Bloom Energy Corp - Quarter Report: 2019 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________
FORM 10-Q
________________________________________________________________________
(Mark One) | |
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: September 30, 2019 | |
or | |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________to ____________ |
Commission File Number 001-38598
________________________________________________________________________
![download1.jpg](https://www.sec.gov/Archives/edgar/data/0001664703/000166470319000040/download1.jpg)
BLOOM ENERGY CORPORATION
(Exact name of Registrant as specified in its charter)
________________________________________________________________________
Delaware | 77-0565408 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
4353 North First Street, San Jose, California | 95134 |
(Address of principal executive offices) | (Zip Code) |
(408) 543-1500 | |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Securities Exchange Act | ||
Title of Each Class (1) | Trading Symbol | Name of each exchange on which registered |
Class A Common Stock $0.0001 par value | BE | New York Stock Exchange |
(1) Our Class B Common Stock is not registered but is convertible into shares of Class A Common Stock at the election of the holder.
________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer þ Smaller reporting company ¨ Emerging growth company þ
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
The number of shares of the registrant’s common stock outstanding as of November 4, 2019 was as follows:
Class A Common Stock $0.0001 par value 75,593,984 shares
Class B Common Stock $0.0001 par value 42,413,662 shares
Bloom Energy Corporation
Quarterly Report on Form 10-Q for the Three and Nine Months Ended September 30, 2019
Table of Contents
Page | |
PART I - FINANCIAL INFORMATION | |
PART II - OTHER INFORMATION | |
2
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “predict,” “project,” “potential,” ”seek,” “intend,” “could,” “would,” “should,” “expect,” “plan” and similar expressions are intended to identify forward-looking statements.
Forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, our plans and expectations regarding future financial results, expected operating results, business strategies, the sufficiency of our cash and our liquidity, projected costs and cost reductions, development of new products and improvements to our existing products, the impact of recently adopted accounting pronouncements, our manufacturing capacity and manufacturing costs, the adequacy of our agreements with our suppliers, legislative actions and regulatory compliance, competitive position, management’s plans and objectives for future operations, our ability to obtain financing, our ability to comply with debt covenants or cure defaults, if any, our ability to repay our obligations as they come due, trends in average selling prices, the success of our PPA Entities, expected capital expenditures, warranty matters, outcomes of litigation, our exposure to foreign exchange, interest and credit risk, general business and economic conditions in our markets, industry trends, the impact of changes in government incentives, risks related to privacy and data security, the likelihood of any impairment of project assets, long-lived assets and investments, trends in revenue, cost of revenue and gross profit (loss), trends in operating expenses including research and development expense, sales and marketing expense and general and administrative expense and expectations regarding these expenses as a percentage of revenue, future deployment of our Energy Servers, expansion into new markets, our ability to expand our business with our existing customers, our ability to increase efficiency of our product, our ability to decrease the cost of our product, our future operating results and financial position, our business strategy and plans and our objectives for future operations.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors including those discussed in ITEM 1A - Risk Factors and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements we may make in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur. Actual results, events or circumstances could differ materially and adversely from those described or anticipated in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no 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 Quarterly Report on Form 10-Q 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.
Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors including those discussed under ITEM 1A - Risk Factors and elsewhere in this Quarterly Report on Form 10-Q.
3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Bloom Energy Corporation
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents1 | $ | 226,499 | $ | 220,728 | ||||
Restricted cash1 | 14,486 | 28,657 | ||||||
Short-term investments | — | 104,350 | ||||||
Accounts receivable1 | 26,737 | 84,887 | ||||||
Inventories | 140,372 | 132,476 | ||||||
Deferred cost of revenue | 50,707 | 62,147 | ||||||
Customer financing receivable1 | 5,919 | 5,594 | ||||||
Prepaid expense and other current assets1 | 25,639 | 33,742 | ||||||
Total current assets | 490,359 | 672,581 | ||||||
Property, plant and equipment, net1 | 384,377 | 481,414 | ||||||
Customer financing receivable, non-current1 | 62,615 | 67,082 | ||||||
Restricted cash, non-current1 | 116,890 | 31,100 | ||||||
Deferred cost of revenue, non-current | 57,286 | 102,699 | ||||||
Other long-term assets1 | 58,400 | 34,792 | ||||||
Total assets | $ | 1,169,927 | $ | 1,389,668 | ||||
Liabilities, Redeemable Noncontrolling Interest, Stockholders’ Deficit and Noncontrolling Interests | ||||||||
Current liabilities: | ||||||||
Accounts payable1 | $ | 81,060 | $ | 66,889 | ||||
Accrued warranty | 15,295 | 19,236 | ||||||
Accrued other current liabilities1 | 82,150 | 69,535 | ||||||
Deferred revenue and customer deposits1 | 88,060 | 94,158 | ||||||
Current portion of recourse debt | 15,678 | 8,686 | ||||||
Current portion of non-recourse debt1 | 7,983 | 18,962 | ||||||
Current portion of non-recourse debt from related parties1 | 3,500 | 2,200 | ||||||
Total current liabilities | 293,726 | 279,666 | ||||||
Derivative liabilities, net of current portion1 | 14,648 | 10,128 | ||||||
Deferred revenue and customer deposits, net of current portion1 | 179,712 | 241,794 | ||||||
Long-term portion of recourse debt | 359,959 | 360,339 | ||||||
Long-term portion of non-recourse debt1 | 217,334 | 289,241 | ||||||
Long-term portion of recourse debt from related parties | 27,734 | 27,734 | ||||||
Long-term portion of non-recourse debt from related parties1 | 31,781 | 34,119 | ||||||
Other long-term liabilities1 | 56,117 | 55,937 | ||||||
Total liabilities | 1,181,011 | 1,298,958 | ||||||
Commitments and contingencies (Note 13) | ||||||||
Redeemable noncontrolling interest | 557 | 57,261 | ||||||
Stockholders’ deficit | (106,847 | ) | (91,661 | ) | ||||
Noncontrolling interest | 95,206 | 125,110 | ||||||
Total liabilities, redeemable noncontrolling interest, stockholders' deficit and noncontrolling interest | $ | 1,169,927 | $ | 1,389,668 |
1We have variable interest entities which represent a portion of the consolidated balances are recorded within the "Cash and cash equivalents," "Restricted cash," "Accounts receivable," "Customer financing receivable," "Prepaid expenses and other current assets," "Property and equipment, net," "Customer financing receivable, non-current," "Restricted cash, non-current," "Other long-term assets," "Accounts payable," "Accrued other current liabilities," "Deferred revenue and customer deposits," "Current portion of non-recourse debt from related parties," "Derivative liabilities, net of current portion," "Deferred revenue and customer deposits, net of current portion," "Long-term portion of non-recourse debt," and "Other long-term liabilities" financial statement line items in the Condensed Consolidated Balance Sheets (see Note 12 - Power Purchase Agreement Programs).
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Bloom Energy Corporation
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenue: | ||||||||||||||||
Product | $ | 182,616 | $ | 125,690 | $ | 504,249 | $ | 355,651 | ||||||||
Installation | 19,010 | 29,690 | 58,553 | 70,053 | ||||||||||||
Service | 23,597 | 20,751 | 70,546 | 60,633 | ||||||||||||
Electricity | 8,248 | 14,059 | 34,612 | 42,095 | ||||||||||||
Total revenue | 233,471 | 190,190 | 667,960 | 528,432 | ||||||||||||
Cost of revenue: | ||||||||||||||||
Product | 94,056 | 95,357 | 350,008 | 246,514 | ||||||||||||
Installation | 26,162 | 40,118 | 72,444 | 87,655 | ||||||||||||
Service | 36,539 | 22,651 | 83,695 | 66,164 | ||||||||||||
Electricity | 23,249 | 8,679 | 50,920 | 28,277 | ||||||||||||
Total cost of revenue | 180,006 | 166,805 | 557,067 | 428,610 | ||||||||||||
Gross profit | 53,465 | 23,385 | 110,893 | 99,822 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 23,389 | 27,021 | 82,020 | 56,165 | ||||||||||||
Sales and marketing | 18,125 | 21,476 | 56,947 | 37,992 | ||||||||||||
General and administrative | 36,599 | 40,999 | 119,335 | 71,346 | ||||||||||||
Total operating expenses | 78,113 | 89,496 | 258,302 | 165,503 | ||||||||||||
Loss from operations | (24,648 | ) | (66,111 | ) | (147,409 | ) | (65,681 | ) | ||||||||
Interest income | 1,214 | 1,467 | 4,799 | 2,326 | ||||||||||||
Interest expense | (15,280 | ) | (16,853 | ) | (47,967 | ) | (60,757 | ) | ||||||||
Interest expense to related parties | (1,605 | ) | (1,966 | ) | (4,823 | ) | (7,265 | ) | ||||||||
Other income (expense), net | 525 | (705 | ) | 568 | (1,635 | ) | ||||||||||
Gain (loss) on revaluation of warrant liabilities and embedded derivatives | — | 1,655 | — | (21,576 | ) | |||||||||||
Net loss before income taxes | (39,794 | ) | (82,513 | ) | (194,832 | ) | (154,588 | ) | ||||||||
Income tax provision (benefit) | 136 | (3 | ) | 602 | 458 | |||||||||||
Net loss | (39,930 | ) | (82,510 | ) | (195,434 | ) | (155,046 | ) | ||||||||
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests | (5,027 | ) | (3,931 | ) | (13,874 | ) | (13,074 | ) | ||||||||
Net loss attributable to Class A and Class B common stockholders | $ | (34,903 | ) | $ | (78,579 | ) | $ | (181,560 | ) | $ | (141,972 | ) | ||||
Net loss per share attributable to Class A and Class B common stockholders, basic and diluted | $ | (0.30 | ) | $ | (0.97 | ) | $ | (1.59 | ) | $ | (4.13 | ) | ||||
Weighted average shares used to compute net loss per share attributable to Class A and Class B common stockholders, basic and diluted | 116,330 | 81,321 | 113,948 | 34,347 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Bloom Energy Corporation
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net loss attributable to Class A and Class B stockholders | $ | (34,903 | ) | $ | (78,579 | ) | $ | (181,560 | ) | $ | (141,972 | ) | ||||
Other comprehensive income (loss), net of taxes: | ||||||||||||||||
Unrealized gain (loss) on available-for-sale securities | (12 | ) | 1 | 14 | 25 | |||||||||||
Change in derivative instruments designated and qualifying in cash flow hedges | (2,444 | ) | 1,236 | (8,137 | ) | 5,156 | ||||||||||
Other comprehensive income (loss), net of taxes | (2,456 | ) | 1,237 | (8,123 | ) | 5,181 | ||||||||||
Comprehensive loss | (37,359 | ) | (77,342 | ) | (189,683 | ) | (136,791 | ) | ||||||||
Comprehensive (income) loss attributable to noncontrolling interests and redeemable noncontrolling interests | 2,457 | (1,182 | ) | 7,845 | (4,745 | ) | ||||||||||
Comprehensive loss attributable to Class A and Class B stockholders | $ | (34,902 | ) | $ | (78,524 | ) | $ | (181,838 | ) | $ | (141,536 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Bloom Energy Corporation
Condensed Consolidated Statements of Convertible Redeemable Preferred Stock, Redeemable Noncontrolling Interest, Stockholders' Deficit and Noncontrolling Interest
(in thousands, except share amounts)
(unaudited)
Three Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||
Redeemable Noncontrolling Interest | Class A and Class B Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Gain (Loss) | Accumulated Deficit | Stockholders' Deficit | Noncontrolling Interest | ||||||||||||||||||||||||||
Amount | Shares | Amount | ||||||||||||||||||||||||||||||
Balances at June 30, 2019 | $ | 505 | 113,949,343 | $ | 11 | $ | 2,603,279 | $ | (148 | ) | $ | (2,718,927 | ) | $ | (115,785 | ) | $ | 104,072 | ||||||||||||||
Issuance of restricted stock awards | — | 2,837,343 | 1 | — | — | — | 1 | — | ||||||||||||||||||||||||
ESPP purchase | — | 1,022,397 | — | 4,267 | — | — | 4,267 | — | ||||||||||||||||||||||||
Exercise of stock options | — | 8,546 | — | 35 | — | — | 35 | — | ||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | 39,537 | — | — | 39,537 | — | ||||||||||||||||||||||||
Unrealized gain/(loss) on available for sale securities | — | — | — | — | (12 | ) | — | (12 | ) | — | ||||||||||||||||||||||
Change in effective and ineffective portion of interest rate swap agreement | — | — | — | — | 13 | — | 13 | (2,457 | ) | |||||||||||||||||||||||
Distributions to noncontrolling interests | (288 | ) | — | — | — | — | — | — | (1,042 | ) | ||||||||||||||||||||||
Net income (loss) | 340 | — | — | — | — | (34,903 | ) | (34,903 | ) | (5,367 | ) | |||||||||||||||||||||
Balances at September 30, 2019 | $ | 557 | 117,817,629 | $ | 12 | $ | 2,647,118 | $ | (147 | ) | $ | (2,753,830 | ) | $ | (106,847 | ) | $ | 95,206 | ||||||||||||||
Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||
Redeemable Noncontrolling Interest | Class A and Class B Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Gain (Loss) | Accumulated Deficit | Stockholders' Deficit | Noncontrolling Interest | ||||||||||||||||||||||||||
Amount | Shares | Amount | ||||||||||||||||||||||||||||||
Balances at December 31, 2018 | $ | 57,261 | 109,421,183 | $ | 11 | $ | 2,480,597 | $ | 131 | $ | (2,572,400 | ) | $ | (91,661 | ) | $ | 125,110 | |||||||||||||||
Issuance of restricted stock awards | — | 6,341,441 | 1 | — | — | — | 1 | — | ||||||||||||||||||||||||
ESPP purchase | — | 1,718,433 | — | 11,183 | — | — | 11,183 | — | ||||||||||||||||||||||||
Exercise of stock options | — | 336,572 | — | 1,440 | — | — | 1,440 | — | ||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | 153,898 | — | — | 153,898 | — | ||||||||||||||||||||||||
Unrealized gain/(loss) on available for sale securities | — | — | — | — | 14 | — | 14 | — | ||||||||||||||||||||||||
Change in effective and ineffective portion of interest rate swap agreement | — | — | — | — | (292 | ) | — | (292 | ) | (7,845 | ) | |||||||||||||||||||||
Distributions to noncontrolling interests | (3,825 | ) | — | — | — | — | — | — | (5,250 | ) | ||||||||||||||||||||||
Mandatory redemption of noncontrolling interests | (55,684 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||
Cumulative effect of hedge accounting standard adoption | — | — | — | — | — | 130 | 130 | (130 | ) | |||||||||||||||||||||||
Net income (loss) | 2,805 | — | — | — | — | (181,560 | ) | (181,560 | ) | (16,679 | ) | |||||||||||||||||||||
Balances at September 30, 2019 | $ | 557 | 117,817,629 | $ | 12 | $ | 2,647,118 | $ | (147 | ) | $ | (2,753,830 | ) | $ | (106,847 | ) | $ | 95,206 | ||||||||||||||
7
Three Months Ended September 30, 2018 | ||||||||||||||||||||||||||||||||||||||
Convertible Redeemable Preferred Stock | Redeemable Noncontrolling Interest | Common Stock1 | Additional Paid-In Capital | Accumulated Other Comprehensive Gain (Loss) | Accumulated Deficit | Stockholders' Deficit | Noncontrolling Interest | |||||||||||||||||||||||||||||||
Shares | Amount | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||
Balances at June 30, 2018 | 71,740,162 | $ | 1,465,841 | $ | 54,940 | 10,570,641 | $ | 1 | $ | 166,803 | $ | 217 | $ | (2,394,040 | ) | $ | (2,227,019 | ) | $ | 141,433 | ||||||||||||||||||
Issuance of class A common stock upon public offering, net of underwriting discounts and commissions, and net of offering costs | — | — | — | 20,700,000 | 2 | 282,278 | — | — | 282,280 | — | ||||||||||||||||||||||||||||
Issuance of class B common stock on convertible notes | — | — | — | 5,734,440 | 1 | 221,579 | — | — | 221,580 | — | ||||||||||||||||||||||||||||
Issuance of class A and B common stock upon exercise of common stock warrants | — | — | — | 312,575 | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Conversion of redeemable convertible preferred stock Series A through G (to common stock upon public offering) | (71,740,162 | ) | (1,465,841 | ) | — | 71,740,162 | 7 | 1,465,834 | — | — | 1,465,841 | — | ||||||||||||||||||||||||||
Reclassification of redeemable convertible preferred stock warrant liability to additional paid in capital | — | — | — | — | — | 882 | — | — | 882 | — | ||||||||||||||||||||||||||||
Reclassification of derivative liability into additional paid-in capital | — | — | — | — | — | 177,208 | — | — | 177,208 | — | ||||||||||||||||||||||||||||
Issuance of common stock | — | — | — | 166,667 | — | 2,500 | — | — | 2,500 | — | ||||||||||||||||||||||||||||
Issuance of restricted stock awards | — | — | — | 14,178 | — | 238 | — | — | 238 | — | ||||||||||||||||||||||||||||
Exercise of stock options | — | — | — | 161,634 | — | 713 | — | — | 713 | — | ||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | 69,325 | — | — | 69,325 | — | ||||||||||||||||||||||||||||
Unrealized gain on available for sale securities | — | — | — | — | — | — | 1 | — | 1 | — | ||||||||||||||||||||||||||||
Change in effective portion of interest rate swap agreement | — | — | — | — | — | — | 54 | — | 54 | 1,182 | ||||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | (288 | ) | — | — | — | — | — | — | (2,041 | ) | ||||||||||||||||||||||||||
Net income (loss) | — | — | 1,794 | — | — | — | — | (78,579 | ) | (78,579 | ) | (5,725 | ) | |||||||||||||||||||||||||
Balances at September 30, 2018 | — | $ | — | $ | 56,446 | 109,400,297 | $ | 11 | $ | 2,387,360 | $ | 272 | $ | (2,472,619 | ) | $ | (84,976 | ) | $ | 134,849 | ||||||||||||||||||
¹ Common Stock issued and converted to Class A Common and Class B Common effective July 2018.
8
Nine Months Ended September 30, 2018 | ||||||||||||||||||||||||||||||||||||||
Convertible Redeemable Preferred Stock | Redeemable Noncontrolling Interest | Common Stock1 | Additional Paid-In Capital | Accumulated Other Comprehensive Gain (Loss) | Accumulated Deficit | Stockholders' Deficit | Noncontrolling Interest | |||||||||||||||||||||||||||||||
Shares | Amount | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||
Balances at December 31, 2017 | 71,740,162 | $ | 1,465,841 | $ | 58,154 | 10,353,269 | $ | 1 | $ | 150,803 | $ | (162 | ) | $ | (2,330,647 | ) | $ | (2,180,005 | ) | $ | 155,372 | |||||||||||||||||
Issuance of class A common stock upon public offering, net of underwriting discounts and commissions, and net of offering costs | — | — | — | 20,700,000 | 2 | 282,278 | — | — | 282,280 | — | ||||||||||||||||||||||||||||
Issuance of class B common stock on convertible notes | — | — | — | 5,734,440 | 1 | 221,579 | — | — | 221,580 | — | ||||||||||||||||||||||||||||
Issuance of class A and B common stock upon exercise of common stock warrants | — | — | — | 312,575 | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Conversion of redeemable convertible preferred stock Series A through G (to common stock upon public offering) | (71,740,162 | ) | (1,465,841 | ) | — | 71,740,162 | 7 | 1,465,834 | — | — | 1,465,841 | — | ||||||||||||||||||||||||||
Reclassification of redeemable convertible preferred stock warrant liability to additional paid in capital | — | — | — | — | — | 882 | — | — | 882 | — | ||||||||||||||||||||||||||||
Reclassification of derivative liability into additional paid-in capital | — | — | — | — | — | 177,208 | — | — | 177,208 | — | ||||||||||||||||||||||||||||
Issuance of common stock | — | — | — | 166,667 | — | 2,500 | — | — | 2,500 | — | ||||||||||||||||||||||||||||
Revaluation of common stock warrants | — | — | — | — | — | (66 | ) | — | — | (66 | ) | — | ||||||||||||||||||||||||||
Issuance of restricted stock awards | — | — | — | 17,793 | — | 305 | — | — | 305 | — | ||||||||||||||||||||||||||||
Exercise of stock options | — | — | — | 375,391 | — | 1,456 | — | — | 1,456 | — | ||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | 84,581 | — | — | 84,581 | — | ||||||||||||||||||||||||||||
Unrealized gain on available for sale securities | — | — | — | — | — | — | 92 | — | 92 | — | ||||||||||||||||||||||||||||
Change in effective portion of interest rate swap agreement | — | — | 2 | — | — | — | 342 | — | 342 | 4,745 | ||||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | (6,501 | ) | — | — | — | — | — | — | (7,403 | ) | ||||||||||||||||||||||||||
Net income (loss) | — | — | 4,791 | — | — | — | — | (141,972 | ) | (141,972 | ) | (17,865 | ) | |||||||||||||||||||||||||
Balances at September 30, 2018 | — | $ | — | $ | 56,446 | 109,400,297 | $ | 11 | $ | 2,387,360 | $ | 272 | $ | (2,472,619 | ) | $ | (84,976 | ) | $ | 134,849 | ||||||||||||||||||
¹ Common Stock issued and converted to Class A Common and Class B Common effective July 2018.
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
Bloom Energy Corporation
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (195,434 | ) | $ | (155,046 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and Amortization | 55,816 | 32,141 | ||||||
Write-off of property, plant and equipment, net | 2,987 | 901 | ||||||
Write-off of PPA II decommissioned assets | 25,613 | — | ||||||
Debt make-whole penalty | 5,934 | — | ||||||
Revaluation of derivative contracts | 1,335 | 26,761 | ||||||
Stock-based compensation | 154,955 | 87,451 | ||||||
Loss on long-term REC purchase contract | 61 | 150 | ||||||
Revaluation of stock warrants | — | (9,109 | ) | |||||
Amortization of debt issuance cost | 16,295 | 20,279 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 58,150 | (11,168 | ) | |||||
Inventories | (7,896 | ) | (44,465 | ) | ||||
Deferred cost of revenue | 56,854 | 47,945 | ||||||
Customer financing receivable and other | 4,142 | 3,736 | ||||||
Prepaid expenses and other current assets | 7,928 | (6,514 | ) | |||||
Other long-term assets | 3,281 | 1,052 | ||||||
Accounts payable | 14,171 | 11,236 | ||||||
Accrued warranty | (3,941 | ) | 1,164 | |||||
Accrued other current liabilities | 5,029 | 1,885 | ||||||
Deferred revenue and customer deposits | (68,180 | ) | (32,203 | ) | ||||
Other long-term liabilities | 2,083 | 10,156 | ||||||
Net cash provided by (used in) operating activities | 139,183 | (13,648 | ) | |||||
Cash flows from investing activities: | ||||||||
Purchase of property, plant and equipment | (23,474 | ) | (4,333 | ) | ||||
Payments for acquisition of intangible assets | (1,478 | ) | (2,762 | ) | ||||
Purchase of marketable securities | — | (15,732 | ) | |||||
Proceeds from maturity of marketable securities | 104,500 | 38,250 | ||||||
Net cash provided by investing activities | 79,548 | 15,423 | ||||||
Cash flows from financing activities: | ||||||||
Repayment of debt | (93,263 | ) | (14,036 | ) | ||||
Repayment of debt to related parties | (1,691 | ) | (990 | ) | ||||
Debt make-whole payment | (5,934 | ) | — | |||||
Payments to redeemable noncontrolling interests related to the PPA II decommissioning | (43,713 | ) | — | |||||
Distributions to noncontrolling and redeemable noncontrolling interests | (9,363 | ) | (14,192 | ) | ||||
Proceeds from issuance of common stock | 12,623 | 1,456 | ||||||
Proceeds from public offerings, net of underwriting discounts and commissions | — | 292,529 | ||||||
Payments of initial public offering issuance costs | — | (2,928 | ) | |||||
Net cash (used in) provided by financing activities | (141,341 | ) | 261,839 | |||||
Net increase in cash, cash equivalents, and restricted cash | 77,390 | 263,614 | ||||||
Cash, cash equivalents, and restricted cash: | ||||||||
Beginning of period | 280,485 | 180,612 | ||||||
End of period | $ | 357,875 | $ | 444,226 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for interest | $ | 35,894 | $ | 30,601 | ||||
Cash paid during the period for taxes | 715 | 1,052 | ||||||
Non-cash investing and financing activities: | ||||||||
Liabilities recorded for property, plant and equipment | 2,574 | 1,874 | ||||||
Liabilities recorded for intangible assets | — | 3,180 | ||||||
Reclassification of redeemable convertible preferred stock warrant liability to additional paid-in capital | — | 882 | ||||||
Conversion of redeemable convertible preferred stock into additional paid-in capital | — | 1,465,841 | ||||||
Conversion of 8% convertible promissory notes into additional paid-in capital | — | 221,579 | ||||||
Reclassification of derivative liability into additional paid-in capital | — | 177,208 | ||||||
Liabilities recorded for initial public offering in accounts payable | — | 1,431 | ||||||
Reclassification of prior year prepaid initial public offering costs to additional paid-in capital | — | 5,894 | ||||||
Liabilities recorded for mandatorily redeemable noncontrolling interest | 11,971 | — | ||||||
Equity investment in PPA II assets | 27,809 | — | ||||||
Accrued distributions to Equity Investors | 288 | 288 | ||||||
Accrued interest and issuance for notes | 1,347 | 20,101 | ||||||
Accrued interest and issuance for notes to related parties | — | 1,229 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
10
Bloom Energy Corporation
Notes to Condensed Consolidated Financial Statements
1. Nature of Business and Liquidity
Nature of Business
Throughout this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms “Bloom Energy,” “we,” “us” and “our” refer to Bloom Energy Corporation and its consolidated subsidiaries.
We design, manufacture, sell and, in certain cases, install solid-oxide fuel cell systems ("Energy Servers") for on-site power generation. Our Energy Servers utilize an innovative fuel cell technology and provide efficient energy generation with reduced operating costs and lower greenhouse gas emissions as compared to conventional fossil fuel generation. By generating power where it is consumed, our energy producing systems offer increased electrical reliability and improved energy security while providing a path to energy independence. We were originally incorporated in Delaware under the name of Ion America Corporation on January 18, 2001 and on September 16, 2006, we changed our name to Bloom Energy Corporation.
Liquidity
We have incurred losses from operations and negative cash flows from operations since our inception. Our ability to achieve our long-term business objectives depends upon, among other things, raising additional capital, acceptance of our products and attaining future profitability. We believe we will be successful in raising additional capital financing from our stockholders or from other sources and refinancing existing debt upon its maturity. For example, in July 2018, we successfully completed an initial public stock offering ("IPO") with the sale of 20,700,000 shares of Class A common stock at a price of $15.00 per share, resulting in net cash proceeds of $282.3 million net of underwriting discounts, commissions and offering costs. We believe that our existing cash and cash equivalents will be sufficient to meet our operating and capital cash flow requirements and other cash flow needs for at least the next 12 months from the date of this quarterly report on Form 10-Q. However, we have long-term debt of $312.3 million due December 1, 2020. We are currently evaluating options to refinance or restructure this debt, however, there can be no assurances that we will be successful in such efforts. Further, there can be no assurance that in the event we require additional capital, such capital will be available on terms that are favorable or at all.
2. Basis of Presentation and Summary of Significant Accounting Policies
We have prepared the condensed consolidated financial statements included herein pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in the consolidated balance sheets as of September 30, 2019 and December 31, 2018, the consolidated statements of operations, the consolidated statements of comprehensive loss, the consolidated statements of convertible redeemable preferred stock, redeemable noncontrolling interest, stockholders' deficit and noncontrolling interest for the three and nine months ended September 30, 2019 and 2018, and the consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018, as well as other information disclosed in the accompanying notes, have been prepared in accordance with U.S. generally accepted accounting principles as applied in the United States ("U.S. GAAP") and have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures herein are adequate to ensure the information presented is not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as filed with the SEC on March 22, 2019.
We believe that all necessary adjustments, which consisted only of normal recurring items, have been included in the accompanying financial statements to fairly state the results of the interim periods. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for our fiscal year ending December 31, 2019.
Certain prior year's amounts reported herein have been reclassified to conform to current period presentation.
11
Principles of Consolidation
These condensed consolidated financial statements reflect our accounts and operations and those of our subsidiaries in which we have a controlling financial interest. We use a qualitative approach in assessing the consolidation requirement for each of our variable interest entities ("VIE"), which we refer to as our power purchase agreement entities ("PPA Entities"). This approach focuses on determining whether we have the power to direct those activities of the PPA Entities that most significantly affect their economic performance and whether we have the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the PPA Entities. For all periods presented, we have determined that we are the primary beneficiary in all of our operational PPA Entities other than with respect to the PPA II Entity, as discussed below.
We evaluate our relationships with the PPA Entities on an ongoing basis to ensure that we continue to be the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation. On June 14, 2019, we entered into a transaction with SP Diamond State Class B Holdings, LLC (“SPDS”), a wholly owned subsidiary of Southern Power Company, in which SPDS will purchase a majority interest in PPA II, which operates in Delaware providing alternative energy generation for state tariff rate payers (the "PPA II upgrade of Energy Servers"). PPA II will use the funds received to purchase current generation Bloom Energy Servers in connection with the upgrade of its energy generation assets fleet. In connection with the closing of this transaction, SPDS was admitted as a member of Diamond State Generation Partners, LLC ("DSGP"). DSGP, an operating company, is now owned by Diamond State Generation Holdings, LLC ("DSGH") and SPDS. As a result of the PPA II upgrade of Energy Servers, we determined that we no longer retain a controlling interest in PPA II and therefore DSGP will no longer be consolidated as a VIE into our condensed consolidated financial statements as of June 30, 2019. For additional information, see Note 12 - Power Purchase Agreement Programs - PPA II Upgrade of Energy Servers.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Significant estimates include assumptions used to compute the best estimate of selling-prices, the fair value of lease and non-lease components such as estimated output, efficiency and residual value of the Energy Servers, estimates for inventory write-downs, estimates for future cash flows and the economic useful lives of property, plant and equipment, the fair value of investment in PPA Entities, the valuation of other long-term assets, the valuation of certain accrued liabilities such as derivative valuations, estimates for accrued warranty and extended maintenance, estimates for recapture of U.S. Treasury grants and similar grants, estimates for income taxes and deferred tax asset valuation allowances, warrant liabilities, stock-based compensation costs and estimates for the allocation of profit and losses to the noncontrolling interests. Actual results could differ materially from these estimates under different assumptions and conditions.
Concentration of Risk
Geographic Risk - The majority of our revenue and long-lived assets are attributable to operations in the United States for all periods presented. Additionally, we sell our Energy Servers in Japan, China, India, and the Republic of Korea (collectively, our Asia Pacific region). In the three and nine months ended September 30, 2019, total revenue in the Asia Pacific region was 15.2% and 18.7%, respectively, of our total revenue. In the three and nine months ended September 30, 2018, total revenue in the Asia Pacific region was 0.1% and 5.9%, respectively, of our total revenue.
Credit Risk - At September 30, 2019, customer E and customer F accounted for 14.7% and 11.1%, respectively, of accounts receivable. At December 31, 2018, customer A accounted for 66.8% of accounts receivable. At September 30, 2019 and December 31, 2018, we did not maintain any allowances for doubtful accounts as we deemed all of our receivables fully collectible. To date, we have neither provided an allowance for uncollectible accounts nor experienced any credit loss.
Customer Risk - In the three months ended September 30, 2019, revenue from customer A and customer B represented 15% and 52%, respectively, of our total revenue. In the nine months ended September 30, 2019, revenue from customer A, customer B, and customer C represented 18%, 44%, and 8%, respectively, of our total revenue. Customer A wholly owns a Third-Party PPA which purchases Energy Servers from us, however such purchases and resulting revenue are made on behalf of various customers of this Third-Party PPA. In the three months ended September 30, 2018, revenue from customer B and customer D represented 54% and 12% of our total revenue, respectively. In the nine months ended September 30, 2018, revenue from customer B represented 51% of our total revenue.
12
Fair Value Measurement
Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 820 - Fair Value Measurements and Disclosures ("ASC 820"), defines fair value, establishes a framework for measuring fair value under U.S. GAAP and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:
Level 1 | Quoted prices in active markets for identical assets or liabilities. Financial assets utilizing Level 1 inputs typically include money market securities and U.S. Treasury securities. | |
Level 2 | Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Financial instruments utilizing Level 2 inputs include interest rate swaps. |
Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Financial liabilities utilizing Level 3 inputs include natural gas fixed price forward contract derivatives. Derivative liability valuations are performed based on a binomial lattice model and adjusted for illiquidity and/or nontransferability and such adjustments are generally based on available market evidence. |
Recent Accounting Pronouncements
Other than the adoption of the accounting guidance mentioned below, there have been no other significant changes in our reported financial position or results of operations and cash flows resulting from the adoption of new accounting pronouncements. There have been no changes to our significant accounting policies that were disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 that have had a significant impact on our condensed consolidated financial statements or notes thereto as of and for the nine months ended September 30, 2019.
Accounting Guidance Implemented in Fiscal Year 2019
Hedging Activities - As of January 1, 2019, we adopted Accounting Standards Update ("ASU") 2017-12 Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12") to help entities recognize the economic results of their hedging strategies in the financial statements so that stakeholders can better interpret and understand the effect of hedge accounting on reported results. It is intended to more clearly disclose an entity’s risk exposures and how we manage those exposures through hedging, and it is expected to simplify the application of hedge accounting guidance. The new guidance is effective for annual periods beginning after December 15, 2018, with early adoption permitted. There was not a material impact to our condensed consolidated financial statements upon adoption of ASU 2017-12.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses; Topic 815, Derivatives and Hedging; and Topic 825, Financial Instruments ("ASU 2019-04"), that clarifies and improves areas of guidance related to the recently issued standards on credit losses (ASU 2016-13), hedging (ASU 2017-12), and recognition and measurement of financial instruments (ASU 2016-01), respectively. The amendments generally have the same effective dates as their related standards. If already adopted, the amendments of ASU 2016-01 and ASU 2016-13 are effective for fiscal years beginning after December 15, 2019 and the amendments of ASU 2017-12 are effective as of the beginning of a company’s next annual reporting period. Early adoption is permitted. As discussed above, we adopted ASU 2017-12 on January 1, 2019 and do not expect the amendments of ASU 2019-04 will have a material impact on our consolidated financial statements.
Income Taxes - During the first three months of fiscal 2019, we adopted ASU 2016-16, Income Taxes—Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The standard is effective for us in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the adoption period. Adoption of this standard had no impact on our consolidated financial statements.
13
Income Taxes - During the first three months of fiscal 2019, we adopted ASU 2018-02 Income Statement—Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits reclassification of certain tax effects in Other Comprehensive Income ("OCI") caused by the U.S. tax reform enacted in December 2017 to retained earnings. We do not have any tax effect (due to full valuation allowance) in our OCI account, thus this guidance has no impact on our consolidated financial statements.
New Accounting Guidance to be Implemented
Revenue Recognition - In May 2014, the FASB issued ASU 2014-09, Revenue From Contracts With Customers (Topic 606), as amended ("Topic 606"). The guidance provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services, as well as guidance on the recognition of costs related to obtaining and fulfilling customer contracts. The guidance also requires expanded disclosures about the nature, amount, timing, and uncertainty of revenues and cash flows arising from customer contracts, including significant judgments and changes in judgments. Topic 606 is effective for our annual period beginning January 1, 2019, and for our interim periods beginning on January 1, 2020. Topic 606 can be adopted using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within the guidance (“full retrospective method”); or (ii) retrospective with the cumulative effect of initially applying the guidance recognized at the date of initial application and providing certain additional disclosures as defined per the guidance (“modified retrospective method”). We will adopt Topic 606 for our fiscal year ended December 31, 2019 using the modified retrospective method, resulting in a cumulative-effect adjustment to retained earnings on January 1, 2019.
We are currently evaluating whether Topic 606 will have a material impact on our consolidated financial statements and expect its adoption to have an impact related to the costs of obtaining our contracts, customer deposits, and deferred revenue. Most notably, the accounting for incremental costs to obtain customer contracts, which primarily consist of sales commissions, will be allocated to the various elements of the transaction and the portion allocated to obtain extended warranty contracts will be deferred and amortized over the expected service period. Further, in preparation for Topic 606, we are in the process of updating our accounting policies, processes, internal controls over financial reporting, and system requirements.
Leases - In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), as amended, which provides new authoritative guidance on lease accounting. Among its provisions, the standard requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for operating leases and also requires additional qualitative and quantitative disclosures about lease arrangements. In March 2019, the FASB issued further guidance in ASU 2019-01, Leases (Topic 842), which provides clarifications to certain lessor transactions and other reporting matters. This guidance will be effective for us beginning January 1, 2020. Early adoption is permitted. We will adopt this guidance on January 1, 2020, applying ASU 2018-11, Leases (Topic 842) Targeted Improvements using the prospective method. We expect to recognize right of use assets and lease liabilities for new contracts recognized as operating leases where we are the lessee.
Cloud Computing - In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"), to clarify the guidance on the costs of implementing a cloud computing hosting arrangement that is a service contract. Under ASU 2018-15, the entity is required to follow the guidance in Subtopic 350-40, Internal-Use Software, to determine which implementation costs under the service contract to be capitalized as an asset and which costs to expense. ASU 2018-15 is effective for us for the annual periods beginning in 2021 and the interim periods in 2022 on a retrospective or prospective basis and early adoption is permitted. We will early adopt ASU 2018-15 on a retrospective basis for our fiscal year ending December 31, 2019 and we do not expect a material impact on the consolidated financial statements and related disclosures.
14
3. Financial Instruments
Cash, Cash Equivalents and Restricted Cash
The carrying value of cash and cash equivalents approximate fair value and are as follows (in thousands):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
As held: | ||||||||
Cash | $ | 231,311 | $ | 136,642 | ||||
Money market funds | 126,564 | 143,843 | ||||||
$ | 357,875 | $ | 280,485 | |||||
As reported: | ||||||||
Cash and cash equivalents | $ | 226,499 | $ | 220,728 | ||||
Restricted cash | 131,376 | 59,757 | ||||||
$ | 357,875 | $ | 280,485 |
Restricted cash consisted of the following (in thousands):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Current | ||||||||
Restricted cash | $ | 12,683 | $ | 25,740 | ||||
Restricted cash related to PPA Entities | 1,803 | 2,917 | ||||||
Restricted cash, current | 14,486 | 28,657 | ||||||
Non-current | ||||||||
Restricted cash | 2,677 | 3,246 | ||||||
Restricted cash related to PPA Entities | 114,213 | ¹ | 27,854 | |||||
Restricted cash, non-current | 116,890 | 31,100 | ||||||
$ | 131,376 | $ | 59,757 |
¹ Non-current restricted cash related to PPA Entities as of September 30, 2019 includes $97.2 million reclassified for certain contingent indemnification for SPDS under the PPA II upgrade of Energy Servers in the form of a letter of credit to SPDS. See Note 12 - Power Purchase Agreement Programs - PPA II Upgrade of Energy Servers for additional information.
Short-Term Investments
As of September 30, 2019 and December 31, 2018, we had no short-term investments and $104.4 million in U.S. Treasury Bills, respectively.
Derivative Instruments
We have derivative financial instruments related to natural gas forward contracts and interest rate swaps. See Note 7 - Derivative Financial Instruments for a full description of our derivative financial instruments.
15
4. Fair Value
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The tables below sets forth, by level, our financial assets that were accounted for at fair value for the respective periods. The table does not include assets and liabilities that are measured at historical cost or any basis other than fair value (in thousands):
Fair Value Measured at Reporting Date Using | ||||||||||||||||
September 30, 2019 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 126,564 | $ | — | $ | — | $ | 126,564 | ||||||||
Interest rate swap agreements | — | 6 | — | 6 | ||||||||||||
$ | 126,564 | $ | 6 | $ | — | $ | 126,570 | |||||||||
Liabilities | ||||||||||||||||
Accrued other current liabilities | $ | 433 | $ | — | $ | — | $ | 433 | ||||||||
Derivatives: | ||||||||||||||||
Natural gas fixed price forward contracts | — | — | 8,465 | 8,465 | ||||||||||||
Interest rate swap agreements1 | — | 11,548 | — | 11,548 | ||||||||||||
$ | 433 | $ | 11,548 | $ | 8,465 | $ | 20,446 |
1As of September 30, 2019, $0.8 million of the gain on the interest rate swaps accumulated in other comprehensive gain (loss) is expected to be reclassified into earnings in the next twelve months.
Fair Value Measured at Reporting Date Using | ||||||||||||||||
December 31, 2018 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Cash equivalents: | ||||||||||||||||
Money market funds | $ | 143,843 | $ | — | $ | — | $ | 143,843 | ||||||||
Short-term investments | 104,350 | — | — | 104,350 | ||||||||||||
Interest rate swap agreements | — | 82 | — | 82 | ||||||||||||
$ | 248,193 | $ | 82 | $ | — | $ | 248,275 | |||||||||
Liabilities | ||||||||||||||||
Accrued other current liabilities | $ | 1,331 | $ | — | $ | — | $ | 1,331 | ||||||||
Derivatives: | ||||||||||||||||
Natural gas fixed price forward contracts | — | — | 9,729 | 9,729 | ||||||||||||
Interest rate swap agreements | — | 3,630 | — | 3,630 | ||||||||||||
$ | 1,331 | $ | 3,630 | $ | 9,729 | $ | 14,690 |
16
The following table provides the fair value of our natural gas fixed price forward contracts (dollars in thousands):
September 30, 2019 | December 31, 2018 | |||||||||||||
Number of Contracts (MMBTU)² | Fair Value | Number of Contracts (MMBTU)² | Fair Value | |||||||||||
Liabilities¹ | ||||||||||||||
Natural gas fixed price forward contracts (not under hedging relationships) | 2,286 | $ | 8,465 | 3,096 | $ | 9,729 | ||||||||
¹ Recorded in accrued other current liabilities and derivative liabilities, net of current portion, in the condensed consolidated balance sheets. | ||||||||||||||
² One MMBTU, or one million British Thermal Units, is a traditional unit of energy used to describe the heat value (energy content) of fuels. |
For the three months ended September 30, 2019 and 2018, we marked-to-market the fair value of fixed price natural gas forward contracts and recorded a loss of $0.8 million and a gain of $1.1 million, respectively, and recorded gains on the settlement of these contracts of $1.1 million and $0.6 million, respectively, in cost of electricity revenue on the condensed consolidated statement of operations. For the nine months ended September 30, 2019 and 2018, we marked-to-market the fair value of fixed price natural gas forward contracts and recorded a loss of $1.5 million and a gain of $1.1 million, respectively, and recorded gains on the settlement of these contracts of $2.7 million and $2.9 million, respectively, in cost of electricity revenue on the condensed consolidated statement of operations.
Embedded Derivative on 6% Convertible Promissory Notes - Between December 2015 and September 2016, we issued $260.0 million of 6% convertible promissory notes due December 2020 ("6% Notes") to certain investors. The 6% Notes bore a 5% fixed interest rate, payable monthly either in cash or in kind, at our election. We amended the terms of the 6% Notes in June 2017 to reduce the collateral securing the notes and to increase the interest rate from 5% to 6%. The 6% Notes are convertible at the option of the holders at a conversion price of $11.25 per share. Upon the IPO, the final value of the conversion feature was $177.2 million and was reclassified from a derivative liability to additional paid-in capital.
There were no transfers between fair value measurement classifications during the periods ended September 30, 2019 and 2018. The changes in the Level 3 financial assets were as follows (in thousands):
Natural Gas Fixed Price Forward Contracts | Preferred Stock Warrants | Embedded Derivative Liability | Total | |||||||||||||
Balances at December 31, 2018 | $ | 9,729 | $ | — | $ | — | $ | 9,729 | ||||||||
Settlement of natural gas fixed price forward contracts | (2,741 | ) | — | — | (2,741 | ) | ||||||||||
Changes in fair value | 1,477 | — | — | 1,477 | ||||||||||||
Balances at September 30, 2019 | $ | 8,465 | $ | — | $ | — | $ | 8,465 |
17
Natural Gas Fixed Price Forward Contracts | Preferred Stock Warrants | Embedded Derivative Liability | Total | |||||||||||||
Balances at December 31, 2017 | $ | 15,368 | $ | 9,825 | $ | 140,771 | $ | 165,964 | ||||||||
Settlement of natural gas fixed price forward contracts | (2,871 | ) | — | — | (2,871 | ) | ||||||||||
Embedded derivative on notes | — | — | 5,533 | 5,533 | ||||||||||||
Changes in fair value | (1,052 | ) | (8,943 | ) | 30,904 | 20,909 | ||||||||||
Reclassification of preferred stock warrants liability to common stock warrants and derivative liability into additional paid-in-capital | — | (882 | ) | (177,208 | ) | (178,090 | ) | |||||||||
Balances at September 30, 2018 | $ | 11,445 | $ | — | $ | — | $ | 11,445 |
Significant changes in any assumption input in isolation can result in a significant change in fair value measurement. Generally, an increase in the market price of our shares of common stock, an increase in natural gas prices, an increase in the volatility of ours shares of common stock and an increase in the remaining term of the conversion feature would each result in a directionally similar change in the estimated fair value of our derivative liability. Increases in such assumption values would increase the associated liability while decreases in these assumption values would decrease the associated liability. An increase in the risk-free interest rate or a decrease in the market price of our shares of common stock would result in a decrease in the estimated fair value measurement and thus a decrease in the associated liability.
Financial Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
Customer Receivables and Debt Instruments - We estimate fair value for customer financing receivables, senior secured notes, term loans and convertible promissory notes based on rates currently offered for instruments with similar maturities and terms (Level 3). The following table presents the estimated fair values and carrying values of customer receivables and debt instruments (in thousands):
September 30, 2019 | December 31, 2018 | |||||||||||||||
Net Carrying Value | Fair Value | Net Carrying Value | Fair Value | |||||||||||||
Customer receivables: | ||||||||||||||||
Customer financing receivables | $ | 68,535 | $ | 52,495 | $ | 72,676 | $ | 51,541 | ||||||||
Debt instruments: | ||||||||||||||||
Recourse | ||||||||||||||||
LIBOR + 4% term loan due November 2020 | 1,956 | 2,016 | 3,214 | 3,311 | ||||||||||||
5% convertible promissory note due December 2020 | 36,026 | 34,509 | 34,706 | 31,546 | ||||||||||||
6% convertible promissory notes due December 2020 | 275,716 | 289,887 | 263,284 | 353,368 | ||||||||||||
10% notes due July 2024 | 89,673 | 94,974 | 95,555 | 99,260 | ||||||||||||
Non-recourse | ||||||||||||||||
5.22% senior secured notes due March 2025 | — | — | 78,566 | 80,838 | ||||||||||||
7.5% term loan due September 2028 | 35,281 | 41,335 | 36,319 | 39,892 | ||||||||||||
LIBOR + 5.25% term loan due October 2020 | 23,571 | 24,637 | 23,916 | 25,441 | ||||||||||||
6.07% senior secured notes due March 2030 | 80,677 | 88,243 | 82,337 | 85,917 | ||||||||||||
LIBOR + 2.5% term loan due December 2021 | 121,069 | 121,417 | 123,384 | 123,040 |
Long-Lived Assets - Our long-lived assets include property, plant and equipment and equity investments in PPA II assets. The carrying amounts of our long-lived assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful life is shorter than originally estimated.
During the three and nine months ended September 30, 2019, there was a decommissioning in PPA II, including the replacement during 2019 of installed Energy Servers, resulting in charges related to the decommissioning of PPA II Energy
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Servers on these assets of $14.6 million and $22.7 million, respectively, which was recognized in cost of electricity revenue in our condensed consolidated statement of operations. As a result of the deconsolidation of DSGP, we remeasured our remaining equity interest in DSGP at fair value of $27.8 million as of June 30, 2019. The fair value of our interest in DSGP was determined based upon the projected discounted cash flows of DSGP that are attributable to DSGH’s remaining interest in DSGP, a level 3 fair value measurement. The most significant inputs into the valuation were a projection of future cash inflows from the PPA II tariff and future cash outflows from operations and maintenance of the Energy Servers not subject to SPDS’s purchase interests and the discount rate applied to those cash flows. As of September 30, 2019, the net carrying value of our interest in DSGP was $27.2 million. Equity investments in PPA II assets are also financial assets that are not measured on a recurring basis. See Note 12 - Power Purchase Agreement Programs - PPA II Upgrade of Energy Servers for additional information.
No material impairment in the fair value assessment of any other long-lived assets was identified in the nine months ended September 30, 2019 and 2018.
5. Balance Sheet Components
Inventories
The components of inventory consisted of the following (in thousands):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Raw materials | $ | 56,787 | $ | 53,273 | ||||
Work-in-progress | 25,429 | 22,303 | ||||||
Finished goods | 58,156 | 56,900 | ||||||
$ | 140,372 | $ | 132,476 |
Prepaid Expense and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Government incentives receivable | $ | 928 | $ | 1,001 | ||||
Prepaid expenses and other current assets | 24,711 | 32,741 | ||||||
$ | 25,639 | $ | 33,742 |
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Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following (in thousands):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Energy Servers | $ | 397,482 | $ | 511,485 | ||||
Computers, software and hardware | 20,592 | 16,536 | ||||||
Machinery and equipment | 103,064 | 99,209 | ||||||
Furniture and fixtures | 9,017 | 4,337 | ||||||
Leasehold improvements | 36,244 | 18,629 | ||||||
Building | 40,512 | 40,512 | ||||||
Construction in progress | 8,651 | 29,084 | ||||||
615,562 | 719,792 | |||||||
Less: Accumulated depreciation | (231,185 | ) | (238,378 | ) | ||||
$ | 384,377 | $ | 481,414 |
Our construction in progress decreased $20.4 million, as compared to December 31, 2018, primarily due to our capitalization of leasehold improvements and furniture and fixtures placed in service during the period related to our move to our new corporate headquarters.
Our PPA Entities' property, plant and equipment under operating leases was $397.5 million and $397.5 million as of September 30, 2019 and December 31, 2018, respectively. The accumulated depreciation for these assets was $96.5 million and $77.4 million as of September 30, 2019 and December 31, 2018, respectively. Depreciation expense related to our property, plant and equipment under operating leases was $6.4 million and $6.4 million for the three months ended September 30, 2019 and 2018, respectively, and $19.1 million and $19.1 million for the nine months ended September 30, 2019 and 2018, respectively.
During the three and nine months ended September 30, 2019, there was a decommissioning in PPA II, including the replacement during 2019 of installed Energy Servers, resulting in: (i) charges related to the decommissioning of PPA II Energy Servers of $14.6 million and $22.7 million, respectively, recognized in cost of electricity revenue in our condensed consolidated statement of operations; (ii) decommissioning and write-off of 9.0 megawatts and 19.0 megawatts of PPA II Energy Servers at net book value of zero and $25.6 million, respectively, which we recognized in cost of product revenue in our condensed consolidated statement of operations; and (iii) deconsolidation of our remaining interest in DSGP, primarily related to the remaining installed Energy Server assets held in PPA II of $27.8 million as of June 30, 2019, of which $27.2 million is recognized as an equity investment as of September 30, 2019 and included in other long-term assets on our condensed consolidated balance sheet. See Note 12 - Power Purchase Agreement Programs - PPA II Upgrade of Energy Servers for additional information.
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Customer Financing Leases, Receivable
The components of investment in sales-type financing leases consisted of the following (in thousands):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Total minimum lease payments to be received | $ | 94,151 | $ | 100,816 | ||||
Less: Amounts representing estimated executing costs | (23,203 | ) | (25,180 | ) | ||||
Net present value of minimum lease payments to be received | 70,948 | 75,636 | ||||||
Estimated residual value of leased assets | 1,051 | 1,051 | ||||||
Less: Unearned income | (3,465 | ) | (4,011 | ) | ||||
Net investment in sales-type financing leases | 68,534 | 72,676 | ||||||
Less: Current portion | (5,919 | ) | (5,594 | ) | ||||
Non-current portion of investment in sales-type financing leases | $ | 62,615 | $ | 67,082 |
The future scheduled customer payments from sales-type financing leases were as follows as of September 30, 2019 (in thousands):
Remainder of 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | |||||||||||||||||||
Future minimum lease payments, less interest | $ | 1,452 | $ | 6,022 | $ | 6,415 | $ | 6,853 | $ | 7,310 | $ | 39,431 |
Other Long-Term Assets
Other long-term assets consisted of the following (in thousands):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Prepaid and other long-term assets | $ | 23,574 | $ | 27,086 | ||||
Equity investment in PPA II assets | 27,235 | — | ||||||
Equity-method investments | 5,834 | 6,046 | ||||||
Long-term deposits | 1,757 | 1,660 | ||||||
$ | 58,400 | $ | 34,792 |
Equity investment in PPA II assets
On June 14, 2019, we entered into a transaction with SPDS for the PPA II upgrade of Energy Servers. In connection with the closing of this transaction, SPDS was admitted as a member of DSGP. DSGP, an operating company, was a wholly owned subsidiary of DSGH prior to June 14, 2019. We determined, as of June 30, 2019, that we have retained significant influence over DSGP and consequently continue to recognize our remaining interest in DSGP as an equity investment included in other long-term assets on our condensed consolidated balance sheet as of September 30, 2019. See Note 12 - Power Purchase Agreement Programs - PPA II Upgrade of Energy Servers.
Equity-method investments
In May 2013, we entered into a joint venture with Softbank Corp. and established Bloom Energy Japan Limited which is accounted for as an equity-method investment. Under this arrangement, we sell Energy Servers and provide maintenance services to the joint venture. Accounts receivable from this joint venture were $0.3 million and $3.3 million as of September 30, 2019 and December 31, 2018, respectively.
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Accrued Warranty
Accrued warranty liabilities consisted of the following (in thousands):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Product warranty | $ | 11,391 | $ | 10,935 | ||||
Operations and maintenance services agreements | 3,904 | 8,301 | ||||||
$ | 15,295 | $ | 19,236 |
Changes during the current period in the standard product warranty liability were as follows (in thousands):
Balances at December 31, 2018 | $ | 10,935 | |
Accrued warranty, net | 7,608 | ||
Warranty expenditures during period | (7,152 | ) | |
Balances at September 30, 2019 | $ | 11,391 |
Accrued Other Current Liabilities
Accrued other current liabilities consisted of the following (in thousands):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Liabilities recorded for mandatorily redeemable noncontrolling interest1 | $ | 12,449 | $ | — | ||||
Compensation and benefits | 19,834 | 16,742 | ||||||
Current portion of derivative liabilities | 5,366 | 3,232 | ||||||
Managed services liabilities | 3,235 | 5,091 | ||||||
Accrued installation | 7,457 | 6,859 | ||||||
Sales tax liabilities | 5,709 | 1,700 | ||||||
Interest payable | 3,520 | 4,675 | ||||||
Other | 24,580 | 31,236 | ||||||
$ | 82,150 | $ | 69,535 |
1 During June 2019, we entered into a PPA II upgrade transaction which included a commitment to mandatorily redeem the noncontrolling interest in DSGH by March 31, 2020 of certain installed PPA II Energy Servers, resulting in the reclassification of mandatorily redeemable noncontrolling interest into accrued other current liabilities on the condensed consolidated balance sheet commencing June 30, 2019. See Note 12 - Power Purchase Agreement Programs - PPA II Upgrade of Energy Servers.
Other Long-Term Liabilities
Accrued other long-term liabilities consisted of the following (in thousands):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Delaware grant | $ | 10,469 | $ | 10,469 | ||||
Managed services liabilities | 28,315 | 29,741 | ||||||
Other | 17,333 | 15,727 | ||||||
$ | 56,117 | $ | 55,937 |
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We have entered into managed services agreements that provide for the payment of property taxes and insurance premiums on behalf of customers. These obligations are included in each agreements' contract value and are recorded as short-term or long-term liabilities based on the estimated payment dates. The long-term managed services liabilities accrued were $28.3 million and $29.7 million as of September 30, 2019 and December 31, 2018, respectively.
6. Outstanding Loans and Security Agreements
The following is a summary of our debt as of September 30, 2019 (in thousands):
Unpaid Principal Balance | Net Carrying Value | Unused Borrowing Capacity | ||||||||||||||||||
Current | Long- Term | Total | ||||||||||||||||||
LIBOR + 4% term loan due November 2020 | $ | 2,000 | $ | 1,678 | $ | 278 | $ | 1,956 | $ | — | ||||||||||
5% convertible promissory note due December 2020 | 33,104 | — | 36,026 | 36,026 | — | |||||||||||||||
6% convertible promissory notes due December 2020 | 296,233 | — | 275,716 | 275,716 | — | |||||||||||||||
10% notes due July 2024 | 93,000 | 14,000 | 75,673 | 89,673 | — | |||||||||||||||
Total recourse debt | 424,337 | 15,678 | 387,693 | 403,371 | — | |||||||||||||||
7.5% term loan due September 2028 | 38,847 | 3,500 | 31,781 | 35,281 | — | |||||||||||||||
LIBOR + 5.25% term loan due October 2020 | 24,068 | 987 | 22,584 | 23,571 | — | |||||||||||||||
6.07% senior secured notes due March 2030 | 81,686 | 2,975 | 77,702 | 80,677 | — | |||||||||||||||
LIBOR + 2.5% term loan due December 2021 | 122,603 | 4,021 | 117,048 | 121,069 | — | |||||||||||||||
Letters of Credit due December 2021 | — | — | — | — | 1,220 | |||||||||||||||
Total non-recourse debt | 267,204 | 11,483 | 249,115 | 260,598 | 1,220 | |||||||||||||||
Total debt | $ | 691,541 | $ | 27,161 | $ | 636,808 | $ | 663,969 | $ | 1,220 |
The following is a summary of our debt as of December 31, 2018 (in thousands):
Unpaid Principal Balance | Net Carrying Value | Unused Borrowing Capacity | ||||||||||||||||||
Current | Long- Term | Total | ||||||||||||||||||
LIBOR + 4% term loan due November 2020 | $ | 3,286 | $ | 1,686 | $ | 1,528 | $ | 3,214 | $ | — | ||||||||||
5% convertible promissory notes due December 2020 | 33,104 | — | 34,706 | 34,706 | — | |||||||||||||||
6% convertible promissory notes due December 2020 | 296,233 | — | 263,284 | 263,284 | — | |||||||||||||||
10% notes due July 2024 | 100,000 | 7,000 | 88,555 | 95,555 | — | |||||||||||||||
Total recourse debt | 432,623 | 8,686 | 388,073 | 396,759 | — | |||||||||||||||
5.22% senior secured term notes due March 2025 | 79,698 | 11,994 | 66,572 | 78,566 | — | |||||||||||||||
7.5% term loan due September 2028 | 40,538 | 2,200 | 34,119 | 36,319 | — | |||||||||||||||
LIBOR + 5.25% term loan due October 2020 | 24,723 | 827 | 23,089 | 23,916 | — | |||||||||||||||
6.07% senior secured notes due March 2030 | 83,457 | 2,469 | 79,868 | 82,337 | — | |||||||||||||||
LIBOR + 2.5% term loan due December 2021 | 125,456 | 3,672 | 119,712 | 123,384 | — | |||||||||||||||
Letters of Credit due December 2021 | — | — | — | — | 1,220 | |||||||||||||||
Total non-recourse debt | 353,872 | 21,162 | 323,360 | 344,522 | 1,220 | |||||||||||||||
Total debt | $ | 786,495 | $ | 29,848 | $ | 711,433 | $ | 741,281 | $ | 1,220 |
Recourse debt refers to debt that Bloom Energy Corporation has an obligation to pay. Non-recourse debt refers to debt that is recourse to only specified assets or our subsidiaries. The differences between the unpaid principal balances and the net carrying values apply to debt discounts and deferred financing costs. We were in compliance with all financial covenants as of September 30, 2019 and December 31, 2018.
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Recourse Debt Facilities
LIBOR + 4% Term Loan due November 2020 - In May 2013, we entered into a $5.0 million credit agreement and a $12.0 million financing agreement to help fund the building of a new facility in Newark, Delaware. The $5.0 million credit agreement expired in December 2016. The $12.0 million financing agreement has a term of 90 months, payable monthly at a variable rate equal to one-month LIBOR plus the applicable margin. The year to date weighted average interest rate as of September 30, 2019 and December 31, 2018 was 6.4% and 5.9%, respectively. The loan requires monthly payments and is secured by the manufacturing facility. In addition, the credit agreements also include a cross-default provision which provides that the remaining balance of borrowings under the agreements will be due and payable immediately if a lien is placed on the Newark facility in the event we default on any indebtedness in excess of $100,000 individually or $300,000 in the aggregate. Under the terms of these credit agreements, we are required to comply with various restrictive covenants. As of September 30, 2019 and December 31, 2018, the debt outstanding was $2.0 million and $3.3 million, respectively.
5% Convertible Promissory Notes due 2020 (Originally 8% Convertible Promissory Notes due December 2018) - Between December 2014 and June 2016, we issued $193.2 million of three-year convertible promissory notes ("8% Notes") to certain investors. The 8% Notes had a fixed interest rate of 8% compounded monthly, due at maturity or at the election of the investor with accrued interest due in December of each year.
On January 18, 2018, amendments were finalized to extend the maturity dates for all the 8% Notes to December 2019. At the same time, the portion of the 8% Notes that was held by Constellation NewEnergy, Inc. ("Constellation") was extended to December 2020 and the interest rate decreased from 8% to 5% ("5% Notes").
Investors held the right to convert the unpaid principal and accrued interest of both the 8% and 5% notes to Series G convertible preferred stock at any time at the price of $38.64. In July 2018, upon the Company’s IPO, the $221.6 million of principal and accrued interest of outstanding 8% Notes automatically converted into additional paid-in capital, the conversion of which included all the related-party noteholders. The 8% Notes converted to shares of Series G convertible preferred stock and, concurrently, each such share of Series G convertible preferred stock converted automatically into one share of Class B common stock. Upon the IPO, conversions of 5,734,440 shares of Class B common stock were issued and the 8% Notes were retired. Constellation, the holder of the 5% Notes, had not elected to convert as of September 30, 2019. The outstanding unpaid principal and accrued interest debt balance of the 5% Notes of $36.0 million was classified as non-current as of September 30, 2019, and the outstanding unpaid principal and accrued interest debt balances of the 5% Notes was $34.7 million as of December 31, 2018.
6% Convertible Promissory Notes due December 2020 - Between December 2015 and September 2016, we issued $260.0 million convertible promissory notes due December 2020 ("6% Notes") to certain investors. The 6% Notes bore a 5% fixed interest rate, payable monthly either in cash or in kind, at our election. We amended the terms of the 6% Notes in June 2017 to reduce the collateral securing the notes and to increase the interest rate from 5% to 6%.
As of September 30, 2019 and December 31, 2018, the amount outstanding on the 6% Notes, which includes interest paid in kind through the IPO date, was $296.2 million. Upon the IPO, the debt was convertible at the option of the holders at the conversion price of $11.25 per share into common stock at any time through the maturity date. In January 2018, we amended the terms of the 6% Notes to extend the convertible put option, which investors could elect only if the IPO did not occur prior to December 2019. After the IPO, we paid the interest in cash when due and no additional interest accrued on the consolidated balance sheet on the 6% Notes.
On or after July 27, 2020, we may redeem, at our option, all or part of the 6% Notes if the last reported sale price of our common stock has been at least $22.50 for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending within the three trading days immediately preceding the date on which we provide written notice of redemption. In certain circumstances, the 6% Notes are also redeemable at our option in connection with a change of control.
Under the terms of the indenture governing the 6% Notes, we are required to comply with various restrictive covenants, including meeting reporting requirements, such as the preparation and delivery of audited consolidated financial statements, and restrictions on investments. In addition, we are required to maintain collateral which secures the 6% Notes in an amount equal to 200% of the principal amount of and accrued and unpaid interest on the outstanding notes. This minimum collateral test is not a negative covenant and does not result in a default if not met. However, the minimum collateral test does restrict us with respect to investing in non-PPA subsidiaries. If we do not meet the minimum collateral test, we cannot invest cash into any non-PPA subsidiary that is not a guarantor of the notes. The 6% Notes also include a cross-acceleration provision which provides that the holders of at least 25% of the outstanding principal amount of the 6% Notes may cause such notes to become immediately due and payable if we or any of our subsidiaries default on any indebtedness in excess of $15.0 million such that the repayment of such indebtedness is accelerated.
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In connection with the issuance of the 6% Notes, we agreed to issue to J.P. Morgan and CPPIB, upon the occurrence of certain conditions, warrants to purchase our common stock up to a maximum of 146,666 shares and 166,222 shares, respectively. On August 31, 2017, J.P. Morgan transferred its rights to CPPIB. Upon completion of the IPO, the 312,888 warrants were net exercised for 312,575 shares of Class B Common stock.
10% Notes due July 2024 - In June 2017, we issued $100.0 million of senior secured notes ("10% Notes"). The 10% Notes mature between 2019 and 2024 and bear a 10.0% fixed rate of interest, payable semi-annually. The 10% Notes have a continuing security interest in the cash flows payable to us as servicing, operations and maintenance fees and administrative fees from the five active power purchase agreements in our Bloom Electrons program. Under the terms of the indenture governing the notes, we are required to comply with various restrictive covenants including, among other things, to maintain certain financial ratios such as debt service coverage ratios, to incur additional debt, issue guarantees, incur liens, make loans or investments, make asset dispositions, issue or sell share capital of our subsidiaries and pay dividends, meet reporting requirements, including the preparation and delivery of audited consolidated financial statements, or maintain certain restrictions on investments and requirements in incurring new debt. In addition, we are required to maintain collateral which secures the 10% Notes based on debt ratio analyses. This minimum collateral test is not a negative covenant and does not result in a default if not met. However, the minimum collateral test does restrict us with respect to investing in non-PPA subsidiaries. If we do not meet the minimum collateral test, we cannot invest cash into any non-PPA subsidiary that is not a guarantor of the notes.
Non-recourse Debt Facilities
5.22% Senior Secured Term Notes - In March 2013, PPA II refinanced its existing debt by issuing 5.22% Senior Secured Notes ("5.22% Notes") due March 30, 2025. The total amount of the loan proceeds was $144.8 million, including $28.8 million to repay outstanding principal of existing debt, $21.7 million for debt service reserves and transaction costs and $94.3 million to fund the remaining system purchases. The loan is a fixed rate term loan that bears an annual interest rate of 5.22% payable quarterly. The loan has a fixed amortization schedule of the principal, payable quarterly, which began March 30, 2014 that requires repayment in full by March 30, 2025. The Note Purchase Agreement requires us to maintain a debt service reserve, the balance of which was zero and $11.2 million as of September 30, 2019 and December 31, 2018, respectively, and which was included as part of long-term restricted cash in the condensed consolidated balance sheets. The notes were secured by all the assets of PPA II. These notes were pre-paid in full on June 14, 2019 and all obligations and liabilities related to such 5.22% Notes have been terminated. During the three and nine months ended September 30, 2019, there was a decommissioning in PPA II, including the retirement of the 5.22% Notes outstanding unpaid debt of $76.6 million, which included the accumulated unpaid interest on the debt. See Note 12 - Power Purchase Agreement Programs - PPA II Upgrade of Energy Servers for additional information.
7.5% Term Loan due September 2028 - In December 2012 and later amended in August 2013, PPA IIIa entered into a $46.8 million credit agreement to help fund the purchase and installation of Energy Servers. The loan bears a fixed interest rate of 7.5% payable quarterly. The loan requires quarterly principal payments which began in March 2014. The credit agreement requires us to maintain a debt service reserve for all funded systems, the balance of which was $3.8 million and $3.7 million as of September 30, 2019 and December 31, 2018, respectively, and which was included as part of long-term restricted cash in the condensed consolidated balance sheets. The loan is secured by all assets of PPA IIIa.
LIBOR + 5.25% Term Loan due October 2020 - In September 2013, PPA IIIb entered into a credit agreement to help fund the purchase and installation of Energy Servers. In accordance with that agreement, PPA IIIb issued floating rate debt based on LIBOR plus a margin of 5.2%, paid quarterly. The aggregate amount of the debt facility is $32.5 million. The loan is secured by all assets of PPA IIIb and requires quarterly principal payments which began in July 2014. The credit agreement requires us to maintain a debt service reserve for all funded systems, the balance of which was $1.8 million and $1.7 million September 30, 2019 and December 31, 2018, respectively, and which was included as part of long-term restricted cash in the condensed consolidated balance sheets. In September 2013, PPA IIIb entered into pay-fixed, receive-float interest rate swap agreement to convert the floating-rate loan into a fixed-rate loan.
6.07% Senior Secured Notes due March 2025 - In July 2014, PPA IV issued senior secured notes amounting to $99.0 million to third parties to help fund the purchase and installation of Energy Servers. The notes bear a fixed interest rate of 6.07% payable quarterly which began in December 2015 and ends in March 2030. The notes are secured by all the assets of the PPA IV. The Note Purchase Agreement requires us to maintain a debt service reserve, the balance of which was $7.9 million as of September 30, 2019 and $7.5 million as of December 31, 2018, and which was included as part of long-term restricted cash in the condensed consolidated balance sheets.
LIBOR + 2.5% Term Loan due December 2021 - In June 2015, PPA V entered into a $131.2 million credit agreement to fund the purchase and installation of Energy Servers. The lenders are a group of five financial institutions. The loan was initially advanced as a construction loan during the development of the PPA V Project and converted into a term loan on
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February 28, 2017 (the “Term Conversion Date”). As part of the term loan’s conversion, the LC facility commitments were adjusted. The loan's terms included commitments to a letters of credit ("LC") facility (see below).
In accordance with the credit agreement, PPA V was issued a floating rate debt based on LIBOR plus a margin, paid quarterly. The applicable margins used for calculating interest expense are 2.25% for years 1-3 following the Term Conversion Date and 2.5% thereafter. For the Lenders’ commitments to the loan and the commitments to the LC loan, the PPA V also pays commitment fees at 0.50% per annum over the outstanding commitments, paid quarterly. The loan is secured by all the assets of the PPA V and requires quarterly principal payments which began in March 2017. In connection with the floating-rate credit agreement, in July 2015 the PPA V entered into pay-fixed, receive-float interest rate swap agreements to convert its floating-rate loan into a fixed-rate loan.
Letters of Credit due December 2021 - In connection with the June 2015 PPA V credit agreement, we obtained commitments to a LC facility with the aggregate principal amount of $6.4 million, later adjusted down to $6.2 million. The amount reserved under the LC as of September 30, 2019 and December 31, 2018 was $5.0 million. The unused LC borrowing capacity was $1.2 million as of September 30, 2019 and December 31, 2018.
Debt Repayment Schedule and Interest Expense
The following table presents our total outstanding debt's unpaid principal balance repayment schedule as of September 30, 2019 (in thousands):
Remainder of 2019 | $ | 2,627 | |
2020 | 379,735 | ||
2021 | 140,334 | ||
2022 | 26,046 | ||
2023 | 29,450 | ||
Thereafter | 113,349 | ||
$ | 691,541 |
Interest expense of $16.9 million and $18.8 million for the three months ended September 30, 2019 and 2018, respectively, was recorded in interest expense on the condensed consolidated statements of operations. Interest expense of $52.8 million and $68.0 million for the nine months ended September 30, 2019 and 2018, respectively, was recorded in interest expense on the condensed consolidated statements of operations.
Related Party Debt
Portions of the above described recourse and non-recourse debt are held by various related parties. See Note 15 - Related Party Transactions for a full description.
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7. Derivative Financial Instruments
Interest Rate Swaps
We use various financial instruments to minimize the impact of variable market conditions on its results of operations. We use interest rate swaps to minimize the impact of fluctuations of interest rate changes on its outstanding debt where LIBOR is applied. We do not enter into derivative contracts for trading or speculative purposes.
The fair values of the derivatives related to interest rate swap agreements applied to two of our PPA companies designated as cash flow hedges as of September 30, 2019 and December 31, 2018 on our consolidated balance sheets were as follows (in thousands):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Assets | ||||||||
Prepaid expenses and other current assets | $ | — | $ | 42 | ||||
Other long-term assets | 6 | 40 | ||||||
$ | 6 | $ | 82 | |||||
Liabilities | ||||||||
Accrued other current liabilities | $ | 894 | $ | 4 | ||||
Derivative liabilities | 10,654 | 3,626 | ||||||
$ | 11,548 | $ | 3,630 |
PPA Company IIIb - In September 2013, PPA Company IIIb entered into an interest rate swap arrangement to convert a variable interest rate debt to a fixed rate. We designated and documented our interest rate swap arrangement as a cash flow hedge. The swap’s term ends on October 1, 2020, which is concurrent with the final maturity of the debt floating interest rates reset on a quarterly basis. We evaluate and calculate the effectiveness of the hedge at each reporting date. The effective change was recorded in accumulated other comprehensive income (loss) and was recognized as interest expense on settlement. The notional amounts of the swap were $24.1 million and $24.7 million as of September 30, 2019 and December 31, 2018, respectively. We measure the swap at fair value on a recurring basis. Fair value is determined by discounting future cash flows using LIBOR rates with appropriate adjustment for credit risk.
We recorded a loss of $12,000 and a gain of $30,000 during the three months ended September 30, 2019 and 2018, respectively, attributable to the change in swap’s fair value. We recorded a loss of $35,000 and a gain of $31,000 during the nine months ended September 30, 2019 and 2018, respectively, attributable to the change in swap’s fair value. These gains and losses were included in gain (loss) on revaluation of warrant liabilities and embedded derivatives in the condensed consolidated statement of operations.
PPA Company V - In July 2015, PPA Company V entered into nine interest rate swap agreements to convert a variable interest rate debt to a fixed rate. The loss on the swaps prior to designation was recorded in current-period earnings. In July 2015, we designated and documented its interest rate swap arrangements as cash flow hedges. Three of these swaps matured in 2016, three will mature on December 21, 2021 and the remaining three will mature on September 30, 2031. We evaluate and calculate the effectiveness of the hedge at each reporting date. The effective change was recorded in accumulated other comprehensive income (loss) and was recognized as interest expense on settlement. The notional amounts of the swaps were $185.0 million and $186.6 million as of September 30, 2019 and December 31, 2018, respectively.
We measure the swaps at fair value on a recurring basis. Fair value is determined by discounting future cash flows using LIBOR rates with appropriate adjustment for credit risk. We recorded a gain of $36,000 and a gain of $40,000 attributable to the change in valuation during the three months ended September 30, 2019 and 2018, respectively. We recorded a gain of $48,000 and a gain of $149,000 attributable to the change in valuation during the nine months ended September 30, 2019 and 2018, respectively. These gains were included in gain (loss) on revaluation of warrant liabilities and embedded derivatives in the condensed consolidated statement of operations.
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We recognize the unrealized changes in the fair value of our derivative contracts designated as cash flow hedges in accumulated other comprehensive income (loss). Upon settlement, changes in the fair value amounts recognized in accumulated other comprehensive income (loss) are recognized to earnings. The changes for the three and nine months ended September 30, 2019 and 2018 were as follows (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | ||||||||||||
Beginning balance | $ | 9,146 | $ | 1,771 | $ | 3,548 | $ | 5,853 | |||||||
Loss (gain) recognized in other comprehensive income (loss) | 2,472 | (1,173 | ) | 8,062 | (4,796 | ) | |||||||||
Amounts reclassified from other comprehensive income (loss) to earnings | (28 | ) | (63 | ) | 75 | (360 | ) | ||||||||
Net loss (gain) recognized in other comprehensive income (loss) | 2,444 | (1,236 | ) | 8,137 | (5,156 | ) | |||||||||
Gain reclassified from other comprehensive income (loss) to earnings | (48 | ) | (58 | ) | (143 | ) | (220 | ) | |||||||
Ending balance | $ | 11,542 | $ | 477 | $ | 11,542 | $ | 477 |
Natural Gas Derivatives
On September 1, 2011, we entered into a fixed price fixed quantity fuel forward contract with a gas supplier. This fuel forward contract is used as part of our program to manage the risk for controlling the overall cost of natural gas. Our PPA Company I is the only PPA Company for which we provided natural gas. The fuel forward contract meets the definition of a derivative under U.S. GAAP. We have not elected to designate this contract as a hedge and, accordingly, any changes in its fair value is recorded within cost of electricity revenue in the condensed consolidated statements of operations. The fair value of the contract is determined using a combination of factors including the counterparty’s credit rate and estimates of future natural gas prices.
For the three months ended September 30, 2019 and 2018, we marked-to-market the fair value of our fixed price natural gas forward contract and recorded a loss of $0.8 million and a gain of $1.1 million, respectively. For the nine months ended September 30, 2019 and 2018, we marked-to-market the fair value of our fixed price natural gas forward contract and recorded a loss of $1.5 million and a gain of $1.1 million, respectively. For the three months ended September 30, 2019 and 2018, we recorded gains of $1.1 million and $0.6 million, respectively, on the settlement of these contracts. For the nine months ended September 30, 2019 and 2018, we recorded gains of $2.7 million and $2.9 million, respectively, on the settlement of these contracts. Gains and losses are recorded in cost of electricity revenue in the condensed consolidated statements of operations.
6% Convertible Promissory Notes
On December 15, 2015, January 29, 2016, and September 10, 2016, we issued $160.0 million, $25.0 million, and $75.0 million, respectively, of 6% Convertible Promissory Notes ("6% Notes") that mature in December 2020. The 6% Notes are contractually convertible at the option of the holders at a conversion price per share equal to the lower of $20.61 or 75% of the offering price of our common stock sold in an initial public offering. Upon the IPO, the options are convertible at the option of the holders at the conversion price of $11.25 per share.
The valuation of this embedded put feature was recorded as a derivative liability in the consolidated balance sheet, measured each reporting period. Fair value was determined using the binomial lattice method. We recorded $0 and a gain of $0.1 million attributable to the change in valuation for the three months ended September 30, 2019 and 2018, respectively. We recorded $0 and a loss of $30.9 million attributable to the change in valuation for the nine months ended September 30, 2019 and 2018, respectively. These gains and losses were included within loss on revaluation of warrant liabilities and embedded derivatives in gain (loss) on revaluation of warrant liabilities and embedded derivatives in the condensed consolidated statements of operations. Upon the IPO, the final value of the conversion feature was $177.2 million and was reclassified from a derivative liability to additional paid-in capital.
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8. Common Stock Warrants
During 2018, all of the preferred and common stock warrants we issued in connection with loan agreements and a dispute settlement converted to warrants to purchase shares of Class B common stock. As of September 30, 2019, we had Class B common stock warrants outstanding to purchase 481,181 and 12,940 shares of Class B common stock at exercise prices of $27.78 and $38.64, respectively. As of December 31, 2018, we had Class B common stock warrants outstanding to purchase 481,182 and 312,939 shares of Class B common stock at exercise prices of $27.78 and $38.64, respectively.
9. Income Taxes
For the three months ended September 30, 2019 and 2018, we recorded a provision for income taxes of $0.1 million on a pre-tax loss of $39.8 million for an effective tax rate of (0.3)%, and a provision for income taxes of $3,000 on a pre-tax loss of $82.5 million for an effective tax rate of 0.0%, respectively.
For the nine months ended September 30, 2019 and 2018, we recorded a provision for income taxes of $0.6 million on a pre-tax loss of $194.8 million for an effective tax rate of (0.3)%, and a provision for income taxes of $0.5 million on a pre-tax loss of $154.6 million for an effective tax rate of (0.3)%, respectively.
The effective tax impact for the three and nine months ended September 30, 2019 and 2018 is lower than the statutory federal tax rate primarily due to a full valuation allowance against U.S. deferred tax assets.
10. Net Loss per Share Attributable to Common Stockholders
Net loss per share (basic) attributable to common stockholders is calculated by dividing net loss attributable to common stockholders by the weighted-average shares of common stock outstanding for the period. Net loss per share (diluted) is computed by using the "if-converted" method when calculating the potential dilutive effect, if any, of convertible shares whereby net loss attributable to common stockholders is adjusted by the effect of dilutive securities such as awards under equity compensation plans and inducement awards under separate restricted stock unit ("RSU") award agreements. Net loss per share (diluted) attributable to common stockholders is then calculated by dividing the resulting adjusted net loss attributable to common stockholders by the combined weighted-average number of fully diluted common shares outstanding.
In July 2018, we completed an initial public offering of our common shares wherein 20,700,000 shares of Class A common stock were sold into the market. Added to existing shares of Class B common stock were shares mandatorily converted from various financial instruments as a result of the IPO.
There were no adjustments to net loss attributable to common stockholders in determining net loss attributable to common stockholders (diluted). Equally, there were no adjustments to the weighted average number of outstanding shares of common stock (basic) in arriving at the weighted average number of outstanding shares (diluted), as such adjustments would have been antidilutive.
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Net loss per share is the same for each class of common stock as they are entitled to the same liquidation and dividend rights with the exception of voting rights. As a result, net loss per share (basic) and net loss per share (diluted) attributed to common stockholders are the same for both Class A and Class B common stock and are combined for presentation. The following table sets forth the computation of our net loss per share (basic) and net loss per share (diluted) attributable to common stockholders (in thousands, except per share amounts):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Numerator: | ||||||||||||||||
Net loss attributable to Class A and Class B common stockholders | $ | (34,903 | ) | $ | (78,579 | ) | $ | (181,560 | ) | $ | (141,972 | ) | ||||
Denominator: | ||||||||||||||||
Weighted average shares used to compute net loss per share attributable to Class A and Class B common stockholders, basic and diluted | 116,330 | 81,321 | 113,948 | 34,347 | ||||||||||||
Net loss per share attributable to Class A and Class B common stockholders, basic and diluted | $ | (0.30 | ) | $ | (0.97 | ) | $ | (1.59 | ) | $ | (4.13 | ) |
The following common stock equivalents were excluded from the computation of net loss per share attributable to common shareholders (diluted) for the periods presented as their inclusion would have been antidilutive (in
thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
Convertible and non-convertible redeemable preferred stock and convertible notes | 27,264 | 24,512 | 27,264 | 27,219 | ||||||||
Stock options to purchase common stock | 4,571 | 3,454 | 4,990 | 3,454 | ||||||||
Convertible redeemable common stock warrants | — | 89 | — | 89 | ||||||||
31,835 | 28,055 | 32,254 | 30,762 |
11. Stock-Based Compensation and Employee Benefit Plan
2002 Stock Plan
Our 2002 Stock Plan (the "2002 Plan") was approved in April 2002 and amended in June 2011. In August 2012 and in connection with the adoption of the 2012 Equity Incentive Plan (the "2012 Plan"), shares authorized for issuance under the 2002 Plan were cancelled, except for those shares reserved for issuance upon exercise of outstanding stock options. As of September 30, 2019, options to purchase 2,014,974 shares of Class B common stock were outstanding and the weighted average exercise price of outstanding options was $22.82 per share.
2012 Equity Incentive Plan
Our 2012 Plan was approved in August 2012. In April 2018 and in connection with the adoption of the 2018 Equity Incentive Plan (the "2018 Plan"), any reserved shares not issued under the 2012 Plan were carried over to the 2018 Equity Incentive Plan. As of September 30, 2019, options to purchase 10,403,072 shares of Class B common stock were outstanding under the 2012 Plan and the weighted average exercise price of outstanding options under the 2012 Plan was $27.24 per share. As of September 30, 2019, we had outstanding RSU awards that may be settled for 8,921,221 shares of Class B common stock under the 2012 Plan.
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2018 Equity Incentive Plan
The 2018 Plan was approved in April 2018. The 2018 Plan became effective upon the IPO and serves as the successor to the 2012 Plan.
The 2018 Plan authorizes the award of stock options, restricted stock awards, stock appreciation rights, RSUs, performance awards and stock bonuses. The 2018 Plan provides for the grant of awards to employees, directors, consultants, independent contractors and advisors, provided the consultants, independent contractors, directors and advisors render services not in connection with the offer and sale of securities in a capital-raising transaction. The exercise price of stock options is at least equal to the fair market value of Class A common stock on the date of grant.
As of September 30, 2019, options to purchase 2,549,816 shares of Class A common stock were outstanding under the 2018 Plan and the weighted average exercise price of outstanding options was $17.95 per share. As of September 30, 2019, we had outstanding RSUs that may be settled for 3,735,720 shares of Class A common stock, and 20,160,281 shares of Class A common stock were available for future grant.
2018 Employee Stock Purchase Plan
In April 2018, we adopted the 2018 Employee Stock Purchase Plan ("ESPP"). The ESPP is qualified under Section 423 of the Internal Revenue Code. As of September 30, 2019, there were 3,030,407 shares of Class A common stock available for future issuance.
Stock Option Activity
A summary of stock option activity under our stock plans during the nine months ended September 30, 2019 is as follows:
Outstanding Options | |||||||||||||
Number of Shares | Weighted Average Exercise Price | Remaining Contractual Life (Years) | Aggregate Intrinsic Value | ||||||||||
(in thousands) | |||||||||||||
Balances at December 31, 2018 | 14,558,420 | $ | 25.93 | 6.78 | $ | 3,084 | |||||||
Added to plan | — | ||||||||||||
Granted | 1,433,064 | 11.19 | |||||||||||
Exercised | (336,572 | ) | 4.28 | ||||||||||
Cancelled | (687,050 | ) | 24.82 | ||||||||||
Balances at September 30, 2019 | 14,967,862 | 25.06 | 6.28 | — | |||||||||
Vested and expected to vest at September 30, 2019 | 14,632,346 | 25.23 | 6.22 | — | |||||||||
Exercisable at September 30, 2019 | 9,238,860 | 28.75 | 4.77 | — |
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RSUs Activity
A summary of our restricted stock units ("RSUs") activity and related information during the nine months ended September 30, 2019 is as follows:
Number of Awards Outstanding | Weighted Average Grant Date Fair Value | ||||||
Unvested Balance at December 31, 2018 | 16,784,800 | $ | 18.74 | ||||
Granted | 3,052,644 | 12.20 | |||||
Vested | (6,341,441 | ) | 18.27 | ||||
Forfeited | (839,062 | ) | 17.58 | ||||
Unvested Balance at September 30, 2019 | 12,656,941 | 17.48 |
Stock-Based Compensation Expense
We used the following weighted-average assumptions in applying the Black-Scholes valuation model:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
2019 | 2018 | 2019 | 2018 | |||||
Risk-free interest rate | 1.9% - 2.0% | 2.8% - 2.8% | 1.9% - 2.6% | 2.5% - 2.8% | ||||
Expected term (years) | 6.4 - 6.7 | 6.2 - 6.7 | 6.4 - 6.7 | 6.2 - 6.7 | ||||
Expected dividend yield | — | — | — | — | ||||
Expected volatility | 45.7% | 56.1% | 45.7% - 50.2% | 54.6% - 56.1% |
Stock-based Compensation - No stock-based compensation costs were capitalized in the three months ended September 30, 2019 and 2018. The following table summarizes the components of stock-based compensation expense in the consolidated statements of operations (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Cost of revenue | $ | 6,793 | $ | 16,156 | $ | 31,557 | $ | 20,025 | ||||||||
Research and development | 6,589 | 15,127 | 33,037 | 18,504 | ||||||||||||
Sales and marketing | 5,823 | 12,900 | 26,270 | 15,066 | ||||||||||||
General and administrative | 20,650 | 27,494 | 64,091 | 33,856 | ||||||||||||
Total stock-based compensation | $ | 39,855 | $ | 71,677 | $ | 154,955 | $ | 87,451 |
During the nine months ended September 30, 2019 and 2018, we recognized $155.0 million and $87.5 million of stock-based compensation expense, respectively. Our stock-based compensation expense is associated with stock options, RSUs, and our ESPP.
As of September 30, 2019, there was unrecognized compensation expense related to unvested stock options of $48.0 million. This expense is expected to be recognized over the remaining weighted-average period of 2.6 years. We had no excess tax benefits in the nine months ended September 30, 2019 and 2018.
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As of September 30, 2019, there was $76.9 million of unrecognized stock-based compensation cost related to unvested RSUs. This expense is expected to be recognized over a weighted average period of 1.1 years.
As of September 30, 2019, there was $9.6 million of unrecognized stock-based compensation cost related to the ESPP. This expense is expected to be recognized over a weighted average period of 1.1 years.
12. Power Purchase Agreement Programs
Overview
In mid-2010, we began offering our Energy Servers through our Bloom Electrons program, which we denote as Power Purchase Agreement Programs, financed via investment entities. Under these arrangements, an operating entity is created (the "Operating Company") which purchases the Energy Server from us. The end customer then enters into a power purchase agreement ("PPA") with the Operating Company to purchase the power generated by the Energy Server(s) at a specified rate per kilowatt hour for a specified term which can range from 10 to 21 years. In some cases similar to direct purchases and leases, the standard one-year warranty and performance guaranties are included in the price of the product. The Operating Company also enters into a master services agreement ("MSA") with us following the first year of service to extend the warranty services and guaranties over the term of the PPA. In other cases, the MSA, including warranties and guaranties, are billed on a quarterly basis starting in the first quarter following the placed-in-service date of the Energy Servers and continuing over the term of the PPA. The first of such arrangements was considered a sales-type lease and the product revenue from that agreement was recognized up front in the same manner as direct purchase and lease transactions. Substantially all of our subsequent PPAs have been accounted for as operating leases with the related revenue under those agreements recognized ratably over the PPA term as electricity revenue. We recognize the cost of revenue, primarily product costs and maintenance service costs, over the shorter of the estimated useful life of the Energy Server or the term of the PPA.
We and our third-party equity investors (together "Equity Investors") contribute funds into a limited liability investment entity ("Investment Company") that owns and is parent to the Operating Company (together, the "PPA Entities"). The PPA Entities constitute variable investment entities ("VIEs") under U.S. GAAP. We have considered the provisions within the contractual agreements which grant us power to manage and make decisions affecting the operations of these VIEs. We consider that the rights granted to the Equity Investors under the contractual agreements are more protective in nature rather than participating. Therefore, we have determined under the power and benefits criterion of ASC 810 - Consolidations that we are the primary beneficiary of these VIEs. On June 14, 2019, we entered into a PPA II upgrade of Energy Servers transaction, and as a result we determined that we no longer retained a controlling interest in PPA II and therefore, it was no longer consolidated as a VIE into our condensed consolidated financial statements as of June 30, 2019. See further discussion below.
As the primary beneficiary of these VIEs, we consolidate in our financial statements the financial position, results of operations and cash flows of the PPA Entities, and all intercompany balances and transactions between us and the PPA Entities are eliminated in the condensed consolidated financial statements.
The Operating Company acquires Energy Servers from us for cash payments that are made on a similar schedule as if the Operating Company were a customer purchasing an Energy Server from us outright. In the condensed consolidated financial statements, the sales of our Energy Servers to the Operating Company are treated as intercompany transactions after the elimination of intercompany balances. The acquisition of Energy Servers by the Operating Company is accounted for as a non-cash reclassification from inventory to Energy Servers within property, plant and equipment, net on our condensed consolidated balance sheets. In arrangements qualifying for sales-type leases, we reduce these recorded assets by amounts received from U.S. Treasury Department cash grants and from similar state incentive rebates.
The Operating Company sells the electricity to end customers under PPAs. Cash generated by the electricity sales, as well as receipts from any applicable government incentive program, is used to pay operating expenses (including the management and services we provide to maintain the Energy Servers over the term of the PPA) and to service the non-recourse debt with the remaining cash flows distributed to the Equity Investors. In transactions accounted for as sales-type leases, we recognize subsequent customer billings as electricity revenue over the term of the PPA and amortize any applicable government incentive program grants as a reduction to depreciation expense of the Energy Server over the term of the PPA. In transactions accounted for as operating leases, we recognize subsequent customer payments and any applicable government incentive program grants as electricity revenue over the term of the PPA.
Upon sale or liquidation of a PPA Entity, distributions would occur in the order of priority specified in the contractual agreements.
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We have established six different PPA Entities to date. The contributed funds are restricted for use by the Operating Company to the purchase of Energy Servers manufactured by us in our normal course of operations. All six PPA Entities utilized their entire available financing capacity and have completed the purchase of their Energy Servers. Any debt incurred by the Operating Companies is non-recourse to us. Under these structures, each Investment Company is treated as a partnership for U.S. federal income tax purposes. Equity Investors receive investment tax credits and accelerated tax depreciation benefits. In 2016, we purchased the tax equity investor’s interest in PPA I, which resulted in a change in our ownership interest in PPA I while we continued to hold the controlling financial interest in this company.
PPA II Upgrade of Energy Servers
Transaction Overview
On June 14, 2019, we entered into a transaction with SP Diamond State Class B Holdings, LLC (“SPDS”), a wholly owned subsidiary of Southern Power Company, in which SPDS purchased a majority interest in Diamond State Generation Partners ("DSGP"), also known as PPA II, which operates in Delaware providing alternative energy generation for state tariff rate payers (the "PPA II upgrade of Energy Servers"). DSGP used the funds received from SPDS to purchase current generation Bloom Energy Servers to upgrade 19.0 megawatts of its existing Bloom Energy Servers with 17.7 megawatts of new Bloom Energy Servers while maintaining comparable output.
In connection with the closing of this transaction, SPDS was admitted as a member of Diamond State Generation Partners, LLC ("DSGP"). DSGP, an operating company, is now owned by Diamond State Generation Holdings, LLC ("DSGH") and SPDS. SPDS made capital contributions to DSGP, which funds were used to purchase 17.7 megawatts of Energy Servers from us. Prior to selling the new generation Energy Servers to DSGP, we repurchased a proportionate number of DSGP’s existing Energy Servers and removed such existing Energy Servers from PPA II's site. In the future, subject to our ability to secure additional capital commitments from sources yet to be identified, the remaining 11.0 megawatts of existing Energy Servers that constitute PPA II may be repurchased by Bloom and replaced by up to approximately 9.8 megawatts of new Energy Servers to be sold by us to DSGP. We estimate that we will need to secure approximately $92 million of additional funding in order to complete the upgrade of the PPA II Energy Servers. In the event that we are unable to secure financing to fund the deployment of the additional 9.8 megawatts of new Energy Servers as part of the PPA II upgrade of Energy Servers, we expect to continue to operate the existing Energy Servers, in which case we may need to amend certain operating permits that had been issued for PPA II assuming all 27 megawatts of Bloom Energy Servers were upgraded. We will continue to operate and service the Energy Servers, but management of DSGP will transfer to SPDS as of the date we have completed the repurchase of all of the interests of the current equity holder in DSGH, Mehetia, Inc., a wholly-owned subsidiary of Credit Suisse AG (“Mehetia”). This repurchase will occur on the earlier of the upgrade of the remaining 11 megawatts with new Energy Servers or March 31, 2020.
Obligations to the PPA II Financiers
After giving effect to the admission of SPDS as a member of DSGP at the closing and the retirement of the existing debt, there are three investors in PPA II: Bloom Energy, Mehetia, and SPDS.
At closing, we made a partial payment for repurchase of the existing Energy Servers owned by DSGP in the amount of approximately $72.3 million, all of which was used by DSGP (along with additional DSGP's cash reserves) to prepay all of its existing indebtedness associated with PPA II. We also agreed to purchase all of the equity interests in DSGH currently held by Mehetia for an estimated purchase price of $57.5 million. The purchase of Mehetia’s equity interests in DSGH will be effected via multiple payments by us with the final payment to be made no later than March 31, 2020.
In connection with the admission of SPDS as a member of DSGP, the DSGP limited liability company agreement was amended to provide, among other things, for the allocation of revenues, benefits and expenses between us, Mehetia and SPDS. Under the amended limited liability company agreement, until such time as all of Mehetia’s equity interests in DSGH have been repurchased, Mehetia is entitled to 100% of the revenues generated from the operation of the 11 megawatts of existing Energy Servers and we are entitled to none of such revenues. From and after the date that all of Mehetia’s equity interests in DSGH have been repurchased, we will be entitled to 100% of the revenues generated by the existing Energy Servers. Additionally, SPDS is entitled to 100% of the revenues generated from the operation of the 17.7 megawatts of new Energy Servers. SPDS is also entitled to 100% of any tax attributes, income and loss associated with the new Energy Servers.
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Obligations to DSGP
At closing, we and DSGP entered into two primary commercial contracts: first, a contract for the purchase, sale and installation of the new Energy Servers (the “EPC Agreement”), and second, a contract for the operation and maintenance of both the existing Energy Servers and the new Energy Servers (the “O&M Agreement”). Both the upfront purchase price for the new Energy Servers under the EPC Agreement and the ongoing fees for our operations and maintenance of the Energy Servers under the O&M Agreement are paid on a fixed dollar per kilowatt basis.
Our obligations to DSGP pursuant to the EPC Agreement include: (i) designing, manufacturing, and installing the new Energy Servers (ii) obtaining all necessary permits and other governmental approvals necessary for the installation and operation of the new Energy Servers; and (iii) commissioning each of the new Energy Servers upon the completion of installation.
Our obligations to DSGP pursuant to the O&M Agreement include: (i) maintaining all necessary permits and other governmental approvals necessary for the operation of the Energy Servers, and maintaining such permits and approvals throughout the term of the O&M Agreement; (ii) operating and maintaining the Energy Servers in compliance with all applicable laws, permits and regulations; (iii) satisfying the efficiency and output obligations set forth in such O&M Agreement (“Performance Requirements”); and (iv) complying with the requirements of the PPA II Tariff. The O&M Agreement obligates us to repurchase some or all of the Energy Servers in the event the Energy Servers fail to comply with the Performance Requirements and we fail to remedy such failure during the cure period.
The O&M Agreement for the Energy Servers provides for the following Performance Requirements and indemnity obligations:
Efficiency Guaranty. We warrant to DSGP that the new Energy Servers will operate at a cumulative average efficiency level of 50%. If the aggregate average efficiency falls below the specified threshold, we are obligated to make a payment to DSGP equal to the increased expense resulting from such efficiency shortfall, with our aggregate liability for such payments capped at the aggregate purchase price of the Energy Servers. During the period from September 2010 to September 30, 2019, no payments have been made pursuant to the Efficiency Guaranty.
Existing Energy Server Output Warranty. We warrant to DSGP that the existing Energy Servers will, in the aggregate, generate a minimum amount of electricity in each calendar quarter, and we are obligated to repair or replace Energy Servers if such Energy Servers fail to satisfy this warranty. If we determine that a repair or replacement is not feasible, we are obligated to repurchase such Energy Servers at the original purchase price. During the period from September 2010 to September 30, 2019, no Energy Servers have been repurchased pursuant to the existing Energy Server Output Warranty.
New Energy Server Output Warranty. We warrant to DSGP that the new Energy Servers purchased by DSGP will, in the aggregate, generate a minimum amount of electricity on a cumulative basis, and we are obligated to repair or replace Energy Servers if such Energy Servers fail to satisfy this warranty. If we determine that a repair or replacement is not feasible, we are obligated to repurchase such Energy Servers at the original purchase price. During the period from the closing of the upgrade to September 30, 2019, no Energy Servers have been repurchased pursuant to the New Energy Server Output Warranty.
New Energy Server Output Guaranty. We warrant to DSGP that the new Energy Servers purchased by DSGP in connection with the PPA II upgrade of Energy Servers will, in the aggregate, generate a minimum amount of electricity on a cumulative basis, and we are obligated to make a payment to DSGP for lost revenues resulting from the shortfall below the guaranteed level if such Energy Servers fail to satisfy this warranty, with our aggregate liability for such payments capped at our customary limitation of liability for output guarantees. During the period from the closing of the upgrade to September 30, 2019, no payments have been made pursuant to the New Energy Server Output Guaranty.
Other Obligations
In addition to the rights and obligations set forth above, the transaction documents related to the upgrade of the PPA II Energy Servers contain certain representations, warranties and covenants of Bloom, DSGH, DSGP, Mehetia and SPDS, including representations and warranties of Bloom and DSGP relating to the conduct of their respective businesses prior to the closing of the transaction, as well as indemnity obligations related to the breach of such representations, warranties and covenants. In addition, we have agreed to indemnify SPDS for losses that may be incurred in the event of certain regulatory, legal or legislative development in an aggregate amount of up to $97.2 million. For this purpose, as of June 30, 2019, we established a cash-collateralized letter of credit of $20.0 million under this obligation. The Equity Capital Contribution Agreement required that in the event our shares of common stock traded at a specified price for a specified period, Southern had the right to require that Bloom either (a) provide supplemental Tariff Damages Collateral (as defined in the agreement) in the amount of the difference between the then-applicable Tariff Damages and the Tariff Damages Collateral then-available to Southern pursuant to the LLC Agreement, or (b) make a payment to Southern in the amount of such difference. During the third
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quarter of 2019, we were required under the transaction to increase collateralization of our obligation by $20.0 million; in addition, the trading price of our common stock triggered Southern’s right to obtain additional collateralization equal to the difference between the Tariff Damage Collateral and Tariff Damage, or $57.2 million, which together resulted in us funding an additional cash-collateralized letter of credit of $77.2 million. In addition, we have also agreed to indemnify SPDS for losses that may be incurred in connection with the loss or disallowance of certain tax benefits that we expect the upgrade of the PPA II Energy Servers to generate, in an incremental amount of up to $7.5 million.
Obligations Under the PPA II Tariff Agreement
In the event that DSGP claims that a Forced Outage Event, defined under the PPA II tariff agreement as the inability of DSGP to obtain a replacement component part or a service necessary for the operation of the Energy Servers at their nameplate capacity, has occurred under the PPA II tariff, DSGP is obligated to purchase and retire, on behalf of Delmarva Power & Light Company, replacement renewable energy credits ("RECs") in an amount equal to the number of megawatt hours for which it receives compensation under the ‘forced outage’ provisions of the tariff, but only if such replacement RECs are available in sufficient quantities and can be purchased for less than $45 per REC. The PPA II tariff agreement provides for payments to DSGP in the event of a Forced Outage Event lasting in excess of 90 days. For the first 90 days following the occurrence of a Forced Outage Event, no payments are made under this provision of the tariff. Thereafter, DSGP is entitled to payments equal to 70% of the payments that would have been made under the tariff but for the occurrence of the Forced Outage Event-that is, the “Forced Outage Event” provision of the PPA II tariff agreement provides for payments to DSGP under the tariff equal to the amount that would be paid were the upgraded PPA II Energy Servers operating at 70% of their nameplate capacity, irrespective of actual output. The PPA II tariff agreement also provides that the “Forced Outage Event” protections afforded thereunder shall automatically terminate in the event that we obtain an investment grade rating.
Impact of PPA II Upgrade of Energy Servers on Consolidated Financial Statements
As described above, the PPA II upgrade of Energy Servers documents contain certain representations, warranties and covenants of Bloom, DSGH, DSGP, Mehetia and SPDS, including representations and warranties of Bloom and DSGP relating to the conduct of their respective businesses prior to the closing of the transaction, as well as indemnity obligations related to the breach of such representations, warranties and covenants. In addition, we have agreed to indemnify SPDS for losses that may be incurred in the event of certain regulatory, legal or legislative development in an aggregate amount of up to $97.2 million. As of September 30, 2019, we believe these events to be remote and therefore, no liability has been recorded on our condensed consolidated financial statements.
As a result of the transaction with SPDS, we reconsidered whether we should continue to consolidate DSGP. We use a qualitative approach in assessing the consolidation requirement for each of our PPA Entities. This approach focuses on determining whether we have the power to direct those activities of the PPA Entities that most significantly affect their economic performance and whether we have the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the PPA Entities. As a result of the PPA II upgrade of Energy Servers, we determined that we no longer retain a controlling interest in PPA II and therefore it will no longer be consolidated as a VIE into our condensed consolidated financial statements as of June 30, 2019. We determined that, as of June 30, 2019, we have retained significant influence over DSGP and consequently continue to recognize our remaining interest in DSGP as an equity investment included in other long-term assets on our condensed consolidated balance sheet as of September 30, 2019.
The PPA II upgrade of Energy Servers completed through September 30, 2019 occurred in two phases, phase 1 where initially SPDS had its purchased interest in 9.7 megawatts of Energy Servers installed during June 2019, and its remaining phase 2 purchased interest in 8.0 megawatts of Energy Servers installed during July and August of 2019. During the three and nine months ended September 30, 2019, we have sold 8.0 megawatts and 17.7 megawatts of our current generation Energy Servers for $71.5 million and $159.3 million, respectively, to DSGP subsequent to its deconsolidation, which is included in product revenue, and recognized installation services of $3.2 million and $7.1 million, respectively, which is included in installation revenue, in our condensed consolidated statements of operations for the three and nine months ended September 30, 2019. Concurrently, we wrote-off 9.0 megawatts and 19.0 megawatts of our earlier generation Energy Servers for $14.6 million and $48.3 million, respectively, and installed 8.0 megawatts and 17.7 megawatts of Energy Servers at a cost of goods sold of $21.1 million and $47.4 million, which is included in cost of product revenue in our condensed consolidated statements of operations for the three and nine months ended September 30, 2019, respectively. In anticipation of replacing the remaining installed 9.0 megawatts of Energy Servers during 2019 under phase 2 which, as a result, reduced their previously expected useful lives, we recognized a one-time charge related to the decommissioning of PPA II Energy Servers of $14.6 million and $22.7 million, which is included in cost of electricity revenue in our condensed consolidated statements of operations for the three and nine months ended September 30, 2019, respectively. Additionally, in paying-off the outstanding debt and interest of PPA II amounting to $77.7 million, we incurred a debt payoff make-whole penalty of $5.9 million, which is included in general and administrative expense in our condensed consolidated statements of operations for the nine months ended September 30,
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2019. Finally, we had PPA II debt issuance costs written-off of $1.0 million and additional interest expense incurred for PPA 2 debt payoff of $0.1 million, which is included in interest expense in our condensed consolidated statements of operations for the nine months ended September 30, 2019.
The PPA II upgrade of Energy Servers resulted in the following impacts on our condensed consolidated balance sheet as of September 30, 2019: (i) cash and cash equivalents decreased by $47.8 million, comprised of approximately $166.4 million cash receipts for the sale of new systems to PPA II, mostly offset by $77.7 million used for the repayment of all PPA II debt plus a make-whole payment fee of $5.9 million, a $43.7 million distribution to Credit Suisse related to the redemption of noncontrolling interest, and a $85.9 million net outflow into restricted cash for certain contingent indemnifications for SPDS under the PPA II upgrade of Energy Servers in the form of a letter of credit to SPDS; (ii) property, plant and equipment, net decreased $48.3 million due to the write-off of 19 megawatts of older Energy Servers from PPA II completed during August 2019; (iii) restricted cash long-term increased $85.9 million, comprised of $97.2 million for certain contingent indemnifications for SPDS under the PPA II upgrade of Energy Servers, partially offset by $11.3 million released after the repayment of debt; and (iv) noncontrolling interest decreased $55.4 million. This is comprised of $43.7 million of cash payments to Credit Suisse resulting from redemption of the noncontrolling interest in PPA II plus the unpaid balance to Credit Suisse of $11.7 million which was reclassified to accrued other current liabilities. Additionally, accrued other current liabilities increased by $0.7 million as a result of accretion, resulting in an ending balance of $12.4 million related to our commitment to mandatorily redeem their noncontrolling interest in DSGH by March 31, 2020 under the PPA II upgrade of Energy Servers.
PPA Entities' Activities Summary
The table below shows the details of the five continuing Investment Companies and their cumulative activities from inception to the periods indicated (dollars in thousands):
PPA II | PPA IIIa | PPA IIIb | PPA IV | PPA V | ||||||||||||||||
Overview: | ||||||||||||||||||||
Maximum size of installation (in megawatts) | 30 | 10 | 6 | 21 | 40 | |||||||||||||||
Installed size (in megawatts) | 11 | 4 | 10 | 5 | 19 | 37 | ||||||||||||||
Term of power purchase agreements (years) | 21 | 15 | 15 | 15 | 15 | |||||||||||||||
First system installed | Jun-12 | Feb-13 | Aug-13 | Sep-14 | Jun-15 | |||||||||||||||
Last system installed | Nov-13 | Jun-14 | Jun-15 | Mar-16 | Dec-16 | |||||||||||||||
Income (loss) and tax benefits allocation to Equity Investor | 99% | 99% | 99% | 90% | 99% | |||||||||||||||
Cash allocation to Equity Investor | 99% | 99% | 99% | 90% | 90% | |||||||||||||||
Income (loss), tax and cash allocations to Equity Investor after the flip date | 5% | 5% | 5% | No flip | No flip | |||||||||||||||
Equity Investor ¹ | Credit Suisse | US Bank | US Bank | Exelon Corporation | Exelon Corporation | |||||||||||||||
Put option date ² | March 31, 2020 | 1st anniversary of flip point | 1st anniversary of flip point | N/A | N/A | |||||||||||||||
Company cash contributions | $ | 22,442 | $ | 32,223 | $ | 22,658 | $ | 11,669 | $ | 27,932 | ||||||||||
Company non-cash contributions ³ | $ | — | $ | 8,655 | $ | 2,082 | $ | — | $ | — | ||||||||||
Equity Investor cash contributions | $ | 139,993 | $ | 36,967 | $ | 20,152 | $ | 84,782 | $ | 227,344 | ||||||||||
Debt financing | $ | 144,813 | $ | 44,968 | $ | 28,676 | $ | 99,000 | $ | 131,237 | ||||||||||
Cumulative Activity as of September 30, 2019: | ||||||||||||||||||||
Distributions to Equity Investor | $ | 163,626 | $ | 4,616 | $ | 2,109 | $ | 6,422 | $ | 70,141 | ||||||||||
Debt repayment—principal | $ | 144,813 | $ | 6,122 | $ | 4,608 | $ | 17,314 | $ | 8,633 | ||||||||||
Cumulative Activity as of December 31, 2018: | ||||||||||||||||||||
Distributions to Equity Investor | $ | 116,942 | $ | 4,063 | $ | 1,807 | $ | 4,568 | $ | 66,745 | ||||||||||
Debt repayment—principal | $ | 65,114 | $ | 4,431 | $ | 3,953 | $ | 15,543 | $ | 5,780 | ||||||||||
¹ Investor name represents ultimate parent of subsidiary financing the project.
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² Investor right on the certain date, upon giving us advance written notice, to sell the membership interests to us or resign or withdraw from the investment partnership.
³ Non-cash contributions consisted of warrants that were issued by us to respective lenders to each PPA Entity, as required by such entity’s credit agreements. The corresponding values are amortized using the effective interest method over the debt term.
4 Installed base decreased from December 31, 2018 due to the repurchase of 19 megawatts of our Energy Servers during June, July and August 2019 under the PPA II upgrade of Energy Servers. See disclosures above.
Some of our PPA Entities contain structured provisions whereby the allocation of income and equity to the Equity Investors changes at some point in time after the formation of the PPA Entity. The change in allocations to Equity Investors (or the "flip") occurs based either on a specified future date or once the Equity Investors reach their targeted rate of return. For PPA Entities with a specified future date for the flip, the flip occurs January 1 of the calendar year immediately following the year that includes the fifth anniversary of the date the last site achieves commercial operation.
The noncontrolling interests in PPA IIIa and PPA IIIb are redeemable as a result of the put option held by the Equity Investors as of September 30, 2019. The noncontrolling interests in PPA II, IIIa and PPA IIIb are redeemable as a result of the put option held by the Equity Investors as of December 31, 2018. The redemption value is the put amount. At September 30, 2019 and December 31, 2018, the carrying value of redeemable noncontrolling interests of $0.6 million and $57.3 million, respectively, exceeded the maximum redemption value.
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PPA Entities’ Aggregate Assets and Liabilities
Generally, Operating Company assets can be used to settle only the Operating Company obligations and Operating Company creditors do not have recourse to us. The aggregate carrying values of the PPA Entities’ assets and liabilities in the condensed consolidated balance sheets, after eliminations of intercompany transactions and balances, were as follows (in thousands):
September 30, | December 31, | |||||||
2019 1 | 2018 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 4,960 | $ | 5,295 | ||||
Restricted cash | 1,803 | 2,917 | ||||||
Accounts receivable | 5,217 | 7,516 | ||||||
Customer financing receivable | 5,919 | 5,594 | ||||||
Prepaid expenses and other current assets | 5,178 | 4,909 | ||||||
Total current assets | 23,077 | 26,231 | ||||||
Property and equipment, net | 300,939 | 399,060 | ||||||
Customer financing receivable, non-current | 62,616 | 67,082 | ||||||
Restricted cash | 114,213 | 2 | 27,854 | |||||
Other long-term assets | 29,589 | 2,692 | ||||||
Total assets | $ | 530,434 | $ | 522,919 | ||||
Liabilities | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 393 | $ | 724 | ||||
Accrued other current liabilities | 14,396 | 1,442 | ||||||
Deferred revenue and customer deposits | 786 | 786 | ||||||
Current portion of debt | 11,483 | 21,162 | ||||||
Total current liabilities | 27,058 | 24,114 | ||||||
Derivative liabilities, net of current portion | 10,654 | 3,626 | ||||||
Deferred revenue, net of current portion | 8,108 | 8,696 | ||||||
Long-term portion of debt | 249,115 | 323,360 | ||||||
Other long-term liabilities | 2,216 | 1,798 | ||||||
Total liabilities | $ | 297,151 | $ | 361,594 |
1 These amounts include PPA II financial statement balances. See discussion above.
2 The increase in restricted cash from December 31, 2018 is primarily due to $97.2 million of cash collateral used to back a Letter of Credit required for the PPA II upgrade.
As stated above, we are a minority shareholder in the PPA Entities for the administration of our Bloom Electrons program. PPA Entities contain debt that is non-recourse to us. The PPA Entities also own Energy Server assets for which we do not have title. Although we will continue to have Power Purchase Agreement Program entities in the future and offer customers the ability to purchase electricity without the purchase of Energy Servers, we do not intend to be a minority investor in any new Power Purchase Agreement Program entities.
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We believe that by presenting assets and liabilities separate from the PPA Entities, we provide a better view of the true operations of our core business. The table below provides detail into the assets and liabilities of Bloom Energy separate from the PPA Entities. The following table shows Bloom Energy's stand-alone, the PPA Entities combined and these consolidated balances as of September 30, 2019 and December 31, 2018 (in thousands):
September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||
Bloom | PPA Entities | Consolidated | Bloom | PPA Entities | Consolidated | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current assets | $ | 467,282 | $ | 23,077 | $ | 490,359 | $ | 646,350 | $ | 26,231 | $ | 672,581 | ||||||||||||
Long-term assets | 172,211 | 507,357 | 679,568 | 220,399 | 496,688 | 717,087 | ||||||||||||||||||
Total assets | $ | 639,493 | $ | 530,434 | $ | 1,169,927 | $ | 866,749 | $ | 522,919 | $ | 1,389,668 | ||||||||||||
Liabilities | ||||||||||||||||||||||||
Current liabilities | $ | 250,990 | $ | 15,575 | $ | 266,565 | $ | 246,866 | $ | 2,952 | $ | 249,818 | ||||||||||||
Current portion of debt | 15,678 | 11,483 | 27,161 | 8,686 | 21,162 | 29,848 | ||||||||||||||||||
Long-term liabilities | 229,499 | 20,978 | 250,477 | 293,739 | 14,120 | 307,859 | ||||||||||||||||||
Long-term portion of debt | 387,693 | 249,115 | 636,808 | 388,073 | 323,360 | 711,433 | ||||||||||||||||||
Total liabilities | $ | 883,860 | $ | 297,151 | $ | 1,181,011 | $ | 937,364 | $ | 361,594 | $ | 1,298,958 |
13. Commitments and Contingencies
Commitments
Operating Leases
During the nine months ended September 30, 2019 and 2018, rent expense for our facilities was $5.7 million and $4.6 million, respectively.
At September 30, 2019, future minimum lease payments under operating leases were as follows (in thousands):
Remainder of 2019 | $ | 9,813 | |
2020 | 15,891 | ||
2021 | 13,218 | ||
2022 | 12,288 | ||
2023 | 12,006 | ||
Thereafter | 42,860 | ||
$ | 106,076 |
Equipment Leases - Beginning in December 2015, we are a party to master lease agreements that provide for the sale of Energy Servers to third parties and the simultaneous leaseback of the systems which we then subleases to customers. The lease agreements expire on various dates through 2025 and there was no recorded rent expense for the nine months ended September 30, 2019 and 2018.
Purchase Commitments with Suppliers and Contract Manufacturers - In order to reduce manufacturing lead-times and to ensure an adequate supply of inventories, we have agreements with our component suppliers and contract manufacturers to allow long lead-time component inventory procurement based on a rolling production forecast. We are contractually obligated to purchase long lead-time component inventory procured by certain manufacturers in accordance with our forecasts. We can generally give notice of order cancellation at least 90 days prior to the delivery date. However, we may also issue purchase orders to certain of our component suppliers and third-party manufacturers that may not be cancelable. As of September 30, 2019 and 2018, we had no material open purchase orders with our component suppliers and third-party manufacturers that are not cancelable.
Power Purchase Agreement Program - Under the terms of the Bloom Electrons program, customers agree to purchase power from our Energy Servers at negotiated rates, generally for periods of up to twenty-one years. We are responsible for all
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operating costs necessary to maintain, monitor and repair these Energy Servers, including the fuel necessary to operate the systems under certain PPA contracts. The risk associated with the future market price of fuel purchase obligations is mitigated with commodity contract futures.
The PPA Entities guarantee the performance of Energy Servers at certain levels of output and efficiency to its customers over the contractual term. The PPA Entities monitor the need for any accruals arising from such guaranties, which are calculated as the difference between committed and actual power output or between natural gas consumption at warranted efficiency levels and actual consumption, multiplied by the contractual rates with the customer. Amounts payable under these guaranties are accrued in periods when the guaranties are not met and are recorded in cost of service revenue in the consolidated statements of operations. We paid $3.5 million and $0.9 million for the nine months ended September 30, 2019 and 2018, respectively. See Note 12 - Power Purchase Agreement Programs - PPA II Upgrade of Energy Servers for additional discussion related to PPA II's commitments and contingencies.
In June 2015, PPA V entered into a $131.2 million credit agreement to fund the purchase and installation of Energy Servers. The lenders have commitments to an LC facility with the aggregate principal amount of $6.2 million. The LC facility is to fund the Debt Service Reserve Account. The amount reserved under the LC as of September 30, 2019 and December 31, 2018 was $5.0 million.
Contingencies
Indemnification Agreements - We enter into standard indemnification agreements with our customers and certain other business partners in the ordinary course of business. Our exposure under these agreements is unknown because it involves future claims that may be made against us but have not yet been made. To date, we have not paid any claims or been required to defend any action related to our indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.
Warranty Costs - We generally warrant our products sold to our direct customers for one year following the date of acceptance of the products under a standard one-year warranty. As part of our MSAs, we provide output and efficiency guaranties (collectively “performance guaranties”) to our customers when systems operate below contractually specified levels of efficiency and output. Such amounts have not been material to date.
The standard one-year warranty covers defects in materials and workmanship under normal use and service conditions, and against manufacturing or performance defects. We accrue this warranty expense using our best estimate of the amount necessary to settle future and existing warranty claims as of the balance sheet date.
Our obligations under our standard one-year warranty and MSA are generally in the form of product replacement, repair or reimbursement for higher customer electricity costs. Further, if the Energy Servers run at a lower efficiency or power output than we committed under our performance guaranty, we will reimburse the customer for the underperformance. Our aggregate reimbursement obligation for this performance guaranty for each order is capped at a portion of the purchase price. Prior to fiscal year 2014, certain MSAs with direct customers were accounted for as separately-priced warranty contracts under ASC 605-20-25 Separately Priced Extended Warranty and Product Maintenance Contracts (formerly FTB 90-1), in which we recorded an accrual for any expected costs that exceed the contracted revenues for that one-year service renewal arrangement, and is included as a component of the accrued warranty liability. Customers may renew the MSAs leading to future expense that is not recognized under GAAP until the renewal occurs. Over time, as our service offering evolved and we began managing the Energy Servers taking into consideration individual customer arrangements as well as our Bloom Energy Server fleet management objectives, our service offering evolved to the point that our services changed, becoming a more strategic offering for both us and our customers. Additionally, virtually all of our sales arrangements included bundled sales of maintenance service agreements along with the Energy Servers. The result is that we allocate a certain portion of the contractual revenue related to the Energy Servers to the MSAs based on our BESP compared to the stated amount in the service contracts.
Delaware Economic Development Authority - In March 2012, we entered into an agreement with the Delaware Economic Development Authority to provide a grant of $16.5 million as an incentive to establish a new manufacturing facility in Delaware and to provide employment for full time workers at the facility over a certain period of time. The grant contains two types of milestones that we must complete to retain the entire amount of the grant proceeds. The first milestone was to provide employment for 900 full time workers in Delaware by the end of the first recapture period of September 30, 2017. The second milestone was to pay these full time workers a cumulative total of $108.0 million in compensation by September 30, 2017. There are two additional recapture periods at which time we must continue to employ 900 full time workers and the cumulative total compensation paid by us is required to be at least $324.0 million by September 30, 2023. As of September 30, 2019, we had 345 full time workers in Delaware and paid $113.8 million in cumulative compensation. As of September 30, 2018, we had 335 full time workers in Delaware and paid $86.0 million in cumulative compensation. We have so far received $12.0 million of the grant which is contingent upon meeting the milestones through September 30, 2023. In the event that we do not meet the milestones, we may have to repay the Delaware Economic Development Authority the grants received to date.
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As of September 30, 2019, we had cumulatively paid $1.5 million for recapture provisions and recorded $10.5 million in other long-term liabilities for potential recapture.
Self-Generation Incentive Program ("SGIP") - Our PPA Entities’ customers receive payments under the SGIP which is a program specific to the State of California that provides financial incentives for the installation of qualifying new self-generation equipment that we own. The SGIP program issues 50% of the fully anticipated amount in the first year the equipment is placed into service. The remaining incentive is then paid based on the size of the equipment (i.e., nameplate kilowatt capacity) over the subsequent five years.
The SGIP program has operational criteria primarily related to fuel mixture and minimum output for the first five years after the qualified equipment is placed in service. If the operational criteria are not fulfilled, it could result in a partial refund of funds received. However, for certain PPA Entities, we make SGIP reservations on behalf of the PPA Entity and, therefore, the PPA Entity bears the risk of loss if these funds are not paid.
Investment Tax Credits ("ITCs") - Our Energy Servers are eligible for federal ITCs that accrued to qualified property under Internal Revenue Code Section 48 when placed into service. In early 2018, the ITC law was retroactively reinstated, extending and phasing-out the ITC through 2021, as follows:
• | the 30% ITC credit was reinstated retroactive to January 1, 2017; |
• | installations that commence construction before January 1, 2020 are eligible for a 30% credit; |
• | installations that commence construction in 2020 are eligible for a 26% credit; |
• | installations that commence construction in 2021 are eligible for a 22% credit; and |
• | installations have to be placed in service by January 1, 2024 or the installations become ineligible for the credit. |
The ITC program has operational criteria that extend for five years. If the energy property is disposed or otherwise ceases to be qualified investment credit property before the close of the five year recapture period is fulfilled, it could result in a partial reduction of the incentives. The purchase of Energy Servers were made by the PPA Entities and, therefore, the PPA Entities bear the risk of repayment if the assets placed in service do not meet the ITC operational criteria in the future.
Legal Matters - From time to time, we are involved in disputes, claims, litigation, investigations, proceedings and/or other legal actions consisting of commercial, securities and employment matters that arise in the ordinary course of business. We review all legal matters at least quarterly and assess whether an accrual for loss contingencies needs to be recorded. The assessment reflects the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular situation. We record an accrual for loss contingencies when management believes that it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Legal matters are subject to uncertainties and are inherently unpredictable, so the actual liability in any such matters may be materially different from our estimates. If an unfavorable resolution were to occur, there exists the possibility of a material adverse impact on the consolidated financial condition, results of operations or cash flows for the period in which the resolution occurs or on future periods.
In July 2018, two former executives of Advanced Equities, Inc., Keith Daubenspeck and Dwight Badger, filed a Statement of Claim with the American Arbitration Association in Santa Clara, CA, against us, Kleiner Perkins, Caufield & Byers, LLC (“KPCB”), New Enterprise Associates, LLC (“NEA”) and affiliated entities of both KPCB and NEA seeking to compel arbitration and alleging a breach of a confidential agreement executed between the parties on June 27, 2014 (“Confidential Agreement”). On May 7, 2019, KPCB and NEA were dismissed with prejudice. On June 15, 2019, a Second Amended Statement of Claim was filed against us alleging securities fraud, fraudulent inducement, a breach of the Confidential Agreement, and violation of the California unfair competition law. On July 16, 2019, we filed our Answering Statement and Affirmative Defenses. We believe the Second Amended Statement of Claim to be without merit and, as a result, we have recorded no loss contingency related to this claim.
In June 2019, Messrs. Daubenspeck and Badger filed a complaint against our CEO, out CFO and our former CFO in the United States District Court for the Northern District of Illinois, Case No. 1:19-cv-04305, asserting nearly identical claims as those in the pending arbitration discussed above. The lawsuit has been stayed pending the outcome of the arbitration. We believe the complaint to be without merit and, as a result, we have recorded no loss contingency related to this claim.
In March 2019, the Lincolnshire Police Pension fund filed a class action complaint in the Superior Court of the State of California, County of Santa Clara, against us, certain members of our senior management, certain of our directors and the underwriters in our initial public offering alleging violations under Sections 11 and 15 of the Securities Act of 1933, as amended, for alleged misleading statements or omissions in our Form S-1 Registration Statement filed with the Securities and Exchange Commission in connection with our July 25, 2018 initial public offering. Two related class action cases were subsequently filed in the Santa Clara County Superior Court against the same defendants containing the same allegations; Rodriquez vs Bloom Energy et al. was filed on April 22, 2019 and Evans vs Bloom Energy et al. was filed on May 7, 2019.
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These cases have been consolidated. Plaintiffs' Consolidated Amended Complaint was filed with the court on September 12, 2019. On October 4, 2019, defendants moved to stay the lawsuit pending the federal district court action discussed below. The hearing on the motion to stay is set for December 13, 2019. Discovery is currently stayed. We believe the complaint to be without merit and we intend to vigorously defend.
In May 2019, Elissa Roberts filed a class action complaint in the federal district court for the Northern District of California against us, certain members of our senior management team, and certain of our directors alleging violations under Section 11 and 15 of the Securities Act of 1933, as amended, for alleged misleading statements or omissions in our Form S-1 Registration Statement filed with the Securities and Exchange Commission in connection with our July 25, 2018 initial public offering. On September 3, James Hunt was appointed as lead plaintiff and Levi & Korsinsky was appointed as plaintiff’s counsel. On November 4, 2019, plaintiffs filed an amended complaint adding the underwriters in our initial public offering, claims under Sections 10b and 20a of the Securities Exchange Act of 1934 and extending the class period to September 16, 2019. We believe the complaint to be without merit and we intend to vigorously defend.
In November 2019, Michael Bolouri filed a class action complaint in the federal district court for the Northern District of California against us, certain members of our senior management, certain of our directors and the underwriters in our initial public offering, alleging violations under Section 11 and 15 of the Securities Act of 1933, as amended, and violations under Sections 10b and 20a of the Securities Exchange Act of 1934 for alleged misleading statements or omissions in our Form S-1 Registration Statement filed with the Securities and Exchange Commission in connection with our July 25, 2018 initial public offering and continuing through September 16, 2019. We believe this is a related case to the Roberts class action discussed above and we will seek to have it so determined and ultimately consolidated therewith.
14. Segment Information
Segments and the Chief Operating Decision Maker
Our chief operating decision makers ("CODMs"), the Chief Executive Officer and the Chief Financial Officer, review financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. The CODMs allocate resources and make operational decisions based on direct involvement with our operations and product development efforts. Bloom Energy is managed under a functionally-based organizational structure with the head of each function reporting to the Chief Executive Officer. The CODMs assess performance, including incentive compensation, based upon consolidated operations performance and financial results on a consolidated basis. As such, we have a single reporting segment and operating unit structure.
15. Related Party Transactions
Our results of operations included the following related party transactions (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Total revenue from related parties | $ | 75,703 | $ | 172 | $ | 168,908 | $ | 31,097 | ||||||||
Consulting expenses paid to related parties (included in general and administrative expense) | 51 | 52 | 153 | 153 | ||||||||||||
Interest expense on debt to related parties | 1,605 | 1,966 | 4,823 | 7,265 |
Bloom Energy Japan Limited
In May 2013, we entered into a joint venture with Softbank Corp., which is accounted for as an equity method investment. Under this arrangement, we sell Energy Servers and provide maintenance services to the joint venture. For the three months ended September 30, 2019 and 2018 we recognized related party total revenue of $1.0 million and $0.2 million, respectively. For the nine months ended September 30, 2019 and 2018 we recognized related party total revenue of $2.5 million and $31.1 million, respectively. Accounts receivable from this joint venture was $0.3 million as of September 30, 2019 and $3.3 million as of December 31, 2018, respectively.
Diamond State Generation Holdings, LLC
On June 14, 2019, we entered into a transaction with SP Diamond State Class B Holdings for the PPA II upgrade of Energy Servers. In connection with the closing of this transaction, SPDS was admitted as a member of Diamond State
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Generation Partners, LLC ("DSGP"). DSGP, an operating company was a wholly owned subsidiary of DSGH prior to June 14, 2019. As a result of the PPA II upgrade of Energy Servers transaction, we determined that we no longer retain a controlling interest in PPA II and therefore it will no longer be consolidated as a variable interest entity, or VIE, into our condensed consolidated financial statements as of June 30, 2019. DSGP is considered to be a related party as it relates to our PPA II upgrade of Energy Servers transaction for which we recognized related party revenue of approximately $74.7 million and $166.4 million, comprised of product revenue of approximately $71.5 million and $159.3 million and installation revenue of $3.2 million and $7.1 million, for the three and nine months ended September 30, 2019, respectively. We determined as of June 30, 2019, that we have retained significant influence over DSGP and consequently continue to recognize our remaining interest in DSGP as an equity investment as of September 30, 2019. See Note 12 - Power Purchase Agreement Programs - PPA II Upgrade of Energy Servers. We had $1.0 million in accounts receivable from DSGP as of September 30, 2019.
Consulting Arrangement
In January 2009, we entered into a consulting agreement with General Colin L. Powell, a member of our board of directors, pursuant to which General Powell performs certain strategic planning and advisory services for us. Pursuant to this consulting agreement, General Powell receives compensation of $125,000 per year and reimbursement for reasonable expenses. In July 2019, the consulting agreement was amended to reduce the compensation payable to General Powell who will no longer be designated a related party for reporting purposes.
Debt to Related Parties
The following is a summary of our debt and convertible notes from investors considered to be related parties as of September 30, 2019 (in thousands):
Unpaid Principal Balance | Net Carrying Value | |||||||||||||||
Current | Long- Term | Total | ||||||||||||||
Recourse debt from related parties: | ||||||||||||||||
6% convertible promissory notes due December 2020 from related parties | $ | 27,734 | $ | — | $ | 27,734 | $ | 27,734 | ||||||||
Non-recourse debt from related parties: | ||||||||||||||||
7.5% term loan due September 2028 from related parties | 38,847 | 3,500 | 31,781 | 35,281 | ||||||||||||
Total debt from related parties | $ | 66,581 | $ | 3,500 | $ | 59,515 | $ | 63,015 |
The following is a summary of our debt and convertible notes from investors considered to be related parties as of December 31, 2018 (in thousands):
Unpaid Principal Balance | Net Carrying Value | |||||||||||||||
Current | Long- Term | Total | ||||||||||||||
Recourse debt from related parties: | ||||||||||||||||
6% convertible promissory notes due December 2020 from related parties | $ | 27,734 | $ | — | $ | 27,734 | $ | 27,734 | ||||||||
Non-recourse debt from related parties: | ||||||||||||||||
7.5% term loan due September 2028 from related parties | 40,538 | 2,200 | 34,119 | 36,319 | ||||||||||||
Total debt from related parties | $ | 68,272 | $ | 2,200 | $ | 61,853 | $ | 64,053 |
Regarding non-recourse debt from related parties, we repaid $0.5 million and $0.8 million of principal plus interest in the three months ended September 30, 2019 and 2018, respectively, and we repaid $1.7 million and $2.3 million of principal plus interest in the nine months ended September 30, 2019 and 2018, respectively. No other significant changes have occurred in total debt from related parties since December 31, 2018. See Note 6 - Outstanding Loans and Security Agreements for additional information on our debt facilities. During the three months ended September 30, 2019 and 2018, interest expense on debt from related parties was $1.6 million and $2.0 million, respectively, and during the nine months ended September 30, 2019 and 2018, interest expense on debt from related parties was $4.8 million and $7.3 million, respectively.
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16. Subsequent Events
There have been no subsequent events that occurred during the period subsequent to the date of these financial statements that would require adjustment to, or disclosure in, the financial statements as presented.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties as described under the heading Special Note Regarding Forward-Looking Statements following the Table of Contents of this Quarterly Report on Form 10-Q. You should review the disclosure under ITEM 1A - Risk Factors in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
Our solution, our Energy Server, is a stationary power generation platform built for the digital age and capable of delivering highly reliable, uninterrupted, 24x7 constant power that is also clean and sustainable. The Energy Server converts standard low-pressure natural gas or biogas into electricity through an electrochemical process without combustion, resulting in very high conversion efficiencies and lower harmful emissions than conventional fossil fuel generation. A typical configuration produces 250 kilowatts of power in a footprint roughly equivalent to that of half of a standard thirty-foot shipping container, or approximately 125 times more space-efficient than solar power generation. Two hundred fifty (250) kilowatts of power is roughly equivalent to the constant power requirement of a typical big box retail store. Any number of these Energy Server systems can be clustered together in various configurations to form solutions from hundreds of kilowatts to many tens of megawatts.
We market and sell our Energy Servers primarily through our direct sales organization in the United States, and also have direct and indirect sales channels internationally, primarily to our Asia Pacific region. Recognizing that deploying our solutions requires a material financial commitment, we have developed a number of financing options to support sales of Energy Servers to customers that lack the financial capability to purchase our Energy Servers directly, who prefer to finance the acquisition using third party financing, or who prefer 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 recently expanded our below investment-grade customer base and have also expanded internationally to target customers with 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.
Purchase and Lease Programs
Initially, we only offered our Energy Servers on a direct purchase basis, in which the customer purchases the product directly from us. In order to expand our offerings to customers who lack the financial capability to purchase our Energy Servers directly and/or who prefer to lease the product or contract for our services on a pay-as-you-go model, we subsequently developed the Traditional Lease, Managed Services, Bloom Electrons Program and further, our Third-Party PPA Program. The Third-Party PPA Program carries many of the same obligations as a traditional Bloom Electrons program, except that we do not have any equity interest in the PPA structure. Therefore, the Bloom Electrons programs and the various Third-Party PPA Programs are collectively described here under the Power Purchase Agreement Program(s). The substantial majority of bookings made and revenue generated in recent periods are pursuant to Third-Party PPA Programs and sales to International Channel Partners.
Power Purchase Agreement Programs
Our customers have the option to purchase electricity produced by our Energy Servers through a financed offering which we refer to as a Power Purchase Agreement Program, whereby one or more parties are equity investors in financing the entities that purchase the Energy Servers. The entity owning the Energy Server then enters into agreements with the customer pursuant to which the customer purchases the electricity generated by the Energy Server for a fixed price per kilowatt-hour. Our Power Purchase Agreement Programs include both the Bloom Electrons Program, which includes an equity investment by us and in which we recognize revenue as the electricity is produced, and our Third-Party PPA Programs, in which we have no equity investment and we recognize revenue on acceptance.
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For further information about our Power Purchase Agreement Programs, see Note 12 - Power Purchase Agreement Programs - PPA II Upgrade of Energy Servers to our consolidated financial statements included in this Quarterly Report on Form 10-Q.
With our Bloom Electrons Program, we endeavored to assist our customers' purchases by directly participating in financing the purchase of their Energy Server. More recently, we have moved to providing the same service to our customers without our direct involvement in the capital financing and therefore, having no equity investment in the resulting PPA. We refer to this purchase option as Third-Party PPA arrangements, structured in a near-identical manner and with the same terms and conditions as our Bloom Electrons Program (described above), only without our assuming an equity position in the PPA structure. This way, we retain the benefits for the marketability of our Energy Servers without the capital burden and without the potential financial liability.
On June 28, 2019, we sold all of our equity interests in 2018 ESA Project Company, LLC (the “Project Company”) to Project Oxygen Holdings, LLC, a wholly owned subsidiary of Duke Energy One, Inc. (“Duke”). The Project Company is party to a portfolio of power purchase agreements with commercial off-takers. Simultaneously with the sale of equity interests, the Project Company entered into sale agreement with us whereby, subject to satisfaction of certain conditions, the Project Company committed to purchase approximately 36.8 megawatts of Energy Servers from us for a total amount of no more than $249 million. Additionally, we agreed to provide operations and maintenance services for the portfolio of Energy Servers. We consider this transaction a Third-Party PPA arrangement. The terms and conditions of this transaction, including the suite of warranties and guaranties provided with respect to the performance of the Energy Servers, are customary for Bloom transactions of this type.
Lease Programs
In our Lease Programs, we sell the Energy Server to a financing party that in turn leases the Energy Server to the customer. We then enter into an operations and maintenance agreement with the customer. The customer pays the financing party a rent payment and pays us an operations and maintenance fee. In our Lease programs, we recognize revenue at the time of the sale to the financing party, which typically occurs in connection with acceptance.
Managed Services Programs
In our Managed Services Programs, we sell the Energy Server to a financing party and simultaneously lease the Energy Server back from the financing party. We then enter into an Energy Server services agreement with the customer. The customer pays us a fixed payment equal to our lease payment obligation to the financing party. In some cases, the customer may also pay us an operations and maintenance fee. In our Managed Services Programs, we recognize revenue at the time of the sale to the financing party, which typically occurs in connection with acceptance.
Purchase Options
Depending upon the purchase option chosen by our customer, either the customer or the financing provider may utilize investment tax credits and other government incentives. However, the timing of the product-related cash flows to us is generally consistent across all of the purchase options. We generally receive all product-related payments by the time that the product is accepted by the end customer.
Our capacity to offer our Energy Servers through any of these arrangements depends in large part on the ability of the parties involved in providing payment for the Energy Servers to monetize the related investment tax credits, accelerated tax depreciation and other incentives, and/or the future power purchase obligations of the end customer. Interest rate fluctuations would also impact the attractiveness of any financing offerings for our customers, and currency exchange fluctuations may also impact the attractiveness of international offerings. The Traditional Lease, Managed Services Programs, and Power Purchase Agreement Programs options are limited by the creditworthiness of the customer. Additionally, the Traditional Lease and Managed Services Programs options, as with all leases, are also limited by the customer’s willingness to commit to making fixed payments regardless of the performance of the Energy Servers or our performance of our obligations under the customer agreement.
Under each purchase option, we provide warranties and performance guaranties for the Energy Servers’ efficiency and output. Under direct purchase, Traditional Lease, and Power Purchase Agreement Program options, the warranty and performance guaranty is typically included in the price of the Energy Server for the first year. The warranty and performance guaranty may be renewed annually at the customer’s option - as an operations and maintenance services agreement - at predetermined prices for a period of up to 30 years. Historically, our customers have almost always exercised their option to renew under these operations and maintenance services agreements. Under the Power Purchase Agreement Programs, we provide warranties and performance guaranties regarding the Energy Servers’ efficiency to the customer (i.e., the electricity user), and we provide warranties and performance guaranties regarding the Energy Servers’ output to the customer that purchases the Energy Servers. Additionally, under the Managed Services Program, the operations and maintenance services
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agreements are priced separately and included for a fixed period specified in the customer agreement. This period is typically either 6 or 10 years, which may be extended at the option of the parties for additional years with all payments made annually.
Warranty Commitments - We typically provide (i) an output warranty to operate at or above a specified baseload output of the Energy Servers on a site, and (ii) an efficiency warranty to operate at or above a specified level of fuel efficiency. Both are measured on a monthly, cumulative, or other basis, as specified in the Financing Agreement or customer agreement, as applicable. Upon the applicable beneficiary making a warranty claim for a failure of any of our warranty commitments, we are then obligated to repair or replace the Energy Server, or if a repair or replacement is not feasible, to pay the customer an amount approximately equal to the net book value of the Energy Server, after which the Financing Agreement or customer agreement would be terminated.
Performance Guaranties - Our performance guaranties are negotiated on a case-by-case basis, but we typically provide (i) an output guaranty to deliver a specified amount of electricity, and (ii) an efficiency guaranty to operate at or about a specified level of fuel efficiency. The output guaranty and efficiency guaranty are each typically measured on a cumulative basis from the date the applicable Energy Server(s) are commissioned, but the measurement period may be subject to negotiations on a case-by-case basis. In each case, underperformance obligates us to make a payment to the applicable beneficiary, subject to a cap specified in the applicable agreement.
International Channel Partners
Prior to 2018, we consummated a small number of sales outside the United States of America, including in India and Japan. In India, sales activities are currently conducted by Bloom Energy (India) Pvt. Ltd., our wholly-owned indirect subsidiary; however, we are currently evaluating the Indian market to determine whether the use of channel partners would be a beneficial go-to-market strategy to grow our India market sales.
In Japan, sales are conducted pursuant to a Japanese joint venture established between us and subsidiaries of SoftBank Corp, called Bloom Energy Japan Limited ("Bloom Energy Japan"). Under this arrangement, we sell Energy Servers to Bloom Energy Japan and we recognize product revenue once the Energy Servers leave the port of the U.S. as Bloom Energy Japan enters into the contract with the end customer and performs all installation work, as well as some of the operations and maintenance work.
In 2018, Bloom Energy Japan consummated a sale of Energy Servers into certain countries in the Asia Pacific region. In addition, we have also entered into a Preferred Distributor Agreement with SK Engineering & Construction Co., Ltd. and SKD&D to enable us to sell directly into the Asia Pacific region.
In September 2019, we entered into a joint venture agreement with SK Engineering & Construction Co., Ltd., a joint stock company organized under the laws of the Republic of Korea (“SK E&C”), to establish a light-assembly facility in South Korea for sales of certain portions of the Bloom Server for the stationary utility and commercial and industrial market in South Korea. The joint venture will be majority controlled and managed by Bloom. We expect the facility to be operational by mid-2020 subject to the completion of certain conditions precedent to the establishment of the joint venture company. Other than a nominal initial capital contribution by Bloom, the joint venture will be funded by SK E&C. SK E&C currently acts as a distributor for Bloom Servers for the stationary utility and commercial and industrial market in Korea and SK E&C will be the primary customer for the products assembled by the joint venture.
Key Operating Metrics
In addition to the measures presented in the consolidated financial statements, we use the following key operating metrics to evaluate business activity, to measure performance, to develop financial forecasts and to make strategic decisions:
• | Product accepted - the number of customer acceptances of our Energy Servers in any period. We recognize revenue when an acceptance is achieved. We use this metric to measure the volume of deployment activity. We measure each Energy Server manufactured, shipped and accepted in terms of 100 kilowatt equivalents. |
• | Product costs of product accepted in the period (per kilowatt) - the average unit product cost for the Energy Servers that are accepted in a period. We use this metric to provide insight into the trajectory of product costs and, in particular, the effectiveness of cost reduction activities. |
• | Period costs of manufacturing expenses not included in product costs - the manufacturing and related operating costs that are incurred to procure parts and manufacture Energy Servers that are not included as part of product costs. We use this metric to measure any costs incurred to run our manufacturing operations that are not capitalized (i.e., absorbed) into inventory and therefore, expensed to our consolidated statement of operations in the period that they are incurred. |
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• | Installation costs on product accepted (per kilowatt) - the average unit installation cost for Energy Servers that are accepted in a given period. This metric is used to provide insight into the trajectory of install costs and, in particular, to evaluate whether our installation costs are in line with our installation billings. |
Comparison of the Three and Nine Months Ended September 30, 2019 and 2018
Acceptances
We use acceptances as a key operating metric to measure the volume of our completed Energy Server installation activity from period to period. We typically define an acceptance as when an Energy Server is installed and running at full power as defined in the customer contract or the financing agreements. For orders where a third party performs the installation, acceptances are generally achieved when the Energy Servers are shipped.
The product acceptances in the period were as follows:
Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||
2019 | 2018 | Amount | % | 2019 | 2018 | Amount | % | |||||||||||||||||
Product accepted during the period (in 100 kilowatt systems) | 302 | 206 | 96 | 46.6 | % | 808 | 552 | 256 | 46.4 | % |
Product accepted increased approximately 96 systems, or 46.6%, for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. Acceptance volume increased as we continue to drive growth from our backlog, including the PPA II upgrade of Energy Servers, and deliver growth in the Asia Pacific region, as well as enhance our ability and capacity to install more Energy Servers with our installation team.
Product accepted increased approximately 256 systems, or 46.4%, for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. Acceptance volume increased as we continue to drive growth from our backlog, including the PPA II upgrade of Energy Servers and deliver growth in the Asia Pacific region, as well as enhance our ability and capacity to install more Energy Servers with our installation team.
As discussed in the Purchase and Lease Programs above, our customers have several purchase options for our Energy Servers. The portion of acceptances attributable to each purchase option in the three and nine months ended September 30, 2019 and 2018 was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
Direct Purchase (including Third Party PPAs and International Channels) | 100 | % | 91 | % | 96 | % | 88 | % | ||||
Traditional Lease | — | % | 9 | % | 4 | % | 12 | % | ||||
Managed Services | — | % | — | % | — | % | — | % | ||||
Bloom Electrons | — | % | — | % | — | % | — | % | ||||
100 | % | 100 | % | 100 | % | 100 | % |
The portion of total revenue attributable to each purchase option in the period was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
Direct Purchase (including Third Party PPAs and International Channels) | 91 | % | 73 | % | 78 | % | 73 | % | ||||
Traditional Lease | 1 | % | 12 | % | 12 | % | 10 | % | ||||
Managed Services | 2 | % | 4 | % | 2 | % | 4 | % | ||||
Bloom Electrons | 6 | % | 11 | % | 8 | % | 13 | % | ||||
100 | % | 100 | % | 100 | % | 100 | % |
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Costs Related to Our Products
Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||
2019 | 2018 | Amount | % | 2019 | 2018 | Amount | % | |||||||||||||||||||||||
Product costs of product accepted in the period | $ | 2,850 | /kW | $ | 3,351 | /kW | $ | (501 | )/kW | (15.0 | )% | $ | 3,019 | /kW | $ | 3,546 | /kW | $ | (527 | )/kW | (14.9 | )% | ||||||||
Period costs of manufacturing related expenses not included in product costs (in thousands) | $1,969 | $6,300 | $(4,331) | (68.7 | )% | $12,227 | $20,103 | $(7,876) | (39.2 | )% | ||||||||||||||||||||
Installation costs on product accepted in the period | $ | 733 | /kW | $ | 1,713 | /kW | $ | (980 | )/kW | (57.2 | )% | $ | 681 | /kW | $ | 1,439 | /kW | $ | (758 | )/kW | (52.7 | )% |
Product costs of product accepted decreased approximately $501 per kilowatt, or 15.0%, for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. The product cost reduction was driven generally by our ongoing cost reduction efforts to reduce material costs in conjunction with our suppliers and our reduction in labor and overhead costs through improved processes and automation at our manufacturing facilities.
Product costs of product accepted decreased approximately $527 per kilowatt, or 14.9%, for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. The product cost reduction was driven generally by our ongoing cost reduction efforts to reduce material costs in conjunction with our suppliers and our reduction in labor and overhead costs through improved processes and automation at our manufacturing facilities.
Period costs of manufacturing related expenses decreased approximately $4.3 million, or 68.7%, for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. Our period costs of manufacturing related expenses decreased primarily as a result of higher absorption of fixed manufacturing costs into product costs due to a larger volume of builds through our factory tied to our acceptance growth, which resulted in higher factory utilization.
Period costs of manufacturing related expenses decreased approximately $7.9 million, or 39.2%, for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. Our period costs of manufacturing related expenses decreased primarily as a result of higher absorption of fixed manufacturing costs into product costs due to a larger volume of builds through our factory tied to our acceptance growth, which resulted in higher factory utilization.
Installation costs on product accepted decreased approximately $980 per kilowatt, or 57.2%, for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. Each customer site is different and installation costs can vary due to a number of factors, including size and site complexity, such as site and utility location, presence of a storage solution, regulatory and any other customer requirements. As such, installation on a per kilowatt basis can vary significantly from period-to-period. When we achieve international acceptances, our partners are responsible for the installation, and therefore we do not incur installation costs. When we achieve acceptances for upgrading customer sites to our latest technology, installation costs are minimal as most of the installation work and costs were incurred when the site was initially installed. The mix of international acceptances and the PPA II upgrade of Energy Servers contributed to the lower installation cost for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018.
Installation costs on product accepted decreased approximately $758 per kilowatt, or 52.7%, for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. Each customer site is different and installation costs can vary due to a number of factors, including size and site complexity, such as site and utility location, presence of a storage solution, regulatory and any other customer requirements. As such, installation on a per kilowatt basis can vary significantly from period-to-period. When we achieve international acceptances, our partners are responsible for the installation, and therefore we do not incur installation costs. The mix of international acceptances and the PPA II upgrade of Energy Servers contributed to the lower installation cost for the nine months ended September 30, 2019.
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Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2019 and 2018
Revenue
Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||
2019 | 2018 | Amount | % | 2019 | 2018 | Amount | % | |||||||||||||||||||||||
(in thousands except percents) | ||||||||||||||||||||||||||||||
Product | $ | 182,616 | $ | 125,690 | $ | 56,926 | 45.3 | % | $ | 504,249 | $ | 355,651 | $ | 148,598 | 41.8 | % | ||||||||||||||
Installation | 19,010 | 29,690 | (10,680 | ) | (36.0 | )% | 58,553 | 70,053 | (11,500 | ) | (16.4 | )% | ||||||||||||||||||
Service | 23,597 | 20,751 | 2,846 | 13.7 | % | 70,546 | 60,633 | 9,913 | 16.3 | % | ||||||||||||||||||||
Electricity | 8,248 | 14,059 | (5,811 | ) | (41.3 | )% | 34,612 | 42,095 | (7,483 | ) | (17.8 | )% | ||||||||||||||||||
Total revenue | $ | 233,471 | $ | 190,190 | $ | 43,281 | 22.8 | % | $ | 667,960 | $ | 528,432 | $ | 139,528 | 26.4 | % |
Total Revenue
Total revenue increased approximately $43.3 million, or 22.8%, for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. This increase was driven primarily by the increase in product acceptances of approximately 96 systems, or 46.6%, for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018.
Total revenue increased approximately $139.5 million, or 26.4%, for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. Revenue in the nine months ended September 30, 2018 included a one-time benefit of $45.5 million associated with the 2017 retroactive ITC benefit recognized in the same period in 2018. In early 2018, the ITC law was retroactively reinstated, extending and phasing-out the ITC through 2021. Future application of ITC to new installations is subject to a phase-out schedule, see Note 13 Contingencies - Investment Tax Credits for additional information.
Excluding this one-time retroactive ITC benefit in 2018, revenue increased during the nine months ended September 30, 2019 approximately $185.0 million, or 38.3% compared to the same period in 2018. This increase was driven primarily by the increase in product acceptances of approximately 256 systems, or 46.4%, for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018.
Product and installation revenue combined increased approximately $46.2 million, or 29.8%, to $201.6 million for the three months ended September 30, 2019 from $155.4 million for the three months ended September 30, 2018. The upfront portion of the product and install revenue increased approximately $51.3 million to $199.9 million for the three months ended September 30, 2019 from $148.6 million for the three months ended September 30, 2018. This increase in upfront product and install revenue was primarily due to the increase in upfront acceptances to 302 in the three months ended September 30, 2019 from 206 in the three months ended September 30, 2018. The upfront product and install average selling price decreased to $6,618 per kilowatt for the three months ended September 30, 2019, from $7,231 per kilowatt for the three months ended September 30, 2018 primarily due to the higher mix of international acceptances where we do not perform the installation service and therefore, do not receive installation revenue.
Product Revenue
Product revenue increased approximately $56.9 million, or 45.3%, for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. This increase was primarily driven by the increase in acceptances of 96 systems, and a higher per unit average selling price associated with those acceptances in the three months ended September 30, 2019, as compared to the three months ended September 30, 2018.
Product revenue increased approximately $148.6 million, or 41.8%, for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. This increase was primarily driven by the increase in acceptances of 256 systems. Product revenue in the nine months ended September 30, 2018 included a one-time benefit of $45.5 million associated with the 2017 retroactive ITC benefit recognized in the same period in 2018. Excluding this one-time retroactive ITC benefit in 2018, revenue increased during the nine months ended September 30, 2019 approximately $194.1 million, or 62.6% compared to the same period in 2018.
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Installation Revenue
Installation revenue decreased approximately $10.7 million, or 36.0%, from $29.7 million for the three months ended September 30, 2018 to $19.0 million for the three months ended September 30, 2019. This decrease was generally driven by the higher mix of international acceptances where we do not perform the installation service and therefore do not receive installation revenue for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. Installation revenue can increase or decrease from period to period as a result of differences in size and complexity for the sites accepted and the mix of international versus domestic acceptances. Both the cost and revenue of installations can vary based on the size of the installation, the complexity of the installation, the features and ancillary equipment included in the installation, and whether or not we perform the installation as part of the overall scope of the customer contract.
Installation revenue decreased approximately $11.5 million, or 16.4%, from $70.1 million for the nine months ended September 30, 2018 to $58.6 million for the nine months ended September 30, 2019. This decrease was generally driven by the higher mix of international acceptances, where we do not perform the installation service for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.
Service Revenue
Service revenue increased approximately $2.8 million, or 13.7%, for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. This was primarily due to the increase in the number of annual maintenance contract renewals driven by our growing fleet of installed Energy Servers.
Service revenue increased approximately $9.9 million, or 16.3%, for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. This was primarily due to the increase in the number of annual maintenance contract renewals driven by our growing fleet of installed Energy Servers.
Electricity Revenue
Electricity revenue decreased approximately $5.8 million, or 41.3%, for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, due to a reduction in revenues from the PPA II upgrade of Energy Servers, resulting from the decommissioning and deconsolidation of the existing Energy Servers during the PPA II upgrade of Energy Servers.
Electricity revenue decreased approximately $7.5 million, or 17.8%, for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, due to a reduction in revenues from the PPA II upgrade of Energy Servers, resulting from the decommissioning and deconsolidation of the existing Energy Servers during the PPA II upgrade of Energy Servers.
Cost of Revenue
Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||
2019 | 2018 | Amount | % | 2019 | 2018 | Amount | % | |||||||||||||||||||||||
(in thousands, except percents) | ||||||||||||||||||||||||||||||
Cost of revenue: | ||||||||||||||||||||||||||||||
Product | $ | 94,056 | $ | 95,357 | $ | (1,301 | ) | (1.4 | )% | $ | 350,008 | $ | 246,514 | $ | 103,494 | 42.0 | % | |||||||||||||
Installation | 26,162 | 40,118 | (13,956 | ) | (34.8 | )% | 72,444 | 87,655 | (15,211 | ) | (17.4 | )% | ||||||||||||||||||
Service | 36,539 | 22,651 | 13,888 | 61.3 | % | 83,695 | 66,164 | 17,531 | 26.5 | % | ||||||||||||||||||||
Electricity | 23,249 | 8,679 | 14,570 | 167.9 | % | 50,920 | 28,277 | 22,643 | 80.1 | % | ||||||||||||||||||||
Total cost of revenue | $ | 180,006 | $ | 166,805 | $ | 13,201 | 7.9 | % | $ | 557,067 | $ | 428,610 | $ | 128,457 | 30.0 | % | ||||||||||||||
Gross profit | $ | 53,465 | $ | 23,385 | $ | 30,080 | 128.6 | % | $ | 110,893 | $ | 99,822 | $ | 11,071 | 11.1 | % | ||||||||||||||
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Total Cost of Revenue
Total cost of revenue increased approximately $13.2 million, or 7.9%, for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. Total cost of revenue includes stock-based compensation which decreased approximately $9.4 million for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. Total cost of revenue, excluding stock-based compensation, increased approximately $22.6 million, or 15.0%, to $173.2 million for the three months ended September 30, 2019, as compared to $150.6 million for the three months ended September 30, 2018. This increase in total cost of revenue was primarily driven by an increase in the volume of product acceptances and our fleet. Cost of revenue for the three months ended September 30, 2019 included $14.6 million in one-time expenses associated with the PPA II upgrade of Energy Servers transaction recorded in cost of electricity revenue. See Note 12 - Power Purchase Agreement Programs - PPA II Upgrade of Energy Servers for further details.
Total cost of revenue increased approximately $128.5 million, or 30.0%, for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. Total cost of revenue includes stock-based compensation which increased approximately $11.5 million for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. Total cost of revenue, excluding stock-based compensation, increased approximately $116.9 million, or 28.6%, to $525.5 million for the nine months ended September 30, 2019, as compared to $408.6 million for the nine months ended September 30, 2018. This increase in total cost of revenue was primarily attributable to higher product cost of revenue which was driven by an increase in the volume of product acceptances. Cost of revenue for the nine months ended September 30, 2019 included $22.7 million in one-time expenses associated with the PPA II upgrade of Energy Servers transaction recorded in cost of electricity revenue. See Note 12 - Power Purchase Agreement Programs - PPA II Upgrade of Energy Servers for further details.
Combined product and installation cost of revenue decreased approximately $15.3 million, or 11.3%, to $120.2 million for the three months ended September 30, 2019, from $135.5 million for the three months ended September 30, 2018. The upfront portion of the product and installation cost of revenue, excluding stock-based compensation, decreased approximately $3.4 million to $112.6 million for the three months ended September 30, 2019, from $116.1 million for the three months ended September 30, 2018. This decrease in upfront product and installation cost of revenue was primarily due to the decrease in installation costs resulting from the higher international mix of customers, where we don’t typically perform the installation service and therefore, we do not incur the related costs. The upfront product and installation average cost of revenue on a per kilowatt basis, also described as total installed system costs ("TISC"), decreased to $3,730 per kilowatt for the three months ended September 30, 2019, from $5,648 per kilowatt for the three months ended September 30, 2018. This decrease was primarily driven by the decrease in installation costs resulting from the higher international customer mix and the size and complexity for the sites accepted in the three months ended September 30, 2019, as well as our ongoing cost reduction efforts to reduce material costs in conjunction with our suppliers and our reduction in labor and overhead costs through improved processes and automation at our manufacturing facilities.
Cost of Product Revenue
Cost of product revenue decreased approximately $1.3 million, or 1.4%, for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. This decrease was driven by the decrease in stock-based compensation, partially offset by the cost associated with the increase in acceptances.
Cost of product revenue increased approximately $103.5 million, or 42.0%, for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. This increase was driven by the increase in acceptances, an increase in stock-based compensation and a $25.6 million one-time write off associated with the PPA II upgrade project, partially offset by a one-time payment of $9.4 million recorded to cost of product revenue in the nine months ended September 30, 2018. This $9.4 million cost was driven by the reinstatement of the ITC program in February 2018 where we were required to repay certain suppliers for previously negotiated contractual discounts.
Cost of Installation Revenue
Cost of installation revenue decreased approximately $14.0 million, or 34.8%, for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. This decrease was generally driven by the higher mix of international acceptances in the three months ended September 30, 2019 where we do not perform the installation service.
Cost of installation revenue decreased approximately $15.2 million, or 17.4%, for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. This decrease was generally driven by the higher mix of international acceptances in the nine months ended September 30, 2019 where we do not perform the installation service.
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Cost of Service Revenue
Cost of service revenue increased approximately $13.9 million, or 61.3%, for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. This increase in service cost was primarily due to more power module replacements required in the fleet as our fleet of installed Energy Servers grows with acceptances and additional extended service contracts are executed supported by our standard maintenance process.
Cost of service revenue increased approximately $17.5 million, or 26.5%, for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. This increase in service cost was primarily due to more power module replacements required in the fleet as our fleet of installed Energy Servers grows with acceptances and additional extended service contracts are executed supported by our standard maintenance process.
Cost of Electricity Revenue
Cost of electricity revenue increased approximately $14.6 million, or 167.9%, for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, mainly due to charges related to the decommissioning of Energy Servers associated with the PPA II upgrade of Energy Servers transaction and a loss recorded as a result of the fair value adjustment on our natural gas fixed price forward contract.
Cost of electricity revenue increased approximately $22.6 million, or 80.1%, for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, mainly due to charges related to the decommissioning of Energy Servers associated with the PPA II upgrade of Energy Servers transaction.
Gross Profit
Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||
2019 | 2018 | Amount | 2019 | 2018 | Amount | ||||||||||||||||||||
(in thousands except percents) | |||||||||||||||||||||||||
Gross Profit (loss): | |||||||||||||||||||||||||
Product | $ | 88,560 | $ | 30,333 | $ | 58,227 | $ | 154,241 | $ | 109,137 | $ | 45,104 | |||||||||||||
Installation | (7,152 | ) | (10,428 | ) | 3,276 | (13,891 | ) | (17,602 | ) | 3,711 | |||||||||||||||
Service | (12,942 | ) | (1,900 | ) | (11,042 | ) | (13,149 | ) | (5,531 | ) | (7,618 | ) | |||||||||||||
Electricity | (15,001 | ) | 5,380 | (20,381 | ) | (16,308 | ) | 13,818 | (30,126 | ) | |||||||||||||||
Total Gross Profit | $ | 53,465 | $ | 23,385 | $ | 30,080 | $ | 110,893 | $ | 99,822 | $ | 11,071 | |||||||||||||
Gross Margin: | |||||||||||||||||||||||||
Product | 48.5 | % | 24.1 | % | 30.6 | % | 30.7 | % | |||||||||||||||||
Installation | (37.6 | )% | (35.1 | )% | (23.7 | )% | (25.1 | )% | |||||||||||||||||
Service | (54.8 | )% | (9.2 | )% | (18.6 | )% | (9.1 | )% | |||||||||||||||||
Electricity | (181.9 | )% | 38.3 | % | (47.1 | )% | 32.8 | % | |||||||||||||||||
Total Gross Margin | 22.9 | % | 12.3 | % | 16.6 | % | 18.9 | % |
Total Gross Profit
Gross profit improved $30.1 million in the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. Stock-based compensation included in cost of revenue decreased approximately $9.4 million for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. Excluding stock-based compensation, gross profit increased in the three months ended September 30, 2019 approximately $20.7 million, or 52.4%, as compared to the three months ended September 30, 2018. This increase was generally due to the increase in product acceptances, higher product average selling price and lower product cost driven by increased volume and ongoing cost reduction activities.
Gross profit improved $11.1 million in the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. During the nine months ended September 30, 2018, gross profit included a one-time benefit of $36.1 million associated with the 2017 retroactive ITC benefit recognized in the same period in 2018. In addition, stock-based
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compensation increased approximately $11.5 million for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. Excluding this one-time retroactive ITC benefit in the nine months ended September 30, 2018 and excluding stock-based compensation, gross profit increased in the nine months ended September 30, 2019 approximately $58.7 million, or 70.1%, as compared to the nine months ended September 30, 2018. This increase was generally due to the increase in product acceptances, higher average product selling price and lower product cost driven by increased volume and ongoing cost reduction activities.
Product Gross Profit
Product gross profit increased $58.2 million in the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. Excluding stock-based compensation, product gross profit increased in the three months ended September 30, 2019 approximately $50.2 million, as compared to the three months ended September 30, 2018. This increase was generally due to the increase in product acceptances, higher average selling price and lower product cost driven by increased volume and ongoing cost reduction activities.
Product gross profit increased $45.1 million in the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. Excluding the one-time retroactive ITC benefit in the nine months ended September 30, 2018 of $36.1 million and excluding stock-based compensation, product gross profit increased in the nine months ended September 30, 2019 approximately $88.5 million, as compared to the nine months ended September 30, 2018. This increase was generally due to the increase in product acceptances, higher average selling price and lower product cost driven by increased volume and ongoing cost reduction activities.
Installation Gross Loss
Installation gross loss improved $3.3 million in the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. This improvement was due to lower installation costs due to a higher mix of international customer sites accepted in the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. Our installation costs are driven by the complexity of each site at which we are installing an Energy Server, including personalized applications, size of each installation, which can cause variability in installation costs, and whether we or our international partners perform the installation.
Installation gross loss improved $3.7 million in the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. This improvement was due to lower installation costs due to a higher mix of international customer sites accepted in the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. Our installation costs are driven by the complexity of each site at which we are installing an Energy Server, including personalized applications, the size of each installation, which can cause variability in installation costs, and whether we or our international partners perform the installation.
Service Gross Profit / Loss
Service gross loss increased $11.0 million in the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. Our service gross loss increased generally due to power module replacements being required as part of our normal maintenance process on a larger installed base of Energy Servers.
Service gross loss increased $7.6 million in the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. Our service gross loss increased generally due to power module replacements being required as part of our normal maintenance process on a larger installed base of Energy Servers.
Electricity Gross Profit / Loss
Electricity gross loss worsened $20.4 million, or 378.8%, in the three months ended September 30, 2019, as compared to the electricity gross profit in the three months ended September 30, 2018, mainly due to charges related to the decommissioning of Energy Servers associated with the PPA II upgrade of Energy Servers transaction.
Electricity gross loss worsened $30.1 million, or 218.0%, in the nine months ended September 30, 2019, as compared to the electricity gross profit in the nine months ended September 30, 2018, mainly due to charges related to the decommissioning of Energy Servers associated with the PPA II upgrade of Energy Servers transaction.
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Operating Expenses
Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||
2019 | 2018 | Amount | % | 2019 | 2018 | Amount | % | |||||||||||||||||||||||
(in thousands except percents) | ||||||||||||||||||||||||||||||
Research and development | $ | 23,389 | $ | 27,021 | $ | (3,632 | ) | (13.4 | )% | $ | 82,020 | $ | 56,165 | $ | 25,855 | 46.0 | % | |||||||||||||
Sales and marketing | 18,125 | 21,476 | (3,351 | ) | (15.6 | )% | 56,947 | 37,992 | 18,955 | 49.9 | % | |||||||||||||||||||
General and administrative | 36,599 | 40,999 | (4,400 | ) | (10.7 | )% | 119,335 | 71,346 | 47,989 | 67.3 | % | |||||||||||||||||||
Total operating expenses | $ | 78,113 | $ | 89,496 | $ | (11,383 | ) | (12.7 | )% | $ | 258,302 | $ | 165,503 | $ | 92,799 | 56.1 | % |
Total Operating Expenses
Total operating expenses decreased $11.4 million, or 12.7%, in the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. Total operating expenses includes stock-based compensation expenses, which decreased approximately $22.5 million for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018.The decrease in stock-based compensation is primarily attributable to the reduction in stock-based compensation associated with the vesting schedule for a one-time employee grant of restricted stock units ("RSUs") at the time of our IPO. These RSUs have a 2-year vesting period starting at the time of IPO and were issued as an employee retention vehicle to bring our stock-based compensation in line with our peer group. In addition to the one-time grant, the stock-based compensation includes some previously granted RSUs that vested upon the completion of our IPO. Total operating expenses, excluding stock-based compensation, increased approximately $11.1 million, or 32.6%, in the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. This increase was primarily due to compensation related expenses associated with hiring new employees, investments for next generation servers and customer personalized application technology development, expenses related to our demand generation functions and expenses related to our public company readiness.
Total operating expenses increased $92.8 million, or 56.1%, in the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. Total operating expenses includes stock-based compensation expenses, which increased approximately $56.0 million for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, accounting for much of the year-over-year increase. The increase in stock-based compensation is primarily attributable to a one-time employee grant of restricted stock units ("RSUs") at the time of our IPO. These RSUs have a 2-year vesting period starting at the time of IPO and were issued as an employee retention vehicle to bring our stock-based compensation in line with our peer group. In addition to the one-time grant, the stock-based compensation includes some previously granted RSUs that vested upon the completion of our IPO. Total operating expenses, excluding stock-based compensation, increased approximately $36.8 million, or 37.5%, in the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. This increase was primarily due to compensation related expenses associated with hiring new employees, investments for next generation servers and customer personalized application technology development, expenses related to our demand generation functions, expenses related to our public company readiness and a $5.9 million one-time debt payoff make-whole penalty associated with the PPA II upgrade of Energy Servers.
Research and Development
Research and development expenses decreased approximately $3.6 million, or 13.4%, in the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. The majority of this decrease was due to stock-based compensation expenses related to RSU grants made at the time of our IPO, which decreased approximately $8.5 million for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. Total research and development expenses, excluding stock-based compensation, increased approximately $4.9 million, or 41.2%, for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. This increase was primarily due to compensation-related expenses for hiring new employees and investments made for our next generation technology development, sustaining engineering projects for the current Energy Server platform, and investments made for customer personalized applications, such as microgrid and storage solutions, and new fuel solutions utilizing biogas.
Research and development expenses increased approximately $25.9 million, or 46.0%, in the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. The majority of this increase was due to stock-based compensation expenses related to RSU grants made at the time of our IPO, which increased approximately $14.5 million for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. Total
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research and development expenses, excluding stock-based compensation, increased approximately $11.3 million, or 30.1%, for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. This increase was primarily due to compensation-related expenses for hiring new employees and investments made for our next generation technology development, sustaining engineering projects for the current Energy Server platform, and investments made for customer personalized applications, such as microgrid and storage solutions, and new fuel solutions utilizing biogas.
Sales and Marketing
Sales and marketing expenses decreased approximately $3.4 million, or 15.6%, in the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. The majority of this decrease was due to stock-based compensation expenses related to RSU grants made at the time of our IPO, which decreased approximately $7.1 million for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. Total sales and marketing expenses, excluding stock-based compensation, increased approximately $3.7 million, or 43.4%, for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. This increase was primarily due to compensation expenses related to hiring new employees and expenses related to efforts to increase demand and raise market awareness of our Energy Server solutions, expanding outbound communications, as well as efforts to develop new customer financing programs and partners.
Sales and marketing expenses increased approximately $19.0 million, or 49.9%, in the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. The majority of this increase was due to stock-based compensation expenses related to RSU grants made at the time of our IPO, which increased approximately $11.2 million for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. Total sales and marketing expenses, excluding stock-based compensation, increased approximately $7.8 million, or 33.8%, for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. This increase was primarily due to compensation expenses related to hiring new employees and expenses related to efforts to increase demand and raise market awareness of our Energy Server solutions, expanding outbound communications, as well as efforts to develop new customer financing programs and partners.
General and Administrative
General and administrative expenses decreased approximately $4.4 million, or 10.7%, in the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. The majority of this decrease was due to stock-based compensation expenses related to RSU grants made at the time of our IPO, which decreased approximately $6.8 million for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. Total general and administrative expenses, excluding stock-based compensation, increased approximately $2.4 million, or 18.1%, for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. The increase in general and administrative expenses was due to an increase in compensation related expenses associated with hiring new employees to support public company readiness across accounting and legal functions, expenses related to becoming a public company, and information technology related expenses for infrastructure and security support.
General and administrative expenses increased approximately $48.0 million, or 67.3%, in the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. The majority of this increase was due to stock-based compensation expenses related to RSU grants made at the time of our IPO, which increased approximately $30.2 million for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. Total general and administrative expenses, excluding stock-based compensation, increased approximately $17.8 million, or 47.4%, for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. The increase in general and administrative expenses was due to an increase in compensation related expenses associated with hiring new employees to support public company readiness across accounting and legal functions, expenses related to becoming a public company, and information technology related expenses for infrastructure and security support, as well as $5.9 million for a one-time debt payoff make-whole penalty associated with the PPA II upgrade of Energy Servers.
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Stock-Based Compensation
Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||
2019 | 2018 | Amount | % | 2019 | 2018 | Amount | % | |||||||||||||||||||||||
(in thousands except percents) | ||||||||||||||||||||||||||||||
Cost of revenue | $ | 6,793 | $ | 16,156 | $ | (9,363 | ) | (58.0 | )% | $ | 31,557 | $ | 20,025 | $ | 11,532 | 57.6 | % | |||||||||||||
Research and development | 6,589 | 15,127 | (8,538 | ) | (56.4 | )% | 33,037 | 18,504 | 14,533 | 78.5 | % | |||||||||||||||||||
Sales and marketing | 5,823 | 12,900 | (7,077 | ) | (54.9 | )% | 26,270 | 15,066 | 11,204 | 74.4 | % | |||||||||||||||||||
General and administrative | 20,650 | 27,494 | (6,844 | ) | (24.9 | )% | 64,091 | 33,856 | 30,235 | 89.3 | % | |||||||||||||||||||
Total stock-based compensation | $ | 39,855 | $ | 71,677 | $ | (31,822 | ) | (44.4 | )% | $ | 154,955 | $ | 87,451 | $ | 67,504 | 77.2 | % |
Total stock-based compensation decreased $31.8 million, or 44.4%, in the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. Of the $39.9 million in stock-based compensation for the three months ended September 30, 2019, approximately $15.9 million was related to a one-time performance RSU grant to our employees that were issued at the time of our IPO and that have a 2-year vesting period. These RSUs provided us an employee retention vehicle to bring our stock-based compensation in line with our peer group. In addition, the stock-based compensation included some previously granted RSUs that vested upon completion of our IPO.
Total stock-based compensation increased $67.5 million, or 77.2%, in the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. Of the $155.0 million in stock-based compensation for the nine months ended September 30, 2019, approximately $70.9 million was related to a one-time RSUs grant to our employees that were issued at the time of our IPO and that have a 2-year vesting period. These RSUs provided us an employee retention vehicle to bring our stock-based compensation in line with our peer group. In addition, the stock-based compensation included some previously granted RSUs that vested upon the completion of our IPO.
Other Income and Expense
Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||
2019 | 2018 | Amount | 2019 | 2018 | Amount | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Interest income | $ | 1,214 | $ | 1,467 | $ | (253 | ) | $ | 4,799 | $ | 2,326 | $ | 2,473 | |||||||||||
Interest expense | (15,280 | ) | (16,853 | ) | 1,573 | (32,687 | ) | (43,904 | ) | 11,217 | ||||||||||||||
Interest expense, related parties | (1,605 | ) | (1,966 | ) | 361 | (4,823 | ) | (7,265 | ) | 2,442 | ||||||||||||||
Other income (expense), net | 525 | (705 | ) | 1,230 | 568 | (1,635 | ) | 2,203 | ||||||||||||||||
Gain (loss) on revaluation of warrant liabilities and embedded derivatives | — | 1,655 | (1,655 | ) | — | (21,576 | ) | 21,576 | ||||||||||||||||
Total | $ | (15,146 | ) | $ | (16,402 | ) | $ | 1,256 | $ | (32,143 | ) | $ | (72,054 | ) | $ | 39,911 |
Total Other Income and Expense
Total other income and expense decreased $1.3 million and $39.9 million in the three and nine months ended September 30, 2019, as compared to the three and nine months ended September 30, 2018, respectively. This decrease was primarily due to the change in accounting for warrant liabilities and embedded derivatives that occurred at the time of the IPO, removing the remeasurement requirement for these instruments, and a decrease in interest expense following the conversion of a portion of our debt into equity at the time of the IPO.
Interest Income
Interest income decreased $0.3 million in the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. This decrease was primarily due to the decrease in interest on the cash and short term investment balances which decreased in that time period.
Interest income increased $2.5 million in the nine months ended September 30, 2019, as compared to the nine months
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ended September 30, 2018. This increase was primarily due to the increase in interest on the cash and short term investment balances which increased as a result of the proceeds from the IPO.
Interest Expense
Interest expense decreased $1.6 million in the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. This decrease was primarily due to lower amortization expense of our debt derivatives and due to the conversion of a portion of our debt into equity at the time of the IPO.
Interest expense decreased $11.2 million in the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. This decrease was primarily due to lower amortization expense of our debt derivatives and due to the conversion of a portion of our debt into equity at the time of the IPO.
Interest Expense, Related Parties
Interest expense, related parties decreased $0.4 million in the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. This decrease was due to the conversion of $40.1 million of our 8% Notes from related parties into equity at the time of the IPO.
Interest expense, related parties decreased $2.4 million in the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. This decrease was due to the conversion of $40.1 million of our 8% Notes from related parties into equity at the time of the IPO.
Other Income (Expense), net
Other income (expense), net improved $1.2 million in the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. This change was primarily due to changes in foreign currency translation expense.
Other income (expense), net improved $2.2 million in the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. This change was primarily due to changes in foreign currency translation expense.
Loss on Revaluation of Warrant Liabilities and Embedded Derivatives
For the three and nine months ended September 30, 2019, the revaluation of warrant liabilities and embedded derivatives was zero. Upon the IPO, the final valuation of the embedded derivatives related to the 6% Notes was reclassified from a derivative liability to additional paid-in capital. For the three and nine months ended September 30, 2018, we recognized net loss of $1.7 million and $21.6 million, respectively, primarily due to an increase in our derivative valuation adjustment for the three and nine months ended September 30, 2018 of $23.5 million and $31.0 million, respectively, which was partially offset by gains recognized from the revaluation of the preferred warrant liability of $4.3 million and $7.6 million, respectively.
Provision for Income Taxes
Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | ||||||||||||||||||||||||||
2019 | 2018 | Amount | % | 2019 | 2018 | Amount | % | ||||||||||||||||||||||
(in thousands except percent) | |||||||||||||||||||||||||||||
Income tax provision (benefit) | $ | 136 | $ | (3 | ) | $ | 139 | NM | $ | 602 | $ | 458 | $ | 144 | 31.4 | % |
NM - Not meaningful
Income tax provision increased $0.1 million in the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, and was primarily due to fluctuations in the effective tax rates on income earned by our foreign entities.
Income tax provision increased $0.1 million in the nine months ended September 30, 2019 to the nine months ended September 30, 2018, and was primarily due to fluctuations in the effective tax rates on income earned by our foreign entities.
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Net Loss Attributable to Noncontrolling Interests and Redeemable Noncontrolling Interests
Three Months Ended September 30, | Change | Nine Months Ended September 30, | Change | |||||||||||||||||||||||||||
2019 | 2018 | Amount | % | 2019 | 2018 | Amount | % | |||||||||||||||||||||||
(in thousands except percent) | ||||||||||||||||||||||||||||||
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests | $ | (5,027 | ) | $ | (3,931 | ) | $ | (1,096 | ) | (27.9 | )% | $ | (13,874 | ) | $ | (13,074 | ) | $ | (800 | ) | (6.1 | )% |
Net loss attributable to noncontrolling interests increased $1.1 million, or 27.9%, in the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. The net loss increased due to increased losses in our PPA Entities which are allocated to our noncontrolling interests.
Net loss attributable to noncontrolling interests increased $0.8 million, or 6.1%, in the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. The net loss increased due to increased losses in our PPA Entities which are allocated to our noncontrolling interests
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Unaudited Quarterly Supplemental Financial Information
The following consolidated statements of operations, presented on a quarterly basis for the nine quarters ended September 30, 2019, are unaudited. These statements have been prepared in accordance with U.S. GAAP for interim financial information and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the results of operations for the periods presented (in thousands, except per share):
2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
Sept. 30 | June 30 | March 31 | Dec. 31 | Sept. 30 | June 30 | March 31 | Dec. 31 | |||||||||||||||||||||||||
(in thousands except per share amounts) | ||||||||||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||||||
Product | $ | 182,616 | $ | 179,899 | $ | 141,734 | $ | 156,671 | $ | 125,690 | $ | 108,654 | $ | 121,307 | $ | 66,913 | ||||||||||||||||
Installation | 19,010 | 17,285 | 22,258 | 21,363 | 29,690 | 26,245 | 14,118 | 21,601 | ||||||||||||||||||||||||
Service | 23,597 | 23,659 | 23,290 | 21,752 | 20,751 | 19,975 | 19,907 | 19,927 | ||||||||||||||||||||||||
Electricity | 8,248 | 12,939 | 13,425 | 13,820 | 14,059 | 14,007 | 14,029 | 14,810 | ||||||||||||||||||||||||
Total revenue | 233,471 | 233,782 | 200,707 | 213,606 | 190,190 | 168,881 | 169,361 | 123,251 | ||||||||||||||||||||||||
Cost of revenue: | ||||||||||||||||||||||||||||||||
Product | 94,056 | 131,952 | 124,000 | 128,076 | 95,357 | 70,802 | 80,355 | 70,450 | ||||||||||||||||||||||||
Installation | 26,162 | 22,116 | 24,166 | 31,819 | 40,118 | 37,099 | 10,438 | 16,933 | ||||||||||||||||||||||||
Service | 36,539 | 19,599 | 27,557 | 28,475 | 22,651 | 19,260 | 24,253 | 14,012 | ||||||||||||||||||||||||
Electricity | 23,249 | 18,442 | 9,229 | 7,988 | 8,679 | 8,949 | 10,649 | 9,806 | ||||||||||||||||||||||||
Total cost of revenue | 180,006 | 192,109 | 184,952 | 196,358 | 166,805 | 136,110 | 125,695 | 111,201 | ||||||||||||||||||||||||
Gross profit (loss) | 53,465 | 41,673 | 15,755 | 17,248 | 23,385 | 32,771 | 43,666 | 12,050 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Research and development | 23,389 | 29,772 | 28,859 | 32,970 | 27,021 | 14,413 | 14,731 | 15,181 | ||||||||||||||||||||||||
Sales and marketing | 18,125 | 18,359 | 20,463 | 24,983 | 21,476 | 8,254 | 8,262 | 9,346 | ||||||||||||||||||||||||
General and administrative | 36,599 | 43,662 | 39,074 | 47,471 | 40,999 | 15,359 | 14,988 | 14,818 | ||||||||||||||||||||||||
Total operating expenses | 78,113 | 91,793 | 88,396 | 105,424 | 89,496 | 38,026 | 37,981 | 39,345 | ||||||||||||||||||||||||
Income (loss) from operations | (24,648 | ) | (50,120 | ) | (72,641 | ) | (88,176 | ) | (66,111 | ) | (5,255 | ) | 5,685 | (27,295 | ) | |||||||||||||||||
Interest income1 | 1,214 | 1,700 | 1,885 | 1,996 | 1,467 | 444 | 415 | 298 | ||||||||||||||||||||||||
Interest expense1 | (1,605 | ) | (16,725 | ) | (17,574 | ) | (17,806 | ) | (18,819 | ) | (25,197 | ) | (24,007 | ) | (29,807 | ) | ||||||||||||||||
Other income (expense), net1 | 525 | (1,606 | ) | 265 | 635 | (705 | ) | (855 | ) | (74 | ) | (123 | ) | |||||||||||||||||||
Gain (loss) on revaluation of warrant liabilities and embedded derivatives | — | (222 | ) | — | (13 | ) | 1,655 | (19,197 | ) | (4,034 | ) | (15,114 | ) | |||||||||||||||||||
Net loss before income taxes | (39,794 | ) | (66,973 | ) | (88,065 | ) | (103,364 | ) | (82,513 | ) | (50,060 | ) | (22,015 | ) | (72,041 | ) | ||||||||||||||||
Income tax provision (benefit) | 136 | 258 | 208 | 1,079 | (3 | ) | 128 | 333 | (120 | ) | ||||||||||||||||||||||
Net loss | (39,930 | ) | (67,231 | ) | (88,273 | ) | (104,443 | ) | (82,510 | ) | (50,188 | ) | (22,348 | ) | (71,921 | ) | ||||||||||||||||
Net loss attributable to noncontrolling interests and redeemable noncontrolling interests | (5,027 | ) | (5,015 | ) | (3,832 | ) | (4,662 | ) | (3,931 | ) | (4,512 | ) | (4,632 | ) | (4,160 | ) | ||||||||||||||||
Net loss attributable to Class A and Class B common stockholders | $ | (34,903 | ) | $ | (62,216 | ) | $ | (84,441 | ) | $ | (99,781 | ) | $ | (78,579 | ) | $ | (45,677 | ) | $ | (17,716 | ) | $ | (67,761 | ) | ||||||||
Net loss per share attributable to Class A and Class B common stockholders, basic and diluted | $ | (0.30 | ) | $ | (0.55 | ) | $ | (0.76 | ) | $ | (0.91 | ) | $ | (0.97 | ) | $ | (4.34 | ) | $ | (1.70 | ) | $ | (6.56 | ) | ||||||||
Weighted average shares used to compute net loss per share attributable to Class A and Class B common stockholders, basic and diluted | 116,330 | 113,622 | 111,842 | 109,416 | 81,321 | 10,536 | 10,403 | 10,333 | ||||||||||||||||||||||||
1 Certain prior years' amounts reported herein have been reclassified to conform to current period presentation.
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Liquidity and Capital Resources
As of September 30, 2019, we had an accumulated deficit of approximately $2.8 billion. We have financed our operations, including the costs of acquisition and installation of Energy Servers, mainly through a variety of financing arrangements and PPA Entities, credit facilities from banks, sales of our preferred and common stock, debt financings and cash provided from our operations. As of September 30, 2019, we had $403.4 million of total outstanding recourse debt and $316.7 million of total outstanding non-recourse debt plus other long term liabilities. See Note 6 - Outstanding Loans and Security Agreements for a complete description of our outstanding debt. As of September 30, 2019 and December 31, 2018, we had cash and cash equivalents of $226.5 million and $325.1 million, respectively.
In July 2018, we successfully completed an initial public offering (IPO) of our securities with the sale of 20,700,000 shares of our Class A common stock at a price of $15.00 per share, resulting in cash proceeds of $282.3 million, net of underwriting discounts, commissions and estimated offering costs. We intend to use the net proceeds from this offering for general corporate purposes including research and development, sales and marketing activities, general and administrative matters, and capital expenditures.
We believe that our existing cash and cash equivalents will be sufficient to meet our operating and capital cash flow requirements and other cash flow needs for at least the next 12 months from the date of this quarterly report on Form 10-Q. However, we have long-term debt of $312.3 million due December 1, 2020. We are currently evaluating options to refinance or restructure this debt, however, there can be no assurances that we will be successful in such efforts. Further, there can be no assurance that in the event we require additional capital, such capital will be available on terms that are favorable or at all.
Our future capital requirements may vary materially from those currently planned and will 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, the expansion of sales and marketing activities, market acceptance of our products, the timing of receipt by us of distributions from our PPA Entities and overall economic conditions. We do not expect to receive significant cash distributions from our PPA Entities. During June 2019, we completed a transaction for the PPA II upgrade of Energy Servers which included new product sale permitting us to repay all the PPA II outstanding debt of $72.3 million. For additional information refer to Note 12. Power Purchase Agreement Programs - PPA II Upgrade of Energy Servers.
Cash Flows
A summary of our sources and uses of cash, cash equivalents and restricted cash is as follows (in thousands):
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Net cash provided by (used in): | ||||||||
Operating activities | $ | 139,183 | $ | (13,648 | ) | |||
Investing activities | 79,548 | 15,423 | ||||||
Financing activities | (141,341 | ) | 261,839 |
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Net cash provided by our variable interest entities (the "PPA Entities") which are incorporated into the condensed consolidated statement of cash flows for September 30, 2019 and 2018, is as follows (in thousands):
Nine Months Ended September 30, | Change | |||||||||||
2019 | 2018 | |||||||||||
PPA Entities ¹ | ||||||||||||
Net cash provided by PPA operating activities | $ | 233,152 | $ | 24,823 | $ | 208,329 | ||||||
Net cash used in PPA financing activities | (148,241 | ) | (32,562 | ) | (115,679 | ) | ||||||
¹ The PPA Entities' operating and financing cash flows are a subset of our consolidated cash flows and represents the stand-alone cash flows prepared in accordance with U.S. GAAP. Operating activities consist principally of cash used to run the operations of the PPA Entities, the purchase of Energy Servers from us and principal reductions in loan balances. Financing activities consist primarily of changes in debt carried by our PPAs, and payments from and distributions to noncontrollling partnership interests. We believe this presentation of net cash provided by (used in) PPA activities is useful to provide the reader with the impact to consolidated cash flows of the PPA Entities in which we have only a minority interest. |
Operating Activities
Net cash provided by operating activities for the nine months ended September 30, 2019 was $139.2 million and was primarily the result of net cash earnings of $67.6 million plus the net decrease in working capital of $71.6 million. Net cash earnings is primarily comprised of a net operating loss of $195.4 million, adjusted for non-cash benefit items including: (i) depreciation and amortization of $55.8 million which includes one-time PPA II decommissioning costs of $22.7 million; (ii) write-off of property, plant and equipment net of $3.0 million; (iii) write-off of PPA II upgrade of Energy Servers decommissioned assets of $25.6 million; (iv) a loss on revaluation of derivative contracts of $1.3 million; (v) stock-based compensation of $155.0 million; (vi) amortization of debt issuance cost of $16.3 million, plus (vii) an expense reclass to financing activities related to a debt make-whole payment of $5.9 million. Net cash provided from changes in working capital consisted primarily of decreases in: (i) accounts receivable of $58.2 million; (ii) deferred cost of revenue of $56.9 million; (iii) customer financing receivable of $4.1 million; (iv) prepaid expenses and other current assets of $7.9 million; and (v) other long-term assets of $3.3 million; plus increases in: (vi) accounts payable of $14.2 million; (vii) accrued other current liabilities of $5.0 million; and (viii) other long-term liabilities of $2.1 million. These sources of cash from working capital were partially offset by an increase in inventory of $7.9 million and by decreases in: (i) accrued warranty of $3.9 million; and (ii) deferred revenue and customer deposits of $68.2 million.
Net cash used in operating activities for the nine months ended September 30, 2018 was $13.6 million and was the result of net cash earnings of approximately $3.6 million offset by the net decrease in working capital of $17.2 million. Net cash earnings is primarily comprised of a net operating loss of $155.0 million, adjusted for non-cash benefit items including: (i) depreciation and amortization of approximately $32.1 million; (ii) write-off of property, plant and equipment net of $0.9 million; (iii) a loss on revaluation of derivative contracts of $26.8 million; (iv) stock-based compensation of $87.5 million; and (v) amortization of debt issuance cost of $20.3 million; partially offset by (vi) a gain on revaluation of stock warrants of $9.1 million. Net cash used by changes in working capital consisted primarily of increases in: (i) accounts receivable of $11.2 million; (ii) inventory of $44.5 million; and (iii) prepaid expenses and other current assets of $6.5 million; plus a decrease in: (iv) deferred revenue and customer deposits of $32.2 million. These uses of cash for working capital were partially offset by decreases in: (i) deferred cost of revenue of $47.9 million; (ii) customer financing receivable and other of $3.7 million; and (iii) other long-term assets of $1.1 million; plus increases in: (iv) accounts payable of $11.2 million; (v) accrued warranty of $1.2 million; (vi) accrued other current liabilities of $1.9 million; and (vii) other long term liabilities of $10.2 million.
Investing Activities
Net cash provided by investing activities in the nine months ended September 30, 2019 was $79.5 million which included proceeds from maturity of marketable securities of $104.5 million, partially offset by $25.0 million used for the purchase of long-lived assets. Our use of cash in the nine months ended September 30, 2019 for the purchase of property, plant and equipment increased, as compared to the same period in 2018, due to completing a move to our new corporate headquarters which is used for administration, research and development, and sales and marketing.
Net cash provided by investing activities in the nine months ended September 30, 2018 was $15.4 million which was primarily the result of net proceeds from maturity of, and partial reinvestment in, marketable securities of $22.5 million, partially offset by $7.1 million used for the purchase of long-lived assets.
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Financing Activities
Net cash used in financing activities in the nine months ended September 30, 2019 was $141.3 million which included payments to noncontrolling and redeemable noncontrolling interest of $43.7 million, distributions paid to our PPA Equity Investors of $9.4 million, repayments of debt of $95.0 million, and a debt make-whole payment of $5.9 million related to our PPA II upgrade of Energy Servers, partially offset by proceeds from issuance of common stock of $12.6 million.
Net cash provided by financing activities in the nine months ended September 30, 2018 was $261.8 million resulted from our initial public offering netting $292.5 million plus proceeds from the issuance of common stock of $1.5 million, partially offset by distributions paid to our PPA Equity Investors of $14.2 million, repayments of long-term debt of $15.0 million, and payments of initial public offering issuance costs of $2.9 million.
Outstanding Loans and Security Agreements
The following is a summary of our debt as of September 30, 2019 (in thousands):
Unpaid Principal Balance | Net Carrying Value | Unused Borrowing Capacity | ||||||||||||||||||
Current | Long- Term | Total | ||||||||||||||||||
LIBOR + 4% term loan due November 2020 | $ | 2,000 | $ | 1,678 | $ | 278 | $ | 1,956 | $ | — | ||||||||||
5% convertible promissory note due December 2020 | 33,104 | — | 36,026 | 36,026 | — | |||||||||||||||
6% convertible promissory notes due December 2020 | 296,233 | — | 275,716 | 275,716 | — | |||||||||||||||
10% notes due July 2024 | 93,000 | 14,000 | 75,673 | 89,673 | — | |||||||||||||||
Total recourse debt | 424,337 | 15,678 | 387,693 | 403,371 | — | |||||||||||||||
7.5% term loan due September 2028 | 38,847 | 3,500 | 31,781 | 35,281 | — | |||||||||||||||
LIBOR + 5.25% term loan due October 2020 | 24,068 | 987 | 22,584 | 23,571 | — | |||||||||||||||
6.07% senior secured notes due March 2030 | 81,686 | 2,975 | 77,702 | 80,677 | — | |||||||||||||||
LIBOR + 2.5% term loan due December 2021 | 122,603 | 4,021 | 117,048 | 121,069 | — | |||||||||||||||
Letters of Credit due December 2021 | — | — | — | — | 1,220 | |||||||||||||||
Total non-recourse debt | 267,204 | 11,483 | 249,115 | 260,598 | 1,220 | |||||||||||||||
Total debt | $ | 691,541 | $ | 27,161 | $ | 636,808 | $ | 663,969 | $ | 1,220 |
Recourse debt refers to debt that Bloom Energy Corporation has an obligation to pay. Non-recourse debt refers to debt that is recourse to only specified assets or subsidiaries of the Company. The differences between the unpaid principal balances and the net carrying values are due to debt discounts and deferred financing costs. We were in compliance with all of our financial covenants as of September 30, 2019 and December 31, 2018.
Recourse Debt Facilities
LIBOR + 4% Term Loan due November 2020 - In May 2013, we entered into a $5.0 million credit agreement and a $12.0 million financing agreement to help fund the building of a new facility in Newark, Delaware. The $5.0 million credit agreement expired in December 2016. The $12.0 million financing agreement has a term of 90 months, payable monthly at a variable rate equal to one-month LIBOR plus the applicable margin. The weighted average interest rate as of September 30, 2019 and 2018 was 6.4% and 5.9%, respectively. The loan requires monthly payments and is secured by the manufacturing facility. In addition, the credit agreements also include a cross-default provision which provides that the remaining balance of borrowings under the agreements will be due and payable immediately if a lien is placed on the Newark facility in the event we default on any indebtedness in excess of $100,000 individually or $300,000 in the aggregate. Under the terms of these credit agreements, we are required to comply with various restrictive covenants. As of September 30, 2019 and December 31, 2018, the debt outstanding was $2.0 million and $3.3 million, respectively.
5% Convertible Promissory Notes due 2020 (Originally 8% Convertible Promissory Notes due December 2018) - Between December 2014 and June 2016, we issued $193.2 million of three-year convertible promissory notes ("8% Notes") to certain investors. The 8% Notes had a fixed interest rate of 8% compounded monthly, due at maturity or at the election of the investor with accrued interest due in December of each year.
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On January 18, 2018, amendments were finalized to extend the maturity dates for all the 8% Notes to December 2019. At the same time, the portion of the notes that was held by Constellation NewEnergy, Inc. ("Constellation") was extended to December 2020 and the interest rate decreased from 8% to 5% ("5% Notes").
Investors held the right to convert the unpaid principal and accrued interest of both the 8% Notes and 5% Notes to Series G convertible preferred stock at any time at the price of $38.64. In July 2018, upon our IPO, the $221.6 million of principal and accrued interest of outstanding 8% Notes automatically converted into additional paid-in capital, the conversion of which included all the related-party noteholders. The 8% Notes converted to shares of Series G convertible preferred stock and, concurrently, each such share of Series G convertible preferred stock converted automatically into one share of Class B common stock. Upon the Company's IPO, 5,734,440 shares of Class B common stock were issued from conversions and the 8% Notes were retired. Constellation, the holders of the 5% convertible promissory notes, have not elected to convert as of September 30, 2019. The outstanding unpaid principal and accrued interest debt balance of the 5% Note of $34.7 million was classified as non-current as of September 30, 2019, and the outstanding unpaid principal and accrued interest debt balance of the 8% Notes of $244.7 million was classified as non-current as of December 31, 2018.
6% Convertible Promissory Notes due December 2020 - Between December 2015 and September 2016, we issued $0.0 million convertible promissory notes due December 2020 ("6% Notes") to certain investors. The 6% Notes bore a 5% fixed interest rate, payable monthly either in cash or in kind, at our election. We amended the terms of the 6% Notes in June 2017 to reduce the collateral securing the notes and to increase the interest rate from 5% to 6%.
As of September 30, 2019 and December 31, 2018, the amount outstanding on the 6% Notes, which includes interest paid in kind through the IPO date, was $296.2 million and $286.1 million, respectively. Upon the IPO, the debt is convertible at the option of the holders at the conversion price of $11.25 per share into common stock at any time through the maturity date. In January 2018, we amended the terms of the 6% Notes to extend the convertible put option, which investors could elect only if the IPO did not occur prior to December 2019. After the IPO, we paid the interest in cash when due and no additional interest accrued on the consolidated balance sheet on the 6% Notes.
On or after July 27, 2020, we may redeem, at our option, all or part of the 6% Notes if the last reported sale price of our common stock has been at least $22.50 for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending within the three trading days immediately preceding the date on which we provide written notice of redemption. In certain circumstances, the 6% Notes are also redeemable at our option in connection with a change of control.
Under the terms of the indenture governing the 6% Notes, we are required to comply with various restrictive covenants, including meeting reporting requirements, such as the preparation and delivery of audited consolidated financial statements, and restrictions on investments. In addition, we are required to maintain collateral which secures the 6% Notes in an amount equal to 200% of the principal amount of and accrued and unpaid interest on the outstanding notes. This minimum collateral test is not a negative covenant and does not result in a default if not met. However, the minimum collateral test does restrict us with respect to investing in non-PPA subsidiaries. If we do not meet the minimum collateral test, we cannot invest cash into any non-PPA subsidiary that is not a guarantor of the notes. The 6% Notes also include a cross-acceleration provision which provides that the holders of at least 25% of the outstanding principal amount of the 6% Notes may cause such notes to become immediately due and payable if we or any of our subsidiaries default on any indebtedness in excess of $15.0 million such that the repayment of such indebtedness is accelerated.
In connection with the issuance of the 6% Notes, we agreed to issue to J.P. Morgan and CPPIB, upon the occurrence of certain conditions, warrants to purchase we common stock up to a maximum of 146,666 shares and 166,222 shares, respectively. On August 31, 2017, J.P. Morgan transferred its rights to CPPIB. Upon completion of the IPO, the 312,888 warrants were net exercised for 312,575 shares of Class B Common stock.
10% Notes due July 2024 - In June 2017, we issued $100.0 million of senior secured notes ("10% Notes"). The 10% Notes mature between 2019 and 2024 and bear a 10.0% fixed rate of interest, payable semi-annually. The 10% Notes have a continuing security interest in the cash flows payable to us as servicing, operations and maintenance fees and administrative fees from the five active power purchase agreements in our Bloom Electrons program. Under the terms of the indenture governing the notes, we are required to comply with various restrictive covenants including, among other things, to maintain certain financial ratios such as debt service coverage ratios, to incur additional debt, issue guarantees, incur liens, make loans or investments, make asset dispositions, issue or sell share capital of our subsidiaries and pay dividends, meet reporting requirements, including the preparation and delivery of audited consolidated financial statements, or maintain certain restrictions on investments and requirements in incurring new debt. As of September 30, 2019, we were in compliance with all of such covenants. In addition, we are required to maintain collateral which secures the 10% Notes based on debt ratio analyses. This minimum collateral test is not a
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negative covenant and does not result in a default if not met. However, the minimum collateral test does restrict us with respect to investing in non-PPA subsidiaries. If we do not meet the minimum collateral test, we cannot invest cash into any non-PPA subsidiary that is not a guarantor of the notes.
Non-recourse Debt Facilities
5.22% Senior Secured Term Notes - In March 2013, PPA Company II refinanced its existing debt by issuing 5.22% Senior Secured Notes due March 30, 2025. The total amount of the loan proceeds was $144.8 million, including $28.8 million to repay outstanding principal of existing debt, $21.7 million for debt service reserves and transaction costs and $94.3 million to fund the remaining system purchases. The loan is a fixed rate term loan that bears an annual interest rate of 5.22% payable quarterly. The loan has a fixed amortization schedule of the principal, payable quarterly, which began March 30, 2014 that requires repayment in full by March 30, 2025. The Note Purchase Agreement required us to maintain a debt service reserve, the balance of which was zero and $11.2 million as of September 30, 2019 and December 31, 2018,, respectively, and which was included as part of long-term restricted cash in the condensed consolidated balance sheets. The notes were secured by all the assets of PPA II.
Decommissioning in PPA II - During the three months ended September 30, 2019, there was a decommissioning in PPA II, including the retirement of the 5.22% Notes outstanding unpaid debt of $76.6 million, which included the accumulated unpaid interest on the debt. See Note 12 - Power Purchase Agreement Programs - PPA II Upgrade of Energy Servers for additional information.
7.5% Term Loan due September 2028 - In December 2012 and later amended in August 2013, PPA IIIa entered into a $46.8 million credit agreement to help fund the purchase and installation of Energy Servers. The loan bears a fixed interest rate of 7.5% payable quarterly. The loan requires quarterly principal payments which began in March 2014. The credit agreement requires us to maintain a debt service reserve for all funded systems, the balance of which was $3.8 million and $3.7 million as of September 30, 2019 and December 31, 2018, respectively, and which was included as part of long-term restricted cash in the consolidated balance sheets. The loan is secured by all assets of PPA IIIa.
LIBOR + 5.25% Term Loan due October 2020 - In September 2013, PPA IIIb entered into a credit agreement to help fund the purchase and installation of Energy Servers. In accordance with that agreement, PPA IIIb issued floating rate debt based on LIBOR plus a margin of 5.2%, paid quarterly. The aggregate amount of the debt facility is $32.5 million. The loan is secured by all assets of PPA IIIb and requires quarterly principal payments which began in July 2014. The credit agreement requires us to maintain a debt service reserve for all funded systems, the balance of which was $1.8 million and $1.7 million as of September 30, 2019 and December 31, 2018, respectively, and which was included as part of long-term restricted cash in the consolidated balance sheets. In September 2013, PPA IIIb entered into pay-fixed, receive-float interest rate swap agreement to convert the floating-rate loan into a fixed-rate loan.
6.07% Senior Secured Notes - In July 2014, PPA IV issued senior secured notes amounting to $99.0 million to third parties to help fund the purchase and installation of Energy Servers. The notes bear a fixed interest rate of 6.07% payable quarterly which began in December 2015 and ends in March 2030. The notes are secured by all the assets of the PPA IV. The Note Purchase Agreement requires us to maintain a debt service reserve, the balance of which was $7.9 million as of September 30, 2019 and $6.5 million as of December 31, 2018, and which was included as part of long-term restricted cash in the consolidated balance sheets.
LIBOR + 2.5% Term Loan due December 2021 - In June 2015, PPA V entered into a $131.2 million credit agreement to fund the purchase and installation of Energy Servers. The lenders are a group of five financial institutions and the terms included commitments to a letter of credit ("LC") facility (see below). The loan was initially advanced as a construction loan during the development of the PPA V Project and converted into a term loan on February 28, 2017 (the “Term Conversion Date”). As part of the term loan’s conversion, the LC facility commitments were adjusted.
In accordance with the credit agreement, PPA V was issued a floating rate debt based on LIBOR plus a margin, paid quarterly. The applicable margins used for calculating interest expense are 2.25% for years 1-3 following the Term Conversion Date and 2.5% thereafter. The loan is secured by all the assets of the PPA V and requires quarterly principal payments which began in March 2017. In connection with the floating-rate credit agreement, in July 2015 the PPA V entered into pay-fixed, receive-float interest rate swap agreements to convert its floating-rate loan into a fixed-rate loan.
Letters of credit due December 2021 - In June 2015, PPA V entered into a $131.2 million term loan due December 2021. The agreement also included commitments to an LC facility, with the characteristics of a line of credit, with the aggregate principal amount of $6.4 million, later adjusted down to $6.2 million. The amount reserved under the letter of credit as of September 30, 2019 and December 31, 2018 was $5.0 million and $5.0 million,
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respectively. The unused capacity as of September 30, 2019 and December 31, 2018 was $1.2 million and $1.2 million, respectively.
Contractual Obligations and Other Commitments
The following table summarizes our contractual obligations and the debt of our consolidated PPA entities that is non-recourse to us as of September 30, 2019:
Payments Due By Period | ||||||||||||||||||||
Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Contractual Obligations and Other Commitments: | ||||||||||||||||||||
Recourse debt(1) | $ | 424,337 | $ | 429 | $ | 360,908 | $ | 38,000 | $ | 25,000 | ||||||||||
Non-recourse debt(2) | 267,204 | 2,198 | 159,161 | 17,496 | 88,349 | |||||||||||||||
Operating leases | 45,541 | 2,313 | 13,652 | 8,212 | 21,364 | |||||||||||||||
Sale-leaseback leases from managed services | 60,533 | 7,501 | 15,455 | 16,082 | 21,495 | |||||||||||||||
Other sale-leaseback related transactions | 28,315 | — | 9,444 | 10,494 | 8,377 | |||||||||||||||
Natural gas fixed price forward contracts | 8,465 | 4,472 | 3,993 | — | — | |||||||||||||||
Grant for Delaware facility | 10,469 | — | 10,469 | — | — | |||||||||||||||
Interest rate swap | 11,548 | 894 | 2,640 | 3,188 | 4,826 | |||||||||||||||
Supplier purchase commitments | 4,315 | 3,676 | 639 | — | — | |||||||||||||||
Renewable energy credit obligations | 1,311 | 769 | 542 | — | — | |||||||||||||||
Accrued other current liabilities(3) | 433 | 433 | — | — | — | |||||||||||||||
Asset retirement obligations | 500 | 500 | — | — | — | |||||||||||||||
Total | $ | 863,404 | $ | 23,618 | $ | 576,903 | $ | 93,472 | $ | 169,411 |
(1) | Our 6% Notes and our credit agreements related to the building of our facility in Newark, Delaware each contain cross-default or cross-acceleration provisions. See “-Outstanding Loans and Security Agreements - Recourse Debt Facilities” above for more details. |
(2) | Each of the debt facilities entered into by PPA Company II, PPA Company IIIa, PPA Company IIIb, PPA Company IV and PPA Company V contain cross-default provisions. See “-Outstanding Loans and Security Agreements - Non-recourse Debt Facilities” above for more details. |
(3) | Accrued other current liabilities includes a liability payable in common stock in connection with a dispute settlement with the principals of a securities placement agent. |
Off-Balance Sheet Arrangements
We include in our consolidated financial statements all assets and liabilities and results of operations of our PPA Entities that we have entered into and over which we have substantial control. For additional information, see Note 12 - Power Purchase Agreement Programs.
We have not entered into any other transactions that have generated relationships with unconsolidated entities or financial partnerships or special purpose entities. Accordingly, as of September 30, 2019 and December 31, 2018, we had no off-balance sheet arrangements.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no significant changes to our quantitative and qualitative disclosures about market risk during the first nine months of fiscal 2019. 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, 2018 for a more complete discussion of the market risks we encounter.
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ITEM 4 - CONTROLS AND PROCEDURES
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 made as defined in Rules 13-a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (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 and Chief Financial Officer as appropriate, to allow for timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, 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 September 30, 2019. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2019, controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding our required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitation on Effectiveness of Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A controls system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls system are met. Further, the design of a controls system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all controls systems, no evaluation of controls can provide absolute assurance that all controls issues and instances of fraud, if any, within our company have been detected. Accordingly, our disclosure controls and procedures provide reasonable assurance of achieving their objectives.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
For a discussion of legal proceedings, see "Legal Matters" under Note 13 - Commitments and Contingencies, in the notes to our consolidated financial statements.
We are, and from time to time we may become, involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any other legal proceedings that in the opinion of our management and if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows.
ITEM 1A - RISK FACTORS
You should carefully consider the risks and uncertainties described below, as well as the other information in this Quarterly Report on Form 10-Q, including our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The occurrence of any of the events or developments described below, or of additional risks and uncertainties not presently known to us or that we currently deem immaterial, could materially and adversely affect our business, financial condition, operating results and prospects. In such an event, the market price of our Class A common stock could decline and you could lose all or a portion of your investment.
Risks Relating to Our Business, Industry and Sales
The distributed generation industry is an emerging market and distributed generation may not receive widespread market acceptance.
The distributed generation industry is still relatively nascent in an otherwise mature and heavily regulated industry, and we cannot be sure that potential customers will accept distributed generation broadly, or our Energy Server products specifically. Enterprises may be unwilling to adopt our solution over traditional or competing power sources for any number of reasons including the perception that our technology is unproven, they lack confidence in our business model, the perceived unavailability of back-up service providers to operate and maintain the Energy Servers, and lack of awareness of our product or their perception of regulatory or political headwinds. Because this is an emerging industry, broad acceptance of our products and services is subject to a high level of uncertainty and risk. If the market develops more slowly than we anticipate, our business will be harmed.
Our limited operating history and our nascent industry make evaluating our business and future prospects difficult.
From our inception in 2001 through 2009, we were focused principally on research and development activities relating to our Energy Server technology. We did not deploy our first Energy Server and did not recognize any revenue until 2009. Since that initial deployment, our business has expanded significantly over a comparatively short time, given the characteristics of the electric power industry. As a result, we have a limited history operating our business at its current scale. Furthermore, our Energy Server is a new type of product in the nascent distributed energy industry. Consequently, predicting our future revenue and appropriately budgeting for our expenses is difficult, and we have limited insight into trends that may emerge and affect our business. If actual results differ from our estimates or if we adjust our estimates in future periods, our operating results and financial position could be materially and adversely affected.
Our products involve a lengthy sales and installation cycle and, if we fail to close sales on a regular and timely basis, our business could be harmed.
Our sales cycle is typically 12 to 18 months but can vary considerably. In order to make a sale, we must typically provide a significant level of education to prospective customers regarding the use and benefits of our product and our technology. The period between initial discussions with a potential customer and the eventual sale of even a single product typically depends on a number of factors, including the potential customer’s budget and decision as to the type of financing it chooses to use as well as the arrangement of such financing. Prospective customers often undertake a significant evaluation process which may further extend the sales cycle. Once a customer makes a formal decision to purchase our product, the fulfillment of the sales order by us requires a substantial amount of time. Generally, the time between the entry into a sales contract with a customer and the installation of our Energy Servers can range from nine to twelve months or more. This lengthy sales and installation cycle is subject to a number of significant risks over which we have little or no control. Because of both the long sales and long installation cycles, we may expend significant resources without having certainty of generating a sale.
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These lengthy sales and installation cycles increase the risk that an installation may not be completed. In some instances, a customer can cancel an order for a particular site prior to installation, and we may be unable to recover some or all of our costs in connection with design, permitting, installation and site preparations incurred prior to cancellation. Cancellation rates can be between 10% and 20% in any given period due to factors outside of our control including an inability to install an Energy Server at the customer’s chosen location because of permitting or other regulatory issues, unanticipated changes in the cost, or other reasons unique to each customer. Our operating expenses are based on anticipated sales levels, and many of our expenses are fixed. If we are unsuccessful in closing sales after expending significant resources or if we experience delays or cancellations, our business could be materially and adversely affected. Since we do not recognize revenue on the sales of our products until installation and acceptance, a small fluctuation in the timing of the completion of our sales transactions could cause operating results to vary materially from period to period.
Our Energy Servers have significant upfront costs, and we will need to attract investors to help customers finance purchases.
Our Energy Servers have significant upfront costs. In order to assist our customers in obtaining financing for our products, we have traditional lease programs with two leasing partners who have prequalified our product and provide financing for customers through various leasing arrangements. In addition to the traditional lease model, we also offer Power Purchase Agreement Programs, including Third-Party PPAs, in which financing the cost of the Energy Server is provided by an Operating Company and funded by a subsidiary investment entity (an "Investment Company") which is financed by us and/or in combination with Equity Investors. We refer to the Operating Company and its subsidiary Investment Company collectively as a PPA Entity. In recent periods, the substantial majority of our end customers have elected to finance their purchases, typically through Third Party PPAs.
We will need to grow committed financing capacity with existing partners or attract additional partners to support our growth. Generally, at any point in time, the deployment of a portion of our backlog is contingent on securing available financing. Our ability to attract third-party financing depends on many factors that are outside of our control, including the investors’ ability to utilize tax credits and other government incentives, our perceived creditworthiness and the condition of credit markets generally. Our financing of customer purchases of our Energy Servers is subject to conditions such as the customer’s credit quality and the expected minimum internal rate of return on the customer engagement, and if these conditions are not satisfied, we may be unable to finance purchases of our Energy Servers, which would have an adverse effect on our revenue in a particular period. If we are unable to help our customers arrange financing for our Energy Servers generally, our business will be harmed. For example, we have been working with financing sources to arrange for additional Third-Party PPA Entities, one of which will need to be finalized in order for our customers to arrange financing so that we can complete our planned installations in the balance of 2019. In addition, while we secured financing to support the installation of approximately 18 megawatts of new products in connection with the upgrade of the PPA II Energy Servers, we will need to secure additional financing in order to support our planned completion of such project in the first half of 2020.
If we are unable to procure financing partners willing to finance such deployments, our business would be negatively impacted.
The economic benefits of our Energy Servers to our customers depends on the cost of electricity available from alternative sources including local electric utility companies, which cost structure is subject to change.
We believe that a customer’s decision to purchase our Energy Servers is significantly influenced by the price, the price predictability of electricity generated by our Energy Servers in comparison to the retail price and the future price outlook of electricity from the local utility grid and other energy sources. The economic benefit of our Energy Servers to our customers includes, among other things, the benefit of reducing such customer’s payments to the local utility company. The rates at which electricity is available from a customer’s local electric utility company is subject to change and any changes in such rates may affect the relative benefits of our Energy Servers. Even in markets where we are competitive today, rates for electricity could decrease and render our Energy Servers uncompetitive. Several factors could lead to a reduction in the price or future price outlook for grid electricity, including the impact of energy conservation initiatives that reduce electricity consumption, construction of additional power generation plants (including nuclear, coal or natural gas) and technological developments by others in the electric power industry which could result in electricity being available at costs lower than those that can be achieved from our Energy Servers. If the retail price of grid electricity does not increase over time at the rate that we or our customers expect, it could reduce demand for our Energy Servers and harm our business.
Further, the local electric utility may impose “departing load,” “standby,” or other charges, including power factor charges, on our customers in connection with their acquisition of our Energy Servers, the amounts of which are outside of our control and which may have a material impact on the economic benefit of our Energy Servers to our customers. Changes in the
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rates offered by local electric utilities and/or in the applicability or amounts of charges and other fees imposed or incentives granted by such utilities on customers acquiring our Energy Servers could adversely affect the demand for our Energy Servers.
In some states and countries, the current low cost of grid electricity, even together with available subsidies, does not render our product economically attractive. If we are unable to reduce our costs to a level at which our Energy Servers would be competitive in such markets, or if we are unable to generate demand for our Energy Servers based on benefits other than electricity cost savings, such as reliability, resilience, or environmental benefits, our potential for growth may be limited.
Furthermore, an increase in the price of natural gas or curtailment of availability could make our Energy Servers less economically attractive to potential customers and reduce demand.
We rely on net metering arrangements that are subject to change.
Because our Energy Servers are designed to operate at a constant output twenty-four hours a day, seven days a week, and our customers’ demand for electricity typically fluctuates over the course of the day or week, there are often periods when our Energy Servers are producing more electricity than a customer may require, and such excess electricity must be exported to the local electric utility. Many, but not all, local electric utilities provide compensation to our customers for such electricity under “net metering” programs. Utility tariffs, interconnection agreements and net metering requirements are subject to changes in availability and terms. At times in the past, such changes have not had the effect of significantly reducing or eliminating the benefits of such programs. Changes in the availability of, or benefits offered by, utility tariffs, the net metering requirements or interconnection agreements in place in the jurisdictions in which we operate could adversely affect the demand for our Energy Servers.
We currently face and will continue to face significant competition.
We compete for customers, financing partners, and incentive dollars with other electric power providers. Many providers of electricity, such as traditional utilities and other companies offering distributed generation products, have longer operating histories, have customer incumbency advantages, have access to and influence with local and state governments, and have access to more capital resources than do we. Significant developments in alternative technologies, such as energy storage, wind, solar, or hydro power generation, or improvements in the efficiency or cost of traditional energy sources, including coal, oil, natural gas used in combustion, or nuclear power, may materially and adversely affect our business and prospects in ways we cannot anticipate. We may also face new competitors who are not currently in the market. If we fail to adapt to changing market conditions and to compete successfully with grid electricity or new competitors, our growth will be limited which would adversely affect our business results.
We derive a substantial portion of our revenue and backlog from a limited number of customers, and the loss of or a significant reduction in orders from a large customer could have a material adverse effect on our operating results and other key metrics.
In any particular period, a substantial amount of our total revenue could come from a relatively small number of customers. As an example, in the nine months ended September 30, 2019, two customers accounted for approximately 62% of our total revenue. In the year ended December 31, 2018, two customers accounted for approximately 54% of our total revenue. One of these customers, a unit of the Southern Company, wholly owns a Third-Party PPA, and this entity purchases Energy Servers that are then provided to various end customers under PPAs. The loss of any large customer order or any delays in installations of new Energy Servers with any large customer could materially and adversely affect our business results.
Risks Relating to Our Products and Manufacturing
Our future success depends in part on our ability to increase our production capacity, and we may not be able to do so in a cost-effective manner.
To the extent we are successful in growing our business, we may need to increase our production capacity. Our ability to plan, construct, and equip additional manufacturing facilities is subject to significant risks and uncertainties, including the following:
• | The expansion or construction of any manufacturing facilities will be subject to the risks inherent in the development and construction of new facilities, including risks of delays and cost overruns as a result of factors outside our control such as delays in government approvals, burdensome permitting conditions, and delays in the delivery of manufacturing equipment and subsystems that we manufacture or obtain from suppliers. |
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• | It may be difficult to expand our business internationally without additional manufacturing facilities located outside the United States. Adding manufacturing capacity in any international location will subject us to new laws and regulations including those pertaining to labor and employment, environmental and export import. In addition, it brings with it the risk of managing larger scale foreign operations. |
• | We may be unable to achieve the production throughput necessary to achieve our target annualized production run rate at our current and future manufacturing facilities. |
• | Manufacturing equipment may take longer and cost more to engineer and build than expected, and may not operate as required to meet our production plans. |
• | We may depend on third-party relationships in the development and operation of additional production capacity, which may subject us to the risk that such third parties do not fulfill their obligations to us under our arrangements with them. |
• | We may be unable to attract or retain qualified personnel. |
If we are unable to expand our manufacturing facilities, we may be unable to further scale our business. If the demand for our Energy Servers or our production output decreases or does not rise as expected, we may not be able to spread a significant amount of our fixed costs over the production volume, resulting in a greater than expected per unit fixed cost, which would have a negative impact on our financial condition and our results of operations.
If we are not able to continue to reduce our cost structure in the future, our ability to become profitable may be impaired.
We must continue to reduce the manufacturing costs for our Energy Servers to expand our market. Additionally, certain of our existing service contracts were entered into based on projections regarding service costs reductions that assume continued advances in our manufacturing and services processes which we may be unable to realize. While we have been successful in reducing our manufacturing and services costs to date, the cost of components and raw materials, for example, could increase in the future. Any such increases could slow our growth and cause our financial results and operational metrics to suffer. In addition, we may face increases in our other expenses including increases in wages or other labor costs as well as installation, marketing, sales or related costs. We may continue to make significant investments to drive growth in the future. In order to expand into new electricity markets (in which the price of electricity from the grid is lower) while still maintaining our current margins, we will need to continue to reduce our costs. Increases in any of these costs or our failure to achieve projected cost reductions could adversely affect our results of operations and financial condition and harm our business and prospects. If we are unable to reduce our cost structure in the future, we may not be able to achieve profitability, which could have a material adverse effect on our business and our prospects.
If our Energy Servers contain manufacturing defects, our business and financial results could be harmed.
Our Energy Servers are complex products and they may contain undetected or latent errors or defects. In the past, we have experienced latent defects only discovered once the Energy Server is deployed in the field. Changes in our supply chain or the failure of our suppliers to otherwise provide us with components or materials that meet our specifications could also introduce defects into our products. In addition, as we grow our manufacturing volume, the chance of manufacturing defects could increase. Any manufacturing defects or other failures of our Energy Servers to perform as expected could cause us to incur significant re-engineering costs, divert the attention of our engineering personnel from product development efforts, and significantly and adversely affect customer satisfaction, market acceptance, and our business reputation.
Furthermore, we may be unable to correct manufacturing defects or other failures of our Energy Servers in a manner satisfactory to our customers, which could adversely affect customer satisfaction, market acceptance, and our business reputation.
The performance of our Energy Servers may be affected by factors outside of our control, which could result in harm to our business and financial results.
Field conditions, such as the quality of the natural gas supply and utility processes which vary by region and may be subject to seasonal fluctuations, have affected the performance of our Energy Servers and are not always possible to predict until the Energy Server is in operation. Although we believe we have designed new generations of Energy Servers to better withstand the variety of field conditions we have encountered, as we move into new geographies and deploy new service configurations, we may encounter new and unanticipated field conditions. Adverse impacts on performance may require us to incur significant re-engineering costs or divert the attention of our engineering personnel from product development efforts. Furthermore, we may be unable to adequately address the impacts of factors outside of our control in a manner satisfactory to our customers. Any of these circumstances could significantly and adversely affect customer satisfaction, market acceptance, and our business reputation.
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If our estimates of the useful life for our Energy Servers are inaccurate or we do not meet service and performance warranties and guaranties, or if we fail to accrue adequate warranty and guaranty reserves, our business and financial results could be harmed.
We offer certain customers the opportunity to renew their operations and maintenance service agreements on an annual basis, for up to 25 years, at prices predetermined at the time of purchase of the Energy Server. We also provide performance warranties and guaranties covering the efficiency and output performance of our Energy Servers. Our pricing of these contracts and our reserves for warranty and replacement are based upon our estimates of the life of our Energy Servers and their components, including assumptions regarding improvements in useful life that may fail to materialize. We do not have a long history with a large number of field deployments, and our estimates may prove to be incorrect. Failure to meet these performance warranties and guaranty levels may require us to replace the Energy Servers at our expense or refund their cost to the customer, or require us to make cash payments to the customer based on actual performance, as compared to expected performance, capped at a percentage of the relevant equipment purchase prices. We accrue for product warranty costs and recognize losses on service or performance warranties when required by U.S. GAAP based on our estimates of costs that may be incurred and based on historical experience. However, as we expect our customers to renew their maintenance service agreements each year, the total liability over time may be more than the accrual. Actual warranty expenses have in the past been and may in the future be greater than we have assumed in our estimates, the accuracy of which may be hindered due to our limited history operating at our current scale.
Early generations of our Energy Server did not have the useful life and did not perform at an output and efficiency level that we expected. We implemented a fleet decommissioning program for our early generation Energy Servers in our PPA I program, which resulted in a significant adjustment to revenue in the quarter ended December 31, 2015, as we would otherwise have failed to meet efficiency and output warranties. As of September 30, 2019, we had a total of 38 megawatts in total deployed early generation servers, including our first and second generation servers, out of our total installed base of 433 megawatts. We expect that our deployed early generation Energy Servers may continue to perform at a lower output and efficiency level and, as a result, the maintenance costs may exceed the contracted prices that we expect to generate if our customers continue to renew their maintenance service agreements in respect of those servers.
Our business is subject to risks associated with construction, utility interconnection, cost overruns and delays, including those related to obtaining government permits and other contingencies that may arise in the course of completing installations.
Because we generally do not recognize revenue on the sales of our Energy Servers until installation and acceptance, our financial results are dependent, to a large extent, on the timeliness of the installation of our Energy Servers. Furthermore, in some cases, the installation of our Energy Servers may be on a fixed price basis, which subjects us to the risk of cost overruns or other unforeseen expenses in the installation process.
The construction, installation, and operation of our Energy Servers at a particular site is also generally subject to oversight and regulation in accordance with national, state, and local laws and ordinances relating to building codes, safety, environmental protection, and related matters, and typically require various local and other governmental approvals and permits, including environmental approvals and permits, that vary by jurisdiction. In some cases, these approvals and permits require periodic renewal. It is difficult and costly to track the requirements of every individual authority having jurisdiction over our installations, to design our Energy Servers to comply with these varying standards, and to obtain all applicable approvals and permits. We cannot predict whether or when all permits required for a given project will be granted or whether the conditions associated with the permits will be achievable. The denial of a permit or utility connection essential to a project or the imposition of impractical conditions would impair our ability to develop the project. In addition, we cannot predict whether the permitting process will be lengthened due to complexities and appeals. Delay in the review and permitting process for a project can impair or delay our and our customers’ abilities to develop that project or may increase the cost so substantially that the project is no longer attractive to us or our customers. Furthermore, unforeseen delays in the review and permitting process could delay the timing of the installation of our Energy Servers and could therefore adversely affect the timing of the recognition of revenue related to the installation, which could harm our operating results in a particular period.
In addition, the completion of many of our installations is dependent upon the availability of and timely connection to the natural gas grid and the local electric grid. In some jurisdictions, the local utility company(ies) or the municipality has denied our request for connection or has required us to reduce the size of certain projects. Any delays in our ability to connect with utilities, delays in the performance of installation-related services, or poor performance of installation-related services by our general contractors or sub-contractors will have a material adverse effect on our results and could cause operating results to vary materially from period to period.
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Furthermore, we rely on the ability of our third party general contractors to install Energy Servers at our customers’ sites and to meet our installation requirements. We currently work with a limited number of general contractors, which has impacted and may continue to impact our ability to make installations as planned. Our work with contractors or their sub-contractors may have the effect of us being required to comply with additional rules (including rules unique to our customers), working conditions, site remediation, and other union requirements, which can add costs and complexity to an installation project. The timeliness, thoroughness, and quality of the installation-related services performed by some of our general contractors and their sub-contractors in the past have not always met our expectations or standards and in the future may not meet our expectations and standards.
Any significant disruption in the operations at our manufacturing facilities could delay the production of our Energy Servers, which would harm our business and results of operations.
We manufacture our Energy Servers in a limited number of manufacturing facilities, any of which could become unavailable either temporarily or permanently for any number of reasons, including equipment failure, material supply or catastrophic weather or geologic events. For example, several of our manufacturing facilities are located in an area prone to earthquakes. In the event of a significant disruption to our manufacturing process, we may not be able to easily shift production to other facilities or to make up for lost production. which could result in harm to our reputation, increased costs, and lower revenues.
The failure of our suppliers to continue to deliver necessary raw materials or other components of our Energy Servers in a timely manner could prevent us from delivering our products within required time frames, and could cause installation delays, cancellations, penalty payments, and damage to our reputation.
We rely on a limited number of third-party suppliers for some of the raw materials and components for our Energy Servers, including certain rare earth materials and other materials that may be of limited supply. If our suppliers provide insufficient inventory at the level of quality required to meet customer demand or if our suppliers are unable or unwilling to provide us with the contracted quantities (as we have limited or in some case no alternatives for supply), our results of operations could be materially and negatively impacted. If we fail to develop or maintain our relationships with our suppliers, or if there is otherwise a shortage or lack of availability of any required raw materials or components, we may be unable to manufacture our Energy Servers or our Energy Servers may be available only at a higher cost or after a long delay. Such delays could prevent us from delivering our Energy Servers to our customers within required time frames and cause order cancellations. We have had to create our own supply chain for some of the components and materials utilized in our fuel cells. We have made significant expenditures in the past to develop our supply chain. In many cases, we entered into contractual relationships with suppliers to jointly develop the components we needed. These activities were time and capital intensive. Accordingly, the number of suppliers we have for some of our components and materials is limited and in some cases sole sourced. Some of our suppliers use proprietary processes to manufacture components. We may be unable to obtain comparable components from alternative suppliers without considerable delay, expense, or at all, as replacing these suppliers could require us either to make significant investments to bring the capability in-house or to invest in a new supply chain partner. Some of our suppliers are smaller, private companies, heavily dependent on us as a customer. If our suppliers face difficulties obtaining the credit or capital necessary to expand their operations when needed, they could be unable to supply necessary raw materials and components needed to support our planned sales and services operations, which would negatively impact our sales volumes and cash flows.
Moreover, we may experience unanticipated disruptions to operations or other difficulties with our supply chain or internalized supply processes due to exchange rate fluctuations, volatility in regional markets from where materials are obtained (particularly China and Taiwan), changes in the general macroeconomic outlook, global trade disputes, political instability, expropriation or nationalization of property, civil strife, strikes, insurrections, acts of terrorism, acts of war, or natural disasters. The failure by us to obtain raw materials or components in a timely manner or to obtain raw materials or components that meet our quantity and cost requirements could impair our ability to manufacture our Energy Servers or increase their costs or service costs of our existing portfolio of Energy Servers under maintenance services agreements. If we cannot obtain substitute materials or components on a timely basis or on acceptable terms, we could be prevented from delivering our Energy Servers to our customers within required timeframes, which could result in sales and installation delays, cancellations, penalty payments, or damage to our reputation, any of which could have a material adverse effect on our business and results of operations. In addition, we rely on our suppliers to meet quality standards, and the failure of our suppliers to meet or exceed those quality standards could cause delays in the delivery of our products, cause unanticipated servicing costs, and cause damage to our reputation.
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We have, in some instances, entered into long-term supply agreements that could result in insufficient inventory and negatively affect our results of operations.
We have entered into long-term supply agreements with certain suppliers. Some of these supply agreements provide for fixed or inflation-adjusted pricing, substantial prepayment obligations and in a few cases, supplier purchase commitments. These arrangements could mean that we end up paying for inventory that we did not need or that was at a higher price than the market. Further, we face significant specific counterparty risk under long-term supply agreements when dealing with suppliers without a long, stable production and financial history. Given the uniqueness of our product, many of our suppliers do not have a long operating history and are private companies that may not have substantial capital resources. In the event any such supplier experiences financial difficulties, it may be difficult or impossible, or may require substantial time and expense, for us to recover any or all of our prepayments. We do not know whether we will be able to maintain long-term supply relationships with our critical suppliers or whether we may secure new long-term supply agreements. Additionally, many of our parts and materials are procured from foreign suppliers, which exposes us to risks including unforeseen increases in costs or interruptions in supply arising from changes in applicable international trade regulations such as taxes, tariffs or quotas. Any of the foregoing could materially harm our financial condition and our results of operations.
We face supply chain competition, including competition from businesses in other industries, which could result in insufficient inventory and negatively affect our results of operations.
Certain of our suppliers also supply parts and materials to other businesses including businesses engaged in the production of consumer electronics and other industries unrelated to fuel cells. As a relatively low-volume purchaser of certain of these parts and materials, we may be unable to procure a sufficient supply of the items in the event that our suppliers fail to produce sufficient quantities to satisfy the demands of all of their customers, which could materially harm our financial condition and our results of operations.
We, and some of our suppliers, obtain capital equipment used in our manufacturing process from sole suppliers and, if this equipment is damaged or otherwise unavailable, our ability to deliver our Energy Servers on time will suffer.
Some of the capital equipment used to manufacture our products and some of the capital equipment used by our suppliers have been developed and made specifically for us, are not readily available from multiple vendors, and would be difficult to repair or replace if they did not function properly. If any of these suppliers were to experience financial difficulties or go out of business or if there were any damage to or a breakdown of our manufacturing equipment and we could not obtain replacement equipment in a timely manner, our business would suffer. In addition, a supplier’s failure to supply this equipment in a timely manner with adequate quality and on terms acceptable to us could disrupt our production schedule or increase our costs of production and service.
Possible new tariffs could have a material adverse effect on our business.
Our business is dependent on the availability of raw materials and components for our Energy Servers, particularly electrical components common in the semiconductor industry, specialty steel products / processing and raw materials. Tariffs imposed on steel and aluminum imports have increased the cost of raw materials for our Energy Servers and decreased the available supply. Additional new tariffs or other trade protection measures which are proposed or threatened and the potential escalation of a trade war and retaliation measures could have a material adverse effect on our business, results of operations and financial condition.
Although we currently maintain alternative sources for raw materials, our business is subject to the risk of price fluctuations and periodic delays in the delivery of certain raw materials, which tariffs may exacerbate. Disruptions in the supply of raw materials and components could temporarily impair our ability to manufacture our Energy Servers for our customers or require us to pay higher prices in order to obtain these raw materials or components from other sources, which could affect our business and our results of operations. While it is too early to predict how the recently enacted tariffs on imported steel will impact our business, the imposition of tariffs on items imported by us from China or other countries could increase our costs and could have a material adverse effect on our business and our results of operations.
A failure to properly comply with foreign trade zone laws and regulations could increase the cost of our duties and tariffs.
We have established two foreign trade zones, one in California and one in Delaware, through qualification with U.S. Customs, and are approved for "zone to zone" transfers between our California and Delaware facilities. Materials received in a foreign trade zone are not subject to certain U.S. duties or tariffs until the material enters U.S. commerce. We benefit from the adoption of foreign trade zones by reduced duties, deferral of certain duties and tariffs, and reduced processing fees, which help us realize a reduction in duty and tariff costs. However, the operation of our foreign trade zones requires compliance with applicable regulations and continued support of U.S. Customs with respect to the foreign trade zone program. If we are unable
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to maintain the qualification of our foreign trade zones, or if foreign trade zones are limited or unavailable to us in the future, our duty and tariff costs would increase, which could have an adverse effect on our business and results of operations.
Risks Relating to Government Incentive Programs
Our business currently depends on the availability of rebates, tax credits and other financial incentives, and the reduction, modification, or elimination of such benefits could cause our revenue to decline and harm our financial results.
The U.S. federal government and some state and local governments provide incentives to end users and purchasers of our Energy Servers in the form of rebates, tax credits, and other financial incentives, such as system performance payments and payments for renewable energy credits associated with renewable energy generation. In addition, some countries outside the U.S. also provide incentives to end users and purchasers of our Energy Servers. We currently have operations and sell our Energy Servers in Japan, China, India, and the Republic of Korea, collectively our Asia Pacific region, where Renewable Portfolio Standards ("RPS") are in place to promote the adoption of renewable power generation, including fuel cells. Our Energy Servers have qualified for tax exemptions, incentives, or other customer incentives in many states including the states of California, Connecticut, Massachusetts, New Jersey and New York. Some states have utility procurement programs and/or renewable portfolio standards for which our technology is eligible. Our Energy Servers are currently installed in eleven U.S. states, each of which may have its own enabling policy framework. We rely on these governmental rebates, tax credits, and other financial incentives to significantly lower the effective price of the Energy Servers to our customers in the U. S. and the Asia Pacific region. Our financing partners and Equity Investors in Bloom Electrons programs may also take advantage of these financial incentives, lowering the cost of capital and energy to our customers. However, these incentives or RPS may expire on a particular date, end when the allocated funding is exhausted, or be reduced or terminated as a matter of regulatory or legislative policy.
For example, the previous federal investment tax credit ("ITC"), a federal tax incentive for fuel cell production, expired on December 31, 2016. Without the availability of the ITC benefit incentive, we lowered the price of our Energy Servers to ensure the economics to our customers would remain the same as it was prior to losing the ITC benefit, adversely affecting our gross profit. While the ITC was reinstated by the U.S Congress on February 9, 2018 and made retroactive to January 1, 2017, under current law it will phase out on December 31, 2022, as noted below:
• | the 30% ITC credit was reinstated retroactive to January 1, 2017; |
• | installations that commence construction before January 1, 2020 are eligible for a 30% credit; |
• | installations that commence construction in 2020 are eligible for a 26% credit; |
• | installations that commence construction in 2021 are eligible for a 22% credit; and |
• | installations have to be placed in service by January 1, 2024 or the installations become ineligible for the credit. |
The ITC program has operational criteria that extend for five years. If the energy property is disposed or otherwise ceases to be qualified investment credit property before the close of the five year recapture period is fulfilled, it could result in a partial reduction of the incentives. The purchase of Energy Servers were made by the PPA Entities and, therefore, the PPA Entities bear the risk of repayment if the assets placed in service do not meet the ITC operational criteria in the future.
As another example, the California Self Generation Incentive Program ("SGIP") is a program administered by the California Public Utilities Commission ("CPUC") which provides incentives to investor-owned utility customers that install eligible distributed energy resources. In July 2016, the CPUC modified the SGIP to provide a smaller allocation of the incentives available to generating technologies such as our Energy Servers and a larger allocation to storage technologies. As modified, the SGIP will require all eligible power generation sources consuming natural gas to use a minimum 50% biogas to receive SGIP funds in 2019 and 100% in 2020. In addition, the CPUC provided a further limitation on the available allocation of funds that any one participant may claim under the SGIP. The SGIP has been extended until January 1, 2026. Our customer sites accepted benefiting from the SGIP represented approximately 5% and 3% of total sites accepted for the nine months ended September 30, 2019 and 2018, respectively.
Changes in federal, state, or local programs or the RPS in the Asia Pacific region could reduce demand for our Energy Servers, impair sales financing, and adversely impact our business results. The continuation of these programs depends upon political support which to date has been bipartisan and durable. Nevertheless, one set of political activists aggressively seeks to eliminate these programs while another set seeks to deny access to these programs for any technology that relies on natural gas, regardless of the technology’s positive contribution to reducing air pollution, reducing carbon emissions or enabling electric service to be more reliable and resilient.
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We rely on tax equity financing arrangements to realize the benefits provided by investment tax credits and accelerated tax depreciation and, in the event these programs are terminated, our financial results could be harmed.
We expect that any Energy Server deployments through financed transactions (including our Bloom Electrons programs, our leasing programs and any Third-Party PPA Programs) will receive capital from financing parties ("Equity Investors") who derive a significant portion of their economic returns through tax benefits. Equity Investors are generally entitled to substantially all of the project’s tax benefits, such as those provided by the ITC and Modified Accelerated Cost Recovery System ("MACRS") or bonus depreciation, until the Equity Investors achieve their respective agreed rates of return. The number of and available capital from potential Equity Investors is limited, we compete with other energy companies eligible for these tax benefits to access such investors, and the availability of capital from Equity Investors is subject to fluctuations based on factors outside of our control such as macroeconomic trends and changes in applicable taxation regimes. Concerns regarding our limited operating history, lack of profitability and that we are only the party who can perform operations and maintenance on our Energy Servers have made it difficult to attract investors in the past. Our ability to obtain additional financing in the future depends on the continued confidence of banks and other financing sources in our business model, the market for our Energy Servers, and the continued availability of tax benefits applicable to our Energy Servers. In addition, conditions in the general economy and financial and credit markets may result in the contraction of available tax equity financing. If we are unable to enter into tax equity financing agreements with attractive pricing terms, or at all, we may not be able to obtain the capital needed to fund our financing programs or use the tax benefits provided by the ITC and MACRS depreciation, which could make it more difficult for customers to finance the purchase of our Energy Servers. Such circumstances could also require us to reduce the price at which we are able to sell our Energy Servers and therefore harm our business, our financial condition, and our results of operations.
Risks Related to Legal Matters and Regulations
We are subject to various environmental laws and regulations that could impose substantial costs upon us and cause delays in building our manufacturing facilities.
We are subject to national, state, and local environmental laws and regulations as well as environmental laws in those foreign jurisdictions in which we operate. Environmental laws and regulations can be complex and may often change. These laws can give rise to liability for administrative oversight costs, cleanup costs, property damage, bodily injury, fines, and penalties. Recently, for example, we paid rather than contest an administrative penalty of $40,000 and assessed costs of $5,454 related to the start-up of upgraded units at our Delaware Fuel Cell Project before such upgraded units were inspected. Capital and operating expenses needed to comply with environmental laws and regulations can be significant, and violations may result in substantial fines and penalties or third-party damages. In addition, ensuring we are in compliance with applicable environmental laws requires significant time and management resources and could cause delays in our ability to build out, equip and operate our facilities as well as service our fleet, which would adversely impact our business, our prospects, our financial condition, and our operating results. In addition, environmental laws and regulations such as the Comprehensive Environmental Response, Compensation and Liability Act in the United States impose liability on several grounds including for the investigation and cleanup of contaminated soil and ground water, for building contamination, for impacts to human health and for damages to natural resources. If contamination is discovered in the future at properties formerly owned or operated by us or currently owned or operated by us, or properties to which hazardous substances were sent by us, it could result in our liability under environmental laws and regulations. Many of our customers who purchase our Energy Servers have high sustainability standards, and any environmental noncompliance by us could harm our reputation and impact a current or potential customer’s buying decision. The costs of complying with environmental laws, regulations, and customer requirements, and any claims concerning noncompliance or liability with respect to contamination in the future, could have a material adverse effect on our financial condition or our operating results.
The installation and operation of our Energy Servers are subject to environmental laws and regulations in various jurisdictions, and there is uncertainty with respect to the interpretation of certain environmental laws and regulations to our Energy Servers, especially as these regulations evolve over time.
Bloom is committed to compliance with applicable environmental laws and regulations including health and safety standards, and we continually review the operation of our Energy Servers for health, safety, and environmental compliance. Our Energy Servers, like other fuel cell technology-based products of which we are aware, produce small amounts of hazardous wastes and air pollutants, and we seek to ensure that these are handled in accordance with applicable regulatory standards.
Maintaining compliance with laws and regulations can be challenging given the changing patchwork of environmental laws and regulations that prevail at the federal, state, regional, and local level. Most existing environmental laws and regulations preceded the introduction of our innovative fuel cell technology and were adopted to apply to technologies existing
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at the time, namely large coal, oil, or gas-fired power plants. Currently, there is generally little guidance from these agencies on how certain environmental laws and regulations may or may not be applied to our technology.
For example, natural gas, which is the primary fuel used in our Energy Servers, contains benzene, which is classified as a hazardous waste if it exceeds 0.5 milligrams ("mg") per liter. A small amount of benzene found in the public natural gas supply (equivalent to what is present in one gallon of gasoline in an automobile fuel tank which are exempt from federal regulation) is collected by the gas cleaning units contained in our Energy Servers which are typically replaced once every 18 to 24 months by us from customers’ sites. From 2010 to late 2016 and in the regular course of maintenance of the Energy Servers, we periodically replaced the units in our servers under a federal environmental exemption that permitted the handling of such units without manifesting the contents as containing a hazardous waste. Although over the years and with the approval of two states, we believed that we operated under the exemption, the U.S. Environmental Protection Agency ("EPA") issued guidance for the first time in late 2016 that differed from our belief and conflicted with the state approvals we had obtained. We have complied with the new guidance and, given the comparatively small quantities of benzene produced, we do not anticipate significant additional costs or risks from our compliance with the revised 2016 guidance. However, the EPA has asked us to show cause why it should not collect approximately $1.0 million in fines from us for the prior period, which we are contesting. Additionally, we paid a nominal fine to an agency in a different state under that state’s environmental laws relating to the operation of our Energy Server under the exemption prior to the issuance of the revised EPA guidance.
Another example relates to the very small amounts of chromium in hexavalent form, or CR+6, which our Energy Servers emit at nanometer scale. This occurs any time a steel super alloy is exposed to high temperatures. CR+6 is found in small concentrations in the air generally. However, exposure to high or significant concentrations over prolonged periods of time can be carcinogenic. While the small amount of chromium emitted by our Energy Servers is initially in the hexavalent form, it converts to a non-toxic trivalent form, or CR+3, rapidly after it leaves the Energy Server. In tests we have conducted, air measurements taken 10 meters from an Energy Server show that the CR+6 is largely converted.
Our Energy Servers do not present any significant health hazard based on our modeling, testing methodology, and measurements. There are several supporting elements to this position including that the emissions from our Energy Servers are in very low concentrations, are emitted as nano-particles that convert to the non-hazardous form CR+3 rapidly, are quickly dispersed into the air, and are not emitted in close proximity to locations where people would be expected to have a prolonged exposure. Nevertheless, we have engineered a technology solution that we are deploying.
Several states in which we currently operate, including California, require permits for emissions of hazardous air pollutants based on the quantity of emissions, most of which require permits only for quantities of emissions that are higher than those observed from our Energy Servers. Other states in which we operate, including New York, New Jersey, and North Carolina, have specific exemptions for fuel cells. Some states in which we operate have CR+6 limits which are an order of magnitude over our operating range. Within California, the Bay Area Air Quality Management District ("BAAQMD") requires a permit for emissions that are more than 0.00051 lbs/year. Other California regulations require that levels of CR+6 be below 0.00005 µg/m³, which is the level required by Proposition 65 and which requires notification of the presence of CR+6 unless it can be shown to be at levels that do not pose a significant health risk. We have determined that the standards applicable in California in this regard are more stringent than those in any other state or foreign location in which we have installed Energy Servers to date, therefore, deployment of our solution has been focused on California's standards.
There are generally no relevant environmental testing methodology guidelines for a technology such as ours. The standard test method for analyzing emissions cannot be readily applied to our Energy Servers because it would require inserting a probe into an emission stack. Our servers do not have emission stacks; therefore, we have to construct an artificial stack on top of our server in order to conduct a test. If we used the testing methodology similar to what the air districts have used in other large scale industrial products, it would show that we would need to reduce the emissions of CR+6 from our Energy Servers to meet the most stringent requirements. However, we employed a modified test method that is designed to capture the actual operating conditions of our Energy Servers and its distinctly different design from legacy power plants and industrial equipment. Based on our modeling, measured results and analysis, we believe we are in compliance with State of California air regulations. However, it is possible that the California Air Districts will require us to abate or shut down the operations of certain of our existing Energy Servers on a temporary basis or will seek the imposition of monetary penalties.
While we seek to comply with air quality and emission standards in every region in which we operate, it is possible that certain customers in other regions may request that we provide the new technology solution for their Energy Servers to comply with the stricter standards imposed by California even though they are not applicable and even though we are under no contractual obligation to do so. We plan to satisfy these requests from customers. Failure or delay in attaining regulatory approval could result in our not being able to operate in a particular local jurisdiction.
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These examples illustrate that our technology is moving faster than the regulatory process in many instances. It is possible that regulators could delay or prevent us from conducting our business in some way pending agreement on, and compliance with, shifting regulatory requirements. Such actions could delay the installation of Energy Servers, could result in penalties, could require modification or replacement or could trigger claims of performance warranties and defaults under customer contracts that could require us to repurchase their Energy Servers, any of which could adversely affect our business, our financial performance, and our reputation. In addition, new laws or regulations or new interpretations of existing laws or regulations could present marketing, political or regulatory challenges and could require us to upgrade or retrofit existing equipment, which could result in materially increased capital and operating expenses.
Furthermore, we have not yet determined whether our Energy Servers will satisfy regulatory requirements in the other states in the U.S. and in international locations in which we do not currently sell Energy Servers but may pursue in the future.
As a fossil fuel-based technology, we may be subject to a heightened risk of regulation, to a potential for the loss of certain incentives, and to changes in our customers’ energy procurement policies.
Although the current generation of Energy Servers running on natural gas produce nearly 50% less carbon emissions compared to the average of U.S. combustion power generation, the operation of our Energy Servers does produce carbon dioxide ("CO2"), which has been shown to be a contributing factor to global climate change. As such, we may be negatively impacted by CO2-related changes in applicable laws, regulations, ordinances, rules, or the requirements of the incentive programs on which we and our customers currently rely. Changes (or a lack of change to comprehensively recognize the risks of climate change and recognize the benefit of our technology as one means to maintain reliable and resilient electric service with a lower greenhouse gas emission profile) in any of the laws, regulations, ordinances, or rules that apply to our installations and new technology could make it illegal or more costly for us or our customers to install and operate our Energy Servers on particular sites, thereby negatively affecting our ability to deliver cost savings to customers, or we could be prohibited from completing new installations or continuing to operate existing projects. Certain municipalities in California have already banned the use of distributed generation products that utilize fossil fuel. Additionally, our customers’ and potential customers’ energy procurement policies may prohibit or limit their willingness to procure our Energy Servers. Our business prospects may be negatively impacted if we are prevented from completing new installations or our installations become more costly as a result of laws, regulations, ordinances, or rules applicable to our Energy Servers, or by our customers’ and potential customers’ energy procurement policies.
Existing regulations and changes to such regulations impacting the electric power industry may create technical, regulatory, and economic barriers which could significantly reduce demand for our Energy Servers or affect the financial performance of current sites.
The market for electricity generation products is heavily influenced by U.S. federal, state, local, and foreign government regulations and policies as well as by internal policies and regulations of electric utility providers. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation. These regulations and policies are often modified and could continue to change, which could result in a significant reduction in demand for our Energy Servers. For example, utility companies commonly charge fees to larger industrial customers for disconnecting from the electric grid or for having the capacity to use power from the electric grid for back-up purposes. These fees could change, thereby increasing the cost to our customers of using our Energy Servers and making them less economically attractive.
In addition, our project with Delmarva Power & Light Company ("the Delaware Project") is subject to laws and regulations relating to electricity generation, transmission, and sale in Delaware and at the federal level.
A law governing the sale of electricity from the Delaware Project was necessary to implement part of several incentives that Delaware offered to Bloom to build our major Manufacturing Center in Delaware. Those incentives have proven controversial in Delaware, in part because our Manufacturing Center, while a significant source of continuing manufacturing employment, has not expanded as quickly as projected. A citizen-antagonist continues to oppose the Delaware Project and seeks support from Delaware officials and others. In 2018, he unsuccessfully petitioned the Delaware Public Service Commission. Most recently, he unsuccessfully appealed a favorable Order of the Secretary of Delaware’s Department of Natural Resources and Environmental Control to Delaware’s Environmental Appeals Board (EAB), an administrative entity with authority to review the Secretary’s Orders. The Secretary’s Order at issue approved permits that enable the upgrade of the Delaware Project. As we expected, the EAB upheld the Secretary’s Order as the appeal was without merit and raised issues that were outside the scope of the permits and beyond the jurisdiction of the EAB. The time for an appeal to court of the EAB's ruling has not yet run. While we believe a further appeal is without merit, if such an appeal was successful, we may face adverse consequences that would negatively affect our operation of the Delaware Project. The Appeal and the opposition to the Delaware Project are examples of potentially material risks associated with electric power regulation.
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At the federal level, the Federal Energy Regulatory Commission ("FERC") has authority to regulate under various federal energy regulatory laws, wholesale sales of electric energy, capacity, and ancillary services, and the delivery of natural gas in interstate commerce. Also, several of our PPA Entities are subject to regulation under FERC with respect to market-based sales of electricity, which requires us to file notices and make other periodic filings with FERC, which increases our costs and subjects us to additional regulatory oversight.
Although we generally are not regulated as a utility, federal, state, and local government statutes and regulations concerning electricity heavily influence the market for our product and services. These statutes and regulations often relate to electricity pricing, net metering, incentives, taxation, and the rules surrounding the interconnection of customer-owned electricity generation for specific technologies. In the United States, governments frequently modify these statutes and regulations. Governments, often acting through state utility or public service commissions, change and adopt different requirements for utilities and rates for commercial customers on a regular basis. Changes, or in some cases a lack of change, in any of the laws, regulations, ordinances, or other rules that apply to our installations and new technology could make it more costly for us or our customers to install and operate our Energy Servers on particular sites and, in turn, could negatively affect our ability to deliver cost savings to customers for the purchase of electricity.
We may become subject to product liability claims which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims.
We may in the future become subject to product liability claims. Our Energy Servers are considered high energy systems because they use flammable fuels and may operate at 480 volts. Although our Energy Servers are certified to meet ANSI, IEEE, ASME, and NFPA design and safety standards, if not properly handled in accordance with our servicing and handling standards and protocols, there could be a system failure and resulting liability. These claims could require us to incur significant costs to defend. Furthermore, any successful product liability claim could require us to pay a substantial monetary award. Moreover, a product liability claim could generate substantial negative publicity about our company and our Energy Servers, which could harm our brand, our business prospects, and our operating results. While we maintain product liability insurance, our insurance may not be sufficient to cover all potential product liability claims. Any lawsuit seeking significant monetary damages either in excess of our coverage or outside of our coverage may have a material adverse effect on our business and our financial condition.
Current or future litigation or administrative proceedings could have a material adverse effect on our business, our financial condition and our results of operations.
We have been and continue to be involved in legal proceedings, administrative proceedings, claims, and other litigation that arise in the ordinary course of business. Purchases of our products have also been the subject of litigation. For information regarding pending legal proceedings, please see Part II, Item 1 of this Quarterly Report on Form 10-Q captioned "Legal Proceedings" and footnote 13 to our consolidated financial statements entitled "Commitments and Contingencies." In addition, since our Energy Server is a new type of product in a nascent market, we have in the past needed and may in the future need to seek the amendment of existing regulations, or in some cases the creation of new regulations, in order to operate our business in some jurisdictions. Such regulatory processes may require public hearings concerning our business, which could expose us to subsequent litigation.
Unfavorable outcomes or developments relating to proceedings to which we are a party or transactions involving our products such as judgments for monetary damages, injunctions, or denial or revocation of permits, could have a material adverse effect on our business, our financial condition, and our results of operations. In addition, settlement of claims could adversely affect our financial condition and our results of operations.
Risks Relating to Our Intellectual Property
Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights may be costly.
Although we have taken many protective measures to protect our trade secrets including agreements, limited access, segregation of knowledge, password protections, and other measures, policing unauthorized use of proprietary technology can be difficult and expensive. For example, many of our engineers reside in California where it is not legally permissible to prevent them from working for a competitor if and when one should exist. Also, litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. Such litigation may result in our intellectual property rights being challenged, limited in scope, or declared invalid or unenforceable. We cannot be certain that the outcome of any litigation will be in our favor, and an adverse determination in any such litigation could impair our intellectual property rights, our business, our prospects, and our reputation.
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We rely primarily on patent, trade secret, and trademark laws and non-disclosure, confidentiality, and other types of contractual restrictions to establish, maintain, and enforce our intellectual property and proprietary rights. However, our rights under these laws and agreements afford us only limited protection and the actions we take to establish, maintain, and enforce our intellectual property rights may not be adequate. For example, our trade secrets and other confidential information could be disclosed in an unauthorized manner to third parties, our owned or licensed intellectual property rights could be challenged, invalidated, circumvented, infringed, or misappropriated or our intellectual property rights may not be sufficient to provide us with a competitive advantage, any of which could have a material adverse effect on our business, financial condition, or operating results. In addition, the laws of some countries do not protect proprietary rights as fully as do the laws of the United States. As a result, we may not be able to protect our proprietary rights adequately abroad.
Our patent applications may not result in issued patents, and our issued patents may not provide adequate protection, either of which may have a material adverse effect on our ability to prevent others from commercially exploiting products similar to ours.
We cannot be certain that our pending patent applications will result in issued patents or that any of our issued patents will afford protection against a competitor. The status of patents involves complex legal and factual questions, and the breadth of claims allowed is uncertain. As a result, we cannot be certain that the patent applications that we file will result in patents being issued or that our patents and any patents that may be issued to us in the future will afford protection against competitors with similar technology. In addition, patent applications filed in foreign countries are subject to laws, rules, and procedures that differ from those of the United States, and thus we cannot be certain that foreign patent applications related to issued U.S. patents will be issued in other regions. Furthermore, even if these patent applications are accepted and the associated patents issued, some foreign countries provide significantly less effective patent enforcement than in the United States.
In addition, patents issued to us may be infringed upon or designed around by others and others may obtain patents that we need to license or design around, either of which would increase costs and may adversely affect our business, our prospects, and our operating results.
We may need to defend ourselves against claims that we infringed, misappropriated, or otherwise violated the intellectual property rights of others, which may be time-consuming and would cause us to incur substantial costs.
Companies, organizations, or individuals, including our competitors, may hold or obtain patents, trademarks, or other proprietary rights that they may in the future believe are infringed by our products or services. Although we are not currently subject to any claims related to intellectual property, these companies holding patents or other intellectual property rights allegedly relating to our technologies could, in the future, make claims or bring suits alleging infringement, misappropriation, or other violations of such rights, or otherwise assert their rights and by seeking licenses or injunctions. Several of the proprietary components used in our Energy Servers have been subjected to infringement challenges in the past. We also generally indemnify our customers against claims that the products we supply infringe, misappropriate, or otherwise violate third party intellectual property rights, and we therefore may be required to defend our customers against such claims. If a claim is successfully brought in the future and we or our products are determined to have infringed, misappropriated, or otherwise violated a third party’s intellectual property rights, we may be required to do one or more of the following:
• | cease selling or using our products that incorporate the challenged intellectual property; |
• | pay substantial damages (including treble damages and attorneys’ fees if our infringement is determined to be willful); |
• | obtain a license from the holder of the intellectual property right, which may not be available on reasonable terms or at all; or |
• | redesign our products or means of production, which may not be possible or cost-effective. |
Any of the foregoing could adversely affect our business, prospects, operating results, and financial condition. In addition, any litigation or claims, whether or not valid, could harm our reputation, result in substantial costs and divert resources and management attention.
We also license technology from third parties and incorporate components supplied by third parties into our products. We may face claims that our use of such technology or components infringes or otherwise violates the rights of others, which would subject us to the risks described above. We may seek indemnification from our licensors or suppliers under our contracts with them, but our rights to indemnification or our suppliers’ resources may be unavailable or insufficient to cover our costs and losses.
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Risks Relating to Our Financial Condition and Operating Results
We have incurred significant losses in the past and we may not be profitable for the foreseeable future.
Since our inception in 2001, we have incurred significant net losses and have used significant cash in our business. As of September 30, 2019, we had an accumulated deficit of $2.8 billion. We expect to continue to expand our operations, including by investing in manufacturing, sales and marketing, research and development, staffing systems, and infrastructure to support our growth. We anticipate that we will incur net losses for the foreseeable future. Our ability to achieve profitability in the future will depend on a number of factors, including:
• | growing our sales volume; |
• | increasing sales to existing customers and attracting new customers; |
• | attracting and retaining financing partners who are willing to provide financing for sales on a timely basis and with attractive terms; |
• | continuing to improve the useful life of our fuel cell technology and reducing our warranty servicing costs; |
• | reducing the cost of producing our Energy Servers; |
• | improving the efficiency and predictability of our installation process; |
• | improving the effectiveness of our sales and marketing activities; |
• | attracting and retaining key talent in a competitive marketplace; and |
• | the amount of stock-based compensation recognized in the period. |
Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.
Our financial condition and results of operations and other key metrics are likely to fluctuate on a quarterly basis in future periods, which could cause our results for a particular period to fall below expectations, resulting in a severe decline in the price of our Class A common stock.
Our financial condition and results of operations and other key metrics have fluctuated significantly in the past and may continue to fluctuate in the future due to a variety of factors, many of which are beyond our control. For example, the amount of product revenue we recognize in a given period is materially dependent on the volume of installations of our Energy Servers in that period and the type of financing used by the customer.
In addition to the other risks described herein, the following factors could also cause our financial condition and results of operations to fluctuate on a quarterly basis:
• | the timing of installations, which may depend on many factors such as availability of inventory, product quality or performance issues, or local permitting requirements, utility requirements, environmental, health, and safety requirements, weather, and customer facility construction schedules; |
• | size of particular installations and number of sites involved in any particular quarter; |
• | the mix in the type of purchase or financing options used by customers in a period, and the rates of return required by financing parties in such period; |
• | whether we are able to structure our sales agreements in a manner that would allow for the product and installation revenue to be recognized up front at acceptance; |
• | delays or cancellations of Energy Server installations; |
• | fluctuations in our service costs, particularly due to unaccrued costs of servicing and maintaining Energy Servers; |
• | weaker than anticipated demand for our Energy Servers due to changes in government incentives and policies or due to other conditions; |
• | fluctuations in our research and development expense, including periodic increases associated with the pre-production qualification of additional tools as we expand our production capacity; |
• | interruptions in our supply chain; |
• | the length of the sales and installation cycle for a particular customer; |
• | the timing and level of additional purchases by existing customers; |
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• | unanticipated expenses or installation delays associated with changes in governmental regulations, permitting requirements by local authorities at particular sites, utility requirements and environmental, health, and safety requirements; |
• | disruptions in our sales, production, service or other business activities resulting from disagreements with our labor force or our inability to attract and retain qualified personnel; and |
• | unanticipated changes in federal, state, local, or foreign government incentive programs available for us, our customers, and tax equity financing parties. |
Fluctuations in our operating results and cash flow could, among other things, give rise to short-term liquidity issues. In addition, our revenue, key operating metrics, and other operating results in future quarters may fall short of the expectations of investors and financial analysts, which could have an adverse effect on the price of our Class A common stock.
If we fail to manage our growth effectively, our business and operating results may suffer.
Our current growth and future growth plans may make it difficult for us to efficiently operate our business, challenging us to effectively manage our capital expenditures and control our costs while we expand our operations to increase our revenue. If we experience a significant growth in orders without improvements in automation and efficiency, we may need additional manufacturing capacity and we and some of our suppliers may need additional and capital intensive equipment. Any growth in manufacturing must include a scaling of quality control as the increase in production increases the possible impact of manufacturing defects. In addition, any growth in the volume of sales of our Energy Servers may outpace our ability to engage sufficient and experienced personnel to manage the higher number of installations and to engage contractors to complete installations on a timely basis and in accordance with our expectations and standards. Any failure to manage our growth effectively could materially and adversely affect our business, our prospects, our operating results, and our financial condition. Our future operating results depend to a large extent on our ability to manage this expansion and growth successfully.
If we discover a material weakness in our internal control over financial reporting or otherwise fail to maintain effective internal control over financial reporting, our ability to report our financial results on a timely and an accurate basis may adversely affect the market price of our Class A common stock.
The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") requires, among other things, that public companies evaluate the effectiveness of their internal control over financial reporting and disclosure controls and procedures. As a recently public company and as an emerging growth company, we elected to delay adopting the requirements of the Sarbanes-Oxley Act as is our option under the Sarbanes-Oxley Act. Although we did not discover any material weaknesses in internal control over financial reporting at September 30, 2019, subsequent testing by us or our independent registered public accounting firm, which has not yet performed an audit of our internal control over financial reporting, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. To comply with Section 404A, we may incur substantial cost, expend significant management time on compliance-related issues, and hire additional accounting, financial, and internal audit staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404A in a timely manner or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we could be subject to sanctions or investigations by the Securities and Exchange Commission ("SEC") or other regulatory authorities, which would require additional financial and management resources. Any failure to maintain effective disclosure controls and procedures or internal control over financial reporting could have a material adverse effect on our business and operating results and cause a decline in the price of our Class A common stock. For further discussion on Section 404A compliance, see our Risk Factor: We are an “emerging growth company,” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors and may make it more difficult to compare our performance with other public companies.
Our ability to use our deferred tax assets to offset future taxable income may be subject to limitations that could subject our business to higher tax liability.
We may be limited in the portion of net operating loss carryforwards that we can use in the future to offset taxable income for U.S. federal and state income tax purposes. Our net operating loss carryforwards ("NOLs") will expire, if unused, beginning in 2022 and 2028, respectively. A lack of future taxable income would adversely affect our ability to utilize these NOLs. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. Changes in our stock ownership as well as other changes that may be outside of our control could result in ownership changes under Section 382 of the Code, which could cause our NOLs to be subject to certain limitations. Our NOLs may also be
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impaired under similar provisions of state law. Our deferred tax assets, which are currently fully reserved with a valuation allowance, may expire unutilized or underutilized, which could prevent us from offsetting future taxable income.
Risks Relating to Our Liquidity
We must maintain customer confidence in our liquidity and long-term business prospects in order to grow our business.
Currently, we are the only provider able to fully support and maintain our Energy Servers. If potential customers believe we do not have sufficient capital or liquidity to operate our business over the long-term or that we will be unable to maintain their Energy Servers and provide satisfactory support, customers may be less likely to purchase or lease our products, particularly in light of the significant financial commitment required. In addition, financing sources may be unwilling to provide financing on reasonable terms. Similarly, suppliers, financing partners, and other third parties may be less likely to invest time and resources in developing business relationships with us if they have concerns about the success of our business.
Accordingly, in order to grow our business, we must maintain confidence in our liquidity and long-term business prospects among customers, suppliers, financing partners, and other parties. This may be particularly complicated by factors such as:
• | our limited operating history at a large scale; |
• | our lack of profitability; |
• | unfamiliarity with or uncertainty about our Energy Servers and the overall perception of the distributed generation market; |
• | prices for electricity or natural gas in particular markets; |
• | competition from alternate sources of energy; |
• | warranty or unanticipated service issues we may experience; |
• | the environmental consciousness and perceived value of environmental programs to our customers; |
• | the size of our expansion plans in comparison to our existing capital base and the scope and history of operations; |
• | the availability and amount of tax incentives, credits, subsidies or other incentive programs; and |
• | the other factors set forth in this “Risk Factors” section. |
Several of these factors are largely outside our control, and any negative perceptions about our liquidity or long-term business prospects, even if unfounded, would likely harm our business.
Our substantial indebtedness, and restrictions imposed by the agreements governing our, and our PPA Entities’, outstanding indebtedness, may limit our financial and operating activities and may adversely affect our ability to incur additional debt to fund future needs.
As of September 30, 2019, we and our subsidiaries had approximately $664.0 million of total consolidated indebtedness, of which an aggregate of $403.4 million represented indebtedness that is recourse to us. Of this $664.0 million debt, $36.0 million represented debt under our 5% Notes, $2.0 million represented operating debt, $260.6 million represented debt of our PPA Entities, $275.7 million represented debt under our 6% Notes and $89.7 million represented debt under our 10% Notes. The agreements governing our and our PPA Entities’ outstanding indebtedness contain, and other future debt agreements may contain, covenants imposing operating and financial restrictions on our business that limit our flexibility including, among other things, to:
• | borrow money; |
• | pay dividends or make other distributions; |
• | incur liens; |
• | make asset dispositions; |
• | make loans or investments; |
• | issue or sell share capital of our subsidiaries; |
• | issue guaranties; |
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• | enter into transactions with affiliates; |
• | merge, consolidate or sell, lease or transfer all or substantially all of our assets; |
• | require us to dedicate a substantial portion of cash flow from operations to the payment of principal and interest on indebtedness, thereby reducing the funds available for other purposes such as working capital and capital expenditures; |
• | make it more difficult for us to satisfy and comply with our obligations with respect to our indebtedness; |
• | subject us to increased sensitivity to interest rate increases; |
• | make us more vulnerable to economic downturns, adverse industry conditions, or catastrophic external events; |
• | limit our ability to withstand competitive pressures; |
• | limit our ability to invest in new business subsidiaries that are not PPA Entity-related; |
• | reduce our flexibility in planning for or responding to changing business, industry, and economic conditions; and/or |
• | place us at a competitive disadvantage to competitors that have relatively less debt than we have. |
Our debt agreements and our PPA Entities’ debt agreements require the maintenance of financial ratios or the satisfaction of financial tests such as debt service coverage ratios and consolidated leverage ratios. Our and our PPA Entities’ ability to meet these financial ratios and tests may be affected by events beyond our control and, as a result, we cannot assure you that we will be able to meet these ratios and tests. Upon the occurrence of events such as a change in control of our company, significant asset sales or mergers or similar transactions, the liquidation or dissolution of our company or the cessation of our stock exchange listing, holders of our 6% Notes have the right to cause us to repurchase for cash any or all of such outstanding notes at a repurchase price in cash equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon. We cannot provide assurance that we would have sufficient liquidity to repurchase such notes. Furthermore, our financing and debt agreements, such as our 6% Notes and our 10% Notes, contain events of default. If an event of default were to occur, the trustee or the lenders could, among other things, terminate their commitments and declare outstanding amounts due and payable and our cash may become restricted. We cannot provide assurance that we would have sufficient liquidity to repay or refinance our indebtedness if such amounts were accelerated upon an event of default. Borrowings under other debt instruments that contain cross-acceleration or cross-default provisions may, as a result, be accelerated and become due and payable as a consequence. We may be unable to pay these debts in such circumstances. If we were unable to repay those amounts, lenders could proceed against the collateral granted to them to secure repayment of those amounts. We cannot assure you that the collateral will be sufficient to repay in full those amounts. We cannot provide assurance that the operating and financial restrictions and covenants in these agreements will not adversely affect our ability to finance our future operations or capital needs, or our ability to engage in other business activities that may be in our interest or our ability to react to adverse market developments.
If our PPA Entities default on their obligations under non-recourse financing agreements, we may decide to make payments to prevent such PPA Entities’ creditors from foreclosing on the relevant collateral, as such a foreclosure would result in our losing our ownership interest in the PPA Entity or in some or all of its assets, or a material part of our assets, as the case may be. To satisfy these obligations, we may be required to use amounts distributed by our other PPA Entities as well as other sources of available cash, thereby reducing the cash available to develop our projects and to our operations. The loss of a material part of our assets or our ownership interest in one or more of our PPA Entities or some or all of their assets, or any use of our resources to support our obligations or the obligations of our PPA Entities, could have a material adverse effect on our business, our financial condition, and our results of operations.
As of September 30, 2019, we and our subsidiaries had approximately $664.0 million of total consolidated indebtedness, including $27.2 million in short-term debt and $636.8 million in long-term debt. In addition, our 10% Notes contain restrictions on our ability to issue additional debt and both the 6% Notes and 10% Notes limit our ability to provide collateral for any additional debt. Given our current level of indebtedness, the restrictions on additional indebtedness contained in the 10% Notes and the fact that most of our assets serve as collateral to secure existing debt, it may be difficult for us to secure additional debt financing at an attractive cost, which may in turn impact our ability to expand our operations and our product development activities and to remain competitive in the market.
In addition, our substantial level of indebtedness could limit our ability to obtain required additional financing on acceptable terms or at all for working capital, capital expenditures, and general corporate purposes. Any of these risks could impact our ability to fund our operations or limit our ability to expand our business, which could have a material adverse effect on our business, our financial condition, our liquidity, and our results of operations. Our liquidity needs could vary significantly and may be affected by general economic conditions, industry trends, performance, and many other factors not within our control.
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We may not be able to generate sufficient cash to meet our debt service obligations.
Our ability to generate sufficient cash to make scheduled payments on our debt obligations will depend on our future financial performance, which will be affected by a range of economic, competitive, and business factors, many of which are outside of our control.
In addition, we conduct a significant volume of our operations through, and receive equity allocations from, our PPA Entities, which contribute to our cash flow. These PPA Entities are separate and distinct legal entities, do not guarantee our debt obligations, and will have no obligation, contingent or otherwise, to pay amounts due under our debt obligations or to make any funds available to pay those amounts, whether by dividend, distribution, loan, or other payments. Distributions by the PPA Entities to us are precluded under these arrangements if there is an event of default or if financial covenants, such as maintenance of applicable debt service coverage ratios, are not met even if there is not otherwise an event of default. Furthermore, under the terms of our equity financing arrangements for PPA Company IIIa and PPA Company IIIb, substantially all of the cash flows generated from these PPA Entities in excess of debt service obligations are distributed to Equity Investors until the investors achieve a targeted internal rate of return or until a fixed date in the future ("Flip Date"), which is expected to be after a period of five or more years, after which time we will receive substantially all of the remaining income (loss), tax, and tax allocation attributable to the long-term customer payments and other incentives. In the case of PPA Company IV and PPA Company V, Equity Investors receive 90% of all cash flows generated in excess of its debt service obligations and other expenses for the duration of the applicable PPA Entity without any Flip Date or other time- or return-based adjustment. Moreover, even after the occurrence of the Flip Date for the PPA Entities, we do not anticipate distributions to be material enough independently to support our ongoing cash needs, and, therefore, we will still need to generate significant cash from our product sales. It is possible that the PPA Entities may not contribute significant cash to us even if we are in compliance with the financial covenants under the project debt incurred by the PPA Entities.
Future borrowings by our PPA Entities may contain restrictions or prohibitions on the payment of dividends to us. The ability of our PPA Entities to make such payments to us may be subject to applicable laws including surplus, solvency, and other limits imposed on the ability of companies to pay dividends.
If we do not generate sufficient cash to satisfy our debt obligations, including interest payments, or if we are unable to satisfy the requirement for the payment of principal at maturity or other payments that may be required from time to time under the terms of our debt instruments, we may have to undertake alternative financing plans such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments, or seeking to raise additional capital. We cannot provide assurance that any refinancing would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds realized from those sales, that additional financing could be obtained on acceptable terms, if at all, or that additional financing would be permitted under the terms of our various debt instruments then in effect. Furthermore, the ability to refinance indebtedness would depend upon the condition of the finance and credit markets at the time which have in the past been, and may in the future be, volatile. Our inability to generate sufficient cash to satisfy our debt obligations or to refinance our obligations on commercially reasonable terms or on a timely basis would have an adverse effect on our business, our results of operations and our financial condition.
Under some circumstances, we may be required to or elect to make additional payments to our PPA Entities or the Power Purchase Agreement Program Equity Investors.
Five of our PPA Entities are structured in a manner such that other than the amount of any equity investment we have made, we do not have any further primary liability for the debts or other obligations of the PPA Entities. However, we are required to guarantee the obligations of our wholly-owned subsidiary which invests alongside other investors in the PPA Entities. These obligations typically include the capital contribution obligations of such subsidiary to the PPA Entity as well as the representations and warranties made by and indemnification obligations of such subsidiary to Equity Investors in the applicable PPA Entity. As a result, we may be obligated to make payments on behalf of our wholly-owned subsidiary to Equity Investors in the PPA Entities in the event of a breach of these representations, warranties or covenants.
All of our PPA Entities that operate Energy Servers for end customers have significant restrictions on their ability to incur increased operating costs, or could face events of default under debt or other investment agreements if end customers are not able to meet their payment obligations under PPAs or if Energy Servers are not deployed in accordance with the project’s schedule. If our PPA Entities experience unexpected, increased costs such as insurance costs, interest expense or taxes or as a result of the acceleration of repayment of outstanding indebtedness, or if end customers are unable or unwilling to continue to purchase power under their PPAs, there could be insufficient cash generated from the project to meet the debt service obligations of the PPA Entity or to meet any targeted rates of return of Equity Investors. If a PPA Entity fails to make required debt service payments, this could constitute an event of default and entitle the lender to foreclose on the collateral securing the debt or could trigger other payment obligations of the PPA Entity. To avoid this, we could choose to contribute additional
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capital to the applicable PPA Entity to enable such PPA Entity to make payments to avoid an event of default, which could adversely affect our business or our financial condition. Under PPA Company IV’s note purchase agreement, PPA Company IV is obligated to offer to repay all outstanding debt in the event that at any time we fail to own (directly or indirectly) at least 50.1% of the equity interest of PPA Company IV not owned by the Equity Investor(s). Upon receipt of such offer, the lenders may waive that obligation or elect to require PPA Company IV to prepay all remaining amounts owed under PPA Company IV’s project debt. The obligations under PPA Company IV have not been triggered as of September 30, 2019.
Risks Relating to Our Operations
We may have conflicts of interest with our PPA Entities.
In each of our PPA Entities, we act as the managing member and are responsible for the day-to-day administration of the project. However, we are also a major service provider for each PPA Entity in its capacity as the operator of the Energy Servers under an operations and maintenance agreement. Because we are both the administrator and the manager of our PPA Entities, as well as a major service provider, we face a potential conflict of interest in that we may be obligated to enforce contractual rights that a PPA Entity has against us in our capacity as a service provider. By way of example, the PPA Entity may have a right to payment from us under a warranty provided under the applicable operations and maintenance agreement, and we may be financially motivated to avoid or delay this liability by failing to promptly enforce this right on behalf of the PPA Entity. While we do not believe that we had any conflicts of interest with our PPA Entities as of September 30, 2019, conflicts of interest may arise in the future which cannot be foreseen at this time. In the event that prospective future Equity Investors and debt financing partners perceive there to exist any such conflicts, it could harm our ability to procure financing for our PPA Entities in the future, which could have a material adverse effect on our business.
If we are unable to attract and retain key employees and hire qualified management, technical, engineering, and sales personnel, our ability to compete and successfully grow our business could be harmed.
We believe that our success and our ability to reach our strategic objectives are highly dependent on the contributions of our key management, technical, engineering, and sales personnel. The loss of the services of any of our key employees could disrupt our operations, delay the development and introduction of our products and services and negatively impact our business, prospects, and operating results. In particular, we are highly dependent on the services of Dr. Sridhar, our Chairman and President and Chief Executive Officer, and other key employees. None of our key employees is bound by an employment agreement for any specific term. We cannot assure you that we will be able to successfully attract and retain senior leadership necessary to grow our business. Furthermore, there is increasing competition for talented individuals in our field, and competition for qualified personnel is especially intense in the San Francisco Bay Area where our principal offices are located. Our failure to attract and retain our executive officers and other key management, technical, engineering, and sales personnel could adversely impact our business, our prospects, our financial condition, and our operating results. In addition, we do not have “key person” life insurance policies covering any of our officers or other key employees.
A breach or failure of our networks or computer or data management systems could damage our operations and our reputation.
Our business is dependent on the security and efficacy of our networks and computer and data management systems. For example, all of our Energy Servers are connected to and controlled and monitored by our centralized remote monitoring service, and we rely on our internal computer networks for many of the systems we use to operate our business generally. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our infrastructure, including the network that connects our Energy Servers to our remote monitoring service, may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber-attacks that could have a material adverse impact on our business and our Energy Servers in the field. A breach or failure of our networks or computer or data management systems due to intentional actions such as cyber-attacks, negligence, or other reasons could seriously disrupt our operations or could affect our ability to control or to assess the performance in the field of our Energy Servers and could result in disruption to our business and potentially legal liability. In addition, if certain of our IT systems failed, our production line might be affected, which could impact our business and operating results. These events, in addition to impacting our financial results, could result in significant costs or reputational consequences.
Our headquarters and other facilities are located in an active earthquake zone, and an earthquake or other types of natural disasters or resource shortages could disrupt and harm our results of operations.
We conduct a majority of our operations in the San Francisco Bay area in an active earthquake zone, and certain of our facilities are located within known flood plains. The occurrence of a natural disaster such as an earthquake, drought, flood, localized extended outages of critical utilities or transportation systems, or any critical resource shortages could cause a
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significant interruption in our business, damage or destroy our facilities, our manufacturing equipment, or our inventory, and cause us to incur significant costs, any of which could harm our business, our financial condition, and our results of operations. The insurance we maintain against fires, earthquakes and other natural disasters may not be adequate to cover our losses in any particular case.
Expanding operations internationally could expose us to additional risks.
Although we currently primarily operate in the United States, we will seek to expand our business internationally. We currently have operations in Japan, China, India, and the Republic of Korea, collectively our Asia Pacific region. Managing any international expansion will require additional resources and controls including additional manufacturing and assembly facilities. Any expansion internationally could subject our business to risks associated with international operations, including:
• | conformity with applicable business customs, including translation into foreign languages and associated expenses; |
• | lack of availability of government incentives and subsidies; |
• | challenges in arranging, and availability of, financing for our customers; |
• | potential changes to our established business model; |
• | cost of alternative power sources, which could be meaningfully lower outside the United States; |
• | availability and cost of natural gas; |
• | difficulties in staffing and managing foreign operations in an environment of diverse culture, laws, and customers, and the increased travel, infrastructure, and legal and compliance costs associated with international operations; |
• | installation challenges which we have not encountered before which may require the development of a unique model for each country; |
• | compliance with multiple, potentially conflicting and changing governmental laws, regulations, and permitting processes including environmental, banking, employment, tax, privacy, and data protection laws and regulations such as the EU Data Privacy Directive; |
• | compliance with U.S. and foreign anti-bribery laws including the Foreign Corrupt Practices Act and the U.K. Anti-Bribery Act; |
• | difficulties in collecting payments in foreign currencies and associated foreign currency exposure; |
• | restrictions on repatriation of earnings; |
• | compliance with potentially conflicting and changing laws of taxing jurisdictions where we conduct business and compliance with applicable U.S. tax laws as they relate to international operations, the complexity and adverse consequences of such tax laws, and potentially adverse tax consequences due to changes in such tax laws; and |
• | regional economic and political conditions. |
As a result of these risks, any potential future international expansion efforts that we may undertake may not be successful.
We are an “emerging growth company,” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Class A common stock less attractive to investors and may make it more difficult to compare our performance with other public companies.
We are an emerging growth company ("EGC") as defined in the U.S. legislation Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGC, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We may take advantage of these exemptions for so long as we are an EGC, which could be until December 31, 2023, the last day of the fiscal year following the fifth anniversary of our IPO. We cannot predict if investors will find our Class A common stock less attractive because we rely on these exemptions. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock, and our stock price may be more volatile.
An EGC may elect to provide financial statements in conformance with the U.S. GAAP requirement for transition periods to comply with new or revised accounting standards. With our not making this election, Section 102(b)(2) of the JOBS
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Act allows us to delay our adoption of new or revised accounting standards until those standards apply to private companies. As a result, our financial statements may not be comparable to companies that comply with public company revised accounting standards effective dates.
Risks Relating to Ownership of Our Common Stock
The stock price of our Class A common stock has been and may continue to be volatile.
The market price of our Class A common stock has been and may continue to be volatile. In addition to factors discussed in this Quarterly Report on Form 10-Q, the market price of our Class A common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
• | overall performance of the equity markets; |
• | actual or anticipated fluctuations in our revenue and other operating results; |
• | changes in the financial projections we may provide to the public or our failure to meet these projections; |
• | failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company or our failure to meet these estimates or the expectations of investors; |
• | the issuance of reports from short sellers that may negatively impact the trading price of our Class A common stock; |
• | recruitment or departure of key personnel; |
• | the economy as a whole and market conditions in our industry; |
• | new laws, regulations, subsidies, or credits or new interpretations of them applicable to our business; |
• | negative publicity related to problems in our manufacturing or the real or perceived quality of our products; |
• | rumors and market speculation involving us or other companies in our industry; |
• | announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, or capital commitments; |
• | lawsuits threatened or filed against us; |
• | other events or factors including those resulting from war, incidents of terrorism or responses to these events; |
• | the expiration of contractual lock-up or market standoff agreements; and |
• | sales or anticipated sales of shares of our Class A common stock by us or our stockholders. |
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. We are currently involved in securities litigation which may subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.
Sales of substantial amounts of our Class A common stock in the public markets, or the perception that they might occur, could cause the market price of our Class A common stock to decline.
The market price of our Class A common stock could decline as a result of sales of a large number of shares of our Class A common stock in the public market as and when our Class B common stock converts to Class A common stock. The perception that these sales might occur may also cause the market price of our common stock to decline. We had a total of 74,942,084 shares of our Class A common stock and 42,875,545 shares of our Class B common stock outstanding as of September 30, 2019. The lock up for our Class B shares expired on January 21, 2019 and these shares are now freely tradeable once converted into Class A shares, except for any shares purchased by our “affiliates” as defined in Rule 144 under the Securities Act of 1933, as amended ("Securities Act").
Further, as of September 30, 2019, we had an aggregate of $296.2 million in convertible debt under which the outstanding principal and interest may be converted, at the option of the holders, into an aggregate of 26.3 million shares of Class B common stock. Upon conversion into Class A common stock, these shares are freely tradeable, except to the extent these shares are held by our “affiliates” as defined in Rule 144 under the Securities Act.
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In addition, as of September 30, 2019, we had options and RSUs outstanding that, if fully exercised or settled, would result in the issuance of 27,624,803 shares of Class B common stock. We have filed a registration statement on Form S-8 to register shares reserved for future issuance under our equity compensation plans. Subject to the satisfaction of applicable vesting requirements, the shares issued upon exercise of outstanding stock options or settlement of outstanding RSUs will be available for immediate resale in the United States in the open market.
Moreover, certain holders of our common stock have rights, subject to some conditions, to require us to file registration statements for the public resale of such shares or to include such shares in registration statements that we may file for us or other stockholders.
The dual class structure of our common stock and the voting agreements among certain stockholders have the effect of concentrating voting control of our Company with KR Sridhar, our Chairman and Chief Executive Officer, and also with those stockholders who held our capital stock prior to the completion of our IPO including our directors, executive officers and significant stockholders, which limits or precludes your ability to influence corporate matters including the election of directors and the approval of any change of control transaction, and may adversely affect the trading price of our Class A common stock.
Our Class B common stock has ten votes per share, and our Class A common stock has one vote per share. As of September 30, 2019 and after giving effect to the voting agreements between KR Sridhar, our Chairman and Chief Executive Officer, and certain holders of Class B common stock, our directors, executive officers, significant stockholders of our common stock, and their respective affiliates collectively held a substantial majority of the voting power of our capital stock. Because of the ten-to-one voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively will continue to control a majority of the combined voting power of our common stock and therefore are able to control all matters submitted to our stockholders for approval until the earliest to occur of (i) immediately prior to the close of business on July 27, 2023, (ii) immediately prior to the close of business on the date on which the outstanding shares of Class B common stock represent less than five percent (5%) of the aggregate number of shares of Class A common stock and Class B common stock then outstanding, (iii) the date and time or the occurrence of an event specified in a written conversion election delivered by KR Sridhar to our Secretary or Chairman of the Board to so convert all shares of Class B common stock, or (iv) immediately following the date of the death of KR Sridhar. This concentrated control limits or precludes Class A stockholders’ ability to influence corporate matters while the dual class structure remains in effect, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that Class A stockholders may feel are in their best interest as one of our stockholders.
Future transfers by holders of Class B common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions such as certain transfers effected for estate planning purposes. The conversion of Class B common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those remaining holders of Class B common stock who retain their shares in the long-term.
The conversion of the 6% Convertible Promissory Note could result in a significant stockholder with substantial voting control.
The holders of the 6% Convertible Promissory Notes have the options to convert the outstanding principal and interest under the 6% Convertible Promissory Note to Class B common stock at a conversion price of $11.25 per share at any time after the IPO and prior to maturity of the 6% Convertible Promissory Note in December 2020. As of September 30, 2019, an aggregate of 21,321,100 shares of Class B common stock is issuable to the Canada Pension Plan Investment Board (“CPPIB”) upon the conversion of the outstanding principal and interest under the 6% Convertible Promissory Note. This, along with 312,575 shares of Class B common stock CPPIB which CPPIB acquired from the exercise of a warrant at IPO, would result in CPPIB having approximately 28.86% of the total voting power with respect to all shares of our Class A and Class B common stock, voting as a single class, and would provide CPPIB significant influence over matters presented to the stockholders for approval and may result in voting decisions by CPPIB that are not in the best interests of our stockholders generally.
The dual class structure of our common stock may adversely affect the trading market for our Class A common stock.
S&P Dow Jones and FTSE Russell have implemented changes to their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, namely, to exclude companies with multiple classes of shares of common stock from being added to such indices. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our common stock may prevent the inclusion of our Class A common stock in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices
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could result in a less active trading market for our Class A common stock. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our Class A common stock.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price of our Class A common stock and trading volume could decline.
The market price for our Class A common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If industry analysts cease coverage of us, the trading price for our Class A common stock would be negatively affected. In addition, if one or more of the analysts who cover us downgrade our Class A common stock or publish inaccurate or unfavorable research about our business, our Class A common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our Class A common stock could decrease, which might cause our Class A common stock price and trading volume to decline. In addition, certain short sellers of our Class A common stock have published reports that we believe have negatively impacted the trading price of our Class A common stock.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid any cash dividends on our capital stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their Class A common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
Provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, may limit attempts by our stockholders to replace or remove our current management, may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees, and may limit the market price of our Class A common stock.
Provisions in our restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our restated certificate of incorporation and amended and restated bylaws include provisions that:
• | our board of directors will be classified into three classes of directors with staggered three year terms; |
• | permit the board of directors to establish the number of directors and fill any vacancies and newly created directorships; |
• | require super-majority voting to amend some provisions in our restated certificate of incorporation and amended and restated bylaws; |
• | authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan; |
• | only the chairman of our board of directors, our chief executive officer, or a majority of our board of directors will be authorized to call a special meeting of stockholders; |
• | prohibit stockholder action by written consent, which thereby requires all stockholder actions be taken at a meeting of our stockholders; |
• | a dual class common stock structure in which holders of our Class B common stock may have the ability to control the outcome of matters requiring stockholder approval even if they own significantly less than a majority of the outstanding shares of our common stock, including the election of directors and significant corporate transactions such as a merger or other sale of our company or substantially all of its assets; |
• | the board of directors is expressly authorized to make, alter, or repeal our bylaws; and |
• | establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings. |
In addition, our restated certificate of incorporation and our amended and restated bylaws provide that the Court of Chancery of the State of Delaware will be the exclusive forum for: any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our restated certificate of incorporation or our amended and restated bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. Our restated certificate of incorporation and our amended and
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restated bylaws provide that unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, which thereby may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision contained in our restated certificate of incorporation and our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, our operating results, and our financial condition.
On December 19, 2018, the Delaware Chancery Court issued an opinion that invalidated provisions in a Delaware corporation’s certificate of incorporation or bylaws that purport to limit to federal court the forum in which a stockholder could bring a claim under the Securities Act, which creates some uncertainty about the enforceability of exclusive forum provisions generally. If a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business and financial condition.
Moreover, Section 203 of the Delaware General Corporation Law may discourage, delay, or prevent a change in control of our company. Section 203 imposes certain restrictions on mergers, business combinations, and other transactions between us and holders of 15% or more of our common stock.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 - OTHER INFORMATION
Increase in Number of Directors; Appointment of Directors.
Effective November 12, 2019, our Board of Directors (the “Board”) authorized an increase in the number of directors serving on the Board from eight to ten directors and appointed two new directors to serve on the Board, as follows:
Jeffrey Immelt was appointed to serve as a Class II director of Bloom Energy to serve in such capacity until the 2020 annual meeting of shareholders and as a member of the Audit Committee of the Board. Mr. Immelt joined New Enterprise Associates as a venture partner in February 2018. Prior to that time, he served as Chief Executive Officer of General Electric for sixteen years until his departure in August 2017. He currently serves on the board of directors of Twilio.
Dr. Michael Boskin was appointed to serve as a Class III director of Bloom Energy to serve in such capacity until the 2021 annual meeting of shareholders and as a member of the Audit Committee and the Nominating, Governance and Public Policy Committee of the Board. Dr. Boskin is the Tully M. Friedman Professor of Economics and Wohlford Family Hoover Institution Senior Fellow at Stanford University where he has been on the faculty since 1971. He is also Chief Executive Officer and President of the consulting firm Boskin & Co., Inc. Dr. Boskin currently serves on the board of directors of Oracle Corporation.
Each of Messrs. Immelt and Boskin will receive the standard compensation for a non-employee director of Bloom Energy. We will also enter into an indemnification agreement with each of Messrs. Immelt and Boskin as of the effective date of their appointments. A copy of the Form of Indemnification Agreement was attached as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 as filed with the SEC on September 7, 2018.
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Departure of Named Executive Officer
On November 7, 2019, we announced that Randy Furr, our Chief Financial Officer, will retire at the end of 2019. Mr. Furr will remain with Bloom Energy in a transition role for a period of time yet to be determined and will assist in the search for his successor.
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ITEM 6 - EXHIBITS
Index to Exhibits
The exhibits listed below are filed or incorporated by reference as part of this Quarterly Report on Form 10-Q.
Incorporated by Reference | ||||||
Exhibit Number | Description | Form | File No. | Exhibit | Filing Date | |
Restated Certificate of Incorporation. | 10-Q | 001-38598 | 3.1 | 9/7/2018 | ||
Amended and Restated Bylaws, effective August 8, 2019 | 10-Q | 001-38598 | 3.2 | 8/14/2019 | ||
* | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities and Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||||
* | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities and Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||||
** | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||
101.INS | * | XBRL Instance Document | ||||
101.SCH | * | XBRL Taxonomy Extension Schema Document | ||||
101.CAL | * | XBRL Taxonomy Extension Calculation Linkbase Document | ||||
101.DEF | * | XBRL Taxonomy Extension Definition Linkbase Document | ||||
101.LAB | * | XBRL Taxonomy Extension Label Linkbase Document | ||||
101.PRE | * | XBRL Taxonomy Extension Presentation Linkbase Document |
^ | Executive Compensation Plans and Arrangements. |
* | Filed herewith. |
** | The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. |
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BLOOM ENERGY CORPORATION | ||||
Date: | November 13, 2019 | By: | /s/ KR Sridhar | |
KR Sridhar | ||||
Founder, President, Chief Executive Officer and Director | ||||
(Principal Executive Officer) | ||||
Date: | November 13, 2019 | By: | /s/ Randy Furr | |
Randy Furr | ||||
Executive Vice President and | ||||
Chief Financial Officer | ||||
(Principal Financial and Accounting Officer) | ||||
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