nasdaq Global Market and New York Stock Exchange and a customized 14 company peer group. It assumes $100.00 invested on October 31, 2017 with dividends reinvested.

GraphicEquity Compensation Plan Information

See Part III, Item 12 for information regarding securities authorized for issuance under our equity compensation plans.

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Stock Repurchases

The following table sets forth information with respect to purchases made by us or on our behalf of our common stock during the periods indicated:

Period

    

Total
Number of
Shares
Purchased (1)

    

Average 
Price Paid
per Share

    

Total Number 
of Shares
Purchased as
Part of
Publicly
Announced 
Programs

    

Maximum
Number of
Shares that 
May Yet be 
Purchased 
Under the 
Plans or
Programs

August 1, 2022 - August 31, 2022

378,933

$

4.21

September 1, 2022 - September 30, 2022

793

3.97

October 1, 2022 - October 31, 2022

Total

379,726

$

4.21

(1) Includes only shares that were surrendered by employees to satisfy statutory tax withholding obligations in connection with the vesting of stock-based compensation awards.

Item 6.

RESERVED

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Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the information included in Item 8 of this Annual Report on Form 10-K. Unless otherwise indicated, the terms “Company”, “FuelCell Energy”, “we”, “us”, and “our” refer to FuelCell Energy, Inc. and its subsidiaries. All tabular dollar amounts are in thousands. In certain instances, the capitalized terms used in this section are defined elsewhere in this Annual Report on Form 10-K, including in the Notes to the Consolidated Financial Statements.

In addition to historical information, this discussion and analysis contains forward-looking statements. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please see the section of this Annual Report entitled “Forward-Looking Statement Disclaimer” for a discussion of the uncertainties, risks and assumptions associated with these statements, as well as the other risks set forth in our filings with the SEC including those set forth under the section entitled “Item 1A — Risk Factors” in this Annual Report.

Overview

Headquartered in Danbury, Connecticut, FuelCell Energy has leveraged five decades of research and development to become a global leader in delivering environmentally responsible distributed baseload energy platform solutions through our proprietary fuel cell technology. Our current commercial technology produces electricity, heat, hydrogen, and water while separating carbon for utilization and/or sequestration. We continue to invest in developing and commercializing future technologies expected to add new capabilities to our platforms’ abilities to deliver hydrogen and long duration hydrogen-based energy storage through our solid oxide technologies, as well as further enhance our existing platforms’ carbon capture solutions.

FuelCell Energy is a global leader in sustainable clean energy technologies that address some of the world’s most critical challenges around energy access, security, safety and environmental stewardship. As a leading global manufacturer of proprietary fuel cell technology platforms, FuelCell Energy is uniquely positioned to serve customers worldwide with sustainable products and solutions for industrial and commercial businesses, utilities, governments, and municipalities.

FuelCell Energy, based in Connecticut, was founded in 1969 as a New York corporation to provide applied research and development services on a contract basis. We completed our initial public offering in 1992 and reincorporated in Delaware in 1999. We began selling stationary fuel cell power plants commercially in 2003.

Recent Developments

The events described in this “Recent Developments” section relate, in part, to matters discussed in more detail below in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and/or in the Notes to the Consolidated Financial Statements. In certain instances, the capitalized terms used in this “Recent Developments” section are defined elsewhere in this Annual Report on Form 10-K, including in the Notes to the Consolidated Financial Statements.

Groton Project – Commercial Operations Achieved at 6 MW

On December 16, 2022, the Company declared and, per the terms of the Amended and Restated Power Purchase Agreement between the Company and Connecticut Municipal Electric Energy Cooperative (“CMEEC”) entered into on that date (the “Amended and Restated PPA”), CMEEC agreed that the platform at the U.S. Navy Submarine Base in Groton, CT (the “Groton Project”) is commercially operational at 6 MW. As of December 16, 2022, the Groton Project will be reported as a part of the Company’s operating generation portfolio. The Amended and Restated PPA allows the Company to operate the plant at a reduced output of approximately 6 MW while a Technical Improvement Plan (“TIP”) is implemented over the next year with the goal of bringing the platform to its rated capacity of 7.4 MW by December 31, 2023. In conjunction with entering into the Amended and Restated PPA, the Navy also provided its authorization to proceed with commercial operations at 6 MW.  The Company paid CMEEC an amendment fee of $1.225 million and will incur performance guarantee fees under the Amended and Restated PPA as a result of operating at an output below 7.4 MW during implementation of the TIP. Although the Company believes it will successfully implement the TIP within approximately one year and bring the plant up to its nominal output of 7.4 MW, no assurance can be provided that such work will be successful. In the event that the plant does not reach an output of 7.4 MW by December 31, 2023, the

66

Amended and Restated PPA will continue in effect, and the Company will be subject to ongoing performance guarantee fees as set forth in the Amended and Restated PPA.

In addition, as previously disclosed, in August 2021, the Company closed on a tax equity financing transaction with East West Bancorp, Inc. (“East West Bank”) for the Groton Project. East West Bank’s tax equity commitment totals $15 million. In connection with the initial closing, the Company drew down $3.0 million. Under subsequent amendments, the terms of East West Bank’s remaining investment commitment of $12.0 million were modified such that East West Bank will contribute $4.0 million on each of the first, second and third anniversaries of the Groton Project achieving commercial operations, rather than contributing the full $12.0 million when the Groton Project achieves commercial operations. In conjunction with the amendments, the Company agreed to pay aggregate fees of $0.5 million, which were paid upon the Company declaring commencement of commercial operations of the plant on December 16, 2022.

With the declaration of commercial operations, East West Bank’s investment in the project has been reclassified as a non-redeemable noncontrolling interest as of December 16, 2022.

For additional information regarding the Groton Project, see “Liquidity and Capital Resources—Generation Operating Portfolio, Projects Assets and Backlog” below.

Amendment No. 3 to Joint Development Agreement with ExxonMobil Technology and Engineering Company

On December 19, 2022, the Company and ExxonMobil Technology and Engineering Company (f/k/a ExxonMobil Research and Engineering Company) (“EMTEC”) entered into Amendment No. 3 to the Joint Development Agreement between the Company and EMTEC, effective as of December 1, 2022 (such amendment, “Amendment No. 3” and such agreement, as amended, the “EMTEC Joint Development Agreement”). In Amendment No. 3, the Company and EMTEC agreed to further extend the term of the EMTEC Joint Development Agreement such that it will end on August 31, 2023 (unless terminated earlier) and to further increase the maximum amount of research costs to be reimbursed by EMTEC from $50.0 million to $60.0 million. Amendment No. 3 is intended to (i) allow for continuation of research that would enable the parties to finalize data collection in support of the project gate decision to use the developed technology in a Company fuel cell module demonstration for capturing carbon at ExxonMobil’s Rotterdam facility, (ii) allow for the continuation of the development, engineering and mechanical derisking of the Generation 2 Technology fuel cell module prototype, and (iii) allow for studying the manufacturing scale-up and cost reduction of a commercial Generation 2 Technology fuel cell carbon capture facility.

Results of Operations

Management evaluates our results of operations and cash flows using a variety of key performance indicators, including revenues compared to prior periods and internal forecasts, costs of our products and results of our cost reduction initiatives, and operating cash use. These are discussed throughout the “Results of Operations” and “Liquidity and Capital Resources” sections. Results of Operations are presented in accordance with U.S. GAAP.

The following discussion and analysis of our Results of Operations and Liquidity and Capital Resources includes a comparison of the fiscal year ended October 31, 2022 (“fiscal year 2022”) to the fiscal year ended October 31, 2021 (“fiscal year 2021”). A similar discussion and analysis that compares fiscal year 2021 to the fiscal year ended October 31, 2020 (“fiscal year 2020”) may be found in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Form 10-K for the fiscal year ended October 31, 2021, which is incorporated herein by reference.

67

Comparison of the Years Ended October 31, 2022 and 2021

Revenues and Costs of revenues

Revenues and costs of revenues for the years ended October 31, 2022 and 2021 were as follows:

Year Ended October 31,

Change

(dollars in thousands)

    

2022

    

2021

    

$

    

%

Total revenues

$

130,484

$

69,585

$

60,899

88%

Total costs of revenues

160,059

85,224

74,835

88%

Gross loss

$

(29,575)

$

(15,639)

$

(13,936)

89%

Gross margin

(22.7)%

(22.5)%

Total revenues for the year ended October 31, 2022 increased $60.9 million, or 88%, to $130.5 million from $69.6 million for the year ended October 31, 2021. Total costs of revenues for the year ended October 31, 2022 increased by $74.8 million, or 88%, to $160.1 million from $85.2 million for the year ended October 31, 2021. The Company’s gross margin was (22.7)% in fiscal year 2022, as compared to a gross margin of (22.5)% in fiscal year 2021. A discussion of the changes in product revenues, service agreements revenues, generation revenues and Advanced Technologies contract revenues follows.

Product revenues

Product revenues, cost of product revenues and gross loss from product revenues for the years ended October 31, 2022 and 2021 were as follows:

Year Ended October 31,

Change

(dollars in thousands)

    

2022

    

2021

    

$

    

%

Product revenues

$

60,000

$

$

60,000

N/A

Cost of product revenues

64,495

7,976

56,519

709%

Gross loss from product revenues

$

(4,495)

$

(7,976)

$

3,481

(44)%

Product revenues gross loss

(7.5)%

N/A

Product revenues for the year ended October 31, 2022 were $60.0 million compared to $0 for the year ended October 31, 2021. The increase in product revenues is a result of module sales to Korea Fuel Cell Co., Ltd. (“KFC”) (a subsidiary of POSCO Energy Co., Ltd. (“POSCO Energy”)) for which the Company recognized $60.0 million on the Ex Works delivery of twenty modules from the Company’s facility in Torrington, CT during the year ended October 31, 2022. Of these twenty modules, eight were delivered during the three months ended October 31, 2022.

Cost of product revenues increased $56.5 million for the year ended October 31, 2022 to $64.5 million, compared to $8.0 million in the year ended October 31, 2021. The increase is primarily due to the module sales to KFC. The increase also relates to a fixed asset impairment charge of approximately $1.0 million incurred during the year ended October 31, 2022 (related to the cessation of operations at a conditioning facility in Danbury, CT, which is being replaced by a new conditioning facility located at our Torrington, CT manufacturing facility as a part of our fiscal year 2022 and 2023 capital investments) and accrued warranty costs of approximately $0.5 million associated with the module sales to KFC discussed above. Manufacturing variances, primarily related to increased material, logistics, utilities and other overhead costs, totaled approximately $13.5 million for the year ended October 31, 2022 compared to approximately $6.9 million for the year ended October 31, 2021.

For the year ended October 31, 2022, we operated at an annualized production rate of approximately 39.3 MW, which is an increase from the annualized production rate of 32.4 MW for the year ended October 31, 2021.  

As of October 31, 2022 and 2021, there was $9.1 million and $0, respectively, of product revenues backlog.

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Service agreements revenues

Service agreements revenues and associated cost of revenues for the years ended October 31, 2022 and 2021 were as follows:

Year Ended October 31,

Change

(dollars in thousands)

    

2022

    

2021

    

$

    

%

Service agreements revenues

$

12,786

$

19,791

$

(7,005)

(35)%

Cost of service agreements revenues

17,233

24,735

(7,502)

(30)%

Gross profit (loss) from service agreements revenues

$

(4,447)

$

(4,944)

$

497

(10)%

Service agreements revenues gross margin

(34.8)%

(25.0)%

Revenues for the year ended October 31, 2022 from service agreements decreased $7.0 million to $12.8 million from $19.8 million for the year ended October 31, 2021. The decrease in service agreements revenues for the year ended October 31, 2022 is primarily due to fewer module exchanges during the year ended October 31, 2022 than during the year ended October 31, 2021. In addition, the decrease in service agreements revenues is also a result of the fact that we recorded a $3.8 million and a $1.0 million reduction in service revenues in the fourth fiscal quarters of 2022 and 2021, respectively, in each case as a result of higher future cost estimates related to future module exchanges compared to our prior estimates. Because we recognize revenue on service contracts over time using a cost input method in accordance with Accounting Standards Codification Topic 606 (“ASC 606”), we evaluate the cost estimates associated with each service contract periodically and adjust revenue accordingly. In fiscal years 2022 and 2021, we reviewed our cost estimates relating to our service contracts and identified higher estimated costs than those that were previously identified. These higher estimated costs are due to our expectation that supply chain costs will remain high relative to prior years and that our production volumes will remain low, resulting in an increase in expected module costs. Because our estimated costs relating to the service contracts increased, we applied a reduction in revenue of $3.8 million and $1.0 million in the years ended October 31, 2022 and 2021, respectively, in accordance with ASC 606.  

For the year ended October 31, 2022, accrued performance penalties under our service agreements totaled approximately $0.7 million compared to approximately $1.6 million for the year ended October 31, 2021. The decrease is the result of payments made to customers during fiscal year 2022. Accrued performance guarantees represent variable consideration for service contracts and accordingly are recorded as an offset to service agreements revenues.

Cost of service agreements revenues decreased $7.5 million to $17.2 million for the year ended October 31, 2022 from $24.7 million for the year ended October 31, 2021. Cost of service agreements revenues were lower for the year ended October 31, 2022 than for the year ended October 31, 2021 primarily due to the fact that there were fewer planned module exchanges in the service fleet that occurred during year ended October 31, 2022 than during the year ended October 31, 2021.

We record loss accruals for service agreements when the estimated cost of future module exchanges and maintenance and monitoring activities exceeds the remaining unrecognized consideration. Estimates for future costs on service agreements are determined by a number of factors including the estimated remaining life of the module(s), used replacement modules available, and future operating plans for the power platform. The net increase of approximately $0.8 million to the loss accrual in fiscal year 2022 was a result of adjustments to future cost estimates related to future module exchanges, as further described above.

We work to continuously improve and mature our products and implement lessons learned into our product designs and manufacturing process subsequent to introduction. In 2021, we examined data related to module field performance, identified improvement opportunities and invested in improvement initiatives with respect to our core molten carbonate technology. We continue to invest in such improvement initiatives. We have identified improvement opportunities ranging from improved thermal management by reducing internal temperature to improving the performance of our electrical balance of plant and implemented design changes to our commercial platforms which are expected to improve overall product performance. As it relates to our fuel cell modules, these improvements center around delivering more uniform temperature distribution within the stack modules with the intent of improving output over the life of the modules to achieve the product’s expected design life.

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Cost of service agreements revenues for both years includes planned maintenance activities, module exchanges and continued investment in the service fleet in order to improve performance. Cost of service agreements includes maintenance and operating costs and module exchanges.

Overall gross loss from service agreements revenues was $4.4 million for the year ended October 31, 2022, which represents a decrease of $0.5 million from a gross loss of $4.9 million for the year ended October 31, 2021. The overall gross margin was (34.8%) for the year ended October 31, 2022, compared to a gross margin of (25.0%) for the year ended October 31, 2021. Gross margin decreased during the year ended October 31, 2022 due to the fact that there were fewer module exchanges during the year ended October 31, 2022 and the module exchanges that were performed during the year ended October 31, 2022 were under service agreements with lower margins, compared to the year ended October 31, 2021.

As of October 31, 2022, service agreements backlog totaled $114.0 million compared to $125.9 million as of October 31, 2021. This backlog is for service agreements of up to 20 years at inception and is expected to generate positive margins and cash flows based on current estimates. Service agreements and license backlog as of October 31, 2021 also included $22.2 million of future license revenue which was reclassified to “Product” backlog as a result of the Settlement Agreement with POSCO Energy and KFC during the year ended October 31, 2022.

Generation revenues

Generation revenues and related costs for the years ended October 31, 2022 and 2021 were as follows:

Year Ended October 31,

Change

(dollars in thousands)

    

2022

    

2021

    

$

    

%

Generation revenues

$

36,186

$

24,027

$

12,159

51%

Cost of generation revenues

63,147

36,017

27,130

75%

Gross loss from generation revenues

$

(26,961)

$

(11,990)

$

(14,971)

125%

Generation revenues gross margin

(74.5)%

(49.9)%

Revenues from generation for the year ended October 31, 2022 totaled $36.2 million, which represents an increase of $12.2 million from revenue recognized of $24.0 million for the year ended October 31, 2021 due to a larger operating portfolio, improved operating output of the generation fleet and sales of renewable energy credits. Generation revenues for the years ended October 31, 2022 and 2021 reflect revenue from electricity generated under our power purchase agreements (“PPAs”) and the sale of renewable energy credits.

Cost of generation revenues totaled $63.1 million in the year ended October 31, 2022, which represents an increase of $27.1 million from the year ended October 31, 2021. Cost of generation revenues included depreciation and amortization of approximately $15.5 million and $15.0 million for the fiscal years ended October 31, 2022 and 2021, respectively. The increase from the year ended October 31, 2021 was primarily due to expensed construction costs of approximately $22.1 million related to the Toyota project and costs of approximately $6.6 million related to the increased size of the installed fleet with the Long Island Power Authority (“LIPA”) Yaphank project achieving commercial operation, offset by lower operating costs for existing plants due to efficiencies from plant maintenance activities and module exchanges.

As further background on the costs related to the Toyota project, it was determined in the fourth quarter of fiscal year 2021 that a potential source of RNG at favorable pricing was no longer sufficiently probable for the Toyota project resulting in impairment of the asset. Thus, as the Toyota project is being constructed, only amounts associated with inventory components that can be redeployed for alternative use are being capitalized. The balance of costs incurred (i.e., the approximately $22.1 million associated with the construction costs mentioned above) are being expensed as cost of generation revenues. The Company recorded a $2.8 million impairment charge in the fourth quarter of fiscal year 2021, which represented the carrying value of the project asset less the carrying value of inventory components that could be redeployed for alternative use. The Company may continue to incur such charges in future periods.

In the fourth quarter of fiscal year 2022, the Company made the decision not to proceed with development of the 7.4 MW and 1.0 MW Hartford projects given the then current economic profile of these projects and as a result incurred an impairment charge of $0.8 million. The Company recorded an impairment charge in the fourth quarter of fiscal year 2021 for the two LIPA project awards for which there were no executed PPAs (which are referred to as the LIPA Brookhaven and Clare Rose Projects), which totaled approximately $1.8 million, representing the full value of the project assets. The impairment charge for the LIPA Brookhaven and Clare Rose Projects was recorded because we made a decision to no

70

longer pursue development of the two projects. The Company also incurred an impairment charge of $0.4 million in fiscal year 2021 for the Triangle Street Project. In fiscal year 2022, we ceased using the Triangle Street Project as a development platform and returned the useable assets to inventory for future deployment as service replacements.

Refer to Note 5. “Project Assets” to the Consolidated Financial Statements for more information on the impairment charges for the fiscal year ended October 31, 2022.

We currently have three projects in development with fuel sourcing risk, which are the Toyota project, which requires procurement of RNG, and our Derby, CT 14.0 MW and 2.8 MW projects, which require natural gas. Fuel sourcing and risk mitigation strategies for all three projects are being assessed and will be implemented as project operational dates become firm. Such strategies may require cash collateral or reserves to secure fuel or related contracts for these three projects. If the Company is unable to secure fuel on favorable economic terms, it may result in impairment charges to the Derby project assets and further charges for the Toyota project asset.

The overall gross loss from generation revenues was $27.0 million for the year ended October 31, 2022, which represents an increase of $15.0 million from a gross loss of $12.0 million for the year ended October 31, 2021. The increase in gross loss from generation revenues is primarily related to the $22.1 million of construction costs being expensed related to the Toyota project, partially offset by higher margins from the operating fleet (due in part to the higher operating output of the generation fleet portfolio) during the year ended October 31, 2022 compared to the year ended October 31, 2021.

As of October 31, 2022 and 2021, generation backlog totaled $0.9 billion and $1.1 billion, respectively.

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Advanced Technologies contracts

Advanced Technologies contract revenues and related costs for the years ended October 31, 2022 and 2021 were as follows:

Year Ended October 31,

Change

(dollars in thousands)

    

2022

    

2021

    

$

    

%

Advanced Technologies contract revenues

$

21,512

$

25,767

$

(4,255)

(17)%

Cost of Advanced Technologies contract revenues

15,184

16,496

(1,312)

(8)%

Gross profit from Advanced Technologies contracts

$

6,328

$

9,271

$