FuelCell Energy(FCEL) - 2021 Q4 - Annual Report

Part I Business FuelCell Energy leads in environmentally responsible fuel cell power platforms for distributed power, hydrogen, and carbon capture Business Overview - FuelCell Energy is a global leader in delivering environmentally responsible distributed baseload power solutions using its proprietary fuel cell technology[21] - The company targets large-scale power users such as utility companies, municipalities, universities, and industrial enterprises, with primary geographic markets in the United States and South Korea[22] Product Platforms and Applications Overview - The company focuses on four key industry applications for its technology[26] - Distributed generation (commercially available) - Distributed hydrogen (commercially available) - Solid oxide based long-duration hydrogen energy storage and electrolysis (under development) - Carbon capture (under development) and carbon separation/utilization (commercially available)[26] Business Strategy and Business Updates - The company's "Powerhouse" strategy, initiated in 2019, has evolved from "Transform, Strengthen and Grow" to a new focus on "Grow, Scale, and Innovate" for fiscal year 2022 and beyond[31][37] - Key achievements in fiscal year 2021 under the "Transform" and "Strengthen" phases included raising capital, repaying significant debt, increasing factory production rates to a 45 MW/year annualized rate, and advancing research on solid oxide platforms and carbon capture with EMRE[32][33][34] - The future strategy emphasizes penetrating key markets (biofuels, microgrids, hydrogen), expanding geographically (Asia, Europe), investing in manufacturing and commercial capabilities, and innovating in hydrogen-based energy storage and carbon capture technologies[37] Current Products - The commercial product line, based on carbonate fuel cell technology, includes various SureSource platforms ranging from 250 kW to 3.7 MW, and a 2.3 MW hydrogen production platform[45] - Key advantages of the SureSource product line include sustainability (combustion-free process), fuel flexibility (natural gas, biogas), reliability (24/7 operation), high-quality thermal energy for CHP applications, and the use of readily available catalyst materials like nickel instead of precious metals[45][46][47][48][49] - The electrical efficiency of the carbonate fuel cell solutions ranges from approximately 47% to 60%, and can reach up to 90% in Combined Heat and Power (CHP) configurations[53] Business Model - The business model is based on multiple revenue streams: platform/component sales, recurring service revenue through long-term agreements, recurring electricity sales under Power Purchase Agreements (PPAs) for its generation portfolio, and research contracts[73] - The company has transitioned project structures in the U.S. predominantly to PPAs. It may retain ownership of projects to generate recurring revenue or sell them to third parties. As of October 31, 2021, the retained operating portfolio totaled 34.0 MW with an additional 41.3 MW under development[75][76] - Following a settlement with POSCO Energy, the company has regained full market access to South Korea and broader Asian markets and plans to aggressively pursue product sales in these key growth regions[78][79] Advanced Technologies Programs - The company engages in research and development programs funded by third parties, including the U.S. Department of Energy (DOE) and ExxonMobil Research and Engineering Company (EMRE), focusing on solid oxide fuel cells, distributed hydrogen, and carbon capture[81][82] Total Research and Development Expenditures | (dollars in thousands) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Cost of Advanced Technologies contract revenues | $16,496 | $16,254 | $12,884 | | Research and development expenses | $11,315 | $4,797 | $13,786 | | Total research and development | $27,811 | $21,051 | $26,670 | Backlog Backlog as of October 31 (in thousands) | Category | 2021 | 2020 | | :--- | :--- | :--- | | Commercial | | | | Product | $— | $— | | Service | $125,918 | $146,810 | | Generation | $1,099,006 | $1,067,228 | | License | $22,182 | $22,182 | | Total Commercial | $1,247,106 | $1,236,220 | | Advanced Technologies | | | | Non-U.S. Government | $17,611 | $37,652 | | U.S. Government - Funded | $22,932 | $11,281 | | U.S. Government - Unfunded | $220 | $220 | | Total Advanced Technologies | $40,763 | $49,153 | | Total Backlog | $1,287,869 | $1,285,373 | - Total backlog remained stable at approximately $1.29 billion as of October 31, 2021. Generation backlog is the largest component, representing future revenues from projects with Power Purchase Agreements (PPAs)[126][129] - The service and generation backlog as of October 31, 2021, had a weighted average term of approximately 17 years[125] License Agreements and Royalty Income; Relationship with POSCO Energy - On December 20, 2021, the company entered into a settlement agreement with POSCO Energy and its subsidiary Korea Fuel Cell Co., Ltd. (KFC), resolving all outstanding legal disputes and confirming FuelCell Energy's full access to the South Korean and broader Asian markets[149] - As part of the settlement, KFC will place firm, non-cancelable orders for 20 SureSource 3000 modules at $3.0 million per module by June 30, 2022, and will use commercially reasonable efforts to order an additional 14 modules by December 31, 2022[151] - The previous exclusive license agreements with POSCO Energy are amended to grant PE Group a limited 'Right to Service License' for existing customers only, with FuelCell Energy exclusively enjoying all other rights to its technology in Korea and Asia[150] Human Capital Resources - As of October 31, 2021, the company had 382 full-time employees, an increase from 316 employees as of October 31, 2020[35][177] - The company maintains a strong focus on workforce health and safety, with an Environmental Management System certified to ISO 14001:2015 and an Occupational Health & Safety Management System certified to ISO 45001:2018. Its experience modification rate (EMR) for safety has been below the industry average for the last 5 years[183][184] Risk Factors The company faces significant financial, operational, and international risks, including persistent losses and supply chain disruptions - Financial Risks: The company has a history of incurring losses and anticipates continued losses and negative cash flows. Its ability to achieve profitability is uncertain[198] - Operational Risks: The business depends on third-party suppliers for key materials, faces significant competition from other energy technologies, and its products use flammable fuels, exposing it to potential liability claims[219][235][243] - International & Legal Risks: The company is subject to risks in international operations, including those related to the settlement agreement with POSCO Energy and KFC. There is no guarantee the parties will successfully work together or comply with the settlement terms[207][211] - Capital & Market Risks: The company will need to raise additional capital, which may not be available on acceptable terms and could lead to stockholder dilution. The stock price has been and could remain volatile[271][286] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[310] Properties The company owns its CT headquarters and leases manufacturing and R&D facilities across CT, Germany, and Canada Company Facilities | Location | Business Use | Footage | Ownership/Lease End | | :--- | :--- | :--- | :--- | | Danbury, Connecticut | Corporate HQ, R&D, Sales, Admin | 72,000 | Company owned | | Torrington, Connecticut | Manufacturing and Administrative | 167,000 | Leased until Dec 2030 | | Taufkirchen, Germany | Manufacturing and Administrative | 20,000 | Leased until June 2023 | | Calgary, Alberta, Canada | Research and Development | 32,220 | Leased until Jan 2023 | Legal Proceedings Significant legal proceedings with POSCO Energy and KFC are settled, with other matters deemed immaterial to financials - The legal proceedings with POSCO Energy and KFC have been settled. Details are incorporated by reference from the Business section of the report[314] - Management believes that other legal proceedings from the ordinary course of business will not have a material adverse effect on the company's consolidated financial statements[315] Mine Safety Disclosures This item is not applicable to the company - Not applicable[316] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock trades on Nasdaq under 'FCEL', no dividends paid, and authorized shares increased for capital raising - The company's common stock trades on the Nasdaq Global Market under the symbol "FCEL"[319] - No cash dividends have ever been paid on common stock, and none are anticipated in the foreseeable future[319] - The number of authorized shares of common stock was increased from 225.0 million to 337.5 million in May 2020, and further increased to 500.0 million in April 2021[320][321] Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations FY2021 saw slight revenue decrease and widened gross loss, but liquidity significantly improved to $432.2 million unrestricted cash Results of Operations Fiscal Year 2021 vs. 2020 Performance (in thousands) | Metric | 2021 | 2020 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $69,585 | $70,871 | $(1,286) | (2)% | | Total Costs of Revenues | $85,224 | $78,596 | $6,628 | 8% | | Gross Loss | $(15,639) | $(7,725) | $(7,914) | 102% | | Gross Margin | (22.5)% | (10.9)% | - | - | - Service & License Revenues: Decreased by 21% to $19.8 million, primarily due to the absence of $4.7 million in license revenues recognized in FY2020 from EMRE and POSCO Energy agreements, and a $1.0 million revenue reduction from higher future cost estimates for module exchanges[370][371][372] - Generation Revenues: Increased by 20% to $24.0 million due to a larger operating portfolio and improved fleet output. However, the gross loss from generation widened by 51% to $12.0 million, driven by higher maintenance costs, depreciation, and $5.0 million in impairment charges for certain projects[383][384][385][386][387] - Operating Expenses: Increased significantly, with administrative and selling expenses rising to $37.9 million and R&D expenses increasing to $11.3 million due to investments in hydrogen commercialization initiatives[394][395] Liquidity and Capital Resources - Unrestricted cash and cash equivalents increased significantly to $432.2 million as of October 31, 2021, from $149.9 million as of October 31, 2020[409] - The company raised approximately $369.7 million in net proceeds from an at-the-market offering program and $156.4 million from an underwritten offering. A portion of these proceeds was used to extinguish the Orion senior secured debt ($87.3 million) and the Series 1 Preferred Shares obligation ($21.5 million)[410][411][413][415] Consolidated Cash Flow Summary (in thousands) | Cash Flow Activity | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $(70,438) | $(36,781) | $(30,572) | | Net cash used in investing activities | $(73,230) | $(32,520) | $(69,300) | | Net cash provided by financing activities | $411,908 | $221,667 | $59,655 | - The company's generation operating portfolio stood at 34.0 MW as of Oct 31, 2021, with an additional 41.3 MW in development and construction[423][425][427] Critical Accounting Policies and Estimates - Management is required to make significant estimates and assumptions affecting reported amounts, particularly in areas such as revenue recognition, contract loss accruals, inventory valuation, warranty accruals, and impairment of long-lived assets[479] - Revenue Recognition: Revenue is recognized based on a five-step approach under ASC Topic 606. Service agreement revenue is recognized over time using a cost-to-cost input method, requiring quarterly reviews of cost estimates which can lead to cumulative catch-up adjustments[486][492] - Impairment of Long-Lived Assets: Assets, including project assets, are reviewed for impairment when events indicate the carrying amount may not be recoverable. This process involves comparing carrying value to future undiscounted net cash flows. The company recorded project asset impairment charges in both fiscal 2021 and 2020[483][484] Quantitative and Qualitative Disclosures About Market Risk Market risks include interest rates, foreign currency, and fuel prices, with PPA fuel price exposure being the most significant - The company is exposed to market risks from interest rates, foreign currency exchange, and fuel prices[517] - Interest rate risk is not considered material based on the company's exposure as of October 31, 2021[518] - The company faces fuel price risk for certain projects. A sensitivity analysis indicates that a $1/MMBTu increase in natural gas prices would result in an annual cost impact of approximately $1.4 million, and a $10/MMBTu increase in RNG prices would result in an annual impact of approximately $2.0 million[521][523][525] Consolidated Financial Statements and Supplementary Data Audited consolidated financial statements report a $101.1 million net loss for FY2021 and $875.2 million in total assets Consolidated Statement of Operations Highlights (in thousands) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total Revenues | $69,585 | $70,871 | $60,752 | | Gross Loss | $(15,639) | $(7,725) | $(21,269) | | Loss from Operations | $(64,902) | $(39,166) | $(66,929) | | Net Loss | $(101,025) | $(89,107) | $(77,568) | | Net Loss per Share | $(0.31) | $(0.42) | $(1.82) | Consolidated Balance Sheet Highlights (in thousands) | | Oct 31, 2021 | Oct 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents, unrestricted | $432,213 | $149,867 | | Total Current Assets | $543,386 | $233,981 | | Project Assets | $223,277 | $161,809 | | Total Assets | $875,248 | $523,538 | | Total Current Liabilities | $52,770 | $58,899 | | Long-term debt and other liabilities | $78,633 | $150,651 | | Total Liabilities | $169,923 | $269,133 | | Total Equity | $642,438 | $194,548 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable to the company - Not applicable[892] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of October 31, 2021 - The company's principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of October 31, 2021[894] - Management concluded that the company maintained effective internal control over financial reporting as of October 31, 2021[896] Other Information The company reports no other information for this item - None[899] Part III Directors, Executive Officers and Corporate Governance Executive officer, director, and corporate governance information is incorporated by reference from the 2022 Proxy Statement - Information required by this item is incorporated by reference to the Company's 2022 Proxy Statement, to be filed within 120 days after the fiscal year end[900] Executive Compensation The information required for this item concerning executive compensation is incorporated by reference from the company's 2022 Proxy Statement - Information required under this Item is incorporated by reference to the Company's 2022 Proxy Statement[902] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership is incorporated by reference from the 2022 Proxy Statement, with 8.4 million securities available for issuance Equity Compensation Plan Information as of October 31, 2021 | Plan Category | Common Shares to be issued upon exercise | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity incentive plans | 22,368 | $78.21 | 8,400,708 | | Employee stock purchase plan | — | — | 21,566 | | Total | 22,368 | $78.21 | 8,422,274 | Certain Relationships and Related Transactions, and Director Independence The information required for this item is incorporated by reference from the company's 2022 Proxy Statement - Information required under this Item is incorporated by reference to the Company's 2022 Proxy Statement[906] Principal Accountant Fees and Services The information required for this item is incorporated by reference from the company's 2022 Proxy Statement - Information required under this Item is incorporated by reference to the Company's 2022 Proxy Statement[907] Part IV Exhibits and Financial Statement Schedules This section provides a comprehensive index of all financial statements, schedules, and exhibits filed in the Annual Report - This section provides a comprehensive list of all documents filed as part of the report, including financial statements and exhibits[909] Form 10-K Summary This item is not applicable - Not applicable[946]