Fuelcell Energy Inc: Form 10-Q for the period ended Jul 31, 2021

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains both historical and forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks, uncertainties and assumptions. The statements contained in this report that are not purely historical are forward-looking statements that are subject to the safe harbors created under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions and strategies for the future. When used in this report, the words “expects,” “anticipates,” “estimates,” “goals,” “projects,” “intends,” “plans,” “believes,” “predicts,” “should,” “will,” “could,” “would,” “may,” “forecast,” and similar expressions and variations of such words are intended to identify forward-looking statements. Such statements relate to, among other things, the following: (i) the development and commercialization by FuelCell Energy, Inc. and its subsidiaries of fuel cell technology and products and the market for such products; (ii) expected operating results such as revenue growth and earnings; (iii) our belief that we have sufficient liquidity to fund our business operations for the next 12 months; (iv) future funding under Advanced Technologies contracts; (v) future financing for projects, including equity and debt investments by investors and commercial bank financing, as well as overall financial market conditions; (vi) the expected cost competitiveness of our technology; and (vii) our ability to achieve our sales plans, market access and market expansion goals, and cost reduction targets.

The forward-looking statements contained in this report are subject to risks and uncertainties, known and unknown, that could cause actual results and future events to differ materially from those set forth in or contemplated by the forward-looking statements, including, without limitation, the risks described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020 and in the section below entitled “Item 1A. Risk Factors,” and the following risks and uncertainties: general risks associated with product development and manufacturing; general economic conditions; changes in the utility regulatory environment; changes in the utility industry and the markets for distributed generation, distributed hydrogen, and fuel cell power platforms configured for carbon capture or carbon sequestration; potential volatility of energy prices; availability of government subsidies and economic incentives for alternative energy technologies; our ability to remain in compliance with U.S. federal and state and foreign government laws and regulations and the listing rules of The Nasdaq Stock Market (“Nasdaq”); rapid technological change; competition; the risk that our bid awards will not convert to contracts or that our contracts will not convert to revenue; market acceptance of our products; changes in accounting policies or practices adopted voluntarily or as required by accounting principles generally accepted in the United States; factors affecting our liquidity position and financial condition; government appropriations; the ability of the government and third parties to terminate their development contracts at any time; the ability of the government to exercise “march-in” rights with respect to certain of our patents; the arbitration and other legal proceedings with POSCO Energy Co., Ltd. (“POSCO Energy”); our ability to implement our strategy; our ability to reduce our levelized cost of energy and our cost reduction strategy generally; our ability to protect our intellectual property; litigation and other proceedings; the risk that commercialization of our products will not occur when anticipated; our need for and the availability of additional financing; our ability to generate positive cash flow from operations; our ability to service our long-term debt; our ability to increase the output and longevity of our power plants and to meet the performance requirements of our contracts; our ability to expand our customer base and maintain relationships with our largest customers and strategic business allies; changes by the U.S. Small Business Administration (the “SBA”) or other governmental authorities to, or with respect to the implementation or interpretation of, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Paycheck Protection Program or related administrative matters; and concerns with, threats of, or the consequences of, pandemics, contagious diseases or health epidemics, including the novel coronavirus (“COVID-19”), and resulting supply chain disruptions, shifts in clean energy demand, impacts to our customers’ capital budgets and investment plans, impacts to our project schedules, impacts to our ability to service existing projects, and impacts on the demand for our products.

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

Investors are cautioned that forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond our ability to control, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors discussed herein. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is provided as a supplement to the accompanying financial statements and footnotes to help provide an understanding of our financial condition, changes in our financial condition and results of operations. The preparation of financial statements and related disclosures requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities, as well as management’s assessment of the Company’s ability to meet its obligations as they come due over the next twelve months. Actual results could differ from those estimates. Estimates are used in accounting for, among other things, revenue recognition, contract loss accruals, excess, slow-moving and obsolete inventories, product warranty accruals, loss accruals on service agreements, share-based compensation expense, allowance for doubtful accounts, depreciation and amortization, impairment of goodwill and in-process research and development intangible assets, impairment of long-lived assets (including project assets), lease liabilities and right-of-use (“ROU”) assets, and contingencies, and in management’s assessment of the Company’s ability to meet its obligations as they come due over the next twelve months. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates. The following discussion should be read in conjunction with information included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020 filed with the Securities and Exchange Commission (“SEC”). Unless otherwise indicated, the terms “Company”, “FuelCell Energy”, “we”, “us”, and “our” refer to FuelCell Energy, Inc. and its subsidiaries. All tabular dollar amounts are in thousands.

OVERVIEW AND RECENT DEVELOPMENTS

Overview

FuelCell Energy is a global leader in sustainable clean energy technologies that address some of the world’s most critical challenges around energy, safety, and global urbanization. As a leading global manufacturer of proprietary fuel cell technology platforms, we are uniquely positioned to serve customers worldwide with sustainable products and solutions for businesses, utilities, governments, and municipalities. Our solutions are designed to enable a world empowered by clean energy, enhancing the quality of life for people around the globe. We target large-scale power users with our megawatt-class installations globally, and currently offer sub-megawatt solutions for smaller power consumers in Europe. To provide a frame of reference, one megawatt is adequate to continually power approximately 1,000 average sized U.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 currently the United States and South Korea, and we are pursuing opportunities in other countries around the world.

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

Recent Developments

Crestmark Sale-Leaseback Transaction

On August 25, 2021, an indirect wholly-owned subsidiary of the Company, San Bernardino Fuel Cell, LLC (“SBFC”), entered into a Purchase and Sale Agreement (the “Purchase Agreement”) and an Equipment Lease Agreement (the “Lease”) with Crestmark Equipment Finance (“Crestmark”). Under these agreements, SBFC sold the 1.4 megawatt (“MW”) biogas fueled fuel cell power plant (the “Plant”) located at the San Bernardino wastewater treatment plant in San Bernardino, California to Crestmark for a purchase price of $10.2 million and then leased the Plant back from Crestmark. SBFC sells the power produced by the Plant to a third party under a twenty-year power purchase agreement (the “San Bernardino PPA”).

The Lease has an initial term of ten years but may be extended at the option of SBFC. An initial rental down payment and one quarter’s rent totaling $2.2 million was paid using the proceeds from the sale of the Plant. Lease payments are expected to be funded with proceeds from the sale of power under the San Bernardino PPA on a quarterly basis.

Reserves covering debt service and future module replacement totaling $2.5 million were also deducted from the proceeds from the sale of the Plant and will be classified as restricted cash of the Company until such time as it meets its performance obligations (such as servicing the Plant and providing module replacements) under the Long Term Service Agreement for the Plant. The Company’s net unrestricted cash proceeds from the transaction totaled approximately $5.3 million, which is the purchase price less the initial rent payments, debt and module reserves, and taxes and transaction fees.

In addition, SBFC and Crestmark entered into an Assignment Agreement on August 25, 2021 (the “Assignment Agreement”) and FuelCell Energy Finance, LLC (“FuelCell Finance”, a wholly-owned subsidiary of the Company and the direct parent of SBFC) and Crestmark entered into a Pledge Agreement on August 25, 2021 (the “Pledge Agreement”) pursuant to which agreements collateral was provided to Crestmark to secure SBFC’s obligations under the Lease which includes a security interest in (i) certain agreements relating to the sale-leaseback transaction, (ii) the revenues with respect to the Plant, (iii) a cash module replacement reserve for the Plant, and (iv) FuelCell Finance’s equity interest in SBFC. SBFC and the Company also entered into a Technology License and Access Agreement with Crestmark on August 25, 2021, which provides Crestmark with certain intellectual property license rights to have access to the Company’s proprietary fuel cell technology, but only for the purpose of maintaining and servicing the Plant in certain circumstances in which the Company is not satisfying its obligations under its service agreement with regard to the maintenance and servicing of the Plant.

Pursuant to the Lease, SBFC has an obligation to indemnify Crestmark for the amount of any actual reduction in the U.S. investment tax credit (“ITC”) anticipated to be realized by Crestmark in connection with this sale-leaseback transaction. Such obligation would arise as a result of reductions to the value of the underlying fuel cell project as assessed by the U.S. Internal Revenue Service (“IRS”). The Company does not believe that any such obligation is probable based on the facts known as of August 25, 2021. The maximum potential future payments that SBFC could be required to make as a result of this obligation would depend on the difference between the fair value of the fuel cell project sold or financed and the value the IRS would determine as the fair value of the project for purposes of claiming the ITC. The value of the ITC in the sale-leaseback agreements is based on guidelines provided by regulations from the IRS. The Company and Crestmark used a fair value determined with the assistance of an independent third-party appraisal.

The Purchase Agreement and the Lease contain representations and warranties, affirmative and negative covenants, and events of default that entitle Crestmark to cause SBFC’s indebtedness under the Lease to become immediately due and payable.

Pursuant to a Guaranty Agreement executed on August 25, 2021 by the Company for the benefit of Crestmark (the “Guaranty”), the Company has guaranteed the payment and performance of SBFC’s obligations under the Lease.

East West Bank Tax Equity Financing Transaction

The Company closed on a tax equity financing transaction in August 2021 with East West Bancorp, Inc. (“East West Bank”) for the 7.4 MW fuel cell project (the “Groton Project”) located on the U.S. Navy Submarine Base in Groton, CT, also known as the Submarine Force. East West Bank’s tax equity commitment totals $15 million (the “Purchase Price”).

This transaction was structured as a "partnership flip," which is a structure commonly used by tax equity investors in the financing of renewable energy projects. Under this partnership flip structure, a partnership, in this case Groton Station Fuel Cell Holdco, LLC (the “Partnership”) was organized to acquire from FuelCell Energy Finance II, LLC, a wholly-owned subsidiary of the Company, all outstanding equity interests in Groton Station Fuel Cell, LLC (the “Project Company”) which in turn owns the Groton Project and is the party to the power purchase agreement and all project agreements. At the closing of the transaction, the Partnership is owned by East West Bank, holding Class A Units and Fuel Cell Energy Finance Holdco, LLC, a subsidiary of FuelCell Energy Finance, LLC, holding Class B Units. The acquisition of the Project Company by the Partnership was funded in part by an initial draw from East West Bank and funds contributed downstream to the Partnership by the Company. The initial closing occurred on August 4, 2021, upon the satisfaction of certain conditions precedent (including the receipt of an appraisal and confirmation that the Groton Project would be eligible for the ITC under Section 48 of the Internal Revenue Code of 1986, as amended). In connection with the initial closing, the Company was able to draw down $3.0 million, of which approximately $0.8 million was used to pay closing costs including appraisal fees, title insurance expenses and legal and consulting fees. The Company is eligible to draw the remaining amount of the commitment, approximately $12 million, once the Groton Project achieves commercial operation. When such funds are drawn down, the funds will be distributed upstream to the Company, as a reimbursement of prior construction costs incurred by the Company.

Under a partnership flip structure, tax equity investors agree to receive a minimum target rate of return, typically on an after-tax basis. Prior to receiving a contractual rate of return or a date specified in the contractual arrangements, East West Bank will receive substantially all of the non-cash value attributable to the Groton Project, which includes accelerated depreciation and Section 48(a) investment tax credits; however, the Company will receive a majority of the cash distributions (based on the operating income of the Groton Project), which are paid quarterly. After East West Bank receives its contractual rate of return, the Company will receive approximately 95% of the cash and tax allocations. The Company (through a separate wholly owned entity) may enter into a back leverage debt financing transaction and use the cash distributions from the Partnership to service the debt.

Under this partnership flip structure, we have an option to acquire all of the equity interests that East West Bank holds in the Partnership starting approximately five and a half years (the anticipated “flip” date) after the Groton Project is operational. If we exercise this option, we are required to pay the greater of the following: (i) the fair market value of East West Bank's equity interest at the time the option is exercised, (ii) 5% of the Purchase Price or (iii) East West Bank’s claim in liquidation determined using the hypothetical liquidation at book value method.

Impact of the COVID-19 Pandemic

During fiscal year 2020, the Company launched a proactive response to the escalating COVID-19 outbreak and temporarily suspended operations at its Torrington, Connecticut manufacturing facility in March 2020. The Company also commenced remote work protocol for those employees worldwide that were capable of working from home. The Company took these actions to secure the safety of the Company’s employees, our corporate community as a whole, and the communities in which our team members live, and to adhere to Centers for Disease Control (CDC) recommendations of social distancing and limited public exposure in connection with the COVID-19 pandemic. All employees that were not able to work from home during the manufacturing facility shutdown due to their job function received full wages and benefits during such time. We did not implement any furlough, layoff or shared work program during such time. The Company resumed manufacturing in June 2020 and the Torrington, Connecticut manufacturing facility employees returned to work. We established a phased-in return to work schedule commencing March 15, 2021 for those employees working from home which was completed in April 2021, as a result of which all U.S. based employees are now back in the office. We continue to evaluate our ability to operate in the event of a resurgence of COVID-19 and the advisability of continuing operations based on federal, state and local guidance, evolving data concerning the pandemic and the best interests of our employees, customers and stockholders. Given the recent increase of COVID-19 cases throughout the U.S. as a result of the highly transmissible Delta variant, the Company has instituted policies to protect its employees and customers such as mask mandates in our facilities and a mandatory vaccination policy requiring all U.S. employees to be fully vaccinated by November 1, 2021.

RESULTS OF OPERATIONS

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

Comparison of Three Months Ended July 31, 2021 and 2020

Revenues and Costs of revenues

Our revenues and cost of revenues for the three months ended July 31, 2021 and 2020 were as follows:

(dollars in thousands)

Total revenues for the three months ended July 31, 2021 of $26.8 million reflects an increase of $8.1 million from $18.7 million for the same period in the prior year. Cost of revenues for the three months ended July 31, 2021 of $25.7 million increased $3.9 million from $21.9 million for the same period in the prior year. A discussion of the changes in product revenues, service and license revenues, generation revenues and Advanced Technologies contract revenues follows.

Product revenues

Our product revenues, cost of product revenues and gross loss from product revenues for the three months ended July 31, 2021 and 2020 were as follows:

(dollars in thousands)

There was no product revenue during the three months ended July 31, 2021 and 2020.

Cost of product revenues decreased $0.8 million for the three months ended July 31, 2021 to $1.9 million, compared to $2.7 million in the same period in the prior year. Both periods were impacted by the under-absorption of fixed overhead costs due to low production volumes. Manufacturing variances, primarily related to low production volumes and unabsorbed overhead costs, totaled approximately $1.7 million for the three months ended July 31, 2021 compared to approximately $2.6 million for the three months ended July 31, 2020. The decrease in manufacturing variances is primarily the result of increased production volumes during the three months ended July 31, 2021.

For the three months ended July 31, 2021, we operated at an annualized production rate of approximately 35 MW, which is an increase from the annualized production rate of 10 MW for the three months ended July 31, 2020. The production rate during the three months ended July 31, 2020 was impacted by the factory shutdown in response to the COVID-19 pandemic.

Service agreements and license revenues

Service agreements and license revenues and related costs for the three months ended July 31, 2021 and 2020 were as follows:

(dollars in thousands)

Revenues for the three months ended July 31, 2021 from service agreements and license fee and royalty agreements increased $7.2 million to $14.3 million from $7.1 million for the three months ended July 31, 2020. The service and license revenues for the three months ended July 31, 2021 include revenues recorded for module exchanges at several plants and routine maintenance activities. The increase in revenue for the three months ended July 31, 2021 is primarily due to the fact that there were more module exchanges during the three months ended July 31, 2021 (generating approximately $13.4 million of revenue in the three months ended July 31, 2021 compared to revenue of $6.0 million in the comparable prior year period).

Cost of service agreements and license revenues increased $4.2 million to $13.0 million for the three months ended July 31, 2021 from $8.8 million for the three months ended July 31, 2020, resulting, in part, from the fact that there were several new module exchanges in the three months ended July 31, 2021 compared to two new module exchanges in the three months ended July 31, 2020. Cost of service agreements includes maintenance and operating costs and module exchanges.

Overall gross profit from service agreements and license revenues was $1.3 million for the three months ended July 31, 2021, which represents an increase of $3.0 million from a gross loss of $1.7 million for the three months ended July 31, 2020. The overall gross margin was 9.2% for the three months ended July 31, 2021 compared to a gross margin of (24.2)% in the comparable prior year period. Gross margin increased during the three months ended July 31, 2021 primarily due to more new module exchanges for projects with higher margins compared to the three months ended July 31, 2020.

Generation revenues

Generation revenues and related costs for the three months ended July 31, 2021 and 2020 were as follows:

(dollars in thousands)

Revenues from generation for the three months ended July 31, 2021 totaled $6.2 million, which represents an increase of $1.5 million from revenue recognized of $4.7 million for the three months ended July 31, 2020. Generation revenues for the three months ended July 31, 2021 and 2020 reflect revenue from electricity generated under our power purchase agreements (“PPAs”) as well as sales of renewable energy credits. The increase in generation revenues in the three months ended July 31, 2021 is primarily due to higher operating output of the generation fleet portfolio as a result of investments in maintenance activities and an increase in the size of the fleet.

Cost of generation revenues totaled $6.7 million in the three months ended July 31, 2021. The increase from the comparable prior year period was primarily due to an increase in maintenance activities undertaken in the three months ended July 31, 2021 in order to improve operating output. Cost of generation revenues included depreciation and amortization of approximately $3.3 million and $3.4 million for the three months ended July 31, 2021 and 2020, respectively.

The decrease in generation revenues gross margin loss is primarily related to an increase in revenues and a decrease in depreciation expense compared to the three months ended July 31, 2020.

We had 34.0 MW of operating power plants in our operating portfolio as of July 31, 2021, which increased from 32.6 MW as of July 31, 2020. The increase relates to the 1.4 MW platform at the wastewater treatment facility in San Bernardino which commenced commercial operations during the three months ended July 31, 2021.

Advanced Technologies contract revenues

Advanced Technologies contract revenues and related costs for the three months ended July 31, 2021 and 2020 were as follows:

(dollars in thousands)

Advanced Technologies contract revenues decreased to $6.2 million for the three months ended July 31, 2021 from $6.9 million for the three months ended July 31, 2020. Compared to the three months ended July 31, 2020, Advanced Technologies contract revenues recognized under the Joint Development Agreement entered into with ExxonMobil Research and Engineering Company (“EMRE”) on November 5, 2019 (the “EMRE Joint Development Agreement”) were approximately $0.1 million higher during the three months ended July 31, 2021, reflecting continued performance under the EMRE Joint Development Agreement during the quarter. However, the increased revenues under the EMRE Joint Development Agreement were offset by $0.8 million less revenue recognized under government contracts during the three months ended July 31, 2021 than during the three months ended July 31, 2020.

Cost of Advanced Technologies contract revenues were $4.1 million for the three months ended July 31, 2021, compared to $4.0 million for the same period in the prior year. Advanced Technologies contracts for the three months ended July 31, 2021 generated a gross margin of $2.2 million compared to a gross margin of $2.9 million for the three months ended July 31, 2020. The decrease in Advanced Technologies contract gross margin is primarily related to the mix of government contracts which resulted in a higher cost share incurred by the Company on such contracts in the three months ended July 31, 2021 compared to the three months ended July 31, 2020.

Administrative and selling expenses

Administrative and selling expenses were $8.7 million and $6.6 million for the three months ended July 31, 2021 and 2020, respectively. The three months ended July 31, 2021 included legal expenses associated with tax equity financings (refer to Note 19. “Subsequent Events” to the Consolidated Financial Statements for more information regarding the tax equity financings) and additional expense for share-based compensation of $0.5 million due to the grants made in August 2020 and November 2020 under our new Long Term Incentive Plans (the “LTI Plans”) (refer to Note 17. “Benefit Plans” to the Consolidated Financial Statements for more information on the November 2020 grants). Also contributing to the increase in administrative and selling expenses for the three months ended July 31, 2021 was increased compensation expense as a result of an increase in staff compared to the comparable prior year period.

Research and development expenses

Research and development expenses increased to $3.0 million for the three months ended July 31, 2021 compared to $1.0 million for the three months ended July 31, 2020. The increase relates to an increase in spending on the Company’s hydrogen commercialization initiatives compared to the comparable prior year period. The comparable prior year period was impacted by restructuring initiatives implemented in 2019 and the reallocation of resources from Company-funded research and development projects to funded Advanced Technologies projects.

Loss from operations

Loss from operations for the three months ended July 31, 2021 was $10.6 million compared to $10.8 million for the three months ended July 31, 2020. This decrease was due to a gross profit of $1.1 million in the three months ended July 31, 2021 compared to a gross loss of $3.1 million in the three months ended July 31, 2020, offset by a $4.1 million increase in operating expenses for the three months ended July 31, 2021. As discussed above, impacting gross profit for the quarter were (i) higher service gross margin primarily due to more new module exchanges for projects with higher margins during the quarter, (ii) improved generation gross margin primarily related to an increase in revenues and a decrease in depreciation expense, and (iii) lower manufacturing variances primarily as a result of increased production volumes. Operating expenses were higher in the period as (a) administrative and selling expenses for the three months ended July 31, 2021 were higher and included legal fees associated with tax equity financings, additional share-based compensation expense under the LTI Plans and an increase in compensation expense and (b) research and development expenses were higher due to an increase in spending on the Company’s hydrogen commercialization initiatives compared to the comparable prior year period.

Interest expense

Interest expense for the three months ended July 31, 2021 and 2020 was $1.6 million and $4.2 million, respectively. Interest expense for both periods presented includes interest related to sale-leaseback transactions and on the loans outstanding associated with the Bridgeport Fuel Cell Project. Interest expense for the three months ended July 31, 2020 includes interest for the amortization of the redeemable preferred stock of subsidiary fair value discount. Amounts owed pursuant to the terms of the redeemable preferred stock issued by FCE FuelCell Energy, Ltd. (“FCE Ltd.”) (which is referred to elsewhere herein as the Series 1 Preferred Shares) were paid, in full, in December 2020. The decrease in interest expense for the three months ended July 31, 2021 is primarily due to the repayment of the $80.0 million principal balance outstanding under the Orion Credit Agreement (as defined below), which was fully repaid in December 2020.

Change in fair value of common stock warrant liability

The $1.7 million expense for the three months ended July 31, 2020 represents an adjustment to the estimated fair value of the Orion Warrants (as defined below) still outstanding as of July 31, 2020. The expense was primarily a result of an increase in the price of the Company’s common stock during the quarter ended July 31, 2020. On December 7, 2020, all remaining Orion Warrants were exercised.

Other income (expense), net

Other income (expense), net was $0.1 million and $(0.5) million for the three months ended July 31, 2021 and 2020, respectively. Other expense, net for the three months ended July 31, 2020 primarily relates to a foreign exchange loss of $0.6 million related to the remeasurement of the Canadian Dollar denominated preferred stock obligation (the Series 1 Preferred Share obligation) of our U.S. Dollar functional currency Canadian subsidiary (FCE Ltd.) offset by a gain of approximately $0.2 million related to the income from refundable research and development tax credits.

Gain on extinguishment of financing obligation

The $1.8 million gain for the three months ended July 31, 2020 represents the difference between the amount of the payoff of the lease and the repurchase of the UCI Fuel Cell, LLC project asset and the carrying amount of the financing obligation.

Provision for income taxes

We have not paid federal or state income taxes in several years due to our history of net operating losses, although we have paid foreign income and withholding taxes in South Korea. There was an income tax provision of $7 thousand recorded for the three months ended July 31, 2021 compared to an income tax provision of $10 thousand for the three months ended July 31, 2020.

Series B preferred stock dividends

Dividends recorded on our 5% Series B Cumulative Convertible Perpetual Preferred Stock (“Series B Preferred Stock”) were $0.8 million for each of the three-month periods ended July 31, 2021 and 2020.

Net loss attributable to common stockholders and loss per common share

Net loss attributable to common stockholders represents the net loss for the period less the preferred stock dividends on the Series B Preferred Stock. For the three-month periods ended July 31, 2021 and 2020, net loss attributable to common stockholders was $12.8 million and $16.1 million, respectively, and loss per common share was $0.04 and $0.07, respectively. The decrease in the net loss attributable to common stockholders for the three months ended July 31, 2021 is primarily due to incurring a higher gross margin for the three months ended July 31, 2021 compared to the corresponding period in fiscal year 2020, lower interest expense during the quarter as a result of the repayment of the Orion Facility (as defined below) and the fact that there was no charge for the change in fair value of common stock warrant liability during the three months ended July 31, 2021 offset by higher operating expenses and the fact that there was no gain on extinguishment of financing obligation recorded in the three months ended July 31, 2021. The lower loss per common share for the three months ended July 31, 2021 as compared to the three months ended July 31, 2020 is primarily due to the higher weighted average shares outstanding as of July 31, 2021 as a result of share issuances since July 31, 2020 and the lower net loss attributable to common stockholders.

Comparison of Nine Months Ended July 31, 2021 and 2020

Revenues and Costs of revenues

Our revenues and cost of revenues for the nine months ended July 31, 2021 and 2020 were as follows:

(dollars in thousands)

Total revenues for the nine months ended July 31, 2021 of $55.7 million reflects an increase of $1.8 million from $53.9 million during the same period in the prior year. Cost of revenues for the nine months ended July 31, 2021 of $62.9 million reflects a $9.4 million increase from $53.6 million during the same period in the prior year. A discussion of the changes in product revenues, service and license revenues, generation revenues and Advanced Technologies contract revenues follows.

Product revenues

Our product revenues, cost of product revenues and gross loss from product revenues for the nine months ended July 31, 2021 and 2020 were as follows:

(dollars in thousands)

There was no product revenue during the nine months ended July 31, 2021 and 2020.

Cost of product revenues decreased $1.3 million for the nine months ended July 31, 2021 to $6.2 million, compared to $7.5 million in the same period in the prior year. Both periods were impacted by the under-absorption of fixed overhead costs due to low production volumes. Manufacturing variances, primarily related to low production volumes and unabsorbed overhead costs, totaled approximately $5.0 million for the nine months ended July 31, 2021 compared to approximately $7.0 million for the nine months ended July 31, 2020. The decline in manufacturing variances is primarily the result of increased production volumes.

For the nine months ended July 31, 2021, we operated at an annualized production rate of approximately 30 MW, which is an increase from the annualized production rate of 14.0 MW for the nine months ended July 31, 2020. The production rate during the nine months ended July 31, 2020 was impacted by the factory shutdown in response to the COVID-19 pandemic.

Service and license revenues

Service and license revenues and related costs for the nine months ended July 31, 2021 and 2020 were as follows:

(dollars in thousands)

Revenues for the nine months ended July 31, 2021 from service agreements and license fee and royalty agreements increased marginally by $0.2 million to $19.9 million from $19.7 million for the nine months ended July 31, 2020. The increase in service and license revenues for the nine months ended July 31, 2021 is primarily due to an increase in new module exchanges offset by cost estimate adjustments related to changes in the expected timing of future module exchanges. Service and license revenues for the nine months ended July 31, 2020 includes license revenues of $4.0 million associated with the EMRE Joint Development Agreement, while the nine months ended July 31, 2021 does not include comparable license revenues.

Cost of service and license revenues increased $4.6 million to $21.0 million for the nine months ended July 31, 2021 from $16.4 million for the nine months ended July 31, 2020. Cost of service and license revenues were higher for the nine months ended July 31, 2021 than for the nine months ended July 31, 2020 primarily due to increases in planned maintenance activities, increased module exchanges and continued investment in the service fleet in order to improve performance. Cost of service agreements includes maintenance and operating costs and module exchanges.

Overall gross loss from service agreements and license revenues was $1.1 million for the nine months ended July 31, 2021, which represents a decrease of $4.4 million from a gross profit of $3.3 million for the nine months ended July 31, 2020.

The overall gross margin was (5.4)% for the nine months ended July 31, 2021 compared to a gross margin of 16.6% in the comparable prior year period. Gross margin decreased during the nine months ended July 31, 2021 primarily due to residual value charges for certain plants which had reached the end of their service terms and an increase in performance guarantees in the nine months ended July 31, 2021, compared to gross margin for the nine months ended July 31, 2020 which included license revenues associated with the EMRE Joint Development Agreement which resulted in positive margins.

Generation revenues

Generation revenues and related costs for the nine months ended July 31, 2021 and 2020 were as follows:

(dollars in thousands)

Revenues from generation for the nine months ended July 31, 2021 totaled $17.3 million, which represents an increase of $2.5 million from revenue recognized of $14.8 million for the nine months ended July 31, 2020 due to improved operating output of the generation fleet portfolio and sales of renewable energy credits. Generation revenues for the nine months ended July 31, 2021 and 2020 reflect revenue from electricity generated under our PPAs and the sale of renewable energy credits.

Cost of generation revenues totaled $23.3 million in the nine months ended July 31, 2021, which represents an increase from the comparable prior year period primarily due to higher plant maintenance costs in 2021 in order to improve operating output and an increase in depreciation and amortization expense related to a higher installed base of operating assets for the 2021 period compared to the prior year period. Cost of generation revenues included depreciation and amortization of approximately $11.2 million and $9.6 million for the nine months ended July 31, 2021 and 2020, respectively, and the increase reflects additional depreciation expense recorded for module exchanges during the nine months ended July 31, 2021.

The decrease in generation revenues gross margin is primarily related to higher plant maintenance costs and depreciation expense compared to the nine months ended July 31, 2020.

Advanced Technologies contract revenues

Advanced Technologies contract revenues and related costs for the nine months ended July 31, 2021 and 2020 were as follows:

(dollars in thousands)

Advanced Technologies contract revenues decreased 5% to $18.4 million for the nine months ended July 31, 2021 from $19.4 million for the nine months ended July 31, 2020. Compared to the nine months ended July 31, 2020, Advanced Technologies contract revenues recognized under the EMRE Joint Development Agreement were approximately $0.8 million higher during the nine months ended July 31, 2021, reflecting continued performance under the EMRE Joint Development Agreement during the nine months ended July 31, 2021. However, the increased revenues under the EMRE Joint Development Agreement were offset by the $1.9 million less revenue recognized under government contracts during the nine months ended July 31, 2021 than during the nine months ended July 31, 2020. Cost of Advanced Technologies contract revenues increased $0.4 million to $12.5 million for the nine months ended July 31, 2021, compared to $12.0 million for the same period in the prior year. Advanced Technologies contracts for the nine months ended July 31, 2021 generated a gross margin of $6.0 million compared to a gross margin of $7.3 million for the nine months ended July 31, 2020. The decrease in Advanced Technologies contract gross margin is related to the mix of government contracts which resulted in a higher cost share incurred by the Company on such contracts in the nine months ended July 31, 2021 compared to the nine months ended July 31, 2020.

Administrative and selling expenses

Administrative and selling expenses were $27.3 million and $19.0 million for the nine months ended July 31, 2021 and 2020, respectively. The nine months ended July 31, 2021 included legal expenses for tax equity financings (refer to Note 19. “Subsequent Events” to the Consolidated Financial Statements for more information regarding the tax equity financings), additional expense for shared-based compensation of $2.3 million due to the grants made in August 2020 and November 2020 under our new LTI Plans (refer to Note 17. “Benefit Plans” to the Consolidated Financial Statements for more information on the November 2020 grants), increased compensation expense and proxy mailing expenses associated with the Company’s annual stockholder meeting. The comparable prior year period also included a legal settlement of $2.2 million which was recorded as an offset to administrative and selling expenses.

Research and development expenses

Research and development expenses increased to $7.8 million for the nine months ended July 31, 2021 compared to $3.3 million for the nine months ended July 31, 2020. The increase relates to an increase in spending on the Company’s hydrogen commercialization initiatives compared to the comparable prior year period. The comparable prior year period was impacted by restructuring initiatives implemented in 2019 and the reallocation of resources from Company-funded research and development projects to funded Advanced Technologies projects. During the nine months ended July 31, 2021, the Company successfully commenced operation and testing of a prototype solid oxide electrolysis hydrogen platform in Danbury, Connecticut.

Loss from operations

Loss from operations for the nine months ended July 31, 2021 was $42.3 million compared to $22.0 million for the nine months ended July 31, 2020. This increase was due to a gross loss of $7.3 million and a $12.7 million increase in operating expenses for the nine months ended July 31, 2021.

As discussed above, impacting gross loss for the nine month period ended July 31, 2021 were (i) lower service gross margin primarily due to residual value charges for certain plants which had reached the end of their service terms and an increase in performance guarantees, whereas gross margin for the nine months ended July 31, 2020 included license revenues associated with the EMRE Joint Development Agreement which resulted in positive margins, (ii) lower generation revenues gross margin primarily related to higher plant maintenance costs and depreciation expense and (iii) lower Advanced Technologies gross margin related to the mix of government contracts during the period. These impacts were partially offset by lower manufacturing variances primarily resulting from increased production volumes.

Operating expenses were higher in the period as administrative and selling expenses and research and development expenses both increased for the nine months ended July 31, 2021. Administrative and selling expenses included legal expenses for tax equity financings, additional share-based compensation expense under the LTI Plans, an increase in compensation expense, and proxy mailing expenses associated with the Company’s annual stockholder meeting. In addition, administrative and selling expenses for the nine months ended July 31, 2020 included a $2.2 million legal settlement that offset administrative and selling expenses and there was no comparable gain for the nine months ended July 31, 2021. Research and development expenses were higher due to an increase in spending on the Company’s hydrogen commercialization initiatives compared to the comparable prior year period.

Interest expense

Interest expense for the nine months ended July 31, 2021 and 2020 was $5.7 million and $11.0 million, respectively. Interest expense for both periods presented includes interest related to sale-leaseback transactions and on the loans outstanding associated with the Bridgeport Fuel Cell Project. Interest expense for both periods also includes interest for the amortization of the redeemable preferred stock of subsidiary fair value discount. Amounts owed pursuant to the terms of the redeemable preferred stock issued by FCE Ltd. (which is referred to elsewhere herein as the Series 1 Preferred Shares) were paid, in full, in December 2020. The decrease in interest expense for the nine months ended July 31, 2021 is primarily due to the repayment of the $80.0 million principal balance outstanding under the Orion Credit Agreement (as defined below), which was fully repaid in December 2020.

Loss (gain) on extinguishment of debt and financing obligation

The loss on extinguishment of debt for the nine months ended July 31, 2021 represents costs associated with the repayment of the $80.0 million principal balance outstanding under the Orion Credit Agreement. The loss on extinguishment of debt amount includes an early prepayment penalty of $4.0 million and the write-off of unamortized debt discounts and deferred finance costs of $7.1 million. The $1.8 million gain for the nine months ended July 31, 2020 represents the difference between the amount of the payoff of the lease and the repurchase of the UCI Fuel Cell, LLC project asset and the carrying amount of the financing obligation.

Loss of extinguishment of Series 1 preferred share obligation

A charge of $0.9 million was recorded for the extinguishment of preferred stock obligation of subsidiary to recognize the difference between the amount of the payoff of the obligation and the carrying amount of the Series 1 Preferred Share obligation.

Change in fair value of common stock warrant liability

The $16.0 million expense for the nine months ended July 31, 2021 represents an adjustment to the estimated fair value of the remaining Orion Warrants prior to exercise, which were exercised, in full, during the nine months ended July 31, 2021. The $39.3 million expense for the nine months ended July 31, 2020 included $23.7 million for the Orion Warrants that were converted during the period and $15.6 million for the Orion Warrants that were still outstanding as of July 31, 2020.

Other (expense) income, net

Other (expense), net was ($0.8) million and other income, net was $0.4 million for the nine months ended July 31, 2021 and 2020, respectively. Other (expense), net for the nine months ended July 31, 2021 primarily relates to a foreign exchange loss of $0.9 million related to the remeasurement of the Canadian Dollar denominated preferred stock obligation (the Series 1 Preferred Share obligation) of our U.S. Dollar functional currency Canadian subsidiary (FCE Ltd.) prior to the payoff of the preferred share obligation in December 2020. Other income, net for the nine months ended July 31, 2020 primarily relates to a net non-cash gain on the extinguishment accounting related to the modification of the Series 1 Preferred Shares including the extinguishment related to the embedded derivatives.

Provision for income taxes, net

We have not paid federal or state income taxes in several years due to our history of net operating losses, although we have paid foreign income and withholding taxes in South Korea. There was an income tax provision recorded for the nine months ended July 31, 2021 of $3 thousand compared to an income tax provision of $40 thousand for the nine months ended July 31, 2020.

Series B preferred stock dividends

Dividends recorded on our Series B Preferred Stock were $2.4 million and $2.5 million for the nine-month periods ended July 31, 2021 and 2020, respectively.

Net loss attributable to common stockholders and loss per common share

Net loss attributable to common stockholders represents the net loss for the period less the preferred stock dividends on the Series B Preferred Stock. For the nine-month periods ended July 31, 2021 and 2020, net loss attributable to common stockholders was $79.3 million and $72.8 million, respectively, and loss per common share was $0.24 and $0.35, respectively. The increase in the net loss attributable to common stockholders for the nine months ended July 31, 2021 is primarily due to incurring (i) a gross loss for the period compared to a gross profit for the corresponding period in fiscal year 2020, (ii) higher operating expenses for the period, (iii) an $11.2 million loss recorded on the extinguishment of the Orion Facility, and (iv) a $0.9 million charge for the extinguishment of the Series 1 Preferred Share obligation. These amounts were offset by lower interest expense due to repayment of the Orion Facility and a lower charge for the change in fair value of common stock warrant liability. The net loss attributable to common stockholders for the nine-months ended July 31, 2020 reflected a $1.8 million gain on the extinguishment of a financing obligation. There was no comparable gain recorded in the nine-months ended July 31, 2021. The lower loss per common share for the nine months ended July 31, 2021 as compared to the nine months ended July 31, 2020 is due to the higher weighted average shares outstanding as of July 31, 2021 as a result of share issuances since July 31, 2020.

LIQUIDITY AND CAPITAL RESOURCES

Overview, Cash Position, Sources and Uses

Our principal sources of cash have been sales of our common stock through public equity offerings, proceeds from third party debt, project financing and tax monetization transactions, proceeds from the sale of our projects as well as research and development and service and license agreements with third parties. We have utilized this cash to develop and construct project assets, perform research and development on Advanced Technologies, pay down existing outstanding indebtedness, and meet our other cash and liquidity needs.

As of July 31, 2021, unrestricted cash and cash equivalents totaled $468.6 million compared to $149.9 million as of October 31, 2020.

In December 2020, the Company closed an underwritten offering of 25.0 million shares of the Company’s common stock. Net proceeds to the Company were approximately $156.4 million after deducting underwriting discounts and commissions and other offering expenses. Proceeds from this offering have been utilized as follows:

• Extinguishment of Senior Secured Debt: On December 7, 2020, the Company paid $87.3 million to settle the outstanding principal, accrued but unpaid interest, prepayment premium, fees, costs and other expenses due and owing to the Orion Agent and the lenders under the Orion Facility and the Orion Credit Agreement (in each case as defined elsewhere herein) and related loan documents. Concurrently, the Orion Agent released all of the collateral from the liens granted under the security documents associated with the Orion Facility, which included the release of $11.2 million of restricted cash to the Company.
• Extinguishment of the Series 1 Preferred Shares: On December 17, 2020, the Company paid all amounts owed to Enbridge Inc. (“Enbridge”) under the Series 1 Preferred Shares (as defined elsewhere herein), totaling Cdn. $27.4 million, or approximately $21.5 million in U.S. dollars. Following such payment, Enbridge surrendered its shares in FCE Ltd. (as defined elsewhere herein) and the related Guarantee and January 2020 Letter Agreement (in each case, as defined elsewhere herein) were terminated.
• Working Capital: The remaining $47.5 million of proceeds from the offering was included in unrestricted cash and is being used to accelerate the development and commercialization of our solid oxide platform and for project development, project financing, debt service, working capital support and other general corporate purposes.

In February 2021, the Company further reduced its debt by repaying the outstanding PPP Note (as defined elsewhere herein) from Liberty Bank under the CARES Act totaling $6.5 million.

On June 11, 2021, the Company entered into an Open Market Sale Agreement with Jefferies LLC and Barclays Capital Inc. with respect to an at the market offering program under which the Company may, from time to time, offer and sell shares of the Company’s common stock having an aggregate offering price of up to $500 million. From the date of the Open Market Sale Agreement through July 31, 2021, approximately 44.0 million shares were sold resulting in net proceeds to the Company totaling approximately $369.0 million. Subsequent to July 31, 2021, an additional 0.9 million shares were sold resulting in net proceeds of approximately $0.6 million. The remaining availability under the Open Market Sale Agreement as of the date of filing of this report is approximately $122.8 million. The Company plans to use the net proceeds from this offering to accelerate the development and commercialization of our Advanced Technologies products, including our solid oxide platform, for project development, for internal research and development, to invest in capacity expansion for solid oxide and carbonate fuel cell manufacturing, and for project financing, working capital support, and general corporate purposes.

We believe that our unrestricted cash and cash equivalents, expected receipts from our contracted backlog, and release of short-term restricted cash less expected disbursements over the next twelve months will be sufficient to allow the Company to meet its obligations for at least one year from the date of issuance of these financial statements.

To date, we have not achieved profitable operations or sustained positive cash flow from operations. The Company’s future liquidity will depend on its ability to (i) timely complete current projects in process within budget, (ii) increase cash flows from its generation portfolio, including by meeting conditions required to timely commence operation of new projects, operating its generation portfolio in compliance with minimum performance guarantees and operating its generation portfolio in accordance with revenue expectations, (iii) obtain financing for project construction, (iv) obtain permanent financing for its projects once constructed, (v) increase order and contract volumes, which would lead to additional product sales, service agreements and generation revenues, (vi) obtain funding for and receive payment for research and development under current and future Advanced Technologies contracts, (vii) successfully commercialize its Advanced Technologies platforms, including its solid oxide, hydrogen and carbon capture platforms, (viii) implement the product cost reductions necessary to achieve profitable operations, (ix) manage working capital and the Company’s unrestricted cash balance and (x) access the capital markets to raise funds through the sale of equity securities, convertible notes, and other equity-linked instruments.

We are continually assessing different means by which to accelerate the Company’s growth, enter new markets, commercialize new products, and enable capacity expansion. Therefore, from time to time, the Company may consider and enter into agreements for one or more of the following: negotiated financial transactions, minority investments, collaborative ventures, license arrangements, joint ventures or other business transactions for the purpose(s) of geographic or manufacturing expansion and/or new product or technology development and commercialization.

Our business model requires substantial outside financing arrangements and satisfaction of the conditions of such financing arrangements to construct and deploy our projects and facilitate the growth of our business. The Company expects to seek long-term debt and tax equity (e.g., sale-leaseback and partnership transactions) for its project asset portfolio as these projects commence commercial operations. The proceeds of any such financing, if obtained, may allow the Company to fund other projects. We may also seek to obtain additional financing in both the debt and equity markets in the future. If financing is not available to us on acceptable terms if and when needed, or on terms acceptable to us or our lenders, if we do not satisfy the conditions of our financing arrangements, if we spend more than the financing approved for projects, if project costs exceed an amount that the Company can finance, or if we do not generate sufficient revenues or obtain capital sufficient for our corporate needs, we may be required to reduce or slow planned spending, reduce staffing, sell assets, seek alternative financing and take other measures, any of which could have a material adverse effect on our financial condition and operations.

Generation/Operating Portfolio, Projects, and Backlog

To grow our generation portfolio, the Company will invest in developing and building turn-key fuel cell projects which will be owned by the Company and classified as project assets on the balance sheet. This strategy requires liquidity and the Company expects to continue to have increasing liquidity requirements as project sizes increase and more projects are added to backlog. We may commence building project assets upon the award of a project or execution of a multi-year PPA with an end-user that has a strong credit profile. Project development and construction cycles, which span the time between securing a PPA and commercial operation of the platform, vary substantially and can take years. As a result of these project cycles and strategic decisions to finance the construction of certain projects, we may need to make significant up-front investments of resources in advance of the receipt of any cash from the sale or long-term financing of such projects. To make these up-front investments, we may use our working capital, seek to raise funds through the sale of equity or debt securities, or seek other financing arrangements. Delays in construction progress and completing current projects in process within budget, or in completing financing or the sale of our projects may impact our liquidity in a material way.

Our operating portfolio (34.0 MW as of July 31, 2021) contributes higher long-term cash flows to the Company than if these projects had been sold. These projects currently generate approximately $19.9 million per year in annual revenue, but this amount may fluctuate from year to year depending on platform output, operational performance and management and site conditions. The Company plans to continue to grow this portfolio while also selling projects to investors. As of July 31, 2021, the Company had projects representing an additional 42.1 MW in various stages of development and construction, which projects are expected to generate operating cash flows in future periods, if completed. Retaining long-term cash flow positive projects, combined with our service fleet, is expected to result in reduced reliance on new project sales to achieve cash flow positive operations, however, operations and performance issues could impact results. We have worked with and are continuing to work with lenders and financial institutions to secure construction financing, long-term debt, tax equity and sale-leasebacks for our project asset portfolio, but there can be no assurance that such financing can be attained, or that, if attained, it will be retained and sufficient.

As of July 31, 2021, net debt outstanding related to project assets was $67.8 million. Future required payments totaled $40.3 million as of July 31, 2021. The outstanding financing obligations under our sale-leaseback transactions, which totaled $48.6 million as of July 31, 2021, include an embedded gain of $31.4 million, which will be recognized at the end of the applicable lease terms.

Our operating portfolio provides us with the full benefit of future cash flows, net of any debt service requirements.

The following table summarizes our operating portfolio as of July 31, 2021:

The following table summarizes projects in process, all of which are in backlog, as of July 31, 2021:

The projects listed in the above table are in various stages of development or on-site construction and installation. Current project updates are as follows:

• Groton Sub Base. The Company achieved mechanical completion, executed the interconnect agreement in July, and commenced the process of commissioning the 7.4 MW platform at the U.S. Navy Submarine Base in Groton, Connecticut. During the commissioning process (the final stage prior to commercial operation), a localized and contained elevated temperature was observed inside a component on one of the two installed plants and, as a result, the commissioning process was suspended. Due to the temporary elevated temperature being above the installation heat rating, we need to repair the gasket seals and insulation. Our team has identified the root cause of the issue and is in the process of applying improvements and preventative upgrades as well as making the necessary repairs to the plant. The issue identified affects unique aspects of this plant and does not affect the rest of our fleet. We expect to resume commissioning on the project in late September but timing is dependent on non-FuelCell Energy related activities on the Navy base. Our intent is to achieve

commercial operations as expeditiously as possible. If commercial operations are delayed beyond October 18, 2021, an extension will be required from the Navy and the Navy will determine whether such extension will be granted. This platform, when fully operational, will demonstrate the ability of FuelCell Energy’s platforms to perform at high efficiencies and provide low CO2 to MWh output. Incorporation of the platform into a microgrid will demonstrate the ability of FuelCell Energy’s platforms to increase grid stability and resilience while supporting the U.S. military’s efforts to fortify base energy supply and demonstrating the Navy’s commitment to clean reliable power.

As described in additional detail above under “Overview and Recent Developments – Recent Developments – East West Bank Tax Equity Financing Transaction,” subsequent to quarter end, in August 2021, the Company closed on a tax equity financing transaction with East West Bank for this project. East West Bank’s tax equity commitment totals $15 million. In connection with the initial closing, the Company was able to draw down $3.0 million, of which approximately $0.8 million was used to pay closing costs including appraisal fees, title insurance expenses and legal and consulting fees. The Company is eligible to draw the remaining amount of the commitment, approximately $12 million, once the Groton Project achieves commercial operation. Under the terms of our agreement with East West Bank, the project has a required commercial operations deadline of October 18, 2021, unless that deadline is amended or waived. If commercial operations are delayed beyond October 18, 2021, an extension will be required from the Navy and the Navy will determine whether such extension will be granted.

• San Bernardino, CA. This 1.4 MW platform located at the wastewater treatment facility in San Bernardino, California commenced commercial operation in July 2021.
• LIPA - Yaphank (Long Island), NY. On-site civil construction of this 7.4 MW project has materially advanced, with all foundations having been completed and most equipment necessary for the complete construction of the fuel cell project having been delivered to the site.
• Derby, CT. On-site civil construction of this 14.8 MW project has advanced, having largely completed the foundational construction necessary in order to begin to receive delivery of the fuel cell platform equipment. This utility scale fuel cell platform will contain 5 SureSource 3000 fuel cell systems that will be installed on engineering platforms alongside the Housatonic River.
• Toyota - Port of Long Beach, CA. This 2.3 MW trigeneration platform, which will produce electricity, hydrogen and hot water, has advanced to early site civil construction. It is anticipated that the fuel cell platform equipment will be received on-site over the next 90 days following the date of filing of this report.

Backlog by revenue category is as follows:

• Service agreements and license backlog totaled $149.2 million as of July 31, 2021, compared to $176.0 million as of July 31, 2020. 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 July 31, 2021 and July 31, 2020. Generation backlog represents future contracted energy sales under contracted PPAs or approved utility tariffs.
• There was no product sales backlog as of July 31, 2021 or July 31, 2020.
• Advanced Technologies contract backlog totaled $40.0 million as of July 31, 2021 compared to $51.9 million as of July 31, 2020. Advanced Technologies contract backlog primarily represents remaining revenue under the EMRE Joint Development Agreement and government projects.

Backlog decreased 2.2% to $1.30 billion as of July 31, 2021 compared to $1.33 billion as of July 31, 2020, reflecting the continued execution of backlog and adjustments to generation backlog, primarily resulting from the decrease in fuel pricing which has lowered estimated future revenue, offset by the inclusion of the project with United Illuminating in Derby, Connecticut which was awarded in the second quarter of this fiscal year.

Backlog represents definitive agreements executed by the Company and our customers. Projects for which we have an executed PPA are included in generation backlog, which represents future revenue under long-term PPAs. Projects sold to customers (and not retained by the Company) are included in product sales and service agreements and license backlog, and the related generation backlog is removed upon sale. Together, the service and generation portion of backlog had a weighted average term of approximately 18 years, with weighting based on the dollar amount of backlog and utility service contracts of up to 20 years in duration at inception.

Factors that may impact our liquidity

Factors that may impact our liquidity in fiscal year 2021 and beyond include:

• The Company’s cash on hand and access to additional liquidity. As of July 31, 2021, unrestricted cash and cash equivalents totaled $468.6 million.
• We bid on large projects in diverse markets that can have long decision cycles and uncertain outcomes. We manage production rate based on expected demand and project schedules. Changes to production rate take time to implement. The annualized production rate as of October 31, 2020 was 17 MW, which was impacted by the manufacturing facility shutdown from March 18, 2020 to June 22, 2020 that was implemented in response to the COVID-19 pandemic. During fiscal year 2020, we made a number of improvements in our manufacturing processes and capabilities, focusing on increasing throughput and simplifying and streamlining production steps, while implementing applicable social distancing protocols. As a result of these improvements, we now have the capability to increase our annualized production rate up to 45 MW on a single production shift. We have increased our annualized production rate from 17 MW at the end of fiscal year 2020 to 30 MW as of July 31, 2021, with an objective of reaching an annualized production rate of 45 MW by the end of this calendar year.
• As project sizes and the number of projects evolves, project cycle times may increase. We may need to make significant up-front investments of resources in advance of the receipt of any cash from the financing or sale of our projects. These amounts include development costs, interconnection costs, costs associated with posting of letters of credit, bonding or other forms of security, and engineering, permitting, legal, and other expenses.
• The amount of accounts receivable and unbilled receivables as of July 31, 2021 and October 31, 2020 was $36.5 million ($13.6 million of which is classified as “Other assets”) and $26.5 million ($8.9 million of which is classified as “Other assets”), respectively. Unbilled accounts receivable represent revenue that has been recognized in advance of billing the customer under the terms of the underlying contracts. Such costs have been funded with working capital and the unbilled amounts are expected to be billed and collected from customers once we meet the billing criteria under the contracts. Our accounts receivable balances may fluctuate as of any balance sheet date depending on the timing of individual contract milestones and progress on completion of our projects.
• The amount of total inventory as of July 31, 2021 and October 31, 2020 was $65.0 million ($4.6 million is classified as long-term inventory) and $60.0 million ($9.0 million is classified as long-term inventory), respectively, which includes work in process inventory totaling $34.2 million and $38.2 million, respectively. Work in process inventory can generally be deployed rapidly while the balance of our inventory requires further manufacturing prior to deployment. To execute on our business plan, we must produce fuel cell modules and procure balance of plant (“BOP”) components in required volumes to support our planned construction schedules and potential customer contractual requirements. As a result, we may manufacture modules or acquire BOP components in advance of receiving payment for such activities. This may result in fluctuations in inventory and in use of cash as of any given balance sheet date.
• The amount of total project assets as of July 31, 2021 and October 31, 2020 was $199.2 million and $161.8 million, respectively. Project assets consist of capitalized costs for fuel cell projects that are operating and producing revenue or are under construction. Project assets as of July 31, 2021 consisted of $99.6 million of completed, operating

installations and $99.6 million of projects in development. As of July 31, 2021, we had 34.0 MW of operating project assets that generated $17.3 million of revenue in the nine months ended July 31, 2021.

• As of July 31, 2021, the Company had 42.1 MW of projects under development and construction, some of which are expected to generate operating cash flows beginning in fiscal years 2021 and 2022. To build out this portfolio, for fiscal year 2021, we forecast project asset expenditures to range between $60.0 million and $75.0 million compared to $31.5 million for fiscal year 2020. To fund such expenditures, the Company expects to use unrestricted cash on hand and to seek sources of construction financing. In addition, once the projects under development become operational, the Company will seek to obtain permanent financing (tax equity and debt) which would be expected to return cash to the business.
• Capital expenditures are expected to range between $5.0 million to $7.0 million for fiscal year 2021, compared to capital expenditures of $0.4 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 $10 million to $12 million in fiscal year 2021 (compared to approximately $4.8 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 July 31, 2021, we had pledged approximately $25.5 million of our cash and cash equivalents as collateral for performance security and for letters of credit for certain banking requirements and contracts. This balance may increase with a growing backlog and installed fleet.

Depreciation and Amortization

As the Company builds project assets and makes capital expenditures, depreciation and amortization expenses are expected to increase. For the three months ended July 31, 2021 and 2020, depreciation and amortization totaled $4.5 million and $4.7 million, respectively (of these totals, approximately $3.3 million and $3.4 million for the three months ended July 31, 2021 and 2020, respectively, relate to depreciation and amortization of project assets in our generation portfolio). For the nine months ended July 31, 2021 and 2020, depreciation and amortization totaled $14.9 million and $13.8 million respectively (of these totals, approximately $11.2 million and $9.9 million for the nine months ended July 31, 2021 and 2020, respectively, relate to depreciation and amortization of project assets in our generation portfolio).

Cash Flows

Cash and cash equivalents and restricted cash and cash equivalents totaled $494.0 million as of July 31, 2021 compared to $192.1 million as of October 31, 2020. As of July 31, 2021, unrestricted cash and cash equivalents was $468.6 million compared to $149.9 million of unrestricted cash and cash equivalents as of October 31, 2020. As of July 31, 2021, restricted cash and cash equivalents was $25.5 million, of which $10.2 million was classified as current and $15.2 million was classified as non-current, compared to $42.2 million of restricted cash and cash equivalents as of October 31, 2020, of which $9.2 million was classified as current and $33.0 million was classified as non-current.

The following table summarizes our consolidated cash flows:

(dollars in thousands)

The key components of our cash inflows and outflows were as follows:

Operating Activities – Net cash used in operating activities was $61.3 million during the nine months ended July 31, 2021, compared to $24.6 million of net cash used in operating activities during the nine months ended July 31, 2020.

Net cash used in operating activities for the nine months ended July 31, 2021 was primarily a result of the net loss of $76.9 million, increases in inventories of $11.0 million, unbilled receivables of $5.4 million, accounts receivable of $4.6 million, and other assets of $3.2 million, and decreases in deferred revenue of $4.5 million and accrued liabilities of $2.6 million partially offset by increases in accounts payable of $0.7 million and non-cash adjustments of $47.9 million.

Net cash used in operating activities for the nine months ended July 31, 2020 was primarily a result of the net loss of $70.3 million, increases in accounts receivable of $4.1 million, inventory of $2.7 million, unbilled receivables of $2.7 million and other assets of $1.7 million, and a decrease in accounts payable of $7.1 million, offset by an increase in accrued liabilities of $4.5 million, deferred revenue of $1.0 million and net non-cash adjustments of $59.2 million, including a $39.3 million charge related to the change in fair value of common stock warrant liability.

Investing Activities – Net cash used in investing activities was $44.2 million for the nine months ended July 31, 2021, compared to net cash used in investing activities of $24.3 million during the nine months ended July 31, 2020.

Net cash used in investing activities for the nine months ended July 31, 2021 included $41.3 million of project asset expenditures and $2.9 million of capital expenditures.

Net cash used in investing activities for the nine months ended July 31, 2020 included $23.5 million of project asset expenditures and a $0.6 million payment for a working capital adjustment for the acquisition of the Bridgeport Fuel Cell Project.

Financing Activities – Net cash provided by financing activities was $406.8 million during the nine months ended July 31, 2021, compared to net cash provided by financing activities of $116.6 million during the nine months ended July 31, 2020.

Net cash provided by financing activities during the nine months ended July 31, 2021 resulted from $523.7 million of proceeds from common stock sales, net of fees and expenses, and $0.9 million of proceeds received from warrant exercises, offset by debt repayments of $94.0 million primarily relating to the payoff of amounts owed under the Orion Credit Agreement and the PPP Note, payment of preferred dividends of $2.4 million under the terms of the Series B Preferred Stock, and payment of $21.5 million to repay all remaining obligations under the terms of the Series 1 Preferred Shares.

Net cash provided by financing activities during the nine months ended July 31, 2020 resulted from the receipt of $65.5 million of debt proceeds from the Orion Facility, net of a loan discount of $1.6 million, $14.4 million of proceeds from the Crestmark sale-leaseback transaction with respect to the Tulare BioMAT plant, $6.5 million of debt proceeds from Liberty Bank under the PPP Note, $3.0 million of debt proceeds from Connecticut Green Bank, and $64.7 million of proceeds from common stock sales, net of fees and expenses, offset by debt repayments of $27.8 million, the payment of deferred financing costs of $2.7 million and the payment of preferred dividends and return of capital of $5.4 million under the terms of the Series 1 Preferred Shares and the Series B Preferred Stock.

Sources and Uses of Cash and Investments

In order to consistently produce positive cash flow from operations, we need to increase order flow to support higher production levels, leading to lower costs on a per unit basis. We also continue to invest in new product and market development and, as a result, we are not generating positive cash flow from our operations. Our operations are funded primarily through cash generated from product sales, service contracts, generation assets and Advanced Technologies contracts, as well as sales of equity and equity linked securities, issuances of corporate and project level debt, and monetization of technology through licenses.

Commitments and Significant Contractual Obligations

A summary of our significant commitments and contractual obligations as of July 31, 2021 and the related payments by fiscal year are as follows:

(dollars in thousands)

(1) Purchase commitments with suppliers for materials, supplies and services incurred in the normal course of business.

(2) Future minimum lease payments on finance and operating leases.

(3) Represents payments due under sale-leaseback transactions and related financing agreements between certain of our wholly-owned subsidiaries and PNC Energy Capital, LLC (“PNC”) and/or Crestmark Equipment Finance (“Crestmark”) (as applicable). Lease payments for each lease under these financing agreements are generally payable in fixed quarterly installments over a 10-year period.

(4) During fiscal year 2020, the Company entered into a 7-year natural gas contract with an estimated annual cost per year of $2.0 million beginning on November 1, 2021. This gas contract is for the Company’s Yaphank project and the costs are expected to be offset by generation revenues on the project.

(5) The Company entered into an agreement with a customer on June 29, 2016 that includes a fee for the purchase of the customer’s power platforms by the Company at the end of the term of the agreement. The fee is payable in installments over the term of the agreement.

(6) We pay $3.2 million in annual dividends on our Series B Preferred Stock, if and when declared. The $3.2 million annual dividend payment, if dividends 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 ($1,692 per share at July 31, 2021) for 20 trading days during any consecutive 30 trading day period.

Debt Paid Off During the Nine Months ended July 31, 2021

Liberty Bank Promissory Note – PPP Note

On April 20, 2020, the Company entered into a Paycheck Protection Program Promissory Note, dated April 16, 2020 (the “PPP Note”), evidencing a loan to the Company from Liberty Bank under the CARES Act, administered by the SBA. Pursuant to the PPP Note, the Company received total loan proceeds of approximately $6.5 million on April 24, 2020 (the “PPP Loan”).

The PPP Note was scheduled to mature on April 16, 2022, had a 1.00% per annum interest rate, and was subject to the terms and conditions applicable to loans administered by the SBA under the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020. Monthly principal and interest payments, less the amount of any potential forgiveness, commenced on November 16, 2020. The Company did not provide any collateral or guarantees for the PPP Note, nor did the Company pay any facility charge to obtain the PPP Note. The PPP Note could be prepaid at any time with no prepayment penalties.

As required by Orion Energy Partners Investment Agent, LLC and its affiliated lenders (collectively, “Orion”) under the Company’s (now former) senior secured credit facility (which is referred to elsewhere herein as the Orion Facility), the Company applied for forgiveness of the PPP Loan in October 2020. However, with the repayment in full of all amounts owed to Orion in December 2020, the Company was no longer required to pursue forgiveness of the PPP Loan.

Additionally, since the time of the application for forgiveness, the Company’s financial circumstances changed substantially, such that the Company was no longer in need of forgiveness of the PPP Loan. Accordingly, on February 11, 2021, the Company withdrew its application for forgiveness and repaid all amounts outstanding under the PPP Note, which totaled approximately $6.6 million, and included approximately $0.1 million in interest.

Orion Credit Agreement

On October 31, 2019, the Company and certain of its affiliates as guarantors entered into a Credit Agreement (as amended, the “Orion Credit Agreement”) with Orion Energy Partners Investment Agent, LLC, as Administrative Agent and Collateral Agent (the “Orion Agent”), and certain lenders affiliated with the Orion Agent for a $200.0 million senior secured credit facility (the “Orion Facility”), structured as a delayed draw term loan to be provided by the lenders primarily to fund certain of the Company’s construction and related costs for fuel cell projects meeting the requirements of the Orion Facility. Under the Orion Credit Agreement, each lender funded its commitments less 2.50% of the aggregate principal amount of the loans funded by such lender (the “Loan Discount).

On October 31, 2019, the Company drew down $14.5 million (the “Initial Funding”) and received $14.1 million after taking into account a Loan Discount of $0.4 million. On October 31, 2019, in connection with the Initial Funding, the Company issued warrants to the lenders under the Orion Credit Agreement to purchase up to a total of 6,000,000 shares of the Company’s common stock, at an exercise price of $0.310 per share (which are referred to herein as the “Initial Funding Warrants”).

On November 22, 2019, a second draw (the “Second Funding”) of $65.5 million, funded by Orion Energy Credit Opportunities Fund II, L.P., Orion Energy Credit Opportunities Fund II GPFA, L.P., Orion Energy Credit Opportunities Fund II PV, L.P., and Orion Energy Credit Opportunities FuelCell Co-Invest, L.P. (as the lenders under the Orion Credit Agreement), was made to fully repay certain outstanding third party debt of the Company, as well as to fund remaining construction costs and anticipated capital expenditures relating to certain projects. The Company received $63.9 million in the Second Funding after taking into account a Loan Discount of $1.6 million as described above. Also in conjunction with the Second Funding, the Company issued to the lenders warrants to purchase up to a total of 14.0 million shares of the Company’s common stock, with an initial exercise price with respect to 8.0 million of such shares of $0.242 per share and with an initial exercise price with respect to 6.0 million of such shares of $0.620 per share (which are referred to herein as the “Second Funding Warrants” and, together with the Initial Funding Warrants, as the “Orion Warrants”). (See Note 12. “Stockholders’ Equity and Warrant Liabilities” for additional information regarding the Orion Warrants.)

Under the Orion Credit Agreement, cash interest of 9.9% per annum was paid quarterly. In addition to the cash interest, payment-in-kind interest of 2.05% per annum accrued which was added to the outstanding principal balance of the Orion Facility but was paid quarterly in cash to the extent of available cash after payment of the Company’s operating expenses and the funding of certain reserves for the payment of outstanding indebtedness to the State of Connecticut and Connecticut Green Bank.

Outstanding principal under the Orion Facility was to be amortized on a straight-line basis over a seven-year term, with the initial payment due 21 business days after the end of the first quarter of fiscal year 2021. The maturity date of the Orion Facility was October 31, 2027. The Orion Facility contained an administrative fee of $0.1 million per year paid on a quarterly basis and also included a prepayment premium of up to 35%. Such prepayment fee was to be reduced over time based on the aggregate amount of principal and interest paid.

On November 30, 2020, the Company, its subsidiary guarantors, and the Orion Agent entered into a payoff letter with respect to the Orion Credit Agreement (the “Orion Payoff Letter”). Pursuant to the Orion Payoff Letter, on December 7, 2020, the Company paid a total of $87.3 million to the Orion Agent, representing the outstanding principal, accrued but unpaid interest, prepayment premium, fees, costs and other expenses due and owing under the Orion Facility and the Orion Credit Agreement and related loan documents, in full repayment of the Company’s outstanding indebtedness under the Orion Facility and the Orion Credit Agreement and related loan documents. In accordance with the Orion Payoff Letter, the aggregate prepayment premium set forth in the Orion Credit Agreement was reduced from approximately $14.9 million to $4.0 million and the Orion Agent, on behalf of itself and the lenders, agreed that any portion of the prepayment premium that would otherwise be required to be paid pursuant to the Orion Credit Agreement in excess of $4.0 million was waived by the Orion Agent and the lenders. The Company expensed the remaining unamortized deferred finance costs and debt discount of $7.1 million.

Concurrently with the Orion Agent’s receipt of full payment pursuant to the Orion Payoff Letter, the Orion Agent released all of the collateral from the liens granted under the security documents associated with the Orion Facility (which included the release of $11.2 million of restricted cash to the Company, which became unrestricted cash), and the Company and its subsidiaries were unconditionally released from their respective obligations under the Orion Credit Agreement (and related loan documents) and the Orion Facility without further action. With the termination of the Orion Facility and the Orion Credit Agreement and related loan documents, the lenders no longer have the right to appoint representatives to attend the Company’s Board of Director meetings as observers.

Outstanding Loans

Connecticut Green Bank Loan

As of October 31, 2019, the Company had a long-term loan agreement with the Connecticut Green Bank, providing the Company with a loan of $1.8 million (the “Green Bank Loan Agreement”). On and effective as of December 19, 2019, the Company and Connecticut Green Bank entered into an amendment to the Green Bank Loan Agreement (the “Green Bank Amendment”). Upon the execution of the Green Bank Amendment on December 19, 2019, Connecticut Green Bank made an additional loan to the Company in the aggregate principal amount of $3.0 million (the “December 2019 Loan”), which was to be used (i) first, to pay closing fees related to the May 9, 2019 acquisition of the Bridgeport Fuel Cell Project and the Subordinated Credit Agreement (as defined below), other fees and interest, and (ii) thereafter, for general corporate purposes.

The Green Bank Amendment provides that, until such time as the loan (which includes both the outstanding principal balance of the original loan under the Green Bank Loan Agreement and the outstanding principal amount of the December 2019 Loan) has been repaid in its entirety, interest on the outstanding balance of the loan shall accrue at a rate of 8% per annum, payable by the Company on a monthly basis in arrears. Interest payments made by the Company after the date of the Green Bank Amendment are to be applied first to interest that has accrued on the outstanding principal balance of the original loan under the Green Bank Loan Agreement and then to interest that has accrued on the December 2019 Loan.

The Green Bank Amendment also modifies the repayment and mandatory prepayment terms and extends the maturity date set forth in the original Green Bank Loan Agreement. Under the Green Bank Amendment, to the extent that excess cash flow reserve funds under the BFC Credit Agreement (as defined below) are eligible for disbursement to Bridgeport Fuel Cell, LLC pursuant to Section 6.23(c) of the BFC Credit Agreement, such funds are to be paid to Connecticut Green Bank until the loans are repaid in full. The Green Bank Amendment further provides that any unpaid balance of the loan and all other obligations due under the Green Bank Loan Agreement will be due and payable on May 9, 2026. Finally, with respect to mandatory prepayments, the Green Bank Amendment provides that, when the Company has closed on the subordinated project term loan pursuant to the Commitment Letter, dated February 6, 2019, issued by Connecticut Green Bank to Groton Station Fuel Cell, LLC (“Groton Fuel Cell”) to provide a subordinated project term loan to Groton Fuel Cell in the amount of $5.0 million, the Company will be required to prepay to Connecticut Green Bank the lesser of any then outstanding amount of the December 2019 Loan and the amount of the subordinated project term loan actually advanced by Connecticut Green Bank. The balance under the original Green Bank Loan Agreement and the December 2019 Loan as of July 31, 2021 was $4.8 million.

Bridgeport Fuel Cell Project Loans

On May 9, 2019, in connection with the closing of the purchase of the membership interests of Bridgeport Fuel Cell, LLC (“BFC”) (and the 14.9 MW Bridgeport Fuel Cell Project), BFC entered into a subordinated credit agreement with the Connecticut Green Bank whereby Connecticut Green Bank provided financing in the amount of $6.0 million (the “Subordinated Credit Agreement”). This $6.0 million consisted of $1.8 million in incremental funding that was received by BFC and $4.2 million of funding previously received by FuelCell Energy, Inc. with respect to which BFC became the primary obligor. As security for the Subordinated Credit Agreement, Connecticut Green Bank received a perfected lien, subordinated and second in priority to the liens securing the $25.0 million loaned under the BFC Credit Agreement (as defined below), in all of the same collateral securing the BFC Credit Agreement. The interest rate under the Subordinated Credit Agreement is 8% per annum. Principal and interest are due monthly in amounts sufficient to fully amortize the loan over an 84-month period ending in May 2026. The Subordinated Credit Agreement contains customary representations, warranties and covenants. The Subordinated Credit Agreement contains a debt coverage ratio which is required to be maintained and may not be less than 1.10 as of the end of each fiscal quarter, beginning with the quarter ended July 31, 2020. The balance under the Subordinated Credit Agreement as of July 31, 2021 was $4.5 million.

On May 9, 2019, in connection with the closing of the purchase of the Bridgeport Fuel Cell Project, BFC entered into a Credit Agreement with Liberty Bank, as administrative agent and co-lead arranger, and Fifth Third Bank as co-lead arranger and swap hedger (the “BFC Credit Agreement”), whereby (i) Fifth Third Bank provided financing in the amount of $12.5 million towards the purchase price for the BFC acquisition; and (ii) Liberty Bank provided financing in the amount of $12.5 million towards the purchase price for the BFC acquisition. As security for the BFC Credit Agreement, Liberty Bank and Fifth Third Bank were granted a first priority lien in (i) all assets of BFC, including BFC’s cash accounts, fuel cells, and all other personal property, as well as third party contracts including the Energy Purchase Agreement between BFC and Connecticut Light and Power Company dated July 10, 2009, as amended; (ii) certain fuel cell modules that are intended to be used to replace the Bridgeport Fuel Cell Project’s fuel cell modules as part of routine operation and maintenance; and (iii) FuelCell Finance (a wholly-owned subsidiary of the Company and the direct parent of BFC) ownership interest in BFC. The maturity date under the BFC Credit Agreement is May 9, 2025. Monthly principal and interest are to be paid in arrears in an amount sufficient to fully amortize the term loan over a 72-month period. BFC has the right to make additional principal payments or pay the balance due under the BFC Credit Agreement in full, provided that it pays any associated breakage fees with regard to the interest rate swap agreements fixing the interest rate. The interest rate under the BFC Credit Agreement fluctuates monthly at the 30-day LIBOR rate plus 275 basis points.

An interest rate swap agreement was required to be entered into with Fifth Third Bank in connection with the BFC Credit Agreement to protect against movements in the floating LIBOR index. Accordingly, on May 16, 2019, an interest rate swap agreement (the “Swap Agreement”) was entered into with Fifth Third Bank in connection with the BFC Credit Agreement for the term of the loan. The net interest rate across the BFC Credit Agreement and the swap transaction results in a fixed rate of 5.09%. The interest rate swap is adjusted to fair value on a quarterly basis. The estimated fair value is based on Level 2 inputs including primarily the forward LIBOR curve available to swap dealers. The valuation methodology involves comparison of (i) the sum of the present value of all monthly variable rate payments based on a reset rate using the forward LIBOR curve and (ii) the sum of the present value of all monthly fixed rate payments on the notional amount, which is equivalent to the outstanding principal amount of the loan. The fair value adjustments for the three months ended July 31, 2021 and 2020 resulted in a $0.1 million gain and a $0.04 million charge, respectively, and for the nine months ended July 31, 2021 and 2020 resulted in a $0.3 million gain and a $0.04 million charge, respectively. The fair value of the interest rate swap liability at July 31, 2021 and October 31, 2020 was $0.6 million and $0.9 million, respectively.

The BFC Credit Agreement requires BFC to maintain a debt service reserve. Each of Liberty Bank and Fifth Third Bank also has an operation and module exchange reserve (“O&M Reserve”) under the BFC Credit Agreement. BFC is required to deposit $100,000 per month into each O&M Reserve for the first five years of the BFC Credit Agreement, with such funds to be released at the sole discretion of Liberty Bank and Fifth Third Bank, as applicable. BFC is also required to maintain excess cash flow reserve accounts at each of Liberty Bank and Fifth Third Bank. Excess cash flow consists of cash generated by BFC from the Bridgeport Fuel Cell Project after payment of all expenses (including after payment of intercompany service fees to the Company), debt service to Liberty Bank and Fifth Third Bank, the funding of all required reserves, and payments to Connecticut Green Bank for the subordinated facility. BFC is also required to maintain a debt service coverage ratio of not less than 1.20, measured for the trailing year based on fiscal quarters beginning with the quarter ended July 31, 2020. The Company has certain quarterly and annual financial reporting requirements under the BFC Credit Agreement. The annual financial statements to be provided pursuant to such requirements are to be audited and accompanied by a report of an independent certified public accountant, which report shall not include a “going concern” matter of emphasis or any qualification as to the scope of such audit.

State of Connecticut Loan

In October 2015, the Company closed on a definitive Assistance Agreement with the State of Connecticut (the “Assistance Agreement”) and received a disbursement of $10.0 million, which was used for the first phase of the expansion of the

Company’s Torrington, Connecticut manufacturing facility. In conjunction with this financing, the Company entered into a $10.0 million promissory note and related security agreements securing the loan with equipment liens and a mortgage on its Danbury, Connecticut location. Interest accrues at a fixed interest rate of 2.0%, and the loan is repayable over 15 years from the date of the first advance, which occurred in October of 2015. Principal payments were deferred for four years from disbursement and began on December 1, 2019. Under the Assistance Agreement, the Company was eligible for up to $5.0 million in loan forgiveness if the Company created 165 full-time positions and retained 538 full-time positions for two consecutive years (the “Employment Obligation”) as measured on October 28, 2017 (the “Target Date”). The Assistance Agreement was subsequently amended in April 2017 to extend the Target Date by two years to October 28, 2019.

In January 2019, the Company and the State of Connecticut entered into a Second Amendment to the Assistance Agreement (the “Second Amendment”). The Second Amendment extended the Target Date to October 31, 2022 and amended the Employment Obligation to require the Company to continuously maintain a minimum of 538 full-time positions for 24 consecutive months. If the Company meets the Employment Obligation, as modified by the Second Amendment, and creates an additional 91 full-time positions, the Company may receive a credit in the amount of $2.0 million to be applied against the outstanding balance of the loan. However, based on the Company’s current headcount and plans for fiscal year 2021 and beyond, it will not meet this requirement or receive this credit. A job audit will be performed within 90 days of the Target Date. If the Company does not meet the Employment Obligation, then an accelerated payment penalty will be assessed at a rate of $18,587.36 multiplied by the number of employees below the number of employees required by the Employment Obligation. Such penalty is immediately payable and will be applied first to accelerate the payment of any outstanding fees or interest due and then to accelerate the payment of outstanding principal.

In April of 2020, as a result of the COVID-19 pandemic, the State of Connecticut agreed to defer three months of principal and interest payments under the Assistance Agreement, beginning with the May 2020 payment. These deferred payments will be added at the end of the loan, thus extending out the maturity date by three months.

Restricted Cash

We have pledged approximately $25.5 million of our cash and cash equivalents as performance security and for letters of credit for certain banking requirements and contracts. As of July 31, 2021, outstanding letters of credit totaled $6.5 million. These 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 July 31, 2021 also included $7.4 million primarily to support obligations under the power purchase and service agreements related to the PNC sale-leaseback transactions and $10.6 million relating to future obligations associated with the Bridgeport Fuel Cell Project. Refer to Note 15. “Restricted Cash” for a detailed discussion of the Company’s restricted cash balance.

Power purchase agreements

Under the terms of our PPAs, customers agree to purchase power from our fuel cell power plants at negotiated rates. Electricity rates are generally a function of the customers’ current and estimated future electricity pricing available from the grid. We are responsible for all operating costs necessary to maintain, monitor and repair our fuel cell power plants. 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 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 July 31, 2021, our operating portfolio was 34.0 MW.

Service and warranty agreements

We warranty our products for a specific period of time against manufacturing or performance defects. Our standard U.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 and Congress authorizes the funds. As of July 31, 2021, Advanced Technologies contract backlog totaled $40.0 million, of which $24.2 million is non-U.S. Government-funded, $15.6 million is U.S. Government-funded and $0.2 million is U.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 18. “Commitments and Contingencies” to our Consolidated Financial Statements for the nine months ended July 31, 2021 included in this Quarterly Report on Form 10-Q for further information.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Estimates are used in accounting for, among other things, revenue recognition, contract loss accruals, excess, slow-moving and obsolete inventories, product warranty accruals, loss accruals on service agreements, share-based compensation expense, allowance for doubtful accounts, depreciation and amortization, impairment of goodwill and in-process research and development intangible assets, impairment of long-lived assets (including project assets), lease liabilities and right-of-use (“ROU”) assets, and contingencies. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates.

Our critical accounting policies are those that are both most important to our financial condition and results of operations and 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. For a complete description of our critical accounting policies that affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements, refer to our Annual Report on Form 10-K for the year ended October 31, 2020 filed with the SEC.

ACCOUNTING GUIDANCE UPDATE

See Note 2. “Recent Accounting Pronouncements,” to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for a summary of recently adopted accounting guidance.

Interest Rate Exposure

Cash is invested overnight with high credit quality financial institutions and therefore we are not exposed to market risk on our cash holdings from changing interest rates. Based on our overall interest rate exposure as of July 31, 2021, including all interest rate sensitive instruments, a change in interest rates of 1% would not have a material impact on our results of operations.

Foreign Currency Exchange Risk

As of July 31, 2021, approximately 1.0% of our total cash and cash equivalents were in currencies other than U.S. dollars (primarily the Euro, Canadian dollars and South Korean Won) and we have no plans of repatriation. We make purchases from certain vendors in currencies other than U.S. dollars. Although we have not experienced significant foreign exchange rate losses to date, we may in the future, especially to the extent that we do not engage in currency hedging activities. The economic impact of currency exchange rate movements on our operating results is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, may cause us to adjust our financing and operating strategies.

Derivative Fair Value Exposure Risk

Interest Rate Swap

On May 16, 2019, an interest rate swap agreement (the “Swap Agreement”) was entered into with Fifth Third Bank in connection with the BFC Credit Agreement for the term of the loan. The net interest rate across the BFC Credit Agreement and the swap transaction results in a fixed rate of 5.09%. The interest rate swap will be adjusted to fair value on a quarterly basis. The estimated fair value is based on Level 2 inputs including primarily the forward LIBOR curve available to swap dealers. The valuation methodology involves comparison of (i) the sum of the present value of all monthly variable rate payments based on a reset rate using the forward LIBOR curve and (ii) the sum of the present value of all monthly fixed rate payments on the notional amount, which is equivalent to the outstanding principal amount of the loan. The fair value adjustments for the three months ended July 31, 2021 and 2020 resulted in a gain of $0.1 million and a charge of $0.04 million, respectively, and for the nine months ended July 31, 2021 and 2020 resulted in a gain of $0.3 million and a charge of $0.5 million, respectively.

The Company maintains disclosure controls and procedures, which are designed to provide reasonable assurance that information required to be disclosed in the Company’s periodic SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed in the Company’s periodic SEC reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in our internal controls over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part I, Item 1A, “Risk Factors” of our most recently filed Annual Report on Form 10-K for the fiscal year ended October 31, 2020, filed with the Securities and Exchange Commission on January 21, 2021, sets forth information relating to important risks and uncertainties that could materially adversely affect our business, financial condition and operating results. Those risk factors continue to be relevant to an understanding of our business, financial condition and operating results and, accordingly, you should review and consider such risk factors in making any investment decision with respect to our securities. The following risk factors are being provided to supplement and to update the risk factors set forth in Part I, Item 1A, “Risk Factors” of our most recently filed Annual Report on Form 10-K for the fiscal year ended October 31, 2020.

Our business and operations have been and may continue to be adversely affected by the 2019 novel coronavirus (COVID-19) outbreak or other similar outbreaks.

Any outbreaks of contagious diseases, including the recent outbreak of the 2019 novel coronavirus (“COVID-19”) that was first detected in Wuhan, China in December 2019 and has since developed into a global pandemic, and other adverse public health developments in countries where we and our suppliers operate, could have a material and adverse effect on our business, financial condition and results of operations. These effects could include disruptions to or restrictions on our employees’ ability to travel, as well as temporary closures of our facilities or the facilities of our customers, suppliers, or other vendors in our supply chain. In addition, COVID-19 has resulted in a widespread health crisis that has adversely affected, and may continue to adversely affect, the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products or our ability to obtain financing for our business or projects. COVID-19 may impact the health of our team members, directors or customers, reduce the availability of our workforce or those of companies with which we do business, or otherwise cause human impacts that may negatively impact our business. Any of these events, which may result in disruptions to our supply chain or customer demand, could materially and adversely affect our business and our financial results. The extent to which COVID-19 will impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted. Such developments may include the geographic spread of COVID-19, the severity of the disease, the duration of the outbreak, the actions that may be taken by various governmental authorities in response to the outbreak, such as quarantine or “shelter-in-place” orders and business closures imposed by various states within the United States, and the impact on the U.S. or global economy. For example, on March 18, 2020, in response to the escalating global COVID-19 outbreak, we temporarily suspended operations at our Torrington, Connecticut manufacturing facility, and also ordered those employees that could work from home to do so. We resumed operations in the manufacturing facility on June 22, 2020, and we established a phased-in return to work schedule commencing March 15, 2021 for those employees working from home that was completed April 19, 2021 with all U.S.-based employees being back in the office. However, we continue to evaluate our ability to operate in the event of resurgences of COVID-19 and the advisability of continuing operations, based on federal, state and local guidance, evolving data concerning the pandemic and the best interests of our employees, customers and stockholders. For example, given the recent increase of COVID-19 cases throughout the U.S. as a result of the highly transmissible Delta variant, the Company has instituted policies to protect its employees and customers such as mask mandates in our facilities and a mandatory vaccination policy requiring all U.S. employees to be fully vaccinated by November 1, 2021. Accordingly, there can be no assurance that any of our facilities will remain open (in full or in part) or that our other operations will continue at full or limited capacity. If we again have to shut down production either due to a resurgence of the COVID-19 pandemic or due to an outbreak in one of our facilities, our project schedules and associated financing could be adversely affected. Further, we have experienced, and may continue to experience, increased costs and expenses, including as a result of (i) conducting daily “fitness-for-duty” assessments for employees, including symptom checks and providing personal protective equipment, (ii) the expansion of benefits to our employees, including the provision of additional time off for employees who have contracted COVID-19 or are required to be quarantined or who are unable to obtain childcare to return to work, and the reimbursement of expenses incurred while working from home, (iii) implementing increased health and safety protocols at all of our facilities, including increased cleaning/sanitization of workspaces, restricting visitor access, mandating social distancing guidelines and increasing the availability of sanitization products, and (iv) the increased cost of personal protective equipment. Although we believe the Company is currently considered an “essential” business in its operating markets, if any of the applicable exceptions or exemptions are curtailed or revoked in the future, or any of these exemptions or exceptions do not extend to any of our key suppliers, our business, operating results and financial condition could be adversely impacted. While we have attempted to continue business development activities during the pandemic, state and local shutdowns, shelter-in-place orders and travel restrictions have impeded our ability to meet with customers and solicit new business, and certain bids and solicitations in which we typically participate have been postponed. As a result, at this time, it is impossible to predict the overall impact of COVID-19 on our business, liquidity, capital resources, supply chain and financial results or its effect on clean energy demand, capital budgets of our customers, or demand for our products. Additionally, while we have continued to prioritize the health and safety of our team members and customers as we continue to operate during the pandemic, we face an increased risk of litigation related to our operating environments. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession that has occurred or may occur in the future because of the pandemic, or because the pandemic worsens again. Additional public health crises could also emerge in the future, including other pandemics or epidemics. Any such public health crisis could pose further risks to us and could also have a material adverse effect on our business, results of operations and financial position.

Our PPP Loan may subject us to challenges regarding qualification for the PPP Loan, enforcement actions, fines and penalties, and has resulted in an informal SEC inquiry into our financial disclosures.

On April 20, 2020, we entered into a Paycheck Protection Program Promissory Note, dated April 16, 2020 (the “PPP Note”), evidencing a loan to the Company from Liberty Bank under the CARES Act. Pursuant to the PPP Note, we received total proceeds of approximately $6.5 million on April 24, 2020 (the “PPP Loan”). In accordance with the requirements of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”), the PPP Loan may have been fully forgiven if (i) proceeds were used to pay eligible payroll costs, rent, mortgage interest and utilities and (ii) full-time employee headcount and salaries were either maintained during the 24-week period following disbursement of the PPP Loan or restored by December 31, 2020. If not so maintained or restored, forgiveness of the PPP Loan would have been reduced in accordance with regulations issued by the SBA. In order to obtain the consent of the Orion Agent and the lenders under the Orion Credit Agreement (each as defined elsewhere in this document) to enter into the PPP Note, the Orion Agent and such lenders required us to apply for forgiveness within 30 days after the last day of the loan forgiveness period as designated under regulations in effect as of June 6, 2020. We used 100% of the proceeds of the PPP Loan to pay eligible payroll costs, and on October 29, 2020, we applied for forgiveness of the PPP Loan. However, with the repayment in full of all amounts owed to the Orion Agent and lenders in December 2020, the Company was no longer required to pursue forgiveness of the PPP Loan. Additionally, since the time of the application for forgiveness, the Company’s financial circumstances changed substantially, such that the Company was no longer in need of forgiveness of the PPP Loan. While we believe we met all of the requirements of the CARES Act, as amended by the PPP Flexibility Act, for forgiveness, on February 11, 2021, we withdrew our application for forgiveness and repaid all amounts outstanding under the PPP Note, together with all accrued interest.

In addition, based on guidance from the United States Department of the Treasury, since the total PPP Loan proceeds exceeded $2.0 million, our forgiveness application is subject to audit by the SBA, including with respect to our certification that the economic uncertainty at the time of our application made our request for a PPP Loan necessary to support our ongoing operations. If we are found to have been ineligible to receive the PPP Loan under the PPP Note, or in violation of any of the laws or regulations that may apply to us in connection with the PPP Note, including the False Claims Act, we may be subject to enforcement actions, fines and penalties, including significant civil, criminal and administrative penalties. In addition, our receipt of the PPP Loan, our submission of a forgiveness application, and our withdrawal of our forgiveness application may result in adverse publicity and damage to our reputation, governmental investigations, inquiries, reviews and audits, such as the SEC inquiry described below, which could consume significant financial and management resources. Any of these events could harm our business, results of operations and financial condition.

On or about May 11, 2020, the Division of Enforcement of the SEC sent the Company an inquiry requesting that we voluntarily provide information to the SEC pertaining to our application and resulting PPP Loan and how the need for the PPP Loan compares with our filings, disclosures and financial condition. While this request for information is voluntary and the Company was not obligated to respond, we are cooperating and have provided information to the SEC.