# Fuelcell Energy Inc: Form 10-Q for the period ended Jan 31, 2020

- Company: [Fuelcell Energy Inc](/companies/fcel.md) (CIK 886128)
- Form: 10-Q
- Filed: 2020-03-16
- Accepted by EDGAR: Mar 16, 2020, 07:31 ET
- Period: 2020-01-31
- Accession: 0001564590-20-010983
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/886128/000156459020010983/fcel-10q_20200131.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/886128/000156459020010983/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-01-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-11-01 to 2020-01-31 | $16.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-11-01 to 2020-01-31 | $13.0m | us-gaap:CostOfGoodsAndServicesSold |
| Research and development | 3 months, 2019-11-01 to 2020-01-31 | $1.2m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2019-11-01 to 2020-01-31 | $5.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-11-01 to 2020-01-31 | −$3.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-11-01 to 2020-01-31 | $3.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-11-01 to 2020-01-31 | $20.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-11-01 to 2020-01-31 | −$40.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-11-01 to 2020-01-31 | −$0.20 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-11-01 to 2020-01-31 | −$0.20 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-11-01 to 2020-01-31 | 202,216,493 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2019-11-01 to 2020-01-31 | −$6.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2019-11-01 to 2020-01-31 | $64.0k | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2020-01-31 | $38.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-01-31 | $124.8m | us-gaap:AssetsCurrent |
| Total assets | at 2020-01-31 | $391.4m | us-gaap:Assets |
| Current liabilities | at 2020-01-31 | $49.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-01-31 | $267.0m | us-gaap:Liabilities |
| Shareholders' equity | at 2020-01-31 | $64.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 95,987 characters.

### FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains both historical and forward-looking statements 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,” “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; (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 to differ materially from those forward-looking statements, including the risks contained in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019 in the section 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 carbon capture configured fuel cell power plants; 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; our dependence on strategic relationships; 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 to terminate its development contracts at any time; the ability of the government to exercise “march-in” rights with respect to certain of our patents; the situation with POSCO Energy which has limited and continues to limit our efforts to access the South Korean and Asian markets and could expose us to costs of arbitration or litigation proceedings; 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 our ability to expand our customer base and maintain relationships with our largest customers and strategic business allies.

We cannot assure you that: we will be able to meet any of our development or commercialization schedules; we will be able to remain in compliance with the minimum bid price requirement of the Nasdaq listing rules; any of our new products or technology, once developed, will be commercially successful; our existing SureSource power plants will remain commercially successful; 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 any such 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.

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. 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), income taxes 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. 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, 2019 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 was founded more than 50 years ago in 1969. We began selling stationary fuel cell power plants commercially in 2003. With more than 9.5 million megawatt hours of clean electricity produced, FuelCell Energy is now a global leader in delivering environmentally-responsible distributed baseload power solutions through our proprietary, molten-carbonate fuel cell technology. Today, we develop turn-key distributed power generation solutions and operate and provide comprehensive service for the life of the power plant. We are working to expand the proprietary technologies that we have developed over the past five decades into new products, markets and geographies.

Fiscal year 2019 was one of transformation for FuelCell Energy. We restructured our management team and our operations in ways that are intended to support our growth and achieve our profitability and sustainability goals. We raised capital under our at-the-market sales plan, which allowed us to pay down our accounts payable and stay current on our forbearance agreements. We repaid a substantial portion of our short-term debt, retired our Series C and Series D Convertible Preferred Stock obligations, and refocused on our core competencies in an effort to drive top-line revenue. We believe we have emerged from a difficult fiscal 2019 as a stronger company, better positioned to execute on our business plan. Our recent achievements, accomplished during one of the most stressful times in the Company’s history, include: (a) closing on a new $200 million credit facility with Orion Energy Partners Investment Agent, LLC and its affiliated lenders, (b) executing a new Joint Development Agreement with ExxonMobil Research and Engineering Company (“EMRE”), with anticipated revenues of up to $60 million, (c) restructuring our business to realize annualized operating savings of approximately $15 million, (d) making progress in constructing certain projects in our backlog, including the Connecticut Municipal Electric Energy Cooperative (“CMEEC”) project at the U.S. Navy base in Groton, Connecticut and the commissioning and startup of the 2.8 MW Tulare BioMAT project in California, (e) relaunching our sub-megawatt product in Europe, (f) executing a strategic relationship with E.On Business Solutions, an affiliate of one of the largest utilities in the world, to market and distribute our products beyond the two FuelCell Energy operating plants E.On already owns, (g) extending the maturity of the Class A Cumulative Redeemable Exchangeable Preferred Shares (the “Series 1 Preferred Shares”) issued by FCE FuelCell Energy Ltd. (“FCE Ltd.”) by one year, and (h) concluding our engagement with Huron Consulting Services, LLC after successful restructuring and payoff of our prior senior secured credit facility.

We will use this new focus coming out of our restructuring to advance our core goals of:

- Executing on our backlog and new project awards;
- Growing our generation portfolio;
- Competing for and winning new business around the world; and
- Developing and commercializing our Advanced Technologies platform of products.

Our mission and purpose remains to utilize our proprietary, state-of-the-art fuel cell power plants to reduce the global environmental footprint of baseload power generation by providing environmentally responsible solutions for reliable electrical power, hot water, steam, chilling, hydrogen, microgrid applications, and carbon capture and, in so doing, drive demand for our products and services, thus realizing positive stockholder returns.

### Recent Developments

#### Crestmark Sale-Leaseback Transaction

On February 11, 2020, a wholly owned subsidiary of the Company entered into a Purchase and Sale Agreement (the “Purchase Agreement”) and an Equipment Lease Agreement (the “Lease”) with Crestmark Equipment Finance, a division of MetaBank (“Crestmark”). Under these agreements, the Company’s subsidiary, Central CA Fuel Cell 2, LLC (“CCFC2”), sold the 2.8 MW fuel cell power plant (the “Plant”) located at the Tulare wastewater treatment plant in Tulare, California to Crestmark and then leased the Plant back from Crestmark through this sale-leaseback transaction. The Plant was designed, manufactured and installed by the Company, and commercial operations began on December 27, 2019. In operating the Plant, CCFC2 purchases biogas from the City of Tulare and will sell the power produced by the Plant to Southern California Edison under a twenty year power purchase agreement under the California Bioenergy Market Adjusting Tariff, which was separately entered into on April 20, 2018 (the “Tulare PPA”).

Under the terms of the Purchase Agreement, Crestmark paid CCFC2 an aggregate purchase price of $14.4 million. A portion of these proceeds were used by CCFC2 to make a down payment and an initial rental payment under the Lease totaling $2.9 million to Crestmark, and to pay taxes, to pay transaction costs and to fund a debt service reserve totaling approximately $1.0 million, resulting in net proceeds to CCFC2 of approximately $10.5 million. These net proceeds (also discussed under “Third Amendment to Orion Credit Agreement” below) were allocated as follows:

- Approximately $6.5 million of the net proceeds were deposited into the Project Proceeds Account (restricted cash on the Company’s Consolidated Balance Sheet) under the Orion Credit Agreement (as defined below). These proceeds may be used to repay amounts outstanding under the Orion Credit Agreement or redeployed, subject to the approval of the Orion Lenders and the Agent (in each case as defined below), to other financing transactions for the Company’s projects. These net proceeds will be classified as restricted cash on the Consolidated Balance Sheet.
- Approximately $1.2 million of the net proceeds were deposited into a module reserve account and debt services reserve account under the Orion Credit Agreement. These net proceeds will be classified as restricted cash on the Consolidated Balance Sheet.
- The balance of the net proceeds, totaling $2.8 million, were used to fund the quarterly cash interest payment due to the Orion Lenders under the Orion Credit Agreement and the dividend payments on the Company’s 5% Series B Cumulative Convertible Perpetual Preferred Stock (“Series B Preferred Stock”) and the Series 1 Preferred Shares of FCE Ltd. required to be paid in the second quarter of fiscal 2020.

The Lease has an initial term of ten years but may be extended at the option of CCFC2. As noted above, an initial rental down payment and one month’s rent totaling $2.9 million was paid using the proceeds from the sale of the Plant. Rental payments are due on a monthly basis in the amount of $0.1 million. Lease payments are expected to be funded with proceeds from the sale of power under the Tulare PPA. Following the sale-leaseback transaction, the remaining rental payments due over the term of the Lease total approximately $8.5 million.

CCFC2 and Crestmark entered into an Assignment Agreement on February 11, 2020 (the “Assignment Agreement”) and FuelCell Finance (the direct parent of CCFC2) and Crestmark entered into a Pledge Agreement on February 11, 2020 (the “Pledge Agreement”) pursuant to which collateral was provided to Crestmark to secure CCFC2’s obligations under the Lease. Specifically, CCFC2 and FuelCell Finance have granted Crestmark a security interest in (i) certain agreements relating to the sale-leaseback transaction, (ii) the revenues CCFC2 receives with respect to the Plant, (iii) two fuel cell modules to be maintained by CCFC2 as replacement modules for the Plant, and (iv) FuelCell Finance’s equity interest in CCFC2. CCFC2 and the Company also entered into a Technology License and Access Agreement with Crestmark on February 11, 2020, 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 project in certain circumstances where 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, CCFC2 has an obligation to indemnify Crestmark for the amount of any actual reduction in the U.S. Investment Tax Credit anticipated to be realized by Crestmark in connection with the foregoing sale-leaseback transaction. Such obligations 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 likely based on the facts known as of March 16, 2020. The maximum potential future payments that CCFC2 could have to make under these obligations would depend on the difference between the fair values of the fuel cell projects sold or financed and the values the IRS would determine as the fair value for the systems for purposes of claiming the Investment Tax Credit. The value of the Investment Tax Credit in the sale-leaseback agreements is based on guidelines provided by the statutory regulations from the IRS. The Company and Crestmark used fair values 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 customary events of default that entitle Crestmark to cause CCFC2’s indebtedness under the Lease to become immediately due and payable.

Pursuant to a Guaranty Agreement executed on February 11, 2020 by the Company for the benefit of Crestmark (the “Guaranty”), the Company has guaranteed the payment and performance of CCFC2’s obligations under the Lease.

#### Third Amendment to Orion Credit Agreement

In order to obtain the Orion Lenders’ consent to the Crestmark sale-leaseback transaction described above and to the use of certain proceeds from the Crestmark sale-leaseback transaction (the “Crestmark Proceeds”) as described below, the Company, the Agent, the Orion Lenders and the other loan parties entered into the Third Amendment to the Orion Credit Agreement (the “Third Orion Amendment”) dated February 11, 2020, and a Consent and Waiver dated February 11, 2020 (the “Consent and Waiver”). Pursuant to the Third Orion Amendment, TRS Fuel Cell, LLC was added as an Additional Covered Project Company (as defined in the Orion Credit Agreement), requiring the Company to pledge all of the assets of TRS Fuel Cell, LLC under the Orion Credit Agreement. In addition, pursuant to the Orion Credit Agreement (as modified by the Third Orion Amendment), all of the proceeds received by the Company from the Crestmark sale-leaseback transaction described above, after the payment of transaction costs, were deposited in the Company’s Project Proceeds Account, which account is restricted, with withdrawals permitted only with consent of the Agent for use to (i) prepay the loans under the Orion Credit Agreement or (ii) fund (x) construction costs, inventory or other capital expenditures for an Additional Covered Project (as defined in the Orion Credit Agreement) whose contracted cash flows (as determined in the Orion Lenders’ sole discretion) meet or exceed a coverage ratio acceptable to the Orion Lenders, and (y) inventory, working capital and other costs required in connection with the performance of purchase orders, service agreements and other binding customer agreements (as determined in the Orion Lenders’ sole discretion); provided, however, that, pursuant to the Third Orion Amendment, certain portions of the funds deposited in the Project Proceeds Account were used as follows: (a) $1.1 million of the Crestmark Proceeds were transferred to the Module Reserve Account (as defined in the Orion Credit Agreement) to fund module replacement costs for Covered Projects (as defined in the Orion Credit Agreement); (b) $0.1 million of the Crestmark Proceeds were transferred to the Debt Reserve Account; (c) $1.7 million of the Crestmark Proceeds were used to fund the quarterly cash interest due to the Orion Lenders under the Orion Credit Agreement; and (d) $1.1 million of the Crestmark Proceeds were used to fund the aggregate amount of the dividends on the Company’s Series B Preferred Stock and the Series 1 Preferred Shares of FCE Ltd. required to be paid in the second quarter of fiscal 2020. The remaining approximately $6.5 million of the Crestmark Proceeds will remain as restricted cash in the Project Proceeds Account and the Company expects to request the Orion Lenders’ consent to draw down all or a portion of such amount for future projects as permitted under the Orion Credit Agreement or use the funds to repay principal due under the Orion Credit Agreement over time. Pursuant to the Consent and Wavier, subject to the terms and conditions described above in the Third Orion Amendment, the Orion Lenders consented to the release of liens on those assets that were the subject of the Crestmark sale-leaseback transaction and to the Company’s entering into the Guaranty.

### 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 January 31, 2020 and 2019

### Revenues and Costs of revenues

Our revenues and cost of revenues for the three months ended January 31, 2020 and 2019 were as follows:

*(dollars in thousands)*

|  | Three Months Ended January 31, 2020 | 2019 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Total revenues | $16,264 | $17,783 | $(1,519) | (9)% |
| Total costs of revenues | $12,983 | $19,988 | $(7,005) | (35)% |
| Gross profit (loss) | $3,281 | $(2,205) | $5,486 | 249% |
| Gross margin | 20.2% | (12.4)% |  |  |

Total revenues for the three months ended January 31, 2020 of $16.3 million reflects a decrease of $1.5 million from $17.8 million during the same period in the prior year. Cost of revenues for the three months ended January 31, 2020 of $13.0 million reflect a $7.0 million decrease from $20.0 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 three months ended January 31, 2020 and 2019 were as follows:

*(dollars in thousands)*

|  | Three Months Ended January 31, 2020 | 2019 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Product revenues | $— | $— | $(—) | N/A |
| Cost of product revenues | 2,016 | 3,422 | (1,406) | (41)% |
| Gross loss from product revenues | $(2,016) | $(3,422) | $1,406 | 41% |
| Product gross margin | N/A | N/A |  |  |

There was no product revenue during the three months ended January 31, 2020 and 2019.

Cost of product revenues decreased $1.4 million for the three months ended January 31, 2020 to $2.0 million, compared to $3.4 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, but there were lower overall manufacturing costs for the three months ended January 31, 2020 due to the Company’s reduction in workforce that was implemented during 2019. Manufacturing variances, primarily related to low production volumes and other charges, totaled approximately $1.7 million for the three months ended January 31, 2020 compared to approximately $3.2 million for the three months ended January 31, 2019. For the three months ended January 31, 2020, we operated at an annualized production rate of approximately 20 MW which is a reduction from the prior year annual production rate of 25 MW.

As of January 31, 2020, there was no product sales backlog compared to $1,000 of product sales backlog as of January 31, 2019.

### Service and license revenues

Service and license revenues and related costs for the three months ended January 31, 2020 and 2019 were as follows:

*(dollars in thousands)*

|  | Three Months Ended January 31, 2020 | 2019 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Service and license revenues | $5,612 | $11,772 | $(6,160) | (52)% |
| Cost of service and license revenues | 1,618 | 12,319 | (10,701) | (87)% |
| Gross profit (loss) from service and license revenues | $3,994 | $(547) | $4,541 | (830)% |
| Service and license revenues gross margin | 71.2% | (4.6)% |  |  |

26

Revenues for the three months ended January 31, 2020 from service agreements and license fee and royalty agreements decreased $6.2 million to $5.6 million from $11.8 million for the three months ended January 31, 2019. Service and license revenues decreased primarily as a result of the fact that there was no revenue recorded in connection with module replacements during the three months ended January 31, 2020. In addition, the three months ended January 31, 2019 included revenue recorded for the Bridgeport Fuel Cell Project service agreement. As a result of the purchase by the Company of the Bridgeport Fuel Cell Project on May 9, 2019, revenue under this service agreement is no longer being recognized. Service and license revenue for the three months ended January 31, 2020 primarily includes license revenues of $4.0 million associated with the Joint Development Agreement entered into with EMRE on November 5, 2019.

Cost of service and license revenues decreased $10.7 million to $1.6 million for the three months ended January 31, 2020 from $12.3 million for the three months ended January 31, 2019, due to the fact that there were no module replacements in the three months ended January 31, 2020. Cost of service agreements includes maintenance and operating costs and module exchanges.

Overall gross profit from service and license revenues was $4.0 million for the three months ended January 31, 2020, which represents an increase of $4.5 million from a gross loss of $0.5 million for the three months ended January 31, 2019. This increase is primarily a result of the license revenues associated with the Joint Development Agreement entered into with EMRE. The overall gross margin percentage was 71.2% for the three months ended January 31, 2020 compared to a gross loss of 4.6% in the prior year period.

As of January 31, 2020, service and license backlog totaled approximately $190.5 million, compared to $291.2 million as of January 31, 2019. Service and license backlog does not include future variable royalties. This backlog relates to service agreements of up to twenty years and is expected to generate positive margins and cash flows based on current estimates. The decrease in service backlog is primarily due to the acquisition of the Bridgeport Fuel Cell Project, as the service backlog of $30.4 million previously remaining for such project was eliminated. This acquisition resulted in additional revenue to be recorded under the power purchase agreement (“PPA”) as compared to the service agreement. Service backlog also includes future license revenue.

### Generation revenues

Generation revenues and related costs for the three months ended January 31, 2020 and 2019 were as follows:

*(dollars in thousands)*

|  | Three Months Ended January 31, 2020 | 2019 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Generation revenues | $5,442 | $1,479 | $3,963 | 268% |
| Cost of generation revenues | 5,557 | 1,636 | 3,921 | 240% |
| Gross loss from generation revenues | $(115) | $(157) | $42 | (27)% |
| Generation revenues gross margin | (2.1)% | (10.6)% |  |  |

Revenues from generation for the three months ended January 31, 2020 totaled $5.4 million which represents an increase of $3.9 million from revenue recognized of $1.5 million for the three months ended January 31, 2019. Generation revenues for the three months ended January 31, 2020 and 2019 reflect revenue from electricity generated under our PPAs. Generation revenues increased for the three months ended January 31, 2020 compared to the same period in the prior year due to additional revenue recorded for the PPA associated with the Bridgeport Fuel Cell Project, which was acquired on May 9, 2019. Cost of generation revenues totaled $5.6 million in the three months ended January 31, 2020, which represents an increase from the comparable prior year period. Cost of generation revenues included depreciation of approximately $2.6 million and $1.0 million for the three months ended January 31, 2020 and 2019, respectively. We had 28.9 MW of operating power plants in our portfolio as of January 31, 2020, compared to 11.2 MW as of January 31, 2019. This increase is primarily a result of the acquisition of the Bridgeport Fuel Cell Project.

As of January 31, 2020, generation backlog totaled approximately $1.1 billion, compared to $982.4 million as of January 31, 2019.

### Advanced Technologies contract revenues

Advanced Technologies contract revenues and related costs for the three months ended January 31, 2020 and 2019 were as follows:

*(dollars in thousands)*

|  | Three Months Ended January 31, 2020 | 2019 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Advanced Technologies contract revenues | $5,210 | $4,532 | $678 | 15% |
| Cost of Advanced Technologies contract revenues | 3,792 | 2,611 | 1,181 | 45% |
| Gross profit from Advanced Technologies contracts | $1,418 | $1,921 | $(503) | (26)% |
| Advanced Technologies contract gross margin | 27.2% | 42.4% |  |  |

27

Advanced Technologies contract revenues for the three months ended January 31, 2020 were $5.2 million, which reflects an increase of $0.7 million when compared to $4.5 million of revenues for the three months ended January 31, 2019. Advanced Technologies contract revenues were higher for the three months ended January 31, 2020 due to the timing of activity under existing contracts as well as the addition of the Company’s Joint Development Agreement with EMRE (which was executed during the first quarter of fiscal 2020). Cost of Advanced Technologies contract revenues increased $1.2 million to $3.8 million for the three months ended January 31, 2020, compared to $2.6 million for the same period in the prior year. Advanced Technologies contracts for the three months ended January 31, 2020 generated a gross margin of $1.4 million compared to a gross margin of $1.9 million for the three months ended January 31, 2019. The decrease in Advanced Technologies contract gross margin is related to the timing and mix of contracts, which were more heavily weighted to cost share agreements performed during the three months ended January 31, 2020, compared to the same period in the prior year.

As of January 31, 2020, Advanced Technologies backlog totaled approximately $64.6 million compared to $37.0 million as of January 31, 2019. This increase was primarily a result of the Joint Development Agreement with EMRE.

### Administrative and selling expenses

Administrative and selling expenses were $5.3 million and $6.8 million for the three months ended January 31, 2020 and 2019, respectively. The decrease from the same period in the prior year primarily relates to a legal settlement of $2.2 million received during the three months ended January 31, 2020, which was recorded as an offset to administrative and selling expenses.

### Research and development expenses

Research and development expenses decreased to $1.2 million for the three months ended January 31, 2020 compared to $6.3 million during the three months ended January 31, 2019. The decrease related to the reduction in spending resulting from the restructuring initiatives implemented in 2019 and the reduction in the resources being allocated to research and development (as resources were instead allocated to funded Advanced Technologies projects).

### Loss from operations

Loss from operations for the three months ended January 31, 2020 was $3.1 million compared to $15.2 million for the three months ended January 31, 2019. The decrease in the loss from operations was primarily a result of higher gross profit and lower operating expenses for the three months ended January 31, 2020.

### Interest expense

Interest expense for the three months ended January 31, 2020 and 2019 was $3.3 million and $2.5 million, respectively. Interest expense for both periods presented includes interest expense related to sale-leaseback transactions and interest for the amortization of the redeemable preferred stock of subsidiary fair value discount. The increase in interest expense during the three months ended January 31, 2020 represents additional interest on the $80.0 million outstanding under our Credit Agreement with Orion Energy Partners Investment Agent, LLC and its affiliated lenders and interest on the loans made by Fifth Third Bank and Liberty Bank in connection with the acquisition of the Bridgeport Fuel Cell Project. The interest expense during the three months ended January 31, 2019 included interest on outstanding amounts under our loan and security agreement with Hercules Capital, Inc. and outstanding amounts under our construction loan agreement with Generate Lending, LLC.

### Change in fair value of common stock warrant liability

The $34.2 million expense for the three months ended January 31, 2020 represents an adjustment to the estimated fair value of the warrants issued to the lenders under our Credit Agreement with Orion Energy Partners Investment Agent, LLC and its affiliated lenders based on a Black-Scholes model. The adjustment included $23.7 million for warrants that were converted during the quarter and $10.5 million for warrants that were still outstanding as of January 31, 2020. The expense is primarily a result of an increase in the stock price during the quarter compared to the stock price used in the Black-Scholes model upon issuance of the warrants.

### Other income, net

Other income, net was $0.5 million and $0.2 million for the three months ended January 31, 2020 and 2019, respectively. Other income, net for the three months ended January 31, 2020 primarily relates to a net non-cash gain on the extinguishment accounting related to the modification of the Series 1 Preferred Stock and the extinguishment related to the embedded derivatives. Refer to Note 13. Redeemable Preferred Stock for additional information.

### Benefit 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. Income tax recorded for the three months ended January 31, 2020 was $0.02 million. There was no income tax recorded for the three months ended January 31, 2019.

### Series B preferred stock dividends

Dividends recorded on our 5% Series B Cumulative Convertible Perpetual Preferred Stock (“Series B Preferred Stock”) were $0.9 million and $0.8 million for the three month periods ended January 31, 2020 and 2019, respectively.

### Series C preferred stock deemed dividends and redemption value adjustment

During the three months ended January 31, 2019, conversions of our Series C Convertible Preferred Stock (“Series C Preferred Stock”) resulted in a variable number of shares of our common stock being issued to settle the conversion amounts and were treated as a partial redemption of our Series C Preferred Stock. Conversions during the three months ended January 31, 2019 that were settled in a variable number of shares and treated as partial redemptions resulted in deemed dividends of $0.5 million. The deemed dividends represent the difference between the fair value of the common shares issued to settle the conversion amounts and the carrying value of the Series C Preferred Stock. A charge to common stockholders of $8.6 million was recorded during the three months ended January 31, 2019 because of equity conditions failures under the Certificate of Designations for the Series C Preferred Stock. The last outstanding shares of Series C Preferred Stock were converted into common stock on May 23, 2019, so there were no shares of Series C Preferred Stock outstanding during the three months ended January 31, 2020.

### Series D preferred stock deemed dividends and redemption accretion

During the three months ended January 31, 2019, conversions of our Series D Convertible Preferred Stock (“Series D Preferred Stock”) in which the conversion price was below the initial conversion price (as adjusted for the reverse stock split) of $16.56 per share resulted in a variable number of shares of our common stock being issued to settle the conversion amounts and are treated as a partial redemption of the shares of our Series D Preferred Stock. Conversions during the three months ended January 31, 2019 that were settled in a variable number of shares and treated as redemptions resulted in deemed dividends of $1.9 million. The deemed dividends represent the difference between the fair value of the common shares issued to settle the conversion amounts and the carrying value of the Series D Preferred Stock. Redemption accretion was recorded during the three months ended January 31, 2019 of $3.8 million. The last outstanding shares of Series D Preferred Stock were converted into common stock on October 1, 2019, so there were no shares of Series D Preferred Stock outstanding during the three months ended January 31, 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, the preferred stock deemed dividends and redemption value adjustment on the Series C Preferred Stock and the Series D Preferred Stock deemed dividends and redemption accretion. For the three month periods ended January 31, 2020 and 2019, net loss attributable to common stockholders was $41.1 million and $33.0 million, respectively, and loss per common share was $0.20 and $3.97, respectively. The increase in the net loss for the three months ended January 31, 2020 is primarily due to the change in fair value of the common stock warrant liability discussed above, partially offset by higher gross profit and lower operating expenses. The lower loss per common share is due to higher weighted average shares outstanding due to share issuances since January 31, 2019.

### LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents, and restricted cash totaled $73.9 million as of January 31, 2020 compared to $39.8 million as of October 31, 2019, consisting of:

- Unrestricted cash and cash equivalents of $38.3 million as of January 31, 2020 compared to $9.4 million as of October 31, 2019.
- Restricted cash and cash equivalents of $35.7 million as of January 31, 2020, of which $8.2 million was classified as current and $27.5 million was classified as non-current, compared to $30.3 million of total restricted cash and cash equivalents as of October 31, 2019, of which $3.5 million was classified as current and $26.9 million was classified as non-current.

The Company’s future liquidity will be dependent on its ability to (i) timely complete current projects in process within budget, including approved amounts that have been financed, as financing does not cover overages, (ii) increase cash flows from its generation portfolio, including by meeting conditions required to timely commence operations of new projects and operating its generation portfolio in compliance with minimum performance guarantees, (iii) obtain approval of and receive funding for project construction under its Credit Agreement with Orion Energy Partners Investment Agent, LLC and its affiliated lenders and meet conditions for release of funds, (iv) increase order and contract volumes, which would lead to additional product sales and services agreements, (v) obtain funding for and receive payment for research and development under current and future Advanced Technology contracts, including achieving a $5 million technological performance milestone under its Joint Development Agreement with EMRE during calendar year 2020, and (vi) implement the cost reductions necessary to achieve profitable operations. Our business model requires substantial outside financing arrangements and satisfaction of the conditions of such financing arrangements to deploy our projects and facilitate the growth of our business. If financing is not available to us on acceptable terms if and when needed, if we do not satisfy the conditions of our financing arrangements or if we spend more than the financing approved for projects, we may be required to reduce planned spending, sell assets, seek alternative financing and take other measures, which could have a material adverse effect on our financial condition and operations.

The key definitive agreements which support the Company’s future liquidity position include:

- On October 31, 2019, the Company and certain of its subsidiaries as guarantors entered into a $200.0 million senior secured credit facility with Orion Energy Partners Investment Agent, LLC, as Administrative Agent and Collateral Agent (the “Agent”), and its affiliates, Orion Energy Credit Opportunities Fund II, L.P., Orion Energy Credit Opportunities Fund II GPFA, L.P., and Orion Energy Credit Opportunities Fund II PV, L.P., as lenders (the “Orion Facility”). The Orion Facility is structured as a delayed draw term loan to be provided by the lenders. In conjunction with the closing of the Orion Facility, on October 31, 2019, the Company drew down $14.5 million (the “Initial Funding”). The Company drew down an additional $65.5 million on November 22, 2019 (the “Second Funding”). The Company may draw the remainder of the Orion Facility, $120.0 million, over the first 18 months following the Initial Funding and subject to the Agent’s approval to fund: (i) construction costs, inventory and other capital expenditures of additional fuel cell projects with contracted cash flows (under PPAs with creditworthy counterparties) that meet or exceed a mutually agreed coverage ratio; and (ii) inventory, working capital, and other costs that may be required to be delivered by the Company on purchase orders, service agreements, or other binding customer agreements with creditworthy counterparties.
- On November 5, 2019, the Company signed a two-year Joint Development Agreement (“JDA”), which was effective as of October 31, 2019, with EMRE, pursuant to which the Company will continue exclusive research and development efforts with EMRE to evaluate and develop new and/or improved carbonate fuel cells to reduce carbon dioxide emissions from industrial and power sources, in exchange for (a) payment of (i) an exclusivity and technology access fee of $5.0 million, (ii) up to $45.0 million for research and development efforts, and (iii) milestone-based payments of up to $10.0 million after certain technological milestones are met, and (b) certain licenses.

As of January 31, 2020, we had 14,034,171 shares of common stock available for issuance, of which 10,275,873 shares were reserved for issuance under various convertible securities, options, and warrants, under our stock purchase and incentive plans, and under our at-the-market sales plan. The limited number of shares available for issuance limits our ability to raise capital in the equity markets and satisfy obligations with shares instead of cash, which could adversely impact our ability to fund our business and operations. We must obtain stockholder approval to increase the number of shares of common stock we are authorized to issue under our Certificate of Incorporation, as amended. In our definitive proxy statement, which was filed on February 14, 2020, the Board of Directors has requested that our stockholders vote to approve a 112,500,000 increase in the number of authorized shares of common stock, which would bring the total number of authorized shares of common stock to 337,500,000.

While there can be no assurances, we anticipate raising additional required capital from new and existing investors and lenders. We expect to work with lenders and financial institutions to secure long-term debt, tax equity and sale-leasebacks for our project asset portfolio as we achieve the commercial operation dates for these projects. This financing, if received, may allow the Company to recycle capital from these projects by reinvesting the capital in other projects (subject to the approval of the lenders and the Agent under the Orion Facility) and to pay down the Orion Facility over time. There can be no assurance that the Company can obtain such financing on terms acceptable to the Company or that the lenders and the Agent under the Orion Facility will consent to such financing. If the Company is unable to obtain such financing or raise additional capital, the Company may reduce its expenditures or slow its project spending. If the Company cannot obtain such financing, cannot obtain such financing on terms acceptable to the Company, or cannot obtain the necessary consents to such financing under the Orion Facility, it would negatively impact the Company’s business model, operations, and liquidity. It should also be noted that the lenders and the Agent under the Orion Facility have broad approval rights over our ability to draw, allocate and use funds from the Orion Facility, including funds in our unrestricted cash and cash equivalents accounts that are expected to be spent for project asset development and to satisfy service and maintenance obligations.

We believe that our cash flows from our existing backlog, including PPAs, service agreements and Advanced Technology contracts, combined with our current unrestricted cash and cash equivalents, cash which is expected to become unrestricted upon our performance of certain milestones under our financing agreements with PNC Energy Capital, LLC (“PNC”), and available borrowings under the Orion Facility will be sufficient to meet our anticipated cash needs for at least the next 12 months.

### Generation/Operating Portfolio, Projects, Project Awards, and Backlog

To grow our generation portfolio, the Company will invest in developing and building turn-key fuel cell projects which will be owned by the Company and classified as project assets on the balance sheet. This strategy requires liquidity, and the Company expects to continue to have increasing liquidity requirements as project sizes increase and more projects are added to backlog. We may commence building project assets upon the award of a project or execution of a multi-year PPA with an end-user that has a strong credit profile. Project development and construction cycles, which span the time between securing a PPA and commercial operation of the plant, vary substantially and can take years. As a result of these project cycles and strategic decisions to finance the construction of certain projects, we may need to make significant up-front investments of resources in advance of the receipt of any cash from the sale or long-term financing of such projects. These up-front investments may include using our working capital, availability under our construction financing facilities or 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 (28.9 MW as of January 31, 2020) contributes higher long-term cash flows to the Company than if these projects had been sold. These projects currently generate approximately $22.0 million per year in annual revenue depending on plant output, operations performance and site conditions. The Company plans to continue to grow this portfolio while also selling projects to investors. As of January 31, 2020, the Company had projects representing an additional 44.3 MW under development and construction, which projects are expected to generate operating cash flows in future periods. 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. The Company expects to finance the construction of the projects still under development and construction using proceeds from the Orion Facility, subject to lender approval, satisfaction of conditions for release of funding, including third party consents, and keeping project costs within approved budgets. We have worked with and are continuing to work with other lenders and financial institutions to secure 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 January 31, 2020, we have financed four projects through sale-leaseback transactions.

As of January 31, 2020, total financing obligations and debt outstanding related to project assets under the sale lease-back transactions was $44.8 million. Future required payments totaled $16.3 million as of January 31, 2020. The outstanding financing obligation under the sale-leaseback transactions includes an embedded gain, which will be recognized at the end of each respective lease term.

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 January 31, 2020:

| Project Name | Location | Power Off-Taker | Rated Capacity (MW) | Actual Commercial Operation Date (FuelCell Energy Fiscal Quarter) | PPA Term (Years) |
| --- | --- | --- | ---: | --- | ---: |
| Central CT State University (“CCSU”) | New Britain, CT | CCSU (CT University) | 1.4 | Q2 ‘12 | 10 |
| UCI Medical Center (“UCI”) | Orange, CA | UCI (CA University Hospital) | 1.4 | Q1 '16 | 19 |
| Riverside Regional Water Quality Control Plant | Riverside, CA | City of Riverside (CA Municipality) | 1.4 | Q4 '16 | 20 |
| Pfizer, Inc. | Groton, CT | Pfizer, Inc. | 5.6 | Q4 '16 | 20 |
| Santa Rita Jail | Dublin, CA | Alameda County, California | 1.4 | Q1 '17 | 20 |
| Bridgeport Fuel Cell Project | Bridgeport, CT | Connecticut Light and Power Company (CT Utility) | 14.9 | Q1 '13 | 15 |
| Tulare BioMAT | Tulare, CA | Southern California Edison (CA Utility) | 2.8 | Q1 '20 | 20 |
|  |  | **Total MW Operating:** | **28.9** |  |  |

31

The following table summarizes projects in process, including those in backlog and awards, as of January 31, 2020:

| Project Name | Location | Power Off-Taker | Rated Capacity (MW) | Estimated Commercial Operation Date (FuelCell Energy Fiscal Quarter) | PPA Term (Years) |
| --- | --- | --- | ---: | --- | ---: |
| Triangle St | Danbury, CT | Tariff - Eversource (CT Utility) | 3.7 | Q2 '20 | Tariff |
| Groton Sub Base | Groton, CT | CMEEC (CT Electric Co-op) | 7.4 | Q3 '20 | 20 |
| Toyota | Los Angeles, CA | Southern California Edison; Toyota | 2.2 | Q4 '22 | 20 |
| San Bernardino | San Bernardino, CA | City of San Bernardino Municipal Water Department | 1.4 | Q2 '21 | 20 |
| LIPA 1 | Long Island, NY | PSEG / LIPA, LI NY (Utility) | 7.4 | Q4 '21 | 20 |
| CT RFP-1 | Hartford, CT | Eversource/United Illuminating (CT Utilities) | 7.4 | Q4 '21 | 20 |
| CT RFP-2 | Derby, CT | Eversource/United Illuminating (CT Utilities) | 14.8 | Q2 '21 | 20 |
|  |  | **Total MW in Process:** | **44.3** |  |  |

The projects listed in the above table are in various stages of development or on-site construction and installation. The Triangle Street project is undergoing commissioning and is expected to reach commercial operations in our second fiscal quarter of 2020. The Groton Sub Base project is under construction. The Company expects to begin the construction process during fiscal 2020 for the San Bernardino, LIPA 1 and CT RFP-2 projects in order to achieve the estimated commercial operations dates.

Backlog by revenue category is as follows:

- Services and license backlog totaled $190.5 million as of January 31, 2020, compared to $226.9 million as of January 31, 2019. Services backlog includes future contracted revenue from routine maintenance and scheduled module exchanges for power plants under service agreements.
- Generation backlog totaled $1.1 billion as of January 31, 2020, compared to $982.4 million as of January 31, 2019. Generation backlog represents future contracted energy sales under contracted PPAs between us and the end-user of the power.
- There was no product sales backlog as of January 31, 2020, compared to $0.1 thousand as of January 31, 2019.
- Advanced Technologies contract backlog totaled $64.6 million as of January 31, 2020, compared to $37.0 million as of January 31, 2019.

Backlog represents definitive agreements executed by the Company and our customers. Projects for which we have a PPA are included in generation backlog, which represents future revenue under long-term PPAs. Projects sold to customers (and not retained by the Company) are included in product sales and service backlog and the related generation backlog is removed upon sale.

Factors that may impact our liquidity in fiscal year 2020 and beyond include:

- While the Company has access to the $200.0 million Orion Facility to finance construction of its generation portfolio, the timing, availability and allocation of any new draws beyond the $80.0 million which has been funded under the Orion Facility are at the discretion of the lenders, which may negatively impact the Company’s liquidity as well as its ability to complete various construction projects. In addition, we expect to work with other lenders and financial institutions to secure long-term debt, tax equity and sale-leasebacks for our project asset portfolio as we achieve the commercial operation dates for these projects. This financing, if received, may allow the Company to recycle capital from these projects by reinvesting the capital in other projects (subject to the approval of the lenders and the Agent under the Orion Facility) and to pay down the Orion Facility over time. There can be no assurance that the Company can obtain such financing on terms acceptable to the Company or that the lenders and the Agent under the Orion Facility will consent to such financing. If the Company is unable to obtain such financing or raise additional capital, the Company may reduce its expenditures or slow its project spending. If the Company cannot obtain such financing, cannot obtain such financing on terms acceptable to the Company, or cannot obtain the necessary consents to such financing under the Orion Facility, it would negatively impact the Company’s business model, operations, and liquidity. It should also be noted that the lenders and the Agent under the Orion Facility have broad approval rights over our ability to draw, allocate and use funds from the Orion Facility, including funds in our unrestricted cash and cash equivalents accounts that are expected to be spent for project asset development and to satisfy service and maintenance obligations.
- We bid on large projects in diverse markets that can have long decision cycles and uncertain outcomes. We manage production rate based on expected demand and projects schedules. Changes to production rate take time to implement. In conjunction with and following the reorganization and reduction in workforce in April 2019, we reduced our production rate to approximately 2 MW, which resulted in an annualized production rate through October 31, 2019 of 17 MW. The annualized production rate as of January 31, 2020 was 20 MW. The Company will evaluate future increases in production rate if and when warranted by business conditions.
- 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, posting of letters of credit, bonding or other forms of security, and incurring engineering, permitting, legal, and other expenses.
- Unrestricted cash and cash equivalents totaled $38.3 million as of January 31, 2020 compared to $9.4 million as of October 31, 2019. Of these amounts, $32.6 million as of January 31, 2020 and $0 as of October 31, 2019, were funded through the Orion Facility and under the terms of the Orion Facility are for use by our consolidated wholly-owned project subsidiaries in the normal course of operations for project construction, purchase of equipment (including inventory from FuelCell Energy, Inc.) and working capital for projects currently under construction in accordance with each project’s construction budget and schedule. Such unrestricted funds may not be used for general corporate purposes. In addition, short-term restricted cash totaled $8.2 million as of January 31, 2020 compared to $3.5 million as of October 31, 2019. The restricted cash balance as of January 31, 2020 includes a $5.0 million debt reserve established in accordance with First Orion Amendment (as defined below). The debt reserve will be released on the first date on which all of the following events have occurred (a) the Groton Project shall have achieved its business plan in accordance with the Groton Construction Budget (as defined in the Orion Credit Agreement), (b) the commercial operation date for the Groton Project shall have occurred, (c) the Groton Project shall have met its annualized output and heat rate guarantees for three months, and (d) a disposition, refinancing or tax equity investment of at least $30 million shall have occurred with respect to the Groton Project.
- The amount of accounts receivable and unbilled receivables as of January 31, 2020 and October 31, 2019 was $16.3 million ($3.2 million of which is classified as “Other assets”) and $14.5 million ($3.5 million of which is classified as “Other assets”), respectively. Unbilled accounts receivable represents 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 January 31, 2020 and October 31, 2019 was $65.2 million ($6.8 million is classified as long-term inventory) and $56.7 million ($2.2 million is classified as long-term inventory), respectively, which includes work in process inventory totaling $41.8 million and $31.2 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 January 31, 2020 and October 31, 2019 was $147.9 million and $144.1 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 January 31, 2020 consisted of $71.8 million of completed, operating installations and $76.1 million of projects in development. As of January 31, 2020, we had 28.9 MW of operating project assets that generated $5.4 million of revenue in the three months ended January 31, 2020. Also, as of January 31, 2020, the Company had an additional 44.3MW of projects under development and construction, some of which are expected to generate operating cash flows in fiscal year 2020.
- Under the terms of certain contracts, the Company will provide performance security for future contractual obligations. As of January 31, 2020, we had pledged approximately $5.7 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.
- For fiscal year 2020, we forecast capital expenditures of approximately $2.0 million compared to capital expenditures of $2.2 million in fiscal year 2019.

### Cash Flows

Cash and cash equivalents and restricted cash and cash equivalents totaled $73.9 million as of January 31, 2020 compared to $39.8 million as of October 31, 2019. As of January 31, 2020, restricted cash and cash equivalents was $35.7 million, of which $8.2 million was classified as current and $27.5 million was classified as non-current, compared to $30.3 million in restricted cash and cash equivalents as of October 31, 2019, of which $3.5 million was classified as current and $26.9 million was classified as non-current.

The following table summarizes our consolidated cash flows:

*(dollars in thousands)*

| Consolidated Cash Flow Data: | Three Months Ended January 31, 2020 | 2019 |
| --- | ---: | ---: |
| Net cash used in by operating activities | $(6,506) | $(11,958) |
| Net cash used in investing activities | (8,299) | (14,224) |
| Net cash provided by financing activities | 48,989 | 14,150 |
| Effects on cash from changes in foreign currency rates | (49) | 7 |
| Net increase (decrease) in cash, cash equivalents and restricted cash | $34,135 | $(12,025) |

33

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

***Operating Activities –*** Net cash used in operating activities was $6.5 million during the three months ended January 31, 2020, compared to $12.0 million of net cash used in operating activities during the three months ended January 31, 2019.

Net cash used in operating activities for the three months ended January 31, 2020 was primarily a result of the net loss of $40.2 million, increases in inventory of $5.8 million, accounts receivable of $2.3 million and other assets of $1.1 million and decreases in accounts payable of $2.5 million and accrued liabilities of $0.8 million, offset by an increase in deferred revenue of $5.0 million and net non-cash adjustments of $40.6 million including a $34.2 million charge related to the change in fair value of common stock warrant liabilities.

Net cash used in operating activities for the three months ended January 31, 2019 was primarily a result of the net loss of $17.5 million and a decrease of $1.3 million in accounts receivable offset by increases in unbilled receivables of $7.8 million, deferred revenue of $5.8 million and accrued liabilities of $2.5 million and net non-cash adjustments of $5.0 million.

***Investing Activities –*** Net cash used in investing activities was $8.3 million for the three months ended January 31, 2020, compared to net cash used in investing activities of $14.2 million during the three months ended January 31, 2019.

Net cash used in investing activities for the three months ended January 31, 2020 included $7.6 million of project assets expenditures and a $0.6 million payment for a working capital adjustment for the acquisition of the Bridgeport Fuel Cell Project in May 2019.

Net cash used in investing activities for the three months ended January 31, 2019 included a $12.6 million investment in project assets to expand our operating portfolio and $1.6 million in capital expenditures.

***Financing Activities –*** Net cash provided by financing activities was $49.0 million during the three months ended January 31, 2020, compared to net cash provided by financing activities of $14.2 million during the three months ended January 31, 2019.

Net cash provided by financing activities during the three months ended January 31, 2020 resulted from the receipt of $65.5 million of debt proceeds from the Orion Facility, net of a debt discount of $1.6 million, and $3.0 million of debt proceeds from Connecticut Green Bank and common stock sales of $3.5 million offset by debt repayment of $15.5 million, the payment of deferred financing costs of $2.5 million and the payment of preferred dividends and return of capital of $3.4 million.

Net cash provided by financing activities during the three months ended January 31, 2019 resulted from the receipt of $17.3 million of debt proceeds which included $10.0 million received under our loan agreement with Generate Lending, LLC, $5.8 million received under our loan agreement with NRG Energy, Inc. and $1.5 million received under our loan agreement with Enhanced Capital Connecticut Fund V, LLC, offset by the debt repayment of $1.6 million and the payment of preferred dividends and the return of capital of $1.0 million.

### 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 consistently 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. During fiscal year 2019, we implemented a series of restructuring activities aimed at reducing operating costs and streamlining operations while targeting cash generation and long-term financial stability.

### Commitments and Significant Contractual Obligations

A summary of our significant commitments and contractual obligations as of January 31, 2020 and the related payments by fiscal year are as follows:

*(dollars in thousands)*

|  | Payments Due by Period Total | Less than 1 Year | 1 – 3 Years | 3 – 5 Years | More than 5 Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Purchase commitments (1) | $34,016 | $31,383 | $2,626 | $7 | $— |
| Series 1 Preferred obligation (2) | 24,331 | 945 | 23,386 | — | — |
| Term and Construction loans (principal and interest) | 174,149 | 16,953 | 55,772 | 50,021 | 51,403 |
| Capital and operating lease commitments (3) | 20,048 | 1,208 | 2,702 | 1,557 | 14,581 |
| Sale-leaseback financing obligation (4) | 16,300 | 3,493 | 5,103 | 4,529 | 3,175 |
| Option fee (5) | 300 | 150 | 150 | — | — |
| Series B Preferred dividends payable (6) | — | — | — | — | — |
| **Totals** | $269,144 | $54,132 | $89,739 | $56,114 | $69,159 |

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

(2) On January 20, 2020, the Company, FCE Ltd. and Enbridge Inc. entered into a letter agreement, which is referred to herein as the “January 2020 Letter Agreement,” pursuant to which they agreed to amend the articles of FCE Ltd. relating to and setting forth the terms of the Series 1 Preferred Shares to modify certain terms of the Series 1 Preferred Shares. Under the terms of the January 2020 Letter Agreement (as described in additional detail below), the Company is still required to make (i) annual dividend payments of Cdn. $500,000 and (ii) annual return of capital payments of Cdn. $750,000. Dividend and return of capital payments are to be made on a quarterly basis and are scheduled to end on December 31, 2021, unless these obligations are satisfied in advance of such date. After taking into account the amendments to the terms of the Series 1 Preferred Shares described in the January 2020 Letter Agreement, the aggregate amount of all accrued and unpaid dividends to be paid on the Series 1 Preferred Shares on December 31, 2021 is expected to be Cdn. $26.5 million and the balance of the principal redemption price to be paid on December 31, 2021 with respect to all of the Series 1 Preferred Shares is expected to be Cdn. $3.5 million. Refer to Note 13. “Redeemable Preferred Stock” for additional information regarding such letter agreement and such modified terms.

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

(4) The amount represents payments due on sale-leaseback transactions of our wholly-owned subsidiaries, under their respective financing agreements with PNC. Lease payments for each lease under this facility are generally payable in fixed quarterly installments over a ten-year period.

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

(6) We pay $3.2 million, if and when declared, in annual dividends on our Series B Preferred Stock. 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 January 31, 2020) for 20 trading days during any consecutive 30 trading day period.

#### Term and Construction Loans

**Orion Energy Partners Investment Agent, LLC Credit Agreement:** On October 31, 2019, the Company and certain of its subsidiaries as guarantors entered into a Credit Agreement (as amended from time to time, the “Orion Credit Agreement”) with Orion Energy Partners Investment Agent, LLC, as Administrative Agent and Collateral Agent (the “Agent”), and certain lenders affiliated with the 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, subject to certain lender approvals. Under the Orion Credit Agreement, each lender will fund its commitments on each funding date in an amount equal to the principal amount of the loans to be funded by such lender on such date, less 2.50% of the aggregate principal amount of the loans funded by such lender on such date (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 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. (the “Orion Lenders”), was made to fully repay certain outstanding third party debt of the Company, including the outstanding construction loan from Fifth Third Bank with respect to the Groton Project and the outstanding loan from Webster Bank, National Association (“Webster Bank”) with respect to the CCSU Project, as well as to fund remaining going forward construction costs and anticipated capital expenditures relating to the Groton Project (a 7.4 MW project), the LIPA Yaphank Solid Waste Management Project (a 7.4 MW project), and the Tulare BioMAT Project (a 2.8 MW project). 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 Orion 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 (the “Second Funding Warrants”).

The Company may draw the remainder of the Orion Facility, $120.0 million, over the first 18 months following the Initial Funding and subject to the Agent’s approval to fund: (i) construction costs, inventory and other capital expenditures of additional fuel cell projects with contracted cash flows (under PPAs with creditworthy counterparties) that meet or exceed a mutually agreed coverage ratio; and (ii) inventory, working capital, and other costs that may be required to be delivered by the Company on purchase orders, service agreements, or other binding customer agreements with creditworthy counterparties.

Under the Orion Credit Agreement, cash interest of 9.9% per annum will be paid quarterly. In addition to the cash interest, payment-in-kind interest of 2.05% per annum will accrue which will be added to the outstanding principal balance of the Orion Facility but will be 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. The Orion Credit Agreement contains representations, warranties and other covenants.

Outstanding principal under the Orion Facility will be amortized on a straight-line basis over a seven year term in quarterly payments beginning one year after the Initial Funding, with the initial payment due 21 business days after the end of the first quarter of fiscal 2021; provided that, if the Company does not have sufficient cash on hand to make any required quarterly amortization payments, such amounts shall be deferred and payable at such time as sufficient cash is available to make such payments subject to all outstanding principal being due and payable on the maturity date, which is the date that is eight years after the date of the Initial Funding or October 31, 2027.

The issuance of the warrants issued in connection with the Initial Funding to purchase up to a total of 6.0 million shares of the Company’s Common Stock (which are referred to herein as the “Initial Funding Warrants”) and recognition of the Second Funding Warrants resulted in $3.9 million being recorded as a liability as of October 31, 2019 with the offset recorded as a debt discount. Refer to Note 12. “Stockholders’ Equity and Warrant Liabilities” for additional information regarding the Initial Funding Warrants and Second Funding Warrants, including the accounting, terms and conversions during the quarter ended January 31, 2020.

In conjunction with the Second Funding, the Company and the other loan parties entered into the First Amendment to the Orion Credit Agreement (the “First Orion Amendment”), which required the Company to establish a $5.0 million debt reserve, with such reserve to be released on the first date following the date of the Second Funding on which all of the following events shall have occurred: (a) each of (x) the commercial operation date for the Tulare BioMAT project shall have occurred and (y) a disposition, refinancing or tax equity investment in the Tulare BioMAT project of at least $5 million is consummated; (b) each of (x) the Groton Project shall have achieved its business plan in accordance with the Groton Construction Budget (as defined in the Orion Credit Agreement), (y) the commercial operation date for the Groton Project shall have occurred and (z) the Groton Project shall have met its annualized output and heat rate guarantees for three months; and (c) a disposition, refinancing or tax equity investment of at least $30 million shall have occurred with respect to the Groton Project. The First Orion Amendment further requires the Company (i) to provide, no later than December 31, 2019, a biogas sale and purchase agreement through December 31, 2021 for the Tulare BioMAT project, which was obtained as of such date, (ii) to obtain by December 31, 2019, a fully executed contract for certain renewable energy credits for the Groton Project, which was obtained as of such date, and (iii) to provide by January 31, 2020 certain consents and estoppels from CMEEC related to the Groton Project and an executed, seventh modification to the lease between CMEEC and the United States Government, acting by and through the Department of the Navy, both of which were obtained as of such date.

In addition, in connection with the Letter Agreement, dated January 20, 2020, among the Company, FCE Ltd. and Enbridge Inc. (the “January 2020 Letter Agreement”), pursuant to which such parties agreed to amend the articles of FCE Ltd. setting forth the terms of the Series 1 Preferred Shares, on January 20, 2020, in order to obtain the Orion Lenders’ consent to the January 2020 Letter Agreement as required under the Orion Credit Agreement, the Company, the Agent, the Orion Lenders, and the other loan parties entered into the Second Amendment to the Orion Credit Agreement (the “Second Orion Amendment”), which added a new affirmative covenant to the Orion Credit Agreement that obligates the Company to, and to cause FCE Ltd. to, on or prior to November 1, 2021, either (i) pay and satisfy in full all of their respective obligations in respect of, and fully redeem and cancel, all of the Series 1 Preferred Shares of FCE Ltd., or (ii) deposit in a newly created account of FCE Ltd. or the Company cash in an amount sufficient to pay and satisfy in full all of their respective obligations in respect of, and to effect a redemption and cancellation in full of, all of the Series 1 Preferred Shares of FCE Ltd. The Second Orion Amendment also provides that the articles of FCE Ltd. setting forth the modified terms of the Series 1 Preferred Shares will be considered a “Material Agreement” under the Orion Credit Agreement. Under the Second Orion Amendment, a failure to satisfy this new affirmative covenant or to otherwise comply with the terms of the Series 1 Preferred Shares will constitute an event of default under the Orion Credit Agreement, which could result in the acceleration of any amounts outstanding under the Orion Credit Agreement.

Refer to Note 18. “Subsequent Events” for information regarding the Third Amendment to the Orion Credit Agreement.

**Connecticut Green Bank Loans:** 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 is 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 accrued interest from May 9, 2019, totaling $0.4 million (“Accrued Fees”), and (ii) thereafter, for general corporate purposes as determined by the Company, including, but not limited to, expenditures in connection with the project being constructed by Groton Station Fuel Cell, LLC (“Groton Fuel Cell”). Pursuant to the terms of the Green Bank Amendment, Connecticut Green Bank will have no further obligation to make loans under the Green Bank Loan Agreement and the Company will have no right to make additional draws under the Green Bank Loan Agreement.

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 monthly in arrears from the date of the Green Bank Amendment at a rate of 5% per annum until May 8, 2019 and at a rate of 8% per annum thereafter, payable by the Company on a monthly basis in arrears. The Green Bank Amendment further provides that the payment by the Company of the Accrued Fees (as described above) includes any shortfall of interest due but unpaid by the Company through and including November 30, 2019. 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, to be applied first to repay the outstanding principal balance of the original loan under the Green Bank Loan Agreement and thereafter to repay the outstanding principal amount of the December 2019 Loan, until repaid in full. The Green Bank Amendment further provides that the entire 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 if not paid sooner in accordance with the Green Bank Loan Agreement. 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 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 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 as of January 31, 2020 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 representations, warranties and covenants. The balance under the Subordinated Credit Agreement as of January 31, 2020 was $5.6 million.

On May 9, 2019, in connection with the closing of the purchase of BFC, FuelCell Energy Finance, LLC (“FuelCell Finance”) (a subsidiary of the Company) 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’s 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. FuelCell Finance 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 on an initial total notional value of $25.0 million, reduced for principal payments.

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 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 January 31, 2020 resulted in a $0.03 million charge.

**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 extends the Target Date to October 31, 2022 and amends the Employment Obligation to require the Company to continuously maintain a minimum of 538 full-time positions for 24 consecutive months. Based on the Company’s current headcount and plans for fiscal year 2020, it will be short of meeting this requirement. 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. The Second Amendment deletes and cancels the provisions of the Assistance Agreement related to the second phase of the expansion project and the loans related thereto, but the Company had not drawn any funds or received any disbursements under those provisions. 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 shall be assessed at a rate of $18,587.36 times 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 addition to the commitments listed in the table under the heading “Commitments and Significant Contractual Obligations,” we have the following outstanding obligations:

#### Restricted Cash

We have pledged approximately $35.7 million of our cash and cash equivalents as performance security and for letters of credit for certain banking requirements and contracts. As of January 31, 2020, outstanding letters of credit totaled $5.7 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 January 31, 2020 also included $18.1 million primarily to support obligations under the power purchase and service agreements related to the PNC sale-leaseback transactions and $7.7 million relating to future obligations associated with the Bridgeport Fuel Cell Project.

As of October 31, 2018, we had uncertain tax positions aggregating $15.7 million and have reduced our net operating loss (“NOL”) carryforwards by this amount. Because of the level of NOLs and valuation allowances, unrecognized tax benefits, even if not resolved in our favor, would not result in any cash payment or obligation and therefore have not been included in the contractual obligation table under the heading “Commitments and Significant Contractual Obligations.”

#### 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 plants. 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 January 31, 2020, our operating portfolio was 28.9 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 January 31, 2020, Advanced Technologies contracts backlog totaled $64.6 million, of which $64.4 million is funded and $0.2 million, which is related to government contracts, is unfunded. Should funding be terminated or delayed or if business initiatives change, we may choose to devote resources to other activities, including internally funded research and development. The funded backlog includes approximately $10 million of milestone payments that are contingent upon achieving technical milestones.

#### 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 17. “Commitments and Contingencies” to our consolidated financial statements for the three months ended January 31, 2020 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 requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Estimates are used in accounting for, among other things, revenue recognition, 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.

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, 2019 filed with the Securities and Exchange Commission.

Effective November 1, 2019, we adopted Accounting Standards Update 2016-02, “Leases” (“Topic 842”). See “Note 11, Leases” included in our Notes to Consolidated Financial Statements for changes to our critical accounting policies as a result of adopting Topic 842. Other than changes to our accounting for leases as a result of adopting Topic 842, there have been no significant changes to the critical accounting policies disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended October 31, 2019.

### 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, as well as recent accounting guidance that is not yet effective.

## Market risk

As filed, 2,250 characters.

### 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 January 31, 2020, 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 January 31, 2020, approximately 0.3% 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 quarter ended January 31, 2020 resulted in $0.03 million of charges.

## Controls and procedures

As filed, 5,470 characters.

### Evaluation of disclosure controls and procedures

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 due to the material weakness described below, the Company’s disclosure controls and procedures were ineffective 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.

Notwithstanding the material weakness described below, management has concluded that our consolidated financial statements included in this Form 10-Q for the quarter ended January 31, 2020 are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States of America for each of the periods presented and that they may be relied upon.

### Previously identified material weakness in internal control over financial reporting

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

We previously disclosed in our Form 10-Qs for the quarters ended April 30, 2019 and July 31, 2019 that the Company did not have resources to sufficiently address asset impairments on a timely basis or the accounting considerations and disclosures related to the Company’s amended credit facilities. As a result, we concluded that there was a material weakness in internal control over financial reporting, as we did not maintain effective controls over the accounting for and disclosures in the consolidated financial statements related to asset impairments and credit facilities. As disclosed in our 2019 Form 10-K, this control deficiency had not been remediated as of October 31, 2019 and the Company further identified that it did not have resources to sufficiently address certain other non-routine transactions and disclosures. This material weakness resulted in material misstatements that were corrected in the consolidated financial statements prior to issuance. This control deficiency has not been remediated as of January 31, 2020.

### Remediation plan for material weakness

Subsequent to the evaluation made in connection with filing our Form 10-Q for the quarter ended April 30, 2019, our management, with the oversight of the Audit and Finance Committee of the Board of Directors, began the process of remediating the material weakness. Progress to date includes engagement of a third party resource to help evaluate the accounting and disclosure for significant matters each quarter. Management also plans to add additional experienced accounting staff. In addition, under the oversight of the Audit and Finance Committee, management will continue to review and make necessary changes to the overall design of our internal control environment to improve the overall effectiveness of internal control over financial reporting.

We have made progress in accordance with our remediation plan and our goal is to remediate this material weakness in fiscal year 2020. However, the material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We are committed to continuing to improve our internal control processes and will continue to review, optimize and enhance our financial reporting controls and procedures, however, there can be no assurance that this will occur within 2020.

### Changes in internal control over financial reporting

Beginning on November 1, 2019, we adopted ASC 842, Leases. As a result of the adoption of this standard, we implemented changes to our processes related to leasing and the related internal controls. These changes included the development of new policies based on the leasing standard and the implementation of a leasing software tool to track and account for our leases. Other than the changes relating to the adoption of ASC 842, there were no changes in our internal control over financial reporting that occurred during our last fiscal quarter (ended January 31, 2020) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 2,637 characters.

Part I, Item 1A, “Risk Factors” of our most recently filed Annual Report on Form 10-K for the fiscal year ended October 31, 2019, filed with the Securities and Exchange Commission on January 22, 2020, 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 factor is being provided to supplement and 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, 2019.

***Our business and operations may be adversely affected by the recent 2019 Novel Coronavirus (COVID-19) outbreak or other similar outbreaks.***

Any outbreaks of contagious diseases, including the recent outbreak of the coronavirus that was first detected in Wuhan, China in December 2019, and other adverse public health developments in countries where we operate could have a material and adverse effect on our business, financial condition and results of operations. These effects could include disruptions 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, the coronavirus may result in a widespread health crisis that could 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. 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 the coronavirus 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 the virus, 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 and the possible impact on the U.S. or global economy. As a result, at the time of this filing, it is impossible to predict the overall impact of the coronavirus on our business, liquidity, capital resources and financial results.

Filed Mar 16, 2020.
Source: SEC EDGAR, the filing index for accession 0001564590-20-010983. Last ingested by Listed: Oct 30, 2026, 17:33 ET. No prices; not investment advice.