Bloom Energy Corp: Form 10-Q for the period ended Mar 31, 2024

OPERATIONS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections about our industry, management’s beliefs, and certain assumptions made by management. For example, forward-looking statements include, but are not limited to, our expectations regarding our products and services, including our aim to provide resilient products, business strategies, including capital expenditures to expand production capacity and sources of funding for capital expenditures, our expanded strategic partnership with SK ecoplant, operations, supply chain (including any direct or indirect effects from the Russia-Ukraine war or geopolitical developments in China), new markets, government incentive programs, impact of the Inflation Reduction Act of 2022 (the “IRA”) and transferability of tax credits on our business and the financing market for installations of our products, impact of new foreign tax rules on our financial statements, growth of the hydrogen market and the sufficiency of our cash and our liquidity, the potential to engage in equity or debt financing transactions, future capital requirements and use of proceeds and our commitments or contingencies. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact are forward-looking statements. Forward-looking statements may be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “designs,” “plans,” “predicts,” “targets,” “forecasts,” “will,” “would,” “could,” “can,” “may,” “aim,” “potential,” “mission,” “commit” and similar terms. These statements are based on the beliefs and assumptions of our management based on information currently available to management at the time they are made. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results, outcomes and the timing of certain events to differ materially from future results or outcomes expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those factors discussed in the section titled “Risk Factors” included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and in our other filings with the U.S. Securities and Exchange Commission (“SEC”). You should review these risk factors for a more complete understanding of the risks associated with an investment in our securities. Such forward-looking statements speak only as of the date of this report. We disclaim any obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

Overview

Description of Bloom Energy

Our mission is to make clean, reliable energy affordable for everyone in the world. We created the first large-scale, commercially viable solid oxide fuel-cell based power generation platform that empowers businesses, essential services, critical infrastructure and communities to responsibly take charge of their energy.

Our technology, invented in the U.S., is one of the most advanced electricity and hydrogen producing technologies on the market today. Our fuel-flexible Bloom Energy Servers can use biogas, hydrogen, natural gas, or a blend of fuels to create resilient, sustainable and cost-predictable power at typically significantly higher efficiencies than traditional, combustion-based resources. In addition, our same solid oxide platform that powers our fuel cells can be used to create hydrogen with our Bloom Electrolyzer. Hydrogen is increasingly recognized as a critically important tool for the decarbonization of the energy economy. Our enterprise customers include some of the largest multinational corporations in the world. We also have strong relationships with some of the largest utility companies in the U.S. and the Republic of Korea, with a growing presence in various international markets.

At Bloom Energy, we look forward to a net-zero future. Our technology is designed to help enable this future by delivering reliable, low-carbon electricity in a world facing unacceptable levels of power disruptions. Our resilient platform has kept electricity available for our customers through hurricanes, earthquakes, typhoons, forest fires, extreme heat and grid failures. Unlike traditional combustion power generation, our platform is community-friendly and designed to significantly reduce emissions of criteria air pollutants. We have made tremendous progress towards renewable fuel production through our biogas, hydrogen and electrolyzer programs, and we believe that we are well-positioned as a core platform and fixture in the new energy paradigm to help organizations and communities achieve their net-zero objectives.

We market and sell our Energy Servers primarily through our direct sales organization in the U.S., and we also have direct and indirect sales channels internationally. Recognizing that deploying our solutions requires a significant financial commitment, we have developed a number of financing options to support sales of our Energy Servers to customers who lack the financial capability to purchase our Energy Servers directly, and who may prefer to finance the acquisition using third-party financing or to contract for our services on a pay-as-you-go model.

Our typical target commercial or industrial customer has historically been either an investment-grade entity or a customer with investment-grade attributes such as size, assets and revenue, liquidity, geographically diverse operations and general financial stability. We have also expanded our product and financing options to below-investment-grade customers and have also expanded internationally, including deployments on a wholesale grid. Given that our customers are typically large institutions with multi-level decision-making processes, we generally experience a lengthy sales process. Once the sale is completed, we have a large multi-disciplined team to facilitate the deployment of our projects in a wide variety of locations under a myriad of regulatory environments.

Strategic Investment

For information on the strategic investment with SK ecoplant Co., Ltd. (“SK ecoplant”, formerly known as SK Engineering & Construction Co., Ltd.), a subsidiary of the SK Group, see Part II, Item 8, Note 1 — Nature of Business, Liquidity and Basis of Presentation, Liquidity section and Note 17 — SK ecoplant Strategic Investment in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

On March 27, 2024, Bloom, Bloom SK Fuel Cell, LLC , a joint venture in the Republic of Korea with SK ecoplant (“Korean JV”), and SK ecoplant entered into the Third Amendment to the Amended and Restated Preferred Distribution Agreement (the “Third ARPDA”). The Third ARPDA adds SK Eternix Co., Ltd. as an additional distributor of Bloom products and ancillary equipment in the Republic of Korea.

Certain Factors Affecting our Performance

Energy Market Conditions

The global energy transition to a zero-carbon environment has created new challenges and opportunities for utilities, suppliers of energy solutions and customers. Shifts and uncertainty in market and regulatory dynamics and corporate and governmental policies are currently impacting the selling process and extending sales cycles and timelines for our natural gas-, biogas- and hydrogen-related products. Increasing electricity rates, decreasing energy reliability, and delays in the development of transmission infrastructure and grid interconnection have led to increased customer interest in our power solutions. At the same time, natural gas supply and pricing concerns due to geopolitical stresses and resulting market changes as well as increasing focus on sustainability targets have led to increased caution from potential customers. The increased use of renewable power generation and the weather effects of climate change have exacerbated aging grid fragilities, increased the occurrence of power outages, created grid transmission shortages, and lengthened already extensively delayed interconnection cycles. Low- and zero-carbon sources of baseload energy have also been curtailed and even banned in some locations, forcing utilities, states and countries to revisit less clean sources of baseload and intermediate power in an attempt to ensure energy reliability. This supply and demand mismatch globally has threatened energy security reliability, reduced the availability of energy, and increased the cost of energy.

Bloom’s power solutions enable customers to address these energy market challenges by offering fuel flexible solutions that are designed to provide cost predictable, resilient, and reliable energy in a timely fashion. As customers and utilities navigate the energy transition and evolving landscape, the ability of our power solutions to fit their economic, regulatory, and policy needs depends on a number of factors, including natural gas availability and pricing, electrical interconnection needs and availability, redundant back up power requirements, cost requirements, and sustainability profile. Even in those situations where the time to power from the utility is years away in light of the need to build out energy transmission infrastructure, these factors still may impact a customer’s buying decision. For example, although our power generation solutions can operate as microgrids, independent from the grid, if a customer desires back up power or a “grid parallel” solution in combination with the Bloom microgrid, required interconnection studies and lengthy interconnection queues remain, eroding the time to power value proposition. According to the Lawrence Berkeley National Lab, U.S. interconnection queue delays are growing, with a forty percent year over year increase in 2022. The typical project interconnection process for large scale projects grew to five years in 2022 compared to three years in 2015 and two years in 2008. In addition, many data center customers and other large power users have signed exclusivity arrangements with their utilities, and this often creates a more complicated dynamic for them to move to a behind the meter solution. To add to this, the rising cost of natural gas, increases in gas distribution rates, limited availability of natural gas supply, as well as disruptions to the world gas markets, has increased the cost of our power solutions for customers and, in certain cases where there is a lack of fuel supply, a complete inability to operate the systems. In the U.S., the lack or slow development of pipeline infrastructure is impacting the timing of customers being able to take advantage of our power solution opportunities. In certain jurisdictions in the U.S. and Europe, natural gas bans have been enacted that prevent the use of our power solutions unless alternative fuels are available. In addition, there is a growing hesitancy among potential customers to purchase our power solutions to run on natural gas. Increasingly, customers want a zero-carbon solution for power, and, although our power solutions are designed to run on biofuels or hydrogen (in addition to natural gas) and help our customers achieve their sustainability goals, these fuels continue to have very limited availability and, for most customers, are not yet economical. This impetus by customers to use zero-carbon solutions today, combined with the current lack of availability of zero-carbon fuels, is adversely impacting our power solution selling opportunities. In addition, many of our potential data center and industrial customers are pursuing greenfield opportunities where the development cycle is long and laden with permitting requirements and the uncertainty of these factors is leading to a more difficult customer decision-making process and longer sales cycles. For example, in the fourth quarter of 2022, we entered into a Power Purchase Agreement (“PPA”) contract for the sale of electricity to a customer for three greenfield sites that were at various stages of development (the “Project”). The first site was expected to be operational with power by the third quarter of 2024. We sold 73 megawatts of the Energy Servers to a Distributor with the expectation that the Distributor would support installation on the Project and install the Energy Servers at the three Project sites. For site specific reasons, in the first quarter of 2024, the end customer decided not to deploy the Energy Servers at the originally selected sites and is looking at alternative sites for deployment. In the interim, the end customer has commenced payments under the PPA and has agreed to continue such payments for the earlier of the full term of the PPA or deployment of the Energy Servers. We will continue to assist the Distributor to deploy the Energy Servers at the alternative installation sites selected by the end customer. Notwithstanding this, depending on the length of the installation delay, the Distributor may decide to reduce future orders or cancel existing orders until the Energy Servers are deployed, and either action could materially and adversely affect our product revenue and the timing of the associated cash flows in 2024.

Corporate procurement policies are also undergoing change that creates uncertainty; while some customers are increasingly focused on decarbonizing their own direct energy supply, including aligning the timing of their zero-carbon power generation with their energy consumption, others are shifting to prioritize overall carbon emissions from the energy system, both of which are impacting our sales.

The regulatory environment for energy solutions continues to shift. In South Korea, the government recently moved to a new, government-run bidding process for fuel cell purchases, which has impacted and may continue to impact demand for our power solutions. In the U.S., the ITC for fuel cells running on a non-zero carbon fuel currently expires at the end of fiscal year 2024. To date, we have been unsuccessful in getting Congress to renew the ITC. Because 2024 is an election year in the U.S., it may be difficult for Congress to achieve an extension of the ITC for commercial fuel cell purchasers this year. If the ITC is not extended for fuel cells, U.S. bookings, revenue and gross margins will likely be materially impacted. In Ireland, which is a large data center market, a directive from the Minister of the Department of the Environment, Climate and Communications to restrict grid connections to data centers and other large power users, along with a halt in high-pressure gas installations has delayed our selling activities in Ireland. Delays in adoption of Renewable Fuel Standard regulations in the U.S. for the use of biogas to generate electricity for electric vehicles, and minimal governmental focus on utilization of biogas outside of its direct use by methane-fueled vehicles, have created uncertainty in prospects for broader biogas availability for industrial uses, including our power solutions. In addition, in most jurisdictions, air permits and various land use permits are required for installation of our solutions over a certain amount of mega-watts, and generally the length of time to obtain these permits increased, while the level of certainty of issuance has decreased and if issued, the cost of compliance requirements can be cost prohibitive. We have experienced a reluctance in certain states to issue permits for gas generation equipment. Even if issued, states may require a blend of costly renewable fuels or other measures to advance climate goals. This has adversely impacted our selling activities.

Significant governmental interest, investment and stimulation of clean hydrogen in the U.S., Europe and in many other regions across the globe have not yet had significant impacts on demand for hydrogen. To date, while the number of proposed hydrogen production projects has grown rapidly, only a small fraction has reached the final investment decision (FID) stage, and an even smaller fraction have been deployed. In addition, the infrastructure needed to transport hydrogen, whether through pipelines or maritime or land-based tankers, is currently only sufficient for existing uses, and has not begun to be extended for anticipated future uses, with hydrogen blending and other approaches remaining at pilot stages. It remains unclear whether regulators in some jurisdictions will allow hydrogen to be introduced into gas distribution systems, which could effectively preclude or severely limit our ability to transport hydrogen from the point of production to the point of consumption.

All of these factors have lengthened the selling cycles for our electrolyzer product and power solutions, and we have experienced delays in our anticipated bookings. Our revenue, margins, and cash flow in any given year are largely dependent on bookings during the prior year. Historically, the majority of our bookings have occurred in the second half of the year, with a significant portion occurring in the fourth quarter. That trend did not continue to the same degree in 2023. If a substantial portion of our anticipated bookings continue to be delayed, our future revenue, margins and cash flow could be materially adversely impacted.

Supply Chain Constraints

We continue to see effects from global supply chain tightness due to the current inflationary environment, war in Ukraine, and trade tensions between the U.S. and China. We are not aware of, and do not expect any significant direct impact on our business or supply chain from the Israel-Gaza Strip armed conflict. While we have not experienced any significant component shortages to date, we are facing pressures from inflation. These dynamics could worsen as a result of continued geopolitical instability. In the event we are unable to mitigate the impacts of delays and/or price increases in raw materials and components, it could delay the manufacturing and installation of, and increase the costs of, our products, which would adversely impact our cash flows and results of operations, including our revenues and gross margin. We expect these supply chain challenges to continue in the short term.

Customer Financing Constraints

Our ability to obtain financing for our Energy Servers depends partially on the creditworthiness of our customers, and deterioration of our customers’ credit ratings can impact the financing for their use of our Energy Servers. Regional banking and financial institution instability, such as the failure of Silicon Valley Bank in the first quarter of 2023, may make it more difficult for our customers to obtain financing. Rising interest rates have also increased the cost of financing for our customers. As interest rates rise, the financiers of our installations demand a higher rate of return, which puts pressure on our margins. We continue to work on obtaining the financing required for our 2024 installations, but if we are unable to secure such financing, our revenue, cash flow, and liquidity could be materially impacted. We expect that in the U.S., the IRA and the transferability of tax credits should make the financing market more robust in 2024, thereby easing some of these customer financing constraints, but this cannot be assured.

Manufacturing and Labor Market Constraints

As recently as 2022, we experienced impacts from labor shortages and challenges in hiring for our manufacturing facilities. While these constraints abated in 2023 and we reduced headcount as part of the Restructuring Plan adopted in September 2023, we may still experience difficulties with hiring and retention, and may face additional labor shortages in the future. For details on the Restructuring Plan refer to Part II, Item 8, Note 12 — Restructuring in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. In addition, the current inflationary environment has led to rising wages and labor costs as well as increased competition for labor. In the event these constraints continue, and we are unable to continue to mitigate the impacts of these challenges, it could delay the manufacturing and installation of our Energy Servers or Electrolyzers, and we may be unable to meet customer demand, which could adversely impact our cash flows and results of operations, including our revenues and gross margin.

Installations and Maintenance of Energy Servers

In the first quarter of 2024, our installation projects experienced some delays relating to, among other things, permitting, utility delays, and access to customer facilities. However, these delays did not significantly impact our revenue.

If we are delayed in or unable to perform maintenance, our previously installed Energy Servers would likely experience adverse performance impacts, including reduced output and/or efficiency, which could result in warranty and/or guaranty claims by our customers. Further, due to the nature of our Energy Servers, if we are unable to replace worn parts in accordance with our standard maintenance schedule, we may incur higher costs in the future. During the three months ended March 31, 2024, we experienced no significant delays in servicing our Energy Servers.

Sustainability

We are committed to a goal of providing consistent returns to our stockholders while maintaining a strong sense of good corporate citizenship that places a high value on the environment, welfare of our employees, the communities in which we operate, the customers we serve, and the world as a whole. We believe that prioritizing, improving, and managing our sustainability related risks, opportunities, and programs help us to better create long-term value for our investors.

In April 2024, we released our 2023 Sustainability Report, Transforming Energy for the Digital Age (the “Sustainability Report”), using generally accepted sustainability frameworks and standards, including alignment with Sustainability Accounting Standards Board standards and the Task Force on Climate-related Financial Disclosures recommendations. In addition, the Sustainability Report also utilized certain Global Reporting Initiative standards and was mapped against the United Nations Sustainable Development Goals. We plan to issue a sustainability report on an annual basis.

Our mission is to make clean, reliable energy affordable for everyone in the world. To that end, we strive to empower businesses and communities to responsibly take charge of their energy while addressing both the causes and consequences of climate change. We aim to serve our customers with products that are resilient, providing uninterrupted power with predictable pricing over the long-term, while addressing sustainability issues by developing an increasingly broad portfolio of solutions for decarbonization.

The Sustainability Report can be found on our website at https://www.bloomenergy.com/sustainibility. Website references throughout this document are provided for convenience only, and the content on the referenced websites is not incorporated by reference into this report.

Inflation Reduction Act of 2022

For information on the IRA, which was signed into law on August 16, 2022, and its impact on our business, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Inflation Reduction Act of 2022 section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

On March 29, 2024, we received notification from the Internal Revenue Service (the “IRS”) of the acceptance of our application for a Qualifying Advanced Energy Project Credit of up to $75.3 million. The application for qualifying advanced energy project credit allocation under Internal Revenue Code Section 48C(e) for the manufacturing facility in Fremont, California (the “Facility”), was submitted by Bloom on December 21, 2023. After a technical review of Bloom’s Section 48C(e) application, the Department of Energy provided a recommendation to the IRS to grant a $75.3 million credit allocation for the Facility. The approval is subject to satisfaction of the underlying certification requirements, including the prevailing wage and apprenticeship requirements, within two years from the date of the application acceptance.

New Foreign Tax Rules

In 2021, the Organization for Economic Co-operation and Development announced an Inclusive Framework on Base Erosion and Profit Shifting, including Pillar Two Model Rules defining a global minimum tax, which calls for the taxation of large multinational corporations at a minimum rate of 15%. Subsequently, multiple sets of administrative guidance have been issued. Many non-U.S. tax jurisdictions have either recently enacted legislation to adopt certain components of the Pillar Two Model Rules beginning in 2024 (including the European Union Member States) with the adoption of additional components in later years or announced their plans to enact legislation in future years. We are continuing to evaluate the impacts of enacted legislation and pending legislation to enact Pillar Two Model Rules in the non-U.S. tax jurisdictions we operate in. However, legislation enacted as of March 31, 2024 did not have a material impact on our financial statements for the three months ended March 31, 2024 and is not expected to have a material impact on our 2024 financial statements due to the relatively small operations outside the U.S.

Liquidity and Capital Resources

We raised cash and supplemented liquidity through financing activities with SK ecoplant in the first quarter of 2023 and issuing the 3% Green Convertible Senior Notes due June 2028 (the “3% Green Notes”) in the second quarter of 2023. At the same time, we increased our working capital spent. In the first quarter of 2024, we built up inventory in preparation for more expected shipments in the second half of 2024. This enabled us to level load production and gain manufacturing efficiency. In addition, we expanded our warehouse space in Delaware and California to store more inventory to meet the anticipated increase in demand. If this increase in demand does not materialize to the degree we anticipated, our liquidity and financial condition may be adversely impacted.

The combination of our cash and cash equivalents and cash flow to be generated by our operations, is expected to be sufficient to meet our anticipated cash flow needs for at least the next 12 months. If these sources of cash are insufficient or are not received in a timely manner to satisfy our near-term or future cash needs, we may require additional capital from equity or debt financings to fund our operations, our manufacturing capacity, product development, and market expansion requirements and to timely respond to competitive market pressures or strategic opportunities, among other things. We may, from time to time, engage in a variety of financing transactions for such purposes, including factoring our accounts receivable. During the three months ended March 31, 2024, we factored $80.7 million of accounts receivable. However, we may not be able to secure timely additional financing on favorable terms, or at all. The terms of any additional financing may place limits on our financial and operating flexibility. Although currently we do not have any floating-rate notes on our balance sheet, rising interest rates may increase our overall cost of capital, if and when we refinance our fixed-rate convertible notes. If we raise additional funds through further issuances of equity or equity-linked securities, our existing stockholders could suffer dilution in their percentage ownership of us, and any new securities we issue could have rights, preferences, and privileges senior to those of holders of our common stock.

Our future capital requirements depend on many factors, including our rate of revenue growth, the timing and extent of spending on research and development efforts and other business initiatives, the rate of growth in the volume of system builds and the need for additional working capital, the expansion of sales and marketing activities both in domestic and international markets, market acceptance of our products, our ability to secure financing for customer use of our Energy Servers, the timing of installations and of inventory build in anticipation of future sales and installations, and overall economic conditions. In order to support and achieve our future growth plans, we may need or seek advantageously to obtain additional funding through equity or debt financing. Failure to obtain this financing in future quarters may affect our results of operations, including our revenues and cash flows.

A summary of our consolidated sources and uses of cash, cash equivalents and restricted cash was as follows (in thousands):

Operating Activities

Our operating activities consisted of net loss adjusted for certain non-cash items plus changes in our operating assets and liabilities or working capital. Net cash used in operating activities during the three months ended March 31, 2024 was $147.3 million, a decrease of $167.4 million compared to the prior year period. The decrease in cash used in operating activities during the three months ended March 31, 2024 as compared to the prior year period was primarily driven by investments made in fiscal year 2023 in our working capital of $142.5 million due to an increase in inventory levels by $25.0 million to support future demand, an increase in accounts receivable by $7.6 million triggered by the timing of revenue transactions and corresponding collections, and the timing of payments to vendors.

Investing Activities

Our investing activities have consisted of capital expenditures, including investments to increase our production capacity. Cash used in investing activities during the three months ended March 31, 2024, was $21.4 million, a decrease of $5.1 million compared to the prior year period and was primarily due to the decrease in expenditures on tenant improvements for a newly leased engineering and manufacturing building in Fremont, California, which opened in July 2022. We expect to continue to make capital investments over the next few quarters to expand production capacity at our new manufacturing facility in Fremont, California, which includes the purchase of new equipment and other tenant improvements. We intend to fund these capital expenditures from cash on hand as well as cash flow to be generated from operations. We may also evaluate and arrange equipment lease financing to fund these capital expenditures.

Financing Activities

Historically, our financing activities consisted of borrowings and repayments of debt, proceeds and repayments of financing obligations, distributions paid to noncontrolling interests, contributions from noncontrolling interests, and proceeds from the issuances of our common stock. Net cash provided by financing activities during the three months ended March 31, 2024 was $7.2 million, a decrease of $299.3 million compared to the prior year period, predominantly due to the proceeds from issuance of redeemable convertible preferred stock of $310.6 million, net of paid issuance costs of $0.4 million, in the three months ended March 31, 2023 as a result of SK ecoplant Second Tranche Closing (please refer to Part II, Item 8, Note 17 — SK ecoplant Strategic Investment in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023), offset primarily by the repayment of debt of $9.9 million in the three months ended March 31, 2023. Net cash provided by financing activities for the three months ended March 31, 2024, consisted of the proceeds from issuance of common stock of $6.8 million, a contribution from a noncontrolling interest of $4.0 million, and proceeds from financing obligations of $1.3 million, offset by repayment of financing obligations of $5.0 million. Our working capital was strengthened with the supplemented liquidity through financing activities with SK ecoplant in the first quarter of 2023 and issuing the 3% Green Notes in the second quarter of 2023, but we may still enter the equity or debt market as needed to support the expansion of our business. Please refer to Part I, Item 1, Note 7 — Outstanding Loans and Security Agreements of this Quarterly Report on Form 10-Q and Part I, Item 1A, Risk Factors — Risks Related to Our Liquidity — Our indebtedness, and restrictions imposed by the agreements governing our outstanding indebtedness, may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 for more information regarding the terms of and risks associated with our debt.

Purchase and Financing Options

For information about our purchase and financing options, see Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, Purchase and Financing Options section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Performance Guarantees

As of March 31, 2024, we had incurred no liabilities due to failure to repair or replace Energy Servers pursuant to any performance warranties made under operations and maintenance agreements (“O&M Agreements”).

For O&M Agreements that are subject to renewal, our future service revenue from such agreements are subject to our obligations to make payments for underperformance against the performance guaranties, which are capped at an aggregate total of approximately $577.7 million (including $451.9 million related to portfolio financing entities and $125.8 million related to all other transactions, and include payments for both low output and low efficiency) and our aggregate remaining potential payment related to these underperformance obligations was approximately $490.8 million as of March 31, 2024. For the three months ended March 31, 2024, we made performance guarantee payments of $15.1 million.

International Channel Partners

There were no significant changes in our international channel partners during the three months ended March 31, 2024. For information on international channel partners, see Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, International Channel Partners section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Key Operating Metrics — Comparison of the Three Months Ended March 31, 2024 and 2023

For a description of the key operating metrics we use to evaluate business activity, to measure performance, to develop financial forecasts and to make strategic decisions, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Key Operating Metrics section in our Annual Report on Form 10-K for the year ended December 31, 2023.

Product Acceptances

The product and megawatt acceptances in the three months ended March 31, 2024 and 2023 were as follows:

Product accepted decreased approximately by 35 systems, or 6.8%, for the three months ended March 31, 2024, as compared to the prior year period, which is equivalent to 3 megawatts. Acceptance volume decreased due to a large transaction in the first quarter of fiscal 2023 that did not repeat in fiscal 2024.

The increase in acceptances of 48 megawatts achieved for the three months ended March 31, 2024 was added to our installed base and, therefore, increased our total megawatts accepted, net, from 1,241 megawatts to 1,289 megawatts.

Purchase Alternatives

Our customers have several purchase alternatives for our Energy Servers. The portion of acceptances attributable to each purchase alternative in the three months ended March 31, 2024 and 2023 was as follows:

The portion of total revenue attributable to each purchase option in the three months ended March 31, 2024 and 2023 was as follows:

Costs Related to Our Products

Total product related costs for the three months ended March 31, 2024 and 2023 was as follows:

Product costs of product accepted decreased by $228 per kilowatt, or 10.0%, for the three months ended March 31, 2024, as compared to the prior year period. The decrease in costs was primarily driven by our continued efforts to reduce material costs, implement cost reduction programs with our vendors, improved processes, and automation at our manufacturing facilities, and reduced labor and overhead costs through restructuring programs executed in fiscal 2023.

Period costs of manufacturing related expenses increased by $4.8 million, or 38.5%, for the three months ended March 31, 2024, as compared to the prior year period. Our period costs of manufacturing related expenses increased primarily as a result of costs incurred to support capacity expansion efforts, which are expected to be brought online in future periods.

Installation costs on product accepted decreased by $165 per kilowatt, or 33.9%, for the three months ended March 31, 2024, as compared to the prior year period. Each customer site is unique and installation costs can vary due to a number of factors, including site complexity, size, and location of gas, among other factors. As such, installation on a per kilowatt basis can vary significantly from period to period. For the three months ended March 31, 2024, this decrease in cost was primarily driven by the change in the mix of sites requiring Bloom installation.

Results of Operations

A discussion regarding the comparison of our financial condition and results of operations for the three months ended March 31, 2024 and 2023 is presented below.

Revenue

(dollars in thousands)

Total Revenue

Total revenue decreased by $39.9 million, or 14.5%, for the three months ended March 31, 2024, as compared to the prior year period. This decrease was driven by a $40.4 million decrease in product revenue, a $9.1 million decrease in installation revenue, a $6.2 million decrease in electricity revenue, offset by a $15.8 million increase in service revenue.

Product Revenue

Product revenue decreased by $40.4 million, or 20.8%, for the three months ended March 31, 2024, as compared to the prior year period. This decrease was primarily driven by the lower average selling price and a 6.8% decrease in product acceptances resulting from a large transaction in the first quarter of fiscal 2023 that did not repeat in fiscal 2024.

Installation Revenue

Installation revenue decreased by $9.1 million, or 44.2%, for the three months ended March 31, 2024, as compared to the prior year period. This decrease was primarily driven by the timing of achieving key project milestones on sites requiring installations by us in the three months ended March 31, 2024.

Service Revenue

Service revenue increased by $15.8 million, or 38.8%, for the three months ended March 31, 2024, as compared to the prior year period. This increase was primarily driven by (1) 188 megawatts of Energy Servers reaching full power in the three months ended March 31, 2024, which contributed to a $12.7 million increase in revenue from maintenance contracts associated with our fleet of Energy Servers, and (2) a decrease of $3.2 million in product performance guarantees that resulted from improved fleet performance.

Electricity Revenue

Electricity revenue includes both revenue from contracts with customers and revenue from contracts that contain leases.

Electricity revenue decreased by $6.2 million, or 30.7%, for the three months ended March 31, 2024, as compared to the prior year period, primarily due to the decrease in installed units, primarily driven by 2015 ESA Project Company, LLC (“PPA V”) activity, which was sold in the third quarter of fiscal 2023.

Cost of Revenue

(dollars in thousands)

Total Cost of Revenue

Total cost of revenue decreased by $23.7 million, or 10.7%, for the three months ended March 31, 2024, as compared to the prior year period. The decrease was driven by a $13.9 million decrease in cost of product revenue, a $9.7 million decrease in costs of installation revenue, and a $5.4 million decrease in cost of electricity revenue, offset by a $5.3 million increase in cost of service revenue.

Cost of Product Revenue

Cost of product revenue decreased by $13.9 million, or 10.7%, for the three months ended March 31, 2024, as compared to the prior year period. The decrease in cost of product revenue was primarily driven by (1) a 6.8% decrease in product acceptances, (2) our ongoing efforts to reduce material costs, (3) reduced labor and overhead costs through restructuring programs executed in fiscal 2023, and (4) improved processes and automation at our manufacturing facilities.

Cost of Installation Revenue

Cost of installation revenue decreased by $9.7 million, or 38.8%, for the three months ended March 31, 2024, as compared to the prior year period. This decrease was primarily driven by the timing of achieving key project milestones on sites requiring installations by us in the three months ended March 31, 2024.

Cost of Service Revenue

Cost of service revenue increased by $5.3 million, or 10.3%, for the three months ended March 31, 2024, as compared to the prior year period. This increase was primarily due to an increase in the deployment of field replacement units, contributing an increase of $4.1 million, and an increase in maintenance material and labor and overhead costs of $2.7 million. The increase was partially offset by (1) a decrease of $2.7 million in repair and overhaul costs, and (2) cost reductions and our actions to proactively manage fleet optimizations.

Cost of Electricity Revenue

Cost of electricity revenue includes both cost of revenue from contracts with customers and cost of revenue from contracts that contain leases.

Cost of electricity revenue decreased by $5.4 million, or 35.8%, for the three months ended March 31, 2024, as compared to the prior year period. This decrease was primarily due to a decrease in installed units, primarily driven by PPA V activity, which was sold in the third quarter of fiscal 2023.

Gross Profit (Loss) and Gross Margin

(dollars in thousands)

Total Gross Profit

Gross profit decreased by $16.2 million in the three months ended March 31, 2024, as compared to the prior year period. This change was predominantly due to a $26.5 million decrease in product gross profit, primarily driven by the lower average selling price of our products and lower product acceptances. The decrease was primarily offset by a $10.5 million improvement in service gross loss, due to our efforts to proactively manage fleet optimizations, and our ongoing efforts to reduce product costs.

Product Gross Profit

Product gross profit decreased by $26.5 million in the three months ended March 31, 2024, as compared to the prior year period. The decrease was primarily driven by the lower average selling price of our products and a 6.8% decrease in product acceptances, partially offset by (1) a lower cost per unit attributable to our ongoing efforts to reduce material costs, (2) reduced labor and overhead costs through restructuring programs executed in fiscal 2023, and (3) improved processes and automation at our manufacturing facilities.

Installation Gross Loss

Installation gross loss improved by $0.7 million in the three months ended March 31, 2024, as compared to the prior year period. This change was primarily driven by the timing of achieving key project milestones on sites requiring installations by us in the three months ended March 31, 2024, and other site related factors such as site complexity, size, local ordinance requirements, and location of the utility interconnect.

Service Gross Loss

Service gross loss improved by $10.5 million in the three months ended March 31, 2024, as compared to the prior year period. This was primarily due to (1) a 188 megawatts of the Energy Servers reaching full power in the three months ended March 31, 2024, which contributed to a $12.7 million increase in revenue from maintenance contracts associated with our fleet of Energy Servers, (2) a decrease of $2.7 million in repair and overhaul costs, (3) the impact of product performance guarantees of $3.2 million that resulted from the higher efficiency of our Energy Server, and (4) our cost reduction efforts to proactively manage fleet optimizations. The change was partially offset primarily due to higher deployment of field replacement units.

Electricity Gross Profit

Electricity gross profit decreased by $0.9 million in the three months ended March 31, 2024, as compared to the prior year period. The year over year change was immaterial.

Operating Expenses

(dollars in thousands)

Total Operating Expenses

Total operating expenses decreased by $30.9 million in the three months ended March 31, 2024 as compared to the prior year period. This decrease was primarily attributable to (1) a decrease in employee compensation and benefits of $19.4 million, predominantly as a consequence of the restructuring efforts in the second half of fiscal year 2023, as well as the voluntary resignation of certain of our executives in the second half of fiscal 2023, and (2) a decrease in consulting, advisory and other professional services costs of $6.3 million as a result of our cost reduction efforts initiated in fiscal 2023.

Research and Development

Research and development expenses decreased by $10.2 million in the three months ended March 31, 2024, as compared to the prior year period. This decrease was primarily driven by (1) a decrease in employee compensation and benefits of $5.0 million, predominantly as a consequence of the restructuring efforts in the second half of fiscal year 2023, (2) a decrease in consumable laboratory supplies and other laboratory related costs of $4.5 million, and (3) a decrease in consulting, advisory and other professional services costs of $0.5 million.

Sales and Marketing

Sales and marketing expenses decreased by $13.5 million in the three months ended March 31, 2024, as compared to the prior year period. This decrease was primarily driven by (1) a decrease in employee compensation and benefits of $9.2 million, predominantly as a consequence of the restructuring efforts in the second half of fiscal year 2023, as well as the voluntary resignation of our Executive Vice President and Chief Business Development and Marketing Officer on September 1, 2023, and (2) a decrease in consulting, advisory and other professional services costs of $3.3 million as a result of our cost reduction efforts initiated in fiscal 2023.

General and Administrative

General and administrative expenses decreased by $7.1 million in the three months ended March 31, 2024, as compared to the prior year period. This decrease was primarily driven by (1) a decrease in employee compensation and benefits of $5.2 million, predominantly as a consequence of the restructuring efforts in the second half of fiscal year 2023, as well as the voluntary resignation of certain of our executives in the second half of fiscal 2023, (2) a decrease in consulting, advisory and other professional services costs of $2.6 million as a result of our cost reduction efforts initiated in fiscal 2023, and (3) a decrease in facility costs of $2.1 million, primarily due to reduction in utility costs. The overall decrease was partially offset by an increase in office expenses of $1.5 million, depreciation expenses of $0.9 million, and other operating expenses of $0.6 million.

Stock-Based Compensation

(dollars in thousands)

Total stock-based compensation for the three months ended March 31, 2024 decreased by $10.7 million as compared to the prior year period, primarily driven by (1) the separation of full-time employees holding equity awards as a result of the restructuring in the second half of fiscal 2023, and (2) the voluntary resignation in fiscal 2023 of certain executives holding equity awards.

Other Income and Expense

(in thousands)

Interest Income

Interest income is derived from investment earnings on our cash balances, primarily from money market funds. The increase in interest income of $5.5 million was primarily due to an increase in cash balance in our money market funds for the three months ended March 31, 2024 compared to the prior year period.

Interest Expense

Interest expense is primarily due to our debt held by third parties.

Interest expense for the three months ended March 31, 2024 increased by $2.8 million as compared to the prior year period. This increase was primarily due to an increase in interest expense related to the 3% Green Convertible Senior Notes due June 2028, issued on May 16, 2023. The increase was partially offset by a decrease in interest expense as a result of the redemption on June 1, 2023 of 10.25% Senior Secured Notes due March 2027, and the repayment of the 3.04% Senior Secured Notes due June 2031, on August 24, 2023.

Other Expense, net

Other expense, net is primarily derived from the impact of foreign currency transactions. Other expense, net for the three months ended March 31, 2024 decreased by $0.2 million, as compared to the prior year period, primarily as a result of foreign currency transactions, offset predominantly by other income of $0.5 million.

Gain on Revaluation of Embedded Derivatives

Gain on revaluation of embedded derivatives is derived from the change in fair value of our sales contracts of embedded EPP derivatives valued using historical grid prices and available forecasts of future electricity prices to estimate future electricity prices. Gain on revaluation of embedded derivatives for the three months ended March 31, 2024, as compared to the prior year period, was immaterial.

Income Tax (Benefit) Provision

(dollars in thousands)

Income tax (benefit) provision consists primarily of income taxes in foreign jurisdictions in which we conduct business. We maintain a full valuation allowance for domestic deferred tax assets, including net operating loss and certain tax credit carryforwards. The income tax provision decreased for the three months ended March 31, 2024, as compared to the prior year period. The decrease was primarily due to fluctuations in the effective tax rates on income earned by international entities.

Net Income (Loss) Attributable to Noncontrolling Interests

(dollars in thousands)

Net income (loss) attributable to noncontrolling interests is the result of allocating profits and losses to noncontrolling interests under the hypothetical liquidation at book value (“HLBV”) method. HLBV is a balance sheet-oriented approach for applying the equity method of accounting when there is a complex structure, such as the flip structure of the PPA Entities.

Net income attributable to noncontrolling interests for the three months ended March 31, 2024, as compared to the prior year period, improved by $4.3 million due to a $2.8 million decrease in losses in PPA V, which was sold in the third quarter of fiscal 2023, and a $1.5 million increase in income related to Korean JV, which is allocated to our noncontrolling interest.

Critical Accounting Policies and Estimates

The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles as applied in the United States (“U.S. GAAP”). The preparation of the condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. Our discussion and analysis of our financial results under Results of Operations above are based on our results of operations, which we have prepared in accordance with U.S. GAAP. In preparing these condensed consolidated financial statements, we make assumptions, judgments and estimates that can affect the reported amounts of assets, liabilities, revenues and expenses, and net income. On an ongoing basis, we base our estimates on historical experience, as appropriate, and on various other assumptions that we believe to be reasonable under the circumstances. Changes in the accounting estimates are representative of estimation uncertainty and are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the following critical accounting policies involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to understanding and evaluating the consolidated financial condition and results of operations.

The accounting policies that most frequently require us to make assumptions, judgments and estimates, and therefore are critical to understanding our results of operations, include:

• Revenue Recognition;
• Valuation of Assets and Liabilities of the SK ecoplant Strategic Investment;
• Income Taxes; and
• Principles of Consolidation.

Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operation in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 provides a more complete discussion of our critical accounting policies and estimates. During the three months ended March 31, 2024, there were no significant changes to our critical accounting policies and estimates.

There were no significant changes to our quantitative and qualitative disclosures about market risk during the three months ended March 31, 2024. Please refer to Part II, Item 7A, Quantitative and Qualitative Disclosures about Market Risk included in our Annual Report on Form 10-K for our fiscal year ended December 31, 2023 for a more complete discussion of the market risks we consider.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (our Principal Executive Officer) and President (our Principal Financial Officer) as appropriate, to allow for timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and President, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of March 31, 2024. Based on such evaluation, our Chief Executive Officer and President have concluded that as of March 31, 2024, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

During the three months ended March 31, 2024, there were no changes in our internal control over financial reporting, which were identified in connection with management’s evaluation required by paragraphs (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

For further information on inherent limitations on effectiveness of internal controls and management’s report on internal control over financial reporting, see Part II, Item 9A, Controls and Procedures in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

There were no material changes in risk factors as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.