FuelCell Energy(FCEL) - 2023 Q4 - Annual Report

Part I Item 1. Business FuelCell Energy, Inc. is a global leader in proprietary fuel cell technology platforms, offering solutions for clean electricity, heat, hydrogen, and carbon capture Business Overview FuelCell Energy provides environmentally responsible distributed baseload energy solutions using its proprietary carbonate and solid oxide fuel cell technologies - The company's product portfolio is based on two electrochemical platforms: carbonate and solid oxide, which can use various fuels including hydrogen, natural gas, and biogas[22] - The platforms operate without combustion, avoiding emissions like NOx, SOx, and particulates, and the electrochemical process concentrates CO2, making it easy to recover and capture[23] - The company has committed to a plan to reduce its carbon emissions to net zero by 2050, implementing an ESG strategy and governance model[27] Our Business Strategy The company's 'Powerhouse' strategy, updated in fiscal year 2022, is built on three pillars: 'Grow, Scale, and Innovate' - The 'Grow' strategy involves capitalizing on core technologies in microgrids, distributed hydrogen, and carbon capture, while expanding into markets in the Middle East, Africa, Asia Pacific, and South America[35][36] - The 'Scale' strategy includes investing in current and new manufacturing capacity, enhancing the commercial organization, and developing the team to support growth[37][38] - The 'Innovate' strategy focuses on advancing hydrogen solutions like storage and electrolysis, developing carbon capture technologies, and diversifying revenue streams to support the global energy transition[38][39][40] Product Platforms and Applications The company's product platforms, based on carbonate and solid oxide technologies, offer five key applications: distributed generation, distributed hydrogen production, electrolysis, carbon capture, and long-duration energy storage - The company is focused on five main applications: distributed generation, distributed hydrogen (Tri-gen), solid oxide electrolysis (SOEC), carbon capture (CCUS), and long-duration energy storage (RSOFC)[45] - The carbonate-based Tri-gen platform co-produces power, hydrogen, and water, offering a lower carbon footprint for hydrogen production compared to conventional steam methane reforming (SMR)[57] - The solid oxide electrolysis (SOEC) platform is designed for high-efficiency hydrogen production, targeting ~90% electrical efficiency, which could significantly lower the cost of green hydrogen[58][59] - The company is developing a reversible solid oxide fuel cell (RSOFC) for long-duration energy storage, which alternates between electrolysis (producing hydrogen) and fuel cell mode (generating power from stored hydrogen)[61] Our Markets FuelCell Energy targets a diverse range of markets, including utilities, industrial applications, data centers, wastewater treatment, and government sectors - The company targets numerous markets such as utilities, industrial processes, data centers, wastewater treatment, government, and the emerging hydrogen economy[69][70] - The utilities and independent power producer market has historically been the largest, with customers including Avangrid, LIPA, Southern California Edison, E.ON, and KOSPO[71] - As of October 31, 2023, more than 220 MW of the company's carbonate platforms have been installed and are operating[74] Our Business Model The company's business model is structured around multiple recurring and non-recurring revenue streams - The business model includes recurring revenue from PPAs and service agreements, and non-recurring revenue from product sales and Advanced Technologies contracts[78][79] - The company may retain ownership of projects under PPAs, providing predictable cash flows, or sell projects to third parties; as of October 31, 2023, the retained operating portfolio totaled 43.7 MW, with an additional 19.4 MW under development[82] - Following a settlement with POSCO Energy, the company has full market access to South Korea and broader Asian markets and is aggressively pursuing sales there[84] Manufacturing and Service Facilities FuelCell Energy operates key manufacturing and service facilities in Torrington, Connecticut; Calgary, Alberta, Canada; and Taufkirchen, Germany - The main carbonate manufacturing facility in Torrington, CT, has a maximum annual capacity of 100 MW and operated at a 32.7 MW annualized rate in FY2023[93] - The Calgary, Canada facility focuses on solid oxide (SOFC/SOEC) technology and is expanding its SOEC production capacity from 4 MW to 40 MW per year, expected to be completed in fiscal year 2024[96] - The company is evaluating U.S. locations for an additional solid oxide manufacturing facility with a potential capacity of up to 400 MW per year to be built in phases[96] Backlog As of October 31, 2023, FuelCell Energy's total backlog was approximately $1.03 billion, a decrease from $1.09 billion as of October 31, 2022 Backlog by Category (in thousands) | Category | 2023 | 2022 | | :--- | :--- | :--- | | Commercial: | | | | Product | $0 | $9,065 | | Service | $140,782 | $114,040 | | Generation | $872,072 | $944,041 | | Total Commercial | $1,012,854 | $1,067,146 | | Advanced Technologies: | | | | Non-U.S. Government | $10,745 | $7,598 | | U.S. Government - Funded | $4,263 | $14,065 | | U.S. Government - Unfunded | $255 | $1,190 | | Total Advanced Technologies | $15,263 | $22,853 | | Total Backlog | $1,028,117 | $1,089,999 | - The service and generation backlog as of October 31, 2023, had a weighted average term of approximately 17 years[114] Significant Customers and Information about Geographic Areas The company's revenue is concentrated among a few key customers, with four top customers accounting for 68% of total consolidated revenue in fiscal year 2023 Revenue Percentage by Major Customer | Customer | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Korea Southern Power Company (KOSPO) | 31% | 6% | 12% | | Korea Fuel Cell Co., Ltd (KFC) | 16% | 46% | —% | | Connecticut Light and Power | 13% | 14% | 20% | | ExxonMobil (EMTEC) | 8% | 8% | 29% | | Total | 68% | 74% | 61% | - In fiscal year 2023, South Korea represented the largest geographic concentration, accounting for 47% of consolidated net revenues[146] Item 1A. Risk Factors The company faces significant risks related to its business operations, sales, technology, and financial condition - The company has a history of net losses and anticipates continued losses and negative cash flows, which may require raising additional capital and could result in stockholder dilution[164][165][227] - Business success is dependent on market acceptance of fuel cell products, which faces competition from traditional power sources, other alternative energy technologies, and is influenced by government incentives and fuel costs[197][202] - The company relies on third-party suppliers for key raw materials like nickel and stainless steel, and disruptions in the supply chain could harm manufacturing and project timelines[181] - A significant portion of revenue is derived from contracts awarded through competitive bidding, and project awards may not convert to contracts or revenue, posing a risk to cash flows[187][188] - The business is increasingly dependent on information technology, and security breaches or system failures could materially affect operations and the performance of its power plant platforms[207][208] Item 2. Properties FuelCell Energy owns its corporate headquarters in Danbury, Connecticut, and leases manufacturing, research, and administrative facilities in Torrington, Connecticut; Taufkirchen, Germany; and Calgary, Alberta, Canada Summary of Company Offices and Locations | Location | Business Use | Square Footage | Lease Expiration | | :--- | :--- | :--- | :--- | | Danbury, CT | Corporate HQ, R&D, Sales, Service | 72,000 | Company owned | | Torrington, CT | Manufacturing and Administrative | 167,000 | Dec 2030 | | Taufkirchen, Germany | Manufacturing and Administrative | 20,000 | Jun 2024 | | Calgary, Alberta, Canada | Manufacturing, R&D | 48,308 | Sep 2028 | | Calgary, Alberta, Canada | Storage | 18,627 | Jul 2024 | Item 3. Legal Proceedings The company is involved in various legal proceedings arising from the ordinary course of business - The company is periodically involved in legal proceedings, but management does not expect them to have a material adverse effect on its financial statements[261][262] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the Nasdaq Global Market under the symbol "FCEL", with 118 holders of record as of December 14, 2023 - The company's common stock trades on the Nasdaq Global Market under the symbol "FCEL"[266] - The company has never paid a cash dividend on its common stock and does not plan to in the foreseeable future[266] Stock Repurchases for the Quarter Ended October 31, 2023 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Sep 1 - Sep 30, 2023 | 356,581 | $1.33 | | Oct 1 - Oct 31, 2023 | 242 | $1.29 | | Total | 356,823 | $1.33 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2023, FuelCell Energy reported total revenues of $123.4 million, a 5% decrease from $130.5 million in 2022, while the gross loss improved significantly to $(10.5) million from $(29.6) million Results of Operations For fiscal year 2023, total revenues decreased by 5% to $123.4 million, while the gross loss narrowed to $(10.5) million from $(29.6) million in 2022 Fiscal Year 2023 vs. 2022 Performance (in thousands) | Metric | FY 2023 | FY 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $123,394 | $130,484 | $(7,090) | (5)% | | Total costs of revenues | $133,929 | $160,059 | $(26,130) | (16)% | | Gross loss | $(10,535) | $(29,575) | $19,040 | (64)% | | Gross margin | (8.5)% | (22.7)% | - | - | - Product revenues decreased by 67% to $19.6 million in FY2023, but generated a gross profit of $6.7 million compared to a $4.5 million gross loss in FY2022, mainly due to recognizing $9.1 million from an expired purchase option by KFC and releasing $10.5 million of previously constrained revenue[286][289] - Service agreements revenues increased by 284% to $49.1 million, driven by 15 new module exchanges in FY2023 compared to fewer in the prior year, resulting in a gross profit of $4.1 million from service agreements, a significant improvement from a gross loss of $4.4 million in FY2022[290][291][295] - Research and development expenses increased to $61.0 million from $34.5 million in FY2022, primarily due to increased spending on commercial development of solid oxide and carbon capture platforms[311] Liquidity and Capital Resources As of October 31, 2023, the company held $250.0 million in unrestricted cash and cash equivalents and $103.8 million in short-term U.S. Treasury Securities - As of October 31, 2023, the company had $250.0 million in unrestricted cash and cash equivalents and $103.8 million in short-term U.S. Treasury Securities[325] - During FY2023, the company sold approximately 44.3 million shares under its Open Market Sale Agreement, raising net proceeds of approximately $97.4 million[327] - The company's generation operating portfolio was 43.7 MW as of October 31, 2023, with an additional 19.4 MW of projects in development and construction[335][341] - Projected capital expenditures for fiscal year 2024 are estimated to be between $60.0 million and $75.0 million, focused on expanding solid oxide manufacturing capacity in Calgary and enhancing carbonate capabilities in Torrington[359] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to several market risks, including interest rate, foreign currency exchange, and commodity price risks - The company uses interest rate swaps to hedge against floating interest rate risk on its debt, converting floating SOFR-based rates to fixed rates[425] - The company has fuel price exposure for three projects (Toyota, Derby 14.0 MW, and Derby 2.8 MW) and mitigates this risk with fixed-price supply contracts[427][428] - A sensitivity analysis shows a $1/MMBTu increase in natural gas prices would result in an annual cost impact of approximately $26,000, while a $10/MMBTu increase in RNG prices would have a $2.0 million annual impact[429] Item 8. Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the fiscal years ended October 31, 2023, 2022, and 2021, including the Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets As of October 31, 2023, FuelCell Energy reported total assets of $955.5 million, a slight increase from $939.7 million in 2022, with total liabilities increasing to $195.2 million from $185.3 million Consolidated Balance Sheet Highlights (in thousands) | Account | Oct 31, 2023 | Oct 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents, unrestricted | $249,952 | $458,055 | | Investments - short-term | $103,760 | $0 | | Project assets, net | $258,066 | $232,886 | | Total Assets | $955,520 | $939,717 | | Liabilities & Equity | | | | Total liabilities | $195,215 | $185,333 | | Total equity | $700,448 | $691,497 | | Total Liabilities & Equity | $955,520 | $939,717 | Consolidated Statements of Operations and Comprehensive Loss For the fiscal year ended October 31, 2023, the company reported a net loss of $108.1 million, an improvement from the $147.2 million net loss in 2022, with total revenues at $123.4 million Consolidated Statement of Operations Highlights (in thousands, except per share data) | Metric | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Total revenues | $123,394 | $130,484 | $69,585 | | Gross loss | $(10,535) | $(29,575) | $(15,639) | | Loss from operations | $(136,084) | $(143,724) | $(64,902) | | Net loss | $(108,056) | $(147,232) | $(101,025) | | Net loss attributable to common stockholders | $(110,768) | $(145,922) | $(104,255) | | Loss per share | $(0.26) | $(0.38) | $(0.31) | Consolidated Statements of Cash Flows For the fiscal year ended October 31, 2023, net cash used in operating activities was $140.3 million, an increase from $112.2 million in 2022, while net cash used in investing activities was $192.4 million Consolidated Cash Flow Summary (in thousands) | Cash Flow Activity | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | $(140,250) | $(112,167) | $(70,438) | | Net cash used in investing activities | $(192,365) | $(46,651) | $(73,230) | | Net cash provided by financing activities | $151,067 | $180,583 | $411,908 | | Net (decrease) increase in cash | $(181,468) | $20,832 | $268,160 | Item 9A. Controls and Procedures The company's management concluded that its disclosure controls and procedures, as well as internal control over financial reporting, were effective as of October 31, 2023 - The company's principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of October 31, 2023[674] - Management concluded that the company maintained effective internal control over financial reporting as of October 31, 2023, based on the COSO framework[676] Part III Item 10. Directors, Executive Officers and Corporate Governance Information regarding the company's executive officers is provided in Part I of the report, with details concerning directors and corporate governance incorporated by reference from the upcoming 2024 Proxy Statement - Information about executive officers is included in Part I of the 10-K, while information on directors and corporate governance will be in the forthcoming 2024 Proxy Statement[680] - The company has a Code of Ethics that applies to all employees, officers, and directors, covering professional conduct, conflicts of interest, and compliance with laws[681] Item 11. Executive Compensation The information required for this item, concerning executive compensation, is incorporated by reference from the company's 2024 Proxy Statement - Details on executive compensation are incorporated by reference from the 2024 Proxy Statement[682] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates by reference information from the company's forthcoming 2024 Proxy Statement regarding security ownership Equity Compensation Plan Information as of October 31, 2023 | Plan Category | Shares to be issued upon exercise | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity incentive plans | 18,291 | $59.63 | 9,069,450 | | Employee stock purchase plan | — | — | 481,278 | | Total | 18,291 | $59.63 | 9,550,728 | Item 13. Certain Relationships and Related Transactions, and Director Independence The information required for this item, concerning related party transactions and director independence, is incorporated by reference from the company's 2024 Proxy Statement - Details on certain relationships, related transactions, and director independence are incorporated by reference from the 2024 Proxy Statement[686] Item 14. Principal Accountant Fees and Services The information required for this item, concerning fees paid to the principal accountant and the services rendered, is incorporated by reference from the company's 2024 Proxy Statement - Details on principal accountant fees and services are incorporated by reference from the 2024 Proxy Statement[686] Part IV Item 15. Exhibit and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Annual Report on Form 10-K - This item lists all financial statements and exhibits filed with the 10-K report[688]