FUELCELL ENERGY, INC. 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 toFuelCell Energy, Inc. and its subsidiaries. All tabular dollar amounts are in thousands. 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 theSEC including those set forth under the section entitled "Item 1A - Risk Factors" in this Annual Report. OverviewFuelCell Energy is a global leader in sustainable clean energy technologies that address some of the world's most critical challenges around energy, safety, and global urbanization. As a leading global manufacturer of proprietary fuel cell technology platforms, we are uniquely positioned to serve customers worldwide with sustainable products and solutions for businesses, utilities, governments, and municipalities. Our solutions are designed to enable a world empowered by clean energy, enhancing the quality of life for people around the globe. We target large-scale power users with our megawatt-class installations globally, and currently offer sub-megawatt solutions for smaller power consumers inEurope . To provide a frame of reference, one megawatt is adequate to continually power approximately 1,000 average sizedU.S. homes. Our customer base includes utility companies, municipalities, universities, hospitals, government entities/military bases and a variety of industrial and commercial enterprises. Our leading geographic markets are currentlythe United States andSouth Korea , and we are pursuing opportunities in other countries around the world.FuelCell Energy , based inConnecticut , was founded in 1969 as aNew York corporation to provide applied research and development services on a contract basis. We completed our initial public offering in 1992 and reincorporated inDelaware in 1999. We began selling stationary fuel cell power plants commercially in 2003. Recent Developments 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.
Shared Clean Energy Facilities Project Awards
OnSeptember 29, 2020 , we announced multiple project awards by the localConnecticut electric distribution companies totaling 11.2 MW, as part of the state-sponsored Shared Clean Energy Facility program. After reaffirming the project selection process on multiple occasions, onNovember 16, 2020 , thePublic Utilities Regulatory Authority ("PURA") inexplicably reversed itself and issued a ruling ordering one of the local electric distribution utilities to re-examine and re-evaluate the bids and submit any revisions to its selected winners onDecember 4, 2020 . OnDecember 4, 2020 , we were notified by one of the electric distribution utilities that 3 of our 4 bid awards totaling 8.4 MW, would not be honored. OnDecember 7, 2020 , the electric distribution utility notified PURA that it had selected new winners, and our projects were not among those selected. We have filed a motion for reconsideration with PURA, a motion to stay confirmation of the new award selections, and we have filed an administrative appeal with theConnecticut Superior Court . While we believe PURA's action to be unlawful and contrary to established precedent, there can be no assurance that we will prevail or have our project awards restored. In addition, there can be no assurance that any such project awards, if they are restored, will result in executed power purchase contracts. 67
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Long Island Power Authority Project Awards
InJuly 2017 , we were awarded three projects onLong Island totaling 39.8 MW. InDecember 2018 , we executed a contract for one of the three awards, which is currently reflected in our backlog. The other two awards, which are not part of our backlog, do not yet have signed contracts as we have been progressing through the required interconnect process. Contrary to assertions made byLong Island Power Authority ("LIPA"), we do not believe that the New York Climate Leadership and Community Protection Act negates the two project awards for which there are not signed contacts. We believe these projects should move forward and we have continued to pursue them in good faith, including with our advancement of the interconnect process. There can be no assurance that any project awards, including these two LIPA awards for which we do not have signed contracts, will result in executed PPAs.
December Common Stock Offering
In December of 2020, the Company and the lenders under the Orion Credit Agreement (the "Selling Stockholders") (see Note 14. "Debt" for the names of the lenders/Selling Stockholders) completed a public offering of the Company's common stock. In connection with this public offering, the Company and the Selling Stockholders entered into an underwriting agreement pursuant to which (i) the Company agreed to issue and sell to the underwriters 19,822,219 shares of the Company's common stock, plus up to 5,177,781 shares of common stock pursuant to an option to purchase additional shares, and (ii) the Selling Stockholders agreed to sell to the underwriters 14,696,320 shares of common stock, in each case at a price to the public of$6.50 per share. The underwriters exercised their option to purchase additional shares, resulting in the issuance and sale by the Company at the closing of the offering of a total of 25,000,000 shares of common stock. The offering closed onDecember 4, 2020 . Gross proceeds from the sale of common stock by the Company in the offering were$162.5 million . The Company did not receive any proceeds from the sale of common stock in the offering by the Selling Stockholders. Upon closing of the offering, the number of shares of the Company's common stock outstanding was 319,706,758.
The Company and the Selling Stockholders paid underwriting discounts and
commissions of
In addition, in connection with the offering, the Company and its directors and officers entered into a customary 90-day lock-up agreement with the underwriters party to the underwriting agreement. As part of the offering,J.P. Morgan Securities LLC waived lock-up restrictions entered into in connection with the common stock offering consummated onOctober 2, 2020 with respect to all of the shares sold in this offering by the Company and the Selling Stockholders.J.P. Morgan Securities LLC also waived all remaining lock-up restrictions applicable to the Selling Stockholders, including with respect to the then-outstanding warrants held by the Selling Stockholders to purchase up to 2,700,000 shares of common stock (which warrants were issued pursuant to the Orion Credit Agreement), and the Selling Stockholders did not enter into new lock-up agreements in connection with the offering.
Orion Credit Agreement -- Payoff of All Obligations
OnNovember 30, 2020 , the Company, its subsidiary guarantors, and the Orion Agent entered into a payoff letter with respect to the Orion Credit Agreement (the "Orion Payoff Letter"). Pursuant to the Orion Payoff Letter, onDecember 7, 2020 , the Company paid a total of$87.3 million to the Orion Agent, representing the outstanding principal, accrued but unpaid interest, prepayment premium, fees, costs and other expenses due and owing under the Orion Facility and the Orion Credit Agreement and related loan documents, in full repayment of the Company's outstanding indebtedness under the Orion Facility and the Orion Credit Agreement and related loan documents. In accordance with the Orion Payoff Letter, the aggregate prepayment premium set forth in the Orion Credit Agreement was reduced from approximately$14.9 million to$4 million and the Orion Agent, on behalf of itself and the lenders, agreed that any portion of the prepayment premium that would otherwise be required to be paid pursuant to the Orion Credit Agreement in excess of$4 million was waived by the Orion Agent and the lenders. 68
-------------------------------------------------------------------------------- Concurrently with the Orion Agent's receipt of full payment pursuant to the Orion Payoff Letter, the Orion Agent released all of the collateral from the liens granted under the security documents associated with the Orion Facility (which included the release of$11.2 million of restricted cash to the Company, which became unrestricted cash), and the Company and its subsidiaries were unconditionally released from their respective obligations under the Orion Credit Agreement (and related loan documents) and the Orion Facility without further action. With the termination of the Orion Facility and the Orion Credit Agreement and related loan documents, the lenders no longer have the right to appoint representatives to attend the Company'sBoard of Director meetings as observers. Warrant Exercise OnDecember 7, 2020 , all remaining Orion Warrants (as defined elsewhere herein) were exercised to purchase a total of 2,700,000 shares of the Company's common stock for an aggregate exercise price of$653,400 (or$0.242 per share). A discussion of the key terms and conditions of the Orion Warrants is included in Note 15. "Stockholders' Equity and Warrant Liabilities" to the consolidated financial statements under the heading "Orion Warrants".
Enbridge/Series 1 Preferred Shares - Payoff of All Obligations
InDecember 2020 , the Company,FCE Ltd. , and Enbridge (in each case as defined elsewhere herein) entered into a payoff letter (the "Enbridge Payoff Letter") pursuant to which the Company paid all amounts owed to Enbridge under the terms of the Series 1 Preferred Shares. As ofDecember 31, 2020 , the amount owed to Enbridge under the Series 1 Preferred Shares totaled Cdn.$27.4 million , which included Cdn.$4.3 million of principal and Cdn.$23.1 million of accrued dividends. OnDecember 18, 2020 , the Company remitted payment totaling Cdn.$27.4 million , or approximately$21.5 million U.S. dollars, to Enbridge. Concurrent with receipt of the payment from the Company, Enbridge surrendered its shares inFCE Ltd. , and the Guarantee and theJanuary 2020 Letter Agreement (in each case as defined elsewhere herein) were terminated. All obligations related to the Series 1 Preferred Shares were extinguished upon payment. A discussion of the key terms and conditions of the Series 1 Preferred Shares is included in Note 16. "Redeemable Preferred Stock" to the consolidated financial statements under the heading "Class A Preferred Shares (the "Series 1 Preferred Shares") ofFCE FuelCell Energy Ltd ". 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 GAAP. The following discussion and analysis of our Results of Operations and Liquidity and Capital Resources includes a comparison of fiscal year 2020 to fiscal year 2019. A similar discussion and analysis that compares fiscal year 2019 to fiscal year 2018 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 endedOctober 31, 2019 . Comparison of the Years EndedOctober 31, 2020 and 2019
Revenues and Costs of revenues
Revenues and costs of revenues for the years endedOctober 31, 2020 and 2019 were as follows: Years Ended October 31, Change (dollars in thousands) 2020 2019 $ % Total revenues$ 70,871 $ 60,752 $ 10,119 17 % Total costs of revenues 78,596 82,021 (3,425 ) (4 )% Gross loss$ (7,725 ) $ (21,269 ) $ 13,544 64 % Gross margin (10.9 )% (35.0 )% Total revenues for the year endedOctober 31, 2020 increased$10.1 million , or 17%, to$70.9 million from$60.8 million for the year endedOctober 31, 2019 . Total costs of revenues for the year endedOctober 31, 2020 decreased by$3.4 million , or 4%, to$78.6 million from$82.0 million for the year endedOctober 31, 2019 . The 69
-------------------------------------------------------------------------------- Company's gross margin was (10.9)% in fiscal year 2020, as compared to a gross margin of (35.0)% in fiscal year 2019. The increase in revenues is attributable to expanded generation and Advanced Technologies activities during fiscal year 2020. A discussion of the changes in product sales, service and license revenues, generation revenues and Advanced Technologies contract revenues follows. Product sales
Product sales, cost of product sales and gross loss from product sales for the
years ended
Years Ended October 31, Change
(dollars in thousands) 2020 2019 $ %
Product sales $ - $ 481 $ (481 ) (100 )%
Cost of product sales 9,924 18,552 (8,628 ) (47 )%
Gross loss from product sales $ (9,924 ) $ (18,071 ) $ 8,147 45 %
Product sales gross margin N/A (3757.0 )%
There were no product sales for the year ended
Cost of product sales decreased$8.6 million for the year endedOctober 31, 2020 to$9.9 million , compared to$18.6 million for the year endedOctober 31, 2019 . Both periods were impacted by the under-absorption of fixed overhead costs due to low production volumes, but there were lower overall manufacturing costs for the year endedOctober 31, 2020 due to the Company's reduction in workforce that was implemented during April of 2019 and the temporary shutdown of ourTorrington manufacturing facility fromMarch 18, 2020 toJune 22, 2020 due to the COVID-19 pandemic. The Company incurred approximately$2.1 million of manufacturing variances during the year endedOctober 31, 2020 due to the manufacturing facility shutdown, which negatively impacted overall gross margin. Manufacturing variances, primarily related to low production volumes and unabsorbed overhead costs, totaled approximately$8.7 million (including the$2.1 million of manufacturing variances mentioned above) for the year endedOctober 31, 2020 compared to approximately$14.5 million for the year endedOctober 31, 2019 . Cost of product sales for the year endedOctober 31, 2019 also includes a charge for a specific construction in process asset related to automation equipment for use in manufacturing with a carrying value of$2.8 million , which was impaired due to uncertainty as to whether the asset would be completed as a result of our liquidity position and continued low level of production rates. For the year endedOctober 31, 2020 , we operated at an annualized production rate of approximately 17.0 MW, which is the same as the annualized production rate for the year endedOctober 31, 2019 . The fiscal year 2020 production rate was primarily a result of the manufacturing facility shutdown that was implemented in response to the COVID-19 pandemic, while the fiscal year 2019 production rate was impacted primarily by the layoffs that occurred inApril 2019 .
As of
Service agreements and license revenues
Service agreements and license revenues and associated cost of revenues for the
years ended
Years Ended October 31, Change
(dollars in thousands) 2020 2019 $ %
Service agreements and license revenues
$ (1,485 ) (6 )% Cost of service agreements and license revenues 24,545 18,943 5,602 30 % Gross profit from service agreements and license revenues$ 588 $ 7,675 $ (7,087 ) (92 )% Service agreements and license revenues gross margin 2.3 % 28.8 % 70
-------------------------------------------------------------------------------- Revenues for the year endedOctober 31, 2020 from service agreements and license fee agreements decreased$1.5 million to$25.1 million from$26.6 million for the year endedOctober 31, 2019 . Service agreements and license revenues decreased primarily due to the fact that$10 million of license revenues were recorded during the year endedOctober 31, 2019 in connection with the EMRE License Agreement, whereas only$4 million of license revenues were recorded during the year endedOctober 31, 2020 in connection with the EMRE Joint Development Agreement. In addition, the year endedOctober 31, 2019 included revenue recorded for theBridgeport Fuel Cell Project service agreement. As a result of the purchase by the Company of theBridgeport Fuel Cell Project onMay 9, 2019 , revenue under this service agreement was no longer recognized afterMay 9, 2019 . In addition to the$4.0 million associated with the EMRE Joint Development Agreement noted above, service agreements and license revenues for the year endedOctober 31, 2020 also includes revenue recognized from routine maintenance and module replacements. Cost of service agreements and license revenues increased$5.6 million to$24.5 million for the year endedOctober 31, 2020 from$18.9 million for the year endedOctober 31, 2019 , due, in part, to a$2.2 million increase in our loss accrual during the year endedOctober 31, 2020 to reflect changes in the expected timing of future module replacements under one service agreement (with respect to the 2.8 MW project at theTulare, California wastewater treatment facility, which was originally commissioned in fiscal year 2018 and is owned by Clearway Energy, Inc.) in order to improve operating performance. In addition, site specific issues at theTulare facility required an earlier than expected module replacement and the Company opted to replace another module earlier than expected at the same site to maximize facility efficiencies. As a result, we incurred a charge, which is included in the loss accrual increase described above, during the year endedOctober 31, 2020 , but which is expected to result in improved margins in the future through enhanced performance. Cost of service agreements and license revenues includes maintenance and operating costs and module replacements. The remaining increase in cost of service agreements and license revenues for the year endedOctober 31, 2020 compared to the year endedOctober 31, 2019 relates to planned maintenance at several plants during the year endedOctober 31, 2020 . Overall gross profit from service agreements and license revenues was$0.6 million for the year endedOctober 31, 2020 , which represents a decrease of$7.1 million from a gross profit of$7.7 million for the year endedOctober 31, 2019 . This decrease is primarily due to the fact that$10 million of license revenues were recorded during the year endedOctober 31, 2019 in connection with the EMRE License Agreement, whereas only$4 million of license revenues were recorded during the year endedOctober 31, 2020 in connection with the EMRE Joint Development Agreement. As a result of both decreased service agreements and license revenues and increased cost of service agreements and license revenues, the service agreements and license revenues gross margin decreased to 2.3% for the year endedOctober 31, 2020 from a gross margin of 28.8% for the year endedOctober 31, 2019 . As ofOctober 31, 2020 , service agreements and license backlog totaled$169.0 million compared to$192.3 million as ofOctober 31, 2019 . 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 also includes future license revenue. Generation revenues Generation revenues and related costs for the years endedOctober 31, 2020 and 2019 were as follows: Years Ended October 31, Change (dollars in thousands) 2020 2019 $ % Generation revenues$ 19,943 $ 14,034 $ 5,909 42 % Cost of generation revenues 27,873 31,642 (3,769 ) (12 )% Gross loss from generation revenues$ (7,930 ) $ (17,608 ) $ 9,678 55 % Generation revenues gross margin (39.8 )% (125.5 )% 71
-------------------------------------------------------------------------------- Revenues from generation for the year endedOctober 31, 2020 totaled$19.9 million , which represents an increase of$5.9 million from revenues from generation recognized of$14.0 million for the year endedOctober 31, 2019 . Generation revenues for the years endedOctober 31, 2020 and 2019 reflect revenue from electricity generated under our PPAs. Generation revenues increased for the year endedOctober 31, 2020 compared to the year endedOctober 31, 2019 due to additional revenue that was recorded for the PPA associated with theBridgeport Fuel Cell Project , which was acquired onMay 9, 2019 , and theTulare BioMAT project, which commenced operations inDecember 2019 . Cost of generation revenues totaled$27.9 million in the year endedOctober 31, 2020 , which represents a decrease from the year endedOctober 31, 2019 . Cost of generation revenues included depreciation of approximately$12.9 million and$6.8 million for the years endedOctober 31, 2020 and 2019, respectively. The decrease in Cost of generation revenues was primarily a result of the inclusion of an impairment charge in the year endedOctober 31, 2019 for each of (i) theTriangle Street Project and (ii) theBolthouse Farms Project , which are described below. Cost of generation revenues for the year endedOctober 31, 2020 includes an impairment charge, which was recorded for theTriangle Street Project during the fourth quarter of fiscal year 2020 and is also described below: i. Impairment charge for theTriangle Street Project : In the fourth quarter of fiscal year 2019, management determined that it would not be able to secure a PPA with terms acceptable to the Company for the Triangle
2019 to operate the project under a merchant model for 5 years and use
the project as a development platform for the Company's advanced
applications. The project sells power through the
wholesale tariff rates and Renewable Energy Credits (RECs) to market
participants. As a result of management's decision to operate the
project in this manner, an impairment charge of $14.4 million was
recorded in the fourth quarter of fiscal year 2019. The amount of theimpairment charge was determined by comparing the estimated discounted
cash flows of the project and the expected residual value of the project
to its carrying value.
In the fourth quarter of fiscal year 2020, the Company reviewed the Triangle
Street Project and as a result of output and revenue projections given
then-current development plans, recorded an additional impairment charge of $2.4
million . The Triangle Street Project is used by the Company as a development
platform for the Company's advanced applications. As a result, revenue
generation is impacted by these activities.
ii. Impairment charge for the
of fiscal year 2019, an impairment charge for the
Project was recorded as management decided to pursue termination of the
PPA given regulatory changes impacting the future cost profile for the
Company and
PPA would be terminated, a
which reflects the difference between the carrying value of the asset
and the value of the components that were expected to be redeployed to
other projects. This project was removed from the Company's backlog as
of October 31, 2019 and the PPA was terminated.
The overall gross loss from generation revenues was $7.9 million for the year
ended October 31, 2020 , which represents an improvement of $9.7 million from a
gross loss of $17.6 million for the year ended October 31, 2019 . This
improvement is primarily a result of the lower impairment charges in the year
ended October 31, 2020 , as discussed above.
As of
72
--------------------------------------------------------------------------------Advanced Technologies contracts
Advanced Technologies contract revenues and related costs for the years ended
Years Ended October 31, Change
(dollars in thousands) 2020 2019 $ %
Advanced Technologies contract revenues
$ 6,176 31 % Cost of Advanced Technologies contract revenues 16,254 12,884 3,370 26 % Gross profit$ 9,541 $ 6,735 $ 2,806 42 % Advanced Technologies contract gross margin 37.0 % 34.3 % Advanced Technologies contract revenues for the year endedOctober 31, 2020 were$25.8 million , which reflects an increase of$6.2 million when compared to$19.6 million of Advanced Technologies contract revenues for the year endedOctober 31, 2019 . Advanced Technologies contract revenues were higher for the year endedOctober 31, 2020 due to revenues recognized in connection with the EMRE Joint Development Agreement (which was entered into onNovember 5, 2019 ). The year endedOctober 31, 2019 also included revenues recognized in connection with the EMRE Joint Development Agreement. Cost of Advanced Technologies contract revenues increased$3.4 million to$16.3 million for the year endedOctober 31, 2020 , compared to$12.9 million for the year endedOctober 31, 2019 , primarily as a result of costs incurred in connection with theEMRE Joint Development Agreement. Advanced Technologies contracts for the year endedOctober 31, 2020 generated a gross margin of$9.5 million compared to a gross margin of$6.7 million for the year endedOctober 31, 2019 . The increase in Advanced Technologies contract gross margin is related to the timing and mix of contracts, which were more heavily weighted to revenue recognized under the EMRE Joint Development Agreement during the year endedOctober 31, 2020 , compared to the year endedOctober 31, 2019 which had lowerEMRE Joint Development Agreement-related revenue and gross margin.
As of
Administrative and selling expenses
Administrative and selling expenses were$26.6 million and$31.9 million for the year endedOctober 31, 2020 and 2019, respectively. The decrease in the year endedOctober 31, 2020 primarily relates to proceeds from a legal settlement of$2.2 million received during the year endedOctober 31, 2020 , which was recorded as an offset to administrative and selling expenses, and higher legal and consulting costs incurred during the year endedOctober 31, 2019 in connection with the restructuring and refinancing initiatives undertaken by the Company in fiscal year 2019.
Research and development expenses
Research and development expenses decreased to$4.8 million for the year endedOctober 31, 2020 , compared to$13.8 million for the year endedOctober 31, 2019 . The decrease related to the reduction in spending resulting from the restructuring initiatives implemented in fiscal year 2019 and the reduction in the resources being allocated to internal research and development (as resources were instead allocated to Advanced Technologies projects). Loss from operations Loss from operations for the year endedOctober 31, 2020 was$39.2 million compared to$66.9 million for the year endedOctober 31, 2019 . The decrease in the loss from operations was primarily a result of the lower gross loss for the year, which was primarily a result of impairment charges of$20.4 million recorded for the year endedOctober 31, 2019 . The decrease is also a result of lower operating expenses for the year endedOctober 31, 2020 due to lower spending (personnel and overhead costs) resulting from the restructuring initiatives implemented in 2019, the legal settlement of$2.2 million received during fiscal year 2020 which was an offset to administrative and selling expenses and the reduction in the resources being allocated to research and development for the year endedOctober 31, 2020 . 73
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Interest expense Interest expense for the year endedOctober 31, 2020 and 2019 was$15.3 million and$10.6 million , respectively. Interest expense for both periods includes interest expense related to sale-leaseback transactions and interest for the amortization of the redeemable preferred stock of subsidiary fair value discount. The increase in interest expense during the year endedOctober 31, 2020 primarily represents additional interest on the$80.0 million outstanding during such period under the Orion Credit Agreement and interest on the loans made byFifth Third Bank and Liberty Bank in connection with the acquisition of theBridgeport Fuel Cell Project . In addition, interest expense during the year endedOctober 31, 2019 also included interest on outstanding amounts during such period under our loan and security agreement with Hercules Capital, Inc. ("Hercules") and a modification fee of$0.8 million that was recorded in connection with the amendment of our loan agreement with NRG Energy, Inc.
Change in fair value of common stock warrant liability
The$37.1 million expense for the year endedOctober 31, 2020 represents an adjustment to the estimated fair value of the warrants issued to the lenders under the Orion Credit Agreement. The expense is primarily a result of increases in the Company's stock price during the year endedOctober 31, 2020 , which were used as an input to remeasure the warrants to fair value on a quarterly basis using a Black-Scholes model at the dates of exercise and period-end for the remaining unexercised warrants, compared to the stock price used in the Black-Scholes model upon the issuance of the warrants.
Gain on extinguishment of financing obligation
The$1.8 million gain for the year endedOctober 31, 2020 represents the difference between the amount of the payoff of the lease with respect to, and the repurchase of theUCI Fuel Cell, LLC project asset and the carrying amount of the related financing obligation. Other income, net Other income, net of$0.7 million and$0.1 million was recorded for the years endedOctober 31, 2020 and 2019, respectively. Other income, net for the year endedOctober 31, 2020 primarily relates to a net non-cash gain on the extinguishment accounting related to the modification of the Series 1 Preferred Stock and the extinguishment related to the embedded derivatives (refer to Note 16. "Redeemable Preferred Stock" for additional information). Other income, net for the year endedOctober 31, 2020 also included a foreign exchange gain of$0.2 million related to the remeasurement of the Canadian Dollar denominated preferred stock obligation of ourU.S. Dollar functional currency Canadian subsidiary, offset by a loss of approximately$0.3 million related to the remeasurement of the interest rate swap on theBridgeport Fuel Cell Project loans. Other income, net for the year endedOctober 31, 2019 includes income of$0.6 million for refundable research and development tax credits and a foreign exchange gain related to the remeasurement of the Canadian Dollar denominated preferred stock obligation for ourU.S. Dollar functional currency Canadian subsidiary, offset by expense of$0.6 million for the remeasurement of the interest rate swap on theBridgeport Fuel Cell Project loans. Provision for income taxes
We have not paid federal or state income taxes in several years due to our
history of net operating losses, although we have paid foreign income and
withholding taxes in
Series A warrant exchange OnFebruary 21, 2019 , we entered into an Exchange Agreement (the "Exchange Agreement") with the holder of the Series A Warrant to Purchase Common Stock issued by us onJuly 12, 2016 (the "Series A Warrant"). Pursuant to the Exchange Agreement, we agreed to issue to the warrant holder 500,000 shares of our common stock in exchange for the Series A Warrant. During the year endedOctober 31, 2019 , we recorded a charge to common stockholders for the difference between the fair value of the Series A Warrant prior to the modification of$0.3 million and the fair value of the common shares issuable at the date of the Exchange Agreement of$3.5 million . 74
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Series B preferred stock dividends
Dividends recorded on our Series B Preferred Stock were
Series C preferred stock deemed contributions and redemption value adjustment, net
During the year endedOctober 31, 2019 , conversions of our Series C Convertible Preferred Stock ("Series C Preferred Stock") resulted in a variable number of shares of our common stock being issued to settle the conversion amounts and were treated as a partial redemption of our Series C Preferred Stock. Conversions during the year endedOctober 31, 2019 that were settled in a variable number of shares and treated as partial redemptions resulted in deemed contributions of$1.6 million . The deemed contributions represent the difference between the fair value of the common shares issued to settle the conversion amounts and the carrying value of the Series C Preferred Stock. The Company also accounted for an extinguishment of the Series C Preferred Stock by recording a deemed contribution of$0.5 million during the year endedOctober 31, 2019 . A charge to common stockholders of$8.6 million was recorded during the year endedOctober 31, 2019 because of equity conditions failures under the Certificate of Designations for the Series C Preferred Stock.
The last outstanding shares of Series C Preferred Stock were converted into
common stock on
Series D preferred stock deemed dividends and redemption accretion
During the year endedOctober 31, 2019 , conversions of our Series D Convertible Preferred Stock ("Series D Preferred Stock") in which the conversion price was below the initial conversion price (as adjusted for the reverse stock split that occurred inMay 2019 ) of$16.56 per share resulted in a variable number of shares of our common stock being issued to settle the conversion amounts and were treated as a partial redemption of the shares of our Series D Preferred Stock. Conversions during the year endedOctober 31, 2019 that were settled in a variable number of shares and treated as redemptions resulted in deemed dividends of$6.0 million . The deemed dividends represent the difference between the fair value of the common shares issued to settle the conversion amounts and the carrying value of the Series D Preferred Stock. Redemption accretion of$3.8 million was recorded during the year endedOctober 31, 2019 and reflects the accretion of the difference between the carrying value of the Series D Preferred Stock and the amount that would have been redeemed if stockholder approval had not been obtained for the issuance of common stock equal to 20% or more of our outstanding voting stock prior to the issuance of the Series D Preferred Stock. If we had been unable to obtain such stockholder approval and were therefore prohibited from issuing shares of common stock as a result of this limitation (the "Exchange Cap Shares") to a holder of Series D Preferred Stock at any time afterApril 30, 2019 , we would have been required to pay cash to such holder in exchange for the redemption of such number of Series D Preferred Shares held by such holder that would not have been convertible into such Exchange Cap Shares. Stockholder approval was obtained at the annual meeting of the Company's stockholders onApril 4, 2019 and no further accretion was required.
The last outstanding shares of Series D Preferred Stock were converted into
common stock on
Net loss attributable to common stockholders and loss per common share
Net loss attributable to common stockholders for the year endedOctober 31, 2020 represents the net loss for the period less the preferred stock dividends on the Series B Preferred Stock. Net loss attributable to common stockholders for the year endedOctober 31, 2019 represents the net loss for the period less the charge associated with the Series A Warrant exchange, the preferred stock dividends on the Series B Preferred Stock, the preferred stock deemed contributions and redemption value adjustment, net on the Series C Preferred Stock and the Series D Preferred Stock deemed dividends and redemption accretion. For the years endedOctober 31, 2020 and 2019, net loss attributable to common stockholders was$92.2 million and$100.2 million , respectively, and loss per common share was$0.42 and$1.82 , respectively. The decrease in the net loss attributable to common stockholders for the year endedOctober 31, 2020 is primarily due to the lower gross loss due to lower impairment charges in fiscal year 2020 and lower operating expenses, partially offset by the change in fair value of the common stock warrant liability 75 -------------------------------------------------------------------------------- discussed above and the fact that there were no amounts recorded for the Series A Warrants and the Series C and D Preferred Stock as none were outstanding during the year. The lower loss per common share for the year endedOctober 31, 2020 primarily is due to the higher weighted average shares outstanding due to share issuances sinceOctober 31, 2019 . LIQUIDITY AND CAPITAL RESOURCES
Overview, Cash Position, Sources and Uses
Our principal sources of cash have been sales of our common stock through public equity offerings, proceeds from third party debt such as borrowings under our credit facilities, project financing and tax monetization transactions, proceeds from the sale of our projects as well as research and development and service and license agreements with third parties. We have utilized this cash to develop and construct power plants, develop Advanced Technologies, pay down existing outstanding indebtedness, and meet our other cash and liquidity needs.
As of
Subsequent to the end of fiscal year 2020, inDecember 2020 , the Company closed an underwritten offering of 25.0 million shares of the Company's common stock. Net proceeds to the Company were approximately$156.3 million after deducting underwriting discounts and commissions and other offering expenses. Proceeds from this offering have been utilized as follows:
• Extinguishment of Senior Secured Debt: On
paid
unpaid interest, prepayment premium, fees, costs and other expenses due
and owing to the Orion Agent and the lenders under the Orion Facility
and the Orion Credit Agreement (in each case as defined elsewhere
herein) and related loan documents. Concurrently, the Orion Agent
released all of the collateral from the liens granted under the security
documents associated with the Orion Facility, which included the release
of
• Payment Under the Series 1 Preferred Shares: On
Company paid all amounts owed to Enbridge Inc. ("Enbridge") under the
Series 1 Preferred Shares (as defined elsewhere herein), totaling Cdn.
such payment, Enbridge surrendered its shares in FCE Ltd. (as defined
elsewhere herein) and the related Guarantee and January 2020 LetterAgreement (in each case, as defined elsewhere herein) were terminated.
• Working Capital: The remaining $47.5 million of proceeds from the
offering is unrestricted cash and may be used to accelerate the
development and commercialization of our solid oxide platform and for
project development, project financing, working capital support and
other general corporate purposes.
We believe that our unrestricted cash and cash equivalents, expected receipts
from our contracted backlog, and release of short-term restricted cash less
expected disbursements over the next twelve months will be sufficient to allow
the Company to meet its obligations for at least one year from the date of
issuance of these financial statements.
To date, we have not achieved profitable operations or sustained positive cash
flow from operations. The Company's future liquidity will depend on its ability
to (i) timely complete current projects in process within budget, (ii) increase
cash flows from its generation portfolio, including by meeting conditions
required to timely commence operation of new projects, operating its generation
portfolio in compliance with minimum performance guarantees and operating its
generation portfolio in accordance with revenue expectations, (iii) obtain
financing for project construction, (iv) obtain permanent financing for its
projects once constructed, (v) increase order and contract volumes, which would
lead to additional product sales, services agreements and generation revenues,
(vi) obtain funding for and receive payment for research and development under
current and future Advanced Technologies contracts, (vii) implement the cost
reductions necessary to achieve profitable operations, (viii) manage working
capital and the Company's unrestricted cash balance and (ix) access the capital
markets to raise funds through the sale of equity securities, convertible notes,
and other equity-linked instruments, all of which will require an increase in
authorized shares, and/or other debt instruments.
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Our business model requires substantial outside financing arrangements and
satisfaction of the conditions of such financing arrangements to construct and
deploy our projects and facilitate the growth of our business. We have obtained
financing through the debt and equity markets during and subsequent to the
fiscal year ended October 31, 2020 . In future periods, the Company expects to
seek lower-cost long-term debt and tax equity (e.g., sale-leaseback and
partnership transactions) for its project asset portfolio as these projects
commence commercial operations. The proceeds of any such financing, if obtained,
may allow the Company to fund other projects. We may also seek to obtain
additional financing in both the debt and equity markets in the future. If
financing is not available to us on acceptable terms if and when needed, or on
terms acceptable to us or our lenders, if we do not satisfy the conditions of
our financing arrangements, if we spend more than the financing approved for
projects, if project costs exceed an amount that the Company can finance, or if
we do not generate sufficient revenues or obtain capital sufficient for our
corporate needs, we may be required to reduce or slow planned spending, reduce
staffing, sell assets, seek alternative financing and take other measures, any
of which could have a material adverse effect on our financial condition and
operations.
As of December 31, 2020 , we had 15,093,242 shares of common stock available for
issuance, excluding treasury stock, of which 5,185,674 shares were reserved for
issuance under various warrants and equity awards, upon conversion of preferred
stock, and under our employee stock purchase and equity incentive plans. The
limited number of shares of our common stock available for issuance will limit
our ability to raise capital in the equity markets and satisfy obligations with
shares instead of cash, which could adversely affect our business and
operations. We plan to seek stockholder approval to increase the number of
shares of common stock we are authorized to issue, but such approval may not be
obtained.
Generation/Operating Portfolio, Projects and Backlog
To grow our generation portfolio, the Company will invest in developing and building turn-key fuel cell projects which will be owned by the Company and classified as project assets on the balance sheet. This strategy requires liquidity and the Company expects to continue to have increasing liquidity requirements as project sizes increase and more projects are added to backlog. We may commence building project assets upon the award of a project or execution of a multi-year PPA with an end-user that has a strong credit profile. Project development and construction cycles, which span the time between securing a PPA and commercial operation of the plant, vary substantially and can take years. As a result of these project cycles and strategic decisions to finance the construction of certain projects, we may need to make significant up-front investments of resources in advance of the receipt of any cash from the sale or long-term financing of such projects. To make these up-front investments, we may use our working capital, seek to raise funds through the sale of equity or debt securities, or seek other financing arrangements. Delays in construction progress and completing current projects in process within budget, or in completing financing or the sale of our projects may impact our liquidity in a material way. Our operating portfolio (32.6 MW as ofOctober 31, 2020 ) contributes higher long-term cash flows to the Company than if these projects had been sold. These projects generated$19.9 million in annual revenue for the fiscal year endedOctober 31, 2020 , but this amount may fluctuate from year to year depending on plant output, operational performance and management and site conditions. The Company plans to continue to grow this portfolio while also selling projects to investors. As ofOctober 31, 2020 , the Company had projects representing an additional 40.7 MW in various stages of development and construction, which projects are expected to generate operating cash flows in future periods, if completed. Retaining long-term cash flow positive projects, combined with our service fleet, is expected to result in reduced reliance on new project sales to achieve cash flow positive operations, however, operations and performance issues could impact results. We have worked with and are continuing to work with lenders and financial institutions to secure construction financing, long-term debt, tax equity and sale-leasebacks for our project asset portfolio, but there can be no assurance that such financing can be attained, or that, if attained, it will be retained and sufficient. As ofOctober 31, 2020 , net debt outstanding related to project assets was$119.0 million . Future required payments totaled$99.9 million as ofOctober 31, 2020 . The outstanding financing obligation under our sale-leaseback transactions, which totaled$49.3 million as ofOctober 31, 2020 , includes an embedded gain of$29.0 million , which will be recognized at the end of the applicable lease terms. As noted above, subsequent to the end of fiscal year 2020, the Company repaid all amounts outstanding under the Orion Credit Agreement and terminated the Orion Facility. 77
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Our operating portfolio provides us with the full benefit of future cash flows, net of any debt service requirements.
The following table summarizes our operating portfolio as ofOctober 31, 2020 : Actual Commercial Operation Date Rated (FuelCell PPA Capacity Energy Fiscal Term Project Name Location Power Off-Taker (MW) Quarter) (Years) Central CT State New Britain, CT CCSU (CT University) University ("CCSU") 1.4 Q2 '12 10 UCI Medical Center Orange, CA UCI (CA University ("UCI") Hospital) 1.4 Q1 '16 19 Riverside Regional Riverside, CA City of Riverside Water Quality (CA Municipality) Control Plant 1.4 Q4 '16 20 Pfizer, Inc. Groton, CT Pfizer, Inc. 5.6 Q4 '16 20 Santa Rita Jail Dublin, CA Alameda County, California 1.4 Q1 '17 20 Bridgeport Fuel Cell Bridgeport, CT Connecticut Light Project and Power Company (CT Utility) 14.9 Q1 '13 15 Tulare BioMAT Tulare, CA Southern California Edison (CA Utility) 2.8 Q1'20 20 Triangle St Danbury, CT Tariff - Eversource (CT Utility) 3.7 Q2'20 Tariff Total MW Operating: 32.6 The following table summarizes projects in process, all of which are in backlog, as ofOctober 31, 2020 : Rated PPA Capacity Term Project Name Location Power Off-Taker (MW) (Years) Groton Sub Base Groton, CT CMEEC (CT Electric Co-op) 7.4 20 Toyota Los Angeles, CA Southern California Edison; Toyota 2.3 20 San Bernardino San Bernardino, CA City of San Bernardino Municipal Water Department 1.4 20 LIPA 1 Long Island, NY PSEG / LIPA, LI NY (Utility) 7.4 20 CT RFP-1 Hartford, CT Eversource/United Illuminating (CT Utilities) 7.4 20 CT RFP-2 Derby, CT Eversource/United Illuminating (CT Utilities) 14.8 20 Total MW in Process: 40.7
The projects listed in the above table are in various stages of development or on-site construction and installation. Current project updates are as follows:
• In the third fiscal quarter of 2020, the Company completed the majority of
its scope of work on the 7.4 MW project at the
be completed prior to commissioning and commercial operation.
• Additionally, construction activity has been substantially completed for
the 1.4 MW project at the
facility. The Company is working with the local utility on the
interconnection process prior to commissioning and commencing commercial
operation.
• We also recently began early-stage construction activity on 24.5 MW of
projects, including the
and utility scale projects in Yaphank on Long Island in New York and
Derby, Connecticut .
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Backlog by revenue category is as follows:
• Service agreements and license backlog totaled $169.0 million as of
October 31, 2020 , compared to $192.3 million as of October 31, 2019 .
Service agreements and license backlog includes future contracted
revenue from maintenance and scheduled module exchanges for power plants
under service agreements.
• Generation backlog totaled $1.1 billion as of October 31, 2020 and
October 31, 2019 . Generation backlog represents future contracted energy
sales under contracted PPAs or approved utility tariffs.
• There was no product sales backlog as of
2019.
• Advanced Technologies contract backlog totaled $49.2 million as ofAdvanced Technologies contract backlog represents remaining revenue
under the EMRE Joint Development Agreement and government projects.
Backlog represents definitive agreements executed by the Company and our customers. Projects for which we have a PPA are included in generation backlog, which represents future revenue under long-term PPAs. Projects sold to customers (and not retained by the Company) are included in product sales and service agreements and license backlog and the related generation backlog is removed upon sale.
Factors that may impact our liquidity
Factors that may impact our liquidity in fiscal year 2021 and beyond include:
• The Company's cash on hand and access to additional liquidity. As of October
31, 2020, unrestricted cash and cash equivalents totaled
Subsequent to the end of the fiscal year, in
closed an underwritten offering of 25.0 million shares of the Company's
common stock. Net proceeds to the Company were approximately
after deducting underwriting discounts and commissions and other offering
expenses. As discussed in greater detail above,
proceeds was used to extinguish the Company's debt under the Orion Facility,
Enbridge under the terms of the Series 1 Preferred Shares and the remaining
$47.5 million of such proceeds is unrestricted cash of the Company.
• We bid on large projects in diverse markets that can have long decision
cycles and uncertain outcomes. We manage production rate based on expected
demand and projects schedules. Changes to production rate take time to
implement. The annualized production rate as of
which was impacted by the manufacturing facility shutdown from
2020 to
pandemic. During fiscal year 2020, we made a number of improvements in our
manufacturing processes and capabilities, focusing on increasing throughput
and simplifying and streamlining production steps, while implementing
applicable social distancing protocols. As a result of these improvements,
the Company now has the capability to increase our annualized production
rate up to 45 MW on a single production shift. For fiscal year 2021, the
Company is currently increasing its production rate and expects achieve an
annualized production rate of 45 MW per year.
• As project sizes and the number of projects evolves, project cycle times
may increase. We may need to make significant up-front investments ofresources in advance of the receipt of any cash from the financing or sale
of our projects. These amounts include development costs, interconnection
costs, costs associated with posting of letters of credit, bonding or other
forms of security, and engineering, permitting, legal, and other expenses.
• The amount of accounts receivable and unbilled receivables as of October
31, 2020 and 2019 was
"Other assets") and
"Other assets"), respectively. Unbilled accounts receivable represent
revenue that has been recognized in advance of billing the customer under
the terms of the underlying contracts. Such costs have been funded with
working capital and the unbilled amounts are expected to be billed and
collected from customers once we meet the billing criteria under thecontracts. Our accounts receivable balances may fluctuate as of any balance
sheet date depending on the timing of individual contract milestones and
progress on completion of our projects.
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• The amount of total inventory as ofOctober 31, 2020 and 2019 was$60.0 million ($9.0 million is classified as long-term inventory) and$56.7
million (
which includes work in process inventory totaling
million, respectively. Work in process inventory can generally be deployed
rapidly while the balance of our inventory requires further manufacturing
prior to deployment. To execute on our business plan, we must produce fuel
cell modules and procure BOP components in required volumes to support our
planned construction schedules and potential customer contractual
requirements. As a result, we may manufacture modules or acquire BOP
components in advance of receiving payment for such activities. This may
result in fluctuations in inventory and in use of cash as of any given
balance sheet date.
• The amount of total project assets as of October 31, 2020 and 2019 wascapitalized costs for fuel cell projects that are operating and producing
revenue or are under construction. Project assets as of October 31, 2020
consisted of $70.5 million of completed, operating installations and $91.3
million of projects in development. As of
of operating project assets that generated
year ended October 31, 2020 .
• As of October 31, 2020 , the Company had 40.7 MW of projects under
development and construction, some of which are expected to generateoperating cash flows beginning in fiscal years 2021 and 2022. To build out
this portfolio, for fiscal year 2021, we
forecast project asset expenditures to range between
expenditures, the Company expects to use unrestricted cash on hand and to
seek sources of construction financing. In addition, once the projects
under development become operational, the Company will seek to obtain
permanent financing (tax equity and debt) which would be expected to return
cash to the business.
• Capital expenditures are expected to range between
million for fiscal year 2021 compared to capital expenditures of
million in fiscal year 2020 as we make investments in our factories,
laboratories and business systems.
• Company funded research and development activities are expected to increase
to
million in fiscal year 2020) as we expect to accelerate commercialization
of our Advanced Technologies solutions including Distributed Hydrogen,
Hydrogen Based Long Duration Energy Storage and hydrogen power generation.
• Under the terms of certain contracts, the Company will provide performance
security for future contractual obligations. As of
pledged approximately
collateral for performance security and for letters of credit for certain
banking requirements and contracts. This balance may increase with a
growing backlog and installed fleet.
Depreciation and Amortization
As the Company builds project assets and makes capital expenditures, depreciation and amortization expenses are expected to increase. For the years endedOctober 31, 2020 and 2019, depreciation and amortization totaled$19.4 million and$12.4 million , respectively (of these totals, approximately$13.9 million and$7.4 million for the years endedOctober 31, 2020 and 2019, respectively, relate to depreciation and amortization of project assets in our generation portfolio and generation intangible assets). Cash Flows Cash and cash equivalents and restricted cash and cash equivalents totaled$192.1 million as ofOctober 31, 2020 , compared to$39.8 million as ofOctober 31, 2019 . As ofOctober 31, 2020 , restricted cash and cash equivalents was$42.2 million , of which$9.2 million was classified as current and$33.0 million was classified as non-current, compared to$30.3 million total restricted cash and cash equivalents as ofOctober 31, 2019 , of which$3.5 million was classified as current and$26.9 million was classified as non-current. 80
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The following table summarizes our consolidated cash flows:
(dollars in thousands) 2020 2019 2018 Consolidated Cash Flow Data: Net cash (used in) provided by operating activities$ (36,781 ) $ (30,572 ) $ 16,322 Net cash used in investing activities (32,520 ) (69,300 ) (51,260 ) Net cash provided by financing activities 221,667 59,655
27,717
Effects on cash from changes in foreign currency rates (92 ) (244 )
12
Net increase (decrease) in cash and cash equivalents$ 152,274 $ (40,461 ) $ (7,209 )
The key components of our cash inflows and outflows were as follows:
Operating Activities - Net cash used in operating activities was$36.8 million during fiscal year 2020 compared to net cash used in operating activities of$30.6 million in fiscal year 2019 and net cash provided by operating activities of$16.3 million in fiscal year 2018. Net cash used in operating activities during fiscal year 2020 was primarily the result of the net loss of$89.1 million , increases in accounts receivables of$6.3 million , unbilled receivables of$5.6 million and inventory of$2.1 million and a decrease in accounts payable of$7.1 million . These amounts were partially offset by increases in accrued liabilities of$5.5 million and deferred revenue of$1.7 million and net non-cash adjustments of$68.5 million . Net cash used in operating activities during fiscal year 2019 was primarily the result of the net loss of$77.6 million and increases in inventory of$6.4 million and unbilled receivables of$4.5 million . These amounts were offset by increases in deferred revenue of$6.0 million and accrued liabilities of$2.4 million , decreases in accounts receivable of$4.8 million and other assets of$2.1 million and net non-cash adjustments of$42.7 million . Net cash provided by operating activities during fiscal year 2018 was primarily the result of decreases in accounts receivable of$48.7 million , inventories of$31.7 million , deferred revenue of$1.3 million and net non-cash activity of$15.4 million . Accounts receivable and inventory decreased primarily as a result of cash received and inventory delivered under the contract to deliver a 20 MW project to KOSPO inSouth Korea . These amounts were offset by the net loss of$47.3 million for fiscal year 2018, decreases in accounts payable of$19.8 million and accrued liabilities of$11.3 million , and an increase in other assets of$2.3 million . Investing Activities - Net cash used in investing activities was$32.5 million during fiscal year 2020 compared to$69.3 million in fiscal year 2019 and$31.4 million in fiscal year 2018. Net cash used in investing activities during fiscal year 2020 included$31.5 million of project asset expenditures and a$0.6 million payment for a working capital adjustment for theMay 2019 acquisition of theBridgeport Fuel Cell Project . Net cash used in investing activities during fiscal year 2019 included the purchase by the Company of all of the outstanding membership interests inBridgeport Fuel Cell, LLC ("BFC"), the owner of the 14.9MW Bridgeport Fuel Cell Project , for$35.5 million ,$31.7 million invested in project assets to expand our operating portfolio and$2.2 million for capital expenditures. Net cash used in investing activities during fiscal year 2018 included a$41.2 million investment in project assets to expand our operating portfolio and$10.0 million for capital expenditures.
Financing Activities - Net cash provided by financing activities was
Net cash provided by financing activities during fiscal year 2020 resulted from the receipt of$63.9 million of debt proceeds under the Orion Facility, which was net of a loan discount of$1.6 million ,$14.4 million of proceeds from the sale-leaseback transaction with Crestmark Equipment Finance,$6.5 million of debt proceeds from Liberty Bank under the PPP Note,$3.0 million of debt proceeds fromConnecticut Green Bank ,$98.3 million of net proceeds from an underwritten equity offering that closed inOctober 2020 ,$73.6 million of net proceeds from at-the-market sales of common stock (after deducting commissions), and$1.3 million of net proceeds from warrant conversions, offset by debt repayments of$30.1 million , the payment of preferred dividends and return of capital of$6.5 million , and the payment of deferred financing costs of$2.7 million . 81
-------------------------------------------------------------------------------- Net cash provided by financing activities during fiscal year 2019 resulted from the receipt of$69.6 million of debt proceeds, which included$26.7 million to acquire all of the membership interest in BFC,$14.5 million under the Orion Facility and the remainder related to project level financings, offset by debt repayments of$48.4 million , the payment of deferred financing costs of$3.3 million and the payment of preferred dividends and return of capital of$1.8 million . The sale of common stock during fiscal year 2019 resulted in proceeds, net of expenses, of$43.6 million . Net cash provided by financing activities during fiscal year 2018 resulted from net proceeds of$25.3 million received in connection with the offering and issuance of the Series D Preferred Stock, the receipt of$13.1 million under the amended loan and security agreement with Hercules and net proceeds received of$10.5 million from warrant exercises and at the market sales of our common stock, offset by cash payments of$16.6 million primarily relating to repayments under the loan and security agreement with Hercules and the payment of preferred dividends and return of capital of$4.2 million .
Commitments and Significant Contractual Obligations
A summary of our significant future commitments and contractual obligations as ofOctober 31, 2020 and the related payments by fiscal year is summarized as follows: Payments Due by Period (dollars in thousands) Less than 1 - 3 3 - 5 More Than Contractual Obligations Total 1 year years years 5 years Purchase commitments (1)$ 34,660 $ 29,136 $ 5,524 $ - $ - Series 1 Preferred obligation (2) 23,447 23,447 - - - Term and Construction loans (principal and interest) (8) 169,609 30,341 56,029 46,886 36,353 Finance and operating lease commitments (3) 19,983 1,432 2,460 1,458 14,632 Sale-leaseback financing obligations (4) 20,362 3,902 5,544 5,415 5,501 Natural gas supply contract (5) 13,781 1,969 3,938 3,938 3,938 Option fee (6) 150 150 - - - Series B Preferred dividends payable (7) - - - - - Total$ 281,992 $ 90,377 $ 73,495 $ 57,696 $ 60,423
(1) Purchase commitments with suppliers for materials, supplies and services
incurred in the normal course of business.
(2) On January 20, 2020 , the Company, FCE Ltd. and Enbridge entered into a
letter agreement, which is referred to herein as the "
Agreement," pursuant to which they agreed to amend the articles of
relating to and setting forth the terms of the Class A Preferred Stock of
modify certain terms of the Series 1 Preferred Shares. Under the terms of
the
the Company was still required to make (i) annual dividend payments of Cdn.
Dividend and return of capital payments were to be made on a quarterly basis
and were scheduled to end on
were satisfied in advance of such date. After taking into account the
amendments to the terms of the Series 1 Preferred Shares described in the
January 2020 Letter Agreement, the aggregate amount of all accrued and
unpaid dividends to be paid on the Series 1 Preferred Shares on
2021 was expected to be Cdn.
redemption price to be paid on
Series 1 Preferred Shares was expected to be Cdn.
Note 16. "Redeemable Preferred Stock" for additional information regarding
such letter agreement and such modified terms. On December 16, 2020 , the
Company and FCE Ltd. delivered a payoff letter to Enbridge, referred to
herein as the Enbridge Payoff Letter, which was executed by Enbridge onpay the amounts owed to Enbridge under the terms of the Series 1 Preferred
Shares (the "Obligation") on or before
its obligations under the Guarantee, dated
in favor of Enbridge, as amended by the Guarantee Amending Agreement dated
Enbridge (the "Guarantee") because
pay the Obligation. On
totaling Cdn.
to Enbridge. Concurrent with receipt of the payment from the Company,
Enbridge surrendered its shares in
Payoff Letter, the transaction is deemed to have occurred on
2020.
(3) Future minimum lease payments on finance and operating leases.
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(4) Represents payments due under sale-leaseback transactions and related
financing agreements between certain of our wholly-owned subsidiaries andLease payments for each lease under these financing agreements are generally
payable in fixed quarterly installments over a 10-year period.
(5) During fiscal year 2020, the Company entered into a 7-year natural gas
contract with an estimated annual cost per year of
the costs will be expected to be offset by generation revenues on the
project.
(6) The Company entered into an agreement with a customer on
includes a fee for the purchase of the plants at the end of the term of the
agreement. The fee is payable in installments over the term of the
agreement.
(7) We pay
and when declared. The
are declared, has not been included in this table as we cannot reasonably
determine when or if we will be able to convert the Series B Preferred Stock
into shares of our common stock. We may, at our option, convert these shares
into the number of shares of our common stock that are issuable at the then
prevailing conversion rate if the closing price of our common stock exceeds
150% of the then prevailing conversion price (
31, 2020) for 20 trading days during any consecutive 30 trading day period.
(8) Subsequent to
the Orion Credit Agreement. Refer to Note 25. "Subsequent Events" of the
financial statements.
Term and Construction Loans
A discussion of the key terms and conditions of the loans outstanding as of
October 31, 2020 is included in Note 14. "Debt" to the consolidated financial
statements. The information included under the headings "Orion Energy Partners
Investment Agent, LLC Credit Agreement," "Connecticut Green Bank Loans,"
"Bridgeport Fuel Cell Project Loans," "State of Connecticut Loan" and "Liberty
Bank Promissory Note" in Note 14. "Debt" to the consolidated financial
statements is incorporated herein by reference.
Subsequent to October 31, 2020 , the Company paid off all outstanding principal,
accrued but unpaid interest, prepayment premium, fees, costs and other expenses
due and owing to the Orion Agent and the lenders under the Orion Facility and
the Orion Credit Agreement and the related loan documents. Refer to Note 25.
"Subsequent Events" of the financial statements. As a result of such repayment,
the following amounts would be removed from the above table:
Less than 1 - 3 3 - 5 More Than
(dollars in thousands) Total 1 year years years 5 years
Orion term loan (principal and
interest) (1) $ 117,995 $ 18,109 $ 37,908 $ 32,323 $ 29,655 (1) As included in the "Term and Construction loans (principal and interest)" in
the above contractual obligations table.
Restricted Cash
We have pledged approximately $42.2 million of our cash and cash equivalents as
performance security and for letters of credit for certain banking requirements
and contracts. As of October 31, 2020 , outstanding letters of credit totaled
$6.5 million . These letters of credit expire on various dates through August
2028 . Under the terms of certain contracts, we will provide performance security
for future contractual obligations. The restricted cash balance as of October
31, 2020 also included $15.1 million primarily to support obligations under the
power purchase and service agreements related to our sale-leaseback transactions
with PNC Energy Capital, LLC ("PNC"), $0.4 million related to our sale-leaseback
transaction with Crestmark Equipment Finance ("Crestmark"), $7.5 million
relating to future obligations associated with the Bridgeport Fuel Cell Project ,
and $11.2 million relating to the reserves established under the Orion Facility.
Refer to Note 21. "Restricted Cash" for a detailed discussion of the Company's
restricted cash balance and refer to Note 25. "Subsequent Events" for the impact
to restricted cash from the repayment of all amounts owed under the Orion Credit
Agreement.
Power purchase agreements
Under the terms of our PPAs, customers agree to purchase power from our fuel
cell power platforms at negotiated rates. Electricity rates are generally a
function of the customers' current and estimated future electricity pricing
available from the grid. We are responsible for all operating costs necessary to
maintain, monitor and repair our fuel cell power platforms. Under certain
agreements, we are also responsible for procuring fuel, generally natural gas or
Biogas , to run our fuel cell power platforms. In addition, under certain
agreements, we are required to produce
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minimum amounts of power under our PPAs and we have the right to terminate PPAs
by giving written notice to the customer, subject to certain exit costs. As of
October 31, 2020 , our operating portfolio was 32.6 MW.
Service and warranty agreements
We warrant our products for a specific period of time against manufacturing or performance defects. Our standardU.S. warranty period is generally 15 months after shipment or 12 months after acceptance of the product. In addition to the standard product warranty, we have contracted with certain customers to provide services to ensure the power plants meet minimum operating levels for terms of up to 20 years. Pricing for service contracts is based upon estimates of future costs, which could be materially different from actual expenses. Refer to "Critical Accounting Policies and Estimates" for additional details.
Advanced Technologies contracts
We have contracted with various government agencies and certain companies from private industry to conduct research and development as either a prime contractor or sub-contractor under multi-year, cost-reimbursement and/or cost-share type contracts or cooperative agreements. Cost-share terms require that participating contractors share the total cost of the project based on an agreed upon ratio. In many cases, we are reimbursed only a portion of the costs incurred or to be incurred on the contract. While government research and development contracts may extend for many years, funding is often provided incrementally on a year-by-year basis if contract terms are met andCongress authorizes the funds. As ofOctober 31, 2020 , Advanced Technologies contract backlog totaled$49.2 million , of which$37.7 million is non-U.S. Government -funded,$11.3 million isU.S. Government -funded and$0.2 million isU.S. Government -unfunded. The amount that is non-U.S. Government -funded includes$10.0 million of milestone payments under the EMRE Joint Development Agreement that are contingent upon achieving technical milestones. If funding is terminated or delayed or if business initiatives change, we may choose to devote resources to other activities, including internally funded research and development.
Off-Balance Sheet Arrangements
We have no off-balance sheet debt or similar obligations which are not
classified as debt. We do not guarantee any third-party debt. See Note 22.
"Commitments and Contingencies" to our consolidated financial statements for the
year ended
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities. Actual results could differ from those estimates.
Estimates are used in accounting for, among other things, revenue recognition,
lease right of use assets and liabilities, contract loss accruals, excess,
slow-moving and obsolete inventories, product warranty accruals, loss accruals
on service agreements, share-based compensation expense, allowance for doubtful
accounts, depreciation and amortization, impairment of goodwill and in-process
research and development intangible assets, impairment of long-lived assets
(including project assets), and contingencies. Estimates and assumptions are
reviewed periodically, and the effects of revisions are reflected in the
consolidated financial statements in the period they are determined to be
necessary.
Our critical accounting policies are those that are both most important to our
financial condition and results of operations and may require the most
difficult, subjective or complex judgments on the part of management in their
application, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. Our accounting policies are set forth
below.
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination and is reviewed for impairment at least annually. The intangible asset represents indefinite-lived in-process research and development for cumulative research and development efforts associated with the development of Solid Oxide Fuel Cell stationary power generation and is also reviewed at least annually for impairment. 84
-------------------------------------------------------------------------------- Accounting Standards Codification Topic 350, "Intangibles -Goodwill and Other" ("ASC 350") permits the assessment of qualitative factors to determine whether events and circumstances lead to the conclusion that it is necessary to perform the goodwill impairment test required under ASC 350. The Company completed its annual impairment analysis of goodwill and in-process research and development assets as ofJuly 31, 2020 and 2019. The Company performed a qualitative assessment for fiscal year 2020 and determined that it was more likely than not that there was no impairment of goodwill or the indefinite-lived intangible asset.
Impairment of Long Lived Assets (including Project Assets)
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. If events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable, we compare the carrying amount of an asset group to future undiscounted net cash flows, excluding interest costs, expected to be generated by the asset group and their ultimate disposition. If the sum of the undiscounted cash flows is less than the carrying value, the impairment to be recognized is measured by the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. During the years endedOctober 31, 2019 and 2020, the Company recorded certain project asset impairment charges. Refer to Note 7. "Project Assets" for details on these charges. Revenue Recognition The Company adopted Accounting Standards Codification ("ASC") Topic 606: Revenue from Contracts with Customers ("Topic 606") effective as ofNovember 1, 2018 . Under Topic 606: Revenue from Contracts with Customers, the amount of revenue recognized for any goods or services reflects the consideration that the Company expects to be entitled to receive in exchange for those goods and services. To achieve this core principle, the Company applies the following five-step approach: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as a performance obligation is satisfied. A contract is accounted for when there has been approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Performance obligations under a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract. In certain instances, the Company has concluded distinct goods or services should be accounted for as a single performance obligation that is a series of distinct goods or services that have the same pattern of transfer to the customer. To the extent a contract includes multiple promised goods or services, the Company must apply judgment to determine whether the customer can benefit from the goods or services either on their own or together with other resources that are readily available to the customer (the goods or services are distinct) and if the promise to transfer the goods or services to the customer is separately identifiable from other promises in the contract (the goods or services are distinct in the context of the contract). If these criteria are not met, the promised services are accounted for as a single performance obligation. The transaction price is determined based on the consideration that the Company will be entitled to in exchange for transferring goods or services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price, generally utilizing the expected value method. Determining the transaction price requires judgment. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis. Standalone selling price is determined by the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price by taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Performance obligations are satisfied either over time or at a point in time as discussed in further detail below. In addition, the Company's contracts with customers generally do not include significant financing components or non-cash consideration. The Company has elected practical expedients in the accounting guidance that allow for revenue to be recorded in the amount that the Company has a right to invoice, if that amount corresponds directly with the value to the customer of the Company's performance to date, and that allow the Company not to disclose related unsatisfied performance obligations. The 85 --------------------------------------------------------------------------------
Company records any amounts that are billed to customers in excess of revenue recognized as deferred revenue and revenue recognized in excess of amounts billed to customers as unbilled receivables.
Revenue streams are classified as follows:
Product. Includes the sale of completed project assets, sale and installation of fuel cell power platforms including site engineering and construction services, and the sale of modules, BOP components and spare parts to customers.
Service. Includes performance under long-term service agreements for power platforms owned by third parties.
License and royalty. Includes license fees and royalty income from the licensure of intellectual property.
Generation. Includes the sale of electricity under PPAs and utility tariffs from project assets retained by the Company. This also includes revenue received from the sale of other value streams from these assets including the sale of heat, steam, capacity and renewable energy credits.
Advanced Technologies. Includes revenue from customer-sponsored and government-sponsored Advanced Technologies projects.
See below for discussion of revenue recognition under Topic 606 by disaggregated revenue stream.
Completed project assets Contracts for the sale of completed project assets include the sale of the project asset, the assignment of the service agreement, and the assignment of the PPA. The relative stand-alone selling price is estimated and is used as the basis for allocation of the contract consideration. Revenue is recognized upon the satisfaction of the performance obligations, which includes the transfer of control of the project asset to the customer, which is when the contract is signed and the PPA is assigned to the customer. See below for further discussion regarding revenue recognition for service agreements. The revenue recognition for completed project assets under Topic 606 is consistent with treatment under ASC 605, Revenue Recognition. Contractual payments related to the sale of the project asset and assignment of the PPA are generally received up-front. Payment terms for service agreements are generally ratable over the term of the agreement.
Service agreements
Service agreements represent a single performance obligation whereby the Company performs all required maintenance and monitoring functions, including replacement of modules, to ensure the power platform(s) under the service agreement generate a minimum power output. To the extent the power platform(s) under service agreements do not achieve the minimum power output, certain service agreements include a performance guarantee penalty. Performance guarantee penalties represent variable consideration, which is estimated for each service agreement based on past experience, using the expected value method. The net consideration for each service agreement is recognized using costs incurred to date relative to total estimated costs at completion to measure progress.
The Company reviews its cost estimates on service agreements on a quarterly basis and records any changes in estimates on a cumulative catch-up basis.
Loss accruals for service agreements are recognized to the extent that the estimated remaining costs to satisfy the performance obligation exceed the estimated remaining unrecognized net consideration. Estimated losses are recognized in the period in which losses are identified.
Payment terms for service agreements are generally ratable over the term of the agreement.
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--------------------------------------------------------------------------------Advanced Technologies contracts
Advanced Technologies contracts include the promise to perform research and development services and, as such, this represents one performance obligation. Revenue from most government sponsored Advanced Technologies projects is recognized as direct costs are incurred plus allowable overhead less cost share requirements, if any. Revenue is only recognized to the extent the contracts are funded. Revenue from previous fixed price Advanced Technologies projects is recognized using the cost to cost input method. Revenue recognition for research performed under the EMRE Joint Development Agreement (as defined elsewhere herein) also falls into the practical expedient category where revenue is recorded consistent with the amounts invoiced.
Payments are based on costs incurred for government sponsored Advanced Technologies projects and upon completion of milestones for previous fixed-price Advanced Technologies projects. Payments under the EMRE Joint Development Agreement are based on time spent and material costs incurred.
License agreements
The Company entered into the License Agreements (as defined elsewhere herein) withPOSCO Energy in 2007, 2009 and 2012. These agreements were terminated by the Company inJune 2020 , which is subject to dispute byPOSCO Energy (for more information, refer to Note 22. "Commitments and Contingencies"). Prior to the date of termination, in connection with the adoption of Topic 606, several performance obligations were identified under the License Agreements, including previously satisfied performance obligations for the transfer of licensed intellectual property, two performance obligations for specified upgrades of the previously licensed intellectual property, a performance obligation to deliver unspecified upgrades to the previously licensed intellectual property on a when-and-if-available basis, and a performance obligation to provide technical support for previously delivered intellectual property.
• The performance obligations related to the specified upgrades would have
been satisfied and the related consideration recognized as revenue upon
the delivery of the specified upgrades. The Company did not recognize any
revenue in fiscal years 2019 and 2020 related to specified upgrades.
• The performance obligations for unspecified upgrades and technical support
were being recognized on a straight-line basis over the license term on
the basis that this represented the method that best depicted the progress
towards completion of the related performance obligations. The Company
recognized revenue totaling
ended
upgrades.
All fixed consideration for the License Agreements was previously collected. The
Company has discontinued revenue recognition of the deferred license revenue
related to the terminated POSCO Energy License Agreements given the pending
arbitration and will continue to evaluate this deferred revenue in future
periods.
The Company entered into the EMRE Joint Development Agreement on November 5,
2019 . The Company recorded license revenue of $4.0 million in association with
this agreement for the fiscal year ended October 31, 2020 which revenue was
considered at a point-in-time upon the signing of the contract as the license is
considered functional intellectual property because it has standalone
functionality, the customer can use this intellectual property as it exists at a
point in time and no further services are required from the Company.
Effective as of June 11, 2019 , the Company entered into the EMRE License
Agreement, pursuant to which the Company agreed, subject to the terms of the
EMRE License Agreement, to grant EMRE and its affiliates a non-exclusive,
worldwide, fully paid, perpetual, irrevocable, non-transferrable license and
right to use the Company's 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 EMRE or
its affiliates, but shall not otherwise be sublicensable. Upon the payment by
EMRE to the Company of $10.0 million , which was received by the Company on June
14, 2019 , EMRE and its affiliates were fully vested in the rights and licenses
granted in the EMRE License Agreement, and any further obligations under the
EMRE License Agreement are considered by the Company to be minimal. As a result,
the total contract value of $10.0 million was recorded as revenue for the year
ended October 31, 2019 .
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Generation revenue For certain project assets where customers purchase electricity from the Company under PPAs, the Company has determined that these agreements should be accounted for as operating leases pursuant to ASC 842, Leases. Revenue is recognized when electricity has been delivered based on the amount of electricity delivered at rates specified under the contracts, assuming all other revenue recognition criteria are met. Generation sales, to the extent the related PPAs are within the scope of Topic 606, are recognized as revenue in the period in which the Company provides the electricity and completes the performance obligation, which is the same as the monthly amount billed to customers.
Revenue Recognition Policy Prior to the Implementation of Topic 606
Prior to the implementation of Topic 606, the revenue recognition policy for the
fiscal year ended
The Company earned revenue from (i) the sale and installation of fuel cell power platforms including site engineering and construction services, (ii) the sale of completed project assets, (iii) equipment only sales (modules, BOP, component part kits and spare parts to customers), (iv) performance under long-term service agreements, (v) the sale of electricity and other value streams under PPAs and utility tariffs from project assets retained by the Company, (vi) license fees and royalty income from manufacturing and technology transfer agreements, and (vii) government and customer-sponsored Advanced Technologies projects. For customer contracts where the Company was responsible for the supply of equipment and site construction (full turn-key construction project) and had adequate cost history and estimating experience, and with respect to which management believed it could reasonably estimate total contract costs, revenue was recognized under the percentage of completion method of accounting. The use of percentage of completion accounting requires significant judgment relative to estimating total contract costs, including assumptions relative to the length of time to complete the contract, the nature and complexity of the work to be performed and total project costs. Our estimates were based upon the professional knowledge and experience of our engineers, project managers and other personnel, who reviewed each long-term contract on a quarterly basis to assess the contract's schedule, performance, technical matters and estimated cost at completion. When changes in estimated contract costs were identified, such revisions could result in current period adjustments to operations applicable to performance in prior periods. Revenues were recognized based on the percentage of the contract value that had incurred costs to date as compared to estimated total contract costs, after giving effect to estimates of costs to complete based on the most recent information. For customer contracts for new or significantly customized products, where management did not believe it had the ability to reasonably estimate total contract costs, revenue was recognized using the completed contract method and therefore all revenue and costs for the contract were deferred and not recognized until installation and acceptance of the power plant was complete. We recognized anticipated contract losses as soon as they became known and estimable. Actual results varied from initial estimates and estimates were updated as conditions changed. Revenue from equipment only sales where the Company did not have the obligations associated with overall construction of the project (modules, BOPs, fuel cell kits and spare parts sales) was recognized upon shipment or title transfer under the terms of the customer contract. Terms for certain contracts provided for a transfer of title and risk of loss to our customers at our factory locations and certain key suppliers upon completion of our contractual requirement to produce products and prepare the products for shipment. Revenue from service agreements was generally recorded ratably over the term of the service agreement, as the Company's performance of routine monitoring and maintenance under these service agreements was generally expected to be incurred on a straight-line basis. For service agreements where the Company expected to have module exchanges at some point during the term (generally service agreements in excess of five years), the costs of performance were not expected to be incurred on a straight-line basis, and therefore, a portion of the initial contract value related to the module exchange(s) was deferred and was recognized upon such module replacement event(s). The Company recognized license fees and other revenue over the term of the associated agreement. The Company recorded license fees and royalty income fromPOSCO Energy as a result of the License Agreements entered into in 2007, 2009 and 2012. Under PPAs and project assets retained by the Company, revenue from the sale of electricity and other value streams were recognized as electricity was provided to customers. These revenues were classified as generation revenues. 88 -------------------------------------------------------------------------------- Advanced Technologies contracts were entered into with both private industry and government entities. Revenue from most government sponsored Advanced Technologies projects was recognized as direct costs were incurred plus allowable overhead less cost share requirements, if any. Revenue from fixed price Advanced Technologies projects was recognized using percentage of completion accounting. Advanced Technologies programs were often multi-year projects or structured in phases with subsequent phases dependent on reaching certain milestones prior to additional funding being authorized. Government contracts were typically structured with cost-reimbursement and/or cost-shared type contracts or cooperative agreements. We were reimbursed for reasonable and allocable costs up to the reimbursement limits set by the contract or cooperative agreement, and on certain contracts we were reimbursed only a portion of the costs incurred. Sale-Leaseback Accounting The Company, through certain wholly-owned subsidiaries, has entered into sale-leaseback transactions for commissioned project assets where we have entered into a PPA with a customer who is both the site host and end user of the power. Due to the Company not meeting criteria to account for the transfer of the project assets as a sale, sale accounting is precluded. Accordingly, the Company uses the financing method to account for these transactions. Under the financing method of accounting for a sale-leaseback, the Company does not derecognize the project assets and does not recognize as revenue any of the sale proceeds received from the lessor that contractually constitutes payment to acquire the assets subject to these arrangements. Instead, the sale proceeds received are accounted for as financing obligations and leaseback payments made by the Company are allocated between interest expense and a reduction to the financing obligation. Interest on the financing obligation is calculated using the Company's incremental borrowing rate at the inception of the arrangement on the outstanding financing obligation. While we receive financing for the related power plant asset, we have not recognized revenue on the sale-leaseback transactions. Instead, revenue is recognized with respect to the related PPAs in accordance with the Company's policies for recognizing generation revenues. Inventories Inventories consist principally of raw materials and work-in-process. Inventories are reviewed to determine if valuation adjustments are required for obsolescence (excess, obsolete, and slow-moving inventory). This review includes analyzing inventory levels of individual parts considering the current design of our products and production requirements as well as the expected inventory needs for maintenance on installed power platforms. Service Expense Recognition We have entered into service agreements with certain customers to provide monitoring, maintenance and repair services for fuel cell power platforms. Under the terms of these service agreements, the power platform must meet a minimum operating output during the term. If the minimum output falls below the contract requirement, we may be subject to performance penalties or may be required to repair and/or replace the customer's fuel cell module. The Company records loss accruals for service agreements when the estimated cost of future module exchanges and maintenance and monitoring activities exceeds the remaining unrecognized contract value. Estimates for future costs on service agreements are determined by a number of factors including the estimated remaining life of the module, used replacement modules available, and future operating plans for the power platform. Our estimates are performed on a contract by contract basis and include cost assumptions based on what we anticipate the service requirements will be to fulfill obligations for each contract. As ofOctober 31, 2020 and 2019, our loss accruals on service agreements totaled$5.5 million and$3.3 million , respectively. 89
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ACCOUNTING GUIDANCE UPDATE
Recently Adopted Accounting Guidance
The Company adopted Accounting Standards Update Codification ("ASC"), "Leases"
("Topic 842" or "ASC 842") on November 1, 2019 . ASC 842, including all the
related amendments subsequent to its issuance, supersedes the prior guidance for
lease accounting and requires lessees to recognize a right-of-use ("ROU") asset
representing the right to use an underlying asset and a lease liability
representing the obligation to make lease payments over the lease term for
substantially all leases, as well as disclose key quantitative and qualitative
information about leasing arrangements. Upon adoption, the Company recognized an
operating lease liability of approximately $10.3 million and corresponding
operating lease ROU assets of approximately $10.1 million . There was no
cumulative effect of the adoption recorded to accumulated deficit. There was no
significant net effect on the Consolidated Statements of Operations and
Comprehensive Loss. Refer to Note 13. "Leases" for additional information on the
Company's adoption of ASC 842.
Recent Accounting Guidance Not Yet Effective
There is no recent accounting guidance not yet effective that is expected to have a material impact on the Company's financial statements when adopted.
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