FuelCell Energy(FCEL) - 2023 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements of FuelCell Energy, Inc. for the periods ended April 30, 2023, and October 31, 2022, including balance sheets, statements of operations and comprehensive loss, statements of changes in equity, and statements of cash flows, along with accompanying notes Consolidated Balance Sheets | Metric (in millions) | April 30, 2023 | October 31, 2022 | | :-------------------- | :------------- | :--------------- | | ASSETS | | | | Cash & Equivalents | $246.8 | $458.1 | | Short-term Investments| $76.4 | $- | | Total Assets | $858.6 | $939.7 | | LIABILITIES | | | | Total Liabilities | $152.6 | $185.3 | | EQUITY | | | | Total Equity | $646.2 | $691.5 | Consolidated Statements of Operations and Comprehensive Loss (Three Months Ended April 30, 2023 and 2022) | Metric (in millions) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Total Revenues | $38.3 | $16.4 | | Gross Loss | $(6.1) | $(7.3) | | Loss from Operations | $(35.9) | $(28.2) | | Net Loss | $(33.9) | $(30.1) | | Net Loss Attributable to Common Stockholders | $(35.1) | $(31.0) | | Loss Per Share (Basic & Diluted) | $(0.09) | $(0.08) | Consolidated Statements of Operations and Comprehensive Loss (Six Months Ended April 30, 2023 and 2022) | Metric (in millions) | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | | Total Revenues | $75.4 | $48.2 | | Gross Loss | $(0.9) | $(10.2) | | Loss from Operations | $(58.3) | $(73.1) | | Net Loss | $(55.0) | $(76.2) | | Net Loss Attributable to Common Stockholders | $(54.5) | $(72.4) | | Loss Per Share (Basic & Diluted) | $(0.13) | $(0.20) | Consolidated Statements of Changes in Equity (Three and Six Months Ended April 30, 2023) | Metric (in millions) | Balance, October 31, 2022 | Balance, January 31, 2023 | Balance, April 30, 2023 | | :-------------------- | :------------------------ | :------------------------ | :---------------------- | | Total Stockholder's Equity | $684.4 | $667.8 | $638.4 | | Total Equity | $691.5 | $675.4 | $646.2 | Consolidated Statements of Changes in Equity (Three and Six Months Ended April 30, 2022) | Metric (in millions) | Balance, October 31, 2021 | Balance, January 31, 2022 | Balance, April 30, 2022 | | :-------------------- | :------------------------ | :------------------------ | :---------------------- | | Total Stockholders' Equity | $642.4 | $602.2 | $691.1 | | Total Equity | $642.4 | $596.7 | $697.5 | Consolidated Statements of Cash Flows (Six Months Ended April 30, 2023 and 2022) | Metric (in millions) | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | | :----------------------------------------- | :------------------------------ | :------------------------------ | | Net Cash Used in Operating Activities | $(88.7) | $(64.7) | | Net Cash Used in Investing Activities | $(111.6) | $(29.1) | | Net Cash (Used in) Provided by Financing Activities | $(4.0) | $123.4 | | Net (Decrease) Increase in Cash, Equivalents & Restricted Cash | $(204.0) | $29.3 | Notes to Consolidated Financial Statements The notes provide detailed explanations and disclosures for the consolidated financial statements, covering the company's business, accounting policies, significant transactions, and financial instruments Note 1. Nature of Business and Basis of Presentation FuelCell Energy, Inc. is a global leader in proprietary fuel cell technology, providing distributed baseload power solutions, electricity, heat, hydrogen, and carbon separation - FuelCell Energy is headquartered in Danbury, Connecticut, and specializes in environmentally responsible distributed baseload power platform solutions using proprietary fuel cell technology[24] - Current commercial technology produces electricity, heat, hydrogen, and water, while separating carbon for utilization/sequestration[24] - The company is investing in developing and commercializing future technologies for hydrogen delivery, long-duration hydrogen-based energy storage (solid oxide technologies), and enhanced carbon capture solutions[24] - The unaudited consolidated financial statements are prepared in accordance with SEC rules and GAAP, with certain information condensed or omitted compared to full annual statements[26][27] - Interest income for the three and six months ended April 30, 2022, was reclassified from 'Other expense, net' to 'Interest income' in the Consolidated Statement of Operations and Comprehensive Loss[28] - The company consolidates its accounts and operations, including Variable Interest Entities (VIEs) which are tax equity partnerships, determining itself as the primary beneficiary[29][30] - Management makes estimates and assumptions for financial reporting, including revenue recognition, lease assets/liabilities, inventory, warranties, share-based compensation, and impairment of assets[31][33] - Principal cash sources include product/project sales, electricity generation, R&D/service agreements, common stock sales, and debt/project/tax monetization financing[34] | Metric (in millions) | April 30, 2023 | October 31, 2022 | | :------------------- | :------------- | :--------------- | | Unrestricted Cash & Equivalents | $246.8 | $458.1 | | Investments - Short-term (U.S. Treasury Securities) | $76.4 | $0 | - During the six months ended April 30, 2023, the company invested $138.2 million in U.S. Treasury Securities, with $63.3 million maturing[35] - Under an Open Market Sale Agreement (July 2022), the company sold 19.4 million shares for $70.0 million gross proceeds through April 30, 2023, with 0.9 million shares sold for $2.9 million gross proceeds during the three and six months ended April 30, 2023[36] - The company believes current liquidity (cash, backlog, U.S. Treasury maturities, restricted cash release) will be sufficient for at least one year[37] - Future liquidity depends on project completion, increased cash flow from generation portfolio, financing for construction/expansion, increased order volumes, R&D funding, commercialization of Advanced Technologies, cost reductions, and capital market access[37][38][40] - The company may pursue various strategic transactions (joint ventures, acquisitions, technology sharing) to accelerate growth, enter new markets, and expand capacity, including for hydrogen production and carbon capture[41] - The business model requires substantial external financing (debt, tax equity) for project deployment, especially with the Inflation Reduction Act, and inability to secure financing could materially adversely affect financial condition[42] - Subsequent to quarter-end, a project financing facility was secured, extinguishing prior debt and releasing $11.2 million in restricted cash, resulting in $46.1 million net unrestricted cash[43] Note 2. Recent Accounting Pronouncements There is no recently adopted accounting guidance or recent accounting guidance that is not yet effective - No recently adopted accounting guidance[43] - No recent accounting guidance not yet effective[44] Note 3. Tax Equity Financings The company utilizes 'partnership flip' tax equity financing structures for its renewable energy projects, specifically for the Groton and Yaphank projects - Groton Tax Equity Financing Transaction: Closed in August 2021 with East West Bancorp, Inc. for a 7.4 MW project, structured as a 'partnership flip' with a $15 million commitment[44][45] - Groton Project commercial operations deadline was extended multiple times, eventually achieved on December 16, 2022, at 6 MW output, with a Technical Improvement Plan (TIP) aiming for 7.4 MW by December 31, 2023[47][48][49][50][51] - East West Bank's investment in Groton Project reclassified from redeemable to non-redeemable noncontrolling interest as of December 16, 2022[53] - Under the partnership flip, East West Bank receives non-cash value (depreciation, ITCs) and the company receives majority cash distributions until East West Bank's target return is met, then the company receives 95% of cash and tax allocations[54] - The company is the primary beneficiary of the Groton Partnership (VIE) for accounting purposes, consolidating its financials[55] | Metric (in millions) | Three Months Ended April 30, 2023 | Six Months Ended April 30, 2023 | | :------------------- | :-------------------------------- | :------------------------------ | | Net Loss Attributable to Noncontrolling Interests (Groton) | $(0.04) | $(2.9) | - Yaphank Tax Equity Financing Transaction: Closed in November 2021 with Renewable Energy Investors, LLC (REI) for a 7.4 MW project, structured as a 'partnership flip' with an $11.9 million commitment (adjusted from $12.4 million)[56][57][58][60] - The company is the primary beneficiary of the Yaphank Partnership (VIE) for accounting purposes, consolidating its financials[63] | Metric (in millions) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | | :------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Net Income (Loss) Attributable to Noncontrolling Interests (Yaphank) | $0.4 | $0.1 | $0.8 | $(5.4) | Note 4. Revenue Recognition This note details the company's revenue recognition policies, including changes for the Groton Project PPA, contract balances, and modifications - Groton Project Amended and Restated PPA (December 16, 2022) is now accounted for under ASC 606, 'Revenue from Contracts with Customers,' recognizing revenue over time as electricity is delivered[64] | Metric (in millions) | April 30, 2023 | October 31, 2022 | | :------------------- | :------------- | :--------------- | | Contract Assets | $41.9 | $20.7 | | Contract Liabilities | $4.8 | $25.4 | - The option for POSCO Energy/KFC to purchase 14 additional modules expired on December 31, 2022, leading to the recognition of $9.1 million in product revenue during the six months ended April 30, 2023, representing consideration allocated to the material right[68] - Amendment No. 3 to the EMTEC Joint Development Agreement (December 19, 2022) extended the term to August 31, 2023, and increased the maximum contract consideration to $60.0 million for continued R&D and demonstration support[69] - A $5.0 million milestone payment received from EMTEC in FY2022 will be recognized as $2.5 million revenue across future deliverables and $2.5 million as a discount on a potential future module purchase for the Rotterdam Project[70] | Remaining Performance Obligations (as of April 30, 2023, in millions) | Amount | | :---------------------------------------------------- | :----- | | Service Agreements | $73.7 | | Generation PPA | $65.1 | | Advanced Technologies Contracts | $22.6 | Note 5. Investments – Short-Term The company invested $138.2 million in U.S. Treasury Securities during the six months ended April 30, 2023, with $63.3 million maturing - During the six months ended April 30, 2023, the Company invested $138.2 million in U.S. Treasury Securities, with $63.3 million maturing[74] - U.S. Treasury Securities are classified as held-to-maturity and recorded at amortized cost[74] | Metric (in millions) | Amortized Cost (April 30, 2023) | Fair Value (April 30, 2023) | | :-------------------- | :------------------------------ | :-------------------------- | | U.S. Treasury Securities | $76.4 | $76.4 | - Contractual maturities are within one year, with a weighted average yield to maturity of 4.75%[75] Note 6. Inventories Inventories consist of raw materials and work-in-process, including standard components and modules for future project construction or service agreements | Metric (in millions) | April 30, 2023 | October 31, 2022 | | :-------------------- | :------------- | :--------------- | | Raw Materials | $39.3 | $30.6 | | Work-in-Process | $55.6 | $67.8 | | Total Inventories | $94.8 | $98.5 | | Inventories – Current | $(87.3) | $(90.9) | | Inventories – Long-Term | $7.5 | $7.5 | - Work-in-process includes $35.2 million (April 30, 2023) and $54.0 million (October 31, 2022) of completed standard components and modules[77] - Long-term inventory consists of modules contractually segregated for use as exchange modules for specific project assets[77] Note 7. Project Assets Project assets include operating installations and construction in progress, with the Groton Project becoming operational and the Toyota project's carrying value impaired due to fuel sourcing issues | Metric (in millions) | April 30, 2023 | October 31, 2022 | | :-------------------- | :------------- | :--------------- | | Project Assets – Operating, net | $174.1 | $125.2 | | Project Assets – Construction in Progress | $63.0 | $107.7 | | Total Project Assets, net | $237.2 | $232.9 | - Estimated useful lives are 20 years for balance of plant/site construction and 4-7 years for modules[80] - Operating project assets increased due to the inclusion of the Groton Project, which became operational during the six months ended April 30, 2023[81] - The 2.3 MW Toyota project's carrying value was determined to be unrecoverable in Q4 FY2021 due to increased RNG pricing; only redeployable inventory components are capitalized, with other costs expensed as generation cost of revenues[84] Note 8. Goodwill and Intangible Assets The company holds goodwill and intangible assets primarily from the 2012 Versa Power Systems acquisition and the 2019 Bridgeport Fuel Cell Project acquisition | Metric (in millions) | April 30, 2023 | October 31, 2022 | | :-------------------- | :------------- | :--------------- | | Goodwill | $4.1 | $4.1 | | In-Process R&D | $9.6 | $9.6 | | Bridgeport PPA (net) | $7.1 | $7.8 | | Total Intangible Assets, net | $16.7 | $17.4 | - Amortization expense for the Bridgeport Fuel Cell Project-related intangible asset was $0.3 million for both three-month periods and $0.6 million for both six-month periods ended April 30, 2023 and 2022[86] Note 9. Accrued Liabilities Accrued liabilities primarily include payroll and employee benefits, product warranty costs, service agreement and PPA costs, and legal/taxes/professional fees | Metric (in millions) | April 30, 2023 | October 31, 2022 | | :-------------------- | :------------- | :--------------- | | Accrued Payroll & Employee Benefits | $6.5 | $8.5 | | Accrued Product Warranty Cost | $0.3 | $0.5 | | Accrued Service Agreement & PPA Costs | $12.6 | $11.3 | | Accrued Legal, Taxes, Professional & Other | $3.5 | $7.0 | | Total Accrued Liabilities | $22.9 | $27.4 | - Decrease in accrued payroll and employee benefits is due to a decrease in accrued bonus as of April 30, 2023, following payouts from the 2022 Management Incentive Plan[92] - Accrued service agreement costs include loss accruals of $7.2 million (April 30, 2023) and $7.3 million (October 31, 2022), and performance guarantee accruals of $5.3 million (April 30, 2023) and $4.1 million (October 31, 2022)[92] Note 10. Leases The company has operating and finance lease agreements for real estate, vehicles, and equipment, with recent lease expansions in Calgary, Canada, for Versa Ltd. - Operating leases are included in Operating lease right-of-use assets and liabilities on the Consolidated Balance Sheets[93] - Finance leases are not significant to the company's financial statements[93] - Versa Ltd. (subsidiary) expanded its Calgary, Canada lease space by 48,000 sq ft (effective January 5, 2023) and an additional 18,627 sq ft (effective February 20, 2023) for short-term solid oxide fuel cell and stack production expansion[94][95] | Metric (in millions) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | | :------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Operating Lease Expense | $0.4 | $0.4 | $0.7 | $0.8 | | Lease Payments Made | $0.3 | $0.3 | $0.6 | $0.7 | - As of April 30, 2023, the weighted average remaining lease term was 17 years, and the weighted average discount rate was 6.95%[96] | Undiscounted Maturities (in millions) | Operating Leases | Finance Leases | | :------------------------------------- | :--------------- | :------------- | | Due Year 1 | $1.2 | $0.0 | | Due Year 2 | $1.4 | $— | | Due Year 3 | $1.3 | $— | | Due Year 4 | $1.3 | $— | | Due Year 5 | $1.3 | $— | | Thereafter | $13.3 | $— | | Total Undiscounted Lease Payments | $19.7 | $0.0 | Note 11. Stockholders' Equity The company has an Open Market Sale Agreement to sell up to 95.0 million shares of common stock, with 19.4 million shares sold as of April 30, 2023 - Under the Open Market Sale Agreement (July 12, 2022), the company can sell up to 95.0 million shares of common stock[100] - From agreement date through April 30, 2023, 19.4 million shares were sold at an average price of $3.60/share, yielding $70.0 million gross proceeds ($68.0 million net)[100] - During the three and six months ended April 30, 2023, 0.9 million shares were sold at an average price of $3.02/share, yielding $2.9 million gross proceeds ($2.7 million net)[100] - As of April 30, 2023, 75.6 million shares remained available for issuance under the agreement[101] Note 12. Redeemable Preferred Stock The company has authorized 250,000 shares of preferred stock, with 105,875 designated as 5% Series B Cumulative Convertible Perpetual Preferred Stock - Authorized to issue up to 250,000 shares of preferred stock, with 105,875 designated as 5% Series B Cumulative Convertible Perpetual Preferred Stock ('Series B Preferred Stock')[102] | Metric (in millions) | April 30, 2023 | October 31, 2022 | | :------------------- | :------------- | :--------------- | | Series B Preferred Stock Outstanding Shares | 64,020 | 64,020 | | Carrying Value | $59.9 | $59.9 | | Dividends Paid (Six Months) | $1.6 | $1.6 | Note 13. Loss Per Share The company reported a net loss attributable to common stockholders for both the three and six months ended April 30, 2023 and 2022 | Metric (in millions, except per share) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Net Loss Attributable to FuelCell Energy, Inc. | $(34.3) | $(30.2) | $(52.9) | $(70.8) | | Series B Preferred Stock Dividends | $(0.8) | $(0.8) | $(1.6) | $(1.6) | | Net Loss Attributable to Common Stockholders | $(35.1) | $(31.0) | $(54.5) | $(72.4) | | Weighted Average Common Shares Outstanding – Basic & Diluted | 406,316,070 | 372,615,824 | 406,055,027 | 369,626,543 | | Net Loss Per Share – Basic & Diluted | $(0.09) | $(0.08) | $(0.13) | $(0.20) | - Potentially dilutive securities were excluded from diluted loss per share calculation due to anti-dilutive effect caused by net loss[106] | Potentially Dilutive Securities Excluded (as of April 30) | 2023 | 2022 | | :---------------------------------------- | :---------- | :---------- | | Outstanding Options to Purchase Common Stock | 18,291 | 20,231 | | Unvested Restricted Stock Units | 7,039,970 | 3,315,557 | | 5% Series B Cumulative Convertible Perpetual Preferred Stock | 37,837 | 37,837 | | Total Potentially Dilutive Securities | 7,096,098 | 4,323,727 | Note 14. Restricted Cash Restricted cash increased to $30.2 million as of April 30, 2023, primarily for outstanding letters of credit, sale-leaseback transactions, and Bridgeport Fuel Cell Park Project reserves | Metric (in millions) | April 30, 2023 | October 31, 2022 | | :-------------------- | :------------- | :--------------- | | Cash Restricted for Outstanding Letters of Credit | $9.1 | $5.0 | | Cash Restricted for PNC Sale-Leaseback Transactions | $5.8 | $5.0 | | Cash Restricted for Crestmark Sale-Leaseback Transactions | $2.9 | $2.9 | | Bridgeport Fuel Cell Park Project Debt Service and Performance Reserves | $10.3 | $8.7 | | Other | $2.1 | $1.3 | | Total Restricted Cash | $30.2 | $23.0 | | Restricted Cash & Equivalents – Short-Term | $(4.8) | $(4.4) | | Restricted Cash & Equivalents – Long-Term | $25.5 | $18.6 | - The increase in restricted cash for outstanding letters of credit is due to a project asset-specific gas contract[108] - PNC sale-leaseback transactions were terminated subsequent to quarter-end, leading to the release of associated restricted cash[108] - Bridgeport Fuel Cell Park Project reserves were released subsequent to quarter-end[108] Note 15. Debt Total debt and finance obligations decreased slightly to $79.9 million as of April 30, 2023 | Metric (in millions) | April 30, 2023 | October 31, 2022 | | :-------------------- | :------------- | :--------------- | | Connecticut Green Bank Loan | $4.8 | $4.8 | | Connecticut Green Bank Loan (Bridgeport Fuel Cell Project) | $3.1 | $3.5 | | Liberty Bank Term Loan Agreement (Bridgeport Fuel Cell Project) | $4.3 | $5.4 | | Fifth Third Bank Term Loan Agreement (Bridgeport Fuel Cell Project) | $4.3 | $5.4 | | Finance Obligation for Sale-Leaseback Transactions | $57.0 | $56.6 | | State of Connecticut Loan | $7.3 | $7.8 | | Finance Lease Obligations | $0.0 | $0.1 | | Deferred Finance Costs | $(1.0) | $(1.2) | | Total Debt and Finance Obligations | $79.9 | $82.4 | | Current Portion of Long-Term Debt & Finance Obligations | $(13.3) | $(13.2) | | Long-Term Debt & Finance Obligations | $66.6 | $69.2 | - Subsequent to quarter-end, a project finance facility was secured, repaying approximately $1.8 million of the Connecticut Green Bank Loan and extinguishing all outstanding senior and subordinated indebtedness related to the Bridgeport Fuel Cell Project to Liberty Bank, Fifth Third Bank, and Connecticut Green Bank[113] Note 16. Benefit Plans The company maintains equity incentive plans, including the 2018 Omnibus Incentive Plan and a Long-Term Incentive Plan for fiscal year 2023 - The 2018 Omnibus Incentive Plan authorizes grants of various equity awards to employees, directors, consultants, and advisors[115] - As of April 30, 2023, 3,517,296 shares remained available for grant under the 2018 Incentive Plan[115] - The FY 2023 Long Term Incentive Plan (approved December 5, 2022) includes Relative Total Shareholder Return (TSR) Performance Share Units (PSUs) and time-vesting RSUs for senior management[118][121] | Share-Based Compensation (in millions) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | | Cost of Revenues | $0.4 | $0.2 | $0.7 | $0.3 | | Administrative & Selling Expense | $2.3 | $1.4 | $4.3 | $2.5 | | Research & Development Expense | $0.4 | $0.1 | $0.7 | $0.2 | | Total | $3.1 | $1.6 | $5.7 | $3.1 | | Restricted Stock Unit Activity (Six Months Ended April 30, 2023) | Shares | Weighted-Average Fair Value | | :------------------------------------------------- | :---------- | :-------------------------- | | Outstanding as of October 31, 2022 | 2,520,881 | $7.93 | | Granted - PSUs | 1,124,953 | $5.50 | | Granted - Time-Vesting RSUs | 3,781,370 | $3.41 | | Vested | (345,728) | - | | Forfeited | (106,056) | - | | Outstanding as of April 30, 2023 | 7,039,970 | $5.16 | Note 17. Commitments and Contingencies The company has commitments under service agreements, power purchase agreements (PPAs), and faces project fuel exposure risks - Under service agreements, the company maintains, monitors, and repairs customer power plants to meet minimum operating levels, with potential performance penalties or module replacement requirements[128][131] - Under PPAs, customers purchase power or other value streams (hydrogen, steam, water, carbon) at negotiated rates, with the company responsible for operating costs and fuel procurement[132] - The company is exposed to fluctuating fuel price risks and procurement challenges for certain PPAs and projects under construction (Toyota, Derby CT 14.0 MW, Derby CT 2.8 MW)[133][134] - For the Toyota project, $36.4 million in charges have been recorded to date, including $4.5 million (three months) and $11.6 million (six months) ended April 30, 2023, due to unrecoverable project expenditures related to RNG sourcing[135] - The carrying value of the Toyota project on the Consolidated Balance Sheet was $22.1 million as of April 30, 2023, representing redeployable inventory components[135] - The Derby 14.0 MW and 2.8 MW projects face natural gas price volatility, but assets were deemed recoverable as of FY2022; no triggering events for impairment occurred in the first six months of FY2023[136] - As of April 30, 2023, unconditional purchase commitments totaled $100.8 million for materials, supplies, and services[137] - Legal proceedings are not expected to have a material adverse effect on consolidated financial statements[139] Note 18. Subsequent Events Subsequent to April 30, 2023, the company secured an $80.5 million Term Loan Facility and a $6.5 million Letter of Credit Facility, collateralized by six operating fuel cell projects - On May 19, 2023, FuelCell Energy Opco Finance 1, LLC (Borrower) entered into a Financing Agreement for an $80.5 million Term Loan Facility and a $6.5 million Letter of Credit Facility[140] - The Financing Facility is secured by the company's interest in six operating fuel cell generation projects[141] - At closing, $11.4 million of Bridgeport Fuel Cell Project debt and $22.2 million in lease buyout amounts for three other projects were repaid/extinguished using Term Loan proceeds and $7.3 million from reserve accounts[143] - Approximately $1.8 million of Parent's long-term indebtedness to Connecticut Green Bank was also repaid[146] - Net proceeds to the company from these transactions totaled approximately $46.1 million (classified as unrestricted cash)[147] - The Term Loan has a seven-year term, maturing May 19, 2030, with interest accruing at SOFR Rate Loans (2.5% margin for first four years, then 3%) or Base Rate Loans (1.5% margin for first four years, then 2%)[148][185][186] - Borrower is required to maintain a $29.0 million capital expenditures reserve for module replacements and a debt service reserve of at least six months of scheduled payments[149][150] - Borrower must enter into interest rate hedge transactions to fix interest rate exposure for at least 75% of the Term Loan's principal balance[151] - On May 22, 2023, Borrower executed interest rate swap agreements with Investec Bank plc and Bank of Montreal to fix 100% of the Term Loan's SOFR rate at 3.716%, resulting in a net interest rate of 6.366% (first four years) and 6.866% (thereafter)[153] - The Financing Agreement includes covenants such as maintaining a debt service coverage ratio of not less than 1.20:1.00 and the Class B Member exercising its option to purchase the Class A Member's interest in the Yaphank Tax Equity Partnership[154] - In April 2023 (effective May 24, 2023), the Third Amendment to the Assistance Agreement with the State of Connecticut extended the employment obligation target date to October 31, 2024, requiring 538 full-time positions for 24 consecutive months[161][198] - Meeting the updated employment obligation and creating an additional 91 full-time positions could result in a $2.0 million loan credit[163][200] - Stockholders approved amendments to the 2018 Employee Stock Purchase Plan (ESPP) and the 2018 Omnibus Incentive Plan on May 22, 2023, authorizing additional shares for issuance[164][168][200][203] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, changes in financial condition, and results of operations, supplementing the financial statements Forward-Looking Statements The report contains forward-looking statements regarding development, commercialization, revenue growth, project timing, business plans, liquidity, financing, cost competitiveness, and market expansion - The report contains forward-looking statements regarding development, commercialization, revenue growth, project timing, business plans, liquidity, financing, cost competitiveness, and market expansion[171] - These statements involve risks and uncertainties, including general economic conditions, interest rates, supply chain disruptions, regulatory changes, commodity prices, government subsidies, compliance, technological change, competition, market acceptance, and the ability to raise capital[171] - Investors are cautioned that actual results may differ materially from projections, and the company undertakes no obligation to update forward-looking statements[174] OVERVIEW FuelCell Energy is a global leader in distributed baseload energy platform solutions, leveraging five decades of R&D in proprietary fuel cell technology - FuelCell Energy is a global leader in distributed baseload energy platform solutions, leveraging five decades of R&D in proprietary fuel cell technology[176] - Current technology produces electricity, heat, hydrogen, and water, while separating carbon for utilization/sequestration[176] - The company is investing in solid oxide technologies for hydrogen delivery and long-duration energy storage, and enhancing carbon capture solutions[176] - FuelCell Energy serves industrial, commercial, utility, government, and municipal customers worldwide[177] RECENT DEVELOPMENTS Recent developments include the closing of a new project financing facility, which refinanced existing debt and provided additional capital, and amendments to the Assistance Agreement with the State of Connecticut - On May 19, 2023, FuelCell Energy Opco Finance 1, LLC (Borrower) secured a Financing Agreement for an $80.5 million Term Loan Facility and a $6.5 million Letter of Credit Facility[178] - The facility is secured by six operating fuel cell generation projects, including Bridgeport, Central CT State University, Pfizer, LIPA Yaphank, Riverside, and Santa Rita Jail projects[179] - Proceeds were used to repay approximately $11.4 million of Bridgeport Fuel Cell Project debt, extinguish $22.2 million in lease buyout amounts for three projects, repay $1.8 million of Connecticut Green Bank debt, fund a $14.5 million capital expenditure reserve, and distribute $34.9 million to Parent[181][182][184] - Net proceeds to the company from these transactions, including $11.2 million released restricted cash, totaled approximately $46.1 million[184] - The Term Loan has a seven-year term, maturing May 19, 2030, with interest rates based on SOFR or Base Rate plus applicable margins (2.5%-3% for SOFR, 1.5%-2% for Base Rate)[185][186] - The company is required to maintain a $29.0 million capital expenditures reserve and a debt service reserve of at least six months of scheduled payments[186][187] - Interest rate swap agreements were executed on May 22, 2023, to fix 100% of the Term Loan's SOFR rate at 3.716%, resulting in a net fixed interest rate of 6.366% (first four years) and 6.866% (thereafter)[188][189][191] - In April 2023 (effective May 24, 2023), the Third Amendment to the Assistance Agreement with the State of Connecticut extended the employment obligation target date to October 31, 2024, requiring 538 full-time positions for 24 consecutive months[198] - Meeting the updated employment obligation and creating an additional 91 full-time positions could result in a $2.0 million loan credit[163][200] - Stockholders approved amendments to the 2018 Employee Stock Purchase Plan (ESPP) and the 2018 Omnibus Incentive Plan on May 22, 2023, authorizing additional shares for issuance[200][203] RESULTS OF OPERATIONS This section analyzes the company's financial performance for the three and six months ended April 30, 2023, compared to the prior year periods Comparison of Three Months Ended April 30, 2023 and 2022 Total revenues significantly increased by 134% to $38.3 million, driven primarily by a substantial rise in service agreements revenues due to module exchanges Revenues and Costs of revenues | Metric (in millions) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Change ($) | Change (%) | | :-------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Total Revenues | $38.3 | $16.4 | $22.0 | 134% | | Total Costs of Revenues | $44.4 | $23.7 | $20.7 | 88% | | Gross Loss | $(6.1) | $(7.3) | $1.2 | 17% | | Gross Margin | (15.9)% | (44.6)% | | | Product revenues | Metric (in millions) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Change ($) | Change (%) | | :-------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Product Revenues | $- | $- | $— | N/A | | Cost of Product Revenues | $3.5 | $3.0 | $0.5 | 15% | | Gross Loss from Product Revenues | $(3.5) | $(3.0) | $(0.5) | (15)% | - Cost of product revenues increased by $0.5 million due to higher manufacturing variances, primarily from lower production volumes and unabsorbed overhead costs[210] - Annualized production rate decreased to 28.7 MW (Q2 FY2023) from 40.8 MW (Q2 FY2022) due to reduced staffing[211] Service agreements revenues | Metric (in millions) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Change ($) | Change (%) | | :-------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Service Agreements Revenues | $26.2 | $2.6 | $23.6 | 892% | | Cost of Service Agreements Revenues | $20.1 | $3.0 | $17.1 | 563% | | Gross Profit (Loss) from Service Agreements Revenues | $6.1 | $(0.4) | $6.5 | 1642% | | Service Agreements Revenues Gross Margin | 23.2% | (14.9)% | | | - Service agreements revenues increased significantly by $23.6 million, primarily driven by eight new module exchanges in Korea during Q2 FY2023, compared to no exchanges in the prior year period[213] - Gross profit from service agreements improved to $6.1 million (23.2% margin) from a gross loss of $0.4 million (14.9% loss margin) in the prior year, due to higher margin module exchanges[215] Generation revenues | Metric (in millions) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Change ($) | Change (%) | | :-------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Generation Revenues | $8.4 | $9.1 | $(0.6) | (7)% | | Cost of Generation Revenues | $17.1 | $14.1 | $3.0 | 21% | | Gross Loss from Generation Revenues | $(8.6) | $(5.1) | $(3.6) | (70)% | | Generation Revenues Gross Margin | (102.4)% | (56.0)% | | | - Generation revenues decreased by $0.6 million, primarily due to the timing of revenue recognition for renewable energy credits[217] - Cost of generation revenues increased by $3.0 million, mainly due to a $2.4 million impairment of a project asset, $4.5 million in expensed Toyota project construction costs, and $1.4 million from the Groton Project becoming operational[218][219] - Gross loss from generation revenues increased by $3.6 million, and gross margin declined to (102.4%), primarily due to the project asset impairment[217][223] - Operating power plants increased to 43.7 MW (April 30, 2023) from 41.4 MW (April 30, 2022), including the 7.4 MW Groton Project (operating at 6.0 MW)[223] Advanced Technologies contract revenues | Metric (in millions) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Change ($) | Change (%) | | :-------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Advanced Technologies Contract Revenues | $3.7 | $4.7 | $(1.0) | (21)% | | Cost of Advanced Technologies Contract Revenues | $3.8 | $3.5 | $0.3 | 7% | | Gross (Loss) Profit from Advanced Technologies Contracts | $(0.0) | $1.2 | $(1.2) | (104)% | | Advanced Technologies Contract Gross Margin | (1.2)% | 25.3% | | | - Advanced Technologies contract revenues decreased by $1.0 million, mainly due to lower revenue from government and other contracts, partially offset by higher revenue from the EMTEC Joint Development Agreement[224] - The segment shifted from a gross profit of $1.2 million (25.3% margin) to a gross loss of $0.04 million (1.2% loss margin), primarily due to lower government and other contract revenues[225][227] Administrative and selling expenses | Metric (in millions) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Change ($) | | :-------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Administrative and Selling Expenses | $15.1 | $13.2 | $1.8 | - Administrative and selling expenses increased by $1.8 million, primarily due to higher compensation expense resulting from an increase in headcount[229] Research and development expenses | Metric (in millions) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Change ($) | | :-------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Research and Development Expenses | $14.7 | $7.7 | $7.0 | - Research and development expenses increased by $7.0 million, primarily due to increased spending on commercial development efforts for solid oxide power generation, electrolysis platforms, and carbon separation/capture solutions[230] Loss from operations | Metric (in millions) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Change ($) | | :-------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Loss from Operations | $(35.9) | $(28.2) | $(7.6) | - Loss from operations increased by $7.6 million, driven by an $8.9 million increase in operating expenses (administrative, selling, and R&D), partially offset by a $1.2 million improvement in gross loss[231] Interest expense | Metric (in millions) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Change ($) | | :-------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Interest Expense | $(1.5) | $(1.7) | $0.2 | - Interest expense decreased slightly, including interest on finance obligations for failed sale-leaseback transactions and Bridgeport Fuel Cell Project loans[232] Interest income | Metric (in millions) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Change ($) | | :-------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Interest Income | $3.7 | $0.1 | $3.6 | - Interest income increased significantly by $3.6 million, primarily from money market investments ($2.8 million) and U.S. Treasury Securities maturities ($0.9 million), reflecting increased invested cash balances[233] Other expense, net | Metric (in millions) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Change ($) | | :-------------------- | :-------------------------------- | :-------------------------------- | :--------- | | Other Expense, Net | $(0.2) | $(0.3) | $0.1 | - Other expense, net, primarily represents foreign currency exchange losses[234] Provision for income taxes | Metric (in millions) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Provision for Income Taxes | $(0.0) | $- | - No significant federal or state income taxes paid due to net operating losses; foreign income and withholding taxes paid in Korea[235] Series B preferred stock dividends | Metric (in millions) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Series B Preferred Stock Dividends | $(0.8) | $(0.8) | - Dividends on 5% Series B Cumulative Convertible Perpetual Preferred Stock remained constant at $0.8 million[236] Net income attributable to noncontrolling interests | Metric (in millions) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net Income Attributable to Noncontrolling Interests | $0.4 | $0.1 | - Net income attributable to noncontrolling interests for the LIPA Yaphank project increased to $0.4 million from $0.1 million[239] - Net loss attributable to noncontrolling interests for the Groton Project was $0.04 million, as the project began operations in Q1 FY2023[239] Net loss attributable to common stockholders and loss per common share | Metric (in millions, except per share) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net Loss Attributable to Common Stockholders | $(35.1) | $(31.0) | | Loss Per Common Share | $(0.09) | $(0.08) | - Net loss attributable to common stockholders increased by $4.1 million, and loss per common share increased by $0.01, primarily due to higher operating expenses, partially offset by lower gross loss[240] Comparison of Six Months Ended April 30, 2023 and 2022 Total revenues increased by 57% to $75.4 million, driven by significant growth in service agreements and generation revenues Revenues and Costs of revenues | Metric (in millions) | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | Change ($) | Change (%) | | :-------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Total Revenues | $75.4 | $48.2 | $27.2 | 57% | | Total Costs of Revenues | $76.3 | $58.4 | $17.9 | 31% | | Gross Loss | $(0.9) | $(10.2) | $9.3 | (92)% | | Gross Margin | (1.1)% | (21.2)% | | | Product revenues | Metric (in millions) | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | Change ($) | Change (%) | | :-------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Product Revenues | $9.1 | $18.0 | $(8.9) | (49)% | | Cost of Product Revenues | $4.5 | $21.2 | $(16.7) | (79)% | | Gross Profit (Loss) from Product Revenues | $4.6 | $(3.2) | $7.8 | (241)% | | Product Revenues Gross Loss | 50.4% | (18.0)% | | | - Product revenues decreased by $8.9 million, but gross profit improved significantly due to the recognition of $9.1 million from the expiration of KFC's module purchase option, with no corresponding costs[245][247][249] - Cost of product revenues decreased by $16.7 million due to the lack of module sales in the current period[248] - Annualized production rate decreased to 33.4 MW (H1 FY2023) from 39.6 MW (H1 FY2022) due to reduced staffing levels[249] Service agreements revenues | Metric (in millions) | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | Change ($) | Change (%) | | :-------------------- | :------------------------------ | :------------------------------ | :--------- | :--------- | | Service Agreements Revenues | $40.1 | $4.8 | $35.3 | 734% | | Cost of Service Agreements Revenues | $31.1 | $5.4 | $25.7 | 475% | | Gross Profit (Loss) from Service Agreements Revenues | $9.0 | $(0.6) | $9.6 | (1,605)% | | Service Agreements Revenues Gross Margin | 22.5% | (12.5)% | | | - Service agreements revenues increased substantially by $35.3 million, driven by 12 new module exchanges (2 in Woodbridge, 10 in Korea) during H1 FY2023, compared to none in the prior year period[250](index=250&